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Posts Tagged ‘Investment Policy Statement’

What could possibly link the children’s story of Watership Down, Thanksgiving turkey and retirement investing risks?

Well, my mind works in strange ways (just ask my wife and I’m sure my 15-month old Spencer agrees as well).

Buy and Hold – A Broken Promise?

After all the troubles in the stock market and in financial markets in general over the past couple of years, I was recently rereading an article in the trade magazine, Journal of Financial Planning. In the September 2009 issue there is a book excerpt by Ken Solow, CFP (R) entitled Buy and Hold is Dead (AGAIN): The Trouble with Quant Models.

Over the past couple of years there has been much written about Buy and Hold investing. You may be familiar with the concept as an approach to investing that focuses on selecting an investment (stocks, bonds, mutual funds, real estate) and simply holding on through good times and bad.  Occasionally, you should rebalance back toward some strategic assert allocation to reduce or minimize certain risks.

The reasoning behind this is simple: humans are bad at financial decisions and by adopting this approach you can take the emotion out of investing.  Too often, we tend to make important decisions with little information and rely on emotions like fear or greed.  In fact, Warren Buffet, investor-extraordinaire of Berkshire-Hathaway fame, has said this many times and by doing the opposite of what the masses do he has amassed a fortune for himself and his investors.

For many, buy and hold was discredited after the great Financial Meltdown that tipped us into the Great Recession.  All asset  classes – whether large company stocks, small company stocks, stocks of foreign firms, bonds from companies large or small and bonds issued by sovereign nations – went down.

Most investors feel cheated, angry and worse. This buy and hold approach was advertised as a way to minimize risk.  Unfortunately, most investors probably misinterpreted the idea of minimizing risk and thought that it eliminated the downside volatility.

As I often say to clients, we know there will be sunny days and rainy days.  Risk management means carrying an umbrella and maybe wearing a rain coat as well.  But just because you are using one or both of them doesn’t mean that you won’t get wet.  You’ll just not get soaked like the guy who’s running from the street curb toward the office door with nothing but a newspaper over his head.

It’s true that Buy and Hold will help take the emotion out of investing. Over the long-term, the Ibbotson Charts will show that all asset classes have gone up since 1926 until now even after the meltdown.

That provides cold comfort to the retiree who is just about to start withdrawals from his portfolio to supplement his retirement income and lifestyle.  There were many who saw their investments drop 30%, 40% or more.  And while their portfolio may have bounced back some with the market rally and over time the market may continue to rise, they just don’t have the time to wait.  They have to start taking out money now.  And each time they take out money to live on, there is less in the pot to grow.

This has happened before.  Remember Enron.  Remember Lucent Technologies.  On one day someone is a paper millionaire.  Fast forward and the companies are in the tank (bankrupt in the case of Enron) and your retirement dream is a nightmare. If you’re at the tail end of a 25 year career, you really don’t have the time to make it up but have to make do with what you have. (Even for these folks, not all is lost and there are things one can do to sustain a retirement as I noted here in a previous post. And I’ll be talking about sustainable withdrawal rates in another post on retirement income planning.)

For the rest of us, there is a lesson in there. And this is where Watership Down and Thanksgiving turkey come into play.

Buy and Hold, Modern Portfolio Theory & The Illusion of Math

Buy and Hold is based on the quantitative model of Modern Portfolio Theory (MPT) first devised Harry Markowitz more than 50 years ago.  Such quantitative models are based on lots of mathematics.  The formulas are complex and elegant.  They are beyond what most of us are comfortable with but they do provide a sense of security.  You input numbers from data on various asset classes and a very precise number comes out the other side of the black box.  This provides a sense of security.  Instead of relying on something subjective like your instinct or your gut feelings, you can put your faith into something objective like the science of math and finance.

Over the past few years and principally from the mid-1990s until our recent meltdown, we have come to rely on ever more complex quantitative models. These complex models drove the markets in real estate and mortgages as we relied more and more on the black boxes of the financial engineers.  But theories are only theories and models are only as good as the assumptions and data used to create them.

A chain is only as strong as its weakest link.  And a model is only as good as the assumptions behind it.  All models are based on past events. And even though we are warned that “past performance is no guarantee of future results” we rely on these backward-looking, statistically-based models for predicting our futures.

