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.”

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Certified Financial Planner

Have you seen the new CFP® TV commercial yet (take a look here)? Pretty Interesting.  The commercial is currently airing on stations that include History Channel, Travel Channel, HGTV, ESPN, MSNBC, CNN and Fox News.

The CFP Board, who issues the CFP® designation, is making a new effort to help define what being a CERTIFIED FINANCIAL PLANNER™ really means.  There are a lot of people that call themselves “Financial Planners,” but only those that have the CFP® designation have satisfied a rigorous set of standards to use the mark.  This includes extensive education, years of experience and a 2-day 10-hour examination covering insurance, investments, retirement, taxes and estate planning.  The CFP Board has also launched a website, www.letsmakeaplan.org,  to help bring clarity to how a CFP® professional can help bring all your individual financial pieces together.  They do a nice job of explaining what you can expect when meeting with a CERTIFIED FINANCIAL PLANNER™ and how you might benefit.

The New Wealthy

Historically, most people have not had to consider the problem of owing Federal estate taxes at their death. With little or no estate planning, most property you own at death is subject to this tax, and will likely include things such as your home, retirement accounts, life insurance policies, investments, and many others. As the law stands right now, however, the group of people subject to the Federal estate tax will dramatically increase in 2011.

In 2009, the Federal exemption amount was $3.5 million, meaning that each estate was not taxed on the first $3.5 million, so long as proper steps were taken to utilize this tax break. In 2010, the Federal estate tax has been repealed, so there will be no Federal estate tax due on the estates of individuals who die this year. In 2011, the Federal exemption amount will be drastically cut to $1 million. With a 2011 Federal estate tax rate of 55% on the value of the estate over $1 million, this is a real problem for those who are going to be subject to this tax.

Among the estate planning industry, there is speculation about whether Congress will actually allow the 2011 estate tax law, as it stands right now, to become effective. The bottom line is that nobody knows what is going to happen, so financial advisors, insurance agents, estate planning attorneys and tax advisors must all work together with clients to devise an estate plan in the light as it currently stands.

A small reprieve in the tax law is that property passed to a surviving spouse is not taxed because of the marital deduction. This means, if you leave everything to your spouse, your estate will not owe estate tax. In essence, the IRS gives you this break and will wait to tax the property at your spouse’s death. Most individuals do not realize though, when they pass everything to their surviving spouse at death, they waste the exemption amount available to them in the year of their death.

There are several basic steps you can take to reduce estate tax liability and to ensure your estate is administered by your wishes. Here are a few fairly simple estate planning steps that you can discuss with your attorney and financial or tax advisor to determine if they are right for you:

Basic Estate Planning Documents

Everyone should see an attorney to have a will drafted. This document is the single most important estate planning document as it lets you dispose of your property in the way you best see fit. It also allows you to name a guardian for minor children, appoint an executor to handle the administration of your estate, and create trusts to hold and distribute your property based on the terms you create while living. It is important to keep this document updated as your wishes may change due to events that occur during your lifetime (i.e., divorce). If you do not have a valid will at your death, the State of North Carolina will determine how your property is distributed using the laws of intestate succession.

It is also advised that you have a durable power of attorney, healthcare power of attorney, and living will drafted to ensure your wishes are met in the event you are unable to make decisions for yourself. Please talk with your attorney to learn more about these documents.

Estate Tax Planning

There are several trust accounts that you can employ to greatly reduce your estate tax liability. The most commonly used strategy is a dual-trust system that would, at your death, spilt your estate into a Family Trust and a Marital Deduction Trust.

The Family Trust would be funded with the maximum amount you can pass estate tax free in the year of your death. This trust would serve three main purposes: save estate taxes, provide income for the surviving spouse’s lifetime, and benefit your children after the surviving spouse’s death.

The Marital Deduction Trust would be funded with the remainder of your estate assets. This trust would be for the benefit of the surviving spouse, meaning he or she would be able to access as much of the funds in the trust as needed during his or her lifetime. Your surviving spouse would have the power to appoint the remaining property in this trust to anyone at his or her death. Note: To take advantage of this two-trust strategy, you will need to split ownership of your assets so that each spouse will have enough individually to fund the Family Trust.

Gifting

The IRS allows each individual to gift an amount annually without being subject to Federal gift tax. For 2010, this amount is $13,000. Projecting with the 2010 exclusion amount, a couple could gift $26,000 to an unlimited number of people every year until death. For wealthy people, gifting the annual exclusion amount to family and friends each year can be a great wealth transfer strategy. This gift can be in the form of cash, stock, or many other forms. Note, however, that the gift must be a present interest.

