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Archive for the ‘Investing Strategy’ Category

A key component of a diversified income-oriented portfolio is dividends. This is what I have noted in the past during my presentations, blogs and online musings. They are a key part of a solid retirement income strategy.

The total return from stocks is derived from two key components:  price appreciation and the cash flow from dividends.

Most investors are certainly familiar with the concept of price appreciation (or depreciation as was evident during the financial crisis and Flash Crash for instance).  This is what the media each night focuses on when they report on “The Market.”

But less noticed is the value of dividends to the longer-term success of an investor.

The Value of Dividends to An Investor

Below is a chart of various recent periods of stock market performance compiled by Thornburg Investment.

The “Dividend Aristocrats Index” refers to an index of companies that consistently lead the market in paying dividends and regularly increasing their dividends.

Annualized Total Return Period Dividend Aristocrats Index S&P 500
1990-94 12.58% 10.4%
1995-99 19.48% 28.54%
2000-04 9.79% -2.29%
2005 – 9/2009 2.32% -0.08%
1990 – 9/2009 10.97% 8.41%

Dividend-paying stocks have shown these positive attributes over this period:

  1. Historically higher yields than bonds
  2. Historically higher total returns compared to bonds because of the stock appreciation potential of the dividend-payers.
  3. Higher income, capital appreciation and total return compared to the S&P 500 Index in almost all of the periods noted above and a near 20-year annualized total return of nearly 11% versus 8.4.

Dividend-paying stocks are probably not as sexy as most aspects of the stock market.  They are part of “value investing.” They are the stuff of “conservative” portfolios built for “widows and orphans.”  They are the basic building blocks used by Benjamin Graham, the author of Intelligent Investing and the principles on which Warren Buffet built Berkshire-Hathaway.

But for an income-oriented investor (such as a retiree) looking at ways to manage income in retirement, they should not be overlooked.  In fact, recent research reveals that those companies that pay out higher dividends also tend to have higher stock prices because they also have higher earnings growth. And earnings growth is another key component in valuing stocks.  This research indicates this as a global tendency.

Searching for Yield

Unfortunately, seeking out high dividend-paying companies in the US is not so easy.  Unlike managements of Euro-based companies where paying dividends is a sort of badge of honor, US companies tend to be much more stingy in paying back earnings to owners of the company (the stockholders).

And the trend in dividend yields is one that continues to decline. A research note by Vanguard (May 2011) shows this trend.  From 1928 through 1945, the average dividend yield was around 5.6% and dividends represented about 67% of company earnings (aka dividend payout ratio). From 1945 to 1982 the average yields dropped to 4.2% and the payout ratio to 53%.  In the more recent period from 1983 through 2010, the average dividend yield has dropped to 2.5% with a payout ratio of about 46%.

As you can see finding “Aristocrats” that pay out higher than these averages makes a big difference.  And the higher payouts may also portend higher future earnings as well as stock price appreciation.

But even those companies which are “stingier” will still help out a portfolio.

Do Lower Dividends Mean Lower Stock Prices?

The question that investors may be asking themselves now is “will these lower dividend yields (historically and compared to Europe for instance) be an indicator of lower stock prices?” Because the market’s dividend yield is below its historical norm, is that an indicator of lower total returns in the future?

While the stock market is certainly not without bubbles and crashes, it is unlikely that this is a factor in possible future stock price levels. Lower dividend yields are not necessarily an indicator of lower total returns.

There are other reasons that are more likely the cause of this trend toward lower yield payouts.  Part of this is based on US tax policy.  Another is the culture of US corporate management that has opted toward share repurchases instead.

In the US, there is a bias in favor of long-term capital gains over receiving dividends and paying income taxes.

When dividends are paid out all stock holders receive the income and are subject to tax. When management opts for a “share repurchase” program, only those who tender their shares are paid out.  So this may be more agreeable to investors who are trying to manage their tax bill from investing. For those who are longer-term stock holders, they may receive more favorable capital gains treatment by holding the stock and waiting simply for appreciation.

Admittedly, there may also be an incentive by management not to declare dividends so that they can hold onto the capital to “reinvest” in the business – which may or may not be a good thing.  (The same argument can also be seen in political terms in Washington when both parties are arguing about whether or not to have tax cuts).

