A recent article in Money Magazine titled “Leaving a Legacy on a Shoestring” by Dan Kadlec, April 2010, got us to thinking about inheritances in general. The gist of the article was that with the recent economic downturn and market meltdown has left quite a few retirees with little to no excess funds to potentially leave to their beneficiaries. The article provides several ways that those strapped for funds can still leave a legacy.

Suggestions included:

(1) Buy a life insurance policy payable to your beneficiaries.
(2) Convert part of an IRA to a Roth IRA, if you can dedicate a portion to your
heirs.
(3) Prepay for a financial planner to work with your children and/or
grandchildren to help them better manage their finances.

The article also quoted a study by the life insurer Allianz regarding the type of bequest that made a lasting legacy. Only 10% of those surveyed felt that financial assets made a lasting legacy. It’s sort of like surveys that show that a pay raise has little lasting affect in motivating an individual, since they had long felt they deserved it. Thirty-four percent of those surveyed felt that possessions of emotional value provide a lasting legacy and 77% felt values and life lessons provided the most meaningful bequest.

We tend to agree with the Allianz survey but believe there is a broader approach that may be even more meaningful to your heirs. We call it leaving a “living legacy”. Our concept of a “living legacy” includes the values, life lessons and possessions of emotional value. We believe it best to make the legacy “living”, by giving of your time and some of the possessions of emotional value while you are still living, so you can see your heirs receive enjoyment.

A “living legacy” includes helping your children in a myriad of ways:

- Help them with their down payment on that new house.
- Teach your children or grandchildren how to make your famous pie or refinish
a piece of antique furniture – transfer your strengths and hobbies to them.
- Help them get their new house ready for move-in or help them decorate their
current residence.
- Help foot the bill for a family trip to Disney or an all-inclusive resort.
- Use your seasoned skills to help them with home or car repairs.
- Baby sit so one parent can work part-time or take care of the grandchildren
so mom and dad can get a well-deserved getaway.

These are but a few ideas of what retirees can do to create a legacy for their children and grandchildren while they are alive and can enjoy seeing their gifts and help appreciated. We believe that these types of “living” bequests will be appreciated and remembered far more than a lump sum of cash after you’re gone.

During these tough times, few people are being given an increase in pay, and if they are, it usually amounts to just a couple of percent. Fortunately for them, inflation is also quite low, so it appears they may be able to avoid losing ground. Nevertheless, with all the government stimulus and spending, it’s not hard to envision high inflation and higher interest rates not too far down the road.

Statistics show that few Americans have given much thought to retirement. According to the website www.cnnmoney.com, the average net worth for an American 55-64 years old is about $180,000. And, that includes real estate. If you consider that a generally-accepted rule says that you can draw about 4% (adjusted for inflation) from your retirement portfolio, annually, to meet retirement needs, the average 64 year old could draw a starting amount of $7,200 at age 65. The actual amount could be much less when that $180,000 also includes the value of one's home.

The bottom line? It’s obvious from these statistics, that few have saved enough. So if you need to save more and you’re unlikely to get a significant raise anytime soon, what can you do? The answer: Give yourself a raise. How might one do that you ask? You can give yourself a raise by taking a serious look at how you are spending your money today and eliminating discretionary items. And, if you are in the 25% Federal tax bracket, each dollar you avoid spending has the same impact as if you earned another $1.33. What a deal! (Actually, when you consider that you would not have to pay State, Social Security and Medicare taxes, it would be much more than $ 1.33).

So how can you cut your spending? First, you need good data. If you don’t know where your money is currently going, we suggest you track it for a few months. You might want to check out the online site www.Mint.com, recently purchased by Intuit, the provider of the Turbo Tax and Quicken software packages.

There are also hundreds of ideas on the internet. Just do a search on “How to spend less” and a number of lists pop up. Some ideas that come to our minds:

- Cut out that daily latte
- Pack a lunch for work
- Mow your own lawn
- Learn how to do some of your own repairs
- Buy a car instead of leasing, and keep it longer
- Cut back on the cable package (read some books)
- Reduce your cell phone bill (Do you really need the data package?)
- Increase insurance deductibles
- Eat out less

We’ve written before about how simplifying our lives can make a lot of sense (See our blog “Is Simplicity the Answer”, dated May 13, 2010). We’ve all become accustomed to all the new gadgets and technology available to us. Yet, do we really need all of these things? The answer depends on your priorities. How do some of the items on the list above compare to having adequate funds for retirement? Or, having enough to send your kids to college? Regardless of the answer to that question, we are certain that some items can be cut form your budget so that you can give yourself a raise and save more for other, higher priority needs.

