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.

In Jeremy Grantham’s latest quarterly letter, he profiled a story about Sir Isaac Newton in which one of the most highly regarded intellects in human history was lucky enough to enter the South Sea stock bubble rather early.  He stayed in long enough to make some money and then, most likely feeling good about himself, sold his holdings at a nice profit.  After the stock continued to rapidly appreciate, his friends began to brag more and more about how rich they were becoming from investing in South Sea stock.  Kicking himself for having made such a foolish mistake by cashing out at such a paltry profit, Sir Isaac dumped much more than he had invested the first time into the stock.  Of course, this time the bubble was perilously close to the top and he made the fateful mistake of riding the bubble burst all the way down before selling out on three separate occasions with hardly anything left to show for his original investment.

Gravity in the Stock Market

There are several lessons in this story.

1. Don’t get carried away no matter what type of circumstances surround an investment.
2. Remember that even smart people get burned by stock bubbles.

For these reasons, we’ve designed our strategy to help fight these feelings.  The stock ranges we establish for each of our clients (and ourselves) act as a discipline, helping to control those visceral responses to booms and busts in the markets.  Making calls of where we should be at a given time within those ranges is a large part of our research process.  So the next time your emotions make you feel like you want to act, remember Mr. Newton’s experience. With a sound and solid investment strategy, you can fight these very human urges that are born out of the fear and greed that dominate the average investor’s decisions.

Many of our newer clients have come to us with old 401(k), 403(b), 457 and Simple IRA accounts from previous employers.  Some even have multiple IRA accounts, often from past rollover situations.  It’s important to have qualified professionals to help you decide on what to do with your inactive qualified plan and multiple IRA accounts.  Whether you are changing jobs, entering retirement or simply wanting to consolidate your accounts, we can help you with each step of the rollover process.

Should you always Rollover a 401k?

There are a few options for dealing with an inactive qualified plan including:

• Rollover the account into a self-directed IRA account, such as a traditional IRA.
• Rollover the account into a new employer-sponsored plan, if allowed under your current plan’s rules.
• Rollover the account into a self-directed IRA account, then convert all or a portion of the funds to a Roth IRA account (after careful tax analysis).
• Leave the account at the current custodian and bring your investment options in line with a comprehensive portfolio strategy.

Despite popular belief, it is not always best to rollover an old employer plan.  Certain custodians offer favorable investment options or have special tax provisions (the North Carolina employees’ Bailey provision, for example), meaning  it could benefit you to leave your account at the current institution rather than combining the funds into another account.

We have experience in dealing with many different custodians when it comes to the rollover process.  For our investment management clients, part of our service is to request and complete paperwork while monitoring the rollover process.  If you are interested in combining inactive qualified accounts, please feel free to contact us.  Your advisor will research the best approach for your individual situation and determine if a rollover is the best choice for you.  If it is, we’ll get the process started as soon as possible.

Not yet a client and unsure if a rollover is right for you? Contact us to schedule an appointment to review your financial picture and develop a plan that will help provide the answer.

Taking Advantage of your Roth 401k?

It’s very possible that you could be saving more money tax-free.  If your company offers a Roth 401k option, then this could be your ticket.  In recent weeks, the question we’ve heard most from clients is “should I be taking advantage of a Roth 401k?”  To help you make a decision we’ve answered the most common questions that people consider when weighing the benefits of using a Roth 401k.

1.       What will my tax picture look like in retirement? If you think your tax rate will be higher than it is now when you retire, then it might make sense to be making contributions to your Roth 401k option.  As you grow older, you will likely pay down your mortgage and have children move out, leaving you with lower itemized deductions, thus increasing your taxable income.  Similarly, if you plan to have an increased spending pattern in your golden years, then higher taxes will most likely be a reality you will be facing.  Some would argue that given our current state in the tax history of this country, we’re very likely to see taxes increase at some point down the line as well.

2.       Will my paycheck be lower? If you choose the Roth 401k, your paycheck will be lower than when you were making traditional 401k contributions.  This is because your deposits are being taxed before they go into the account.  This is in direct contrast to the 401k you may have already been contributing to.  Those contributions were deposited before they were taxed.  Therefore, less comes out of your paycheck with traditional 401k contributions.

3.       I’m not sure I have enough time before retirement? The time before retirement could make or break your decision.  If you have a 30 year time span in which to invest, the tax-free growth during that time would be hard to beat.  On the other hand, if you are in your late 50’s with retirement no more than 5 years away, the tax-free growth may not be enough to make the switch.

4.       What if I make too much money? There are no income restraints to participate in the Roth 401k.  In order to contribute to Roth IRA’s your income needs to be south of $167k to make the full $5000 ($6,000 if you’re 50 or over in 2010) per year contribution.  By using the Roth 401k, you will be able to deposit $16,500 ($22,000 if you’re over 50) into a tax-free account.