And management may also have an incentive to repurchase stock because such programs provide the company with flexibility to change the terms – something that is frowned upon if management were to lower or cancel a declared dividend.

How to Use Dividends in Your Portfolio

In any event, using dividend-paying stock is something that makes sense in retirement portfolios.  To provide tax efficiency, it makes sense to include these in your qualified accounts (like IRAs).  And to boost income, it makes sense to add global dividend-paying stocks which tend to have higher yields and payouts.  Nothing in these current research notes indicates that the lower US yields and payouts are an indicator for lower future stock prices.  There are enough other things going on in the economy locally and globally that can impact do that.

To Build a Better Mousetrap or Get More Information

For more ways to build a retirement income portfolio, please feel free to give me a call directly at 978-388-0020 and stay tuned to the company website for upcoming webinars that will cover this topic too.

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This is a common question from many folks.

There are many valid reasons to consider a 401k rollover.

While changing jobs can be stressful and life can otherwise get in the way, you really should not neglect this.  Oftentimes, out of sight is out of mind and you could be losing money and not even know it.

Costs

While it may not seem like it, you are paying for your funds to stay with your old employer’s sponsored plan.  You just don’t see it.  Fees for employer plans are not very transparent.  While you may not see an actual bill, your employer is probably paying for the administration of the plan through hidden fees assessed on the balances held in it.

I have seen sponsored plans that had these back-end hidden fees and charged the participant a piece for each contribution.  A little here, a little there all adds up.  And the more it is, the less there is to compound for your retirement.

While there are few things that you can control in life and investing, fees are one of them.

In a rollover IRA, you’ll have more choices of platforms which may offer low loads and costs so you can keep more in your pocket.  So control what you can when you can for successful investing.

Choice and Access

While some employer plans may offer a variety of funds which may be top of the line, you’re still limited to the menu selected by your employer.  More often than not this is influenced by the broker associated with the plan.  And this can be influenced by the restrictions placed on the choices by the broker’s company or administrator because there may be an incentive to fill the menu with one fund family.

I’ve seen plans offered through national payroll companies that required more than 50% of the fund choices to be from one particular fund family.  Not every choice in a management company’s fund line up may be stellar so you’re limiting yourself by staying with the old plan.

When you rollover you’ll have a much larger universe to choose from.  (Like most independent fee-based advisers, my registered investment adviser company has access to more than 14,000 non-proprietary mutual funds with no loads or loads waived).  You’ll typically even have access to individual stocks, bonds, Unit Investment Trusts, Exchange Traded Funds and bank CDs.

The Self-Directed IRA Option – Not Available in Your 401(k)

Have you ever considered investing in something besides stocks, bonds or mutual funds? Maybe you might want to invest in real estate or buy judgments or invest in a business by being its lender or providing a friend with start-up capital.

Well, you can’t do that with a typical 401k plan.  But you can with a self-directed IRA.  And such an IRA can’t be done through the Big Box financial firms.  There are specialized bank and non-bank custodians who handle such transactions and work through independent financial planners to help their clients learn more about such options.

Risk Controls & Broader Choice of Investment Strategies

While you may have online access to your company-sponsored plan so you can make trades or switches of your funds periodically, there really are no risk controls that you can use given the limitations of the platform the 401k is using.

Let’s put it this way:  Investors make money when they don’t lose it.  At least that’s my working philosophy.  Having options and systems in place means that you stand a better chance of protecting your retirement nest egg.

It’s always easier to not lose money in the first place than it is to try to make up for lost ground.  Your money has to work harder to get back to breakeven — much less get ahead for your retirement goals.

Consider this:  If you think that Treasurys or munis are in their own bond bubbles, what can you do to protect yourself through your 401k?  Probably, not much.

But in your own IRA you’ll be able to build a more all-weather portfolio that includes inflation hedges like convertible bonds, foreign dividend-paying stocks, master limited partnerships or even managed futures.   All come in mutual funds or ETFs which offer the advantages of diversification without the tax and cost structures of direct investment options.

Want to lower costs and control your investments more? You can even buy individual corporate or taxable municipal bonds and build an income ladder with the help of a professional financial planner.

Or maybe you want to minimize the impact of another downdraft in the market.  Using ETFs and trailing stop-loss orders you may help protect your gains.  Not an option in your old 401k.