A number of our clients are in their late fifties or early sixties. In many cases they were motivated to hire a financial planner as they worried about their readiness for retirement. While it’s good they saw a need, there is no doubt that the earlier one begins to focus on their finances, the better.

One 2009 report on credit card debt showed that 19% of college graduates had over $7,000 in credit card debt. The website creditcards.com reports that the average household credit card debt was over $15,500! We believe that educating your children about money is one of the best things you can do for them.

Most children are first introduced to money whey they receive their first allowance. An article in the Journal of Financial Planning by Eileen Gallo, Ph.D, titled “Walking the Walk: A Financial Planner Teaching His Children” (April 2010), discusses how a husband and wife consulting team have been educating their children about money. With their approach, an allowance should be something given to a child, not tied to chores. According to the article: “The purpose of chores is to help children develop a work ethic, and the purpose of an allowance is to help them learn to think, choose and consider alternatives, when it comes to money”.

There are many ways to structure allowances. The couple in the article awards $6 a week to each of their children. Two dollars are for spending, two dollars goes into a bank account and two dollars are for charity. At the end of the year, half of the money saved can be spent on something more significant, teaching the children the concept of saving for a large purchase and providing an opportunity to discuss the concept of priorities. The other half remains in the bank. Each year the bank account gets bigger, so their 50% for spending gets bigger and more meaningful.

The couple found that deciding on a charity was best done on an annual basis rather than weekly. It’s probably wise to avoid letting your interests dictate your children’s charitable ideas.

Other things parents can do include the following: (1) help their children learn about stocks by setting up an account for them to invest a small amount of money. (2) pay their children for doing other projects around the home. (3) spend time showing their children what it costs to run the household and (4) Set an example by living a conservative lifestyle.

As children get older they will need a broader exposure to money matters. Some schools provide classes in basic money management. If your children’s school doesn’t, ask an administrator if they’ve considered the program sponsored by the National Endowment for Financial Education (NEFE). NEFE’s High School Financial Planning Program® (HSFPP) consists of a seven unit student manual, instructor’s guide, and a dynamic suite of Web pages that offer a large, continually growing collection of resources, articles, and financial tools for teachers, students, and parents. NEFE provides the material free of charge. To learn more about the program, visit http://hsfpp.nefe.org .

Some financial advisors help educate their client’s children. As part of our annual investment services, Patterson Advisors provides each client with a 3-4 hour “mini analysis” on a wide variety of topics, which can include basic financial education for a relative, or even a friend, for that matter.

There are a myriad of ways to educate your children about money matters. How you choose to do so isn’t nearly as important as making a decision to help them learn and then following through with it. Not discussing money matters at all can be just as detrimental to a child’s financial future as leading a poor example.

In the fall of 2008, we published a list of important Do’s and Don’ts in an Oakland Press supplement. We felt it would be beneficial to our new readers and remind our past readers of those key things that can make all the difference in the world to their financial future. We’ve also added a few updates to the list.

- Do make a concerted effort to manage your money. You’ve spent the majority of
your life working to accumulate money. It’s important to learn how to manage your money yourself and/or get professional help. Make sure you are getting good advice.

- Don’t make basic financial mistakes such as:
(1) not establishing an emergency fund. Everyone should have at least three to six months of fixed and variable expenses in a cash-equivalent account that earns a competitive interest rate. And, with the extreme swings we’ve seen in the last few years, we now believe it may make sense to have 6 to 12 months of cash set aside to meet fixed and variable expenses instead of just 3 to 6 months.
(2) running up credit card debt. Pay off all credit card balances each month. If you can’t eliminate your credit card debt, you’re obviously spending more than you’re making. Review your budget and eliminate all discretionary expenses.
(3) not having adequate insurance coverage. Make sure you have adequate auto, homeowner’s, medical, life and disability insurance. Consider long-term care insurance and an umbrella liability policy.