In a normal world, the behavior of markets and investors can be assumed pretty well. But in panics, all bets are off.  No amount of modeling can predict how presumably reasonable people will act but it’s safe to say that human nature’s fight or flight syndrome kicks in hard.

Watership Down – A Lesson from Spencer’s Bedtime

What happens is that things go along and work until they don’t.  Assumptions are assumed to be fine until they need to be revised. When I was reading Watership Down there is a scene where the protagonist, a wild rabbit, encounters a number of other well-fed white rabbits.  Our hero tries to get them to follow him but to no avail.  The tame rabbits live in a fine world where they are provided plenty of food, water, shelter and care.  What more is there to go searching for “out there?”

The Thanksgiving Turkey

Our false sense of security and belief in a system like MPT or Buy and Hold can be illustrated in the tale of the Thanksgiving turkey.

As retold by Nassim Taleb in The Black Swan:

Consider a turkey that is fed every day. Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race “looking out for its best interests,” as a politician would say. On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey:  It will incur a revision of belief.

Unable or unwilling to question its beliefs, the turkey was lulled into a false sense of security by his daily reinforcing experiences. Like the tame white rabbits in Watership Down, the turkey’s world is looking good and life is great.  So much so that neither even think about ways to escape.

At least in the animated movie Chicken Run with Mel Gibson (another soon-to-be Spencer favorite), the chickens are led to question their assumptions about life on the farm and plot ways to escape.

What We Learn from Bedtime Stories for Investing

What we learn from these stories is that just because things have worked in the past, doesn’t mean that they are absolute truths that will hold in the future. The most dangerous thing that an investor can do is simply accept with blind faith the assumptions of the past.  In a changing market, there’s nothing scarier than conventional thinking.

Theories are only theories and while it may seem like heresy to question assumptions, it’s in your best interest to do so.

Does this mean abandoning Modern Portfolio Theory or Buy and Hold? No.

It does mean that it makes sense to add some human judgment to the mix.  Good models can work even better with common sense.

Like the counter-culture of the 1960s would teach, you as an investor will do best to question authority and question assumptions.

Use an Investment Policy Statement as a Better Road Map

Here with the aid of a qualified professional you can walk through and create a personalized investment policy statement as a road map for investing decisions.

Such an approach can combine the quantitative tools to be used along with the more qualitative, value-based criteria that can be combined to help in the investment selection and portfolio management process.

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Recent academic research by Gordon Pye on the impact of emergency withdrawals on retirement planning may put into question the rule of thumb used by many advisers to determine a safe, sustainable withdrawal rate.

For many investors and their financial advisers, the accepted rule of thumb has been to withdraw no more than 4% of an investment portfolio in any given year to provide a sustainable income stream when in retirement.

Is this rule of thumb reasonable given the potential impact of personal emergencies?  And how can a withdrawal strategy be created to account for them and the impact of external forces like a market correction or longer bear market?

Cloudy Crystal Ball

Analytical tools and software have come a long way but even contemporary tools can’t account for everything.

I spoke with an estate attorney the other day.  We were talking about the many challenges for helping clients plan properly for contingencies in the face of so many internal and external variables.

What he said is worth keeping in mind when thinking about any sort of financial planning:  If you tell me when you’re going to die, I can prepare a perfect estate plan for you?

The same sentiment can be adapted for retirement income planning.  Sure, if you tell me how long you’ll live in retirement, how much it will cost each year and when you’re going to die, I can tell you how much you’ll need.

In reality, this is unlikely.  More often than not, the crystal ball is cloudy. So you have two choices here: Wing it or Plan.

Winging it is pretty simple. Nothing complicated.  Simply keep shuffling along. Sometimes you’ll scramble. Other times you’ll be “fat and happy” for lack of a better phrase.

Planning, on the other hand, is a lot like work.  It requires assumptions and conversations.  It may even require bringing in others to help create the framework.

While nobody wants another job to do given an already busy day, there is an upside to investing the time here: Peace of mind.

What the Doctor Says:

Here’s a summary of what Dr. Pye wrote recently in his article.

  • In retirement, you may never have an emergency or you may have one or more.
  • The timing and extent of these emergencies is unknown.
  • While a retiree may be able to reduce the damage caused by a bear market maybe through market growth, other emergencies may require withdrawals that siphon money away from the investment pot that can never again be used to help repair the hole left by that withdrawal.
  • The timing of these emergency withdrawals may cause a retiree to abandon a market strategy at an inopportune time.

