Savvy Mutual Fund Tax Moves

Year-end is always hectic, but it’s well worth taking the time to consider a few investment moves that could have positive tax ramifications.

First, think about tax-loss harvesting, or selling some of your losing positions at a loss in order to offset capital gains elsewhere in your portfolio. Also you need to manage mutual fund distributions. Remember, mutual funds must pay out at least 90% of their net capital gains and income to shareholders every year. Therefore, funds typically issue shareholder distributions toward the end of the year. If you’ve registered a loss in a fund that’s set to make a distribution, you might consider selling it before the distribution is issued. Not only can you use the loss to offset other gains, but you avoid taxes on the distribution.

Similarly, you might consider putting off until next year the purchase of a new fund poised to make a distribution. That is, if you buy the fund now, you will owe taxes on any distributions you receive by the end of year even though you did not participate in the fund’s growth over the course to the year.

You might think that the market’s negative performance this year would mean a lack of gains to distribute. However, it’s always worth checking to be sure. Your fund company's website should have estimates for year-end distributions.

However, if you own mutual funds in your 401(k), IRA or other tax-advantaged retirement account, you don't have to worry about these fund distributions because they will not be taxed until you begin withdrawing your money in retirement.

Feeling Squeezed?

Call it the middle-class squeeze. According to Paul Taylor, executive vice president of the Pew Research Center, income is shifting to the top tier of American households, especially those in the top 5% who earn more than $181,000 annually.

Just how much of American income has shifted to the top wage earners? The Pew Research Center found that in 2010, the top 20% of U.S. households collected 50.3% of the nation's income, up from 49.9% in 2006. The lowest-earning one-fifth of households collected just 3.3% of the nation's income, down from 3.4% in 2006. Three-fifths of households, or 60% collected just 46.3% of the income last year, down from 46.7% in 2006.

These increases for top tier households and decreases for the middle class may seem relatively minor, a percentage point here and there. However, according to Heidi Shierholz, an economist with the Economic Policy Institute, in the 1970s, 53% of the nation's income went to the middle class. She notes that middle class households began losing significant ground in the early 2000s and that the downward trend has been exacerbated by the recent recession and our difficult employment market.

With record unemployment, a struggling housing market, and continued market volatility, it is unlikely the middle class squeeze will cease anytime soon. That makes it that more crucial than ever to tend to your financial plan. Now’s a great time for an annual review to construct your balance sheet, evaluate your goals and ensure that your investment strategy properly aligns with your short- and long-term goals and your risk tolerance.

CDO Chief Daddy Officer

Many of you know that Bernhardt Wealth Managment has two traditions during the Holiday Season.  One is that we make contributions to charities in honor of our clients and the other is that we send our clients and strategic relationships a book.  This year is the 14th year we have sent a book, and we were pleased to send CDO Chief Daddy Officer: The Business of Fatherhood by Christos Efessiou.

Chris told me about the book when I first met him last year. As soon as he described the premise of CDO, I knew it would be an outstanding candidate for our gift book. My instincts proved correct when I had the opportunity to read a draft this summer.

I recommend this book to business owners, executives and employees; parents and grandparents; and teenagers, college students and recent graduates. There are lessons that every reader can apply to his or her life. One lesson we can apply is to leverage our business skills to the business of life.

Chris signing books in my office

One reason I like the book so much is that it confirms the reason I started my own independent, fee-only firm to give objective, conflict-free advice to our clients. My passion is to touch each client’s life in a way that allows them to lead the life they want to lead. For some clients hiring us as their personal chief financial officer means they have more time to spend with their family. For others it means they have more time to focus on their business/profession. And for others it means they have more time to give back to their communities or charities that are important to them.

Money is a tool. Peace and contentment do not increase as our net worth increases. Peace and contentment are the byproducts of realizing what is important to you and spending more energy on those things. I don’t think Chris will look back at any point in his life and say “I wish I spent less time with my daughter and more time day trading.”

Chris signing books in my office

I encourage you to get his book (if you don't already have it) and hope you find it inspirational and motivational.  I also invite you to contact me to let me know what you liked about the book.  And finally, I hope you consider writing a review of the book on Amazon.

The entire Bernhardt Wealth Management team and I wish you a happy, safe and rewarding Holiday Season! Please let us know if we can leverage our skills and knowledge to help you or someone you know achieve and pursue what is important to you or them.

Chris and me holding one of the books he signed

If It Sounds too Good to Be True, You Can Bet That It Is

A recent article in the Washington Post, “Children’s Charity Victim of Ponzi Scheme,” caught my eye. Looking to protect its endowment in 2008’s difficult market, the DC-based Hillcrest Children’s Center invested in what Garfield Taylor of Gibraltar Asset Management Group described as a “can’t lose” investment strategy. By mid 2009, the $8 million Hillcrest invested had evaporated in a Ponzi scheme, severely compromising their ability to help orphans and families in need.

Stephen L. Cohen, an SEC official, notes in the piece that this sad story should serve as a reminder to investors. “There really isn’t any such thing as an investment that has zero risk with a high reward,” Cohen said. I wrote an article “A Tragic Case of Misplaced Trust” in the wake of Bernie Madoff’s crimes that outlines steps investors should take to protect themselves. Briefly, investors should choose to work with an independent Registered Investment Advisor who is bound by a fiduciary duty to clients and who uses an independent custodian. Also, it’s crucial not to put all your eggs in one basket and to understand what you invest in.

Above all, however, question the impossible. When an investment manager claims to always beat the market, be skeptical. Simply, when evaluating potential investments, remember the old adage: “If it sounds too good to be true, it probably is.”

Sports Illustrated: In My Tribe

Most of the people who know me know that I love college football and, more specifically, the Nebraska Cornhuskers.  I never attended the University of Nebraska but I grew up on a farm in Nebraska.  There was always work to be done on the farm but on a Fall Saturday I would never be far away from a radio so I could hear the radio broadcast of my beloved Nebraska Cornhuskers and the opponent I hoped they would defeat that day.

My pride for my Nebraska Cornhuskers is about to come forth and I wanted to share with you the first paragraph and last section of an article, In My Tribe, written by Terry McDonell in the November 28, 2011, issue of Sports Illustrated.

First Paragraph:  In the fall of 1980, when SI senior writer Lars Anderson was nine years old and living in Lincoln, his father took him to the Florida State-Nebraska game. With less than a minute left in the fourth quarter, the highly favored Cornhuskers had the ball on the Seminoles' three-yard line, trailing 18-14. That's when heartbreak visited Nebraska: Quarterback Jeff Quinn fumbled. Florida State recovered. Game over. Then, as Seminoles coach Bobby Bowden and his team walked off the field, the crowd rose to its feet in appreciation of the underdogs' hard-fought victory. At first it was just polite clapping, the kind you hear at a golf tournament, but then fans started cheering for Bowden and his players, building to one of the loudest roars of the day. Tears of disappointment ran down Lars's cheeks as his father put his arm around him, pointed to the red-clad fans in full throat and said, "Lars, this is as good as sports gets."

Last Section:  The rearview mirror has always been the best oracle when it comes to sports. More than 30 years after Lars Anderson saw that Florida State-Nebraska game with his father, he was reporting a story about the history of spring football and had lunch with Coach Bowden in Birmingham. Near the end of the conversation, Anderson mentioned that he was from Lincoln. The coach's eyes lit up. Without prompting, he recalled that day three decades earlier when the fans of Nebraska cheered him off the field.

"What a moment," Bowden said, a grin spreading over his face. "Wow."

And then these two men, two generations apart, just looked at each other until Bowden spoke again.

"The classiest thing I ever experienced."

Thanks for indulging me for a few moments to share my love of Nebraska football.  Go Huskers!  Go Big Red!

Could Black Friday Spark a Rally?

Black Friday sales may be the harbinger of a significant surge in consumer confidence that could fuel our economic recovery. According to the National Retail Federation (NRF), Black Friday retail sales were up 16% over last year. The NRF notes that 226 million shoppers hit the stores and online sales over Thanksgiving weekend and spent $52.4 billion.

