Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Tuesday, November 30, 2010

Who Can You Trust? – Part II

Our last blog was titled “Who Can You Trust?” (Saturday, November 27, 2010). We discussed the myriad of designations for financial advisors and why you need to check their credentials carefully. We had written before about the problem with many financial advisor credentials but decided to raise the issue again after reading an article in the Wall Street Journal titled “The Credentials Racket” by Jason Zweig and Mary Pilon, (Saturday/Sunday, October 16-17). Recently, a follow-up article by the same authors points out more problems with advisors’ credentials (“Who’s Advising Your Advisers?”, The Wall Street Journal, Saturday/Sunday November 20-21, 2010).

The follow-up article discusses the problems with the training provided by the groups who grant the credentials. According to the article, some of the groups have lower standards and people with questionable backgrounds leading their training programs. An example given was the Society of Certified Retirement Financial Advisors, which appointed an education chairman who had lost his state securities and insurance licenses.

Another example given was the National Association of Financial and Estate Planning (NAFEP), whose seven-person “advisory board” included an individual who had been barred from the insurance and securities industries for two years in Tennessee.

The article also pointed out that some of the groups have also been accused of teaching their students questionable sales methods.

We noted in our last blog that it’s possible that many people who need financial help shy away from hiring an advisor because they are unsure of how to find one they can trust. With over 200 financial designations out their, some with shady characters doing the training, it’s no wonder consumers are hesitant to hire an advisor.

If you need help, we recommend you start your search with those who are Certified Financial Planner® licensees (i.e., those who use the CFP® designation). Follow that with a check with state security regulators: Go to and click on “Check Your Broker or Adviso”r. Next, interview the advisor in depth. Make sure you understand clearly how he or she will be compensated.

Be wary of asking for references. Unless you know someone personally, a reference is probably not worth much. Some state regulatory organizations frown on advisors giving references unless the advisor discloses his entire client list. And, they can’t disclose their client list without their clients’ approvals. So, if an advisor gives you a reference, be very skeptical.

With proper due diligence, you can find a good advisor you can trust. Just be sure you take the time to do it thoroughly.

Saturday, November 27, 2010

Who Can You Trust?

Many Americans lack the skills to effectively manage their money and would like some help. It is likely that they don’t seek it for two reasons: (1) They view the costs as prohibitive and (2) They are unsure about how to find an advisor they can trust. Both concerns are understandable. We focus here on the second one: How can you find an advisor you can trust?

To find a qualified accountant most people rely on credentials and look for a Certified Public Accountant (CPA). Finding a qualified financial advisor isn’t as easy. We’ve written about this before, yet we were surprised by a recent Wall Street Journal article (“The Credentials Racket” by Jason Zweig and Mary Pilon, Saturday/Sunday, October 16-17) that noted there were now 95 different “professional” credentials for financial advisors compared to 48, back in 2005.

The most commonly recommended certification, without question, is the Certified Financial Planner (CFP®) designation. Other well-known designations often cited along with the CFP designation are the CPA and CFA (Chartered Financial Analyst) designations. The latter two, however, do not require the multiple-discipline study required of the CFP program.

The Wall Street Journal article points out that the CFP, CPA and CFA credentials require a much more rigorous program in order to become certified. Certificants of the CFP program are required to take the equivalent of fifteen credit hours of undergraduate study followed by a 10 hour, two day exam. Ongoing CFPs must complete 30 credits of continuing education every two years, including a two credit course on ethics.

In contrast, the article discusses the less-rigorous requirements for certification as a Certified Retirement Financial Adviser (CRFA), which requires a 100 question exam requiring only forty to seventy-five hours of preparation.

Finding an advisor with the CFP certification is just the start. We recommend you find someone who has worked previously with the advisor and check with state regulatory authorities to make sure the advisor is properly registered and has not been disciplined for unauthorized activities. Ask for a copy of their SEC Form ADV Part II which all financial advisors are required to provide prospective clients.

Find out how they charge for their services. Those who charge fixed or hourly fees are usually preferred. Next, would be fee-based advisors, who charge a percentage of assets managed. With those who charge commissions, there is always the question of whether a recommendation is being made solely because of the commission that the advisor will receive. Be sure to ask also about the fees charged by the funds that the advisor recommends.

In summary, don’t be impressed by a long string of designations following an advisors name. And, don’t stop your due diligence just because a friend recommended someone with a CFP designation. Dig deeper into their background and how they charge for their services.

“CFP is a federally registered trademark of the Certified Financial Planner Board of Standards, Inc.”

