Are you making checklists?

Posted by dfederman on Nov 9, 2011 in Market News | Comments Off

Check lists are a great way to stay organized each day, and are a great way to avoid “A.D.D.” A checklist is also a good approach to kick start your financial plan. Start out with a simple list of broad categories: debt management, cash reserves, retirement planning, estate planning, tax planning, insurance, and long-term investments. Within the broad categories drill down deeper into your specific needs.

• Debt Management – When was the last time you re-financed? Have you consolidated student loans? Track your expenses if debt repayment is an issue for you.
  
• Insurance – If you have a family, make sure to have life insurance and disability insurance to replace income should something happen to you. Get a Personal Liability Umbrella Policy to give liability coverage above and beyond home owners and auto insurance. If you medical issues, check your maximum “out of pocket” expenses in your major medical policy.
• Retirement Planning – If you are in your working years, contribute the maximum you are allowed to your retirement plans. “Save and invest. Save and invest.”
• College Planning - Take advantage of tax deferred growth in a 529 college savings plan. Qualifying educational expenses will be paid tax free. No capital gains.
• Employee Benefits – Take advantage of your employee benefits such as Flexible Spending Accounts and Employer Matching.
• Estate Planning - If you are ALIVE meet with an estate attorney, who will review an estate planning checklist.
• Long-term care insurance – If you have accumulated assets over $700k, look into long-term care insurance as an estate planning tool to protect your nest egg should you meet long-term medical care.
• Invest in a diversified fashion – Know yourself and invest according to your risk tolerance and comfort levels. But avoid getting too conservative. If you place too much of your money in cash or bonds, you run the risk of losing purchasing power over time to inflation.
• Taxes – If you are a business owner, work with a CPA to efficiently manage your tax issues. If you are an individual, also work with a CPA. The tax code is complicated!

It can be overwhelming out there, but it does not have to be. Starting out with check lists can reduce the stress and anxiety involved with getting your finances organized.

Are you biased?

Posted by dfederman on Aug 31, 2011 in Market News | Comments Off

Experts in the fields of behavioral finance and neuroeconomics have found that humans are susceptible to developing biases. A bias is a preconceived notion, preference, or tendency that, once adopted, is difficult to alter or overcome.

Here are some of the common biases we often see:

Mental anchoring is an attachment to past events, situations, numbers, ideas, explanations, or impressions, that tend to block thinking. The mind ignores other aspects of the situation, and particularly neglects new events (or a sounder analysis of the available information) that make the situation different from the past (or from the way we evaluated it in the past). This often leads to biased decisions. The investor’s mind often stays focused or  stuck on a past price reference (his/her buying price for example, or sometimes a round price, or a past peak price, or some rigid / stubborn objective decided in the past…). He / she does not accept to sell an asset he / she owns if its current price is under that reference price, even if its future price prospect has been dwindling. Therefore he/she takes the risk of losing more money by keeping an asset that did not keep its promises.

Confirmation bias is a tendency for investors to look for and admit as relevant only information that confirm their prior beliefs, and/or to interpret whatever information in a sense that fits those preconceptions.

Recency bias is to give more importance to recent events than to older ones. It is a kind of mental myopia that focuses on the most recent information. A common example in asset markets is the expectation that some assets which have been fashionable until now will keep being popular in the near future.

Catastrophisizing Bias – Similar to Recency Bias. Extrapolating today’s bad news indefinitely into the future. “Things are terrible today, and will always be terrible. The stock market will NEVER recover.” “Gold is going to keep going up and up and up.”

Mental accounting/compartmentalizing bias – using separate criteria to value and to deal with your different economic assets, transactions, situations or expectations. The “house money” effect is a good example. People are usually rather cautious on the risk/return prospects when they invest their hard earned savings. But when they sell their winners for profits they view their profits as “house money” with which they can speculate.

Who Is In Charge?

Posted by dfederman on Jul 8, 2011 in Market News | Comments Off

Courtesy of ElderLaw News, a weekly e-newsletter that brings you reports of legal developments and other trends of vital interest to seniors and their advocates. This newsletter is distributed by The Estate Planning & Elder Law Firm, P.C. If you are interested in a free subscription to the Elder Law News, then please e-mail them at office@lifecareplanning.com, telephone them at (703) 243-3200, or fax at 703-841-9102.