- Do diversify your portfolio
True diversification requires owning 8-10 broad asset classes that provide low- correlated returns. Owning several mutual funds that have similar holdings provides little diversification. True diversification can increase returns while at the same time, lowering risk. Consider including the following asset classes:

- Cash or cash equivalents
- Short-term bonds
- TIPS (Treasury Inflation Protected Securities)
- Intermediate to long-term bonds
- High-yield bonds
- International bonds
- Large domestic stocks
- Small domestic stocks
- International stocks
- Real estate investment trust (REIT) funds
- Commodity funds

Make sure you rebalance your portfolio at least annually, buy selling over-allocated asset classes and buying under-allocated asset classes. Stay disciplined and avoid letting your emotions drive your investment decisions.

- Don’t ignore investment expenses and taxes
Many investors have no idea what they are paying, either directly or indirectly, for the management of their investments. Mutual fund management fees, advisory fees, transaction costs and taxes can significantly eat away at portfolio returns. Make a concerted effort to understand what you’re paying and reduce it to the absolute minimum. Pay attention to the tax efficiency of the funds you invest in. Taxes can eat up a high percentage of your returns.

- Do take time to plan for retirement
A successful retirement requires adequate savings as well as psychological preparation. Will your money last through your life expectancy? What will you do in retirement? How will your self-worth be impacted? Careful planning can make a world of difference.

- Don’t ignore basic estate planning
Don’t let an unexpected death leave you or your survivors scrambling to put their financial life back together. Make sure your financial records are in order and take the time have the basic estate planning documents prepared.

- Don’t rush into buying an annuity
While everyone is worried about their money lasting through retirement, annuities can be complex products and often carry hefty fees. Annuity sales personnel make big commissions off of annuity sales. Some types of annuities can be appropriate for retirees. Nevertheless, you need to educate yourself about all aspects of annuities before making a purchase. We recommend you seek the unbiased advice of a financial professional who is not in the business of selling annuities.

Available now for a few years, target-date funds typically invest with a retirement-target date objective for the investor (e.g. Fidelity Freedom 2010 Fund, Symbol: FFFCX, which was designed for investors retiring in 2010). In most cases, these funds switch to more conservative asset classes, as the target date approaches.

They are appealing for those who don’t want to hire an investment advisor, aren’t knowledgeable enough to manage their own money or just don’t want to take the time to manage their assets. Target-date funds received a lot of press in the 2008 market downturn, because they, in more than a few cases, performed horribly. It’s very important, then, for investors to have some basic knowledge about target-date funds in order to be sure they are selecting a product suitable to their needs.

In testimony to Congress in 2009, John Rekenthaler, Vice President of Research for Morningstar®, discussed several areas investors need to pay attention to. As with any mutual fund, it’s important to pay attention to the fees charged. In Mr. Rekenthaler’s testimony, he noted that the average expense ratio for target-date funds was 0.69%, not bad for an asset-allocation fund. Yet, looking deeper, expense ratios ranged from a low of 0.19% to a high of 1.82%. Such a difference in fees can amount to staggering differences in the value of the funds you’ve invested in, over long periods of time.

Mr. Rekenthaler’s testimony also touched on the issue of the underlying funds that target-date funds invest in. If the target-date fund invests in funds of the same company that is marketing the target-date fund, it’s unlikely the target-date fund will perform as well as another target-date fund that seeks to use the best underlying funds available.

Another important feature of target-date funds is their “glide path”. Basically, a fund’s “glide path” involves how much is allocated to each asset class and how the allocations change as the target date is approached. Mr. Rekenthaler’s testimony noted: “The longer-dated funds tend to look quite similar. For example, the allocation to stocks for the 2040 funds in Morningstar's database runs from 80% as a minimum to 95% as a maximum. . Absent any mistakes from implementing the asset allocation, those funds will tend to perform fairly similarly.”

As the funds age, however, and approach their target date, the allocation to stocks varies significantly. This makes the risk of target-date funds with the same target date substantially different. Therefore, an investor thinking that all funds with the same target date would have similar risks, would be greatly mistaken.

A recent article in the Wall Street Journal by Anna Prior titled “Before Buying a Target-Date Fund ….” (Monday, June 7, 2010), pointed out some additional concerns to be aware of. First, she noted that you must also understand whether the fund is designed to just get you “to” retirement or “through” retirement. A “to” glide path will reach its most conservative allocation at the target date, while a “through” glide path won’t reach its most conservative allocation until 10, 20 or more years later, in order to provide inflation protection.

Another point worth noting is how broadly a target-date fund is diversified. Broad diversification can be good, as it can help lower volatility and increase returns. However, funds that try to juice returns by investing in riskier assets may turn out performing poorly.