Wednesday, November 24, 2010

Some Thanksgiving Thoughts

Our blog is primarily focused on how you can improve your financial situation. Last year, during the holidays, we received an email card from a client that put things in perspective. We wrote about the need to think of others and thought it appropriate to repeat that message as we all give thanks this Thanksgiving.

It doesn’t matter what religion you practice or even if you practice a religion, the email we received was a good reminder that there are many others much worse off than we are who can use our help.

While we can’t vouch for the numbers quoted in the email, we’d like to share a few of the messages as a reminder that we need to help others with our gifts, not only now, during the holiday season, but throughout the year.

Hear are a few of the thoughts that made us take special note:

“If you have food in the refrigerator, clothes on your back, a roof overhead and a place to sleep, you are richer than 75% of the people in the world.”

“If you have money in the bank, in your wallet and spare change in a dish some place, you are among the top 8% of the world’s wealthy.”

“If you woke up this morning with more health than illness, you are more blessed than the million who will not survive this week.

“If you have never experienced the danger of battle, the loneliness of imprisonment, the agony of torture or the pangs of starvation, you are ahead of 500 million people in the world”.

“If you can attend a church meeting without fear of harassment, arrest, torture or death, you are more blessed than 3 billion people in the world.”

So while we write of how to increase your investments, lower taxes, save for college, plan for retirement and a myriad of other financial topics, we urge you now and throughout the year to share some of your wealth with others less fortunate. Even a little can go a long way.

Sure, the last couple of years have been tough, but if you’ve been reading our blog, it’s highly likely that you are far better off than a very large number of other people in the world. And, we believe strongly that any funds you give to others in need during these difficult economic times will provide a return to you that far exceeds any you might have received by investing the money for your own benefit.

Note: In a previous blog article posted December 8, 2009, titled “A Better Way to Give”, we discussed a way to better stretch your limited gifting dollars.

Monday, November 22, 2010

Words of Wisdom on Economists

Like lawyers and politicians, economists are often the brunt of jokes, wisecracks and famous quotes. Peter Lynch, famed mutual fund manager for Fidelity, once noted: “As some perceptive person once said, if all the economists of the world were laid end to end, it wouldn’t be a bad thing.” (1) And, even John Kenneth Galbraith, a famed economist himself, once said: “Economics is extremely useful as a form of employment for economists.” (2)

Why is it that people like to pick on economists? And is there a lesson here for the average investor?

Economics is a very complex field. There are so many variables that it seems that no two economists can ever agree on where the economy is headed. And, if economists can’t agree on the direction of the economy, why would one expect that investment gurus could successfully predict the short-term direction of the markets?

We believe that the seeming inability of economists to agree on where the economy is headed lends support to many a financial advisor’s belief that it’s futile to try to time the market. The lesson from economics, therefore, is to adopt a broadly-diversified portfolio tuned to your individual risk tolerance and objectives and then rebalance that portfolio on a regular basis. You may not beat the market but we expect you’ll do quite well over the long run.

(1), (2) both quotes taken from “The Quotable Investor”, The Lyons Press

Thursday, November 18, 2010

Are You Prepared for an Emergency?

We’ve written several times about the basic steps to take before even thinking about investing money for retirement or college for your children. Having basic insurance coverage on your auto, home and life, plus an adequate emergency fund are critical.

We were shocked by a statistic published in a recent Journal of Financial Planning (October, 2010). Forty-five percent of Americans believe that they could meet their financial obligations for less than a month if they lost their job.

A basic rule of thumb for most financial planners is that you should set aside in cash or cash equivalents at least three to six months of your fixed and variable expenses. In many cases we now lean toward having six months to a year’s worth of funds set aside.

The last two years have been tough for everyone, and for many just having enough to meet everyday needs is difficult. Nevertheless, you can be sure another tough recession lies ahead, and probably sooner than we might expect. Now is the time to do all you can to establish a rainy day fund for the next economic crisis.

Tuesday, November 16, 2010

Budget Strained by New Needs?

We've written before regarding what appears to be some new trends to live a simpler life. The economic crisis of the last couple of years has had a big impact on many Americans. Many have lost their jobs; many have lost their house due to foreclosure and few have received pay increases. They worry about higher taxes and rising national debt.

It seems that many are cutting back, at least on the little things. A recent poll by Harris Interactive, dated November 11, 2010, documents some of the ways people have cut back. According to the Harris poll, some 37% are going to the hairstylist or barber less often, over a quarter of adults have cancelled magazine subscriptions and one in five Americans have stopped purchasing coffee in the morning. Twenty-two percent have cut back on cable TV and seventeen percent have cut or cancelled cell phone service.

