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.

Saturday, March 26, 2011

Avoid These Basic Money Mistakes

Note: We wrote this article a couple of years ago for the Oakland Press. We believe these common mistakes need to be re-iterated, again and again. We’ve updated it to reflect some of our current thinking.

If you’re a new college graduate, it’s easy to get so anxious about investing that you fail to take care of some simple basics. And it’s not just twenty-year olds that make basic mistakes. We often have clients in their forties and fifties, or even older, who have failed to address the some of the following basic pre-requisites to investing.

First and foremost, everyone needs to establish an emergency fund. Financial planners typically recommend that an emergency fund equal to three to six months of fixed and variable expenses be maintained in liquid assets (cash or cash equivalents). This is to avoid having to liquidate investments at a possible loss as a result of an emergency. You can also afford to increase your insurance deductibles if you have more than the deductibles set aside.

If you are single or married with only one bread-winner, we recommend at least a six month emergency fund. If your household has two solid incomes, then a three-month fund may be adequate. Lack of an emergency often leads to excessive credit card debt. (Note: as a result of the recent “Great Recession”, we now favor a six month to twelve month emergency fund for two-income families.)

When you do establish your emergency fund, don’t place it in a bank checking or savings account earning a paltry 1% or 2% (or lower) return. Instead, you should find a solid higher-returning money-market fund paying close to the one-year CD rate.

Eliminating credit card debt is another basic pre-requisite before starting to invest. Interest rates of 15% and 16%, or more, are common for credit cards. It makes no sense to invest in a stock and bond portfolio paying at best a single digit return while you are paying nearly double that rate in monthly credit card interest. And, to earn a solid portfolio return requires taking on the risk of the stock market. Think along the lines that paying down credit-card debt is equivalent to earning a high-return with no risk.

Another common mistake people make is to give investing priority over addressing the most basic everyday risks that can be minimized with adequate insurance policies. Good medical coverage, disability insurance, life insurance, home and auto insurance are a must to avoid large losses that could forever impact your ability to achieve your lifetime goals. You might also want to consider long-term care insurance and/or umbrella liability insurance. (Note: long-term care providers have significantly raised rates recently and some have withdrawn from the market, altogether. Selecting a provider who will be around, “long term”, is more difficult than ever.)

Often our clients have no disability insurance. Your chances of becoming disabled on a given day are actually greater than your chance of dying. A long-term disability can seriously hinder achievement of your financial goals.

Besides credit card debt, other high-interest-rate debts should also be paid off before investing. Just as with credit-card debt, paying off other high interest-rate loans is equivalent to earning the associated loan-interest rate without taking on the risk of the stock market.

Finally, make sure you take advantage of employer 401(k) plan-matching contributions and stock-purchase plan discounts before dedicating other funds to new investments. Then, once you’ve taken care of the basics, when you do begin investing, get some unbiased help from a financial professional who has your best interests at heart.

Tuesday, March 22, 2011

Want to Know More About Your Advisor?

With all the financial scams going around (think Madoff), it’s more important than ever to carefully check out any financial advisor you may be considering or even the one you are currently using. We noted in our last blog that a new disclosure document will soon be available to investors, Form ADV Part 2A and 2B. See our last blog posted on Sunday, March 20th, titled “New Disclosure Document Will Help Investors”, for details.

Another document is also available to investors, for review, called Form ADV Part I. Part I is a basic registration document that has to be filed with either the states an advisor works in or with the Securities and Exchange Commission, depending on the amount of “assets under management”, the advisor has. Previously, advisors with more than $25 million in assets under management had to register with the SEC and each state in which they had more than five clients. Now, that hurdle is $100 million in assets under management.

The new form ADV Part 2A must be filed by March 31st. Once it is filed and approved, both parts of the ADV will be available for review by investors on the Investment Adviser Public Disclosure website ( If you go to this site you can then select “Investment Adviser Search” to find the adviser firm or representative you are interested in.

Disclosures regarding arbitration, bankruptcy filings and civil or criminal actions against the advisor are included. Details regarding the business services offered, how the adviser is compensated and any potential conflicts of interest are included.

You can’t be too careful when it comes to seeking help with your finances. Do your homework and you'll be able to sleep better at night.

Sunday, March 20, 2011

New Disclosure Document Will Help Investors

By the end of this month registered investment advisors will be required to begin using a new disclosure document that will help investors better evaluate and compare investment advisors.

