What if you have prepared your taxes and owe money but have no money to pay your taxes? This is a common problem right now as many folks have lost their jobs. The IRS indicates it is willing to work with you. Please view the attached video from CNN interviewing the IRS Commissioner. Help is on the way!
http://www.cnn.com/video/#/video/business/2009/04/13/dcl.gw.pay.taxes.cnn
Monday, April 13, 2009
Sunday, March 29, 2009
Who Will Guard Your Nest Egg
By JASON ZWEIG
A power struggle in Washington will shape how investors get the advice they need.
On one side are stockbrokers and other securities salespeople who work for Wall Street firms, banks and insurance companies. On the other are financial planners or investment advisers who often work for themselves or smaller firms.
Heath Hinegardner
Brokers are largely regulated by the Financial Industry Regulatory Authority, which is funded by the brokerage business itself and inspects firms every one or two years. Under Finra's rules, brokers must recommend only investments that are "suitable" for clients.
Advisers are regulated by the states or the Securities and Exchange Commission, which examines firms every six to 10 years on average. Advisers act out of "fiduciary duty," or the obligation to put their clients' interests first.
Most investors don't understand this key distinction. A report by Rand Corp. last year found that 63% of investors think brokers are legally required to act in the best interest of the client; 70% believe that brokers must disclose any conflicts of interest. Advisers always have those duties, but brokers often don't. The confusion is understandable, because a lot of stock brokers these days call themselves financial planners.
Brokers can sell you any investment they have "reasonable grounds for believing" is suitable for you. Only since 1990 have they been required to base that suitability judgment on your risk tolerance, investing objectives, tax status and financial position.
A key factor still is missing from Finra's suitability requirements: cost. Let's say you tell your broker that you want to simplify your stock portfolio into an index fund. He then tells you that his firm manages an S&P-500 Index fund that is "suitable' for you. He is under no obligation to tell you that the annual expenses that his firm charges on the fund are 10 times higher than an essentially identical fund from Vanguard. An adviser acting under fiduciary duty would have to disclose the conflict of interest and tell you that cheaper alternatives are available.
If brokers had to take cost and conflicts of interest into account in order to honor a fiduciary duty to their clients, their firms might hesitate before producing the kind of garbage that has blighted the portfolios of investors over the years.
Richard G. Ketchum, chairman of Finra, has begun openly using the F-word: fiduciary. "It's time to get to one standard, a fiduciary standard that works for both broker-dealers and advisers," he told me. "Both should have a fundamental first responsibility to their customers."
When I asked whether Finra should be that single regulator, Mr. Ketchum replied: "Do we have the infrastructure and would we do a good job? We think yes."
Others disagree. "It would be lethal if Finra becomes the only regulator," retorts Tamar Frankel, a professor of securities law at Boston University. "Finra has an inherent conflict of interest, because it's the same people regulating themselves."
In testimony to the Senate in the past week, SEC Chairwoman Mary Schapiro said the agency is considering "whether to recommend legislation to break down the statutory barriers" that impose different regulations on brokers and advisers.
Ms. Schapiro stepped down earlier this year as head of Finra to lead the SEC. In 2005, when she was vice chairwoman of Finra's predecessor, Ms. Schapiro wrote a scathing letter to the SEC calling "this much-vaunted fiduciary duty ... imprecise and indeterminate."
When I asked her now if she still held that view, Ms. Schapiro replied: "I wear a new hat now. I completely get that I work for America's investors, so my perspective has changed. I think investors would rationally say that they prefer fiduciary duty as the standard of care. And they are entitled to have their interests come first, always."
Ms. Schapiro said it is too early to say who should be the lead regulator if brokers and advisers are brought under the same set of rules.
Ms. Schapiro sounds sincere, and they say there is no zeal like that of the convert. Here is hoping she means what she now is saying, and that Congress -- and the investing public -- will hold her to it. It is high time for everyone who says "Trust me" to be held to the highest standard.
Write to Jason Zweig at intelligentinvestor@wsj.com
A power struggle in Washington will shape how investors get the advice they need.
On one side are stockbrokers and other securities salespeople who work for Wall Street firms, banks and insurance companies. On the other are financial planners or investment advisers who often work for themselves or smaller firms.
Heath Hinegardner
Brokers are largely regulated by the Financial Industry Regulatory Authority, which is funded by the brokerage business itself and inspects firms every one or two years. Under Finra's rules, brokers must recommend only investments that are "suitable" for clients.