In more good news, an NRF pre-holiday poll found that shoppers are more optimistic this year than they were last year. Based on that survey, the NRF forecasted that total holiday sales would be up 2.8% to $465.6 billion. However, the wildly successful Black Friday may result in sales beating that estimate. Interestingly, over the last ten years, we’ve seen a 2.6% annual average increase in holiday spending. However, over the course of the previous decade, the average annual increase was 3.4%.

Retailers have a huge incentive to get you to shop until you drop this season. As the NRF notes, about 20% of their sales occur in the less than 30 days between Black Friday and Christmas. For some retailers, such as jewelers, that percentage could be as high as 40%. To resist the holiday message to spend, spend, spend, think of other economies that stress the merits of saving. Over the past three decades, Germany, France, Austria, Belgium, and Sweden have maintained household saving rates between 10 and 13 percent. Conversely, saving rates in the United States dropped to nearly zero in 2005 before inching up to 5% during the credit crisis of 2008. Most recently, our savings rate has fallen to less than 4%, far less than half of what many Europeans save. Think about that as you head to the mall….

Think Twice About an Indexed Annuity

We all enjoy playing a game we can’t lose, but investing in the stock market is not one of them. However, the promise of “guaranteed returns” led shell-shocked investors to pour nearly $30 billion into index annuities in 2009, even as they pulled $9 billion out of U.S. stock funds.

Index annuities are a close cousin of a traditional deferred fixed annuity, an investment vehicle in which an insurance company invests your money in bonds during an "accumulation period" of seven years and then converts your account into a steady stream of guaranteed income payments. An index annuity has the additional twist of tying those guaranteed payments to the performance of a stock market index, such as the S&P 500.

Guarantees are tempting in the wake of the Great Recession and continued market turbulence, but dangers lurk in the indexed annuity’s structure and fine print. In my view, the top three stumbling blocks are:

• High commissions, up to 9 percent in some cases, that can tempt the selling agents to act against your best interests.
• Steep surrender fees, as high as 20 percent, that can be imposed if you cash out before 10 years.
• Product complexity that makes it tough to know what you are buying.

Beyond those concerns, according to William Reichenstein, an investment management professor at Baylor University, over the long term a very conservative portfolio easily beats an index annuity. Why do indexed annuities almost always underperform? The issuing insurance company caps your return and can adjust the cap each year. A common cap for an annuity tied to the S&P 500 is 4.5 percent. And, according to the research firm Advantage Compendium, for the five years ended in September, the average index annuity paid an annualized 3.89 percent, just slightly better than the 3.81% you would have earned in a five-year CD and less than the 5.1 percent from taxable bond funds.

Finally, please be aware that fixed annuities are often marketed at “informational lunches” that are really over aggressive, high pressure sales pitches. Remember, the old adage “There is no such thing as a free lunch” applies to the market as well.

In Praise of Rebalancing

If buying low and selling high is the secret to investing success, should you buy every time the market drops significantly? Jason Zweig argues convincingly in a Wall Street Journal article that investing during the market’s equivalent of retails’ Black Friday is not a simple path to increased returns. Sure, buying low helps, but how low does the market have to go before you buy? Also, you have to correctly identify how high is high enough to sell.

Zweig correctly identifies rebalancing—selling one asset that has gone up in price to buy another that has gone down—as the key to improving returns over time. Rebalancing works as your portfolio’s GPS. That is, you set your course with your initial asset allocation, but when you encounter roadblocks or the unexpected along your route, the GPS re-calculates your driving directions, or rebalances, to keep you on course to reach your destination.

Zweig quotes research from Francis Kinniry Jr., an investment-strategy analyst at Vanguard Group, that found that, over the past decade, regular rebalancing between stocks and bonds would have added about 0.3 percent in average annual return to a strategy of buying on dips of 2 percent or more. Further, he shares the finding that an investor with 40 percent in U.S. stocks, 20 percent in international stocks and 40 percent in U.S. bonds who rebalanced at year end over the last decade would have earned 5.6 percent annually —versus 4.9 percent for someone who merely bought and held.

Here’s another analogy to underscore the value of rebalancing. It feels great to buy a new car far below the sticker price, but you need to regularly maintain your vehicle for it to serve you well over the long-term. Rebalancing is required maintenance for your portfolio. As I look back on the technology bubble that burst, 9/11 and the financial crisis/Great Recession, our disciplined rebalancing is one of the major reasons our clients have had a better investment experience.

Don't Let Fear Thwart Your Investment Strategies

With Paranormal Activity 3 setting records at the box office, it’s a good time to talk about how fear can impede sound investment decisions. Certainly, the acute market volatility we’ve experienced over the last few years has sparked a growing fear among investors of incurring additional losses. How does this attitude impact your portfolio? Interestingly, a Fidelity survey of participants in workplace retirement plans during the turbulent 18-month period from October 2008 to March 2010 quantifies just how much letting yourself fall into fear’s grips can hurt.

Fidelity found retirement investors who kept contributing to their plan and who maintained some exposure to equities throughout the period were better off throughout the market’s roller coaster ride than those who moved in and out of the market in an attempt to avoid losses. Specifically, the 81,400 who sold all stocks in 2008 had an average return of -6.8 percent over the period. On the other hand, the 7,332,000 who sat tight and kept investing in equities earned an average 21.8 percent over the 18 months.

We tend to retreat during market turbulence because, as behavioral finance pioneers Daniel Kahneman and Amos Tversky have shown, human beings have a stronger preference for avoiding losses than for registering gains.

Recognizing and adjusting for this innate bias may help prevent you from making fear-driven decisions during dark days in the market. Think about your own behavior during past downturns. Did you make any fearful decisions that you now regret? With volatility looking like it’s here to stay, has your risk tolerance changed? If so, it may be necessary to make adjustments to your portfolio. Otherwise, the best advice to keep short-term volatility from prompting emotional fear-based decisions that can negatively impact your portfolio is to stay focused on your long-term goals.

As Benjamin Graham, a pioneer in security analysis said, “Individuals who cannot master their emotions are ill-suited to profit from the investment process.” As our clients' trusted advisor, it’s our job to help minimize the impact of inescapable emotional swings and maintain disciplined investing.

Stick with Stocks

Many investors believe step one in dialing down their portfolio’s risk should be reducing equity exposure. Yes, stocks are riskier than bonds, but that’s an oversimplification that can result in some misguided moves. First, stocks provide a greater return than bonds over the long term According to Standard & Poor’s, the S&P 500 Index has had an average annual return of 9.9 percent annually from 1926 to 2010. Over the past 50 years, it’s returned 9.8 percent, and over the past 25 years, the return has been 9.9 percent. According to Ibbotson Associates, long-term government bonds have averaged 5.5 percent, 7.1 percent, and 8.9 percent during these same three time periods.

Stocks are also a better hedge against inflation. On an inflation-adjusted basis, the S&P 500 Index has provided average annual returns of 6.7 percent from 1926 to 2010, 5.4 percent over the past 50 years, and 6.9 percent over the past 25 years. There were a total of 10 rolling-year periods when the S&P 500 Index did not keep up with inflation. While long-term government bonds provided inflation-adjusted returns of 2.4 percent, 2.9 percent, and 5.9 percent over those same three periods, there were 33 rolling-year periods when long-term government bonds did not keep up with inflation. One factor influencing the gap between stocks and bonds is that, even in difficult markets, companies can increase their prices to remain competitive.

If you want another reason to invest in equities, consider this prediction by Professor Sylla, a financial historian at New York University's Stern School of Business who has studied market behavior all the way back to 1790. A recent Wall Street Journal article--A Long-Term Case for Stocks--reported his view that if the market sticks to its long-term pattern, the Dow Jones Industrial Average could climb to 20250 by the end of 2020, up 84% from its recent 10992. Additionally, he says the Standard & Poor's 500-stock index might hit 2300, up 99% from its recent close of 1154.23.

