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Whether you’ve watched him on Headline News, listened to his radio program or read one of his books, Clark Howard has established a loyal following.  He is a national financial voice who’s known for helping consumers “save more, spend less and avoid getting ripped off.”  Clark has long been a supporter of independent advisors for individual investors.  More specifically Clark endorses NAPFA, the National Association of Personal Financial Advisors, as a resource for people to find quality fee-only planners.

Clark ‘s shows are generally full of sound and easy to implement tips which educate consumers on finding great deals. Like most financial celebrities, the nature of Clark’s advice is designed for the masses which can be effective for most, but not all.  While he does a great job of teaching listeners about the qualities of different investment accounts, we don’t agree with much of his advice on investment strategies.

Active vs. Passive

A few of his overarching recommendations encourage investors to use index funds and target-date funds in their portfolios.  He claims that by using other (active) mutual funds you “almost always will make less money over long periods of time.” While passive investing is a valid strategy for some, we believe we can achieve better performance by using a more active approach.  This is why we offer our actual composite results to new clients which demonstrate how our strategy has outperformed over time.  It is true that not everyone can be above average when investing, but that doesn’t mean that no one can.

Target-date funds align portfolios on the set it and forget it strategy which can add extra risk when stocks make big moves.  Using a continuous strategy instead, allows for adjustments as the market changes, which helps avoid missed opportunities.

In our effort to keep the client’s interest first, we want to employ the very best investment strategy available to accomplish their objectives, which is why we use these same strategies for our own investments.  Contact us to learn more about our continuous investment strategy and the results it has produced.

Identity Theft

There you are awaiting your tax refund, only to find it has already been claimed by someone else.  Scammers are ever on the cutting-edge of new ways to swindle you out of your money.

One of the newest forms of thievery is the filing of fraudulent tax returns with stolen identities to claim tax refunds.  The scammers file a tax return under your name with your Social Security number before you get the chance.  In 2011, the IRS reported a 500% increase in fake tax returns from the previous year.  In response to this, the IRS is stepping up efforts to prevent and fight against this type of abuse which helped stop $1.5 billion in refunds from being sent to these criminals last year.  If this happens to you, the IRS will work with you to ultimately get you the tax refund, but the process can cost you up to 6 months of frustrations and time trying to clear your tax record.  Here are a few tips to help you spot if you may be next…

• Guard Your Info – Be careful about where you are giving your Social Security number.  The IRS never asks for your SS number by email or phone.  If you do receive fraudulent emails, report to phishing@irs.gov.
• Watch for Warnings – If you receive a formal letter from the IRS, contact the agency immediately to determine what you can do.
• Don’t Help the Thieves – Scammers are now using your social networks to acquire your SS number.  Particularly if you make your hometown and birthday public on the sites.

Photo Credit: Duodenum Rex

Moving to All Cash

The Prospect Theory states that people fear losing more than they value winning.  There was a great example of this emotional tug-of-war in a recent article in Money Magazine, called, “My brilliant sell-everything trade.”  In this situation, the writer, a regular reporter on mutual funds and investing information, made the decision just before the debt-ceiling decision last summer to move all of his 401k investments to cash based on his fear of a pending market drop.  Throughout the article the writer does a nice job dissecting his decision-making and the difficulties he’s experienced since he made that move.

The Second Decision

What most people don’t realize is that when making a fear-driven decision to move money out of the stock market, you are also adding another likely tougher decision of when to move money back in to stocks.  Inevitably, to make this move so that it is most beneficial to you, you would need to sell stock investments before things looked bad (selling high) and then shift money back in to stocks when things looked even worse (buying low).   This is contrary to the “let’s wait until things look better,” comment we hear most often in these situations.

Making drastic emotional decisions during market extremes can be dangerous to your long-term returns.  Instead stick with a diversified investment strategy that is designed with your risk preferences in mind.  Market shocks will continue to happen, but having the awareness to separate your emotional response from the rational response will benefit you over time.

Shocking

A central discussion in 2012 will be the possibility of inflationary and deflationary economic outcomes around the world.  Several of the deflationary threats that made news in 2011 continue to raise significant questions as we move in to 2012.

Potential European Breakup

Uncertainty surrounding debt situations in Europe will continue to drive market movements as the debate about the balance of payments between Germany and the rest of Europe drags on.  Germany could be a bigger problem than Greece and other debt-laden nations, as they insist on running a trade surplus and wanting everyone to cut government budgets when Europe is in a recession.  This makes it very difficult for the weak countries to improve their budget deficits.