The bottom line seems to be that while target-date funds can serve you well, you need to do your homework before selecting one. Those who pick a target-date fund because they don’t want to take the time to manage their own funds or don’t have the knowledge to do so may be unhappy with the results if they don’t seek some professional help.

Our last blog focused on the views of several noted Wall Street bears (Doom and Gloom Ahead?). Many had correctly predicted past crashes, although in some cases they were significantly premature. All were very negative about our future economic prospects.

We’ve been reading a number of articles lately regarding what’s coming down the road with respect to taxes. If there was any one thing that would lend credence to the bears’ negative views, it’s the burden taxes will have on us going forward.

New complexity and taxes will be added as a result of the recently passed healthcare bill. We’re still in limbo with respect to estate taxes. Will the estate tax be re-instated retroactively to January first of this year? What will the rates be? What exemption will be included? The estates of those who have already died this year are in limbo. Will they pay no estate tax yet receive only a limited step-up-in-basis? Will many file law suits if Congress reinstates the estate tax retroactively?. What a mess!

And, it’s not a ”Laffing” matter according to Arthur Laffer (noted economist, Chairman of Laffer Associates and author of “Return to Prosperity: How America Can Regain Its Economic Superpower Status”) in a June 7, 2010 article in the Wall Street Journal titled “Tax Hikes and the 2011 Economic Collapse”. Perhaps we should have included Mr. Laffer in our doom and gloom blog.

In his article, Mr. Laffer points out that people and corporations will adjust the timing, place and type of their income to minimize taxes. He points out that “the nine states without an income tax are growing far faster and attracting more people than the nine states with the highest income tax.”

Unless Congress acts, federal state and local taxes will rise at the beginning of next year, due to the expiration of the Bush tax cuts. Mr. Laffer says that: “Tax rate increases next year are everywhere.” He goes on to say: “Today’s corporate profits reflect a shift into 2010. These profits will tumble next year, preceded most likely by the stock market.”

He also noted: “The prospect of rising prices, higher interest rates and more regulations next year will further entice demand and supply to be shifted from 2011 into 2010.” That’s why the economy is as good as it is this year, he says. If he is right and Congress does nothing to address these tax issues before year end, Mr. Laffer and the bears we discussed in our last blog may well be right about a severe downturn in 2011.

Just when many thought the economy was recovering, we were hit with the European crisis. One day the DOW is up 200 points and a few days later it’s down a couple hundred. Investors are jittery. There are reasons to be somewhat hopeful and lot’s of reasons to worry. Whether you are bullish or bearish, you can find lots of gurus whose views are in sync with yours. If you pick two economists at random, we suspect the chances are just as good that they’ll disagree on the future of the economy as they will agree on the future.

So what should we make of an article in Bloomberg Businessweek (June 14, 2010) titled “Lessons from the Biggest Bears”? The article discusses the views and past predictions of some of the most well-known bears who, despite some signs of recovery, see tough times ahead.

They included: Nouriel Roubini, also known as Dr. Doom, Robert Prechter who revived a system of measuring investor psychology called the Elliot Wave Principle; money manager Peter Schiff; Nassim Taleb, author of The Black Swan; Michael Panzner, author and stockbroker; investment adviser Gary Shilling; Stephan Roach, Chairman of Morgan Stanley Asia; Meredith Whitney, formerly an analyst for Oppenheimer who then launched Meredith Whitney Advisory Group; and James Grant, Publisher of Grant’s Interest Rate Observer.

In many cases, according to the article, these bears made predictions that came true, but not necessarily in a timely manner. Roudini predicted our current crisis originally in 2004. Panzner called for the collapse in 2005.

Prechter predicted the crash of 1987, telling his newsletter subscribers to sell their stocks two weeks before the crash. Later, according to the article: “….. in 2002, he predicted the Dow Jones Industrial average would fall below 1000. It surged 25 percent the following year and kept going until 2007.”

Peter Schiff had written a book prior to the recent market crash titled Crash Proof: How to Prosper from the Coming Economic Collapse. While he predicted the collapse of the housing market, his advice to investors, to invest their money in foreign stocks, was less than stellar.

To be sure, the bears as a group have been quite successful at predicting many of the past market events, though as we noted earlier, not necessarily in a timely manner. In some cases other predictions have proven to be off target. In general, they are currently very bearish about the prospects for the U.S. economy. How should you respond to their negative outlook?

