All Things Financial Planning Blog


The 5 Biggest Changes in Personal Finance over the Last 20 Years

Personal-DebtMy son recently turned twenty and it inspired me to reflect on all of the changes in his life as well as in my professional life. My son’s progression has gone from being a baby, to a toddler, to a growing child, to a teenager, and finally to a young adult. He is now trying to figure out his professional place in life as he just finished his first year of college. During that same timeframe, I’ve seen personal-finance go through its own five stages of maturity. Twenty years ago it was more about buying a product, being transaction focused, little reliance on technology, running massive volume plans, and focusing just on the money aspects, not health and psychological aspects.

  1. Let’s face it, our culture must sell products and we’re pretty darn good at it. The problem is that the marketing and slick ads of all the things we buy in America today, don’t always match the quality and integrity. I think the biggest move that our industry has made in the last 20 years was to go from selling a product to following a process. The process includes a comprehensive financial plan. The financial plan not only talks about investments but also about understanding debt, figuring out a budget, understanding human capital (what we think of as our skills to make money for ourselves), reviewing your insurance for the major risks in life, and understanding that all of these things are linked together in order to get us all to the finish line.
  2. The transaction focus over the years has ebbed and flowed in terms of the hyperactivity in order to get better performance. Back in the olden days, it was about transactions because that’s how many advisers were paid. It was said that advisers are not in the storage business they’re in the moving business. Today the focus is on asset management for a fee, retainers, hourly fees, and project fees rather than commissions. Although I see a bit of a backlash happening in the last few years where it appears technology is getting ahead of the small investor. The advent of massive millisecond transactions have caused us to doubt the integrity of the system which the world of investments is built upon. We had multiple occasions like the “flash crash” and the search for algorithms giving institutions a major-league advantage over the average investor.
  3. For those who need help with their finances, the place to start your search is to ask a friend if they know somebody that’s good. Yet the next step is to get on the Internet and search for someone that appears to fit your standards. Even though it’s like trying to take a sip out of a fire hose every time you do a Google search people are finding most of their initial information on the internet. Today, I feel it’s much more of a collaborative effort between the adviser and the client. The adviser gathers the information needed to better help assist the client in making decisions. The best advisers these days are more of a librarian than a master of many disciplines.
  4. The financial plans that we put together over the years can be extremely comprehensive and lengthy. The problem with that is that planning by the pound doesn’t always get things done because most people are very busy these days and just want to get down to a summary version. I know that because I do a daily radio show commentary and 14 years ago I had 3 minutes to talk, today I have a minute and 10 seconds. A more modular approach works better because it talks about your specific problem at the moment and how you fix it. I feel that the best plan these days is to have one page versus 100.
  5. Probably the most important change that I’ve seen over the last 20 years is that financial planning has gotten much more holistic. It is about looking at the big picture and trying to incorporate wisdom, along with emotions, as we see the springing up of behavioral economics and why we do what we do. Reading a book like Daniel Kahneman’s Thinking, Fast and Slow (he was the first psychologist to win a Nobel Economic prize) should be mandatory for anybody who’s going to invest or put together a financial plan. It’s really critical to try and take health, wellness, happiness, human capital, emotions, relations, and wealth together as they are all part of the playing field.

The world of financial planning and investment advisory has moved steadily in the right direction over the last 20 years and I hope that it will continue to do so. There is certainly a lot of room for improvement yet I feel that some of the breakthroughs that we’ve seen in healthcare and technology over the last two decades are going to find their way into a simpler, more comprehensive blend of our money and life connections. Robbers used to say, “Your money or your life.” The next phase of financial planning is going to be “Your money and your life!”

Dave Caruso, CFP®
Certified Financial Planner™
Coastal Capital Group
Danvers, MA


Young Investors Key to Beating the Market

Invest Outside the BoxWant to know how to beat the market? “Sure,” you may say, “it’s possible. If I spent my every waking hour researching undervalued companies.”

But, what if I told you I had a fool proof way for those with time to spare to win against the market, without searching rummage shops for discarded crystal balls, or trusting in your uncle’s stock advice? And on top of that, even the most novice investor can use this strategy and win?

Impossible? Read on.

The way to beat the market isn’t by finding the next hot mutual fund manager or dedicating yourself to becoming the next Warren Buffett, it’s simply how you manage your tilt.

Your “tilt” is how your portfolio is invested in the market. You hopefully are diversified over the universe of stocks, but your tilt tells your holdings of large or mega companies versus small or medium sized firms. It also tells if you tend to invest in companies trading at premiums or discounts to the overall market.

More often than not, most retirement investors I meet are “top heavy,” investing in a mix that doesn’t stray too far from the market represented to a higher degree by largest companies, or a mix that resembles the S&P 500 (most people refer to this as the market). This is often the case if you’re investing in a Target Retirement Date fund, or any other fund or funds, or have a managed account.