So when you roll your account over, you’ll also have access to professional help, tools and direct management options tailored to your specific needs that you just can’t get within your old 401k.

Actionable Suggestions – Things to Consider:

iMonitor Portfolio Program: We prepare the allocations, select the funds or other investments and monitor.  We will make changes and rebalancing decisions as needed for you.

Money Tools DIY Program: We prepare the allocations and select the funds.  We will offer recommendations on Exchange Traded Funds as well. Periodically, we send you updates for rotating funds or rebalancing. You manage the funds directly on whatever custodian or trading platform you choose.

For more information, please call Steve Stanganelli, CFP® at 978-388-0020 or 617-398-7494.

Check out the website and newsletter archives for more on this and similar topics:  www.ClearViewWealthAdvisors.com

Adapted from ViewPoint Newsletter Archive (January 20, 2011)

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No doubt about it.  This has been a very rough winter that we lived through here in the Boston area.

While the calendar has turned to spring, many of us are still trying to fix the damage left behind by snow and ice from so many winter storms.

As I write this it still seems like we have imported the weather that Seattle or Portland, Oregon might be know for (even if it is true that Seattle has more sunny days than Boston). It is cold, overcast and wet.  Not the best days for cycling (my other passion besides Spencer and Kristin hanging out on the side panel here).  Nor is it good weather to hang out on the back deck which is something that I like to do during my lunch breaks.

But even if the weather were cooperating, I would not be able to use my deck. Why?  Well, let’s just say that Mother Nature left me a souvenir and a reminder about her power.

With all the snow and ice that we got, it was hard to keep up and one too many snowstorms (coupled with a builder who decided to save money on lag bolts) finally collapsed the deck sometime in February.

I came home to a note from my neighbor – Don’t go out on your deck.  Not that I was planning to go out in the middle of a dark night. But that is where the gas grill was located and I guess if I was a grilling fool I might go out and it would have been a long way down after that first step.

Mother Nature is still flexing her muscles especially along the Mississippi River.  Now my deck is a small thing compared to the devastation left behind in the wake of multiple mega-tornadoes that crossed through the South sort of like General Sherman’s March to the Sea and swollen rivers now drowning hundreds of acres of farmland and threatening homes along the Mississippi.

But it is instructive.

A Teachable Moment

Let’s just say that you shouldn’t leave anything to chance.  Sure, you may have a homeowner’s policy and you renew it each year.  But don’t assume that the coverage that you had last year is going to help you this year.  And you really need to review your policies with a qualified agent (or a good financial adviser) regularly.

Do you really have the right coverage?  After you file a claim is not when you want to find out that you’re not covered.

I’m reminded of my neighbor – the same one who left me the note – who had his basement flooded after an ice storm and the power and his generator both went out.  He ended up with an indoor pool in his basement when the sump pump stopped working.  He didn’t know that he could have had a rider on his policy to cover sump pumps.  That was probably a $5,000 mistake for a $50 to $100 rider on his policy.

The Insurance Claims Process

So after my little incident, I called my agent to file a claim.  The insurance company had been very prompt in sending out paperwork and an adjuster.

Because it was tax season, I was unable to get way from the office to meet with the adjuster.  I described the damage to him including the generator located under the deck and the gas grill that was on it. He took his notes but pretty much did his thing when he inspected the property.

In the end, the insurance company adjuster filed his estimate with the insurer and I received a copy.  The insurer quickly cut a check for the amount shown on the estimate.

But I reviewed the estimate and noticed discrepancies.  The dimensions of the deck on his estimate were smaller than the actual size.  There was no note about the higher cost composite decking material that I had.  Instead the estimate covered replacement with regular wood. There was no notation about the damages to the generator and electrical work needed to reinstall it.  Nor was there any allowance for the damages to the items on the deck.

Now I understand that trying to inspect damage when snowbanks are four feet high around the deck and the deck itself is covered makes it really difficult to get a proper view of the damage. Nothing nefarious is going on here. And to their credit, the insurer did note that they would send out the adjuster again.

But there is no incentive on the part of the insurer or their adjuster to come back out.  As far as they are concerned the property damage claim is settled.

This is why it is all the more important for you as a homeowner and policyholder to protect yourself.

How?  Get professional help on your side.

Enter the Public Insurance Adjuster

OK.  You like your insurance company. I’ve seen the ads.  They offer great service and rates. The ads are cute sometimes. And in most cases, the insurance company estimate is more than fair.