First, we think you need to keep in mind that many of these bears have written books or newsletters and therefore have a need to stay in the public eye. While they may truly believe what they are saying, being a bit outrageous is good for their book and newsletter sales. So, we think their views should be considered, but perhaps with a grain of salt.

Even if they are right, we can’t be sure of the timing of their dire views. They have been off by several years in their past predictions. That could happen again. So what should you do?

We happen to agree with many of their concerns and can envision another economic downturn ahead. However, we don’t know for sure if that will happen, or when. It’s certainly possible, we believe, that the economy will improve to a point that investor confidence will return and we will see a significant bull market, at least in the short-term. Another downturn will eventually come, we just don’t know how soon or how severe it will be.

Our advice, for our clients, is to stay they course. Remain broadly diversified and rebalance at least annually. Avoid market timing, stay invested in all asset classes and don’t let your emotions drive your investment decisions.

The “flash crash” that occurred on May 6th was a scary event for most investors. The Securities and Exchange Commission agreed to a stock-market “circuit breaker” yesterday that will be a first step at preventing another “flash crash”. For more information, see our previous blog post titled “Should You Prepare for the Next ‘Flash Crash’?”.

As you may recall, the “flash crash” caused some shares to drop in value to as low as one penny. The Dow Jones Industrial average (DOW) dropped 1000 points in just a few minutes and then recovered by more than 600 points, just as quickly. To date, no reason has been found for the quick crash and recovery. It seems likely that computerized trading was somehow involved and possibly caused some hedge funds to retreat to the sidelines. This caused a lack of liquidity for some Exchange Traded Funds (ETFs) and some stocks.

An article in today’s Wall Street Journal (June 11, 2010) titled ‘Circuit Breaker’ Set, by Fawn Johnson, outlined the details of the new rule. The change implemented today will be in effect on a pilot basis for a period of six months. Only stocks included in the Standard & Poors (S&P) 500-stock index are initially affected. The new rule calls for all exchanges to stop trading for five minutes if a stock in the S&P 500 Index drops more than 10% in the previous five minutes. This will hopefully allow traders to assess whether such a quick drop in price of a stock is due to a real change in value or whether it’s due to some market anomaly.

This first step does not include small-cap stocks or index-based products such as ETFs. According to the article, Mary Schapiro, SEC Chairman, hopes to soon expand the circuit breakers to cover other stocks and ETFs.

Since no definitive cause has been determined for the “flash crash”, no one can be sure the new circuit breaker rules will prevent a similar incident in the future. Nevertheless, it seems a logical step in the right direction. Clearly, it seems that market volatility is here to stay and we can expect additional market crashes in the future. Investors, therefore, need to make sure that their portfolio allocations are in line with their risk tolerance and that they have sufficient cash on hand to weather future market downturns.

We always advise our clients to keep their individual stock holdings to five percent or less of their entire portfolio value. Otherwise, they may be taking on substantially more risk than they realize.

A recent case in point strongly supports this advice. Today’s Wall Street Journal reported that British Petroleum (BP) stock dropped 16% yesterday and is down approximately 50% for the year, as a result of the oil leak disaster in the Gulf of Mexico. If a substantial portion of your portfolio was invested in BP stock, it could have severely impacted your financial future.

Events such as the Gulf oil disaster occur very unexpectedly. While the impact on BP’s stock is easy to understand, there may be other companies that will also be impacted significantly. Others gas and oil companies may suffer as a result of a backlash against the oil drilling industry. Tourism-related industries could also be impacted.

There are all types of scenarios that can severely impact a company’s earnings and stock price. Environmental disasters (hurricanes, draughts, floods, earthquakes, volcanoes, tornados, etc.), product liability litigations, fraud, and economic and political events, can all occur with little or no warning. Nearly every company bears risk to these types of events and others we haven’t thought about.

We have advised many clients to reduce or eliminate stock holdings. In many cases subsequent events have made those reductions look very wise. When clients come to us with large individual stock holdings, it can be quite difficult to get them to significantly reduce those holdings.

If you have a stock that has appreciated in value to the extent that it is now worth substantially more than 5% of your total portfolio’s value and you hesitate to sell it because you are just sure it will rise further, consider the following: Assume that instead of owning that stock you had cash equal to the current market value of the stock. Ask yourself if you would invest that sum of money all in that one stock, given that its price is now historically high. In most cases, clients say no they would not do that; that would be too risky. So why then would you continue to hold that much stock in your portfolio?