Advisers are regulated by the states or the Securities and Exchange Commission, which examines firms every six to 10 years on average. Advisers act out of "fiduciary duty," or the obligation to put their clients' interests first.
Most investors don't understand this key distinction. A report by Rand Corp. last year found that 63% of investors think brokers are legally required to act in the best interest of the client; 70% believe that brokers must disclose any conflicts of interest. Advisers always have those duties, but brokers often don't. The confusion is understandable, because a lot of stock brokers these days call themselves financial planners.
Brokers can sell you any investment they have "reasonable grounds for believing" is suitable for you. Only since 1990 have they been required to base that suitability judgment on your risk tolerance, investing objectives, tax status and financial position.
A key factor still is missing from Finra's suitability requirements: cost. Let's say you tell your broker that you want to simplify your stock portfolio into an index fund. He then tells you that his firm manages an S&P-500 Index fund that is "suitable' for you. He is under no obligation to tell you that the annual expenses that his firm charges on the fund are 10 times higher than an essentially identical fund from Vanguard. An adviser acting under fiduciary duty would have to disclose the conflict of interest and tell you that cheaper alternatives are available.
If brokers had to take cost and conflicts of interest into account in order to honor a fiduciary duty to their clients, their firms might hesitate before producing the kind of garbage that has blighted the portfolios of investors over the years.
Richard G. Ketchum, chairman of Finra, has begun openly using the F-word: fiduciary. "It's time to get to one standard, a fiduciary standard that works for both broker-dealers and advisers," he told me. "Both should have a fundamental first responsibility to their customers."
When I asked whether Finra should be that single regulator, Mr. Ketchum replied: "Do we have the infrastructure and would we do a good job? We think yes."
Others disagree. "It would be lethal if Finra becomes the only regulator," retorts Tamar Frankel, a professor of securities law at Boston University. "Finra has an inherent conflict of interest, because it's the same people regulating themselves."
In testimony to the Senate in the past week, SEC Chairwoman Mary Schapiro said the agency is considering "whether to recommend legislation to break down the statutory barriers" that impose different regulations on brokers and advisers.
Ms. Schapiro stepped down earlier this year as head of Finra to lead the SEC. In 2005, when she was vice chairwoman of Finra's predecessor, Ms. Schapiro wrote a scathing letter to the SEC calling "this much-vaunted fiduciary duty ... imprecise and indeterminate."
When I asked her now if she still held that view, Ms. Schapiro replied: "I wear a new hat now. I completely get that I work for America's investors, so my perspective has changed. I think investors would rationally say that they prefer fiduciary duty as the standard of care. And they are entitled to have their interests come first, always."
Ms. Schapiro said it is too early to say who should be the lead regulator if brokers and advisers are brought under the same set of rules.
Ms. Schapiro sounds sincere, and they say there is no zeal like that of the convert. Here is hoping she means what she now is saying, and that Congress -- and the investing public -- will hold her to it. It is high time for everyone who says "Trust me" to be held to the highest standard.
Write to Jason Zweig at intelligentinvestor@wsj.com
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Tuesday, March 10, 2009
The Madoff Madness
As I read the headlines on the internet today, I see that Bernard Madoff, former NASDAQ Stock Market chairman and founder of Bernard L. Madoff Investment Securities LLC, will most likely plead guilty and be sentenced to life in prison.
What did he do? He allegedly collected money to invest from clients, made up false statements to show that they were doing well, and used new clients' money to pay interest and withdrawals to existing clients. This is known as a Ponzi scheme and is estimated to involve more than a $50 billion loss for his investors.
His clients didn't see this coming. Could they have? Let's look at three key safety tips that would have prevented this from happening.
Know what you own. Stick to stocks, bonds, ETFs, and mutual funds that are publicly traded and listed on major exchanges like the New York Stock Exchange. They are valued independently at least daily, if not minute-by-minute, while the exchange is open. You can check their reported returns against your own portfolio. If you can't look up the prices and performance in the newspaper or on the Internet - that's a red flag - ask a lot more questions.
Use an independent custodian. Madoff held his client assets, managed them, and priced them, too. See the conflicts of interest? Investment performance can look better if the prices reported to clients are manipulated, which is allegedly how Madoff showed winning year after winning year despite market turmoil. At our firm, our clients have an independent third party, either TD Ameritrade, Vanguard or American Funds (for the College America accounts) pricing each investment they own. We have no input on investment pricing, and that separation is a very good thing. Clients also get an independent statement directly from TD Ameritrade, Vanguard or American Funds.