5.       Does my match grow tax-free as well? Even if you decide to fund the Roth 401k, your employer’s match (assuming you receive one) will be funneled to the traditional 401k in pre-tax deposits like it normally would.

Also, as of this year, you are now able to convert a portion of your current 401k to a Roth 401k.  Keep in mind, that each situation is different and you can only truly know if a Roth 401k is right for you by evaluating your own personal situation.

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Separate Politics and Investing

When it comes to investing, emotions are probably the single biggest obstacle to success for most investors.  Since strong emotions often accompany politics, we feel it’s important to try and minimize politics when gathering our investment research and implementing investment strategies.

Given that there are plenty of examples of the economy and markets doing well and examples of it doing poorly with every combination of party control, we believe that the business cycle is simply much more powerful than politics.  Of course in countries like Cuba and Venezuela that is not the case, since the government controls so much, but this is the United States and we are one of the most market oriented nations in the world.

As for individual investors, we have noticed that efforts of all the political actors to motivate their base around the time of elections can be a particularly dangerous time for those whose political beliefs are strong.  For this group, it is probably even more beneficial that they have us, or a trusted professional third-party in place, to implement their investment strategy.

Photo Credit: lakelandlocal

Making use of the Gym

Why do we do this?  Until recently, researchers had no idea what made us act so strangely.  But now, a few studies are helping explain how we make decisions, and the results are funny.

David Laibson, an economics professor at Harvard, has conducted research which suggests that people do fairly complex mental accounting whenever they make decisions, and count future rewards (or efforts) as half as important as present rewards or efforts.

How does this work?  Suppose you get up in the morning and face the decision of whether or not to go to the gym.  In your mind, the effort of putting on your sweats and driving the health club on any particular day can be given a hassle factor of 6.  The benefits (being more healthy and in better shape) can be assigned a benefits value of 8.  But the future benefit is discounted by half, so it has an effective weight, in your decision-making, of four.  Since 6 (the hassle) is greater than the benefit factor of 4 (eight divided by two), your mind decides to skip today’s workout.

In mathematical terms, Laibson says the decision to exercise today can be defined by the equation (-6) + (8/2) = -2.  The negative result means that the future benefits are not worth the immediate investment.

So why do people buy memberships in the gym in the first place?  Laibson offered an analysis of the PLAN (or resolution) to exercise, and the numbers come out very different.  The intention to go to the gym three times a week costs nothing.  The future effort of going to the gym (-6) will be discounted by half, and so will the benefits (+8).  Therefore the mental equation you use when you buy the gym membership be defined as 0 [the "cost" of planning to go to the gym three times a week] + (-6/2) + (8/2) = 1.

“Planning to go to the gym is a win,” Laibson explains, “chiefly because the planning itself costs nothing.

In a confirming bit of research, two of Laibson’s students surveyed health and fitness facilities in the Boston area and found that the average cost of a gym membership is $75 a month.  Because people swipe their membership cards into the machines as they enter, there are fairly detailed records of how often members actually go.  The researchers found that the average person goes to the health club four times a month, which means the average cost per visit is $19.

But…  Laibson’s students found that these health clubs typically offered a $10 “pay per visit” rate.  Clearly, the people who bought their memberships intended to go at least twice as often as they actually did.  The mental equation around planning produced a very different outcome from the mental equation around execution.

Is there a way to change this mental accounting?  Laibson suggested that you hire a coach who will hold you accountable–adding a hassle factor if you don’t go to the gym.  Or arrange to meet a friend there three days a week, adding the hassle factor of disappointing your friend if you don’t show up.  Or, if you want to do it more positively, promise yourself that you’ll reward yourself with a fruit smoothie after you exercise, adding something positive to the mental equation.

This article was written by Bob Veres.  He writes for several national publications and publishes a monthly newsletter titled “Inside Information.”  You can find more info about him here http://www.bobveres.com/.

Photo Credit:  mjzitek

Are your Investments Growing?

Controlling Your Emotions?

Morningstar, an independent investment research company, compiled returns for how the average mutual fund investor did during the 2000’s. The research added a layer of analysis to the total return calculation by also tracking the cash flows in and out of the mutual fund.  They wanted to see what the performance looked like if you took into account additional buys and sells in the fund during the same time frame.  Then they compared the findings to the buy-and-hold strategy that mutual funds use to report investment performance.  What the findings show is that most investors suffer from bad timing as they get in when prices are high and get out when prices are low.  This is a reflection of how market forces can drive investor emotions and result in behaviors that cause poor relative investment performance.

Slow And Steady

Another interesting discovery is how fund companies provide different investing experiences for the average investor.  The institutions that stick to fundamentally sound investment principles were proven to have better investor returns relative to total returns than those companies that use a short-term, current-trends marketing strategy to attract investors.

Financial Symmetry’s composite results for the decade were an average annual rate of return of 4.93% compared to the average annual investor return of 1.68% across all funds.

Photo Credit: TheGiantVermin

Watch Out For Potholes

Photo Credit : me and the sysop

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.

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