Now that the market (DOW) has rebounded significantly from its low of near 6500 in March 2009 to over 10,000, it’s a good time to review your holdings to see if there are any stocks whose values now represent too great a percentage of your total portfolio. If so, we strongly urge you to consider reducing those holdings. You’ll sleep better at night.

A friend in his late forties recently told us of his plan to retire in his early fifties after amassing a seven-figure portfolio. He said he planned to just live off the interest and dividends. He wasn’t going to touch his principal. Surely such a tidy sum would meet his retirement needs!

It quickly became clear that the income he anticipated needing was based on what he thought he required in today’s dollars. We asked if he had considered what the effect of inflation would have on his retirement. Did he understand that over a twenty-year period 3% inflation would erode his purchasing power by 45%? Has he thought about the fact that retiring at age 55 and living to age 95 (not unlikely with improvements in medicine) would subject his purchasing power to 40 years of inflation? It would most assuredly necessitate tapping into his principal.

Higher taxes and market volatility could also inflict a heavy toll on his plans. He was clearly surprised that such a large nest egg might not be enough. We pointed out that while his plans could fall short, they also might well succeed.

The issue, we told him is that more detailed planning was required to better assess his situation. How much would he really need to live on in retirement? Would his house be paid for when he retires? Might he and his wife downsize? What might inflation be in the future? How much Social Security income should he plan for? What might the future tax rates be? How might the market affect his plans?

The bottom line: some in-depth planning with varied assumptions was required to truly assess our friend’s retirement plans. The ability to generate Monte Carlo simulations and bad-timing scenarios (techniques included in sophisticated financial planning software) would be extremely helpful to better assess his retirement plans. The lesson for all is that seat-of-the –pants retirement planning may well lead to great disappointment in one’s later years. How much is enough depends on a whole host of factors.

We’ve all heard time and time again about the lack of saving for retirement by many Americans. An article by Chavon Sutton (CNNMoney.com, March 9, 2010) quoted a recent study by the Employee Benefit Research Institute confirming that little has changed. The article stated that: “the percentage of workers who said they have less than $10,000 in savings grew to 43% in 2010, from 39% in 2009.” The value of the homes of those surveyed and their pension plans, if any, were not included. Twenty-seven percent of those surveyed had less than $1,000 saved for retirement. Clearly, many Americans will find it very hard to retire comfortably in the coming years. This is the retirement problem most often discussed in the news.

What’s not discussed as much is the other side of the coin: those who have saved a significant amount for their retirement. So why should we talk about their situations? What problems are they faced with? While they too may not have enough to last through retirement, they may also risk underutilizing what they have worked so hard to save.

As financial advisors, it turns out that many of those who come to us have indeed saved well for retirement. The problem they face is determining how much they can safely spend. Many have been extremely frugal, saving every penny they can. They are so used to pinching pennies that they find it hard to spend what they have saved. If they continue to deprive themselves of luxuries they could afford during retirement and leave a substantial sum to their beneficiaries or to charities, all of the deprivation they suffered during their working years will be for naught.

So what should they do? In many cases they need someone to analyze their situation to assess their planned retirement spending. They need a qualified advisor with software that can do sophisticated analysis such as Monte Carlo simulation and show them how they would fair with bad market years early in their retirement. A qualified advisor could run various scenarios with different assumptions for investment returns, inflation and taxes. If they don’t seek expert advice, they’ll likely either overspend or just continue their frugal ways, not knowing if they are spending too much or too little.

Just because you have been successful in saving what you think is a substantial amount for retirement doesn’t mean your retirement is golden. You may actually have underestimated the affect of inflation and be strapped by loss of purchasing power. On the other hand, you may be so careful with your money that you miss out on a richer retirement that was actually within your reach. You have only one life to live. Don't avoid seeking a qualified financial planner to help you plan for this important stage in your life.

Clients often come to us with portfolios invested in specific sectors and specific countries. Such investments can be quite good but need to be handled with care. They often smack of market timing. More often than not, investors read of the latest hot sector or country to invest in. They decide to buy, often at quite high prices. When the investment loses its luster and reverts to a more sensible price, losses occur.