China’s Real Estate Bubble

China is still facing the unwinding of their residential housing bubble and the effect this will have on their longer-term growth prospects.  They do have room to adjust monetarily by lowering interest rates further, but their drive for continued modernization vs. the inevitable real estate slowdown may cause political unrest.

US Elections

Another wild card in 2012 will be the US elections. Markets like certainty, so if the outcomes of the elections becomes more uncertain as the campaigns heat up, volatility may pick up.  Of course as the outcomes become more certain, volatility is likely to decrease.

Iran

Relations with Iran are becoming more and more strained.  The questions surrounding their nuclear programs and declining oil production due to sanctions, have created threats of a shutdown of the Strait of Hormuz, which helps transport one-fifth of the world’s oil supply.  If tensions continue to rise, the potential for economic disruption would also increase.

We understand that when fear is high, like now, long term investment risk for stocks is actually low.   This is coupled with the potential rise in residential construction that we’ve been discussing which should also improve the jobs picture.  Uncertain issues like the ones mentioned above could still give life to a global recession but, if the solutions to these problematic situations are just a little better than expected, the markets could respond with a continued melt-up rather than a melt-down.

The Road Ahead

The debate centers around the relationship between the strong and weak economies using the Euro.  Because the Euro is made up of 17 different countries, there are inherent limitations in using monetary policy to control the supply of money – stronger countries helping out weaker countries – like we can do with our states here in America.  One of the major questions being debated is should Germany assist the weaker countries (Portugal, Ireland, Greece and Spain) with fiscal payments.  By looking at a graph of the balance of payments between Germany and the weaker countries, you can see when the imbalances began to widen.  As you may imagine, this has not been a popular idea in Germany, and reports have even surfaced that a new two-tier Europe could be one of the possible solutions.

Without expansionary monetary policies to match the austerity in the weaker countries, it’s likely that economic growth could be strangled by the paradox of thrift, as everyone tries to save simultaneously thus decreasing their consumption and in turn crippling aggregate demand. If these countries receive no help and cannot meet future targets, the outcome could result in the end of the euro and more economic pain.  Perhaps creating a deflationary environment similar to what happened in Europe in the 1930′s.  While possible, we do not see this as the most likely outcome.  In fact, with the recent increase in the European aid package, it seems the European Central Bank is making an effort to prevent more trouble in the short-run.  Finding a way to end the imbalances over the medium run is the next obstacle.

Bad Outcome = Positive Surprise?

Stock markets around the world will likely continue to see heavy volatility as the debate continues.  However, with international markets bottoming near 35% from the most recent peak in April and the US market losing just under 20% during the same period, a very bad outcome may already be priced in to the markets.  We’re still not sure how the European debt issues will be solved but if they can reach a solution, and that solution is better than expected, the markets could see a positive push going forward.

Money Savvy Pig

If you think back to your childhood, what were the biggest influences on how your view of money developed?  If you’re anything like me, this question triggers memories of the struggle between saving my hard-earned allowance and spending it on the newest pack of baseball cards in hopes of obtaining the rare 1989 Ken Griffey Jr. Upper Deck rookie card.

Since my wife and I just welcomed our first child into the world, I thought I would share some of the conversations that have been taking place at our house regarding how we plan to teach our daughter about money.  We’ve both heard and read over the years that teaching kids about how to handle money is one of the bigger challenges parents face.  Whether it is rewards for good grades or allowances for mowing the grass, the ability to spend that income develops quite naturally with young children.  So what are the key points to teach our children about the importance of saving vs. spending more than they earn?  Here’s a few we plan to employ…

Somebody’s Watching Me

This was not just a creepy 1980′s song by Rockwell, it’s really a phrase that describes how your kids are likely that somebody.  They are learning from our actions whether we like it or not. One of the best ways to teach sound money management is by actually using a budget to manage the family finances.  In addition to keeping the numbers updated, making a point to openly discuss where we are spending our money demonstrates how to be accountable for our decisions.  Using a budget also teaches how to delay gratification if money is not yet earned.   By communicating openly and explaining the why behind our money decisions, children can pick up lessons along the way.  Several examples include pointing out the unit cost of items in the grocery store, explaining your net pay vs. your gross pay and discussing the percentages you are giving and saving. Volunteer work can be a great way to demonstrate the benefits of giving your time while also validating that rewards that aren’t monetary can be just as fulfilling.

