All Things Financial Planning Blog


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Are You an Investor or Speculator?


A Worthwhile Financial Market DiagnosisHow can you tell if you are you an investor or a speculator? Many casual investors buy stocks and assume they are investing, but in reality, they are actually speculating. True investing entails conducting a thorough analysis of a company, determining whether the current price is justified, deciding whether the stock would be a good addition to your portfolio, and repeating the process periodically; speculation is simply buying a stock because you think it’s a good company or you heard a good tip, but you really don’t know how the company makes money, who its competitors are, or in some cases, even what it does. Most people would say they are an investor, but unless you are employing the fundamental analysis discussed below, you may actually be a speculator.

Top-Down

Suppose you believe that the new Affordable Care Act will benefit pharmaceutical companies and you want to capitalize on that potential gain. In a top-down approach, you would first generate a list of all the publicly traded pharmaceutical companies. Then you would compare them among each other using that industry’s metric. If any of the companies are non-US companies, then you need to translate the company’s currency to the US dollar for an equal comparison. Some common comparison metrics include: profit margins, sales, market capitalization, market penetration, debt/equity, etc. In addition, each industry has its own unique metric. For example, airlines use (revenues per passenger miles) and hotels use (average daily rate). Once you have identified the best stock within your filtered list, then you can determine whether the stock price is cheap or expensive versus its competitors.

Bottom-Up

Suppose you are an avid Facebook user and want to invest in the stock. In a bottom-up approach, you would first obtain financial information for Facebook to understand how it makes money. What are its income sources: advertising, selling products, partnerships? How much of their income comes from each source? Who are its competitors and what do their numbers look like? Keep in mind, just because a company makes a ton of money, it still doesn’t make it a good investment. Facebook made $5 billion in 2012 while Microsoft made $74 billion in 2012, yet Facebook stock trades at almost 143 times the value of Microsoft.

Research Reports

Some investors prefer to rely on research reports prepared by prominent analysts at investment banks. One of the many lessons the recent financial crisis taught us is that investment banks have countless conflicts of interest. There is no shortage of headlines where an investment bank issued research reports where they also did investment banking for the company in question. Unless the research is truly independent and neither the analyst nor their firms have a vested interest in the companies they cover, their assessment of a company is tainted by their firm’s relationship with the company being reviewed.

As you can see, researching individual stocks is very labor intensive whether you use the top-down or bottom-up approach. The analysis doesn’t stop when you buy the stock, you must continue to monitor the company (not just the stock price) to ensure it still meets your criteria. It’s ok to invest in stocks, but investors must recognize that unless they conduct ongoing and thorough analysis, they are merely gambling.

Ara OghoorianAra Oghoorian, CFP®, CFA
Founder and President
ACap Asset Management
Los Angeles, CA


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Defining Diversification


In the top few responses most people give when you ask what they know about investing, “it’s important to be diversified” is right up there with “buy low, sell high”. Both statements are true and very important components of investing. My concern is that we hear and say these things so often, we lose sight of what they actually mean.

Investopedia.com defines Diversification as “a risk management technique that mixes a wide variety of investments within a portfolio.” True, but what the heck does that mean? Can it be any mix of investments? What does it really hope to accomplish? Is my portfolio diverse?

Today my goal is not to sell you on a particular investment strategy or convince you that there is any one way to properly diversify. My hope is to provide some key educational points to enhance your understanding of this important rule of thumb.

As the last several years have shown, investing in the stock market can be a volatile experience. If you invest in stock in one or even a small handful of companies, the value of your portfolio can shift wildly, often it seems for no logical reason. The primary purpose to diversify your investments is to decrease these and other risks.

How does one increase a portfolio’s diversity? Let’s look at a portfolio strictly invested in stocks. The simple answer is to buy a higher number of stocks. The better answer is to buy a higher number of different kinds of stocks. Suppose you own General Motors. Buying Ford might technically make you more diverse, but only slightly so. You still own just two companies, both large, US automakers. Instead, you should look at a vast array of companies differing in size, location and type.

