The following post was written by Thomas King, a CPA and financial planner based in Kansas City.  The following letter was sent to his clients last week, and he allowed us to repost it in its entirety. These views are not necessarily reflective of his firm, CBIZ.

As you are probably aware, the stock market has taken it on the chin for the last 3 or 4 days.  I usually don’t like to use the term “correction”, as I believe the stock markets are efficient for the most part and there needs to be a buyer for every seller, i.e. there is essentially a winner and a loser for each trade that is made, making it a zero sum game.

This downturn in the markets has been expected for some time now, and it is my opinion that the economic troubles of Greece had very little to do with this recent downturn.  I guess I also need to include Spain and Portugal as part of the problems in the EEU.

For the US during 2010, our markets have continued to outperform the economy by the proverbial mile.  Much of this market performance was fueled by institutional buying, where manager compensation is primarily tied to performance.  For the most part, individual investors remained on the sidelines.

If there is any good economic news, you need to be able to sort through all of the confusing pro and con media stories.  It is my belief that…

• there has been a small amount of job (employment) improvement, which is somewhat contrary to what we hear from our government.  I’m not faulting the government for the lack of meaningful employment improvement. Heck, I can’t remember a time, other than during the presidency of FDR and his “New Deal” WPA program, where the government was actually able to produce a significant number of jobs.  Unfortunately, after the end of the WPA, unemployment retreated to its previously high levels.

• Although there have been a number of articles suggesting that business has used up all of the excess productivity from its slimmed-down workforce, business still needs to believe that there will be economic stability moving forward.  I do fault the government here for creating a very confusing and unstable economic picture for the next few years.
• Although the consumer has appeared to shed his or her dour view of the economy, and started shopping again, there is a good chance that this spending spurt may be short-lived without any significant improvement in the economy.

• The rather new “anti-spending” position of the government will also be short-lived, as incumbent politicians struggle to be reelected at a time when the voting public has started to figure out that many of these folk stink at what they do.

What should an investor do at this time?  I don’t believe that selling out at this point in time is the right answer.  I do believe that we will find some market stability in the near term.  Traders, and not long-term investors, are the main cause of our current volatility.  At some point these traders will determine that they can make more money in an improving market than they can make in a market that is trending downward.

If I had additional investment funds, I would wait for this upward trend or “momentum” to start back and I would be buying at the then existing lower prices.  If you were previously buying equities based on their dividend yield, the new yield will be that much higher.  Buying equities for their long-term growth potential will still be a favorable move.

I would tend to favor US equities over non-US equities, primarily Europe.  The inherent problems with the EEU aren’t going away overnight.  Greece will probably need to be saved again, as well as some of the other smaller, less stabile countries.  ( Do I smell socialism in these problems?)

In the fixed income markets, you will most likely find that the yield spread between the lower credit quality bonds and the better credit quality bonds will have increased over what it was a week ago.  You will be getting paid more for the additional risk you are taking by owning these high risk, high yield investments.  If you are somewhat risk adverse with your fixed income holdings, owning shorter-term bonds will help when the coming inflation storm begins.  For those in the middle of the risk scale, don’t forget the U.S government TIPs (longer-term inflation protected bonds).

Those of you that currently invest with us in our fully-diversified portfolios are well aware that we significantly favor US equities over their international counterparts.  In addition, we favor smaller companies over larger companies and value companies over growth companies.  Our research in general tells us that smaller companies have outperformed larger companies over longer periods of time.  The same is true for value companies versus growth companies.  The simple answer to the question of “Why?” is the concept of risk.

Thanks again for your business and the trust you have shown in us.  We wish you a most enjoyable summer season.

Investment Advisory Services Offered Through CBIZ Financial Solutions, Inc.

An SEC Registered Investment Adviser

44 Baltimore St.  Cumberland, MD 21502  (800) 445-7447

Image via Wikipedia

With property values diminishing rapidly, many people wonder if now is the right time to buy a house. Luckily, the NY Times has put together an excellent little calculator which can help make the decision for you.

A few notes about usage:

1. It doesn’t seem to account for utilities when renting, so make sure to include them as part of your monthly rent.
2. There is an advanced settings tab where you can specify your marginal tax rate, renters insurance, etc.
3. Many renters improve upon their property by painting, installing cabinets, new appliances, etc. Make sure to include these costs as well.