Clearly, cutting back on the little things will help a strained budget, however, we believe Americans need to give serious thought to what can and what can’t be cut. In an article by Humberto Cruz titled “Are boomers’ ‘necessities’ grounded in reality?” (Sarasota Herald Tribune, August 28, 2010), Mr. Cruz discussed the results of another Harris poll commissioned by Mainstay Investments. The “Retirement Lifestyle” study examined what were considered the ’needs” of boomers who had $100,000 or more in investments.

It used to be that food, clothing and shelter were the basic needs. The study found that new “needs” have surfaced. Some of the new needs identified in the study were healthcare, internet connections, shopping for birthdays and special occasions, family vacations and getaways, lawn care, housekeepers, club memberships, professional haircuts, and funding children’s education.

We often see client budgets that include $ 100 or more for pet care and $100 to $150 a month for cable and cell phone bills. Clearly, cases can be made for all of the above new needs, in special circumstances. Nevertheless, we believe Americans need to re-examine their life goals and in light of what is really important to them, re-assess how they are spending their money. They might find that mowing the lawn provides some exercise that promotes better health and saves $20 to $ 25 a month for their poorly funded retirement.

Saturday, November 13, 2010

Another Blow for Long-Term Care Insurance

In one of our recent blogs titled “Long-Term Care Insurance Getting Tougher to Buy” (Thursday, October 21, 2010), we noted that insurers were significantly raising the premiums on long-term care policies.

Buying long-term care insurance has always been a difficult decision for many people. To begin with, no one wants to think about losing their independence and having to move into a nursing home. On top of that, with few Americans saving sufficiently for retirement, budgets have little room for the cost of long-term care insurance.

At the time of this writing, an article in the Wall Street Journal (“MetLife Steps Back from Long-Term Care Market” by Erik Holm and Anne Tergesen, November 12, 2010) makes us wonder about the viability of long-term care insurance. The article notes that MetLife, one of the bigger sellers of the coverage has just announced that they will no longer offer long-term care insurance to their customers.

Insurers have found it more difficult to make money on long-term care policies due to several factors. One is that with interest rates so low, they are unable to make enough by investing premium dollars to cover the cost of the benefits. The article also noted that people are hanging on to their policies longer than expected. Assumptions regarding the number of purchasers who will let their policies lapse (i.e., quit paying premiums and forego the policies) have proved to be higher than expected. And, with people living longer than in the past, the cost of benefits is rising significantly.

In our previous blog we noted that John Hancock had announced price increases up to 40% for its policyholders. Other companies have ceased selling the product. Yet still others are holding their ground. The Wall Street Journal article notes that “New York Life, which has sold the product since 1988, said it has never raised rates for customers once they have purchased a long-term care policy.” While this is encouraging, the increases in prices and decision to stop selling the product altogether by some insurers, gives one little confidence a policy will be viable, long-term. Will long-term care insurance be a short-term product?

Thursday, November 11, 2010

More Words of Wisdom from “Anonymous”

Our last “Words of Wisdom” blog was attributed to that unknown person “anonymous”. Today’s quote from anonymous is “a rising tide raises all ships”. We suspect that most investors are feeling a bit better now about their investments with the market’s recent rally. At the time of this writing, the Dow Jones Industrial Average is up 11.89% for the year.

Some are probably patting themselves on the back for their good judgment and investing prowess. “Anonymous” says, however, that we should not get too overconfident about our investment skills, for everyone’s portfolio has risen along with the market. Nevertheless, you can at least take credit for being “in the market”. If you remained in the market throughout the last two-year crisis, you are to be commended.

We often talk about the “typical investor” who buys high and sells low. They follow the crowd, buying the latest hot assets and then panic and sell when the market crashes. They need to do just the opposite. Even if you stayed in the market, you may have some of the bad characteristics of our typical investor.

So what should you do now? You might want to take a look at your portfolio and trim your winners back to your target allocations, if you have target allocations. If you don’t have target allocations for the various asset classes in your portfolio, you might want to spend some time establishing targets. If you’re not sure how to do this, we recommend you seek professional help.

If you stayed in the market but are not broadly diversified, you should consider diversifying your portfolio as soon as possible. Again, we suggest you seek professional help if you don’t know how to do this.

If you pulled everything out of the market and are still sitting on the sidelines, we really recommend that you seek professional help. You need to establish a broadly diversified portfolio tuned to your individual risk tolerance so that you can avoid panicking the next time there is a serious market crash.

