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When you’re on an airplane and hit turbulence or rough weather, the flight crew tells you to stay seated and buckled.  Unfortunately, when the markets hit bad weather, there is rarely such a warning.

You might want to call it “Black Thursday.”

Yesterday, the markets around the world went into a tailspin reacting almost violently to the ongoing drumbeat of dour economic news.

On the radar, we’ve seen the storm clouds moving in for a while now:

  • lower than expected GDP in the US last quarter,
  • downward revisions of the GDP to a negligible 0.4% for the first quarter,
  • lower business and consumer confidence surveys,
  • sharply lower than expected new jobs created,
  • higher unemployment,
  • foreign debt crises weighing down our Eurozone trading partners.

There was a temporary distraction over the last couple of weeks as we in the US focused on the debt ceiling debate to the exclusion of all else.  Self-congratulatory press remarks by politicians aside, nothing done in Washington really changed the fact that we are still flying into a stiff head wind and storm clouds that threaten recovery prospects.

Eventually, though, the accumulation of downbeat news over the past few weeks seems to have finally come to a head yesterday.  No one thing seems to have caused it.  It just seems that finally someone said “the Emperor has no clothes” and everyone finally noticed the obvious: global economies are weak and burdened by debt and political crises.

All of this has been creating doubt in the minds of investors about the ability to find and implement policies or actions by governments or private sector companies.  And doubt leads to uncertainty.  And if there’s one thing we know for certain, it is that markets abhor uncertainty.

While many commentators may have thought that the “resolution” of the debt ceiling debate in Washington would have calmed the markets, it seems that upon further review of the details the markets are not so sure.  And in an “abundance of caution” market analysts who once were so OK with exotic bond and mortgage investments are now reacting overly negatively to any and all news and evidence of weakness by governments or companies.

What’s An Investor to Do?

Don’t panic.  It may be cliché but it’s still true.  If you hadn’t already put in place a hedging strategy, then what is past is past and move forward.

So the Dow has erased on its gains for 2011 and has turned the time machine back to December 2008.

If you sell now — especially without a plan in place — you’re setting yourself up for failure.

Here’s a simple plan to consider:

  1. Hold On:  You can’t lose anything if you sell.
  2. Hedge: As I’ve said before in this blog and in the ViewPoint Newsletter, you need to put in place a hedge.  There are lots of tools available to investors (and advisers) to help:  Exchange Traded Funds (ETFs) on the S&P 500, for instance, can be hedged with options or you can use “trailing stop-loss” instructions to limit the market downside; another option – inverse ETFs that move opposite the underlying index. These aren’t buy-hold types of ETFs but can be used to provide short-term (daily) hedges.
  3. Rebalance:  If you’re not already diversified among different asset classes, then now’s the time to look at that. You may be able to pick up on some great bargains right now that will position you better for the long-term.  Yes, every risky asset got hit in the downdraft but that’s still no reason to be bulked up on one company stock or mutual fund type.
  4. Keep Your Powder Dry and in Reserve:  Cash is king – an oft-repeated phrase still holds true now.  Take a page from my retirement planning advice and make sure you have cash to cover your fixed overhead for a good long time.  With cash in place, you won’t be forced to sell out at fire sale prices now or during other rough times. This is part of what I refer to as “Buy and Hold Out.”
  5. Seek Professional Help:  Research reported in the Financial Planning Association’s Journal of Financial Planning shows that those with financial advisers and a plan are more satisfied and overall have more wealth.  Avoiding emotional mistakes improves an investor’s bottom line.

As a side note:  The old stockbroker’s manual still says “Sell in May and Go Away.”  Probably for good reason.  Historically, the summer months are filled with languid or down markets and volatile ups and downs.

 

While it’s tempting to give in to the emotional “flight” survival response that you’re feeling right now, don’t give in.  Stand and fight instead.  But fight smart. Have a plan and consider a professional navigator.

If you are seeking a second opinion or need some help in implementing a personal money rescue plan, please consider the help of a qualified professional.

 

Let’s Make A Plan Together:  978-388-0020

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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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Investing Mistake #1: Treating Investments Like a Part-Time Job and Not a Business.

“When a man tells you that he got rich through hard work, ask him: Whose?” Don Marquis

While you may be investing for a child’s education, a vacation home or retirement, the common ingredient for success really is the process, approach and mindset you bring to making investing a success.  Take it seriously and you get serious results.  If you are fearful, your results will reflect it.  If you are a daredevil, your results may reflect that, too.

All your personal goals are important, aren’t they? You’ve worked hard for your money, didn’t you?  So why not find a better way to make your money work smart for you?