Using 10-year averages of annual market returns, including dividends and adjusting for inflation, Prof. Sylla found when 10-year-average annual returns drop below 5% as they did in 2008 and 2009, markets tend to transition to recovery.

Of course, we all know that past results cannot be used to guarantee future returns…

The real lesson in this research is that investors are best served when they take a long-term view of the market and think in terms of decades and years, not quarters.

BofA's Move Increases Brokers' Conflict of Interest

When Bank of America management decided to relieve Sallie Krawcheck of her duties as head of Bank of America’s wealth management division, they put more than 16,000 Merrill Lynch brokers in the hands of a new boss who presumably has a different corporate agenda. It’s expected that David Darnell, who hails from the banking side of B of America, will likely spearhead a renewed effort on the part of the nation's largest bank to further integrate Merrill Lynch and encourage its brokers to cross-sell more bank products.

This initiative for brokers at Bank of America Merrill Lynch clearly illustrates the conflicts of interest that brokers operate under. However, remember that anyone who is a registered representative of a broker/dealer also has a conflict of interest. Also, an advisor who is dually registered with a broker/dealer and RIA still is not a full-time fiduciary.

Bernhardt Wealth Management is a registered investment advisor and a fiduciary. That means we always put our clients’ interests ahead of our own -- in all cases. To fully appreciate the role and responsibilities of a fiduciary, we return to its Latin roots: fides, meaning faith, and fiducia, meaning trust or confidence. Traced back to English Common Law, fiduciary describes a person who holds a position of great trust. Most often, a fiduciary would administer trusts or handle the conveyance of property. Particularly in today’s complex and challenging market, you deserve nothing less than a fiduciary.

To determine if the advisor you work with is a fiduciary, consult the National Assocation of Personal Financial Advisor's “Fiduciary Questionnaire.”

Is Social Security a Ponzi Scheme?

Governor Perry generated quite a stir during a recent Republican debate when he referred to Social Security as a Ponzi scheme. According to Governor Perry, Social Security is a “monstrous lie…a Ponzi scheme to tell our kids that are 25 or 30 years old today you're paying into a program that's going to be there."

We can debate how long Social Security can remain solvent, but it is not a Ponzi scheme. In fact, this article in the New York Times offers details on just how Social Security differs from a Ponzi scheme.

That said, we all know there’s plenty about Social Security that needs fixing. Simply, last year Social Security began paying out more in benefits than it received in taxes. And as more Boomers retire, that shortfall is expected to grow, especially given high unemployment rates. The New York Times article points to the nonpartisan Congressional Budget Office’s estimate that the combined Social Security trust funds would be exhausted in 2038. However, a number of steps could keep the program afloat. Washington could choose to increase taxes, reduce benefits by raising the retirement age, or reduce cost-of-living increases. Of course, none of these options will be popular with voters, so it remains to see what our elected officials who often are more concerned with keeping their jobs than with attacking our nation’s most serious problems will do. If the debt ceiling debates are any indication, we could be in for a rough ride on the way to Social Security reform.

Celebrating the Spirit of Volunteerism

After my niece, Dorothy, graduated from high school this year, she spent the summer with me. She did some work in my office, and we spent very enjoyable weekends sightseeing in the D.C. area. After a tour of Mount Vernon one Saturday, we had the pleasure of having a conversation over lunch with a couple--Don and Virginia--who had recently retired.  They sold their home in Texas and travel the country in their trailer.

However, the most unique element to their new lives is that they spend three months at a time in different parts of the country volunteering at various U.S. Fish & Wildlife Service locations. When they take a break from these rewarding volunteer commitments, they may take a cruise; schedule a visit with their kids and grandkids, or see another part of the country. They love their new lifestyle. They use Volunteer.gov to apply to various locations from Alaska to Florida and from California to Maine.

We’ve all heard the expression, “Put your money where your mouth is,” and American’s certainly do that. According to the recently released Giving USA 2011: The Annual Report, Americans donated 2 percent of their disposable personal income to charitable causes in 2010, amounting to $290.89 billion. This was an increase over 2009 and two years of declines during the Great Recession. However, it must be especially gratifying in retirement to so actively contribute to the causes you have long supported financially like Don and Virginia--our new friends from Mount Vernon.  You can see a photo of Don, Virginia and Dorothy below.

Debating Tax Reform

“Warren Buffett’s secretary shouldn’t pay a higher tax rate than Warren Buffett. There is no justification for it,” declared President Obama when he announced his deficit-reduction plan. “It is wrong that in the United States of America, a teacher or a nurse or a construction worker who earns $50,000 should pay higher tax rates than somebody pulling in $50 million.”

The President’s reference to the Oracle of Omaha was a response to Buffett’s recent editorial in the New York Times where he noted that the tax rate he paid last year was lower than that paid by any of the other 20 people in his office – and suggested that the rich should pay more in taxes.

In an interview with ABC’s Christiane Amanpour, Buffett clarified his views further when responding to her question on whether the wealthy need tax cuts to increase business activity and further economic growth. Said Buffett, “The rich are always going to say that, you know, 'Just give us more money, and we'll go out and spend more, and then it will all trickle down to the rest of you. But that has not worked the last 10 years, and I hope the American public is catching on.”

Is the middle class paying more in taxes than millionaires? Remember, election season is heating up, so it’s worth doing some fact checking. According to data from the IRS quoted by the New York Times, in 2009, 1,470 households filed tax returns with incomes above $1 million yet paid no federal income tax. However, that's less than 1 percent of the nearly 237,000 returns with incomes above $1 million. This year, those millionaires are expected to pay an average of 29.1 percent of their income in federal taxes, according to the Tax Policy Center. Households making between $50,000 and $75,000 will pay an average of 15 percent of their income in federal taxes.

Yet, projections are just that. Taxes are determined based on where income comes from. Wages are taxed higher than capital gains, for example. Additionally, the tax code is riddled with deductions, exemptions and credits.

As the quest for the White House continues, I’m sure we’ll see tax figures spun a dozen different ways. Certainly, the debate over the “Buffett rule”--that suggests that people making more than $1 million a year should pay a larger percentage of their income in taxes than middle-class families pay--will continue. But it seems to me true tax reform will be a little more complicated than that.

Diversification, Diversification, Diversification

In their well-known and oft-quoted 1986 study of 91 large pension plans, “Determinants of Portfolio Performance,” published in the Financial Analysts Journal, Gary P. Brinson, L. Randolph Hood and Gilbert L. Beebower found 94% of portfolio returns were determined by the asset allocation plan and just 6% attributable to market timing and security selection. Interestingly, however, most individual investors spend little time constructing an appropriate asset allocation plan. Rather than determining the ideal percentage to invest in stocks, bonds, and cash and spreading assets among various sub asset classes, most investors look for the hot stock. This return chasing results in portfolios that are overly concentrated in specific stocks or funds, which increases overall risk.

In Are stocks a loser's bet? another industry influential, William J. Bernstein, quotes research from Dimensional Fund Advisors that found that from 1980 to 2008, the top-performing 25% of stocks were responsible for all the gains in the broad market, as represented by the University of Chicago's Center for Research in Security Prices (CRSP) database of the U.S. total stock market.  So why not invest in only those carefully chosen "superstocks?"  Bernstein’s answer, “Simple: Because a portfolio of 'carefully chosen' equities could easily wind up with none of the best-performing stocks in the market - and thus produce flat or negative returns over many years. Missing out on even a handful of superstocks can leave you short of your target.”

Bernstein notes further that if you missed out entirely on the top 10% performers from 1980 to 2008, you would have cut your annual returns to 6.6% from 10.4%. How does translate into dollars? Bernstein says, “A $100,000 investment in 1980 would have grown to $1.8 million by 2008 at 10.4%. That same amount, at 6.6%, would have grown to only $640,000.” That’s quite a difference.

Here’s the bottom line: It is not worth risking your family’s financial security by speculating on a few stocks, no matter how carefully chose or how much inside insight you think you have. Think of your mother’s advice. “Don’t put all your eggs in one basket.” Spreading your money between stocks, bonds, and cash--asset classes that historically have responded differently to market conditions--is your best defense against being hurt by poor performance in any one asset class. As you see from the Callan Periodic Table of Investment Returns, one asset class never stays at the top or bottom forever. History teaches us that, like a seesaw, as some investments decline, others rise to offset those losses.