This means expanding your portfolio to large and small companies of all types (often called sectors) all across the globe, avoiding the urge to own more companies in the U.S. than in other parts of the world. U.S. companies make up just 40-50% of global market share. By focusing solely on the U.S., you cut off the opportunity to better diversify and participate in the opportunity for growth in more than 50% of the world’s companies.

I want to stress that none of this is a blueprint for any type of investment strategy. It is simply an effort to help you understand what diversification means. How much diversification, in what areas, and the blend or allocation of different types of assets is a decision that should be made with careful thought and, in most cases, professional advice based on your goals and ability to tolerate risk.

As you approach your personal financial planning and goals, it’s important to obtain at least a basic grasp on the essentials in order to make the most educated decisions possible. There are lots of trusted professionals there to help, but knowledge is always a worthwhile investment.

Chip Workman, CFP®, MBA
Lead Advisor
The Asset Advisory Group
Cincinnati, OH


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What to Invest In Today


I meet with individuals on a daily basis that have different perceptions of the world, and how they should react with their portfolio:

  •  I’m worried about what’s going on in the world, I want to sell out of international stocks.
  • International stocks have been down more than domestic, I feel like it’s a great time to buy.

Both clients have valid reasons to think what they do. So, who is right and who is wrong?

I don’t know enough about the market to tell them what will happen with stocks over the next week, month, or year. I do know however that the above messages include underlying perceptions of investing that are rarely productive, and never consider an individuals goals.

In a recent TED talk titled Perspective is Everything (warning: an instance of foul language is used), advertising guru Rory Sutherland discussed this idea of perception, and specifically how economists (and likely the ones my above clients take their cues from) have the wrong perception of how to assist people in making the best decisions. He points to an often ignored school of economic thought (economics of the Austrian school) that instead of studying mathematical models, places its focus on psychology to determine why people act in order to find solutions to economic problems.

Most investors have bought into an investing paradigm that involves beating something or someone (neighbors, family, etc.), or maximizing yield. It makes sense why so many people equate this idea to investing since this is the exact paradigm they hear from so called ‘experts’ of investment management – “I best the markets.” The piece of their reasoning that doesn’t always translate is that they need to beat the markets to justify their jobs; that doesn’t mean what they offer is what you need.

As an advisor I rarely talk to clients about performance or winning investing as if it is a game. While it may be in an investment managers interests to take gambles with your money, it is not in yours.

Rather, I encourage investors to focus on the reasons for investing, and pick the best investments that meet those objectives, rather than starting with the objective of ‘winning.’ I use the acronym GPS to describe the starting point investors should have to qualify an investments usefulness.

Growth. All investors seek growth, and historically growth is best achieved by participating in the profits earned by successful businesses.

But, while most stock mutual funds fail to beat the markets, most investors with a ‘win at all costs’ mentality get burned, or waste countless hours jumping from one hot fund to the next in search of an extra percent return. The activity of buying into one hot fund at a high, and moving out of it after it falls on tough times often leads to a significantly lower portfolio returns than what would have been achieved by staying put.

Stability. Investors also want safety, but the question they rarely ask is – “How safe is this investment?” I hear far more often – “How much does it earn?”

The rule to remember here is don’t sacrifice safety for yield. Instead of thinking about what often amounts to a few extra dollars a year, ask yourself – “What are the chance of this money being there for me when I need it?”

Principal preservation is another goal of investors; to have their money not only stay stable, but increase as prices rise. I typically talk about it out of GPS order because a combination of Growth and Stable investments may provide the right mix to achieve a portfolio that keeps up with inflation. These may be real assets like real estate, precious metals, currency, or real goods. Think about these investments as providing diversification benefits first over providing winning returns.