Check on insurance. Our clients benefit from fraud insurance. The first part is Securities Investor Protection Corporation (SIPC) coverage for $500,000 per account. Then, at TD Ameritrade Institutional, there is an additional aggregate amount of $250 million of additional securities protection.
Fraud insurance does not protect against market declines; but it does protect against theft of securities and/or related fraudulent transactions.
One final thought - if an investment sounds too good to be true, it probably is. Reportedly Madoff claimed consistent annual returns of 10-12% with little volatility and no annual losses. Can you name any legitimate investor who can make that claim in recent years?
What did he do? He allegedly collected money to invest from clients, made up false statements to show that they were doing well, and used new clients' money to pay interest and withdrawals to existing clients. This is known as a Ponzi scheme and is estimated to involve more than a $50 billion loss for his investors.
His clients didn't see this coming. Could they have? Let's look at three key safety tips that would have prevented this from happening.
Know what you own. Stick to stocks, bonds, ETFs, and mutual funds that are publicly traded and listed on major exchanges like the New York Stock Exchange. They are valued independently at least daily, if not minute-by-minute, while the exchange is open. You can check their reported returns against your own portfolio. If you can't look up the prices and performance in the newspaper or on the Internet - that's a red flag - ask a lot more questions.
Use an independent custodian. Madoff held his client assets, managed them, and priced them, too. See the conflicts of interest? Investment performance can look better if the prices reported to clients are manipulated, which is allegedly how Madoff showed winning year after winning year despite market turmoil. At our firm, our clients have an independent third party, either TD Ameritrade, Vanguard or American Funds (for the College America accounts) pricing each investment they own. We have no input on investment pricing, and that separation is a very good thing. Clients also get an independent statement directly from TD Ameritrade, Vanguard or American Funds.
Check on insurance. Our clients benefit from fraud insurance. The first part is Securities Investor Protection Corporation (SIPC) coverage for $500,000 per account. Then, at TD Ameritrade Institutional, there is an additional aggregate amount of $250 million of additional securities protection.
Fraud insurance does not protect against market declines; but it does protect against theft of securities and/or related fraudulent transactions.
One final thought - if an investment sounds too good to be true, it probably is. Reportedly Madoff claimed consistent annual returns of 10-12% with little volatility and no annual losses. Can you name any legitimate investor who can make that claim in recent years?
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Thursday, March 5, 2009
IRA Contribution Deadlines
IRA Contribution Deadline
Don’t miss the IRA contribution deadline! Make sure you make your 2008 IRA contribution before April 15! With share prices at historic lows, fully funding your IRA for 2008 (and 2009) could mean a tremendous boost toward saving for retirement. Times are tough, but remember: the goal is to buy low and sell high! Anyone with an IRA should use this opportunity to fully fund it.If you’ve been contributing $50 or $100 to an IRA each month, there’s room to contribute a lot more. Putting $600 or $1,200 in your IRA annually is nice, but you can direct up to $5,000 into your IRAs for tax year 2008, and up to $6,000 if you turn 50 in 2008. (These limits apply whether you have one IRA or 21 IRAs – they represent the total amount an individual may contribute to one or more IRAs for 2008. If your modified adjusted gross income, or MAGI, is really high, then you may have to contribute less.)
As for your 2009 contribution...You have until April 15, 2010 to make that one, but you can also make it during 2009 and cross it off your to-do list. Again, with stock prices so low, a lot of amazing values are available. This recession will not last forever; looking back years from now, chances are you will be very glad you contributed what you did when you did.
Please call us if we can help you with your contributions.
Don’t miss the IRA contribution deadline! Make sure you make your 2008 IRA contribution before April 15! With share prices at historic lows, fully funding your IRA for 2008 (and 2009) could mean a tremendous boost toward saving for retirement. Times are tough, but remember: the goal is to buy low and sell high! Anyone with an IRA should use this opportunity to fully fund it.If you’ve been contributing $50 or $100 to an IRA each month, there’s room to contribute a lot more. Putting $600 or $1,200 in your IRA annually is nice, but you can direct up to $5,000 into your IRAs for tax year 2008, and up to $6,000 if you turn 50 in 2008. (These limits apply whether you have one IRA or 21 IRAs – they represent the total amount an individual may contribute to one or more IRAs for 2008. If your modified adjusted gross income, or MAGI, is really high, then you may have to contribute less.)
As for your 2009 contribution...You have until April 15, 2010 to make that one, but you can also make it during 2009 and cross it off your to-do list. Again, with stock prices so low, a lot of amazing values are available. This recession will not last forever; looking back years from now, chances are you will be very glad you contributed what you did when you did.