Our clients don’t expect us to help them outperform the stock market. Rather, they want our help to develop a plan pay for college, or maintain their lifestyle in retirement, or achieve other important goals. The best way to do this is to invest each client's money in a globally diversified portfolio based upon their goals and risk tolerance.  This does not mean they will never have losses but it is the best way to ensure they get the market return rather than hoping someone can identify the year’s top stocks for their portfolios.

Is a College Degree Worth What It Costs?

PIMCO bond fund legend Bill Gross grabbed the spotlight a few weeks ago when he questioned the value of a college education in today’s economy. In “School Daze, School Daze, Good Old Golden Rule Days,” he wrote, “College was great as long as the jobs were there.” Gross also described the liberal arts education as a “four-year vacation interrupted by periodic bouts of cramming or Google plagiarizing.” That’s not something parents wanted to read as they packed up their cars to take this year’s incoming freshmen class to college.

The facts Gross offers to lay the foundation for his thesis include: College tuition has increased at a rate 6% higher than the general rate of inflation for the past 25 years, making it four times as expensive relative to other goods and services as it was in 1985. Also, the average college graduate now leaves school with $24,000 of debt. College graduates, he reasons, “can no longer assume that a four year degree will be the golden ticket to a good job in a global economy that cares little for their social networking skills and more about what their labor is worth on the global marketplace.”

Certainly, we all know college graduates who are struggling to find employment. And we all know students who are in college who, for whatever reason, would be better served elsewhere. However, it seems a bit of an overreaction to let the current job market, influenced by a confluence of unprecedented market events, dictate how we prepare the next generation of thinkers to compete in global marketplace. Surely, the goal at the end of a college education is meaningful employment, but higher education cannot be governed by the economy alone.  The business leaders I have interviewed typically recommend a college education for today's young people.

What do you think?

Is Now a Good Time for Wealth Transfers?

Our ever changing tax laws seem perpetually riddled with sunset clauses. And that makes estate planning opportunities fleeting. For instance, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRA), increased the federal gift tax exclusion to $5 million. Accordingly, you can make $5 million in gifts in your lifetime without paying a gift tax. However, the TRA is scheduled to sunset at the end of 2012. Post-sunset, the federal gift tax exclusion will revert to its previous lower level of just $1 million. Therefore, if you have been considering making large gifts to your children or grandchildren, it may be advantageous to move those assets before the end of next year.

Also on the estate planning radar screen is the fact that Standard & Poor’s recent downgrade of long-term credit rating for U.S. Treasury debt from AAA to AA+ may cause an increase in the safe harbor interest rates for intra-family debt transactions. These so-called Applicable Federal Rates (AFRs) are currently near historic lows -- and that obviously works to your advantage when making lifetime transfers of business interests or property to your children or grandchildren. We’ll keep a watchful eye on interest rates so we can effectively guide your estate planning decisions.

If you want to discuss how to take advantage of the increased gift tax exclusion under the TRA or how a potential increase in AFRs might impact your estate planning, you should consult your attorney, accountant, or wealth manager.

The Truth about the Downgrade and the Downturn

After a period of growth and semi-stability where many hoped that the worst of the market volatility was behind us, last month we experienced dramatic downturns not seen since the dark days of 2008. Some will blame the Dow’s freefall on Standard & Poor’s decision to downgrade U.S. Government debt from its AAA to a lesser AA+ credit rating. (See the “S&P Downgrades the U.S.: Five Things” for details.)

While the downgrade is unprecedented, in my view, it is not responsible for the profound market volatility we’re experiencing. More likely, the steep decline reflects the market’s broader frustration with the difficulty our elected officials had striking a debt ceiling compromise and the fact that Washington’s solution is a temporary fix. Congress and the President ultimately agreed to a budget cut of $2.1 trillion, half of the figure initially debated.

Standard & Poor’s has grabbed all the headlines, but it’s important to note that the other two major credit agencies, Moody’s and Fitch, elected not to downgrade U.S Treasuries. Although sticking with their top rating of Aaa, Moody's Investors Service did assign a negative outlook on United States government bonds on August 2. The firm noted that it could take “further action if: (1) there is a weakening in fiscal discipline in the coming year; (2) further fiscal consolidation measures are not adopted in 2013; (3) the economic outlook deteriorates significantly; or (4) there is an appreciable rise in the US government's funding costs over and above what is currently expected.”

Regardless of being on a kind of watch list, U.S. debt still remains among the world's safest investments. In fact, we’ve seen a rally in the Treasury market with the traditional “flight to quality” that occurs when we experience dramatic market downturns. It’s also worth noting that the downgrade to AA+ does not apply to short-term Treasury securities. Accordingly, money market funds, which generally hold a lot of short-term Treasury securities, should be unaffected by the downgrade. There may be long-term negatives, however. China and other foreign countries could demand a higher interest rate to hold U.S. debt. Additionally, consumers could face higher rates for mortgages, car loans, and student loans. Stay tuned.

A Moment to Reflect on 9/11

I am sure the hearts and minds of every American reflected with great sadness on the events that took place ten years ago.  Our thoughts and prayers go out to everyone who lost a loved one on 9/11 or as a result of the terrorist attacks on America.

As I was reflecting on 9/11, I wanted to share two articles and one video that are worth reading and seeing.  The articles are written by Peggy Noonan--one on the five year anniversary of 9/11 and the other on the ten year anniversary.  They are:

     The Sounds that Still Echo from 9/11

     We'll Never Get Over It, Nor Should We

To watch the video click on this link for an eight minute video on the World Trade Center Memorial.

God Bless You and God Bless America!

The Numbers are Staggering

Following Standard & Poor’s downgrade of U.S. debt during the week of August 10th, investors pulled $40.3 billion out of long-term mutual funds of all types, according to the Investment Company Institute (ICI). Put in perspective, the outflow of $40.3 billion was roughly 25 percent more than was pulled out in the previous four weeks combined and more than double the $17.0 billion pulled out the previous week. Since, May 1, according to the ICI, investors have pulled out more than $85 billion.

The extreme volatility of the last few weeks not withstanding, the economic recovery continues to follow an atypical course. Generally, the more significant a market downturn is, the stronger the rebound. Yet, although the economy contracted about 4% during the “Great Recession,” the worst since the Great Depression, this recovery has been lackluster. In fact, growth is running at about half the expected speed due to tight credit conditions, a depressed housing market and a pervasive lack of consumer and corporate confidence. Unsure whether better days are around the corner or further down the road, investors have been focused on capital preservation and the search for decent yield.

If the “Super Congress” makes essential budget cuts and positive signs like strong corporate earnings and robust exports continue, we’ll see a real improvement in investors’ confidence. That optimism will move steadily from Main Street to Wall Street and give our recovery the boost it needs. In the meantime, diversification and investment discipline will continue to be the best policy in this environment.

Get the Raise You Deserve

Articles instructing us how to trim our budgets often target the coffee shop specialty coffees: $3.00 a day, compounds to $15 a week, $60 a month, and so on through your working career. I recently heard a compelling rebuttal to the instruction that we do without our morning caffeine stop. “I’m not expecting any great inheritance,” the twenty-something employee declared. “I figure the money I spend in the morning to fuel my day is a great investment in my own productivity.” That statement got me to thinking that more than ever today’s young workers rely on themselves, not their parents or fabulous market gains to achieve their goals. Accordingly, their salary is more important that ever.

With high unemployment making it a hirer’s market, it’s more important than ever not to sell yourself short when it comes to salary negotiations. A recent article by Greg Robb for Market Watch offered some stellar advice for those about to tackle salary negotiations.

Set your expectations, says Don Hurzeler, author of the book The Way Up: How to Keep Your Career Moving in the Right Direction. If you are unemployed and applying for work, he says to expect to earn approximately what your old salary was or slightly less. However, if you are being hired away from an existing position, look for a 20% salary increase.