But you owe it to yourself to get a second opinion. (Heck, that’s good advice on most things in life especially those concerning money).

This is where you call in the help of a Public Insurance Adjuster.

In my case, I called on the help of  Matthew Alphen of Lynnfield, Massachusetts.  I first met Matt years ago at a Kiwanis event and stay connected to him through BNI connections we shared.

Like other Public Insurance Adjusters, Matt is licensed by the state’s Division of Insurance. He represents consumers with claims.

He came out and did his inspection and his cost estimate is higher.

Granted the deck wasn’t covered in snow by that time so he didn’t have to trudge through the snowbanks that once surrounded it.

Granted he and other public adjusters have an incentive to provide an estimate that may be higher than the first because of the way that he gets compensated. Like most public adjusters he receives ten percent (10%) of the amount a homeowner collects from the insurance proceeds.

But that also means he has an incentive to do a thorough job when representing a homeowner.

Reasons for the higher estimate:

  • He used correct dimensions
  • He noted the materials used
  • He researched the city building code and noted changes that would require upgrades needed once the deck is rebuilt

What You Can Do to Protect Yourself

Like I said: This is a teachable moment.

So here is a short list of actionable items to consider when dealing with insurance for your home. It can also be applicable for other types of insurance claims as well such as autos, rental property and business.

  • Review your policies regularly with your agent.  (While I do not sell insurance, I do help clients review their policy terms and coverages as part of my financial planning services). This is especially important to make sure that the agent has a correct description of the property and any changes or additions made are properly covered.
  • Make sure your coverage includes a rider for inflation protection.  Without it you may out-of-pocket to cover more of the repair costs yourself.
  • Make sure your coverage also provides for updated building code protection so that any repairs that need to be done to meet the new rules are covered.  Otherwise, it’s going to be out of your pocket.
  • When you have a damage claim call a public insurance adjuster for a second opinion.
  • Get a financial plan in place.  A good fee-based or fee-only financial planner can provide a second set of eyes to help you review and find the right kinds of insurance coverage.

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There are many valid reasons to consider a 401k rollover.

Costs

While it may not seem like it, you are paying for your funds to stay with your old employer’s sponsored plan.  You just don’t see it.  Fees for employer plans are not very transparent.  While you may not see an actual bill, your employer is probably paying for the administration of the plan through hidden fees assessed on the balances held in it.

I have seen sponsored plans that had these back-end hidden fees and charged the participant a piece for each contribution.  A little here, a little there all adds up.  And the more it is, the less there is to compound for your retirement.

While there are few things that you can control in life and investing, fees are one of them.

In a rollover IRA, you’ll have more choices of platforms which may offer low loads and costs so you can keep more in your pocket.  So control what you can when you can for successful investing.

Choice and Access

While some employer plans may offer a variety of funds which may be top of the line, you’re still limited to the menu selected by your employer.  More often than not this is influenced by the broker associated with the plan.  And this can be influenced by the restrictions placed on the choices by the broker’s company or administrator because there may be an incentive to fill the menu with one fund family.

I’ve seen plans offered through national payroll companies that required more than 50% of the fund choices to be of one particular fund family.  Not every choice in a management company’s fund line up may be stellar so you’re limiting yourself by staying with the old plan.

When you rollover you’ll have a much larger universe to choose from.  (My company has access to more than 14,000 non-proprietary mutual funds with no loads or loads waived).  You’ll typically even have access to individual stocks, bonds, Unit Investment Trusts, Exchange Traded Funds and bank CDs.

Have you ever considered investing in something besides stocks, bonds or mutual funds? Maybe you might want to invest in real estate or buy judgments or invest in a business by being its lender or providing a friend with start-up capital.

Well, you can’t do that with a typical 401k plan.  But you can with a self-directed IRA.  And such an IRA can’t be done through the Big Box financial firms.  There are specialized bank and non-bank custodians who handle such transactions and work through independent financial planners to help their clients learn more about such options.

Risk Controls & Broader Choice of Investment Strategies

While you may have online access to your company-sponsored plan so you can make trades or switches of your funds periodically, there really are no risk controls that you can use given the limitations of the platform the 401k is using.