Instead of pouring over funds and worrying about what fund or investment will outperform the others, a less stressful and far more productive strategy for individuals is to figure out how much you need to have invested for each category, select investments based on how well they match category criteria and not on returns, monitor those investments, and control the factors you can (avoid investing with companies with poor stewardship, poor performance, and excessive costs). This activity of determining how much you need in each category aligns your investment selection to your individual goals.

Invest today in a changed perception, from trying to win the highest return, to following a purposeful investment selection plan which will ease your stress, align your portfolio with your personal goals, and likely increase your returns.

robertSchmanskyRobert Schmansky, CFP®
Financial Advisor
Clear Financial Advisors, LLC
Royal Oak, MI


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Invest in Your Company Stock Like an Executive


Have you ever worked at a job that gave you access to more of something than you could ever want?

You might be a pizza lover, but let me assure you from my own experience that a few weeks of full time work at a pizza shop will lessen that craving quite a bit. The same feeling can be had with any profession you may love from the outside, but find that having access to too much of whatever it is lessens the allure.

I imagine that this feeling can be the same with executives of corporations, though they tend to not only have a great job and perks in their businesses, but also have access to company stock in ways the average employee does not.

When I look at how successful executives invest in their own companies – these individuals that have stock options, stock grants, restricted stock, and a myriad of other plans that incentivize them to be owners and have a stake in the company’s success – it can be somewhat surprising to watch their behavior towards owning stock and how it can be different than the average employee.

They own stock (and often times lots of it), but perhaps it’s similar to having ‘too much’ of something that makes you appreciate what ‘it’ is in different ways.

I find executives who own stock in the many ways they do often exhibit the opposite behavior of regular employees when it comes to holding stock in the company they work for.

Regular employees often:

  • Hold too much of their company stock as a percent of their investments,
  • Have a tendency to think the stock will do better than other similar companies,
  • Hold onto it based on emotion both during goods times and bad, and
  • Generally want more rather than less.

While it’s true many executives have minimum stock ownership requirements that can result in their holding a substantial amount of company stock, they don’t often go out of their way to buy substantial amounts, or gamble on where the stock may or may not go. Many look for opportunities to sell and diversify their holdings. The first move many make at retirement is to sell stock they previously were restricted from doing so and creating a diversified portfolio. \

We want to feel like the stock of company that provides us with an income and our benefits will do well, but attaching those feelings to any stock can be a HUGE investing mistake! Investors who do this carry significant risk, as not only is their income and company benefits based on the company, but so is the success of their investment plans!

Executives that already have more company stock also seem to appreciate diversification over many companies other than just their own. While we often think we have great knowledge about how a new product will impact a company’s stock performance, business leaders that have been around know it’s not what they think they know that will determine the stock price, but it is what they don’t know about the event that can drive the stock price up or down.

If you are an investor in stock of the company who employs you, think as if you are investing like those that are successful and diversifying your risks, or if you have a tendency to invest in your company based on emotion.

A rule of thumb to invest by: Never allow any investment to be more than 10% of your total portfolio.

robertSchmanskyRobert Schmansky, CFP®
Financial Advisor
Clear Financial Advisors, LLC
Royal Oak, MI


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The Fiscal Side to Staying Fit


I often compare the financial services industry to the world of diet and fitness. In fact, I wrote a blog about it here last year. Parts of both industries seem to share an obsession with selling quick fixes and easy answers to long term, difficult challenges.

But, what about a more direct comparison? Is there a direct relationship between physical and fiscal health? Is there more incentive than a slimmer waistline and a new pair of jeans to getting in shape and staying fit? Sure, the health benefits should be motivation enough, but virtually any behavioral data available suggests they are not.

The short answer is there’s most definitely a relationship and the cost savings are more important than ever. If you look at the way inflation impacts our society, health care costs lead the way, meaning it costs you more each and every year to provide you and your family with the same level of care. A healthier you could mean lower health & life insurance premiums, fewer days off work, lower food costs and reduced costs associated with nursing care and assisted living down the road. The list can go on and on.