If the investor is knowledgeable of the country or sector and follows it closely, setting a price at which to sell and sticking to it, it may be a turn out to be a rewarding strategy. If the investor has an advisor who is very knowledgeable of the investment and can advise on when to sell, then this too may provide a positive end result. Or, if the investor expects the country or sector to have good long-term prospects and plans to hold the asset for many years, then such narrowly-focused investing can be successful.

If, on the other hand, you are flying by the seat of your pants, chasing the latest “hot assets”, then your specific sector/country investing is likely no different than market timing, which we say time and time again, is “very tough to do”. It’s tough to do because you have to be right twice, when to buy and when to sell. Being right once is tough enough to do. Being right both times is very difficult to do, particularly when your emotions often work against you.

For these reasons, we think most investors will do better to concentrate on using broadly diversified mutual funds. With international investing, we recommend avoiding global funds and country-specific funds. Assuming you have domestic funds in your portfolio, we prefer you avoid global funds which also include U.S. stocks. It’s easier to manage your international allocation if you use international funds that don’t include U.S. stocks.

As for investing in specific sectors, we think the average investor will generally do better by sticking to widely-diversified, low cost, tax-efficient funds. In many cases, we recommend focusing on index funds and exchange-traded funds (ETFs) within defined asset classes. You’ll only need to occasionally add to or sell a bit of these holdings to adjust them to your target allocation. Doing this will keep transaction costs and taxes to a minimum and eliminate the need to try to time market prices.

If you believe you are smarter than the average investor, then such country specific and sector funds may be right for you. Nevertheless, we suggest you check your ego at the door and honestly evaluate your investment acumen. For most investors and perhaps you too, we believe broader diversification is often better, requires less effort and less worry.

When the market has been down sharply and the economy has been in a funk, as it has for the last couple of years, it’s understandable that everyone begins to ask themselves if their isn’t a better vehicle to invest in. We’ve been warning time and time again of the dangers of searching for that silver bullet. Yet, it’s human nature for investors to be drawn to the latest hot asset in hopes of recovering from their losses.

It is pretty hard to escape the advertisements for gold on TV unless your leave your set turned off. It always seems that whatever investment has been hot recently gets the most ad dollars. So that brings us to the question: Is gold a good investment at this time? Recent articles in the Wall Street Journal chronicled two opposing views.

The first article was by Liam Pleven and Carolyn Cui and was titled “A Billionaire Goes All-In on Gold” (Saturday, May 22, 2010). It discussed the investment focus of Tigris Financial’s Thomas Kaplan who was quoted to have said “I feel the only asset I have confidence in is gold.” Kaplan, a billionaire, was reported to have invested the majority of his wealth on gold and other precious metals. The article said: “Mr. Kaplan’s views are shaped by a concern, shared by many investors, that heavy government spending hasn’t contained the woes facing the financial system.”

The second article by Jason Zweig, titled “Why One Legendary Investor Is More Worried Than Ever” was published the same day in the Wall Street Journal. Mr. Zweig explained how Seth Klarman (president of Baupost Group, a firm in Boston that manages $22 billion of investors’ money) views the current market situation. Mr. Zweig stated in the article that “Mr. Klarman specializes in buying securities that nauseate other investors….” Mr. Zweig pointed out how worried Seth is about the world economy, in general.

And how does Seth feel about gold as a hedge against the problems of the future? According to Mr. Zweig, Seth believes that all the obvious hedges are already extremely expensive, including gold. Seth was quoted as saying that gold is “Near its all-time high, it’s a very hard moment to recommend gold.”

So who’s right? Is it Thomas Kaplan or Set Klarman? Although there still may be room for gold to rise, we tend to ascribe to Seth Klarman’s views. A chart of gold’s ten-year run in the article about Thomas Kaplan has an eerie similarity to charts we’ve seen of past asset bubbles, at least in the pre-burst stages. Perhaps Mr. Kaplan will be smart enough to get out before any potential bubble might burst.

If you have been tempted yourself to jump on the gold bandwagon, we urge you to limit your stake to a small percentage of your portfolio and establish prices at which you will sell if gold continues to rise or if it suddenly loses its luster. The reason many investors get caught in bubbles is they never sell. They assume the party will go on forever.

While we may have missed an opportunity with gold, we do not recommend that the average investor buy individual commodities, countries, stocks or bonds. We believe they are better served by investing in professionally managed low-cost, tax efficient, broadly diversified funds (and in some cases, passively managed indexes). We too are concerned about high inflation in the future. We prefer to take the route of investing in TIPs and broadly diversified commodity-based funds.