I recently met with two gentlemen who had sought my advice regarding their mother. Their situation was typical. The mother was living independently at home while her two sons were leading busy lives nearby.
Although the mother was relatively healthy, she did suffer from uncontrolled high blood pressure and high cholesterol. She was not, however, what would be considered elderly ? she was able to work, cook, clean, mow her lawn, garden, and participate in other activities. Then, unexpectedly, she suffered a massive stroke.
On the day of the stroke, her sons met her at the hospital. For quite some time they were unsure whether she would survive. The hospital provided excellent care, and she saw a variety of specialists and nurses. The hospital staff made sure she was stabilized and not in any immediate danger. Once she was stable, they discharged her to a rehabilitation facility. Her sons provided what little information they had about their mother’s health. They were largely unaware of her medical conditions, the medications she was taking, and any recent medical problems. Because none of their mother’s medical conditions had resulted in a hospital stay or episode that would cause them concern, the mother and sons had not felt the need for the sons to be informed about her health conditions. The only person in a position to provide information to the hospital was the mother’s primary care physician, and that physician was never consulted while the mother was in the hospital.
The mother’s discharge form the hospital happened with almost no notice to her sons; this also is all too typical. One of her sons went to visit his mother, and it was only then that he was informed that the hospital was moving his mother to a rehabilitation facility. The sons were not given a choice regarding the facility to which she would be discharged. They also were not given any information about what to expect or with whom they should speak once their mother was admitted to the rehabilitation facility. The mother was moved to the rehabilitation facility, and, once again, her primary care physician was not consulted.
After their mother was admitted to the rehabilitation facility, the sons tried to determine what would be the best long-term plan for her. I met with the sons and spent quite a bit of time with them to determine their goals and objectives, what they saw as the long-term plan for both their lives and their mother’s life, and I tried to get an idea of what would be feasible for them. I quickly realized that they had no idea of their mother’s capabilities since the stroke, where she was in the rehab process, and her prognosis. The sons had tried to ascertain this information ? they spent time with their mother during normal working hours, while taking time off from their jobs. They tried to speak with the physical therapist, but that person was never available, so the sons obtained opinions from anyone to whom they could speak. They never were able to speak with a physician, they never met any type of director, and they never received any real answers.
Because the sons were trying desperately to devise a plan for their mother’s care, we met several times over the course of several months, and each time I asked about their mother’s progress. It became obvious that the sons were still unaware of her real progress, and they did not even know what questions to ask. While I am not a physician or a social worker, I realized that they needed the help of someone with medical knowledge and knowledge of the health care system ? a health care advocate.
I referred the sons to a local medical social worker. She met with them at the facility and met with their mother. She was able to interpret the information they provided, and she gave them an honest assessment of what their mother’s needs were at the time. I then met with the medical social worker and both sons and began to try to get a sense of what the sons needed to achieve their goals and objectives. The medical social worker began to ask questions such as: “Was your mother’s primary care physician consulted?” “Has your mother been seen by a neurologist since she left the hospital?” “What has the psychiatrist said about her progress?” “Who was present at her team meeting?” The questions she asked boiled down to one question, “Who was in charge of leading their mother’s medical team and who was in charge of pulling everything together?”
In a perfect world, the mother’s primary care physician would remain in charge. Unfortunately, our medical system is fragmented and that does not always occur. The second choice for the person in charge is someone in the family. In the situation described here, the sons were unaware of any of their mother’s health condition. In addition, they had no medical knowledge, they did not know what questions to ask, and they did not know to whom they were supposed to pose their questions. They were under the impression that progress reports such as “Your mother is improving,” were standard. The medical social worker was able to ask the right questions, and she was able to point out that the question “Who is in charge?” was the most important question to ask.
As a result of their conference with the medical social worker, the sons discovered that their mother was not seen by the necessary specialists. The medical social worker also gave the sons a realistic view of their mother’s capabilities and what she would be able to accomplish with further rehabilitation. With this information and with the assistance of a gerontologist, the sons have come up with a plan to bring their mother home with assistance. She has been given the opportunities she needed to rehabilitate as much as possible, and the medical social worker was able to help arrange the right type of in-home care. All of this has been overseen by the gerontologist acting as the team leader in conjunction with her new primary care physician.
The lesson to be learned from this example is that the medical system is fragmented. While it may seem that a loved one is getting the right type of care, only an expert and an advocate can point out what is missing.
The Estate Planning & Elder Law Firm’s life care planning program is designed to assist families by helping to put you in charge of your life or a loved one’s life. We can assist you in finding the right health care advocate. In addition, we have elder care advocates who can assist with the management of chronic illness and aging outside of the medical field.

