Does the value equal the cost?

As a new mom I am always trying to do what is best for my child.  Whatever the decision-whether to swaddle, use a pacifier, or let him cry-I frequently second-guess myself and wonder if I should be doing things differently.  At the end of the day I know that we have to do what works best for our family.  One decision that I thought I was sure of was funding a college education.  My husband and I are both college graduates and value not only the opportunities that a degree provides, but also the experiences and maturity gained in those college years.

However, I have been reading a lot about the “Return on Investment” of a college education and that self-doubt is starting to creep up again.  In Bill Gross’ recent Investment Outlook , he questions, “A mind is a precious thing to waste, so why are millions of America’s students wasting theirs by going to college?”  He is not the only well respected name questioning the value of a college education.  You may have also seen Peter Thiel on the news.  Theiel, head of Clarium Capital, established a foundation to give $100k grants to students to drop out of school and pursue entrepreneurial ventures.  What are well-meaning parents to do?

Luckily the latest Journal of Financial Planning has some food for thought:

• “Three-quarters of Americans believe college is too expensive and more than half (57%) say there is not an adequate value return for what students and families pay.”
• The U.S. Census Bureau reports that the median annual income gap between a college graduate and a non-graduate is $19,550
• “The strong majority of college graduates (86%), feel their higher-education experience was worth the investment.  Three-quarters believe that experience was very useful in helping them grow intellectually.  About 70% believe it helped them grow and mature as a person and 55% mention its use in preparing them for a job or career.”
• “Many Americans say a young person’s success depends largely on a good work ethic (61%) and knowing how to get along with people (57%).  Fewer than half (42%) point to a college education.”

This is all a lot to digest, but just another instance where I know I need to follow my instincts.  The financial planner in me is also telling me to practice what I preach-contribute to a 529 plan after fully funding retirement accounts and Roth IRAs and avoid over-funding those plans.   For more about this strategy read “Thinking Outside the 529 Box.”

Photo credit: ajajendorf25

Ofunato, Japan

The tragedy in Japan continues to be the top news story and warrants international support.  While the human aspect of this crisis continues to be devastating, we can’t discount the economic impact as well.  Well respected international fund family, First Eagle Funds, was heavily allocated to Japanese investments before the tsunami hit.  To find out how they are reacting to current events and their outlook for the future in Japan, please read their recent Manager Insights.

Photo Credit: DVIDSHUB

credit: jepoirrier

We work hard to build wealth for our clients while fostering an honest and open stream of communication about their financial situations.

As a result, it is upsetting to us when we see deceptive marketing practices to sell investment products or promote undesirable lending practices.  At best, these types of companies may offer products that are inappropriate for the consumer, and at worst they are flat out scams.

The Federal Trade Commission developed a website to demonstrate just how easy it is for scam artists to create reputable-looking marketing materials and websites.   Click on the link below and you will find a company that sounds like a great solution for your borrowing needs:

http://wemarket4u.net/esteemed/

Immediately, the word “Guaranteed” at the top should raise a red flag.  Click on any link within the page and you will find more tips from the FTC for identifying loan scams.  When evaluating investments or loan products, the age old advice still holds true – if it sounds too good to be true, it probably is.

Listen to Me

Many of our new clients tell us they found out about fee only financial planning by listening to talk radio or watching their favorite financial pundit on television.  Media personalities such as Suze Orman, Clark Howard, and Dave Ramsey do a great service by inspiring consumers to take control of their financial lives. We also appreciate those who send clients our way by touting the benefits of fee-only financial planning.

While the work they do providing financial education and empowerment to the masses is terrific, there is one thing missing from their advice — YOU.  Every once in a while we shock clients by recommending a different strategy than the hard and fast rules preached by these financial celebrities.  This is because we take the time to get to know you, what your values are, and help you define your long term goals.  We appreciate that every client is different and can benefit from planning and investment strategies that address their unique needs.  Media personalities have to define systems intended to work for nearly everyone, so their methods tend to be extreme, from only using cash in envelopes for expenses to denying yourself purchases that may increase your quality of life.

Food for thought

Sometimes the methods used by financial celebrities remind us of the health gurus on TV that come to your house and throw away all the food in your pantry or promote juice cleanses and no-carb diets.  These measures may help you lose weight in the short term, but are not always realistic or appropriate for your specific needs.  A few of the financial strategies we have recommended against are:

Pay Off Your Mortgage Early

This principle is one that is so appealing, because interest costs over the life of a mortgage are huge when looked at in dollar terms.  However, we typically do not recommend neglecting contributions to your retirement accounts or emergency funds in order to pay off a mortgage early.  The reason for this is that, for borrowers with good credit, mortgage rates are at historical lows, plus the interest payments are tax deductible.  Therefore, the interest paid on this debt is likely to be lower than the rate of return earned on your investments over a 15 or 30 year period.  While debt can be a four letter word, using debt responsibly as part of a coordinated strategy can help you achieve your long term goals.