Let’s put it this way:  Investors make money when they don’t lose it.  At least that’s my working philosophy.  Having options and systems in place means that you stand a better chance of protecting your retirement nest egg.

It’s always easier to not lose money in the first place than it is to try to make up for lost ground.  Your money has to work harder to get back to breakeven much less get ahead for your retirement goals.

Consider this:  If you think that Treasurys or munis are in their own bond bubbles, what can you do to protect yourself through your 401k?  Probably, not much.  But in your own IRA you’ll be able to build a more all-weather portfolio that includes inflation hedges like convertible bonds, foreign dividend-paying stocks, master limited partnerships or even managed futures.  All come in mutual funds or ETFs which offer the advantages of diversification without the tax and cost structures of direct investment options.

Or maybe you want to minimize the impact of another downdraft in the market.  Using ETFs and trailing stop-loss orders you may help protect your gains.  Not an option in your old 401k.

So when you roll your account over, you’ll also have access to professional help, tools and direct management options tailored to your specific needs that you just can’t get within your old 401k.

Things to Consider:

iMonitor Portfolio Program

Money Tools DIY Program

For more information, please call Steve Stanganelli, CFP® at the Rollover Helpline at 978-388-0020 or 617-398-7494.

Check out the website and newsletter archive for more on this and similar topics:  www.ClearViewWealthAdvisors.com.

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Reverse Mortgage Basics

A reverse mortgage is a type of loan that certain eligible homeowners can get to tap into the equity in their home. Unlike traditional loans, they do not require the same sort of underwriting so no income, asset or credit checks are needed.  And unlike a traditional loan, there is no monthly repayment for any amounts borrowed.  Repayment of the loan’s principal and interest starts only after the homeowner dies or the home is sold.

To be eligible for such a loan, all owners on the property title need to be at least age 62.

For the most part, reverse mortgages, also referred to as RMs, are backed by the federal government through the FHA (Federal Housing Administration) that administers the program.

Myth: The Bank Keeps the House

These types of mortgages have been around for many years (since the late 1970s) and have gone through many changes.

One misconception about these types of loans is that a homeowner loses the house to the bank because of certain terms of such loans when they first came out. In the way way past, banks would take the title to the home.  But that is far from the reality for these types of loans now. The property title remains with the homeowner.

How A Reverse Mortgage Limit Is Set

The amount of money that a homeowner gets is based on current age, life expectancy, and appraised value.  With this information, the bank will determine the credit line or limit that the homeowner can tap.  The lender will apply an interest rate to the amounts outstanding and add it to the balance owed (and subtract the interest accrued from the amount of credit line that is available).  Eventually, when the homeowner dies or moves out of the home then the lender will require repayment.

The total amount that is owed is capped as a percentage of the property value which is assumed to appreciate at a certain rate during the owner’s life expectancy.

A homeowner can move out and sell the property and keep the proceeds above whatever the payoff amount is.  If the homeowner dies and the property passes to his estate, his heirs can sell the property or refinance it and keep it.

The cost for such a loan can be pricey.  Even with recent administrative changes reducing origination fees from the standard 2% of the loan amount, these loans can cost upwards of $12,000 for a $250,000 or $300,000 credit line amount.  Although traditional credit and income underwriting are not required, all the other costs associated with a closing like title work, title insurance, recording fees, mortgage insurance and underwriting are still needed.

Why Would A Homeowner Consider A Reverse Mortgage? Comparing Some Options

Why would a homeowner opt for this? Let’s face it.  Most folks would prefer not to move into an assisted living facility or a nursing home if they can avoid it. So a reverse mortgage is a good option for those who want to age in place in their home.

It provides a cash flow to help support the costs of running the house. And it taps the equity that a homeowner has built up over time that can be used to pay for essentials like medicine or home renovations to make the home safe and useful for an aging homeowner.

Yes, home equity lines or loans are also an option.  They can be even cheaper certainly on the origination side since so many banks offer them with no closing costs.  But the homeowner must make a payment each month even if it is just the interest only that is typically required for the first five or 10 years of the line.  And if the owner doesn’t have the cash to make that payment, then there is the risk of a foreclosure.

As a former mortgage banker, I would see situations where an elder couple would call me after having refinanced the loan several times. Each time they had to incur closing costs and because their income or credit may have slipped they would only qualify for more costly loan terms that could put them at greater risk of losing the house down the road.

