Congress fiddles while U.S. burns!

Politicians around the world seemed to have messed things up so badly our investments were making little or no sense, based on history. Or were they? All great empires come and go: Greece, Rome, Italy, Spain, Great Britain and now the United States?

You see we have been looking at the last 10 year wondering what was wrong with the stock markets. We were wondering why they were not performing like they did during the last century. Here is a persuasive argument that we may be overestimating future equity returns and return estimates in our investments, and maybe investing in all the wrong places.

Financial Advisors in the United States (U.S.) tend to use long-term U.S. equity returns as their guidepost for what they expect stocks to do in the future in the United States. Most advisors adapt historical assumptions based on PE ratios and other valuation measures. But if you go back to the beginning, where did these returns come from? They came from our country at the start of the 20th century until now. The United States at the turn of the century was basically an emerging market economy. Then it moved to a developed market and then to the leading economy in the world. During this time the dollar became the world's reserve currency.

Here's the point that affects our planning assumptions: going forward, are U.S. equity returns going to reflect the rapid growth of an emerging market becoming developed, or a developed market becoming the dominant global economy? Have we built in return assumptions that were extraordinary once-in-a-lifetime trajectory of economic growth, along a path which almost certainly cannot be sustained going forward?

If we have: we need to look outside the U.S. to find the returns that would reflect that growth. What we want to do is consistently hitch our wagon to the emerging, developing economies around the world; to the extent we can identify them. That's what U.S. investors did for 100 years in the U.S., by investing in the United States. That may be the only way we get returns like we got from U.S. equities over the past century.

There are a lot of implications here, and potentially a lot to change about our current thinking. So let's start by taking a closer look at the U.S. growth story. In 1900, the estimated total market cap of the world was $18 billion. Europe made up 56%, with Britain comprising 24% all by itself. India accounted for 10% of global market cap, Russia 11% and the U.S. 16%. The U.S. was a smaller, less wealthy country. You could have described it as an emerging economy, even though the term didn't exist back then."

Between 1900 and the mid-1970s, the U.S. share of the world's market cap grew from 15% to over 70%. Be-tween the mid-70s and the end of 2010, the rest of the world caught up dramatically, and the U.S. share of the world's $47 trillion share value had fallen back to 32%. Since 2000, our equity returns haven't been exactly world-beating. Is it possible that this is a better predictor of the future than the time period when the U.S. was increasing its percentage of total market cap and global GDP?

I know we have all be raise to believe that the United States is the best, biggest and most wonderful country in the world and I would agree with you right up until sometime around March of 2000. Looking forward, Jeremy Siegel has projected that by 2050, the U.S. share of global market cap will have fallen to 17%, almost exactly where it was in 1900.

Looking at the situation another way, the U.S. economy grew by an average of 3.8% a year from 1946 to 1973, right around the time when America's share of market cap peaked. Since then, GDP growth has averaged 2.7%, and the most recent decade has not lived up to even that average. From 2000 to 2010, the U.S. accounted for just 15% of total global GDP growth, less than Europe (21%) or China (23%). The U.S. share of global GDP peaked in 1985 at 32.74%. In 2010, the U.S. accounted for 24% of global GDP.

This is not to say that the U.S. will fall into some kind of severe slump, or that U.S. companies won't continue to generate profits. But it does suggest that the long, rapid run up from an emerging economy to global super-power was an extraordinary wagon to hitch your portfolio to. A long projected decline from the world's dominant economy to a market share under 20% might generate lower annual returns going forward.

A better way to say this is that U.S. investors have been spoiled by extraordinary domestic growth that helped produce extraordinary domestic stock returns not found anywhere else. If we anchor on the returns that investors enjoyed during that probably never-to-be-repeated era in the U.S., and project them forward in our portfolios, there is a strong possibility of disappointment.

So how do we want to deploy our assets in the global opportunity set, if the U.S. is mature and likely descending from its peak? Who or what is ascending? Where can we find similar growth to what the U.S. had enjoyed? And how can we position our investments to capture that growth?

Our search led to those economies that are currently emerging and what was most surprising was how rapidly this is taking place today. The term "emerging markets" was been coined in 1981, defined as countries with in-come per capita of $10,000 or less. The threshold today is around $15,000. The first EM indices seem to date back to 1995, when this obscure niche of the global economy made up 3% of the world's market cap. By the end of last year, that percentage had grown to 28%. Goldman Sachs recently issued a report that suggests that by 2030, the market cap of what we used to call emerging markets will exceed that of the traditional developed markets. Jeremy Siegel forecasts that EM countries will make up 67% of total market cap by 2050.

Turning back to GDP, during the 2000-2010 decade, China alone contributed 23% of total GDP growth, India 8%, Japan 3%, and other Asian nations 12%. For the next five years, while the U.S. is projected to contribute 13% of world economic growth, China's projected contribution is 29%, India's is 10%, Japan's is 3% and the rest of Asia is projected to contribute 11% of the world's growth. My calculator says that this makes up more than half (53%) of the world's growth coming from Asia, mostly from the less developed economies.

While China gets the majority of the press coverage, it is not the only country that is growing rapidly. According to the International Monetary Fund, by the year 2015, there will be 17 countries with an annual GDP over $1 trillion, compared with only ten today." In the first half of 2010, Asia, notably including the Hong Kong market, accounted for 60% of global IPOs, vs. 16% for the U.S.

Okay, so what do we DO with this information? Step one is to overcome our homeboy bias and recognize that much of the GDP and portfolio return growth is going to come from abroad in the years ahead. Our homeboy bias will be harder to cure because it worked so well for U.S. investors in the past well, until ten years ago, anyway; and because we probably have unrealistic expectations about future U.S. stock returns.

Step two is to recognize that what we call emerging markets are not what they were in 1995. Most of Asset Allocations in the U.S. allow only 3% of a portfolio to be allocated into emerging markets. They just assume, without really thinking about it, that our emerging markets allocation should be somewhere in that range. But if that's where the majority of the world's growth is going to come from, it needs to be a bigger part of our allocations.

Step three is to recognize that the traditional indices severely underweight the places where the growth is expected to come from. The MSCI EAFE Index allocates 66% of its weightings to Europe and another 20% to Japan. The EAFE EM Index, meanwhile, allocates just 7% of its assets to Indian stocks, and 18% to China. We have an unusually high 40% allocation to non-U.S. equities. If you have 20% of client portfolios in EAFE, and another 20% in the EM index that means your total allocation to India is 1.4%. To China (including Hong Kong): 5.2%. To other Asian countries: 12.2%.

In all, this aggressive international investor would have just under 20% of his client’s portfolios invested in the economies that are projected to generate 50% of the world's economic growth over the next five years.

Step four is to reexamine the argument that you can get all the exposure you need to international and emerging markets growth by investing in U.S.-based multinational firms. There are 5,000 companies worldwide with a market cap over $1 billion, and 75% of them are located outside the U.S. There are 25 stock markets with an average company size of $1 billion or more. Ten of these are considered emerging markets, and the U.S. is number three on that list.

Step five, it may be time to retire the term "emerging markets" altogether. "There's a real lack of consistency in how some of these countries are defined and categorized. China is the obvious example; if you look at coastal China, you see all the signs of a major economic power, a country with 1.1 millionaire households. True, many people in the interior are impoverished, but given China's importance in the global economy, and the sophistication of its technology and its overall wealth, how much longer can you say it is "emerging”? Plus, Hong Kong is considered a developed market, and China's and Hong Kong's stock markets are clearly intertwined. Half of the market cap on the Hong Kong stock exchange is made up of mainland Chinese companies.

Rethinking Allocations
Once you make all of these mental adjustments, what then? The Americas, including the U.S., Canada and Latin America make up 40% of the world's market cap. So that becomes the reference percentage you start with before making any tactical or strategic adjustments. Note that this allocation includes a number of developed markets, Canada and the U.S.; and a number of emerging economies, Latin America. Instead of drawing a lot of distinctions about how developed each country is, focus on capturing the region and its various economies.

The Asian/Pacific region currently makes up 30% of the world's market cap. Europe, which includes many developed and some emerging Eastern European economies, makes up 25%. An "other" category, which includes many Middle Eastern and African nations, currently makes up 5%.

That's the base allocation. If you still have a U.S. bias you could raise the Americas allocation from 40% to 45%. You still want to stay ahead of the strong growth in Asia, so increased the Asia allocation a little bit, up to 32%. Next you reduced the Europe allocation from 25% to 20% to make room for the slightly increased expo-sure to the Asian region. The last piece of the puzzle is to reduce Middle Eastern and African nations from 5% to 3% of client portfolios.

Another advantage is that this approach is easy to implement. Within each of the broad allocations are a variety of country-specific ETFs, plus ETFs that focus on the different regions.

There could be a problem with two very popular ETF the Vanguard Emerging Markets Index and the iShares Emerging Markets Index. Both funds are based on MSCI criteria, what happens when MSCI determines that China is no longer an emerging market? It could be a huge mess. We need to keep track of this situation, since we currently use them in our client allocations.

When you look at the years since 2000 in this larger context, the lost decade doesn't seem quite so strange any more. We are starting to experience what everybody else in the world would consider normal market returns, perhaps even subnormal since the U.S. is now on a course that is opposite to its remarkable 20th century burst from relative obscurity to preeminence.