Value vs. Quantity

Other lessons that get lost in the money conversations is teaching our children the true value of an item.  By taking care of the things they already have, children can prolong the life of a toy decreasing the extra purchase to replace due to wear and tear.  Kids also can learn by making things instead of purchasing them.  Going through this exercise teaches young children how to use their imaginations and also how to be resourceful with the things they already have.

Experiences = Life Lessons

One of the best ways for anyone to learn a truth is by making a mistake.  Kids need to have the freedom to make mistakes because of their own decisions so that it creates teachable moments for parents.  One tool, that does a nice job of creating these situations is the Money Savvy Pig.  By putting this tool to use, kids learn about the opportunity cost of a dollar.  They can place money in the save, spend, donate or invest section of the bank.  Therefore, if they choose to save a dollar, that dollar can no longer be spent, given or invested.

We’d love to hear your input.  What are some of the successful methods you’ve used to teach your children about how to handle money?

Certified Financial Planner

Have you seen the new CFP® TV commercial yet (take a look here)? Pretty Interesting.  The commercial is currently airing on stations that include History Channel, Travel Channel, HGTV, ESPN, MSNBC, CNN and Fox News.

The CFP Board, who issues the CFP® designation, is making a new effort to help define what being a CERTIFIED FINANCIAL PLANNER™ really means.  There are a lot of people that call themselves “Financial Planners,” but only those that have the CFP® designation have satisfied a rigorous set of standards to use the mark.  This includes extensive education, years of experience and a 2-day 10-hour examination covering insurance, investments, retirement, taxes and estate planning.  The CFP Board has also launched a website, www.letsmakeaplan.org,  to help bring clarity to how a CFP® professional can help bring all your individual financial pieces together.  They do a nice job of explaining what you can expect when meeting with a CERTIFIED FINANCIAL PLANNER™ and how you might benefit.

Mail piling up?

This is one of the more common questions we hear about the amount of prospectuses, annual reports, etc. that our clients receive from their investment companies.  Would you believe that this much disclosure could actually be bad for you?  Especially when it comes to the financial services industry, more disclosure is a benefit to the client, right?

Disclosure Debate

With all the hub-bub in Washington of who should police the financial planning industry of late, the debate about the effectiveness of disclosure is heating up.  At a recent industry meeting last fall, discussions centered around the idea that the more disclosure a company unleashes on the public the more confused they become in case after case.  Daylian Cain, assistant professor of organizational behavior at the Yale School of Management, discussed his findings of how heavy disclosure can actually harm an investor.  The standard example in these cases being the more pages in a disclosure document the less likely the investor is to read it.  Read more about this interesting discussion here.

Plain-English Descriptions

Last July, the SEC changed financial companies requirements for disclosure so that it will now be in a plain English narrative form with the hopes of making it easier to compare between different companies.  Reading the article above describes how several firms will look to drown their clients with pages and pages of disclosure.  We’ve been working hard over the last few months to make our disclosure form (Form ADV) to be more concise and meaningful to our business activities.  We’ll be sending out new copies of this document in the next few weeks.

Photo Credit: luxomedia

In Jeremy Grantham’s latest quarterly letter, he profiled a story about Sir Isaac Newton in which one of the most highly regarded intellects in human history was lucky enough to enter the South Sea stock bubble rather early.  He stayed in long enough to make some money and then, most likely feeling good about himself, sold his holdings at a nice profit.  After the stock continued to rapidly appreciate, his friends began to brag more and more about how rich they were becoming from investing in South Sea stock.  Kicking himself for having made such a foolish mistake by cashing out at such a paltry profit, Sir Isaac dumped much more than he had invested the first time into the stock.  Of course, this time the bubble was perilously close to the top and he made the fateful mistake of riding the bubble burst all the way down before selling out on three separate occasions with hardly anything left to show for his original investment.

Gravity of the Stock Market

There are several lessons in this story.

1. Don’t get carried away no matter what type of circumstances surround an investment.
2. Remember that even smart people get burned by stock bubbles.

For these reasons, we’ve designed our strategy to help fight these feelings.  The stock ranges we establish for each of our clients (and ourselves) act as a discipline, helping to control those visceral responses to booms and busts in the markets.  Making calls of where we should be at a given time within those ranges is a large part of our research process.  So the next time your emotions make you feel like you want to act, remember Mr. Newton’s experience. With a sound and solid investment strategy, you can fight these very human urges that are born out of the fear and greed that dominate the average investor’s decisions.