Downsides for A Reverse Mortgage

Setting up a reverse mortgage as a line of credit will not jeopardize Social Security benefits and is not counted as an income source for tax purposes. On the other hand, if the homeowner is receiving Medicaid, then it could be counted as an assessable asset that may limit qualification for such benefits.

Some folks who are facing bankruptcy have opted to go the reverse mortgage route.  Jesse Redlener and David Burbridge, attorneys who specialize in these matters, told me of the case where a couple transferred the title from joint ownership (husband and wife) to just the wife.  Then they completed the reverse mortgage process.  And the husband who now owned no other property filed for bankruptcy.  The courts considered this a fraudulent transfer of the property and the assets available for the credit line now became eligible to pay off the husband’s other creditors.

Get More Information From Your Planning Team

The bottom line here is that before making a serious money move you really need to bring in the professionals to help navigate through the minefield.  Actions have consequences and this is an area where a good team of advisers (banker, financial planner, attorney) can help.

For more information on reverse mortgages, you may want to call Bob Irving of First Integrity Mortgage, LLC, a licensed reverse mortgage originator.

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Do you want to clear a room or stop a conversation fast?  Talk about life insurance.  Mention life insurance to someone and the reaction is something like hearing nails across a chalk board. Folks will either run for fear that you’re going to try to sell them something or their eyes will glaze over.

Most folks don’t want to talk about it.  The topic is boring.  And it’s kind of weird to talk about death.

Heck, when I speak with folks about planning, the inevitable phrase I hear in the conversation is “If I die …” as if they have found some secret to living forever.

So assuming that you’re not featured in the Vampire Diaries, there is a very high likelihood (about 100% give or take 0%) that you may die someday. So it only makes sense to consider life insurance as part of your overall planning.

Life Insurance Through Work Is Only A First Step

Most folks will get some insurance through their employer.  It’s cheap. It’s fast. There’s no medical exam.  It’s simple.

And as I’ve said time and again, there’s always a simple solution to every problem.  (In this case, employer-sponsored group life insurance). And as I’ve also said before, simple solutions are probably wrong.

Now don’t think that I’m saying that the group policy that you get and pay for through your paycheck is wrong.  It’s a good start.  But there’s more to proper life insurance planning than simply figuring a multiple of your salary.

How Much Life Insurance Is Needed?

The reason for any insurance is to cover the costs of risks that we are either not willing or don’t have the resources to cover ourselves.  That’s true whether you’re insuring a car, a home, your life or your paycheck.  So first you need to know what it is that you’re covering.

In the case of life insurance, it’s usually a good idea to figure out how much money your family needs to maintain their current standard of living if you and your income are no longer part of the picture.  Then add in any large expenses to cover.  Typically, this would include an amount to pay off any mortgages and loans and even college funding or other similar expected obligations. Net out the amount of other insurance and investments available and this will give you an idea of the amount of insurance coverage to get.

The amount of insurance that one needs throughout life changes with circumstances.  This is why it’s critical to include an insurance needs analysis as part of your regular financial planning progress reports.  This is why I use a particular tool from ESPlanner that helps project the amounts of coverage needed over time.

Insurance as An Asset Class to Reduce Risks

Now I’ve said that insurance is an asset class.  Why?  Well consider this.  When you invest, you’re likely to spread your money into different types of asset classes:  stocks and bonds of large, small, US and foreign companies.  This is the basis of diversification: don’t put all your eggs in one basket. You do this to help reduce risk.  In this case, you’re trying to reduce the risk of having your investment wiped out by spreading your bets to other sectors of the economy and even parts of the world.

Like asset diversification, insurance is also a risk tool.  In this case insurance is there to replace things that you may not have the cash or investments to cover on your own.  Or maybe you feel you’d be better off investing the cash and earn a return on your money that will hopefully increase the resources you need for your lifestyle whether now or in retirement.

Think of it this way.  You could hit home run after home run picking stocks but what happens if you or your family are hit with an unexpected loss?  You’d have to dip into your savings and investments.  You’d need to sell those winning stocks.  You’d probably incur huge capital gains and have to pay taxes on it.

Life insurance is there to cover living expenses, replace in some small way the loss of income if you or your loved one dies and it does this for the most part tax free to the beneficiary.