The difference between what we have come to expect and what we can actually expect from U.S. equities may not be as enormous as the big picture would make it seem. To satisfy my curiosity, I pulled out the Credit Suisse 2011 Global Investment Yearbook, which has stock returns for various countries and regions since 1900. The real (after-inflation) growth in U.S. stocks over that time period has been 6.3% a year. During much of that century and a decade, at least the first 80years or so, the U.S. was taking global market share away from Europe; in other words, America was ascendant and Europe was being passed, the way America is now being passed by the more rapidly-growing Asian economies.

Wrangling Over a Phantom Stimulus By Bob Veres

The headlines are screaming again, this time about the Capitol Hill controversy over payroll tax cuts. And, as usual, there is more to the story than what you're reading.

First the good news. Earlier reports said that a stalemate on the tax cut would shut down the government, but before the Senate went home for the holidays, it passed a separate bill that finances the government through next September.

Better news: by all reports, Republicans and Democrats were--and are--in general agreement that there should be some kind of stimulus to the still-recovering economy, and the biggest, least-stimulated sector is consumer spending. The Republicans argued for more tax relief for the wealthiest Americans, and want to reduce pollution controls and force the President to approve the proposed Keystone XL pipeline, which would deliver oil from tar sands in Alberta, Canada to refineries in Texas. Meanwhile, the Democrats wanted a broad-based stimulus measure that would put spending money in the hands of more mainstream American consumers. And they supported environmentalist opposition to the pipeline and the pollution proposals.

Naturally, the two sides couldn't agree on a compromise, so the Senate, by an overwhelming majority, kicked the can down the road for two months by agreeing to continue the reduction in Social Security taxes from 6.2% to 4.2% until Congress could get back in session early next year.

It seems clear that the Senators expected their colleagues in the House of Representatives to follow this simple solution. But nothing is simple in this partisan political atmosphere, and the House (for now, at least) has rejected the measure.

There are several interesting complexities here that should have gotten more attention. One of them is the problems that this wrangling has created for employers, who will have to scramble at the last minute to change their payroll systems to reflect either the 6.2% rate or the 4.2% rate. Which will it be? Who knows? All anybody knows for sure is that the withholding amount will need to be correct starting January 1, and the National Payroll Reporting Consortium has already said that, as a result of the brinkmanship, there is now not enough notice to accommodate any changes that quickly.

Of course, if and when the whole issue is taken up at the end of the proposed two-month extension, companies would face exactly the same dilemma. Chalk this up to a Congress that is oblivious to the consequences of its actions on the business community--especially small businesses.

Behind the scenes, there are other dramas. One involves the very complicated way that the Social Security tax reduction is structured. Reducing the payroll tax would obviously reduce the flow of money into the Social Security trust fund, which is famously experiencing solvency troubles of its own. Neither side wanted to be seen as making the entitlement mess any worse, so the stopgap bill would have had the U.S. Treasury pick up the payments--a sideways accounting move has no real substance. The bill also prevents doctors who accept Medicare payments from receiving a 27% reduction in reimbursement payments, which would weaken the financial stability of another entitlement program, so the Treasury will pay that out of its pocket as well.

But the surprising thing here is that this is actually a revenue-neutral piece of legislation. The Treasury coffers would be replenished through a side door that nobody seems to have noticed. Title IV, entitled "Mortgage Fees and Premiums," would have raised the amount that Fannie Mae and Freddie Mac--the organizations that back a majority of home loans in the U.S.--would collect in mortgage fees after January 2012. In all, the raised mortgage fees--which would increase the cost of homeownership at a time when the housing market is staggering--would pay for the two month extension of the payroll tax cut (estimated at $20 billion) plus two months of additional jobless benefits for 2.5 million out-of-work Americans (an estimated $8.4 billion) and two months of added Medicare reimbursements to doctors (an estimated $6.6 billion).

Can we call this a stimulus, when money comes out of the pockets of home buyers and put in the pockets of payroll workers, the unemployed and doctors? Since the bill seems to be stuck in partisan wrangling, maybe the question is moot anyway.

Don't Kill The Messenger

Don’t kill the messenger!

In days of old messengers were often killed by leaders, if they brought bad news to them, after awhile the messengers would defect or leave the country rather than bring bad news that would get them killed. Can you blame them?

Since the middle of August there has not been that much good news to talk about. I know some of you have been pretty disappointed that investments have not done better. Most people just want some good news. However, my job is to tell you the truth and safe guard your investments during times like this.

November 30th the DJIA was up almost 500 points and people were disappointed that we were not completely back into our investments. Yet if you understand what caused the rally you might be happier with cash.

First, China cut its reserve ratio requirement by 50 basis points overnight, which is the most effective means it has for trying to boost bank lending. This sent the markets up a bit over 1%. This is the first time since 2008 they have done so, indicating that the recent weakness in housing and construction markets in China is bad enough that China had to do something. The part that should be worrying you is China’s economy has hit a wall despite massive amounts of bank lending and deficit spending by China equal to at least 37% of its GDP in each of the last three years.

Second, there was a coordinated global central bank action to lower swap rates for European banks borrowing dollars. The U.S. Fed, ECB (European Central Bank) and other central banks are trying to make it attractive for banks in the Euro-zone to borrow dollars directly from the ECB instead of in the private or interbank markets. This keeps interest rates low. This was good for another 2% or so move in the markets. However, this does nothing to solve the underlying credit issues that are plaguing Europe, but merely postpones the day of reckoning. Everything I see and read tells me Europe will be in a recession like we had in 2008 within 18 months.

Third, the markets were oversold and trading on light volume which makes the sustainability of this move suspect. Despite the big move the markets stopped dead in the middle of the resistance band of 1245 to 1250 on the S&P 500.

Don’t Miss the Ten Best Days in the Stock Market

We have all seen the articles “Don’t Miss the Ten Best Days in the Stock Market” which all show that missing just a small percentage of the market's best days dramatically reduces an investor’s return. This assertion has been repeated so often that it's become unquestioned. Have you read an article that disputes this belief?

If you look at the top one-day gains and losses for the Dow Jones Industrial Average (DJIA), you will notice an interesting phenomenon.

1.The worst days seemed to be in close proximity to the best days

2.In the majority of cases, large percentage gainers were no more than 90
trading days away from a large percentage loser, sometimes before and sometimes
after.

3.In 50 percent of the cases, gainers and losers were separated by no more than
12 trading days.

4.When looking at Nasdaq's the largest gainers and losers, all but two have
occurred since 2000.

These observations make it hard to believe that investment success rested upon being fully invested in order to catch the winning days. Rather, especially in the case of the Nasdaq crash of 2000, it suggests that it was more important to miss the worst bear market which brings us to the other side of the coin: All of the "Don't Miss the Ten Best" articles fail to mention what would happen to your portfolio if you missed the ten worst days. We know that it takes a 100% gain to make up for a 50% loss and Monte Carlo retirement analysis shows that low volatility portfolios often last longer than those tuned for high returns especially during your retirement years when you are drawing on your investments. So it's more important to avoid large losses than it is to pursue large gains.

What happens if rather than missing the ten best days, you miss the ten worst?

Paul Gire, CFP®, from Strategic Advisory Services decided to study this. He examined one of the most bullish periods in Dow history, from 1984 to 1998. In addition, He examined the impact from missing not just the 10 best and worst days, but also examined the 20, 30, and 40 best and worst days. What he found was simply remarkable.

1.The buy-and-hold return for this 15-year period was 17.89%, one of the most
bullish periods in the stock market’s history.

2.As expected, missing the best days lowered returns, and missing just 40 of
the best days over this 15 year period cut returns nearly in half.

3.Missing the worst days has the expected result of increasing returns
substantially, improving the return by 77% for missing the 40 worst days.

However, how realistic can it be to get in and out of your investments and be in your investments on the best days and out of your investments on the worst days, if 50% of those days are within 12 trading days of each other and all the rest are within 90 days of each other? Paul’s next discovery was really remarkable and to me the final key to my puzzle.

By missing both the best and the worst days between 1984 to 1998 you got a remarkably consistent return. Whereas missing just the best or worst had a magnified impact as the number of days increased, missing both produced a consistent return of approximately 20%, as shown by the chart at the beginning of this post.

Not only does missing both result in superior returns, imagine the benefits from lower volatility:

1.Lower mental and physical stress.

2.Less volatility on retirement income making it last much longer.

As investors learned during the 2000 to 2002 and 2008 to 2009 market meltdowns, it's one thing to stay the course when investments are booming, yet quite another when market meltdowns are rapidly eroding gains from years of careful saving and investing. The 30 months 2000 to 2002 stock market meltdown erased half of the market gains made since 1974, the previous 26 years. Then came 2008 and early 2009. Now look at what is happening in 2011.

Is it possible we are missing something when we look at the last 110 and 10 year periods? Stay tuned for next month's post!

World problems and November 23rd:

The current worldwide problems have so many twists and turns you just don't know what to do next. Let’s take a look at what I am seeing right now.

Europe: Every time one of the PIIGS (Portugal, Italy, Ireland, Greece & Spain) appears to have or not have a solution to their debt problems your investments go crazy. The DJIA can move up and down 500 points in a day. The problem as I see it is that we have five countries with debt problems and only one or two have been working on their problems. So does this mean we will continue to have 500 point swings until all five countries get things under control? Probably?