Is it a guaranteed cure all? Of course not, but the reduced physical and mental stress to your body & mind over time alone should make it worth the effort.

Nothing I’ve said is earth shattering news, so where do we get off track? In part, it’s the way we think about nutrition and fitness. As kids, we “go outside and play” or go to “recess”. Adults refer to “working out” or “doing yard work”. Kids typically snack as a way to grab a quick, healthy snack to refuel before more play. Adult snacking becomes something we do with one hand reserved for the remote control while the other is stained orange from a food-like substance known as the cheese doodle.

The comparison to fiscal and physical fitness extends beyond cost savings. In fact, putting a plan together to stay as healthy as possible carries many of the same rules of thumb as a financial plan. Let’s look at some specifics . . .

  • Start today, not tomorrow
    • Compounding works in many areas of life. Many of you know that the earlier you start saving for the future, the easier it is to meet your goals. The costs to waiting are high. Same goes for your physical health. Quitting smoking today? Better than tomorrow. Starting to take a daily walk today versus waiting until Monday. Better. Every little bit helps and the more you do immediately, the less painful it will be.
  • Diversify
    • One of the biggest reasons people burn out or never get going with an active lifestyle is the perceived boredom. Just as sticking all your eggs in one asset class or investment is a surefire way to fail in investing; there can more to a healthy lifestyle than a treadmill or stationary bike. Diversify your activity and you’ll be much more likely to stay engaged and succeed. There’s any number of ways to do this including CrossFit, Zumba, Yoga, and Tai Chi. Many community center and gyms are offering an ever-increasing array of classes. Challenge your body in different ways and keep your mind engaged by turning your training into true cross-training.
  • Do it with Purpose – Make a Plan
    • Too often, people choose investments without any real consideration as to whether it is appropriate for them or what role it plays in meeting their goals. Much the same, putting a diet together based on a two minute TV clip or walking into a fitness facility and trying to figure out the machines without a sense of your ability to tolerate the physical exertion is a poor choice. Checking first with your doctor and spending an hour or two with a personal trainer can go a long way in jump starting a successful plan.
  • Stay Low Cost
    • Costs matter, but shouldn’t be an excuse. You don’t have to spend a fortune to stay fit. If you have nothing to spend on your physical health (read that again and see if it makes sense to you), there’s still plenty you can do with your own two feet and your body weight to stay very healthy. The internet is a valuable tool for researching various ways to build a program with little to no equipment at all. Besides, with all the money you’ll save by eating less, and cutting back on health care costs, how can you afford not to get started?

Perhaps the biggest link of all is to manage your expectations. If you expect mind-blowing results without the work, it’s no different than expecting reasonable investment returns without any meaningful contributions or planning. It’s just not the way life works. Focus on those things you can control and don’t sweat minor setbacks from time to time. In fact, make a point to celebrate even small milestones as a way of stoking the fire towards more progress. Just make sure you find a way to reward yourself that doesn’t mean overindulging, or you’ll be right back where you started.

Chip Workman, CFP®, MBA
Lead Advisor
The Asset Advisory Group
Cincinnati, OH


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Get a Tax Rate Like Mitt…You May Be Already There and Don’t Know It


The recent release of candidate Mitt Romney’s tax returns stirred up a firestorm debate on how someone with his wealth pays so little taxes. It begins to rekindle debates over inequity which will only drum on louder throughout the remaining months of the U.S. Presidential campaign.

The complexity of the U.S. tax system cannot be overstated. There were 1,396,000 words in the entire tax code of the Internal Revenue Code and Regulations in 1955.  In 2005, the word count was just over 9,097,000 words, a whopping 545% increase in that given time.