As with all financial and tax matters, there are endless estate planning options that can be tailored to your specific situation and implemented to help your estate avoid tax liability. If you think you have a potential estate tax issue, seeking the advice of an attorney and tax advisor could literally save you hundreds of thousands of dollars. Employing an estate plan is no longer something just the CEOs of fortune 500 companies need to consider. Be sure to address these issues early because when the time comes to implement your plan, it’ll be too late!

This is a guest post from Attorney Zeke Bridges and Law Clerk Erin Hurd, both of Western Wake Law Group in Cary, North Carlina.  Zeke practices in the area of Estate Planning Law.

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Lots of people have made money in gold, right?  How about collectibles?  Hedge funds?  Wine?  As many investors discover, the world of alternative investing is cluttered with hard to understand rules that can create an uphill climb from the outset.  Take for example this recent story in Businessweek:

http://www.businessweek.com/magazine/content/10_31/b4189050970461.htm

The investor’s urge to do something different was driven by his desire to make up for losses in his portfolio.  So as he watched the price of oil plummet in early 2009 to $34 a barrel, he saw an opportunity to get in at a low price (buy low thinking is good!) and had his broker invest in an exchange traded fund, or ETF, that is designed to track the price of crude oil.

What he didn’t know about was something called contango.  Not only does this word sound like the famous dance, but it also a figurative dance as well.

As this investor learned, the contango trap happens when the price of oil, or other commodity, is rising, but the ETF designed to track the price of oil loses money.  Huh?…

It basically comes down to an inability to take delivery of the oil.  The ETF is a pool of investment dollars, not an empty oil tanker.  In order for the ETF to stay in the game, it has to renew its futures contracts.  So when the contract it currently holds is close to expiration, it buys another one at (you guessed it) a higher price, thus eroding the value of your original investment.

It’s not just individual investors learning hard lessons by using strategies involving alternative investments, there are plenty of examples of big pension and endowment funds gambling their assets on risky and overly complicated investments.

http://www.tampabay.com/news/politics/state-pension-funds-266-million-investment-disappeared-in-2-years/1034097

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aHQ2Xh55jI.Q

The moral of the story is to control the impulse to go in a different direction just for the sake of trying something different.  If you are going to go down a new investment path be sure that you have charted the course by using a sound, straight-forward strategy.

As a rule of thumb, the more complicated an investment is the less likely the investor fully appreciates the risks they are taking.  As Warren Buffett once said, “Never invest in a business you cannot understand.”

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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.

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Smartphones and other portable devices allow the user to stay connected from even the most remote locations.  Social networking sites like Twitter and Facebook have amplified the chatter to a level that no one would have dreamed of at the beginning of the millennium.

A troubling byproduct of this flood of information is the ease with which extreme messages are being propagated.  From cable news shows to the blog-o-sphere, we are being bombarded with ideological beliefs that are driven mostly by emotion and have little use for facts.  During turbulent times especially, irrational views can become pervasive because they touch emotional nerves that otherwise would not be as sensitive.

A Ratings Game

Avoid Extremes

Larger than life persona’s on both ends of the spectrum do their best to keep us all in a constant state of anxiety because they know that if we are provoked enough we will continue to tune in.  The name of the game is ratings, because higher ratings translate into higher advertising revenue.

Glenn Beck and Michael Moore are polar opposites on the political sphere, but they have more in common than either one of them would care to admit.  The challenge they face is trying to blend editorial content within a format that is meant to entertain.  They both endeavor to create an emotional response in their audiences by enhancing certain aspects of the subject matter while leaving important details out that would possibly cause a different reaction.

Motivation that was born of their formative experiences is altered by a cycle of capitalistic one-upmanship that can distort even the purest of intentions.

Unfortunately, blurring of the lines between truth and fiction in the information landscape is all too common, and often the consequence for the consumer is drawing a conclusion without having heard the full story.

Separating Fact from Fiction

Keeping fact separated from emotion is an important part of our job and something that we spend a great deal of time doing.  A healthy dose of skepticism is necessary, as we have found that even the most respected source of information can often be influenced by their biases.

We employ various methods, such as quantitative research, to enhance the opinions and analysis gathered from our trusted sources.  We also talk to people in our industry as well as our clients to get a perspective as to how others are experiencing the economy.

There is no easy solution to charting the course that we feel will provide the best opportunity for success.  By remaining consistently disciplined in a long-term approach to investing, we believe that we can gain an advantage by filtering out the noise.

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Reverse Your Emotions

Don't Panic!

Successful investing requires turning emotions on their head.  When most people are nervous is the time to see opportunity, and when most people are fearless is the time to be scared.