United States: The Presidential cycle tells us that we have 7 ½ months before the market volatility will slow down in the United States. Our unemployment is way too high, with no hope to go lower until after the election next year. Does that last statement surprise you? It should not. The Republicans do not want the country to get better, or they won’t be able to put a Republican in the White House.

Inflation and Interest Rates: Here the government maybe down right lying to us. They tell us that we have no inflation and it is better for the recovery to keep interest rates low.

I was buying this for a while. Then I heard the statement, “If Italy could pay 2%, rather than 6% on their bonds, Italy would not have its current debt problems.

That got me thinking, since I was also told that higher inflation would help the recovery rather than hurt it. With inflation housing prices would go up, companies could raise prices, profits would go up, individual wealth would increase, companies would have a reason to start hiring and the economy could get better.

So why has the Federal Reserve stated that they will keep interest rates low for the next two year. The Government maybe afraid if inflation and interest rates were to be allowed to move freely, the interest rate the government would have to pay on their bonds would go up so high that the United States could be in the same shape that the PIIGS are now.

The Super Committee: Before you start thinking of Thanksgiving turkey or holiday shopping, there’s a big hurdle we have to surmount. The Nov. 23 deadline for the “Super Committee” of the U.S. Congress to come up with at least $1.2 trillion in cuts to the federal budget deficit over the next 10-years. If they don’t work out a deal, automatic budget cuts will take effect, as ordered by last summer’s debt ceiling agreement. While we’ve been watching Greece and Italy, this small group of legislators has been trying to work out an agreement on how to do this. Neither party wants their members to give in to an agreement that does not help their own party in the coming election.

If there isn’t some give and take now, the consequences could be draconian cuts in everything from the military budget to all social programs, not to mention what this would do to the stock markets.

There are other possibilities. The committee could ask for a deadline extension. The goal is to have the Congressional Budget Office “score” the savings in time for Congress to pass the package by the end of the year. They will only have four weeks to do that, after the 23rd, if they want to go home for Christmas.

If the committee is deadlock and fails to agree, it could put the United States in the position that Italy and Greece are currently in.

If they could come to agree on even deeper cuts than the minimum, it could set America back on the right course for the next generation. Today's voters would not like what it would take to do this, but it would have a very positive effect on the future of the country and the stock markets. What do you think the chance of this happening is?

The results that come out of the Super Committee will create a significant turning point for the economy. So we want to be prepared to adjust your long-term investment allocations, but we don’t want to jump before thinking about the consequences.

If the Super Committee and Congress can’t come to an effective resolution, gold will surely soar; inflation or debt default will push interest rates much higher. The stock market’s immediate reaction would be downward as market participants don't like uncertainty, but stocks historically have been a very good hedge against inflation. If the Super Committee does not come up with a solution by November 23rd and the stock markets fall; any cash you currently have will look pretty good. Yet, you will need to get that cash invested while the markets are down to profit from our government’s inability to do what it should do.

So how should you invest if that happens?
That just went out in my latest newsletter to clients.

U.S. Debt: YOU CAN BE PART OF THE SOLUTION!

Since April 2011 Americans witnessed a political theater over the U.S. debt ceiling. The Standard and Poor’s review of that performance resulted in a downgrade of the federal government’s credit rating.

While Congress raised the debt ceiling for now, the U.S. debt remains a problem and the short-term solution offered by the deal in Congress does little to give us a long-lasting solution.

The creation of a “super” deficit committee by Congress merely kicked the can down the road. Congress, and its long years of indecision regarding what to do about deficits and the national debt, is the problem!

The U.S. is currently experiencing historically high levels of debt. The best way policy experts have of measuring debt burden is comparing the national debt to total Gross Domestic Production (GDP). Today, the total net debt is 75% of GDP. This type of high debt is normal during periods of war like that of WWI and WWII. We are at war in Afghanistan and Iraq; however, that is nowhere near the wartime mobilization of WWI and WWII.

The U.S. debt is an accumulation of many years of deficits, which has been brought about by exceeding revenues during past fiscal year. These deficits did not cause our current situation alone. The U.S. has run an annual deficit in almost every year since 1945. But we have never encountered debt levels as perilous as the one we have now.

Our debt is due to structural causes brought about by poor political choices. These poorly designed public policies directly contributed to the housing bubble, loose oversight of Fannie Mae and Freddie Mac, lack of regulations on sub-prime lending and low-interest rates for far to long.

Public policies in response to the 2008 meltdown led to even higher debt with its fiscal stimulus and monetary policy. We should not fault the federal government’s response to the crisis in 2008; there were very few alternatives available once we got into that mess.

So you see, our large debt burden problem is structural and will not be reversed when the economy picks up. The hole the Congress has dug for our country is far to deep and getting deeper at an accelerating rate. We are coming to a tipping point. If we reach that point, several negative consequences could result.

1. The national debt will crowd out private investment.
2. Spending will have to be cut and taxes raised to pay off just the increasing interest on the U.S. debt.
3. The debt load will severely restrict the government’s ability to act in times of an emergency.

There is time to start reversing the trend; we are not doomed to the fate of countries such as Greece and Ireland. Yet, it will take a bipartisan approach and shared sacrifice to correct our present course and here in lays the problem. We have seen how our Congress and Senate work together, or should I say do not work together. If the U.S. continues down the same road it has been on for the last 12 years, we are going to get the same results: recessions, higher U.S. debt and continued high unemployment.

The definition of insanity is continuing to do the same thing you have always done an expecting a different results.

You can be part of the solution. We are about to go through the thing that has always made this country GREAT! A National election! You need to meet with our candidates and listen closely to them. You also need to be heard by them. You need to be heard saying that you will not stand for politics as usual. You know in your heart of hearts that to actually fix the problems of the U.S. debt, unemployment and our country; we will have to raise taxes and cut spending. Don’t stand for a politician that is promising “No new taxes” or “We can cut spending” alone. They are simply saying what you want to hear to get elected. Stand up for what you personally feel it is going to take to fix our country!

Did anyone get the license number of the truck that just ran over the stock markets?

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity…” These words, penned in 1859 by Charles Dickens, could well describe the technical picture of our current market.

Without the help of any particularly bad news announcements, the stock market fell hard today, August 4th, with Dow Jones Industrial Average down nearly 513 points.

We moved our bond money back into markets during the first of the week just before the debt problem was fixed. Yes, Washington just kicked the can down the road and did not fix the problem, but they did enough that the markets should have been happy for now. However, look what is happening?

I have checked the Yield curve, oil prices and transportationals and only the transportationals show any signs of a problem.

I am not sure what is causing the current problem, except Washington’s dragging out the debt crisis and other problems like the air traffic control problem. Washington may have spooked the world by their ineptitude and lack of understanding of what goes on in the real world. Congress and the Senate went on vacation while the U.S. Markets (Roman) burns.

Every year the stock markets have a 10% or 15% correction. We had a 10% correction caused by the Japanese Tsunami. I had hope that would be the only one this year. However we are down 10% this week, during a period of time that we should be going up? It feels like October 1987?

Stay tuned for tomorrow!

God bless!

How to use your computer to get high quality low cost hotels!

Priceline, Bidding For Travel and Trip Advisor.

This information was originally given to me by a friend. I have changed it a little to try and make it easier to understand and use. OK,I’ll admit it: I’m on a mission to teach others how to get high quality hotel rooms at the lowest cost possible when they travel. So I would like to share how to make the most of Priceline.com, the website that helps users obtain discount rates for travel related services like airline tickets, hotels and rental cars. Priceline is not a direct supplier of these services. Instead, it facilitates its suppliers’ services to its customers.

http://www.priceline.com

Priceline offers two basic services:

1. A fixed-price travel service just like any other travel agency.
2. The other is the “Name Your Own Price” feature.

Priceline’s fixed-price service offers nothing special in terms of pricing, unless Priceline happens to posts a mistake rate that users can jump on if they act quickly. But that’s rare.

However, the “Name Your Own Price” feature can save you up to 60 percent on hotel costs
if you know how to use it.

To make the most of Priceline, you have to start by becoming familiar with four other sites: BiddingForTravel.com, BetterBidding.com, BiddingTraveler.com, and TripAdvisor.com.

BiddingForTravel, TravelBuddy, and BetterBidding are sites that list successful previous Priceline bids for airfares, hotels and car rentals around the world. Along with TripAdvisor, they also list reviews for the hotels in any given city, and by region, and by star rating, Five Star is the best, One Star is really bad. I bid for Four Star and Three Star hotels and, if the reviews are OK, Two and a Half Star hotels in a region where I want to stay.

http://biddingfortravel.yuku.com/

http://www.travelbuddy.com

http://www.betterbidding.com

http://www.tripadvisor.com

To go through the steps, I’ll use a trip I took to see a client a few years ago. He lived in Boston at the time.

First, I went to Priceline.com and the Name Your Own Price hotels and found the various regions listed for the Boston market as well as the top hotel ratings in that zone.

Then:

1. I opened another window and headed to BiddingForTravel.com. On that site, I went to “hotels,” then “Mass,” then “Boston.” I checked previous accepted prices in the various regions of Boston.