The biggest unknown?  Health care is the biggest likely emergency on your retirement budget.  These can be related to your own health or even an adult son or daughter.  Other emergencies may be caused by catastrophic weather (mudslide, wind or flood damage to your home), the extended loss of a job by a son or daughter or a divorce compelling you to help out.

In other research by Dr. John Harris supports the notion that what matters most to all investors – and retirees in particular – is the sequence of returns not simply the average rate of return on a portfolio.

Intuitively, we understand this.  A bird in the hand is worth two in the bush.  Cash now is better than cash later (which may be a deterrent against planning now for a future need).  If you were to just retire and the market takes a nosedive as you are withdrawing funds, you would be in tough shape because you have a smaller base that is invested that has to do double (or triple) duty.  The amount of appreciation needed to make up for the hole left by the withdrawals combined with market losses would be near impossible or require an investor to take imprudent risks to try to regain lost ground.

So what’s an investor to do?

  1. Save more – easier said than done but this is really key or otherwise choose a different lifestyle budget.
  2. Reduce initial withdrawal rates from 4% to 3%.
  3. Follow an “endowment spending” policy instead of a simple rule of thumb.
  4. Invest for income from multiple sources (dividend-paying stocks as well as bonds).
  5. Stay invested in the stock market but change up the players.  Not even a championship ball club has the same line up from game to game.  As markets change, you need to add more tactical plays into the mix of asset types
  6. Separate your investments into different buckets:  short-term lifestyle budget, medium-term and longer-term.  Each of these can have different risk characteristics.
  7. Keep a safety net of near-cash to cover lifestyle needs for 1 to 2 years.
  8. Monitor the buckets so that one doesn’t get too low or start to overflow.  This will require moving funds from one to the other to maintain consistency with the targets.
  9. Don’t let your insurances lapse.  Insurance is there to fill in the gap so you don’t have to shell money out-of-pocket.  Here you want to regularly recheck your homeowner coverage for inflation protection riders, cost of replacement and liability.  Check your coverage and deductible limits for wind, sump pump and other damage.

 

 

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The holiday season is almost upon us.  Before we all get caught up in the spirit of the season (or mayhem, depending on your perspective), consider taking time to get your fiscal house in order with these tips.

The Year of the RMD

Last year, required minimum distributions (RMDs) were not required as Congress granted a reprieve to not force clients to take distributions from severely depressed retirement accounts.

That free pass is not available this year.  So if you or someone you know is over age 70 1/2, you have to take a distribution from your IRAs.  This also applies to those who are beneficiaries of inherited IRA accounts as well.

Distributions don’t have to be taken from each IRA account but a calculation must be made based on the value of all accounts at the end of last year.  Then a withdrawal can be made from one or more accounts as long as it at least equals the minimum amount.

Think Ahead for Higher Taxes

In all likelihood, taxes will be higher next year.  As things stand, the Bush-era tax cuts are set to expire and marginal income tax rates and estate taxes will increase.

So look to booking capital gains this year if possible since tax rates on both long-term and short-term gains are certainly lower this year.

Reduce Concentration

There’s obviously enough going on to distract any investor but what I’m talking about here is concentrated stock positions.  Many clients may take advantage of company-sponsored stock purchase plans or have inherited positions concentrated in just a few stock positions.

Regardless of one’s age, this is risky.  This is especially risky to concentrate your income and your investments with your employer.  Remember Enron?  How about WorldCom?  Or maybe Alcatel-Lucent?

So given the lower capital gains tax rates that exist definitely now (versus a proposed but illusory extension later), it makes sense to reduce the highly concentrated positions in one or more stocks.

I know a widow who inherited the stock positions that her husband bought.  These included AT&T and Apple.  While AT&T was once a great “widow and orphans” stock paying out a reliable dividend because of the cash flow generated from its near monopoly status in telephone services, it broke up into so many Baby Bells.  The dividends from these have not matched the parent company and the risks of these holdings have increased as the telecom sector  has become more volatile.

And while Apple has been a soaring success for her (bought very low), it represents over one-third of her investment holdings.

Like most people I come across, she has emotional ties to these holdings.  And while she and others like her would not think of going into a casino to put all their chips on one or two numbers at the roulette wheel, they don’t find it inconsistent to have a lot of their eggs in just one or two investment baskets.