Charlotte Weeks, a Chicago-based career coach advises clients to avoid answering questions about expected salary early in the interview process. She says to deflect money questions by turning the tables and talking about what you can offer the company. Later in the interview process, you might offer an acceptable salary range based on your research into what others in the field earn, says Karen Lawson, a management consultant.

Finally, before you accept an offer, be sure to calculate the value if a company’s benefits, including health insurance, 401(k) plan, deferred compensation program, and even vacation and sick leave.

Should Your Small Foundation Convert to a Donor-Advised Fund?

In an investment environment that’s seen endowment assets drop and administrative costs climb, many families nationwide are eschewing the cache of small foundations for donor-advised funds. Why? Lower administrative costs and flexibility mean that more money goes to their charitable causes.

According to a recent article in Investment News, Fidelity Investments' Charitable Gift Fund, the largest donor-advised fund with $5.6 billion in assets, took in about $30 million from foundations in the one-year period ended June 30, 2011, up from $16 million a year before. Similarly, Schwab Charitable, the second-largest donor-advised fund with $3.1 billion in assets, saw roughly $28 million converted from foundations to donor-advised funds, double the amount from last year.

A donor-advised fund is an account established at a sponsoring charity. You make irrevocable contributions of cash, securities, or other assets to the giving account and receive an immediate tax deduction. As the account advisor, you then make distributions from the account to other operating non-profits, such as hospitals, schools, environmental organizations, or the Red Cross. The fund handles all the due diligence, tax filing, compliance, and administration. Approval of your grant recommendations is essentially automatic as long as your designated charity is a 501(c)3 in good standing.

The benefits of donor-advised funds I’ve long stressed for individuals also hold true for foundations. For example, whether an individual directs funds to a foundation or a donor-advised fund, they qualify for the charitable deduction that year, and can disperse the funds later, on their own timetable. (Note: There are some limitations on securities so be sure to check with your tax advisor.) Donor advised funds also facilitate donations of stock and other assets, allow donors to maintain privacy, and deliver the benefits of professional recordkeeping at a lower cost that a foundation can.

Of course, you need to consider your foundation’s goals before making the move to a donor-advised fund. Although you may realize tax and administrative benefits with a donor-advised fund, foundations do offer greater grant-making flexibility, allowing you, for example, to establish an endowed scholarship.

Brokerage Firms Must Report Investment Gains; Plus S&P Downgrade

In an effort to ensure everyone pays their fair share of taxes, on January 1st of this year, the Federal government began requiring brokerage firms and other custodians to calculate and report gains or losses on certain customer trades to the IRS. This requires knowing not only the cost basis (the amount paid for the security), but also establishing the method to calculate gains. Most custodians use the “first-in, first-out” method for equities and the average cost method for mutual funds to determine cost basis.

You should consult your custodian to determine what methods are available to you and to determine how your portfolio is setup. For our clients we utilize a hybrid of the "high cost" method. We first try to determine if there are any trade lots that can be sold at a loss.  Once that has been done we sell the lots with the highest cost basis that are over 12 months old first.  This gives us the maximum tax efficiency on any trading in our client accounts.

Our portfolios’ tax-efficiency has always been a major concern. While many give up on tax loss harvesting in years when investors have not registered significant gains, the exercise is never a waste of time. Remember, harvested losses can offset any gains and up to $3,000 of net capital losses can be deducted from their ordinary income on their tax return for the year. Net losses above that $3,000 can be carried over to future years until they've all been used up by future portfolio gains.

As we expect capital gains tax rates to increase in the future, the tax loss harvesting approach makes even more sense. Simply, losses you book today mean gains that are otherwise likely to be taxed at a higher tax rate in the future could be tax free.

Utilizing “tax swaps” whereby we sell a losing position and simultaneously purchase a similar security (mindful of wash sales rules which prohibit selling and then buying the same security within 30 days) allows us to maintain exposure to the asset class while we harvest losses.

S&P Debt Downgrade:

Unrelated to this blog topic is the subject of Standard & Poor's downgrade of the U.S. credit rating from AAA to AA+.  This will be brief but as I mentioned to many, I felt investors and the media made more of this matter than what it deserved.  The U.S. dollar is still the global reserve currency and Standard & Poor's and others don't exactly have a pristine record when it comes to making accurate credit ratings.

On the lighter side, I wanted to share the formula below that a friend shared with me.  I don't know where he got it, and I am unable to give credit to the person who created it.  If someone knows who created it, I will gladly give them credit.  In the meantime, I hope you can enjoy the humor of it:


No offense is intended to be directed at the POTUS, Senate Democrats, House Republicans, Tea Party or Wall Street.  Just enjoy it!

Protecting Seniors from Financial Scams

We’ve all received emails riddled with misspellings from scam artists notifying us that a vast amount of cash is just waiting for us to claim, or that something’s amiss with our bank account. All we need to do is enter our bank information and money will be wired immediately and we’ll live happily ever after. Many of these scams are targeted at older people.

A recent MetLife study found older Americans are financially abused by family members, strangers and businesses to the tune of $2.9 billion a year. Alarmingly, despite increased efforts to educate seniors about the dangers of sharing their financial information, the sum of swindled funds is 12% higher than in 2008. The real tragedy, of course, is that both numbers may grossly under-estimate the thefts as experts figure that more than 80% of cases are not reported because the victims are too embarrassed to report the thefts to their children or authorities.

Why are our seniors so vulnerable? A recent Investment News article mentions research from behavioral economist David Laibson that found that people tend to make poorer financial decisions as they age. Laibson’s take on this sad reality is that because seniors are often lonely, they may be more willing to talk to strangers.

To protect your older relatives, I suggest sharing two simple investment adages: If it sounds too good to be true, it probably is a scam. And if you don’t understand it, you should not own it.

If you’re charged with reviewing the bank accounts of a loved one, any large withdrawal should prompt questions. Of course, seniors working with an independent financial advisor who is a fiduciary (i.e., a firm like Bernhardt Wealth Management) have the added assurance of a trusted professional reviewing their financial accounts and activities in their accounts.

Credit-Report Firms to Face Scrutiny

On July 21st, the newly formed Consumer Financial Protection Bureau (CFPB) took over a range of consumer-product regulatory functions from bank regulators. In addition to mortgages and other credit products, the CFPB also is now responsible for the oversight of the three major consumer credit-reporting companies, Equifax, Experian PLC, and TransUnion. In spite of this new level of fresh oversight, presumably to do something about the high rate of errors in credit reporting, my advice still holds: It is wise to request a copy of your credit report at least once a year to make sure that a mistake isn’t damaging your credit score and resulting in your having to pay high interest rates.  You can go to AnnualCreditReport.com to request a copy of your credit report.

It will be interesting to see whether this new agency will be able to do anything about the high rate of credit report errors. I would hope that the credit reporting companies would have to open up their own books and processes for thorough examinations.

July 21st was also the year anniversary of the passage of the Dodd-Frank Act. And Securities and Exchange Commission (SEC) Chairman Mary Schapiro, speaking before Congress, used the occasion to warn that the SEC needs “significant additional resources” in order to fully address their new responsibilities under Dodd-Frank. “There’s only so much you can achieve by wringing funds out of the existing budget,” she said. Over time, she says, “full implementation of the Dodd-Frank Act will require a total of approximately 770 new staff,” including experts in derivatives, hedge funds, data analytics, and credit ratings. She also noted that the SEC “also will need to invest in technology to facilitate the registration of additional entities and capture and analyze data on these new markets.”

Let’s hope the SEC gets the resources it needs to fulfill its broader responsibilities under Dodd-Frank.