2. Then I looked at reviews of the hotels on TripAdvisor.com.

3. Then decided what star level I was comfortable with.

For me the downtown Copley and the Back Bay regions were too expensive. The airport region was best for me and within my frugal budget, especially since it came with shuttle service to the subway stop (“T”) to go downtown and then back to the hotel. On other trips to Boston, I’ve typically gotten the Hyatt Harborside Hotel, at Boston Logan Airport for $56 per night. It’s a beautiful hotel that costs $149 a night on a typical weekend. I always ask for a waterside room. If you do not ask for what you want, when you get to the hotel, they will give you a bad view by the elevators.

The key to being successful at BiddingForTravel.com is to read carefully the section on bidding and re-bidding. It is located in the Hotels FAQ. Suppose you want “Zone Airport” and a Four-Star hotel. From previous bidders, you see that $56 has been won in the past, so your first bid should be: Zone Airport, 4 stars, $50. If you don’t win that one, then add another zone that only has lower star levels available, and this time bid $54. If there are five zones without a hotel over three and one half stars, you get five free re-bids until you get an accepted bid.

Re-bidding allows you to start low and move your price higher without changing your parameters. But I have to caution you again: Read these sections of BiddingForTravel.com before going to Priceline.com where you will actually place your bids. You should even practice this technique with several imaginary cities without hitting the “Buy My Hotel” button. Once you’ve booked on Priceline, there are no refunds.

We have had people stay in Priceline rooms in over 30 U.S. cities, as well as in London, Dublin, Paris and Rome and they have never been disappointed. The key is to do your research on BiddingForTravel.com or BetterBidding.com first, then double-check the reviews at TripAdvisor.com.

It’s also important to remember to bid one star level higher in Europe for accurate comparisons to U.S. hotels. One bad hotel in a given zone and at a given star rating should force you to bid at a higher level or different zone for that city.”

Bottom line: By using these websites in conjunction – Priceline, TripAdvisor, BiddingForTravel, BetterBidding - you can save 60% on your travel expenses for the rest of your travel life.

It takes some work, but a dollar in your pocket is better than a dollar in someone else’s pocket. Play with this a couple of times and it will become easier than you think.

The U.S. debt ceiling is no place for politicians to be playing chicken!

If you want a less-than-serious look at how our banking system works, try this short video on for size: http://www.youtube.com/watch?v=M_3T-Af57Pg&NR=1.

But if you want to know how Washington works, you need an insider to guide you.

Chances are, you've been a little dismayed about what you're seeing in Washington these days. Not only are the two parties constantly bickering at each other, but they seem to be blocking each other from getting anything done. That may be a great thing under normal circumstances, but at a time when there are so many major problems to be solved, gridlock doesn't seem to be the ideal solution.

That's why so many financial advisors were interested to hear what David Gergen said when he spoke at NAPFA’s conference in Salt Lake City. Gergen has worked for both Democratic and Republican presidents, and has managed to keep an insider's view of Washington. In his view, are things really as bad as they seem?

Gergen told the audience that, despite all the bickering, both sides of the aisle see the current debt crisis through the same basic filter. "People in Washington basically agree on the nature of the problem and its consequences," he said. "which are outlined in the theories proposed by economists Ken Rogoff and Carmen Reinhart."

Rogoff and Reinhart's influential book, entitled "This Time It's Different," looks at various debt, fiscal and economic crises in different countries around the world over a period of several hundred years. Their conclusion is that the most crippling economic scenarios play out over a familiar pattern. First, you have a financial crisis, and the government throws a ton of money to end it. "But then," said Gergen, "you have thrown so many resources at the problem that it moves from a financial to a fiscal crisis, because the government had to borrow so much to stop the financial crisis. And it is how they handle the fiscal crisis that determines their long-term well-being as a country."

The book also outlines some danger zones. If public debt grows larger than 60% of the size of the country's economy, you start to enter a danger zone. "At that point, you really need to deal with the problem or you are moving into deeper water," said Gergen.

If the debt level reaches 100% of GDP, the country moves into the danger zone. Its economic growth rate goes down at least a percentage point, and creditors (think: China) begin to get nervous and demand higher rates on their government bond investments. Borrowing costs go up, adding to the problem, and the lower economic growth rate lowers tax revenues, making it harder to pay down the debt, which and sends the whole situation into another round of still higher borrowing costs and lower economic growth.

Gergen noted that since World War II, U.S. government debt has generally run about 38% of America's Gross Domestic Product--what Rogoff and Reinhardt would call a healthy range. This last year, we reached the 60% level. Under the government's current trajectory, we might hit that 100% level in less than a decade.

Both Republicans and Democrats want to avoid that scenario, which is the good news. The bad news is that they disagree on how to do it. "There are two ways to address the problem," Gergen told the audience. "You can cut spending, or you can raise revenues. Spending is 25% of GDP right now. The Republicans want to get that down to 21%, the Democrats want to cut but not that far, and they both want to cut different things." To make up the difference, the Democratic leadership wants to raise taxes on upper-income Americans; the Republicans want to maintain the current tax rates.

Is there any hope? Gergen noted that a bipartisan committee headed by Republican ex-Senator Alan Simpson and Democratic former White House chief of staff Erskine Bowles has mapped out a way to reduce total government debt by $4 trillion, cutting spending by two dollars for every dollar of tax increases. A so-called Gang of 6 in Congress that included both liberal Democrats and Conservative Republicans was working on an alternative proposal, but that fell apart a week before Gergen spoke. A third group, chaired by Vice President Joe Biden, is still holding meetings.

Overhanging any negotiations, and making them more complicated, is the debt ceiling limit, which will be breached on August 2, throwing the U.S. in technical default on all of its bond obligations. "[U.S. Treasury Secretary Tim] Geithner would like to get this resolved well before August 2, so as not to rattle the markets," Gergen told the audience. "The Wall Street folks are warning the people in Washington not to play with the debt ceiling, that any loss of confidence in the U.S. could be a big deal. Meanwhile, the Republican leadership thinks they'll get a better deal as they approach August 2, and some Republicans think there may not be a problem if the negotiations go past August 2."

The silent party to these negotiations, the general public, seems not to understand the severity of the issue, Gergen said. "In recent polls, 60% of them think we should not raise the debt limit," he told the audience.

In the long run, Gergen said, if Congress manages to address the debt issue responsibly, it could make America stronger. "Otherwise," he said, "it will be very bad news." Because the political risks of taking action that might alienate the public, both Congress and the White House seem to prefer kicking the government debt issue down the road for 18 months, deferring any serious action until after the 2012 elections, which Gergen finds dismaying.

"We're playing right close to the edge on this," he told the group. "This is dangerous stuff for our politicians to be playing with." He described it as one of the most serious issues he has seen in Washington in the last 30-40 years.

Are the gasoline prices going to slow the current economic recovery?

Yesterday, when I filled up my, Lincoln MKZ Hybrid, gasoline tank I hit my all time record for the cost of a tank of gas, $64. So I started asking everyone I talked to, “How are the current gasoline prices affecting your activities?” They have all said gasoline prices are having an effect on how often they drive and the plans they are making for the summer.

Since crude oil is one of my three main indicators for stock market problems I decided to go back and see how crude and gasoline prices today relate to those in the past.

First, when crude oil prices go up near 80% on the first day of the month over the same price 12 months before, it signals a stock market problem coming. It has correctly signaled this January 1, 1974, September 1, 1979, July 1, 1987, September 1, 1990, November 1, 1999, July 1, 2000, October 1, 2004, November 1, 2007 and January 1, 2010. This was the only signal that called the October 1987 crash. So let’s take a look at what it is telling us today:

• Crude oil prices were up 54.02% over the same price 12 months ago on May 1, 2011, current Midwest regular gasoline price were $4.19 per gallon.
• The last time crude oil was this high was April 1, 2008, crude oil prices were $100.98 per barrel and gasoline prices were $3.71 per gallon.
• By July 1, 2008 crude oil prices were $140.97 per barrel and Midwest regular gasoline prices were $4.21 per gallon.
• Crude oil prices at or near $130.64 per barrel on June 1, 2011 would be a very red flag.

Interestingly enough, all reports show that we have a surplus of gasoline today. This is being explained because of all of the hybrid and high mileage cars that have been bought in the past few years.

If this is the case then why are prices so high? Well part of the reason is the political problems around the world in oil producing countries. The other part might be because of speculators within the investment markets. Our current gasoline prices are as high as when crude oil was at $140 per barrel not $111 per barrel. Why might that be?

Finally, why is this important to you: Crude oil has to do with everything you do and have; it does not just affect your gasoline prices? Crude oil is used for:

• Farmer’s fertilizer when they are planting your food.
• Medical chemicals.
• Clothing chemicals.
• Furniture finishing products.
• Cleaning chemicals.
• Transportation of products to factories and then to retailers and much more.

Only time will tell how big of a problem this is

Slow Buring Crisis

Through a combination of procrastination and bad timing baby boomers are facing a personal finance disaster just as they're hoping to retire. In January this year, more than 10,000 baby boomers a day began turning 65, a pattern that will continue for the next 19 years.

The boomers, who in their youth revolutionized everything from music to race relations, are set to redefine retirement. But a generation that made its mark in the tumultuous 1960s now faces a crisis as it hits its own mid-60s.

"The situation is extremely serious because baby boomers have not saved very effectively for retirement and are still retiring too early," says Olivia Mitchell, director of the Boettner Center for Pensions and Retirement Research at the University of Pennsylvania.