However, is this the best mix when you’re young and have time to take risks?

By shifting the weights of your portfolio towards areas of the market that tend to have higher degrees of return (and volatility), you may supercharge your retirement accounts when starting out, specifically by using a greater share than the market of smaller companies with more room to grow, and stocks that are trading at a discount to the market (value stocks).

How much better can you do than the S&P 500 by including more small and value in your mix?
The S&P 500 averaged 9.5% per year since 1928. One can not invest in an index, but if you could and had invested $1 in the S&P 500 way back then, you would have had $3,530 at the end of 2012.

Using a similar strategy of owning the stock market, but by shifting the tilt to include more small, and more value, a portfolio that tracks Dimensional Fund Advisors US Adjusted Market Value Index would have averaged 11.7% during the same period. An investment of $1 would have grown to $11,998.

A strategy of tilting more towards small and value stocks will be more volatile than the market, so don’t think this approach will only lead to gains; you still have to master the skill of not watching your accounts rise and fall in the short run. However, while you’re accumulating and have a long time horizon, volatility can be your friend.

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


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.


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.


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


How Do Options Work?

The Economics of FearWhat if you had had a hunch that Microsoft stock would skyrocket when it introduced Windows 8? Would you have risked purchasing Microsoft stock on just a hunch? Or what if you owned a hundred shares of Apple but wanted to protect yourself from the stock’s recent declines? Well you can do both through options. An option is a standardized contract to either buy or sell a stock at a pre-determined price within a specific date. The key word is option; if you buy an option contract, you have the option, not the obligation, to exercise your contract if it makes financial sense for you at that future date. Option trading has been around for thousands of years and is widely used by many people to either protect the value of an existing investment or speculate on the future movement of an asset. There are two types of option contracts: calls and puts. A call option gives the owner the option to buy a stock at a set price in the future, whereas a put option gives the owner the option to sell a stock at a set price in the future. Let’s see how each one works.

Example of a Put Option:

A put option grants you the right to sell a stock at a set price. An investor buys a put option if she feels the price of a stock is going to decline and wants to lock-in a particular price. Let’s look at a specific example: It is March, and you own 100 shares of Apple stock (symbol: AAPL) that you bought for $400. You think that the price of Apple will decline from its current price of $457 in the coming months and you want to protect your gains. Each option controls 100 shares of the underlying stock, so 1 put option would give you the protection you seek. You could buy a $450 put option that expires in 3 months (May). If the price of Apple goes below $450 between now and May, you can exercise your option and sell your shares at $450. If the price of Apple doesn’t get that low, then you would keep your shares and simply let your option expire.

Example of a Call Option:

A call option grants you the right to buy a stock at a specific price. You would buy a call option if you think the price of a stock will rise within a given time and you wanted to benefit from the expected rise. Continuing with our Apple example, assume you don’t own the stock, but you think that Apple stock will rise in the next couple of months. You could buy an option that expires in May that allows you to buy Apple stock at $500. If the price of Apple rises above $500, you could exercise your call option and buy the stock at $500. Again, if the price of Apple does not rise by the May expiration date, you simply let your option expire.

As you can imagine, options can be useful for certain investors who are interested in: protecting a large gain; benefiting from a stock’s rise/fall without actually owning the stock; and in some cases, diversifying. While there are only two types of options (calls and puts), there are a multitude of strategies an investor can employ by combining calls and puts.

Though it may seem that options as part of your portfolio is a no-brainer, this article is simply an introduction to options. It is important to understand that options are quite complicated and can be rather risky. Options should only be used by experienced investors who really understand the mechanics of options – note, there is no easy money in trading options. Some people brag about making a lot of money in options, but be careful because option prices move very quickly, and while you can quickly make a lot of money, you can also easily lose a lot of money in just a single day.

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


Headlines vs. Markets – A Case Study

Bad-IdeaThe media’s job is ultimately to make money by selling advertising. How much advertisers are willing to pay depends on how widely their message will be distributed. That is measured by how well a television network, magazine or newspaper does at maintaining eyes on the screen or sales at the newsstand. Unfortunately, that often means the more negative a story or the more fear a topic instills, the more exposure it’s likely to receive. This is a common complaint, yet we keep watching.

Going back to my blog from last month, an investor’s job is to earn a return on the money they invest in line with the risk taken. Despite some volatility based on truly unforeseen headlines, the market is much less sensitive to the media and much more concerned with what is actually going on in the companies that comprise a given marketplace than the average investor.

In other words, to get a true sense at what’s going on at the markets, look at the markets, not the guy on TV keeping you glued until the next commercial break.

One quarter does not an investment lifetime make, but I’d like to use the fourth quarter of 2012 as a brief case study in lending some credence to the above point.