Please call us if we can help you with your contributions.
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Friday, November 7, 2008
More Strategies on Weathering the Economic Storm
We have seen lots more volatility this week in the stock market. Bad news keeps getting badder, like the loss of over $1 million jobs this year and General Motors burning through billions of dollars worth of cash in the last quarter alone. These are staggering numbers. What do they have to do with you and me? In the short term--everything as we continue to watch our 401ks become 101ks but as long term investors, we can weather the storm. Here are some strategies that you have probably heard before but we all need continued reassurances:
1) Stick to your plan.
1) Stick to your plan.
- Young people--keep on funding your Roths and make sure you have emergency savings
- Pre-Retirees--keep on saving in to your retirement plans--your dollar cost averaging is a big plus right now
- Retirees--watch your spending --you might have to tighten the belt for a few years
2) Stick to simple investing
- Low cost mutual stock and bond funds
- Don't try to figure out the next hot sector or the sector that you think is poised for significant growth
- And for goodness sake, don't think you know when to get out of the market and when to get back in. Remember that upward surge of 900 points the end of October???
3) Rebalancing
- Rebalancing your portfolio at least annually provides smoother returns and guarantees that you are selling high and buying low
- Harvest those tax losses now--great opportunity to rebalance taxable accounts and capture the losses (can always be carried forward if not used this tax year) and rebalance your portfolio at the same time
4) Turning off the "white noise"
There are some total idiots on the major news channels who just love to spout off and create sensational stories. Boring! Turn them off!
Call or email me anytime with any issues. Have a great weekend.
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Monday, October 27, 2008
Misc IRS Adjustments for 2009
IRS has $266 Million in Undeliverable Refunds and Stimulus Payments. The IRS is urging taxpayers to make sure their mailing address is up-to-date. If a taxpayer has moved since he or she last filed a tax return, Form 8822, Address Change Request, should be filed with the IRS. It is critical that taxpayers who are due a stimulus check update their addresses with the IRS before year-end, because by law, economic stimulus payments must be sent out by December 31 this year.
2009 Social Security Cost of Living Adjustments. Beginning January 1, 2009, the maximum earnings subject to social security tax withholding increases to $106,800. The earnings needed for one quarter of coverage is $1,090. The threshold for coverage for domestic employees increases to $1,700.
2009 Inflation Adjustments AnnouncedThe IRS has released Revenue Procedure 2008-66 announcing increases in deductions, exemptions, limitations, and credits for 2009, as well as widened tax brackets. Key changes affecting 2009 returns include the following:
2009 Social Security Cost of Living Adjustments. Beginning January 1, 2009, the maximum earnings subject to social security tax withholding increases to $106,800. The earnings needed for one quarter of coverage is $1,090. The threshold for coverage for domestic employees increases to $1,700.
2009 Inflation Adjustments AnnouncedThe IRS has released Revenue Procedure 2008-66 announcing increases in deductions, exemptions, limitations, and credits for 2009, as well as widened tax brackets. Key changes affecting 2009 returns include the following:
- The value of each personal and dependency exemption increases to $3,650.
- The new standard deduction is $11,400 for married couples filing a joint return, $5,700 for singles and married individuals filing separately, and $8,350 for head of household.
- Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $67,900
- . The maximum earned income tax credit for low and moderate income workers and working families with two or more children is $5,028. The income limit for the credit for joint return filers with two or more children is $43,415.
- The annual gift exclusion rises to $13,000, up from $12,000 in 2008.
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Prescription for Today's Economic Uncertainty
Many people are over-indebted, over-fed and living in a fast-depreciating house. Savings rates, although improved, are paltry. It's time to return to the practice of thrift and leave the culture of debt behind. If there is any lesson to be learned from the current economic uncertainty it is that we can no longer rely on gains from our assets to adequately provide for us. We need to focus on what we can control-spending less and saving more. Building a bigger nest egg is our best hope for accumulating enough assets to finance our lifestyles over a 30- to 40-year period. To accomplish this, we must live well below our means and save the difference. Even if you are years away from retirement, start saving now. For every 10 years you delay saving for retirement, you will need to save three times as much each month just to catch up. Put savings at the top of your expense list and pay yourself first. Take full advantage of the match your employer offers in your retirement savings plan. Never leave free money on the table. If you are just a few years away from retirement and determine that you'd rather build a bigger safety net than rely on stock market returns to get you through, think about working longer or working part-time after you've retired from your full-time job. You may even consider a second career. Leaving your nest egg to grow for a longer period may mean you won't have to alter your lifestyle later on. If you are already in retirement and are concerned that your spending level might jeopardize the longevity of your assets, then a retrenchment plan may be in order. Scrutinize your expenses, cut back the "fluff" and find expense-cutting ideas in books and magazine articles. Find ways to have fun with little or no money. Find a cause you have passion for and get involved. It will cost you more time than money. Running retirement projections as often as I do, the variable that seems to threaten the longevity of retirees' assets more than any other is their spending level. What retirees seem to worry most about is outliving their assets. Turn worry into action. Spend less, save more and measure your goals periodically to assess your progress. If you don't manage it, you can't measure it. It's never too late to start. It's only too late if you don't start at all.
