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.

Thursday, May 12, 2011

Our Final Blog!

We regret to announce that we have decided to discontinue our blogging activity with this final note. We would like to thank all of you who have spent time reading and commenting on our blogs and especially want to thank the Oakland Press for giving us the opportunity to share our thoughts and knowledge with its readers. We would especially like to thank Glenn Gilbert, Executive Editor of the Oakland Press and Rick Kessler, Good Life Editor, for their support.

It was a difficult decision to discontinue this effort. We have received a great deal of positive feedback during the nearly two years we have written well over two hundred articles covering all facets of personal finance. Writing two or three times a week is a bigger commitment than many might think and we have decided we can better serve our clients by focusing our efforts on other priorities.

We’d like to close with some investment advice we think best sums up the message we have been trying to get across these last two years:

(1)Diversify, diversify, diversify. Broad portfolio diversification will reduce risk and increase returns. It’s one of the best things you can do to improve your investment results.

(2)Higher returns mean higher risk – Don’t chase the latest hot investment you read about or hear about on TV. By the time you invest, it’s often too late.

(3)Find out how much you are paying – Make sure you understand exactly how your financial advisor is compensated. Find out what fees you’re paying for the various investments you own.

(4)Don’t forget Taxes – Pay attention to the tax efficiency of your portfolio and don’t let taxes get in the way of making the right changes to your portfolio.

(5)Establish a target portfolio - Determine the amount of risk you are comfortable with and allocate your assets across bond and stock assets accordingly. At least annually, review your allocation. Sell over-allocated asset classes and buy under-allocated asset classes. This forces you to do what is prudent and takes the emotion out of investing. It requires discipline, however.

(6)Focus on your spending – Determine what is most important to you and establish financial goals for your future. Then, align your spending with those goals and identify spending that doesn’t support what’s really important to you.

(7)Take advantage of employer retirement plans – Make sure you are contributing enough to take advantage of any employer match.

(8)Get professional help if you need it – Don’t be embarrassed to seek professional help if you’re unsure how to get your financial house in order. Yes, it will cost you money, but if you take care to select an advisor carefully, professional help can pay for itself many times over. We strongly suggest you consider a Certified Financial Planner® licensee.

We could go on and on with this list, but the items above represent some of the most important advice we’ve written about in our blog. Over time, we plan to publish selected past blogs on our website . We hope you will visit our website from time to time to see what we have added.

Thank you all again for your support and interest.

Friday, May 6, 2011

No Tree Grows to the Sky!

An old Wall Street Adage, “No Tree Grows to the Sky”, seems to be good advice once again. In the last few days we’ve seen commodity prices drop rather significantly after large recent price increases.

Silver has dropped 8 percent on Thursday alone, oil prices 8.6 percent and copper 3.3percent. As reported in Thursday’s Wall Street Journal (May 5th), silver had dropped 19 percent since the previous Friday.

Gold was down $34 an ounce yesterday, as well, to $1480.90 an ounce. Gold recently reached a high of more than $1540 an ounce. Gold has been on a tear for some time.
One can’t turn on the TV without seeing several ads to “Buy gold now”.

We have cautioned our readers for some time about buying gold, only to continue to watch it rise higher and higher. For those who limited their allocation to a modest amount and set a target price at which to take their profits, an investment in gold likely proved to be quite good.

Unfortunately many investors get greedy and continue to invest more and more as the price rises and peaks. Then when it drops quickly, they lose most, if not all of their gains.

Gold may continue its rise still further. We prefer broader allocations to commodities rather than investing in one metal alone. Even then, commodity investing isn’t for the faint of heart. You need to have a long-term orientation and avoid over-allocating too much to this one asset class.

We wouldn’t be surprised to see more downturns in commodities in the short run. Today’s Wall Street Journal’s feature article titled “Commodity Prices Plunge” by Liam Plevin notes: “But commodities investors and analysts say that the global appetite for natural resources remains robust, which is likely to keep prices from falling dramatically for long.”

We believe commodities should be included in most investors’ portfolios as a hedge against inflation. Commodities also have a low correlation to other more traditional asset classes. That helps reduce overall portfolio volatility and increase long-run portfolio returns. You just need to take care as to how you invest in commodities and how much you invest in them. If you are unsure of how to do so, we suggest you seek professional help.

Sunday, May 1, 2011

Additional Thoughts on Retirement Withdrawal Rates

Our recent blog titled “New Study Sheds Light on Retirement Withdrawal Rates” (Friday April 22, 2011) discussed a recent study published in the Journal of Financial Planning that seemed, on the surface at least, to indicate that under certain circumstances, portfolio withdrawal rates exceeding 4% annually (adjusted for inflation) may be sustainable for retirees.

We had planned a follow-up blog with some additional thoughts. A few days ago, we received a comment from Wade Pfau, a former Oakland County resident, and now Associate Professor of Economics at the National Graduate Institute for Policy Studies (GRIPS) in Tokyo, Japan. Mr. Pfau has a stellar background, having obtained a Ph.D. in economics from Princeton University (2003). Mr. Pfau also writes a blog on titled “Pensions, Retirement Planning and Economics Blog”. In his blog bio, he states that his “main research interests are related to developing methods to better analyze issues related to retirement planning”.

Mr. Pfau had posted a blog titled “Trinity Study Updates” on April 1, 2011, discussing the same study we wrote about. We will leave it to our readers to read Mr. Pfau’s entire article and point out here just a few of the points he made. Mr. Pfau’s comments included the following:

(1) Mr. Pfau noted that the Trinity study did not consider mutual fund fees, which he noted could be anywhere from 1% to 2%, annually. Such fees could considerably impact the sustainable withdrawal rate.

(2) He also noted that the Trinity study considered withdrawal periods of up to 30 years. For those living to age 100 or more, lower withdrawal rates will be required in order to have a high probability of one’s funds being sufficient.

(3) Mr. Pfau noted that the Trinity study seems to indicate that higher portfolio stock percentages are needed for high success in retirement. He stated in his blog that “with U.S. data, the choice of stock allocations between 30% and 80% had very little impact on the worst-case sustainable withdrawal rates”.

(4) He commented that the Trinity study did not take into consideration retires who wanted to leave something for their beneficiaries.
He also pointed out some good news that we had planned to comment on. He stated : “On the other hand, there is some good news. Retirees who diversify their portfolios with international assets and TIPS many very well find an edge to keep the 4% rule alive.”

We would take his statement a bit further. We recommend our clients invest in eleven different asset classes, including TIPS and international assets as well as some commodity-related assets. Studies have shown that broad diversification can increase returns while lowering portfolio risk. We believe a focus on broad diversification and low fund fees (well below 1% for index funds) can do much to preserve the 4% rule and perhaps provide for a somewhat higher withdrawal rate. Further study is likely necessary to see whether our theory is justified. We appreciate Mr. Pfau’s comments and encourage our readers to read his blog in its entirety (just click on the link above).