Think About It: Stock Market Quotes

For over ten years we have preached the the merits of the efficient markets hypothesis and why investors should use low-cost, tax-efficient, broadly diversified asset class funds in an asset allocation plan tailored to their unique concerns, goals and risk tolerance.  We believe this strategy is the optimal way to grow and protect wealth.  And many of the greatest minds in modern finance agree:

"It is nearly always unwise to act on insights that you think are your own but are in fact shared by millions of others."
--John Bogle, Founder of The Vanguard Group

"Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees."
--Warren Buffet

"Investors should remember that excitement and expenses are their enemies."
--Warren Buffet

"Again, the problem is not that investment research is not done well. The problem is that it is done so well by so many...that no single group of investors is likely to gain a regular and repetitive useful advantage over all other investors."
--Charles Ellis, Vanguard Director and author of "Winning the Loser's Game"

"I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities."
--Benjamin Graham, Warren Buffet’s mentor and "Father" of security analysis

"All the time and effort that people devote to picking the right fund, the hot hand, the great manager, have in most cases led to no advantage."
--Peter Lynch, author of "Beating the Street"

"Don't try to beat the market, and don't believe anyone who tells you they can—not a stock broker, a friend with a hot stock tip, or a financial magazine article touting the latest mutual fund."
--Burton Malkiel, Professor of Economics, Princeton University

"Don't try to beat the market. Put your savings into some indexed mutual funds, which will make you just as much money (if not more) at much less cost."
--William Sharpe, Professor of Finance, Stanford University, Nobel Prize in Economics

"Invest in index funds. Your odds of beating the market in an actively managed fund are less than 1 in 100."
--David Swensen, Chief Investment Officer, Yale Endowment Fund

"As a general rule of thumb, the more complexity that exists in a Wall Street creation, the faster and farther investors should run.”
--David Swensen

Quotes on the Lighter Side
"Every day, self-proclaimed stock market "experts" tell us why the market just went up or down, as if they really knew. So where were they yesterday?"
--Anonymous

"If stock market experts were so expert, they would be buying stock, not selling advice."
--Norman R. Augustine

"There are two kinds of investors, be they large or small: those who don't know where the market is headed, and those who don't know that they don't know. Then again, there is a third type of investor--the investment professional, who indeed knows that he or she doesn't know, but whose livelihood depends upon appearing to know."
--William Bernstein

"Prediction is very difficult, especially if it is about the future."
--Niels Bohr, 1922 Nobel Laureate

"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years."
--Warren Buffett

 "In the business world, the rearview mirror is always clearer than the windshield."
--Warren Buffett

"...there's no better advice on how to live longer than to quit smoking and buckle up when driving. The lesson: advice doesn't have to be complicated to be good."
--Charles Ellis

"One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute."
--William Feather

"There are two times in a man's life when he should not speculate: when he can't afford it, and when he can."
--Mark Twain

58 Percent of Investors Have Lost Faith in the Stock Market

Surveys are beginning to record what we all know is true. The financial crisis has had a profound impact on investors. In fact, 58 percent of investors have lost faith in the stock market, according to a survey of 1,274 Americans conducted by Prudential Financial. Forty percent say they have a conservative portfolio, up from 33 percent before the recession, and 44 percent say they are unlikely to ever again invest in stocks. Only 37 percent describe their portfolios as aggressive, down from 46 percent prior to the recession.

While 70 percent of the respondents said they have taken steps to improve their financial situation by saving more or reallocating their investments, the majority have moved their money to more conservative investments. This move to safety creates a new risk that they might fall short on achieving their retirement goals.

For most investors, the biggest threat to a financially secure retirement is not short-term market volatility, but inflation. Consider this: Even if inflation stays at the historical level of 3 percent, the cost of almost everything will double in 24 years. That means if you are living on $80,000 in 2011, by 2035, you’ll need $160,000 to maintain your standard of living. Accordingly, as we plan for retirements to span greater than three decades, it’s clear that portfolios comprised solely of bonds and cash will not protect against inflation. Today, the increased length of retirement requires an allocation to global equities for growth potential and diversification.

Yet, investors may not be as reluctant to invest in equities as they report. According to Strategic Insight, year-to-date cash contributions through April to equity and hybrid funds have surpassed inflows to fixed income funds for the first time since the financial crisis. Equity funds netted $110 billion through April, mixed funds $30 billion and bond funds $100 billion as investors acknowledge higher equity allocations to meet their long-term financial objectives.”

401(k) Plans Hit the Big 3-0

It’s been three decades since the 401(k) arrived on the retirement saving scene. And to celebrate the tax-deferred account’s milestone, many U.S. companies that eliminated their 401(k) matching contributions during the Great Recession are beginning to restore this valuable benefit.

According to the consulting firm Towers Watson, during the recent recession, almost one in five U.S. companies with at least 1,000 workers suspended 401(k) matching contributions. Now, many of those companies are reinstating the perk – albeit often at a reduced level. Today, the once standard 3% match is considered generous. In addition to offering smaller matches, some companies are linking their contributions to corporate profits or requiring employees to reach a particular dollar level in their account before any matching occurs.

With traditional pension plans going the way of the drive-in movie and concerns mounting over the long-term health of Social Security, 401(k) accounts are a critical leg to the retirement stool. According to the Employee Benefit Research Institute (EBRI), 79 percent of eligible workers (36 percent of all workers) say they participate in retirement savings plan with their current employer. Furthermore, 28 percent of participants report that they have increased the percentage of their salary that they contribute to the plan in the past year, and just 4 percent report they decreased the percentage. EBRI also found that workers who currently participate in this type of plan are more than twice as likely as those who do not to report retirement savings and investments of at least $50,000 (52 percent vs. 23 percent).

While 401(k) participation levels have certainly increased since the plan’s introduction and held steady even throughout the recent financial crisis, the industry can do a better job with education. In fact, EBRI found less than half of workers (42 percent) report they and/or their spouse have tried to calculate how much money they will need to save to secure a comfortable retirement. Disappointingly, this percentage is lower than the 53 percent recorded in 2000 and the 47 percent in 2008.

Dodd-Frank Debated

In a recent news article, “Old Fears Resurface as Lawmakers Confront Basel III, Dodd-Frank Changes,” Donna Borak reported that U.S. lawmakers at a House Financial Services Committee recently addressed whether requirements of the Dodd-Frank Act, combined with tougher international capital and liquidity rules are driving financial institutions overseas.

The article offered dueling perspectives. Rep. Shelley Moore Capito, R-W.Va., told top regulatory officials, "I think failing to examine the aggregate cost of compliance with Dodd-Frank could lead to job losses and, in the worst case, a downgrade of the United States as a financial center

Conversely, Lael Brainard, Undersecretary of the Treasury for International Affairs stated, “There are some who would argue that the United States is moving too fast on financial reform, that we should slow it down, wait to see what other countries implement. I don't agree. By moving first and leading from a position of strength, we are elevating the world's standards to ours."

Borak also quotes Brainard as stressing that in passing Dodd-Frank, that “policymakers were not choosing between stability and growth, as critics charge” The “real point,” she says, “is that we will have much healthier growth if, in fact, we put in place a safe and sound financial system."

I couldn’t agree more, but am sure that the Dodd-Frank debate will continue – especially later this month when the SEC presents to Congress its cost benefit analysis of requiring that broker-dealers be subject to the same fiduciary standard of care as investment advisors. That’s something all investors deserve.

Investing is Boring

I came across an article in the Financial Post that I thought was worth sharing.  The article was titled Investing is Boring: If You Want Excitement, Go to Vegas.

The entire article is well worth reading but I particularly liked the following quote:  "timing the market is impossible, forecasts are for the gullible, and stock-picking is a mug’s game."

Recovery? What Recovery?

Soft. Stalled. Uneven. These are the words we’ve read in headlines that describe the market’s recovery. The economy grew at just an 1.8% annual rate in the first quarter of this year, down from 3.1% in the fourth quarter of 2010. Experts agree that two factors critical to any market recovery have been absent in our transitioning market. To get the recovery into high gear, home prices must stop declining and begin their ascent. Second, consumers, the driving engine of our economy, must regain their confidence and begin to spend more freely.

According to Susan M. Wachter, a Wharton real estate professor, we are three to five years away from being back to what might be considered the “new normal” in the commercial and residential real estate markets. She points out that construction is a job-intensive sector, and therefore, the sector that generally leads the job recovery. Without the boost from robust construction activity, she says the overall recovery is “far more vulnerable to other negatives.”