Going into the fourth quarter of 2012, it was hard to find much optimism. Most Americans had grown tired of an intensely divided election, Superstorm Sandy devastated the East coast and the fiscal cliff was looming on the horizon. In fact, I’ve spoken with many people who still believe that 2012 was a bad one for the markets.

Let’s look at some of the crises that many “just knew” would sink the markets to end the year and what wound up occurring in reality . . .

  1. Europe’s unemployment rate hits 11.6% signaling more problems for international investors:
    International developed markets were up 5.93% just in the 4th quarter of 2012 (represented by the MSCI World ex USA Index (net dividends))
  2. Greece’s debt and budget woes would continue to keep drag down developed market returns:
    Greece, for the second quarter in a row, led developed markets with a return of 17.87% for the fourth quarter (represented by MSCI All County World IMI Index)
  3. China’s slowing economy meant that emerging markets were in trouble to end the year:
    Emerging markets stocks were up 5.58% for the 4th quarter of 2012 (represented by the MSCI Emerging Markets Index (net dividends))
  4. An Obama re-election spelled doom for the U.S. market:
    The S&P 500 Index finished 2012 up 16% for the year
  5. Those fearing the doom and gloom should take refuge in commodities, specifically gold:
    Commodities ended the quarter down -6.33% with Gold down -5.65%. Commodities overall wound up down -1.06% for 2012 (All represented by the Dow Jones-UBS Commodity Index Total Return)

I want to stress again that this is just a one quarter snapshot. It’s not to suggest that anyone should have invested or sold any of their investments based on the above information. It simply illustrates how strongly our emotions can be pulled by headlines when what actually occurs in reality is a much, much different story.

So, what is an investor to do with this information? Not as much as you might think. It’s less about action and more about awareness. Have a plan, stick to it, be aware of the world around you, but careful of the motivations of those telling the story. Try to separate your concern for local, national and world events from your long term investing strategy.

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


Democrats or Republicans: Who’s Better?

On November 6, 2012, registered voters will have the privilege of heading to the polls and cast their ballots for President, members of Congress and a whole host of local candidates. The citizens of the United States will elect its representatives to lead our Nation through challenging economic and political times.

Individual candidates aside, which political party should you vote for if wanted robust economic growth and higher stock markets? The answer may surprise you.

The two dominant political parties in the United States are the Democrat and Republican parties. It is difficult to define the complex ideology of the present day political parties and the followers that comprise them yet alone recalling ideology of decades past. Let us start with a “who we are” from the Democratic and Republican National Committee websites:

Democratic: Our party was founded on the conviction that wealth and privilege shouldn’t be an entitlement to rule and the belief that the values of hardworking families are the values that should guide us.¹

Republican: The Republican Party is inspired by the power and ingenuity of the individual to succeed through hard work, family support and self-discipline.²

My further refinement of their respective ideologies: Democrats believe in a more equal society where Government plays a larger role and Republicans believe more in an entrepreneurial society and less Government.

Which political party, Republican or Democrats, when in control of the White House, has the highest stock market returns over the last 111 years? The Dow Jones Industrial Average (DJIA) has increased 7.79% during years when there has been a Democrat as President. This is more than double the performance of a Republican Presidency which increased 2.95% over the same period. Not what many would expect.

This appears to be completely counterintuitive given the differences between both parties’ ideologies. What can be learned from the enclosed chart when looking at political party control for both White House and Congress and its historic impact on the stock market, economy and inflation?

Stocks (DJIA)           Industrial Production          Inflation (CPI)
Democratic President            7.79                              5.27                                             4.46
Republican President             2.95                              1.81                                               1.80
Democratic Congress             6.05                              4.49                                              4.37
Republican Congress              3.57                              1.45                                              0.65
Dem. Pres., Dem. Cong.          7.33                             6.31                                               4.62
Dem. Pres., Rep. Cong.           9.63                              1.11                                               3.79
Rep. Pres., Rep. Cong.            1.62                               1.57                                             -0.37
Rep. Pres., Dem. Cong            4.92                              2.04                                               4.01
Table courtesy of Ned Davis Research, Inc.

If you are a stock market investor, you would welcome the very specific scenario of a Democratic President and a Republican controlled Congress. This combination would have resulted in a very satisfying 9.63% average gain for the DJIA.

What is the worst scenario historically for investors? This would have been during complete Republican control of both the White House and Congress. During this time, the DJIA was up only 1.62% on average, the worst performing period of any political party combination. Given the Republicans rooted fundamentals in business, entrepreneurship and small Government, this is a surprising outcome. Industrial Production, which measures output from factories, mines and utilities, also languished under complete Republican control with its second worst result of 1.57% growth.