Today, I sees a lot of new empty-nesters who spent all their years and money raising kids, putting them through school and clothing them in the right brands.

"Now their kids are gone, and they realize they've done nothing to prepare for retirement. Many prospects come in to see us today and think they have all this money and they ask how they're doing, and they're shocked when I tell them they are in trouble. When they were kids, they thought that if they had $100,000, they were rich. Today, that doesn't go very far."

There are several reasons to be concerned:

• The traditional pension plan has disappearing. In 1980, 39% of private-sector workers had a pension that guaranteed a steady payout during retirement. Today that number stands closer to 15% and getting smaller, according to the Employee Benefit Research Institute.

• Reliance on stocks in retirement plans is greater than ever; 42% of those workers now have 401(k) accounts. But the past decade has been a lost one for stocks.

• Many retirees banked on their homes as their retirement fund. But the crash in housing prices has slashed a third of a typical home's value. Now 22% of homeowners, or nearly 11 million people, owe more on their mortgage than their home is worth. Many are boomers.

Failure to save

Too many boomers have ignored or underestimated the worsening outlook for their finances, says Jean Setzfand, director of financial security for AARP, the group that represents Americans over age 50. By far the greatest shortcoming has been a failure to save. The personal savings rate - the amount of disposable income unspent - averaged close to 10% in the 1970s and '80s. By late 2007, the rate had sunk to -1%.

The recession has helped improve the savings rate - it's now back above 5%. Yet typical boomers are still woefully short on retirement savings. Boomers in their 50s and 60s with a 401(k)account for at least six years had an average balance of less than $150,000 at the end of 2009.

Signs of coming trouble are visible on several other fronts, too:

• Mortgage debt: Nearly two in three people age 55 to 64 had a mortgage in 2007, with a median debt of $85,000.

• Social Security: Nearly 3 out of 4 people file to claim Social Security benefits as soon as they're eligible at age 62. That locks them in at a much lower amount than they would get if they waited.

The monthly checks are about 25 percent less if you retire at 62 instead of full retirement age, which is 66 for those born from 1943 to 1954. If you wait until 70, your check can be 75 percent to 80 percent more than at 62. So, a boomer who claimed a $1,200 monthly benefit in 2008 at age 62 could have received about $2,000 by holding off until 70.

• Medical costs: Health care expenses are soaring, and the availability of retiree benefits is declining.
"People cannot fathom how much money will be needed to simply cover out-of-pocket medical care costs," says Mitchell of the University of Pennsylvania.

A 55-year-old man with typical drug expenses needs to have about $187,000 just to cover future medical costs. That's if he wants to be 90 percent certain to have enough money to supplement Medicare coverage in retirement, according to the Employee Benefit Research Institute. Because of greater longevity, a 65-year-old woman would need even more to cover her health insurance premiums and out-of-pocket health expenses: an estimated $213,000.

• Employment: Boomers both need and want to work longer than previous generations. But unemployment is near 10 percent, and many have lost their jobs.

The average unemployment period for those 55 and older was 45 weeks in November. That's 12 weeks longer than for younger job-seekers. It's also more than double the 20-week period this group faced at the beginning of the recession in December 2007.

If financial neglect turns out to be many boomers' undoing, challenging circumstances are stymieing others.


'Slow-burning' crisis

Add this all up, and there's a "slow-burning" retirement crisis for boomers, says Anthony Webb, a research economist at the Center for Retirement Research.

"If you have a crisis where the adverse consequences are immediately clear, then people understand that they have to do something," Webb said. "When the consequences will be felt 20 or 30 years in the future, the temptation is that we kick the can down the road."

As a result, he believes many won't change their behavior.

For less affluent boomers, it won't take that long to feel the pain of poor planning. Concerns about financial trouble will hang over many of those 65th birthday celebrations in 2011.

Many seem to view their plight through rose-colored granny glasses. An AARP survey last month of boomers turning 65 next year found that they worry no more about money than they did at age 60 - before the recession or the collapse of home prices. But in an acknowledgement of reality, 40% of boomers said they plan to work "until they drop."

You, Too, Can Balance the Federal Budget

Want to have a little mindless fun? Try balancing the federal budget in ten minutes or less.

Believe it or not, you can actually do this on an interactive web site created by the New York Times. (You can find it here: http://www.nytimes.com/interactive/2010/11/13/weekinreview/deficits-graphic.html) There are two graphics at the top of the page: one is the projected shortfall in 2015 (a scary $418 billion), and the other is a more long-term (and scarier) deficit in 2030 ($1.345 trillion).

To reduce those numbers, you make hard choices. You can cut foreign aid in half, eliminate all farm subsidies, cut the pay of civilian federal workers by 5 percent, reduce the federal workforce by 10 percent, reduce the military to pre-Iraq War size and reduce troops in Asia and Europe, reduce the number of troops in Iran and Afghanistan to 30,000 by 2013 (or make more modest cuts), raise the Social Security retirement age (there are two options), modify estate taxes, reduce or eliminate the Bush tax cuts, or impose a national sales tax and/or carbon tax.

And more. With each box you check (each cut you make or tax you raise), you see how much progress you're making on the overall budget deficit in 2015 and 2030. The choices are not easy ones, and you quickly discover that the "fixes" most often debated on both sides of the aisle in Congress won't make much of a dent.

Unfortunately, there isn't a button on the web site that you can push to make these deficit reduction provisions actually happen in the real world. But having an easy, interactive tool like this will undoubtedly help raise awareness, among the people who don't deal with these budget numbers on a daily basis, about the kind of measures that will have to be taken if we don't want to leave our children and grandchildren with a ton of federal debt to pay off. You'll probably remember this little game next time you hear a politician talking tough about eliminating debt in Washington.

The Informational Risk Premium

When you step back and look at the investment landscape, it is sometimes helpful to ask yourself if anything really IS different this time; to try to determine what has changed.

The usual answers point to recent return gyrations: the tech bubble's spectacular burst ten years ago, the near-death experience of global capitalism in 2008-2009. But the truth is, we've seen all this before in one form or another. Ask your grandparents; the 1929 crash and Great Depression were far more painful to far more people than anything we've experienced in recent years.

Michael Aronstein, who manages a mutual fund called the Marketfield Fund, offers an interestingly different take on what is fundamentally different today. In a one-hour speech at the NAPFA Practice Management & Investments Conference in San Diego, on September 22, he connected two dots that most of us are aware of intuitively, but may not have consciously considered. He said that the primary challenge for investment advisors, financial planners and money managers today, which is different from the challenges you faced in the past, is the sheer amount of attention that individual investors are now able to pay to the ups and downs in their portfolios.

"In the last 15 years," he said, "we have moved from an era where people who were not in the business would check stock quotes, if at all, in the morning when they got their newspaper. Sometimes, you would listen to a radio program on your way home from work, and it might tell you what the Dow Jones Industrial Average closed at."

Compare that with today, when it's possible to have a running ticker at the bottom of your computer screen, or a portrait of your investment portfolio continuously updating its various components and arriving at new values every 15 minutes. At the same time, news, information and even fundamental analysis might be flowing into your brain through various sources. "Regarding the economy and its various indicators, there are probably ten thousand data points that we could be looking at in real time," Aronstein continued. "Combine that with hundreds and hundreds of opinions being thrown around as important every day, and it is a formula for driving everybody insane--and I think that really is what is happening to the investing public."

Put in its simplest terms, we are being driven to an unbalanced mental state by the sheer amount of information and opinions that are piling into our awareness at increasing speed, and nobody has a vested interest in telling us that paying attention is highly unlikely to improve our investing lives. In fact, to the extent that we feel panic, fear or a concern that we're missing out on some opportunity, all this information may well be sabotaging the average person's returns.

Panic is a particularly dangerous emotion to investment portfolios, and there is some evidence that more of it is being artificially manufactured by the media than ever before. Aronstein pointed out that it has become a pretty good business to give out doomsday information and frighten investors, and a lot of people have become pretty good at it. "It is rare to spend a day watching CNBC or any of the other financial reality programs," he said, "and not hear somebody come out with the most disastrous, frightening, extreme forecast about what is going on in the world and in peoples' portfolios."

That, in itself, helps us get a better handle on this new era of investing. Aronstein said that risk assets like stocks, which tend to be liquid and priced every second, become increasingly unattractive in an environment where there is a negative or confusing spin on their every movement. Who wants to own something which increasingly gives you heartburn and insomnia? As people sell out of the investments in order to avoid this confusion/heartburn factor, risk assets become more attractively priced than their fundamentals would justify. This could raise their future returns the same way value stocks enjoy return advantages over sexier growth companies: they are less attractive to the average investor.

Instead, investors might become more interested in investments which aren't traded every day--such as real estate and certain types of hedge funds. Because there is no way to watch them change in value in real time, the market commentators aren't talking about them or offering doomsday scenarios before the commercial break. Look for these products to proliferate, not necessarily because anybody believes less-liquid products offer better returns, but because they reduce stress.

It would be easy to say that market reality shows represent a scourge on the investing world. Of course they are unhelpful. Of course the moment-by-moment market movements and most of the data and opinions are of less than zero value to your financial health.

But the important thing here is for all of us to recognize that a new risk factor has emerged in the investment marketplace. This emerging "information risk premium" suggests that if you can tolerate (or ignore) the uncertainty and doomsday commentaries while others cannot, you might be able to get better returns ultimately

10 things to do with your IRA before the end of the year!