Mark Zandi, chief economist and cofounder of Moody's Economy.com. put a graphic spin on the market’s recovery. He says to have a vibrant recovery and economic expansion, housing has to go from “being a headwind to a tailwind.” Yet, with average housing prices having declined for six consecutive months, we have a ways to go before that happens.

As for consumer confidence, a survey by the Certified Financial Planner Board of Standards found that a majority of Americans are still experiencing negative fallout from the recession. Fifty-five percent say they have delayed a big purchase and 45 percent have dipped into their savings to stay afloat in tough markets.

However, The CFP Board of Standards survey also recorded hope: 83 percent of respondents said their own personal financial situation will remain the same or improve in the coming year. That optimism is a powerful first step in jumpstarting consumer spending and getting the economy moving full steam ahead.

Does Your College Aid Package Include a Loan?

According to Finaid.org, more than $100 billion in federal education loans and $10 billion in private student loans are originated each year. Of course, the terms of various loans can vary greatly.

• Stafford Loans are federal loans that come in two varieties: Subsidized (based on financial need) or unsubsidized. Subsidized Stafford loans have a lower interest rate than the unsubsidized loans and interest doesn’t start accruing until after graduation. Unsubsidized Stafford loans start accruing while the student is in school, but payment can be deferred until after graduation.
• PLUS Loans are designed for parents and interest rates are usually higher than other types of federal loans.
• Perkins Loans are made through the schools and interest does not begin to accrue until after graduation.

To compare various loans’ terms, you can use the Loan Comparison Calculator at Finaid.org. And remember that if your aid package includes a loan with a very high interest rate, you can decline that part of the package.

Inevitably, evaluating financing options prompts the question: How much college debt is too much college debt? Getting a sense of national averages may help you to answer that question. Using data from the 2007-2008 National Postsecondary Student Aid Study (NPSAS) conducted by the National Center for Education Statistics at the US Department of Education, Finaid.org offers the following table showing the percentage of students borrowing and the average cumulative debt per borrower (excluding Parent PLUS Loans) at graduation according to type of educational institution.

Who Doesn’t Dream of Working for the Next Google?

U.S. job growth is driven by startup companies, but if you’ve been offered the opportunity to get in on a company’s ground floor, it’s important to consider potential risks along with the rewards.

Drawing from a 2010 Kauffman Foundation study, Polly Black, Director of the Center for Innovation, Creativity and Entrepreneurship at Wake Forest University, has developed a list of five important considerations for those contemplating joining a startup:

1. Passion. Look in the mirror, advises Black. Long hours and low pay require that you have a real passion for what the small startup company is doing.
2. Financial stability. Evaluate the company’s financial backing. Is it profitable? If it hits a major roadblock, what are the plans to stay afloat?
3. Chemistry. Start ups require a lot of team work, so you need to decide if you fit in with the other employees.
4. Market need. Black says company leaders should be able to clearly articulate the market need they are meeting with their product or service in a sentence or two. If they can’t, that may indicate a lack of focus that could impede the company’s success.
5. Experience. How will your work be balanced between job responsibilities and decision decision-making? Will you be comfortable with the level of autonomy offered?

Interestingly, your evaluation of risk and reward on the employment front is not unlike the work we do to accurately identify your risk tolerance that informs the construction of your portfolio. In both cases, if you take on additional risk, you have the potential to reap greater rewards. Also, as with investing, there are different periods in your life that may be more conducive to taking on additional risks.

Pessimistic Mass Affluent Need a Plan

MFS' recently released findings from its Investing Sentiment Survey show that mass affluent investors (those with between $100,000 and $1 million in household investable assets) have pessimistic attitudes toward investing. Primary factors contributing to the negativity include the impact of 2008's financial crisis and concerns over potential reductions in Social Security. Interestingly, although many have accumulated significant assets, these investors are not optimistic about the future. In fact, 32% describe themselves as protective, 17% as pessimistic, and 16% as fearful. Only 41% describe themselves as hopeful. Other findings include:

• 44% reported reducing their discretionary spending over the last 12 months; only 14% reported an increase in discretionary purchases.
• 59% agreed with the statement: “I am more concerned than ever about being able to retire when I thought I would,” with only 16% disagreeing.
• 49% agreed with the statement: “Over the past few years, I've lowered my expectations about what life will be like in retirement.”

It seems to me that the mass affluent need a financial plan. I would point out that in the October 2010 Dow Jones Affluent Investor Study of 1,287 investors with more than $500,000 in investable assets, approximately half reported that they prefer to manage their own investment portfolios. Additionally, the study found that of those investor working with an advisor, one-third said they had not developed a retirement plan.

As our clients know, an investment policy statement (IPS), a written plan that details their goals and a plan to meet them, is integral to feeling secure. To ensure investment decisions are based on reason rather than emotions and support short- and long-term goals, an IPS specifies an investor’s time horizon, risk tolerance, and standards for a diversified, risk-appropriate portfolio he or she can live with in all markets. In addition to keeping investors grounded during times of market stress, an IPS helps them measure their progress towards their goals.

CFA to Congress: Ignore Misleading Industry Arguments and Allow SEC to Proceed with Fiduciary Rule

In January, in response to a requirement of the Dodd Frank law, the SEC delivered a report to Congress recommending that broker-dealers be subject to the same fiduciary standard of care as investment advisors. However, the SEC delayed imposing the fiduciary rule to conduct a cost benefit analysis. In advance of the SEC’s planned July meeting to address those findings, advocates for imposing a universal fiduciary duty are urging the SEC to enact the rule.

Notably, the Consumer Federation of America’s (CFA) Director of Investor Protection Barbara Roper recently wrote to U.S. House members urging them not to be swayed by misleading arguments from a small segment of the broker-dealer community. In her letter, Roper contested the view set forth mainly by brokers whose business model depends on the sale of high-cost variable annuities, that imposing a universal fiduciary standard could have “unintended consequences” for middle income investors.

Roper wrote, “The SEC has proposed a way to move forward on fiduciary duty that maximizes investor protections while minimizing industry disruption. In doing so, it has won broad support from industry and investor advocates alike. It would be tragic if opposition from a few industry members intent on maintaining the status quo were able to derail that progress. Despite the self-interested claims of certain industry members, it is the middle income investors who must make every dollar count who are most in need of these enhanced protections.”

I couldn’t agree more. I am proud that the Bernhardt Wealth Management team serves our clients as a fiduciary and look forward to the day when all investors can be confident that all financial advisors act only in their clients’ best interests.

Nebraska

I was recently reminded of this video and thought I would share it.  The song was written by Kevin Marcy and sung by The Marcy Brothers.  (Kevin was two years behind me in high school.)  The video was shot in and around my hometown of Hay Springs, Nebraska--where I spent the first 18 years of my life before I attended college.  I hope you enjoy it!

Time to Re-assess Market Risks/Rewards?

According to Jim Parker, Vice President, DFA Australia Limited, understanding investment risk begins with accepting that “the market itself has already done a lot of the worrying for you.” As Parker notes, “Markets are highly competitive, which means that new information is quickly built into prices. Instead of trying to second guess the market, you work with it and take the rewards that are on offer.”

To put yourself in the best position to “take the rewards,” it’s wise to work with an advisor to build a diversified portfolio designed to meet your long-term goals – and meet periodically to review your progress and make necessary changes to ensure you are still on course.

If the Great Recession has altered your perception of risk, now may be a good time to meet to re-assess your risk tolerance. Remember, how much risk you decide to take involves assessing three inter-related factors: your future goals; your age and investment time horizon; and additional personal factors such as your current net worth and natural temperament.

As you consider where you fit in the risk spectrum, remind yourself of the Catch 22 inherent in the risk and return equation. That is, while Merriam-Webster’s Collegiate Dictionary defines risk as “possible loss or injury,” risk also is present in opportunities that will be lost if you totally avoid risk. The simple truth, according to Parker, is: “If there were no risk, there would be no return.” Your chances of getting the balance just right are much greater if you work with a financial advisor who combines what Parker refers to as the “accumulated knowledge of financial science” with in-depth knowledge about you.