Why Mindset Can Really Harm You

Too often, investors simply think that what and how they save won’t really matter.  They don’t have enough money to make it worth it and they don’t have the time to really focus on the whole investing game. I know, life gets in the way when you’re doing other things and making other plans.

Thinking of this made me remember visiting an underground cave with my friends John and Lisa on a trip through the Blue Mountains. We entered the caves on a tour and saw all these fantastic, awe-inspiring formations created by the centuries of slow drips of water and mineral from the cave ceilings.  The stalactites and stalagmites formed bridges and statues of animals and even formations reminiscent of the craftsmanship used to build the cathedrals of Medieval Europe.  Small, incremental and consistent efforts produced such grand results.  If it can happen in nature, why not for something like a college savings account?

Too often, investors simply throw up their hands and take the easy road.  They do nothing, make no changes and for fear of making a mistake or because they don’t know who to trust, they avoid working with a professional.

They may hear the media report that a monkey throwing darts at a list of mutual funds or stocks may have beaten a professional money manager. Another favorite topic in the financial press is how most money managers do not bear their index.  But on the other hand, other stories will focus on the fantastic results of quick trigger investment schemes of the day-trader variety.

Let’s face it:  How well your investments perform from day to day will not likely make a big difference in your lifestyle now.  But how well you plan and invest may determine if, how and when you can retire, build a legacy to pass on and do all the things that are on your personal “bucket list.”

Two Categories of Investors

So investors will fall into two categories:  Those who focus exclusively on performance and those who focus on process.

Most investors, despite repeated warnings in small print at the end of the ads,  will focus on past performance as reported by the popular press and websites.  So despite the daily constraints on time because of family and work, these same folks will pick up an occasional financial newspaper or magazine or troll some financial websites and pick up a few ideas. They’ll see a Top 10 list of investments from last quarter or last year and then buy them because they performed well over some arbitrary time frame.

The Part-Time Investor in Action

Those who are more well-to-do or successful or affluent are either too busy making money to focus their time on investing or they believe that they have the skills to handle things on their own because they are successful in their careers.

I’m reminded of a woman I met on several occasions to discuss a way to bring some order to her investments.  She was a single mom raising a teen and worked in a fast-paced, deadline sensitive business.  Whenever we spoke, we were regularly interrupted by ringing phones and a buzzing pager.  Although she barely had time for lunch, much less research basic investment concepts, she ultimately decided that she would go it alone and master an online trading strategy to buy and sell stocks and options.

If you’re a successful surgeon or restaurateur or engineer or banker, do you really think that the same skill set that got you to the top of your profession, will also mean you can invest the time needed to properly manage and protect your wealth – not just your investments, but the whole set of tax, asset protection, retirement strategy planning, credit and cash management concepts?

Highly successful people may have achieved enviable incomes but can tend to be haphazard or casual about investing and integrating a financial plan.  Often, they may think that their incomes are secure, their career path certain, and they have skill and time to handle things on their own.

In reality, most may not really know what it takes to get to their goal.  For a 49-year old executive with a good $400,000 annual income and a $1 million investment portfolio trying to target for a retirement lifestyle at age 65 without much down scaling, he has to grow his nest egg to $6 million within a mere decade and a half.

And there is the equally disturbing statistic that the Great Recession has been hard on white collar professionals.  Those with college and advanced degrees make up more than 20% of the unemployed and long-term unemployed.

Be the CEO of Your Own Investment Company

Investing at any level and especially at this level requires a business mindset. The same sort of principles that apply to business success apply to your own investing. And just like any other CEO, you need to make sure that your assets are managed in a systematic, disciplined and prudent manner.

  • Business Plan: You need a business plan for your investments that covers the short and long term.  This means having a clear road map for your goals with appropriate benchmarks tied to achieving them. Instead of using the arbitrary indexes quoted by the media, you need to have a personal benchmark so you’re more likely to stay on target.
  • SMART GOALS: You need clear goals: Specific, Measurable, Achievable, Realistic and Time-Specific
  • Commit to a Realistic Strategy: You need a clear strategy for meeting those goals – a 20% annual return might sound nice but is it realistic given historical norms and your own experience and peace of mind
  • Don’t take it personally: As in business, don’t take the ups and downs in the market personally and don’t be afraid to review
  • Surround yourself with a professional team: If you’re serious about investing for success, then take the time to assemble a proper team of professionals who can help and who you can trust.  No business succeeds long term without a good team.

Don’t be too focused on your career to ignore this.  You can’t afford to treat your family’s future security as a part-time job or hobby.

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The entrepreneur was being interviewed after a long life.  He had made it through the Great Depression and was looking back.  As he warmly reflected, he straightened up and with a twinkle in his eye told the world the secret of his success.