How did stocks and the economy fare when Democrats completely controlled the White House and Congress? The DJIA had its second best result with an average gain of 7.33% while Industrial Production performed at a chart toping 6.31% growth rate. But, this scenario also produced the highest rate of inflation with the Consumer Price Index (CPI) surging 4.62% over that period. Good gains for stocks and the economy but tempered by higher rates of inflation.

Regardless of political ideology, history shows us that conflict may be the best scenario for investors. When the White House has been in Democratic control and Congress in the Republican’s hands, stock market investors have fared best.

Should you prefer gains in Industrial Production, you hope for a Democratic sweep of power. Low inflation rates, you would welcome a Republican President and control of Congress.

Who is Better? It all depends. Candidates, political parties and special interest groups are projected to spend billions of dollars persuading voters to punch a ballot in favor of their platform and candidate. They will use statistics, polls and a variety of other numbers to either taint the opposition or bolster their own standing. British politician Benjamin Disraeli stated “There are three types of lies — lies, damn lies and statistics.” Don’t be easily swayed by highlighted numbers. Dig deeper into the stated arguments and underlying statistics to better understand what you are being led to believe. Most important, on November 6, go vote.


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


Why Diversification Matters

Last week a friend and I were catching up on life over lunch. This particular person happens to be an extremely knowledgeable investor, and he generally enjoys trying to pin me down on what may happen with the market, economy, interest rates, and the like.

And while he knows my feelings about predictions, we went on to chat about what is going on in the world; and, what various circumstances may or may not mean for holding different investments.

At one point I asked if he was diversified, or had a plan, for whatever may happen.

“My portfolio is well spread out over ten stocks. I’m diversified.”

And over a great Caesar salad, I heard a familiar story about the value of “placing all of your money in one basket, and watching that basket.” I heard again about investor-extraordinaires who called the last downturn exactly when the market turned, and how Warren Buffett’s Berkshire Hathaway only owns a handful of stocks.

But beyond the same conversation we’ve had several times before, there was something else he wanted to discuss that day; a deeper reason for his needing to know what the market may do next, and I could detect a level of worry that was not always noticeable in our past talks.

You see, my friend is of a normal retirement age, and has been out of the workforce for the last few years. He went back to school to pursue a certificate in an unrelated field; he graduated with flying colors. The conversation we were having began to flow from investments to how his original plans involved his working again to make retirement work.

We went on to discuss that while he isn’t drawing on his portfolio yet, there is an ever growing likelihood he would soon. There are daily worries over any number of things that may cause that to happen; a car engine on its last legs, a furnace that needs replacing. And, while he has his health, that too was another topic of concern.

He knew he had saved a decent amount during his first career, but not as much as he could or should have. Due to anxiety during the downturn, he pulled out of the market close to the bottom, and returned late after the majority of the rebound.

I went on and shared with him how we may have our disagreements when it comes to investments, but no matter what beliefs, ideas, or philosophies an investor has, for people diversification is critical. It was the number one reason for his worries I said to him; his retirement plan had turned into a gamble over what stocks would be success stories, when the odds (and his own history) were not in his favor.

Still unconvinced, he presented his case… and being nervous about loss, he countered all of his own points for me.

  • The commentators are saying bonds are in a bubble and to invest in inflation hedges… but of course there has been no inflation to speak of yet.
  • And, the economy looks like it will continue to do poorly so should I pull out of my stocks… but, the market has had two above average years of growth.
  • Domestic stocks certainly won’t grow compared to foreign companies… but, it is a global economy, and look at the problems they’re having in Europe.

My friend’s answer to his financial dilemmas fell back on getting everything right in the market on an almost daily basis. He was watching his account performance day-by-day because his timeline, or time preference, for needing to cash in his investments may change that quickly.

The money managers he watches on television can have a bad week, month, or year, and can still be tops in their profession. The institutional investors whose research he reads don’t have to worry about unexpected car replacements, or health concerns.

As I thought about what else I could say to help, what came to mind was a simple alternative mindset about his investments. Instead of an all-or-nothing strategy, look at your savings in a ‘multiple portfolio’ approach.

A multiple portfolio approach involves seeing the different needs for your investments within the overall structure. Picture a different bucket for every unique goal you have for your money — an example in this case being a separate portfolio for each year of retirement — with all of the buckets together making up your portfolio.

Knowing for the next four years my friend would need to supplement his income for $5,000 of living expenses, and $3,000 as a gift to pay for a Grandchild’s tuition, he would never invest that combined $32,000 in the market. If his car won’t make it another five years, that’s another goal to add that to the conservative piece as well.

I don’t know if it helped, but it seemed as though there was an ‘ah hah’ moment where the risks he was taking with the portion of his money he needed to have absolute faith would be available for use, when he needed it. And, that is why diversification matters.

robertSchmanskyRobert Schmansky, CFP®
Financial Advisor
Sound Capital, LLC
Royal Oak, MI