Since she relies on these investments to supplement her income, she needs to think about how to protect herself.  Although people may recognize this need, it doesn’t make it any easier to get people to do what is in their best interests when their emotions get in the way.

‘Tis the Season for Giving

Right now the highest marginal income tax bracket is 35% which is set to rise to 39.6%.  And capital gains tax rates are set to rise as well.  And come January 1, the capital deduction on gifts will be reduced from 35% to 28%.  All of this makes giving substantial gifts to charities a little more costly for your wallet.  So if you’re planning to make a large charitable donation, it pays to speed it up into this year.

To Roth or Not to Roth – Year of the Conversion?

This year provides high-earners an opportunity to convert all or part of their tax-deferred accounts to Roth IRAs which offers an opportunity to pay no income tax on withdrawals in the future.

The decision to take advantage of this opportunity needs to be weighed against the availability and source of cash to pay taxes now on previously deferred gains in the tax-deferred IRAs or 401ks. It also must consider the assumptions about future income tax rates and even whether or not future Roth IRA withdrawal rules might be changed by Congress.

Create an Investment Road Map

To really help gain clear direction on your investing, you really should consider sitting down with an adviser who will help you draft your personal investment road map (an Investment Policy Statement) that outlines how investment purchase and sale decisions will be made, what criteria will be used to evaluate proposed investments and how you will gauge and track results toward your personal benchmark.

This exercise helps establish a clear process that minimizes the impact of potentially destructive emotional reactions that can lead you astray.

Rebalance and Diversify

Just as you might plan on changing the batteries in your smoke detectors when you reset the clocks in the spring and fall, you should rebalance your investments periodically as well.

Now is as good a time as any to reassess your risk tolerance.  Research has shown that an investor’s risk tolerance is dynamic and influenced by general feelings about yourself, your situation and the world around you.  With the world’s stock markets showing many positive gains, this may lead some to become more willing to take risks.  This may not be a good thing in the long run so really question your assumptions about investing.

Armed with your investment road map and a risk profile, you will be in a better position to determine the mix of investments for diversification.  Don’t be afraid of adding to the mix investment asset classes that may not be familiar.  The idea of diversification is assembling investment assets that complement each other while potentially reducing risk.  And just as the economy has changed and the types of industries that are dominant rise and fall, it’s fair to say that what is “in” now may be “out” later making it important to reconsider your mix.

For this reason, this is why looking abroad to developed and emerging markets still makes sense.  Many of these economies are not bogged down by the after-effects of the great financial meltdown. And the rise of their consumerist middle classes means the potential to take advantage of demographics favoring growth sectors like natural resources, telecom, agriculture and technology.

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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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On Wednesday, March 11, I launched the inaugural event of my Financial Road Map Series teleconferences.

I want to thank each of you who stopped by to listen in to my brief discussion on taking control of your financial future by controlling what you can.

To recap the important points we discussed:

1.) Control What You Can:  No sense in worrying about things that are beyond our individual control.  There’s plenty enough for us to handle and impact directly.  Things that you can control can include:  Your saving and spending habits, your health and exercise programs, your asset allocation, your investing costs, and most importantly, YOUR ATTITUDE.

2.) Have SMART Goals:  Begin with the end in mind.  Be Specific with Measurable goals that are Attainable and Realistic and tied to a specific Timeframe.  It’s one thing to say “someday I want to be rich” or “someday I want to own a boat.”  But if you can put a number to that vision, your mind’s eye can picture it as reality and it becomes a real target to shoot for.

3.) Understand Your Risk:  These past seventeen months have tested what it means to be an investor.  It has highlighted the reality that most individuals do not have a handle on their own risk appetite.  Understanding risk is more than simply answering a few questions on a form.  It involves an open and honest conversation with yourself, your spouse (significant other) and your advisor. Go beyond the standard form and consider what does money mean to you, how your family treated money, what has been your best and worst financial decision and how you came to those decisions.  Ask yourself (or your advisor should ask) how you feel about these risk attitudes.  You may even want to consider using an impartial tool located at www.riskprofiling.com to provide additional insight into your risk tolerance.

  • NOTE: In my practice I utilize multiple risk profile formats to get a handle on how a client thinks and what motivates a decision.  This is helpful to be able to better communicate with a client. 