“It was really quite simple.  I bought an apple for five cents, spent the evening polishing it, and sold it the next day for 10 cents. With this I bought two apples, spend the evening polishing them and sold them for 20 cents. And so it went until I had amassed $1.60.

It was then my wife’s father died and left us $1 million.”

Sudden wealth is certainly one way to make it.  And the lottery is another.

But in reality most of us will need to rely on the principles of growing your wealth slowly.

It may not be sexy and exciting to talk about but over time there are certain principles that will work:

  • Living beneath your means
  • Consistently saving
  • Responsibly using credit
  • Protecting your assets, life and income with appropriate insurance
  • Investing in a broad, diversified mix of assets

Of course there are lots of specifics that need to be tailored for each individual and to reflect what’s going on in the world around us.  From year to year specific investments may need to be changed just as you might change the drapes or the color of your house. But the overall process of building and preserving wealth depends on the foundation you build. And like your house, you want that foundation to be solid.

Over the next several posts I’ll continue to explore the most common mistakes that investors make and how you can avoid them.

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“Sometimes all it takes to change your life massively for the better is a small action and a small success, “ says David Bach, a noted author on money matters. 

  1. Consolidate Your Accounts:  Don’t wait for spring cleaning to roll around.  Make it easier on yourself by combining old 401(k) or IRA balances from your various old jobs.  This can help cut down on the amount of paper you receive and improve the chances you’ll have a coordinated investment plan. And it’s just one more way to have a more ‘green’ holiday.
  2. Pay Yourself First: While there always seems like there’s more month at the end of your paycheck, you can only get ahead by making a point of putting aside money in savings.  It doesn’t matter if it’s just $5 or 5% of each paycheck as long as it’s consistent.  Start somewhere and try to build up to your target of at least 5% of your net cash flow. Direct the money into a separate money market account that you can’t access easily from an ATM or debit card.
  3. Get to Know Where Your Money Goes:  For most people cash flow is not the problem. It’s cash retention that is a challenge. There always seems to be too much flow away from you.  Set up a system to keep track of where your money is spent.  Whether you decide to use a notebook or financial accounting software like Quicken or an online service like Mint.com, this is a first step to getting the information you need to decide what your spending priorities should be. 
  4. Cut Expenses:  Armed with the information from your tracking, now consider ways to lower expenses.  Do you really need a daily Mucho Grande from your favorite coffee place?  At $5 a day, your habit could help pay for your annual vacation or pay down your credit card or mortgage debt. Do you really use all those movie channels?  Can you wear a sweater and lower the thermostat?  Do you really need to be in the mall? Cut down on impulse shopping by creating and sticking to a master list of groceries and household goods.
  5. Reduce Temptation: Consider saving the bulk of any bonus checks or raises.  By automatically diverting this money, you’ll be able to add to your emergency stash, have cash to pay down debt or even invest. See #2 above.
  6. Reevaluate Your Risk Tolerance:  One of the most useful services that financial planners can offer is helping you really articulate your goals and establish your tolerance for investing risk.  After the bumpy ride of the past 18 months, most folks realize that they may not have had a handle on this.
  7. Avoid the Casino Mentality: It is an understatement that investing in the market can be risky but now is not the time to try to play catch up by “doubling down” or chasing the hottest investments ideas.  Remember the story of the tortoise and hare.  Sometimes the race doesn’t go to the swiftest but the most consistent.  So diversify your eggs into different baskets and watch those baskets.  For help in choosing the right mix of investments and a style that will help you sleep better at night, consider meeting with a CERTIFIED FINANCIAL PLANNER ™ professional.
  8. Rebalance Your Investments:  Over time, accounts that have been consistently rebalanced tend to have higher balances.  So plan to rebalance at least annually or even quarterly.  But first you need to have targets in mind so that you can unemotionally prune back your winners while adding to the laggards.
  9. Add to Your Retirement:  If you haven’t taken advantage of your employer’s sponsored retirement plan, start now.  If your employer doesn’t offer a plan or you’re self-employed, start your own.  Resolve to set aside at least the amount that will get you the maximum company match.   Ideally, you should know your “NUMBER” for living in retirement the way you want.  Consulting with a CERTIFIED FINANCIAL PLANNER ™ professional can help you here.
  10. Get Planning Advice to Map Your Route to Your Goals:  Maybe you’ve winged it and thought your home and 401(k) were your tickets to a secure retirement.  Odds are that your planning is not filling the bill.  Sit down with a CERTIFIED FINANCIAL PLANNER ™ professional to discuss your whole picture and map out the action steps that will help keep you on track for financial success.

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Is real estate still a good investment?

As a landlord dealing with sometimes rowdy tenants or unexpected repairs, you may wonder whether or not it’s still worth it.