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Saturday, October 11, 2008
Judy's Letter from her heart
Dear Friends,
Today is Saturday and we have a blessed three days of NO stock market as the market is closed on Monday in observance of Columbus Day. I pray that everyone takes a deep breath and just calms down for the next three days. I plan on going for long walks, doing yoga, attending a wedding for the son of some dear friends and going to the Charger game on Sunday. It has been an incredible week—we are truly living in unprecedented times. My mom (who was a young girl during the depression) called yesterday to see how her portfolio is doing. When I gave her the news, she said that she would gladly lose all her money if she could have my Dad back with her. My Dad died three years ago and three months before my late husband, Lee. That really hit home with me. And it kind of put everything in perspective.
I really want to share from my heart with you because you are all dear friends and I so appreciate the fact that you have entrusted me with your financial well being. It is a responsibility that I willingly accept. This week, I have been in agony as I have watched and seen everyone’s hard earned savings lose so much in value. The weight of the responsibility has been crushing. However, I do believe with every fiber of my being that this will pass—it may take a few years—but we will recover and learn from this. While there is no way to determine where the bottom of this market is—the issue is not how far it falls but how high it will bounce thereafter.
There are serious forces at work in the economy that are causing this turmoil and some are temporary and some are permanent: I am quoting from a newsletter that was sent to me by Bill Losey, a CFP. The following 5 paragraphs with the bold headings are written by Bill.
The credit markets have seized up. This is real and it is temporary. Almost all large public and private companies issue commercial paper - short- term debt instruments that mature in less than 270 days to help meet their short-term liabilities. This debt in the past has been very liquid and quite secure. It is what has been owned by most money market funds to help them give savers better returns than they would get from owning Treasuries. Since concern has dramatically increased about corporate balance sheets and their ability to meet even the shortest of obligations, two things have happened. People have fled money market funds, which means that those funds must sell their paper and there is no market for the new paper that is being issued. When you hear about the "need" for a rescue package, this is the main reason why. The Fed and the Treasury are trying to create an avenue of liquidity for these instruments. This part of the plan is what will eventually hit Main Street. The reason that this is temporary is because it is too significant to not be worked out. Everything from hospital payrolls to inventory purchases is dependent upon this mechanism, so it will be fixed.
Wall Street is broken. This is real and it is permanent. Some of the largest investment banks were using a tremendous amount of leverage on exotic instruments that created even more leverage. This industry will continue to change and change dramatically. Access to money will not be as easy, which means profits for these companies will be compromised. Eventually they will come up with new and different ways to make money, but regulation will inevitably make it harder to make as much as they did for contributing as little as they had. This will inevitably change what types of investments will make sense going forward. Less exotic will be back in vogue
Fear and greed own the day. This is real and it is permanent. Every day, stock prices are determined by sellers - who either need to raise money or are convinced their stocks are going down, and buyers - who believe that they are getting bargains on investments that will go up. In periods of turmoil, there are far more sellers than buyers. People get scared that their investments are going to fall forever and sell (often at the worst possible times). When markets are going up, people think that they have all the answers and end up buying at the worst possible times. No one is ever completely rational, but successful investors tend to be less scared and less greedy than unsuccessful ones.
Diversification doesn't work. This is real and it is temporary. When we have a global melt-down, all investments, other than the very safest, fall. This means that asset classes initially fall together. And this is usually the case for around three to six months. After that, the most mispriced asset classes come back more strongly than others. Everything has been a sinking ship this past month.
People are hurting. This is real and it is temporary. Jobs have been lost and more jobs will be lost. People who piled on debt will have tremendous problems working their way out of the hole that they dug for themselves. The stress of seeing investments drop can add to the stress that each of us feel in raising a family, or work, or tending to our aging parents. People are scared right now and are not making rational decisions.