And you can carry over the idea of diversification to insurance.  Just like mixing up the kinds of stocks or bonds you own, you can carry insurance from two or more insurers.  You do this by having your employer-sponsored group plan plus something you pay for on your own separate from your employer.  You can further diversify by mixing up the kinds or terms of coverage dividing some between term and permanent type policies.

Kinds of Life Insurance: Term vs Permanent

Insurance comes in two basic varieties: term and permanent.  Term insurance has a fixed premium for a fixed time period.  It’s great for covering specific risks for a defined time period (i.e. a mortgage, college costs).  Permanent life insurance has many flavors but in essence the key is that some of your premium that you pay is used to build up cash value.

Now for those who are unhappy with the stock market, you may want to consider some of the benefits offered by permanent life insurance.

  • The value is guaranteed. You’ll always know how much you have. And the insurer is required to credit a minimum amount to your value each year.
  • You receive dividends and their tax-free. Policyholders will receive dividends that increase the value of their account.
  • You can access the cash value at any time. Unlike going to a bank for a loan, the insurer will give you access to your account’s cash value with very little delay. You pay no penalty when receiving the cash as long as you repay yourself.  And if you set up the account properly, you can build up enough cash value to tap into for anything from buying a car to buying a home to funding retirement without paying a penalty or taxes.  (This is described by some as the Infinite Banking Concept where you become your own banker).

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The other day I was contacted by Evan Lips, a reporter from the Lowell Sun who was doing a timely article on financial planning tips for the new year.

He had spoken to other financial planners and investment representatives and he had a wide range of opinions provided by them.  These included ways to manage credit to savings to kinds of investments to use for a retirement account.

Because everyone is at a different place in his or her life, some of these tips may not really help now. For instance, how you take money out of retirement accounts when retired is a tip that is less important to someone recently graduated looking to pay off student loan debt.

But there is something common that really can help anyone of any age.

Number One Tip for 2011 and Beyond

So my Number One tip for any consumer of any age:  Control What You Can and Leave the Rest.

What do I mean?

Consumers are usually their own worst enemy.  Too distracted by daily affairs, it’s easy to become overly focused on the news of the moment.  And this can lead to an emotional reaction that can otherwise sabotage long-term financial health.

Things You Can Control

1.      Investors have control over certain things: Their emotions (and reactions to the crisis of the day), investment expenses, asset allocation and amounts they save.

2.       Investing is long-term but the financial media is fixed on short-term crises of the moment.  Be mindful of that and try to tune out the noise.

3.       Your mom was right: Live beneath your means and you’ll have extra cash to save; build up your emergency reserves (minimum 3 months of fixed expenses for married couples working; 6 months for couples with one-earner and nearer 12 months for someone with variable income).

4.       Pay yourself first.  Make it automatic. Have a portion of your paycheck directly sent to a high-yielding savings account.

5.       You can lower your investing expenses and improve your diversification by using Exchange Traded Funds.  ETFs are investments that can trade like stocks but represent a broad basket of investments.  (Sort of like an index mutual fund but with even less expense). If you have less than $100,000 to invest and are looking for efficient core holding for global stock diversification, consider something like the OneFund® ETF from US One at www.usone.com (ticker symbol: ONEF) which is composed of 5 other ETFs from Vanguard and costs less than 0.35% per year while providing 95% exposure to 5,000 large, small and medium-sized companies throughout the world.

6.       Develop good money habits: Reconsider that fancy coffee or fast-food lunch and pocket the savings for a more meaningful goal (i.e. vacation, paying off debt, down payment for a house).

7.       Pay off your debt by snowballing payments.  This technique will help you see progress toward paying off debts.  Start with the ones with the lowest balances and pay above the minimum.  Then when this debt is paid in full apply the amount you were paying toward the next debt.  Eventually, like a snowball rolling down hill, you’ll be applying all these payments in large lumps toward the highest balance debt.  And this will help accelerate paying the debts off and lower your interest expenses.  Then when everything is paid off you can direct this toward your emergency reserves or investing goals.

8.       Position yourself to qualify for more student financial aid: Skip the allowance and put your kid to work.  See my post on this here.

Want Some Low-Cost Globally Efficient Ways to Invest?

What is an ETF?  Go to https://moneylinkpro.wordpress.com/?s=exchange+traded+fund or http://www.investopedia.com/terms/e/etf.asp

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