Do I Save for My Kid’s College or My Own Retirement?

Posted by dfederman on Jul 1, 2011 in Market News | Comments Off

by Dan Federman, CFP(r)

According to collegeboard.org, the average cost of a 4-year in-state public university costs $19,388 per year in today’s dollars. Parents with a newborn baby need to plan for this college expense today even though the money won’t be needed for 18 years. The total expected cost, including tuition & fees, room & board, and books & supplies, is projected to be to $201,108 in 18 years, assuming an inflation rate of 5%.  If these parents plan to pay for 100% of college costs, they need to contribute roughly $450 per month into a 529 College Savings Plan for the next 18 years assuming an average 8% annual return on investments from a diversified portfolio of stock funds, bond funds, and cash. And this is just for one child!

If these parents have ample discretionary income and are able to save toward this college goal, then great, they can treat this as one of their routine monthly expenses. However, what if funds are tight and they have not saved enough for their own retirement needs?  In that case, saving for retirement must take precedence over saving for college, primarily because a retirement goal must be “fully funded” by retirement age, and there are no “scholarships” for retirement. College expenses, on the other hand, may be “partially funded” by the parents, with the remainder being paid through financial aid, grants or scholarships (or, with some help from the grandparents).

To learn more about 529 Plans visit http://www.collegesavings.org/index.aspx or http://www.savingforcollege.com/.

To learn more about Ariba Asset Management Inc., visit www.aribaasset.com or call 800-808-7488 x101.

A Fool and His Money are Soon Parted

Posted by dfederman on May 27, 2011 in Market News | Comments Off

Outline by Dan Federman, CFP^®

“It is said that only a fool learns from his own mistakes, a wise man from the mistakes of others.” – Otto von Bismarck (1815-1898) Prussian German statesman and aristocrat.

“From the errors of others a wise man corrects his own.” -Publilius Syrus (1st Centry BC-?) Roman writer and poet.

“Experience: that most brutal of teachers. But you learn, my God do you learn.” -  C.S. Lewis quotes

“Experience is the name we give to our past mistakes” – Oscar Wilde quotes

“Good judgment comes from experience. Experience comes from bad judgment.” -     Unknown

Below are some investment and financial mistakes we’ve seen people make. Let’s be wise and learn from others’ mistakes!