If we assume your risk tolerance is low, you may need to dollar-cost average back into the market in order to sleep at night. If you are a long-term investor, however, and have confidence that over the long run the market will rise, putting your entire portfolio back into the market now is the best approach. (This assumes you have an adequate emergency fund and funds needed for short-term goals are invested more conservatively.)

Whatever your situation, don’t get overconfident just because the market has risen nicely in the last few months.

Tuesday, November 9, 2010

Another Twist to Harvesting Losses

In our last blog titled “It’s That Time of Year Again”, we pointed out that dumping your losses at year end (“harvesting them”) can allow you to recover some of the losses by writing them off on your tax return and reducing your taxes. Doing so also allows you to replace poor investments with investments that have better prospects. In some cases you may want to buy back a loser if you believe it has good prospects.

Unfortunately, your timing with respect to harvesting can make a big difference in the end result. A recent article in the Wall Street Journal titled “Facing Your Failures” by James B. Stewart (Saturday/Sunday, October 30-31, 2010) discussed the problem. Mr. Stewart noted the problem with harvesting late in the year:

“The problem is that is when everyone else is doing it. Year after year, I end up selling a losing position, only to watch it bounce back in January when the tax-loss selling is over and bargain hunters swoop in.”

Mr. Stewart notes that if you want to re-establish a position in an asset you harvested, there’s no reason you can’t sell it now, before the majority of other investors do so, wait the required thirty days to avoid a “wash sale” (see our previous blog for an explanation if you don’t know about the wash sale rules) and buy the asset bask at year end after everyone else has sold. Doing so can allow you to capture your losses for tax purposes and gain back some of your losses as others buy the asset back and drive up the price.

Of course, if everyone catches on to this technique, it won’t really be effective. That’s often the case with investment strategies. When everyone adopts the approach, it no longer works as effectively.

Sunday, November 7, 2010

It’s That Time of Year Again

Halloween was just here; the cold of winter is approaching and farmers are all clearing their fields, harvesting the last of the year’s crops to prepare for next year’s planting. Between now and year-end, we need to consider some harvesting of our own, to take advantage of the last two years’ tumultuous markets and minimize any losses remaining in our portfolio. Losses in taxable accounts can be “harvested”, resulting in significant income tax savings that will mitigate any losses we may have in our portfolios.

All too often, investors have a tendency to hold on to their winners and losers too long. They don’t want to part with losers because they’re sure that as soon as they do, the losing investment will rebound. They can’t stand the thought of selling and then missing out on a miraculous recovery. They overlook the fact that if they sold the loser, they could mitigate their loss by writing off the loss on their tax return and then replace the poor-performing asset with one that has a better probability of providing a good solid return going forward.

As for holding on to winners too long, investors have similar fears; what if they sell a winner and then lose out on future gains? Or, they hold on to winners to avoid having to pay taxes on their gains. Letting taxes get in the way of doing what’s right from an investment standpoint, is a common mistake. You need to establish a target selling price when you purchase a stock. When it reaches that price, you should sell the stock unless you can make a sound argument as to why that stock remains undervalued. Keep in mind too, that a significant increase in the capital gains tax is likely going forward, although no one knows when.

So, with the 2010 tax year coming to an end, it’s time to “harvest” your winners and plow up your losers. Even though the market has risen significantly in recent months, you may still have significant losses in your taxable accounts. And, if you haven’t rebalanced your portfolio recently, trimming over-allocated asset classes could reduce your portfolio risk, significantly. With the economy still facing high unemployment and more real estate foreclosures looming, some worry that we might still have a double-dip recession. Selling some winners may be a wise move.

If you focus on the tax savings from selling losers and the current low capital gains rate, it will help motivate you to take action. Often the losses will offset the gains of selling winners and eliminate the potential capital gains liability.

Review your portfolio and look for assets with significant losses. It may be that the asset is worth keeping but has a significant loss that can be used to offset the gains of a winner that needs to be sold. Due to what’s called the “wash-sale rule”, you can’t just sell the asset and then re-purchase it. IRS rules require you to wait 30 days before re-buying else you lose the right to write off the loss. There may be a way around this rule, however.

For example, let’s suppose you have a substantial holding in the Fidelity Spartan 500 Index fund that is still down significantly from your purchase price. You’d like to sell the fund but want to maintain your position in large domestic stocks, in case the market continues its upward swing. You can sell the Fidelity fund and immediately buy a somewhat similar fund (such as the Vanguard Total Stock Market Index Fund). You may want to check with your tax advisor to be sure the new fund is not essentially the same as the one you sold. IRS rules are unclear as to what they consider to be essentially the same fund. This is a gray area that you need to be pay attention to. In the case where the holding is a stock, you may be able to find a similar stock in the same industry in order to maintain your position in the market.