The one universal truth is that nothing lasts forever and things will change. It may take awhile but we will dig ourselves out of this mess. Regardless of whether you are a republican or democrat or which candidate you endorse for president—I do believe that a new administration will bring some much needed leadership and confidence to this country. I really think we will see a more positive spirit in this country after November 5th.
I want to let you know (again) what I think you should be doing right now and what my husband and I are doing:
1. If you are working, keep your jobs. Work harder and smarter than your co-workers. Layoffs could be coming and you want to be the LAST one considered. If you fear a layoff, be proactive and get out there and start looking for a job. Don’t sit around and wait for the axe to fall. High unemployment is inevitable in the next few years due to the domino effect of what is going on.
2. If you are retired and in a position where you are drawing down on your portfolio and not adding to it, then consider part time work in the next few years so that you can slow down the withdrawals.
3. Control your spending. Go through your spending categories and cut out most of the discretionary stuff like eating out, expensive vacations, clothes shopping etc… Now is the time to take that money and stick it into your emergency savings account. This gives you peace of mind and lets you sleep at night.
4. Save, save, save.
5. Do what it takes to keep your good credit history and reputation. Credit will be tight from now on and your credit reputation is of paramount importance. The days of buying houses and cars with mediocre credit are OVER.
6. Turn off the TV and the talking heads and go for a walk or take up a hobby. Do not sit around and listen to this stuff. They all sensationalize it and make it seem worse than ever. Fall is a beautiful time of the year, regardless of where you live, so go out and enjoy it.
7. Be more frugal with Christmas and holiday presents this year. Your family and close friends would love to have the gift of your time and love rather than expensive gifts.
8. Do not make any BIG purchases right now, especially real estate. Always call first and let’s discuss it first.
9. Home equity lines are being frozen, so if you really think that you will need to use in the future, I suggest that you draw on it NOW and put the money into a savings account.
10. And finally, if you really cannot sleep at night and are so distressed by the current situation, then please call me and we will discuss making some changes to your portfolio. I know this is contrary to what I have been preaching for the past two weeks (and I have no intention of selling anything in my portfolio) but physical and mental and emotional health, in my opinion, are more important than the size of your portfolio.
Please let us know how we can help you or discuss any concerns or questions. I am leaving for Nashville on Friday, Oct 17th and returning Tues, October 21st. I am attending the annual Cambridge Financial Advisor conference. Trust me; I need this conference and some R&R! Bill is going with me but Cheryl and Marcie will be here and minding the store. Again, I take my job and your financial well being with the utmost seriousness. It is a sacred trust. Thank you for letting me be your guide during these difficult days.
Warmly,
Judy Stewart, CFP, MBA, E.A.
Today is Saturday and we have a blessed three days of NO stock market as the market is closed on Monday in observance of Columbus Day. I pray that everyone takes a deep breath and just calms down for the next three days. I plan on going for long walks, doing yoga, attending a wedding for the son of some dear friends and going to the Charger game on Sunday. It has been an incredible week—we are truly living in unprecedented times. My mom (who was a young girl during the depression) called yesterday to see how her portfolio is doing. When I gave her the news, she said that she would gladly lose all her money if she could have my Dad back with her. My Dad died three years ago and three months before my late husband, Lee. That really hit home with me. And it kind of put everything in perspective.
I really want to share from my heart with you because you are all dear friends and I so appreciate the fact that you have entrusted me with your financial well being. It is a responsibility that I willingly accept. This week, I have been in agony as I have watched and seen everyone’s hard earned savings lose so much in value. The weight of the responsibility has been crushing. However, I do believe with every fiber of my being that this will pass—it may take a few years—but we will recover and learn from this. While there is no way to determine where the bottom of this market is—the issue is not how far it falls but how high it will bounce thereafter.
There are serious forces at work in the economy that are causing this turmoil and some are temporary and some are permanent: I am quoting from a newsletter that was sent to me by Bill Losey, a CFP. The following 5 paragraphs with the bold headings are written by Bill.