1. PROCRASTINATION
   1. Save Early. Save Often.
   2. If you have Assets to Protect or Income to Replace in the event of catastrophes, get properly insured while you can.
   3. ACTING OUT OF GREED (TRYING TO GET RICH QUICK)
      1. Buying an “Investment Tip”
         1. i.      Listening to a friend, coworker, family member who tells you a stock is going to “double in six months.”
2. Buying a “Good Story” without considering risks or fundamentals
   1. i.      ex. “alternative energies” – makes sense, but businesses such as ethanol, electric cars,etc. may not be profitable for a very long time.
   2. ii.      Funds designed to double the performance of a particular market sector do not work.
3. Listening to Fortune Tellers
   1. i.      Many newsletter writers who sell subscriptions attract “sheepish” investors looking for the Promised Land.
   2. ii.      No one has a Crystal Ball
   3. iii.      Predicting the Future is Speculative
   4. iv.      Past Performance is not Indicative of Future Results
   5. v.      Ask yourself, “who is on the other side of this trade, why do you know more than they do and is this a fair price?” If there are many willing buyers and sellers, by definition, it is a fair price. (source: IFA.com)
4. Making Enormous Concentrated Bets.
   1. i.      Ex. betting big on energy stocks, Gold, Tech Stocks, Real Estate, etc.
   2. ii.      Over-concentrating in employer stocks.
5. Seeking High Yields on Cash or Other Investments
   1. i.      High yield = high risk
6. Investing in Fads.
   1. i.      Ex. Green energy, dotcoms, social media
   2. ACTING OUT OF FEAR
      1. “Catastrophisizing” – believing today’s disaster will continue indefinitely into the future.
      2. Basing investment decisions on daily headlines in the media.
         1. i.      Turn off the TV
         2. ii.      Don’t open your statements during bear markets (but check with an advisor to see if you are properly diversified in the first place)
7. Buying bear market funds or shorting stocks, attempting to capitalize from a downturn in the markets.
8. ACTING OUT OF EMOTION
   1. Buying in a state of euphoria and selling in a panic and leads to “buying high and selling low.”
   2. ATTEMPTING TO TIME THE MARKET.
      1. “Let’s wait it out until things get better”
      2. “Let’s take profits and buy on the next dip.”
      3. FAILURE TO HAVE A POSITIVE ATTITUDE ABOUT THE FUTURE.
      4. USING ASSETS TO GO INTO DEBT
         1. Buying Investments on Margin
            1. i.      Using stocks as collateral to borrow money = Bad Idea.  If the investments (or the overall market) turns south, you may be forced to sell at the worst possible time.
9. Using your home as an ATM
10. FAILURE TO MAXIMIZE RETIREMENT CONTRIBUTIONS
    1. Many people only contribute to their 401k plans at work if their employer contributes. We live in a society of shrinking pensions and social security benefits. Take full advantage of your company retirement plan.
    2. FAILING TO THINK LONG-TERM
       1. Time is your best ally when it comes to investing.
       2. If you need the money in 3 years or less, it should not be at risk in the stock market or in any “short-term trades.”
       3. FAILURE TO INVEST WITHIN THE CONTEXT OF AN ASSET ALLOCATION OR INVESTMENT POLICY STATEMENT (IPS)
          1. Compartmentalizing investments – viewing one investment at a time rather than taking a comprehensive view of your entire financial situation.
          2. Thinking “big is better” –placing investments only in “large blue chip companies” – Enron, Fannie Mae, AIG, Merrill Lynch, AIG, General Motors, etc. were all big blue chips before their stocks tanked.
          3. Investing in “dividend paying stocks” (ignoring all other asset classes available)
          4. FAILURE TO PUT YOURSELF FIRST
             1. If you have to make the choice, fund your retirement before funding your children’s college expenses. When you reach retirement age and are no longer working, you do not have the luxury of being able to save. Instead, you are taking distributions from your savings.
             2. FAILING TO PLAN FOR THE WORST CASE SCENARIO
                1. Failing to have adequate cash reserves for emergencies.
                2. Failing to set up an Estate Plan which
                   1. i.      Authorizes people to handle your affairs if you no longer can because of illness of disability (Financial and Health Care Powers of Attorney)
                   2. ii.      Specifies who gets what after you pass away (Wills, Trusts)
                   3. iii.      Provides for children who are minors or who have special needs. (Insurance, Trusts)
                   4. iv.      Minimizes estate taxes (ex. Credit Shelter Trusts, gifting strategies)
                   5. TAKING UNNECESSARY PENALTIES
                      1. Required Minimum Distributions (RMDs) – if you fail to take out the required distribution amount, the penalty is 50%!
                      2. Taking a non-qualified IRA distribution prior to age 59 ½ results in a 10% penalty and paying income taxes.

What have been some of your personal investment or financial blunders?

If you need to review your portfolio or personal financial situation, please feel free to contact us 1-800-808-7488 x101, visit us at www.aribaasset.com, or read our blog www.2020insight.com.

A Fool and His Money Are Soon Parted Part 2

Posted by dfederman on May 25, 2011 in Market News | Comments Off