But having an honest conversation is also integral to proper investment planning.  For instance, I can use the standard risk profile tools, my questions and the website tool listed above and determine a Risk Capacity Measure for a client.

A person who has verifiable emergency reserves (3 to 12 months depending on their particular circumstances), has a positive cash flow and net worth, low debt ratio and adequate life insurance in place has a capacity for higher risk than someone not demonstrating these attributes.  For someone lacking these attributes, the financial plan will likely focus on improving these measures before investing in something risky.

4.) Have an Investment Road Map: Most people would not go on a trip without a map or GPS.  The same should be true about investing.  Having a road map (called an Investment Policy Statement) is something that professional investors like pension funds, insurance companies and endowments use all the time.  It outlines the end result desired (for instance, growth of capital with the investment generating $X in income per year), the types of investments that will be considered (i.e. no investment in nuclear power or tobacco), and the criteria for determining when to buy, when to sell and what to replace it with.  This helps take the emotion out of investing and avoids having a long-term plan sabotaged by the chatter of “talking heads” either in the media or at the office water cooler.

5.) Risk Allocation:  You don’t need a graduate degree in finance to understand that some things just make sense.  More than ever the old adage makes sense: Don’t Put All Your Eggs in One Basket.  While it is true that all asset classes have lost value from their peak nearly 18-months ago, that is no reason to give up on the wisdom of diversification. Just because someone doesn’t win a race the first time doesn’t mean you give up running ever again, does it?

But let’s be sensible about this.  Having a target risk allocation (based on investor age, timeframe until goal, risk capacity and risk tolerance) does not mean simply that you “buy and hold” or “set and forget.”  While academic literatute indicates that a buy and hold strategy will win out over time, in reality most investors do not have the stomach for the occasional and frightening roller coaster rides that happen like they have recently.  In which case in makes sense to buy, regularly and tactically rebalance while exploiting short-term trends and hold cash.  (Most investors do a poor job at following trends, implementing a disciplined trading strategy without emotion and sometimes having to go against the grain and do what seems uncomfortable like buying when everyone else is selling).

6.) Control Your Costs and Your Investment Vehicle: Invesment costs can weigh you down like an anchor.  And choosing the right investment vehicle helps you ride in comfort to your destination. 

Consider this:  Not all mutual funds are created equal.  Actively managed mutual funds have costs that detract from performance.  And typically more than 50% of active mutual funds do not match much less beat their benchmark index.  Does this mean that you give up on investing?  Heck, no. It just means you find another ride.  When a star football player gets hurt, does the team forfeit the remaining games?  No, they have a back up ready for replacement.  With a solid investment policy and using ETFs, you can make a quick switch, too.

This is why you should consider a strong core of index mutual funds and Exchange Traded Funds (ETFs) as part of your investment stratetgy (see “Top 8 Reasons to Use ETFs in Your Portfolio,” March 10 blog post).

7.) Estate Planning is for Everyone: Be prepared.  That’s the motto that every Boy Scout knows.  It’s good advice here as well.  Having the best investment strategy and record-breaking performance on investments will mean absolutely nothing if you’re not on a strong foundation.  This is what an estate plan will help do by laying the groundwork on how you want to control disposition of your assets and control your affairs.  Regardless of age or portfolio size, an estate plan is important throughout the various stages of life.  This goes for seniors and newly married couples.  If you have something or someone to protect, you need to talk with an attorney to draft a plan that includes at the very least: a Last Will, a durable Power of Attorney, a health care directive.  And if you have minor children it is imperative to have your guardianship issues addressed.

8.) Insurance: In uncertain times, it is even more important to make sure that you protect yourself from contingencies that can blow up your plans and get you off track.

Please review these items annually.  Consider putting it on your calendar to coincide with the seasonal change for clocks.

  • Make sure you have full replacement coverage on your property
  • Add an “umbrella liability” policy to your home and auto.  In a litigious world you don’t need to lose everything because of a lawsuit.
  • Make sure you have filed a “homestead declaration” recorded at the Registry of Deeds on your primary residence.  This will protect you from creditors placing a lien on your property that could force you to sell to settle a suit.
  • Review your employer-sponsored benefits and consider group Long-term Care Insurance, Short and Long-term Disability and Supplemental Accident coverages in addition to standard health/vision coverage.
  • You really need to consider coordinating these coverages with individually owned policies because when you leave your employer you will lose these coverages. 
  • Life Insurance:  Do speak with a financial planner who will do a detailed expense analysis to determine the appropriate level of insurance.  This approach is more likely to result in an appropriate level of insurance at a lower cost than rules of thumb based on income.  As with employer-benefits, consider having policies separate from your work.  A level-term policy is relatively inexpensive and offers cost-effective coverage during the peak years when you may have considerable debts and family responsibilities.

