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Archive for March, 2010

We live in a sea of credit, credit cards and debt in general. It’s the lifeblood of our economy and personal finances.

Now with recent legislative changes having taken effect in February, it’s time to reassess the credit cards we carry and make the most of them while avoiding any nasty bites from behind.

Cardholders have been receiving disclosures in tiny print from their credit card companies for a while now. But most of us ignore these densely worded forms. But there are hidden traps in them.

Sure, the card companies are not supposed to arbitrarily increase your interest rate on existing balances and it cannot apply payments to the lowest interest rate balances first.

On the other hand, the privilege of having a card will now likely cost more: the return of annual fees, inactivity fees and even fees if you use the card but not enough.

You could consider closing out the cards you don’t use. But remember that will likely have a negative impact on your personal credit score. One of the factors that a credit score is based on includes the longevity of an account and you could inadvertently be hurting your score by closing out an account that you don’t use. It may make sense to use the card for a few transactions to meet the minimum. But plan on paying these charges off in full each billing cycle.

If you do happen to carry a balance, then consider replacing your BIG BRAND card with one of the smaller competitors. These card issuers may offer better deals, lower rates and lower fees, too. Start with a credit union or smaller, local bank by logging onto FindACreditUnion.com.

To compare your existing cards and find other deals, you may also want to check out CardRatings.com or Savvy-Discounts.com.

Considering a balance transfer? Watch out. Big banks are moving to up the fee from the average of 3% of the balance to 5% and eliminating the dollar cap. Look for banks that will do such transfers and cap the total fee.

It’s your money and the one certain way to get ahead is to control the things that you can control. And by watching the details regarding your credit, you can control your costs. Put more into your pocket by reducing the bite from your plastic.

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Just when you thought it was safe to get back into the investing waters, talk of deflation has creeped back into conversation.

Why does it matter? Well, how you position your portfolio to deal with these two scenarios will make a big difference to your personal bottom line.

With inflation, your money is worth less the longer you hold onto it. So you’re more likely to spend in the now because prices may be moving up.

With deflation, your money may buy more later the longer you hold onto it as prices continue to drop. (Not good for a seller but a better deal for a buyer – just ask someone trying to sell a house in Florida these days).

Since consumers respond differently to these two opposing forces, the ultimate direction of them can have a decidedly different impact on how the recovery progresses because of the way consumers react and business respond to their actions. Ultimately, this will impact how to position an investment portfolio accordingly.

The Right Hook
During a fight a boxer may expect to be hit from both the right and left. It’s just not known when and with how much force. But a good boxer, like a Boy Scout, knows to be prepared.

First the economy has been peppered with jabs from the right that could result in higher inflation: expanding money supply, ballooning government deficits, higher commodity prices, weak currency value.

Given the huge inherited, current and projected government deficits here and abroad, the conventional thought has been that all of this government stimulus will ultimately result in “crowding out” private investment and raise the ugly head of higher inflation down the road. The prospect of higher taxes to pay for these past deficits also lends support to these thoughts.

Recent run-ups in certain commodity prices like oil and energy products have resulted in a rise in consumer prices in January bolstering fears of inflation.

The Left Hook

Now comes the left hook – the deflationary threat: asset prices continuing to fall, increasing slack in industrial capacity, and continuing pressure keeping a lid on labor expenses because of high unemployment.

Credit is still tight with bank lending down. While dollars have been pumped into the economy through the TARP program, it’s mostly sitting in bank vaults. Money that isn’t circulating isn’t a cause of inflation.

Recent economic reports have indicated that core consumer prices actually are flat, well below the 10-year average of 2.2%.

Despite some recent reports, housing prices and rents are down and still expected to fall in key markets, dampening the immediate threat of inflation.

Defensive Portfolios: Lessons from Spencer

The best and strongest home depends on your environment and the threats faced.

Each evening before putting our infant son, Spencer, to bed, we read a story. The favorite for now is


    The Three Little Pigs
(undoubtedly because of Spencer’s dad’s animation).

We all know the story: Three pigs, three houses built from different materials, one pig survives because of his well-built brick house.

The same can be said for portfolios. Heck, a house of sticks can provide some shelter in some circumstances but what happens if a big bad wolf shows up?

Since we don’t know which type of bad wolf will be showing up at the door (inflation or deflation), it makes sense to be positioned to survive either threat.

The elements of a portfolio will likely be the same regardless of an investor’s mind-set. The differences will be in the proportion of the components used.

Inflation Protection Portfolio
To protect this type of portfolio consider elements more likely to retain value even as inflation increases. Example: Commodity funds or ETFs; inflation-linked fixed income funds that include TIPS and/or floating rate notes; Real Estate Investment Trusts or REIT funds (10%); Cash to take advantage of higher short-term interest rates.

Deflation Protection Portfolio
The majority of this type of portfolio is positioned in long-term Treasurys followed by cash and municipal bonds. As consumer prices and interest rates fall, the fixed income stream from the bonds would be worth more.

To protect against surprise inflation, a smaller proportion would be set aside into TIPS, commodities and higher-quality/large cap US stocks.

Little Pig, Little Pig, Let Me In
Not sure where the market will go? Not sure which threat to expect? Learn from the third little pig: Build the strongest house possible.

If there is inflation, the economy will be expanding. As such equities will be the place to be. So consider an allocation of 20% to 25% in the US and a like amount in foreign equities. A portion of these equities should include high-quality firms that are dividend-paying. Commodities and cash will likely benefit from inflation so a 10% allocation to each is prudent. The fixed income component can include some exposure to TIPS (5%) as well as intermediate high-quality bonds (20% – 30%).

To hedge against the risk of deflation, a portfolio with exposure to municipal bonds (5%) and long-term Treasurys (5% – 10%). And some of the equity portfolio should include exposure to consumer staples that tend to do well in such an environment.

To provide some added diversification consider adding positions in companies that focus on infrastructure and firms that can maintain pricing power like utilities, pipeline operators and the like.

Taking these steps should allow an investor to sleep better at night. At least it works for Spencer.

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A recent WSJ/Market Watch online article showed the recent results of a survey conducted by Lawyers.com.

To see the article, click here or paste this URL into your browser: http://www.lawyers.com/~/link.aspx?_id=FB4FE9A5-7469-46CC-B225-44B3BCB5A294&_z=z

The unfortunate reality is that humans are not by nature very good planners for the long term. Most tend to think that such things are good in general but too daunting to take care of given the demands of our over-crowded daily lives. And besides, nothing bad will ever happen to me, right?

It’s sad to say that more people spend more time planning a vacation than worrying about something as dry and abstract as “estate plan.”

The only time such an important topic can cut through the thought clutter is to make it real and tangible. That’s why there was a spike in calls to get life insurance after the Twin Towers fell. That’s why there was an uproar during the whole Terry Schiavo case and folks started calling lawyers to draft health care proxies.

The benefits need to be broken down so that folks can relate. For example: What would you do if your house burned down? People can relate to the pain of being without a home and the devastating impact if they had to shell out cold hard cash from their own pocket to rebuild. Or you can simply show pictures of Katrina victims.

The equivalent is needed for getting people to plan. And as professional planners it’s our job to keep people focused on getting these things done.

Regardless of the amount of your wealth, if you have someone or something you care about, you need to have a plan. Otherwise, the state will gladly impose it’s own plan on you.

So how do you feel about a foster parent for your kids or leaving your hard-earned savings to Uncle Sam?

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