It is no wonder that the Oracle of Omaha, the great investor Warren Buffet, must have been confused when he wrote an Op-Ed piece in the New York Times stating that among his secretary and other office workers their “tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.” If this truly is the case, the office workers should immediately seek qualified tax preparers to file amended tax returns. So how does one of the world’s richest men not understand individual income taxes and the rates they really pay? Simple, he doesn’t prepare his own tax returns.

Let’s cut to the chase. There is a perception that the rich do not pay their “fair” share of taxes and that middle class and poor suffer because of it. First, let us focus on giving and receiving. Specifically, who pays the taxes and who receives the government spending generated from taxes. According to the Tax Foundation, for every dollar taxpayers in the top 20% of earnings (household income over $191,400) paid, they received $0.32 of Federal spending. Compare that to every dollar taxpayers in the bottom 40% paid (household income less than $35,300), they received $17.75 of Federal spending.1 It is estimated that a trillion dollars ($1,000,000,000,000) is transferred each year from high- to low-income groups.2

According to the Internal Revenue Service, there were 137,982,203 tax returns filed in 2009 with positive adjusted gross incomes. The average tax rate for earners in the top 1% was 24.01%. The average tax rate for the bottom 50% of all taxpayers was 1.85%. In fact, the total share of income taxes paid by the top 1% of earners rose from 43.26% in 1987 to 58.66% in 2009. Contrast that to the bottom 50% of earners whose share went from 6.07% in 1987 to 2.25% in 2009. The tax burden of the top 1% of taxpayers now exceeds that paid by the bottom 95% of taxpayers.

Source: Tax Foundation

Get a Rate Like Mitt

What is a taxpayer to do if they find themselves paying tax rates above the national average relative to their income? The first suggestion is to have a professional tax preparer review your situation and look for ways to reduce your tax liability. If you are a single person who rents, does not contribute to any retirement plan, no investments, no children and makes no charitable contributions, you will be in a relatively high tax bracket. There are a wide variety of tax deductions (lowers taxable income) and tax credits (dollar for dollar offset against tax liability) that are available to nearly all taxpayers.

In addition, there are ways to reduce your tax liability by investing wisely. For investors, dividends can be treated in two ways – as ordinary income or as a qualified dividend. The qualified dividend is taxed at a maximum rate of 15%. If you are in a 15% or lower bracket, you will pay 0% on qualified dividends while all other dividends will be added to your income and potentially subject to much higher rates. 

How you sell an investment for a gain can also have a big impact on your tax liability. If you sell a stock or mutual fund that is held for less than a year, the gain will be subject to ordinary income taxes. Instead, should you hold the investment for a year, the gain will be subject to long-term capital gains rates. For taxpayers at or above the 25% bracket, the long-term capital gains tax rate is 15%. For investors at or below the 15% bracket, the tax liability is 0%. 

The problem with taxation does not lie within the socioeconomic structure that currently exists. The problem is put directly on our elected officials and in particular members of the House of Representatives where tax legislation is introduced. Over 22 million tax returns claimed $6 billion dollars in tax preparation fees of which $1.7 billion was claimed by those with adjusted gross incomes below $60,000. Another issue. All of the above suggestions are for this year only. It all changes in 2013 as the Bush-Era tax cuts are set to expire.

The Internal Revenue Code is not nearly as complex as the attempt for the citizens of our republic to define “fair” when it comes to paying taxes. The debate over the word “fair”, especially during the intense heat of the upcoming elections, is filled with political partisanship, misinformation and fuzzy math. Voters owe it to themselves to become more knowledgeable about the issues at hand. Great sources of information can be found at TaxStats on the IRS website (www.irs.gov/taxstats), the Congressional Budget Office (www.cbo.gov) and the nonpartisan education organization Tax Foundation (www.taxfoundation.org).

1 www.taxfoundation.org/files/wp1.pdf
2 “Why Taxes Matter” Tax Foundation 2008 publication

Ed GjertsenEdward Gjertsen II, CFP®
Vice President
Mack Investment Securities, Inc.
Glenview, IL