The new documents will replace one of two forms investment advisors have to file with the Securities and Exchange Commission (SEC). The documents are called the ADV Part I and ADV Part 2. ADV Part I is filed online, primarily for review by the SEC and the States that investment advisors operate in. The ADV Part 2 is referred to as the “brochure” and must be provided to prospective clients for their review.

In the past, the ADV Part 2 was unavailable in an electronic format and was extremely cumbersome to change. The new version can be created in Microsoft Word and uploaded into Adobe Publisher, making copies available online via a PDF file.

The new ADV Part 2consists of two parts, Part 2A and Part 2B. Part 2A must be written in “plain English”. The SEC has even provided investment advisors with a plain English handbook with suggestion regarding how to simplify their ADV.

The ADV Parts 2A and 2B provide detailed information regarding who the investment advisors are, how they do business, how they are compensated and what, if any, conflicts of interest may exist. It also includes a detailed explanation of the strategies employed by the advisor and the risks involved in those strategies.

We found that it was quite time consuming creating the new ADV Part 2A but feel strongly that the new documents describe clearly who we are, what we do and how we are compensated. We believe our approach better supports the interests of our clients and believe that the new ADV Part 2 better makes that case to prospective clients. Investors will be able to make better decisions when hiring an advisor to help them manage their financial affairs.

Thursday, March 17, 2011

It’s Not the Time to Panic

We’ve seen the market drop significantly the last two days on fears the nuclear radiation problem in Japan may worsen. It’s certainly a concern to all. On top of that we have many other things to worry about, including our economy, rising U.S. Debt, problems in the Middle East and more.

Nevertheless, the Japanese are resourceful, resilient people. Trouble may remain in the short-term, but long term we can expect they will rise to the occasion and come back strong. The other issues we expect will work themselves out as well. We’ll continue to see ups and downs in the market. More problems will come and go.

There’s a lesson to learn, however, if you have been thinking about getting out of the market the last couple of days, either partially or entirely. If you have been thinking it’s time to sell, it may be an indication that you either should not be in the market at all or that you have too much invested in the market.

Smart investors look at market downturns as opportunities to buy. They buy low and sell high. What we call “typical investors”, tend to buy high and sell low, as they let their emotions drive their investing actions. We wouldn’t be surprised to see a big jump in the market in the next few days as investors look to the long-term and see the drop in prices as an opportunity to buy low.

We’re not recommending everyone go out and buy stocks right now. Whether an individual investor should consider doing that depends on many factors specific to that investor. We certainly could see a further decline in market prices during the coming days and weeks.

The point is, that if you’ve been having trouble sleeping at night because of the recent stock market gyrations, then you need to re-examine your investment strategy (assuming you have one). And, if you aren’t really sure of what you should do, you need to seek some professional help.

Sunday, March 13, 2011

Words of Wisdom from Will Rogers

It’s been a tough slog the last few years, economically speaking. The economy now appears to be moving in the right direction, yet many people are still hurting from the “Great Recession”. Their homes are worth less and their portfolios took a beating. Things are still not good on the “home front”, no pun intended. Home prices may still turn downward some more before hitting a bottom.

Investors’ portfolios, on the other hand, have, in most cases, made a nice recovery, unless you got out of the market and delayed too long getting back in. Even though many have recovered much of what they lost, they feel like they’ve lost precious time preparing for their retirement and are looking for the goose that laid the golden egg.

Some advice from a well-known celebrity of the 1920’s and 1930’s, William Penn Adair Rogers, better known as “Will” Rogers, is worth noting. He said: “Let advertisers spend the same amount of money improving their product that they do on advertising, and they wouldn’t have to advertise it.”

Every day, we hear commercial after commercial touting gold as the thing to buy. It may turn out that it is the best thing to buy right now. Yet the more people push something as the next best thing, the more dubious I become.

I had a couple of people ask me about a video presentation that’s making its way around the internet. It’s very long, and presents a doom and gloom picture of the American economy. If you break out the presentation, you have to re-start from the beginning. I finally figured out how to just view a written version of it. It talks about how to get free advice on this and that and in the end only gives the “free” information if you sign up for the writer’s investment newsletter. I decided to check on his background and discovered that he had been sued by the Securities and Exchange Commission. I noted today that he is advertising on Fox news. I hope the SEC is keeping an eye on him.