The stock market did worse during the 2000’s than it did in the 1930’s! Do you remember how you felt in September of 2002?  Or even last February 2009? These periods are when many people were giving up on the stock market.  Fear had brainwashed their rational decision-making skills. If they would have realized in 2002 that their investments were about to go on a multi-year bull market ride, would their fear have been as pronounced?

On the other hand, people’s attitudes of early 2000 and October 2007 were ripe with optimism and fearlessness.  This is a direct contrast to the fear and pessimism that are now dominant.  Optimism makes people overpay for opportunity, while fear makes them overpay for safety.

It’s important to recognize that we will continue to have economic scares in the future (as we always have in the past).   Economic Cycle Research Institute had a recent write-up about the lag effect in people’s perception after a recession.

Take Inventory of Your Short-Term Holdings

What percentage of your investments are in safe areas?  The basic rule of thumb is to have 3-6 months of your living expenses in a safe place with little risk.  This allows you some breathing room for the money you have invested in the markets.  Knowing that you have a cushion of cash and bonds to access for your everyday expenses gives riskier investments time to ride through the stock market dips.

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Watch Out For Potholes

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Unfortunately, with an investment portfolio we don’t always hit a pothole or get a steering wheel shake to let us know it’s time for realignment.  In fact, when investors do begin seeing bad returns, it often leads them to make bad choices with their investments resulting in costly mistakes. We have become well aware of this natural human tendency which is why we rely heavily on our research themes.  By conducting our investment review process quarterly, we can review client portfolios and realign according to our research themes if necessary. During our analysis, we monitor how closely the client’s current investment mix matches our long-term investment strategy.  We also measure the level at which our clients’ stocks are positioned within the allocation ranges we establish during our initial planning work.  If the stock percentage is above or below the range, we know an adjustment should be made.

Mental Accounting

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Many investors have a tendency to bucket their investment accounts.  They assign different purposes for their accounts which in turn require different investment strategies for each account.  For an investor to reach their optimal portfolio return, we feel it’s vital to have a coordinated investment strategy across all investment accounts.  Qualified plans give us the best example of this philosophy.  Many investment choices offered in 401k’s and 403b’s are limited compared to what you might be able to access in other accounts.  In a 401k, there may be a great international fund choice but only average domestic choices.  In this scenario, we may want to use the attractive international investment for all the funds in the 401k and surround it with more quality choices in other accounts where we have more investment selection.

I’ll Owe More in Taxes?!?

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Don’t let the tax tail wag the investment dog.  In other words, there are times when heavy realized gains in a holding could lower the motivation to sell if you were strictly looking at the scenario from a tax perspective.  However, if this same security represented 75% of the portfolio and was comprised of one individual stock, the concentration risk would most likely outweigh the desire to hold on to the stock to avoid incurring a large capital gain.  Decisions such as these take careful evaluation and can only truly be assessed by taking the “big picture” into consideration.

Other Factors

Our investment review process allows us to assure our client’s portfolio is in good working order. To accomplish this, we also consider specific factors such as a client’s age, family relationships, tax considerations, risk levels, and the latest notes and communications with the client to assure we are not missing any potential improvements that could be made to their overall investment situation.  Our investment review process helps us take great care in assuring our client’s investment mix matches their risk preferences. Do you have a review process for your investments?

This is the second part of a 3-part series we’re calling “Behind the Scenes.” It is our hope that this series will give our clients a more transparent look at our business so they can better understand the diligence we employ with each client review.

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.

In response to the many fears and uncertainties that arose during the recent economic crisis, The National Association of Personal Financial Advisors (NAPFA) Consumer Education Foundation sponsored multiple financial advice events around the country as part of the “Your Money Bus” tour.  On Tuesday January 19^th, the “Your Money Bus” rolled in to downtown Raleigh, in partnership with NC State Treasurer Janet Cowell’s office.

With unemployment hovering around 10% and dramatic swings in the stock market, the need for financial advice was very apparent in the crowd of more than 85 that showed up at the State Government Complex in downtown Raleigh.  The impressive turnout of people came with a wide mix of questions that dealt with everything from how much and in which accounts they should be saving to which debts they should be paying down the quickest.

Partners of Financial Symmetry, Allison Berger and Chad Smith, participated in the event for the second consecutive year.

“We’ve really enjoyed being involved with the ‘Your Money Bus’ tour over the last two years.  It’s a great opportunity to spread financial literacy and make a difference in our community.” -Allison Berger

“Volunteering our advice has been a neat way to provide people with action steps that can help them gain some peace of mind when dealing with their finances.” -Chad Smith