Have fun playing with the calculator!

__________________________________

*Global Education & Career Development Center (GECDC) and Society of Women
Engineers (SWE) Present:*

*Personal Finance 101*

*Date: Tuesday, April 13*

*Time: 7:00 PM – 8:30 PM*

*Venue: Room 4-231*

** Dinner will be provided! ****

Thinking about planning and managing your finances? Come to this panel to learn about basic personal finance!

*Topics include:*

• What is Financial Planning
• Cash Reserves
• Debt Management
• The Power of Savings
• Understanding the types of Accounts
• Understanding the types of Investments
• Basic Estate Planning

*Speaker features:* Mark Porter

Mark Porter  is a Certified Financial Planner with Ameriprise Financial. He has a degree in Finance from M.I.T. with a minor in economics. Mark works with clients through goal based, comprehensive financial planning.

Two Hypotheticals: Planning for a Rainy Day

In scenario 1, you invest 5 grand at the end of each year for the next 10 years. After 10 years, you don’t invest a dime until you retire (at the end of year 30). Thus, you’ve invested $50,000 total.

In scenario 2, you don’t invest a penny until 10 years from now, but invest  5 grand each year for the next 20. This makes your total investment $100,000.

Both of your investments compound at a rate of  6% each year. Which scenario would you choose to retire on?

The surprise (maybe not for some)

Scenario 1 returns more money by the time you want to retire! In fact, you’ll make almost $30,000 more than Scenario 2. But how can this be since you invest TWICE as much in Scenario 2??

Simple. Your investments in early years make a great deal of difference, and the interest that compounds year over year (even at a modest rate of 6%) is more than enough to make up for the larger investments made in Scenario 2.

So start investing now. You won’t regret it!

For the last few months, I’ve been hard at work on a comprehensive system for determining what to do with your money. I’ve spoken with financial advisors, friends and family, working to establish the easiest and most effective way to give you a personalized financial report.

And now, it’s ready for an alpha release. As such, I present to you, HapiMoney.

How it’s set up

There are 4 main sections: Basic Info, Budgeting, Balance Sheet, and the Risk Questionaire.

Basic Info: The shortest section, but still very important; just fill in your email, age and when you want to retire. The longer you’ve got until retirement, the better off you are.

Budgeting: Your monthly income and monthly expenses. Using these variables, we can determine the amount you’ll need to retire, how much free cash you’ll generate (for investing purposes), and how much cash you should keep on hand for an emergency fund.

Balance Sheet: This tells us what you own and what you owe. From this information, we can determine which of your debts to pay off and the required rate of return for you to reach your goals.

Risk Questionaire: How risk averse are you? By taking this academically developed survey, we can determine how much of your investable income should be allocated towards risky investments like stocks or towards less risky assets like fixed income.

Your Personalized Report

Given your responses to the 4 main sections, we can give you a step by step analysis of what to do with your money: how much cash to keep on hand and where to put it, give you recommendations on a brokerage account along with some ETFs to buy (and how much), and finally tell you whether you can achieve your retirement goals.

So give it a try, and let me know if you found it helpful. Email me at alex@hapimoney.com. I’d love to hear what you like and what you dislike (and if you find any bugs)!

Image via Wikipedia

Most of us who work for large corporations get granted stock options as part of the compensation package. As a result, many also hold onto stakes which make up huge portions of their net worth.  Make no mistake, Stock is a great incentive mechanism, especially for smaller companies where each individual has more effect on the bottom line.  Company stock is, however, incredibly risky to hold on to in any large amounts.

Aside from the fact that having large amounts of your net worth tied up in any one asset is a mistake, owning your own companies stock compounds this immensely. Why? Because your job security and the value of the stock are incredibly correlated. If the company’s stock tanks, chances are going to lose your job.  If you lose your job AND your retirement fund disappears, you are straight up screwed.  Look at what happened to the employees of Enron? Or the employees of WorldCom? These employees l0st their livelihood and retirement funds and will now have to work for the rest of their lives.

Be smart, and while you should definitely keep some stock, make sure its not an outrageously high amount.