You often see advertisements for computer trading programs that will “surely help you beat the market”. If they are so good, why doesn’t the seller just concentrate on his portfolio instead of pushing his trading techniques. When everyone starts using the same trading strategy, that’s when they no longer work. So if you really had a “can’t miss” strategy, why would you sell it to anyone else?

The whole point of this blog is to remind everyone that there’s no silver bullet out there. There’s no free lunch. If you want to get rich, you must work hard, save your money, invest wisely and be wary of those who have the magic solution to getting rich. You need to do due diligence before investing with anyone. You need to find out how they get paid, what their credentials are and take what they say with a big grain of salt.

Wednesday, March 9, 2011

Half Full or Half Empty?

We are basically optimistic people and tend to focus on the positive rather than the negative. We’ve had an “insider” (aka family member) mention that the blogs of late have had a pretty consistent cautionary tone. That’s due in part to our desire to help our readers address the issues that make them vulnerable when economic downturns occur.

Today, we’d like to report on some positive signs that things are getting better. A study by Charles Schwab and Company titled “Independent Advisor Outlook Study”, conducted between January 18th and January 28th, 2011shows that independent registered investment advisors (RIAs) are now quite optimistic about the economy. Schwab conducts its study every six months and the recent study shows a marked improvement in RIA optimism.

The survey included some 1300 RIAs with over $284 billion under management. The report stated that more than three-quarters of the RIAs surveyed (77 percent) expect the S&P 500 to rise in the next six months compared to 63 percent in the July 2010 study. According to the study, more than 50 percent classified themselves as “bulls” and less than 10 percent as “bears”.

Below are some of the findings included in the study:

• U.S. Treasury yields: Sixty-four percent think U.S. Treasury yields will increase in the next six months, while only eight percent think they will go down.

• Bush tax cuts: An overwhelming majority (85%) believe the extension of the Bush tax cuts will have a favorable impact on the stock market and economy overall.

• Quantitative easing: Fifty-five percent say the quantitative easing activities being conducted by the Federal Reserve will have a favorable impact on the stock market and economy overall.

• Inflation: Sixty-four percent of advisors think inflation will increase over the next six months, up significantly from just 28 percent six months ago.

• Cost basis reporting changes: Nearly half of RIAs’ clients (48%) are unaware of the impact the recent changes to cost basis reporting will have on their tax situation.

We hope the study portends a continued improvement in the economy. We live in turbulent times, which sometimes makes it difficult to see the glass as half full versus half-empty.

Sunday, March 6, 2011

Don’t Take Your Eye off The Ball

In the game of golf, it’s not uncommon for friends of a new golfer to repeatedly tell them to “keep their eye on the ball” or “keep their head down” after they dribble their fairway shot fifty or sixty yards up the fairway. Repeatedly hitting the long ball requires concentration and practice. If you don’t keep your eye on the ball, the results will be unpredictable. If you don’t spend some time at the driving range or get some lessons, you’ll likely not improve.

Success financially also requires concentration and focus on your goals. Help from a professional can be extremely beneficial. Many people fear that hiring some help will cost too much. Yet, if you hire the right advisor, the benefits can be huge. While taking the big step to get help from a financial advisor is, in many cases critical, it’s only a start. If you take your eye off the ball, you may find yourself in the rough or the sand trap with a sub-par financial future staring you in the face.

Periodic financial reviews can be instrumental in keeping you on track. It’s not unusual for us to see financial clients stray from their original plans. You might assume that in most cases, clients spend too much and face the prospect of running out of money. While that happens often, we also see the opposite case.

Some conservative clients are so worried about running out of money, that they are overly frugal. They have enough money to take an occasional overseas trip, eat out more often or buy a new car but hesitate to do so out of fear their money won’t last. They need a professional advisor to tell them it’s OK to spend.

We’ve also seen cases where we tell people they have sufficient funds, even encourage them to spend more and then later have to pull in the reins a bit as they go overboard.

As part of our investment services annual contracts, we provide our clients with phone/email financial consulting and an annual “mini-analysis” of their choice. They can request a “quick retirement” analysis, estate plan review, insurance review or other analysis of choice during each twelve-month contract year. These reviews are essential to keeping them on track to achieve their goals.

We are in some very dynamic times. It’s very difficult to predict the future. A one-time financial plan can be very beneficial. But things are constantly changing. To ensure ongoing success an occasional tune-up, a trip to the driving range or a quick lesson can help ensure long-term success and help you keep your eye on the ball.

Thursday, March 3, 2011

Are You Managing Your 401(k) Account?