The credit markets have seized up. This is real and it is temporary. Almost all large public and private companies issue commercial paper - short- term debt instruments that mature in less than 270 days to help meet their short-term liabilities. This debt in the past has been very liquid and quite secure. It is what has been owned by most money market funds to help them give savers better returns than they would get from owning Treasuries. Since concern has dramatically increased about corporate balance sheets and their ability to meet even the shortest of obligations, two things have happened. People have fled money market funds, which means that those funds must sell their paper and there is no market for the new paper that is being issued. When you hear about the "need" for a rescue package, this is the main reason why. The Fed and the Treasury are trying to create an avenue of liquidity for these instruments. This part of the plan is what will eventually hit Main Street. The reason that this is temporary is because it is too significant to not be worked out. Everything from hospital payrolls to inventory purchases is dependent upon this mechanism, so it will be fixed.
Wall Street is broken. This is real and it is permanent. Some of the largest investment banks were using a tremendous amount of leverage on exotic instruments that created even more leverage. This industry will continue to change and change dramatically. Access to money will not be as easy, which means profits for these companies will be compromised. Eventually they will come up with new and different ways to make money, but regulation will inevitably make it harder to make as much as they did for contributing as little as they had. This will inevitably change what types of investments will make sense going forward. Less exotic will be back in vogue
Fear and greed own the day. This is real and it is permanent. Every day, stock prices are determined by sellers - who either need to raise money or are convinced their stocks are going down, and buyers - who believe that they are getting bargains on investments that will go up. In periods of turmoil, there are far more sellers than buyers. People get scared that their investments are going to fall forever and sell (often at the worst possible times). When markets are going up, people think that they have all the answers and end up buying at the worst possible times. No one is ever completely rational, but successful investors tend to be less scared and less greedy than unsuccessful ones.
Diversification doesn't work. This is real and it is temporary. When we have a global melt-down, all investments, other than the very safest, fall. This means that asset classes initially fall together. And this is usually the case for around three to six months. After that, the most mispriced asset classes come back more strongly than others. Everything has been a sinking ship this past month.
People are hurting. This is real and it is temporary. Jobs have been lost and more jobs will be lost. People who piled on debt will have tremendous problems working their way out of the hole that they dug for themselves. The stress of seeing investments drop can add to the stress that each of us feel in raising a family, or work, or tending to our aging parents. People are scared right now and are not making rational decisions.
The one universal truth is that nothing lasts forever and things will change. It may take awhile but we will dig ourselves out of this mess. Regardless of whether you are a republican or democrat or which candidate you endorse for president—I do believe that a new administration will bring some much needed leadership and confidence to this country. I really think we will see a more positive spirit in this country after November 5th.
I want to let you know (again) what I think you should be doing right now and what my husband and I are doing:
1. If you are working, keep your jobs. Work harder and smarter than your co-workers. Layoffs could be coming and you want to be the LAST one considered. If you fear a layoff, be proactive and get out there and start looking for a job. Don’t sit around and wait for the axe to fall. High unemployment is inevitable in the next few years due to the domino effect of what is going on.
2. If you are retired and in a position where you are drawing down on your portfolio and not adding to it, then consider part time work in the next few years so that you can slow down the withdrawals.
3. Control your spending. Go through your spending categories and cut out most of the discretionary stuff like eating out, expensive vacations, clothes shopping etc… Now is the time to take that money and stick it into your emergency savings account. This gives you peace of mind and lets you sleep at night.
4. Save, save, save.
5. Do what it takes to keep your good credit history and reputation. Credit will be tight from now on and your credit reputation is of paramount importance. The days of buying houses and cars with mediocre credit are OVER.
6. Turn off the TV and the talking heads and go for a walk or take up a hobby. Do not sit around and listen to this stuff. They all sensationalize it and make it seem worse than ever. Fall is a beautiful time of the year, regardless of where you live, so go out and enjoy it.
7. Be more frugal with Christmas and holiday presents this year. Your family and close friends would love to have the gift of your time and love rather than expensive gifts.
8. Do not make any BIG purchases right now, especially real estate. Always call first and let’s discuss it first.
9. Home equity lines are being frozen, so if you really think that you will need to use in the future, I suggest that you draw on it NOW and put the money into a savings account.
10. And finally, if you really cannot sleep at night and are so distressed by the current situation, then please call me and we will discuss making some changes to your portfolio. I know this is contrary to what I have been preaching for the past two weeks (and I have no intention of selling anything in my portfolio) but physical and mental and emotional health, in my opinion, are more important than the size of your portfolio.
Please let us know how we can help you or discuss any concerns or questions. I am leaving for Nashville on Friday, Oct 17th and returning Tues, October 21st. I am attending the annual Cambridge Financial Advisor conference. Trust me; I need this conference and some R&R! Bill is going with me but Cheryl and Marcie will be here and minding the store. Again, I take my job and your financial well being with the utmost seriousness. It is a sacred trust. Thank you for letting me be your guide during these difficult days.