You also need to analyze your winners to determine those that have reached their target selling price and should be sold. You should also look for stocks that have done so well that they now represent more than 5% to 10% of your total portfolio’s value. Often these holdings are in stock of the company you work for or for which you have strong emotional ties (e.g. inherited from your parent). Nevertheless, a stock holding of more than 5% to 10% of your portfolio adds significant risk that should be avoided. Having too much stock in the company you work for is a big mistake. When times get bad, companies lay off people or give early retirements. At the same time, your company’s stock price will likely be low, just when you may need it the most. ”Harvest” time is a good time to trim those holdings too, since losses from losers can help mitigate the taxes from possible gains.

So, as we point out every year to our clients at this time, let the falling leaves be a reminder to take a look at your portfolio and do some “harvesting”!

Friday, November 5, 2010

A Budget Category Often Overlooked in Retirement Planning

My wife and I have one grandchild, a grandson now age four. We love him dearly and cherish the moments we have with him. We take care of him one day a week and it’s always a high point for us.

I distinctly remember talking to a couple we know, just prior to our grandson’s birth. The husband told me, that every time his wife passed a toy store, book store or children’s clothing outlet, his wife was drawn inside as if by a human magnet of some sort. He said his wife was constantly buying something for their grandchildren and I’d better prepare myself for the hit on our finances.

I never even gave it a second thought when I was contemplating my semi-retirement. Sure, I knew we’d be spoiling our grandchildren like everyone else, but I truly underestimated what our friend was talking about. Everyone wants their grandchildren to have the best of everything. It’s tough to pass up all the toys, books and clothes that many of us didn’t have when we were children.

If you’re in the planning stage for retirement, you might want to at least include a budget item for spending on your grandchildren. Consider doing so, if you will likely contribute to one or more of the following: their college fund, clothing needs, entertainment (movies, sporting events and special shows), toys, games and books. You also may buy car seats, game tables and sporting equipment. Perhaps you’ll help with swimming lessons, dance class and maybe even fees for little league. And, if you spend the winter in a warm climate, you may even want to set aside some money for plane tickets to help your kids come visit.

A recent article in the Wall Street Journal titled “Grand Times” by Glenn Ruffenach, (October 25, 2010) provides data from a recent study by, a website that focuses on family relationships. According to the article, grandparents spent an estimated $52 billion on goods and services for their grandchildren in 2009. In 2005, according to the article there were 62.4 million grandparents, and in 2010, an estimated 69.6 million. No data was provided for 2009, but we can estimate that there were , somewhere around 68 million grandparents that year. That means, that on the average, they spent around $765 each on their grandchildren, that year. For a married couple, that comes to $1,529 per couple, per year.

So, what would you spend if you had several grandchildren? One thing is for sure - you’ll likely spend more than you think. Of course, they’re worth every penny. Just don’t forget to include the category in your planning!

Tuesday, November 2, 2010

Be Careful With Reinvesting

We are often asked the question regarding whether or not it’s advisable to reinvest the dividends or capital gains distributed by mutual funds. In non-taxable accounts such as IRAs, there’s really no problem with reinvesting, since distributions are taxed as ordinary income when withdrawn. And while you may have some cost basis as a result of post-tax contributions, the distributions of dividends and capital gains have no affect on the cost basis in tax-deferred accounts.

There’s no problem in taxable accounts, either, if you keep good records. Often, however, people make the mistake of not adjusting their cost basis by adding to the cost of purchases, the value of the reinvested dividends and capital gains that have been distributed. If this is not taken into consideration, you will end up paying tax twice on the dividends and capital gains.

Why is that, you ask? Dividends and capital gains are reported annually to the IRS on Form 1099. You must include the distributions on your tax return, annually and pay the tax due. If you don’t adjust your cost basis when the holding is sold, you’ll pay tax again on the distributions you’ve received.

Reinvesting dividends and capital gains in taxable accounts can make record keeping a bit more difficult when you sell taxable assets. It’s not really a problem if you sell the entire holding, including all the reinvested shares. If, however, you sell part of a holding, then you must determine which lot, lots or partial lots were sold. This can be a bit more involved, even if you have good records. Therefore, you may want to avoid reinvesting dividends and capital gains in your taxable accounts.

Our recent blog titled “Good News for Some, Bad News for Others” (October 26, 2010), discussed the fact that brokers will be required to keep track of the cost basis information for you going forward. Nevertheless, you will still have to specify what lots you are selling when you sell part of a holding. If you don’t reinvest in taxable accounts, specifying lots will be easier.