For specific advice on any of these matters, please consider speaking with an independent board-certified planner.

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With Valentine’s Day just around the corner and the celebration of love and fidelity, it is somewhat incongruous to think about divorce.  But every ‘good-bye’ leads to a new ‘hello.’  And it is all the more important for smart individuals to prepare correctly with proper advice ahead of time so that each party can have a fresh start.

When love goes wrong, there are a host of money pitfalls and potholes on the road to and from the courthouse. 

Soon-to-be singles will benefit greatly by adding a financial planning professional to the team, especially one with special training in the area of divorce planning.

Too often individuals are caught up in the emotions of a love gone wrong and are too distracted by grievances to see the bigger picture.

Regardless of who gets the house, there are issues that neither the court nor your attorney may be skilled enough to address with you.

Consider how poor credit decisions, a job loss of an ex-spouse or medical problems during or after the divorce might impact you.  Otherwise smart people can make big mistakes that will haunt them as they try to start over.

Key points for you to consider:

  1. Get your own financial advice:  Just as you should not rely upon your spouse’s attorney, you should not rely upon his or her financial advisor.  Saving a little money on advice now may hurt you later.  In most cases, attorneys and courts are not skilled enough in the area of financial planning to adequately evaluate settlement offers to determine if they are equitable and in the long-run best interests of each party.  This is where an experienced planner will pay off in spades. Good planners experienced in this area will be able to identify financial issues unique to the situation and help evaluate the financial impact of settlement offers as well as outline the action steps to take to make sure your credit is preserved so that you are not adversely impacted later.
  2. Review each other’s Reports: While credit issues may be the least of one’s concerns when dealing with a risk of physical danger, it’s important to not lose sight of its importance in the big scheme of things. Before the divorce is finalized, negotiate to inspect each other’s credit reports for a period prior to and just after the divorce is finalized. Trouble can surface and it’s helpful to identify potential issues ahead of time.  If both sides haven’t already obtained their annual free credit reports from the three major credit agencies (TransUnion, Experian and Equifax), the place to go is www.AnnualCreditReport.com.
  3. Remove your ex-spouse from your accounts immediately: Call all lenders on joint credit accounts to arrange to remove the ex-spouse’s name as an authorized party. Terminate joint asset accounts as well. This will need to be coordinated with the ex-spouse or his/her attorney to make sure that there is a proper division of liabilities.
  4. Consider refinancing joint debts you keep after the divorce: Whether it is for a mortgage, equity loan or auto, it is a good practice to arrange to refinance these debts to remove the ex-spouse. This might be easier said than done given the realities of each household’s new cash flow situation, but it will make things easier if possible.  If it’s not possible to do so immediately, it is important to arrange for a credit-monitoring service to alert you about negatives impacting your credit report and consumer credit score. This will lessen the likelihood that erratic or even fraudulent credit activity by a former spouse will go unchecked and severely impact your own good standing.
  5. Update your beneficiaries and estate plan documents:  In the daily rush of life, it is all too common to forget to update beneficiary designations on asset accounts, retirement accounts or life insurance.  Contact your employer to arrange changes to delete your ex-spouse from benefits if permitted by the divorce decree. Nothing can be more painful than to have an unfortunate or untimely death result in your ex-spouse receiving your assets or insurance.  It happens all too often and is far from amusing to the loved ones who depend on you. Ideally, you should also consult with an attorney when your divorce is final to update estate planning documents like your Will, Power of Attorney and Health Care Proxy as well. Those who own a business or investment property interests have other special considerations.

 

A divorce is far more involved than simply signing a final divorce decree.  As I’ve tried to highlight here there are a range of financial issues that will impact each party and their children.

For a more complete checklist of the types of issues you may need to be aware of if planning a divorce, please call me directly for a complimentary copy of the Divorce Planning NewStart Checklist.

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