Your IRA, your own piece of your retirement puzzle, requires some tender loving care. Here’s a list of what you might need to do before December 31, 2011.

1. Take your required minimum distribution

Make sure all Required Minimum Distributions (RMD) are taken for the year 2010.

Look at all owned IRA accounts and employer plans (401(k), TSA and SEPs) for individuals age 70 ½ or older this year or inherited IRAs.

Beneficiaries, no matter what their age, must take distributions from all inherited accounts beginning in the year after the death of the account owner. Also, inherited accounts must be split before year end so beneficiaries can use their own life expectancies to calculate their RMDs.

Remember to take any 72(t) distributions that are required for 2010. If you fail to do this, you will pay penalty and interest retroactively to the first year you started taking these distributions.

2. Check for excess contributions

It might seem unlikely, given that the average IRA contribution is $3,798, but it’s possible that you contributed too much to your IRA during the year. If so, remove any excess contributions before the end of the year or you will be charged a 6% penalty for any excess contributions.

3. Is everything in place?

Take nothing for granted when it comes to your IRA. Before year end, double check on all IRA funds that you moved from one account to another during 2010, make sure that IRA funds went into IRA accounts, not non-IRA accounts or Roth IRAs and be sure that Roth IRA funds went into Roth IRA accounts.

4. Can you do a stretch IRA?

Check whether your IRA custodian or 401(k) plan administrator will allow for the so-called “stretch” for beneficiaries.

The stretch means that beneficiaries can use their own life expectancy for distributions. In addition, check whether the custodian or plan administrator will accept a durable power of attorney, and disclaimers.

The answer to these questions will have substantial impact on the success of your estate plan. If the custodian or 401(k) (plan administrator) doesn’t accept a durable power of attorney or disclaimer, you might consider another custodian.

5. Who’s your beneficiary?

Here’s some well-worn but can’t be repeated often enough advice: Review your beneficiary designations. Make sure there is both a primary and a contingent beneficiary named on the beneficiary designation form.

If there is no beneficiary named, the IRA proceeds will go to the estate and lose the tax advantage of the stretch benefits. If there is no contingent beneficiary, and the primary beneficiary has died, then the assets also go to the estate with the same negative result.

It’s especially worth checking your beneficiary designations if you’re divorced. Make sure your ex-spouse has been deleted as a beneficiary, unless you want them to remain as a beneficiary. The U.S. Supreme Court has recently ruled that the beneficiary named on the beneficiary designation form trumps divorce.

Don’t name your living trust as your beneficiary. A living trust should not be the beneficiary because the living trust must qualify as a ‘designated beneficiary’ to receive favorable stretch and tax treatment. I find that most living trusts do not qualify, or can lose their designated beneficiary status through later changes to the trust.

Make sure your custodian has a written copy of your beneficiary designations.

6. One last chance for Roth conversions

If you plan to do a Roth conversion in 2010, the funds must leave the IRA by Dec. 31 to be reported and taxable as a 2010 distribution and conversion. The funds can then be rolled over to the Roth IRA up to 60 days after they are received by the account owner.

Contrary to what some might believe, you do not have until April 15, 2011 to do a 2010 Roth conversion.

Here's another reason why you might want to convert some or all of your IRA to a Roth IRA: the Roth IRA could fund a credit shelter or by-pass trust.
Remember, anyone can convert their traditional IRAs to a Roth IRA in 2010 regardless of income. What’s more, you can pay the taxes over two years, instead of one.

7. Turn wealth into income

Right about now, the Social Security Administration is sending you a report that tells you how much income you’ll receive in today’s dollars when you retire. Write down that number on a piece of paper.

Now, total up the value of all IRA and 401(k) accounts in your household and multiple that number by 0.04. That number is the amount some experts say you could withdraw from your retirement in today’s dollars.
Now, add that number to your Social Security benefit figure, and then subtract that amount from your income. The results are roughly the amount of money you’ll need from other sources (such as work, pensions, reverse mortgages, life insurance or inheritances) to enjoy a lifestyle similar to what you have today. If you are not working you will no longer be paying your social security taxes, roughly 6.5% of your earned income each year.

Let’s use some round numbers as an example. Say you have household income of $100,000. You expect to receive $25,000 per year from Social Security and withdraw $5,000 per year from your retirement accounts. If you do not work you will no longer be paying $6,500 in social security taxes. Somehow you’ll need to come up with another $63,500 per year to live the life to which you are accustomed.

For some, the best way to close the gap will be to contribute more to their IRAs and 401(k)s wile working, work longer, or lower their standard of living.

8. Review your investment plan

Consider updating your investment policy statement or plan. Make sure your asset allocation remains appropriate given your financial goals.
Rebalance your IRA’s asset allocation, if you haven’t done so within the past year. It’s best to rebalance your IRA in a holistic manner. That is, look at all your assets in all your accounts, taxable and tax-deferred.

In many cases, consider putting your fixed-income investments in your tax-deferred accounts and those investments that produce capital gains and dividend income in your taxable accounts.

Since IRAs are tax-deferred vehicles, it makes no sense for them to hold ‘tax-preferenced’ investments such as municipal bonds and annuities.

You can also use your RMDs to rebalance. It could save on transaction costs.

9. Roll old 401(k)s to an IRA

If you have one or more 401(k)s sitting with former employers, consider rolling that money over to an IRA. You should get better investment choices, lower costs and more control of your investment assets.

10. Recharacterize your Roth IRA

If you converted a traditional IRA into a Roth IRA during 2010 and now realize that your income taxes were higher than expected due to the conversion, or you’re short money to pay the income tax or you’re unwilling to pay the income tax, consider a recharacterization. That is, consider putting the money in the Roth IRA back into your traditional IRA.

Retirement Planning, Technology and Clients Over 37 Years

Thirty seven years ago, there were very few financial planners. There were very few investment choices and for most of us retirement planning was pretty much a theoretical exercise. I had no retired clients. I built my business with people my age or in their early forties, plus or minus fifteen years. They were mainly concerned with accumulating assets. They were oblivious wondering how they would actually convert those assets into an income stream at retirement.

Back then we used hand held calculators to calculate investment returns and retirement projections. When computers first came out we paid $1.00 per minute for our calculations that can now be done on Excel. It took 20 to 30 minutes to do what we can now calculate in 30 seconds. The retirement sufficiency calculations we used were deterministic, employing static savings, earnings, spending, and inflation assumptions. The results were neat, smooth chart showing a clients money growing evenly and gradually going down during retirement. It was the best we could do at the time. But it brings to my mind the H. L. Mencken quote, “For every complex problem there is an answer that is clear, simple, and wrong.” At my core I’m a math and finance geek. My first spreadsheet program was on Lotus 123. I cut my teeth writing single-sheet spreadsheets and thought I had died and gone to heaven when linkable, multi-sheet spreadsheets came along. They allowed us to build increasingly customizable spreadsheets that could incorporate complex client assumptions. As it turns out, client and investment market behavior was rarely captured in those assumptions.

If you want some humbling entertainment, look at a few of the retirement calculations I performed 20 years ago. I generally find that I overstated the portfolio earnings rate (greatly), the inflation rate (modestly), and the savings rate (ridiculously). I underestimated the increase in the spending level and client’s unexpected large withdrawals. I had absolutely no way to predict divorce or death of a spouse and I were really thrown curve balls on job losses. And let’s face it; in 1999 no one predicted that the U.S. stock market indices would enjoy a decade of negative returns. That’ll leave a mark on any retirement program!

So, here are five things about retirement planning I have learned. They may be debatable; they’re just some of the things I’ve come to believe. Embedded in these beliefs are the three dimensions in which I’m convinced we must serve our clients, if we are to help them to be successful:
In the real world, there’s no such thing as a straight line or a smooth curve. Compare There are some advisers who confuse steady investment and growth with actual retirement planning. It is naively assumed that if the investing is well done, retirement will work out just fine. This does not demonstrate how well the client can meet their retirement expectations. You can do everything right investing your client’s funds, but if their saving or spending behaviors aren’t cooperative, they can still fail to meet their goals. Planners that stop at this dimension are doomed to lose assets and market share as their clients come to realize that their adviser can’t definitively answer the simple question, “How soon can I afford to retire?”

There’s no such thing as a safe investment. Back in the old days, we believed that small-cap stocks were risky, but large-cap stocks, particularly those in the Dow, were safe. I even had clients who would recite the old saying, “As goes GM (… GE or Merrill Lynch), so goes the country.” We now know that’s not so. For years, many believed that investment-grade corporate bonds were safe; until we watched AA-rated bonds default. The biggest trap caused by the bull market of the 1990s was that many of us focused on return, with little regard for risk. If the retirement numbers didn’t work, just bump up the return assumptions with no consideration on the increased risk level! Even today, risk lurks in unlikely places. Ten-year Treasuries currently yield around 4%. I heard a noted economist suggest that the 10-year Treasury could be at 10% by mid-2013. You do the math to see the losses that would result from such an outcome. Retirement planning demands obsessive scrutiny of risk. If we fail at this point, we can ruin lives. Clients must be better educated about the known and possible risks they face in their retirement portfolios.