Or if you don’t have BoA, dump your Wachovia, Wells Fargo, et. al. accounts where you are saving money at abysmally low rates for below average customer service and ATM fees. It’s insane how much control these guys have of your money.

Where should you put it instead? Try your brokerage account. My Schwab Account has free checking, an ATM card which REIMBURSES me for all fees (yes, no fees), and pays a better interest rate…plus, I can see all of my investments from one dashboard.

Why do I use my BoA account? For the convenience of depositing checks, and that’s it. Switch to your brokerage and you will save a ton on fees and start actually earning interest.

-EDIT-

Not 2 days after I posted this, did BoA charge my account a monthly maintenance fee.  When I signed up for the account, I was told there were no monthly minimums, but apparently this is only applicable if you do direct deposits to the account at least once a month.  Since I switched up my direct deposits to my Schwab account, BoA felt a little threatened . Luckily, calling and complaining led to the cancellation of the fee (lesson: always call and protest fees).

I also learned that Bank of America doesn’t have this requirement on all MyAccess checking accounts created online. Since I have MyAccess checking, I simply asked for them to waive all future fees. In typical bureaucratic fashion, the only way for me to insure that there are no monthly minimums are for me to create a new account online and cancel my old one. Talk about horrendous customer service.

Image via Wikipedia

Once you’ve determined how much cash to keep on hand the next step is to figure out what to do with the rest of your assets.  It seems confusing, especially if you’ve never done it before, but it’s not.

These assets should be divided into two categories, fixed income (or assets whose value is derived from a fixed series of interest payments – things like CD’s, bonds, ) and what I will call capital appreciation assets (or assets whose value is derived from increase in asset price – things like stocks, real estate, currencies, etc).

How you determine this is based on 2 things:  1) How risk averse you are and 2) What your financial goals are (when do you want to retire?  how old are you now?). The younger you are and more risk seeking you are, the more you should put into equities. The older you get, or the more risk averse you are, the more you should put into bonds.

Here’s how you do that:

1) Establish how risk averse you are:

• Go take this quiz. Come back after it tells you how willing you are to take risks.  Remember what your score is (it’s out of 47).

2) Go to this site, and input how old you are, when you want to retire, and the score you got on the risk site. This will give you the answers to where you should put your money.

Lastly, you’ll need to figure out if this asset allocation will allow you to reach your goals, especially for you risk averse 55 year olds who have no savings, and no income… but that’s for another post.

The NY Times has an interesting article on lifetime annuities here. Basically, a retirement annuity is when you give an insurance company an upfront lump sum of cash, and they provide you with smaller guaranteed payouts for life.

My favorite part of the article is how commission based financial advisors can no longer profit once a client puts their money into an annuity (since they make money for every time you trade) , thus leading them to call this process “annuicide”.

Another interesting issue is based on how low the payouts are. Lets take the example they gave in the article:

So let’s say a 65-year-old man in Illinois turned over $100,000 in exchange for $632 a month for life, a recent quote from immediateannuities.com.

At first glance, $632/month translates to about $7500/year which looks pretty good when you invested $100k (7.5%). Unfortunately, you don’t get the $100k back at the end which means that you have to live 13 additional years just to BREAK EVEN without inflation- and to compensate for inflation you will need to live an additional 5 years on top of that…and to reach a return that would be afforded to you buy the purchase of a long term bond (assuming about 5% yield), you’d have to live until the age of 88.

For those interested in doing this experiment yourself, there’s a function in Excel called IRR, which stands for Internal Rate of Return. In one column type -100,000 (which is your investment in the annuity), and then type the series of payments for each consecutive year below the 100k ($7500 for simplicity’s sake).  In another cell, type =IRR(select the values you entered in followed by a comma “,” then enter a guess, say 1%). You’ll see what the actual return this investment provides you is.

The reason that insurance companies price these annuities so that it takes 13 years to earn back is because the average life expectancy is only 78 years of age. That means, on average, an insurance company will have 13 years just to pay you back with effectively no interest…a no interest loan! So when do annuities make sense? If you were planning on living to 100 is a good choice, or if you just don’t want to deal with the hassle and worry of researching other fixed income investments. Either way, it’s probably better to diversify if you end up going the annuity route, so don’t put all of your eggs in the “annuity” basket.