Pay Cash For Everything

This concept also makes sense and the goal is to keep you from living beyond your means.  After all, if you can afford something, you shouldn’t have to use a credit card to pay for it.  However, credit cards have made our financial lives easier by allowing us to visit the bank less frequently and carry less cash on us.  Unless you have struggled with credit card debt in the past, we find that many people can handle the responsibility of spending reasonably with a credit card and paying off the balance every month.  Typically only extreme cases warrant a cash only strategy.

Buy and Hold Only Index Funds

This is not bad advice for the average investor just starting out or going it on their own.  This comes down to whether you believe in active or passive investing and cost.  Index funds charge lower expense ratios than actively managed mutual funds.  Therefore, if you believe that no one can beat the market, it is pointless to pay more for active management.  We embrace a more active investment philosophy and acknowledge that while not everyone can beat the market, talented managers that can provide additional returns can be worth the extra cost.  Another problem with this advice is that most investors can not stick to a buy and hold strategy and tend to make portfolio changes based on short term market volatility and emotional biases.  This leads to sub-par performance over time.

Photo Credit: Steph Anderson

This Little Piggy Goes to Target.

When we start working with a new client, one of the first steps is typically consolidating the number of accounts they have outstanding.  In our experience this makes your finances easier to manage by reducing the mental accounting that needs to take place every time a financial decision is made.  While this has always made sense to us from a simplification standpoint, it also seems to result in lower overall spending.  Recent research from the University of Utah found that “consumers who use multiple accounts spend more money than those with a single account.”

Don’t Bucket Your Savings

While this process ultimately simplifies financial management for our clients, the transition from multiple accounts to just a few is not always an easy one.  Most of us want to use a “bucketing” strategy to save for different life goals.  However, in the event of a true emergency or change of plans, money may need to come from a fund with another intended purpose.  This is why we feel consolidating the number of accounts outstanding offers the greatest flexibility in terms of cash flow and investment, not to mention it may also help with your budgeting goals.

Photo Credit: A National Acrobat

Photo Credit: David Remer's Hammer Photography

While we emphasize the importance of annual tax planning, it’s also important to not let tax avoidance override your other financial goals.  Liz Davidson, of Forbes.com, wrote a nice piece describing how people lose money when they let tax issues dominate their investment decisions. The article does a great job of examining why payments to the IRS can be such a tough pill to swallow and identifies traps most of us fall into in an attempt to shrink our tax bill.

Please contact us if you have questions about appropriate strategies for reducing your tax bill while also staying on track for your long term goals.

photo credit - cliff1066™

If you invest in your employer sponsored retirement plan you have probably heard of Target-Date funds.  These funds are characterized as investments that change the allocation of stocks, bonds, and cash according to your specified retirement date.  In theory, these funds should progressively reduce risk exposure as the target date approaches.  However, there are no universal allocation standards, so the returns have varied widely from plan to plan.  This was highlighted by the market downturn in 2008 when funds with a target date of 2010 lost an average of 25%, with some posting losses of over 40%.

While the concept of these funds is great; taking the guesswork out of retirement planning for the average investor; further research, transparency, and likely regulation is required.  To that aim the Senate Special Committee on Aging will be introducing legislation that would require fiduciary responsibility for target-date fund managers. This is a step in the right direction, but there are still many other concerns that warrant attention.  In October 2009 Morningstar’s vice president of research Jon Rekenthaler testified before the Senate Special Committee on Aging.  You can read his testimony here:

“Five Concerns About Target Date Funds”

http://advisor.morningstar.com/articles/article.asp?docId=17632

“Advisor Perspectives” recently reviewed the predictive ability of the star rating system over a full market cycle and the results of their study were similar to our experiences.  In a recent letter published by Robert Huebscher, he states, “We concur that the ratings are not an effective forward-looking measure, but that is not how they are used in the industry.  By calling this calculation a rating, Morningstar imparts at least the implicit endorsement of higher- rated funds and an expectation that their relative performance advantage will endure.”

To read the full article and learn more about fund performance over a full market cycle go to:

http://www.advisorperspectives.com/newsletters09/Morningstar_Ratings_Fail_over_a_Full_Market_Cycle.php