We need to show clients more than when they’re likely to run out of money if average returns are achieved, we also show them how this could change if we went through persistently poor markets. After the last decade, I would feel remiss if I didn’t share this with the client. This gives both of us time to take actions that offer the best chance to improve the outcome. Performance alone won’t achieve retirement success.

Human beings have little capacity to predict their spending patterns five years from now, let alone 40 years from now. When I think back on financial forecasting techniques I studied and then taught, the accuracy of a forecast was assumed to decrease as the time period increased. We have a great capacity to think about our “daily bread.” We have little capacity to predict what we’ll spend on food in 10 years, let alone our cable TV, Internet, and cell phone expenditures. If you don’t believe me, look at your spending in these areas (if they even existed) just 10 years ago. I can’t wait to see what I’ll be paying for “transporter beam” services in 15 years! It isn’t just a matter of simply inflating today’s expenses; we must also attempt to project where our clients will be spending their money 30 years from now. More practically, how accurate are today’s spending assumptions that you’re using? Most of the budgets I get from clients should be classified as fiction, not biography. This is an area that at one time we blew off, but now pay much greater attention to, no matter how messy it gets.

Human beings aren’t wired to conceptualize large sums of capital. The studies showing the incredible number of lottery winners who file for bankruptcy in a short time have great significance on retirement planning. How many of your clients hold the vast majority of their assets in qualified plans? That probably has more to do with the difficulty in getting to qualified monies compared to non-qualified accounts. Excepting those born into great family wealth, most of us are culturally programmed to think week-to-week or month-to-month in our spending. If we receive a large sum of money (or start receiving a very large income that could stop at any time, as is the case with athletes or entertainers) we can mentally confuse the large sum with a massive monthly amount that will continue forever. Getting clients to see their portfolio as a large fruit tree where they harvest fruit (dividends and interest) rather than lopping off limbs (withdrawing principle) is critical to helping them remain successful. This allows us to use our month-to-month bias in a positive manner.

The answer doesn’t (and will never) rely on one simple solution or product. Over the years I’ve read with amusement articles suggesting that an insurance or investment product manufacturer has or will come out with a “silver bullet” product that will solve all problems associated with retirement income distributions. There is one word that explains why this is unlikely to happen—complexity. The third dimension I face in retirement planning—the cash flow dimension. If I fail here, my clients don’t eat! So, why might a one-product-fits-all approach struggle in the real world? First, the potential benefit from a single product would be greatest if the client had everything in one account. I can only think of two of our clients who fall into that category. Planners using all available tools usually have multiple accounts for each household. In our case, the average is five. Second, the source of distributions may need to change for tax reasons; particularly before 50½ and after 70½. Flexibility of distributions is the only way to cover needed changes as they arise. Third, I have great concern over how tax laws will change over the next decade. The last thing I would want is to have all investments taxed at ordinary income. The flexibility to affect the character of taxable income may grow, not decline, in importance as Congress continues to wrestle with ways to reduce the deficit that it has developed over the past nine years.

Implementing all three dimensions in today’s technological environment is still a challenge. Our systems do the first dimension well, the second dimension okay, and the third dimension poorly. This third area is where I’m hopeful more effort is made by technology providers and intermediaries in the future. Systems to monitor and manage this third dimension are virtually non-existent. That wasn’t a problem when we only had a few retired clients, but it’s a problem now, and I hate to think what it will look like in 10 years.

As a Financial Planner Our Primary Role: The Ghost of Christmas Future
Even if a planner can master all three of the dimensions I’ve outlined, the remaining wild card is client behavior. I’ve come to believe that we can’t actually change client behavior; we can only show them the results of their current course of action in a clear, accurate manner. If they don’t like the outcome, they’ll affect the change.

There is a powerful quote in therapist circles that goes something like this, “Change happens when the pain of staying the same is greater than the pain of the change.” Ebenezer Scrooge’s life was transformed after the Ghost of Christmas Future ran the video forward, showing the consequences of continuing his current approach to life. The pain of changing from a greedy old Scrooge was nothing compared to a life of derision and abandonment.

The sooner clients see retirement issues in great clarity through all three dimensions, the sooner they can affect the change needed to make the picture turn out the way they desire. Retirement math is brutal; simply trying to deal with it by wishing, hoping, and living in denial is a formula for disaster.

Most of our physician clients have to deliver news that their patients don’t particularly want to hear, but they deliver it kindly, yet frankly. By doing so, they permit their patients to choose the course of care, knowing both the risks and the potential benefits that they prefer. Over the next few years, I have been faced with similar challenges with many of my clients. It may not be pretty, but I serve them best when I accurately depict a future that can still be changed. When I see clients today I always have a 1 or 2 page agenda showing what we need to discuss at our meetings. Approximately 3% of those clients see under number two, “You are going to run out of money!” Few if any of those clients do anything about it. They are more concerned with their cable TV today than there food and shelter in the future!

Creative Financial Design with offices in Lansing, Portage and Southfield.

American's take a vacation?

People in other countries think we Americans are a little weird in our work habits, and they may be right. The web site Expedia.com has recently conducted its ninth annual survey of international vacations, telling us how many vacation days are taken by workers of different countries. French workers get the most 38 days a year, on average, although they typically only take 36 of them. Italians receive 31 days, although, on average, they leave 6 of them on the table.
The American workers? The web site reports that "throughout the eight years that the Vacation Deprivation survey has been conducted, the U.S. has long-held the dismaying distinction of being the country with the worst vacationing habits." Our workers, on average, receive 13 days of vacation time, less than any country in the developed world, including Japan 15 days, Australia and Canada 19 day apiece, Germany 27 days and Britain 26days. Even so, more than a third of Americans don't take their full yearly allotment of vacation days. In the 2009 Expedia study they found Americans give back a total of 436 million of them.

To make matters worse, there is plenty of evidence, on the beaches, in restaurants and the theme parks that many workers are still slipping in an hour or two of productive labor on their days off, calling the office on their cell phones or earnestly consulting their blackberries. Expedia says that 24% of employed American adults do this, but this may be an undercount.

Meanwhile, 37% of employed American adults report regularly working more than 40 hours a week.

This compulsive work ethic may help explain another phenomenon that American financial planners frequently talk about at conferences: how difficult it is for some of their clients to spend their hard-earned money once they've accumulated more than they're ever likely to need.

It's not hard to find advice online and elsewhere for people who overspend and can't stay on a budget, but there seems to be no support or therapy available for a sizable number of Americans who long ago got in the habit of accumulating, and even when they've achieved the point where they no longer have to work, they still do, meanwhile living not beyond their means, but significantly, sometimes uncomfortably, under it. For some of us, stopping to enjoy what we've accumulated seems to be as hard as fully disconnecting from the office.

Is this really a problem? If your goal in life is to increase America's GDP and raise our average worker productivity statistics, then no, everything is fine. But one of the most poignant statements I ever heard was by a rabbi who was asked to travel to Oklahoma City to offer grief counsel to the families of the victims of the bombing incident.

"In my line of work, I regularly sit with people in their last hour of life," he said, "and often people will tell me, with the benefit of hindsight, looking over the course of their lives, that they wish they had spent more time with their loved ones or children, or doing things that gave them pleasure. Never once, in all my years," he added, "has anybody expressed regret that they didn't spend more time at the office."

By the way, as I write this I am on vacation?


Ted Feight, CFP® is a fee-only Certified Financial Planner with 37 years of experience. He limits the amount of clients and planner can have to 100 or less. Ted is the Chair of the Midwest National Association of Personal Financial Planners and is a member of the National Board of Directors for the National Association of Personal Financial Planners. He has offices in Lansing and Postage, Michigan and is toying with the idea of opening an office in the Detroit Metropolitan area.

Link to the Expedia article: http://www.expedia.com/daily/promos/vacations/vacation_deprivation/default.asp .

How many new clients can a planner take and take care of old clients?

I’ve always had a rather altruistic view concerning the role and purpose of financial planning. In my opinion, a financial plan is a tool to determine the most prudent course of action. Just as a physician orders various tests to assist in the diagnosis, I consider the plan as the instrument which directs my recommendations. Therefore, I rarely render advice before I review the results of the plan.

I would hope that the majority of financial planners share this paradigm. I would also contend that there are several who do not and use the “financial plan” as a tool to increase product sales. The difference depends on the focus of the individual advisor. Either they are sales driven or advice driven. You cannot act in one fashion and profess another, although many do.

The issue becomes capacity. How many new comprehensive financial plans can one advisor generate in a year while still taking care of his existing clients? Remember, the more comprehensive the plan is, the lower the number will be. The general consensus at JP Morgan seems to be somewhere between 20 and 24 per year, according to an article in Investment Advisor magazine, written by Mike Patton. I would personally be hard pressed to do half that many.

Another relevant question is this. How often will you update a client’s plan? It took me several years to settle this issue, but a few years ago I decided that updating each part of a client’s financial plan every 2 to 3 years, during reviews. However, this can often get preempted during periods of time like the 2008 market meltdown, when a client’s needs are much different than during good times. I inform clients of this at the beginning of the relationship so they will know what to expect.

Here’s the challenge. As the number of planning clients increase, so do the number of plan updates, after a few years it can become problematic. For example, let’s assume I have 70 clients and gain 10 new planning clients each year over the next three years. In year two you have 80 updates and 10 new plans to prepare. In year three, you have 90 plans to update and 10 new plans to prepare. Each year the task becomes increasingly difficult. I am beginning to sense this so I have been trying to streamline our processes, but at what point does the ability to take new clients or keep smaller less productive clients collide?