Many Americans pay little attention to their 401(k) (or other similar type account such as a 403(b) or 457 account), let alone to their entire portfolio. A recent article in the Wall Street Journal titled “401(k) Advice – For a Hefty Fee”, by Karen Blumenthal (January 29, 2011), pointed out some interesting statistics regarding 401(k) accounts:

(1) The Employee Benefit Research Institute and the Investment Company Institute (a fund-industry trade group) reported that 17% of 401(k) account holders in their twenties owned little or no stock. Young investors should generally hold more stock in their portfolios than bonds, unless they are saving for a short-term goal.

(2) The article also reported that in those 401(k) accounts where company stock was a choice, 30 percent of those over forty years of age held more than 20 percent of their account in their company’s stock. When times are bad and a company has problems that force it to lay off employees, the company stock price is usually depressed as well. Holding too much of your company’s stock is a risky thing to do.

(3) A Schwab study reported that 53 percent of investors found that selecting 401(k) options was more difficult than selecting health benefit options.

Ms. Blumenthal’s article focused on new services being offered by Schwab, Fidelity, Vanguard and J.P. Morgan Chase to help investors manage their 401(k) accounts. In some cases, investors can quiz a financial planner and in other cases they can pay to have their account managed for $40 to $60 a year for every $10,000 managed (0.4% to 0.6% of the amount managed). Accounts over $100,000 pay less. Those fees are in addition to mutual fund fees.

Ms. Blumenthal notes that in many cases the management services are provided by outside third parties who act as a fiduciary for the investor. A fiduciary is required to act in the best interests of the client. Investors need to provide other information about their situation, such as how long they plan to work, other assets they have, etc.

One benefit of the approach is that those who sign up for these services generally tend to save more. A survey by Schwab showed that 70% of those receiving help nearly doubled their savings rate. Apparently, when one gets serious enough to pay for help they make more of an effort to save.

This new support can make a difference in your long-term financial success. It’s not cheap, however, and still leaves the need to manage other accounts outside your 401(k) as well as your other financial affairs. Another option is to consider working with a financial planner to develop a comprehensive financial plan that addresses your total financial well-being.

Tuesday, March 1, 2011

Make Sure You Read the Fine Print

We have written several articles recently about significant changes in long-term care. Due to the high costs of providing long-term care, many companies have raised premiums substantially, in some case by as much as 40 percent. Others, such as Met-Life have stopped issuing new policies. For details see our past blogs titled: “Another Blow for Long-Term Care Insurance” (November 13, 2010) and “More News on Long-Term Care” (February 15, 2011).

A recent article in the Wall Street Journal, titled “The Latest Long-Term Care Snafu”, by Anne Tergesen, January 22, 2011 pointed out some additional issues you need to be aware of.

Many older, long-term care policies have provisions that can make it difficult to successfully make claims. The article points out that by taking care to read the policies in detail so that you understand the terms of the contract, you can, in many cases, avoid having a claim denied. Today’s policies generally are more liberal in their coverage than the policies written twenty years ago, according to the article.

Some of the rules to be aware of that the author pointed out in the article are:

(1) Some policies require a three-day hospital stay before benefits kick in. Therefore, patients with Alzheimer’s, who are physically in good shape, may not be able to receive benefits after satisfying the a 90 to 100 day waiting period. Family members may move Mom to a nursing home, pay for the first 100 days and then find out that mom can’t receive benefits because she didn’t spend three days in the hospital first.

(2) Make sure a health-care professional certifies that the disability will last 90 days or longer. Make sure the claim is documented adequately, as well. It may pay to seek help in preparing a claim from a geriatric care manager.

(3) Some insurers send assessors to verify disabilities. Some seniors, embarrassed by their disabilities, downplay their problems, only to have their claims denied.

(4) Some insurers have a 90 calendar-day waiting period before benefits can start. Others have a “service-day” waiting period where only days where care was paid to a licensed provider counts. In those cases, families can’t satisfy the waiting period requirements by taking care of Mom or Dad themselves.

(5) Some policies require that caregivers have specific licenses in order to be covered. Others require a certain number of beds in a facility (ruling out places like adult family homes).

As you can see, it’s very important to carefully understand the fine print in any long-term care policy you or your parents have or on any policy you are considering. Clearly, with the cost pressures on insurers, the recent increases in premiums and the companies getting out of the business, you can be sure that insurers will only honor future claims that meet all contract requirements.