Despite these headaches and the ongoing doom and gloom reported about real estate prices, owning investment real estate continues to provide a number of benefits.

Buying a property offers a number of favorable tax benefits, a way to generate income, diversify a personal investment allocation and in some cases have a tenant pay for your personal housing expenses.

As an investment property owner, you can deduct a host of expenses connected with operating the property including mortgage interest, property taxes, utilities and repairs. Aside from actual expenses incurred, property owners also benefit from a valuable non-cash expense: depreciation.

Losses generated from rental activities are typically considered to be “passive activity losses” with an exception for real estate professional. These losses can then be used to offset other passive income from another real estate investment or another type of passive investment such as in a private limited partnership. Disallowed passive activity losses and credits are deferred until there is passive income generated or the property is disposed in a taxable transaction.

Like all good rules there are exceptions. Although “passive activity” losses by rule must be used to offset other passive activity income, there are additional tax benefits available to those who are low- or middle income earning households.

For those who have adjusted gross income below $100,000 and “actively participate” in the management of the rental property, a real estate investor may use up to $25,000 in passive activity losses to offset non-passive income like income from wages or a business.

This remains one of the few tax shelters available to moderate income taxpayers. And like any other gift from the IRS, it comes with certain strings attached. In this case, the ability to use this passive activity loss exception phases out above certain income thresholds starting at $100,000 of AGI reduced $1 for every $2 of income above the threshold until eliminated at $150,000 AGI.

The key to “active participation” generally means involvement in management decisions about the property. Choosing the kind of paint or wallpaper? Reviewing bids for different contractors? Collecting the rent? All may be considered part of the active participation of the property owner.

About Steve Stanganelli, CFP ®

Steve is a five-star rated, board-certified financial planning professional offering specialized consulting advice on investments including self-directed IRAs and retirement income planning. Steve is affiliated with Quest Financial Services, a fee-only Registered Investment Advisor located in Lynnfield and can be reached at 888-323-3456.

Article Source: http://EzineArticles.com/?expert=Steven_Stanganelli

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Did you know that close to $4.2 Trillion in IRA and retirement account assets can be invested in much more than the standard run-of-the-mill investment choices offered at Big Box investment companies?

Ever since IRAs were first introduced in the 1970s, investors have been permitted to invest in a range of stock market alternatives including non-publicly traded assets such as real estate, notes and loans, private equity and tax liens.  But not many financial advisors and even fewer investors are fully aware of the options.

Legendary investor Warren Buffett uses a simple rule for success:  Invest in what you know and understand.  Diversification offers risk protection. And what better way to diversify than to own something that you have experience with like real estate or a business?

You may find greater portfolio diversification and a return-on-investment that might be better geared to meet your individual goals when you consider investing in what you know from experience.

Any IRA including a traditional IRA, SEP, Roth IRA, Coverdell Education Savings Accounts and solo 401(k) can use a portion of IRA funds to acquire interests in these various stock market alternatives.   Essentially, an investor determines the amount and source of the funds, transfers them to an independent third party custodian to hold and then instructs the custodian to release funds to acquire an investment in one or more alternatives.  The custodian also holds all income for the investor derived from the investment.

The “rules of the road” can be complex but not impossible to navigate with proper guidance.  Basically, an investor, spouse, lineal descendant or fiduciary advisor is a “prohibited person” and cannot “self-deal” or make personal use of the property.  With few exceptions, a “prohibited person” cannot work for or take income from an IRA investment.

What can an investor do?  Combine multiple IRAs from many individuals along with personal funds to buy property as co-tenants, for example.

It’s easier to list the things that a self-directed IRA cannot use as possible investments.  These include 1.) collectibles, 2.) life insurance contracts, and 3.) stock in a Sub-Chapter “S” corporation.  Most everything else is fair game.

If structured properly, the self-directed IRA can act as a lender to help facilitate a real estate transaction. Self-directed IRAs can invest as a member of an LLC or as a stockholder of a C-Corporation or even as a Limited Partner.  This is one way to add a level of asset protection to an investment.

Harnessing the power of a self-directed IRA may offer an investor a whole new way to invest and get retirement dreams back on track.

For a guide to Self-Directed IRA Basics including the “rules of the road” for avoiding IRS trouble spots, please call 617-398-7494 or email steve@ClearViewWealthAdvisors.com for a free copy of the notes from his presentation made to Greater Lowell Landlord Association members on November 11, 2009.

About Steve Stanganelli, CFP ®

Steve is a five-star rated, board-certified financial planning professional offering specialized consulting advice on investments including self-directed IRAs.  Steve is principal of Clear View Wealth Advisors, LLC, a fee-only Registered Investment Adviser located in Amesbury and Wilmington and can be reached at 617-398-7494.

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