New Law August 15th on Debit Card Overdraft fees

There’s a new law going into effect on August 15, 2010. It’s called Regulation E (Reg E), and deals specifically with overdrafts. Basically now you have to choose to Opt In or Opt Out of overdraft protection.

Currently many banks will approve your debit card even though there is not enough money in your account. Effective August 15, every banking client will be opted out of overdraft protection unless they choose to opt in. Should you opt in or opt out?

Opt In for Overdraft

If you choose to opt in for overdrafts, your card may get approved even though the funds are not available in your checking account. This may be good in the event of an emergency where you are stuck with absolutely no cash and your car has broken down, or even to avoid embarrassment when you’re out to dinner with a date and your card would normally be declined. On the other hand, opting in to overdraft protection would not be a good idea for someone who doesn’t balance their checkbook. I definitely wouldn’t recommend opting in if you don’t keep up with your balance. There’s no sense in risking overdraft fees!
Opt Out of Overdrafts

Opting out is just what it sounds like: no overdrawing your checking account with the debit card. Don’t be overly confident, though: recurring debit card transactions are an exception. If you’ve let your car insurance company charge your debit card, the transaction may be approved even though the funds are not available. Otherwise, if you don’t have the money in your account, your card won’t get approved to cover the transaction. This is definitely helpful in the fact that you’re less likely to get overdraft fees.

If you don’t do anything, you’ll automatically be opted out of overdraft protection.
Under the Fed rules, banks would have to explain what overdraft protection is, the details of how it works and the fees associated with it before asking consumers to opt in to the program. (See model opt-in disclosure.)

"The final overdraft rules represent an important step forward in consumer protection," Federal Reserve Chairman Ben S. Bernanke, said in a press release on the rules. "Both new and existing account holders will be able to make informed decisions about whether to sign up for an overdraft service."

Another blow to banks

The new rules are the latest setback for the nation's banks and credit unions already reeling from the effects of the economy and new consumer credit card rules coming online. Thursday's overdraft regulations are sure to trim back what had become a growing income source, estimated at $23.7 billion in 2008 and projected to hit $38.5 billion in 2009.

In third quarter financial statements filed this month, Wells Fargo indicated it expects to take in $300 million less in fee revenues in 2010 because of policies the bank has implemented to help consumers limit overdraft and returned item fees. Facing a rising tide of consumer complaints, Bank of America and Chase have also revised their policies to give customers the choice of using overdraft services.

Edward L. Yingling, president and CEO of the American Bankers Association trade group, said the bankers have created an overdraft task force to look at consumer concerns as well as how technology can be improved and the role of retailers and merchants processing transactions.

"This new rule addresses the primary concerns that have been raised by consumers and policymakers and will help bring consistency and clarity to overdraft programs. Our goal is to have a system that works well for banks and customers and keeps the payment system running efficiently," Yingling said in a statement.

The Fed rules also come as lawmakers in both houses of Congress are considering bills (H.R. 3904 and S. 1799) to curb overdraft abuses. The proposed bills are more far reaching than the Fed rules and include bans on multiple overdraft fees during a single month. Those bills also seek to regulate how debit card transactions are processed by banks. Consumer advocates have complained that transactions are processed to maximize fees for banks rather than chronologically as they occur. A hearing on the Senate bill is scheduled for Nov. 17 before the Senate Banking Committee.

Lawmaker: Fed rules don't go far enough

Rep. Carolyn Maloney, co-sponsor of the House bill, applauded the Fed for recognizing that the overdraft fee problem needs review, but said the Fed rules don't go far enough to address all of the practices harmful to consumers.
While these rules are a good, solid step forward, they don't eliminate the need for congressional action on this issue," Maloney said in a statement. "The Fed still allows institutions to charge an unlimited quantity of overdraft fees, would do nothing to make fees proportional to the amount of the overdraft, and would not address the manipulation of posting order of charges to accounts. Under the Fed's new rule, a $5 cup of coffee could still become a $40 cup of coffee after an overdraft fee is added!"

She added: "My bill does all that -- it caps the quantity of fees at one per month or six per year, requires that fees be reasonable, and prohibits posting-order manipulation, and includes all transactions, not just debit cards. Those are provisions I believe make for the strongest consumer protections, that's why Chairman [Barney] Frank and I have proposed this legislation, and that's what I believe the House will be passing."

Consumer groups have called overdraft fees "high-cost loans" and note that banks can decline debit transactions when there aren't enough funds but don't because of the profits they can make from the fees consumers pay. Advocates say banks often don't explain to consumers that they can avoid overdraft fees by linking their debit cards to other savings accounts or opening a line of credit -- less expensive alternatives to overdraft fees.
Eric Halperin, director of the Washington, D.C., office of the Center for Responsible Lending, criticized the Fed's "failure to propose or enact necessary safeguards against a host of unfair practices."

"Congress needs to step in to stop the abusive practices the Fed has known about for nearly a decade, but once again has failed to address," Halperin said in a statement.

Fed research: Consumers want choice

According to the Fed, which conducted consumer research on overdraft practices, most consumers would prefer to have a choice in enrolling -- or "opt in" for -- overdraft programs for ATM and debit card transactions. The research also showed that most people do want overdraft coverage for important bills such as rent, telephone and other utilities. Thus, the new rule applies to ATM and one-time debit card transactions but not checks. A 2009 study by the Center for Responsible Lending found most overdraft fees were generated at the point of sale, when consumers are using their cards at check-out.

The Fed rule also took steps to prevent banks from discriminating against customers who do not opt in by requiring that they have the same account terms, conditions and features as account holders who opt in to the fees. Anyone with ATM or debit cards prior to July 1, 2010, cannot be charged overdraft fees after Aug. 15, 2010, unless the bank or credit union has first gotten the consumer's consent to participate in an overdraft program.

"Overdraft fees can be costly," Fed Gov. Elizabeth A. Duke, who heads the agency's Committee on Consumer and Community Affairs, said in a press release. "Our rule will help consumers better understand the terms and conditions of overdraft services and will give them an opportunity to avoid fees when these services do not meet their needs."

Said Maloney at an Oct. 30 congressional hearing on her overdraft bill: "The overdraft problem is significant and getting worse. The quantity of debit card transactions now exceeds the quantity of credit card transactions."

Investment Worries

Investing Worries:

Have you ever felt anxious about your investment portfolio? Who hasn't? A recent presentation, at one of my professional conferences, pointed out that five out of every six years will produce a stock market return sequence that either triggers anxiety or smacks your portfolio so hard that you wonder why you ever trusted the markets to begin with.

This is normal. Many people simply cannot handle stock market volatility, which is why the people who DO have, historically, tended to make more, over multiple ups and downs, than the people who kept all their money stashed away in Treasury bonds.

The question is: is there better way to handle the inevitable anxiety that comes with buying stocks?

Psychologist Ken Haman, who now works at the investment firm Alliance Bernstein, says that the key is to stay rational. He points to studies of the human brain which shows that all of us actually have two brains. One is the neocortex, where all of your higher thought processes take place. Below the neocortex is a primitive brain which is about as smart as an alligator, and this lower brain happens to be where all of our survival instincts are housed. Whenever you experience panic, the primitive brain immediately takes over and shuts down the neocortex--which allows you to respond instantly (rather than thoughtfully) on those many occasions when a saber-toothed tiger is running in your direction.

So when the markets have spent the past quarter giving up all the gains they generated in the first quarter, what do you do? First, talk with somebody who actually listens to you about how you're feeling. Then start to engage your neocortex. What do you imagine is going to happen in the future? Then move to: is that what you think, or how it feels?

Give us a call and we will help guide you through this process, and then, when your neocortex is functioning again, you can look at some of the past market declines and see what happened next, or look at your financial situation and take stock of your progress toward your financial goals.

Roth IRA Conversion Magic!

Last year I suggested clients talk to their CPAs about the costs of transferring some money from their traditional IRAs into a Roth IRA, because the IRS was going to allow transfers done in 2010 to have the tax on the transfer spread over 2 years.

I see all clients 1 to 4 times a year depending on need and the amount of assets I am managing for them. When I meet with clients along with my normal investment report I have a 2 page sheet showing my concerns and thought about the recent past and coming year. The following is an excerpt from one of today's client meetings.

2. Last year we transferred $12,978 from your IRA Rollover to your Roth IRA. This year your CPA said to move $25,956 from your IRA Rollover to your Roth IRA. We transferred shares (to keep trading costs down) and got a little more than we wanted, $27,883.83. You will be paying taxes on this over a 2 year period of time and this may cause you to pay taxes on and extra $963.92, each year. The extra tax should be approximately $96.39, each year.

3. We transferred this money into your Roth IRA because it will grow tax free, but come out of the Roth IRA tax free; rather than 100% taxable which would be normal when money comes out of an IRA Rollover. The amount to roll over was figures in such a way that you probably will not have to pay any tax on the money transferred. If calculated correctly you transferred money from an account that is 100% taxable when money is removed, into an account that is 100% tax free when money is removed and did not have to pay any tax on the money we transferred. Now that is real MAGIC if it works out correctly.

Pretty cool!