Warmly,
Judy Stewart, CFP, MBA, E.A.
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Thursday, October 9, 2008
What Does Warren Buffet think?
Did you see Charlie Rose’s interview with Warren Buffett? On October 1, they met in San Diego for a brief chat about the economy and the financial markets. Earlier that day Buffett had announced that his holding company, Berkshire Hathaway, would invest $3 billion in General Electric. The great investor was realistic about today’s economy – and also optimistic.“It’s like a great athlete that’s had a cardiac arrest.” That’s Buffett’s view of the U.S. economy right now. What led to the heart attack? He puts it as simply as he can: “300 million Americans, their lending institutions, their government, their media, all believed that house prices were going to go up consistently. And that got billed into a $20 trillion residential home market.” Everyone leveraged up, and when “you have a 20% fall in value of a $20 trillion asset, that’s $4 trillion. And when $4 trillion [in] losses lands in the wrong part of this economy, it can gum up the whole place.” Now, with major financial institutions deleveraging, “only one institution in the world that can leverage up in [a] countervailing force to that, and that’s the United States Treasury.”“An economic Pearl Harbor.” Dire words? Well, in Buffett’s view, that was what the last month or so on Wall Street had meant for the country. “In my adult lifetime, I don’t think I’ve ever seen people as fearful economically as they are right now. They are not wrong to be worried.” When something like this hits, he added, “You better spring into action with the best people you have.” He praised the initiative and vision of Treasury Secretary Henry Paulson – and FDIC Chairman Sheila Bair, in his view the unsung hero of the crisis. For the next administration, “it’s more important who the Treasury Secretary is than who the Vice President is.”Will taxpayers get their money back? “I would bet on it.” Buffett feels that the Treasury Department’s plan to purchase hundreds of billions of mortgage-related assets will turn a profit given that they will buy them at market, and also “because the United States government has staying power and it has a low cost of borrowing.” The Bush administration’s plan is, in short, “the kind of stuff I love to do.” He noted that “if I could take 1% of that $700 billion pot and take the gain or loss from it and be their partner, and they would buy the stuff at market, I’d make a lot of money.”“Financial weapons of mass destruction.” Buffett is no fan of derivatives. “They destroyed AIG. They certainly contributed to the destruction of Bear Stearns and Lehman.” He feels that if AIG had resisted the temptation of derivatives, it “would be doing fine today.” He later added that the Federal Reserve structured its $85 billion loan to AIG “very, very well … they have put themselves in a position where they are very likely to get their money back, maybe more … I mean I want to hire the guy that made that deal. He’d fit in well at Berkshire.”The “choice” America is making. In Buffett’s assessment, the U.S. is “to some extent, making a choice between future inflation and getting off the floor. And we’re likely to have more inflation in the future as a consequence of the things we do to fight the present situation.” He cautions that “unemployment’s going to go up under any circumstances.”“You want to be greedy when others are fearful.” Personally, Buffett sees many attractive opportunities right now. Cash reserves are important, “but when people talk about cash being king, it’s not king if it just sits there and never does anything. There are times when cash buys more than other times, and this is one of [them].” In addition, Buffett reminds us of the inverse of his principle: “You want to be fearful when others are greedy. It’s that simple.”“Oh, I think confidence will come back.” When Rose asked him what might “never be the same” about Wall Street or the American economy, Buffett replied optimistically. “We’ve got all the ingredients for a sensational future. It’s just that right now the athlete’s on the floor. But this is a super athlete.”“I don’t want any viewer to [think] a magic wand exists in Congress,” he stated. “So they’re going to see some more bad news. But if we do this, we’re doing the right thing. And if [we do], the system will work over time.”
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Monday, September 22, 2008
Is My Money Really Safe?
An article that I highly recommend, "Is My Money Really Safe?," by Joan Goldwasser, Kimerly Lankford, and Pat Esswein. Clients, if you have any questions about this article or anything pertaining to it, please write me an email.
Is My Money Really Safe?
When IndyMac bank failed this summer, the lines of nervous account holders trying to withdraw their money made headlines everywhere. But that was an anomaly.
The Federal Deposit Insurance Corp. has taken over ten other banks this year without incident. If you are worried about the safety of your money -- in banks or brokerages, such as Lehman Brothers, which filed for bankruptcy September 14 -- or money you've paid your mortgage servicer for taxes or insurance, here are answers to your pressing questions.
To finish the article, please follow this link to Kiplinger's.
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