Ready for a Challenge?

Last month I wrote about a recent article, Why We're Not Wired for Successful Retirements by Philip Moeller, that was based on a financial literacy test given to consumers in Chile. I noted how many of those surveyed misunderstood the power of compound interest. Since then, blog readers have asked about the other questions. So, here they are, reprinted directly from the article. Only 68 out of nearly 14,250 tested answered all six correctly. See how you do. (The correct answers follow, but no peeking!)

1. Chance of Disease: If the chance of catching an illness is 10 percent, how many people out of 1,000 would get the illness?
2. Lottery Division: If five people share winning lottery tickets and the total prize is two million Chilean pesos, how much would each receive?
3. Numeracy in Investment Context: Assume that you have $100 in a savings account and the interest rate you earn on this money is 2 percent a year. If you keep this money in the account for five years, how much would you have after five years? Choose one: more than $102, exactly $102 or less than $102.
4. Compound Interest: Assume that you have $200 in a savings account, and the interest rate that you earn on these savings is 10 percent a year. How much would you have in the account after two years?
5. Inflation: Assume that you have $100 in a savings account and the interest rate that you earn on these savings is 1 percent a year. Inflation is 2 percent a year. After one year, if you withdraw the money from the savings account, you could buy more/less/the same?
6. Risk Diversification: Buying shares in one company is less risky than buying shares from many different companies with the same money. True/False

Answers:

1.  100
2. 400,000 pesos
3. More than $102
4. $242
5. Less
6. False

How did you do?

Do You Have a Lead Advisor?

A new report from State Street Global Advisors and the Wharton School Taking on the Role of Lead Advisor: A Model for Driving Assets, Growth and Retention offers some insights into how investors’ loss of confidence in markets during the recession prompted many to begin managing their money themselves or to engage multiple advisors to diversify the risk they perceived of working with just one advisor.

However, because multiple advisors rarely share information about the clients, the report found that investors working with multiple advisors can easily and mistakenly take on too much or too little risk relative to their financial goals. Specifically, the report notes, “Using multiple advisors to work out portfolio strategies independently often can lead to overlapping exposures or to divergent allocations that result in neutral market positions.”

To guard against this risk, the report suggests that investors may want to consider appointing a lead advisor to oversee the entire investment portfolio. That’s how I think of myself – as my clients’ personal chief financial officer – working to identify and prioritize goals and develop a clear plan for how they will reach them.

As the State Street/Wharton report points out, this “lead advisor model” is one successfully used by advisors to the ultra high net worth. Especially because, more than ever, investors desire unbiased, personalized financial advice they can trust, it makes good sense to working with a fiduciary who oversees all your investments, across all accounts and among other professionals and coordinates with other professionals, such as CPAs and estate planning attorneys.

What’s the Future of Social Security?

Do American workers have confidence that they will receive future benefits from Social Security? Results from the Employee Benefit Research Institute’s 2011 Retirement Confidence Survey (RCS) show most American workers are skeptical about the program. Here are some statistics from the report:

• Seventy percent of workers are not too or not at all confident that Social Security will continue to provide benefits of at least equal value to the benefits retirees receive today.
• Three-quarters of workers express concern that the age at which they become eligible for Social Security retirement benefits will increase before they retire.
• Today’s workers are less likely to expect Social Security income in retirement (77 percent total major and minor source of income, down from 88 percent in 1991) than today’s retirees are to report having Social Security income (91 percent total).
• Workers are half as likely to expect Social Security to provide a major share of their income in retirement (33 percent) as retirees are to say Social Security makes up a major share of their income (68 percent). However, EBRI research found in 2009 that 60 percent of those age 65 or older received at least 75 percent of their income from Social Security.
• Workers who are closer to retirement are more likely to expect Social Security to be a source of income in retirement than are younger workers (92 percent of workers age 55 and older vs. 63 percent ages 25–34).

The message here is clear: The unsure long-term status of Social Security coupled with the significant decline of defined benefit plans mean that working Americans must shoulder an increased responsibility to fund a financially secure retirement.

Mother Knows Best: Don’t Put All Your Eggs in One Basket

We probably all can recall hearing our mother say, “Don’t put all your eggs in one basket.”  That solid advice to diversify is often misapplied to the investing front. Some investors think that buying 50 blue chip stocks complies with that adage. Others figure that buying ten mutual funds properly diversifies their portfolio, only to find that those ten mutual funds invest in many of the same stocks. Still others think hiring multiple advisors will ensure a truly diversified portfolio, but soon discover that those advisors use similar funds and that the management fees are higher than they would be with just one advisor.  So what does not putting all of your eggs in one basket mean?

True diversification means owning all of the stocks that make up the market, and it is the only true way to ensure you get market returns.  Further, spreading your money between stocks, bonds, and cash--asset classes that historically have responded differently to market conditions--is your best defense against being hurt by poor performance in any one asset class. History teaches us that, like a seesaw, as some investments decline, others rise to offset those losses. Additionally, you should diversify within asset categories by sub-asset class, even by investment style. Note, too, that diversification in any asset category is achieved more effectively through asset class mutual funds rather than with individual stocks. Building a diversified portfolio requires identifying your asset allocation strategy, diversifying within each asset class, and then periodically rebalancing your portfolio.

In honor of Mother’s Day, think back to what your mother told you about life: Be patient. Do your best. Look before you leap. Remarkably, her words of wisdom have a direct application in today’s markets.

EBRI’s 2011 Retirement Confidence Survey: Gender Comparisons Among Workers

Do men and women plan and save for retirement equally? The 21st annual Retirement Confidence Survey (RCS) provides some answers. The RCS found men and women are equally likely to save for retirement. Also, women are statistically as likely as men to report they are offered (43 percent vs. 49 percent) and contribute to (34 percent vs. 39 percent) a work place retirement savings plan. However, men (17%) are more likely than women (10%) to say they are very confident about several of the financial aspects of retirement.

Interestingly, although women tend to face higher health care expenses in retirement due to their greater longevity, women (35 percent) are more likely than men (26 percent) to think they will need to accumulate less than $250,000 for retirement. Another point of departure is that women are more likely than men to be very concerned about the possibility that Social Security payments will be reduced (68 percent vs. 52 percent) and the age at which they become eligible for Social Security retirement benefits will increase before they retire (54 percent vs.44 percent).

Apart from gender comparisons, the 2011 RCS reported some disconcerting news -- Americans’ confidence in their ability to afford a comfortable retirement has plunged to a new low. The percentage of workers not at all confident about having enough money for a comfortable retirement increased from 22 percent in 2010 to 27 percent this year, the highest level in the RCS’ 21 years. Also, instead of reducing spending and/or saving more to shore up retirement accounts, most workers are planning on delaying retirement and/or working part-time in retirement. My caution is always is that health concerns may not allow you to work as long as your figure to.

Decisions, Decisions

In Which Risks Are Worth Taking Jim Parker, a vice president at Dimensional Fund Advisors, writes, “Even the most self-declared risk-averse people take risks every day.” Parker notes that routine risks to our safety include crossing the road, exercising at the gym, choosing lunch and using electrical equipment. He adds, “There are the big decisions like selecting a degree course, choosing a career, finding a life partner, buying a house and having children. These are all risky decisions, all uncertain, all involving an element of fate.”

In making these decisions, Parker says we seek to “ameliorate risk by carefully weighing up alternatives, researching the market, judging possible consequences and balancing what feels right emotionally and intellectually, both in the short term and in the long.”

New research from Harvard Business School’s Michael Norton addresses how managers making decisions often err in one of two directions—either overanalyzing a situation or ignoring helpful information to go with their gut. More specifically, when deciding among potential products or employees, managers routinely take too much time considering all the attributes of their choices—even attributes that are irrelevant. Equally troublesome, their fear of the decision paralysis that can occur when evaluating too much information, often cause managers to decide to trust their instincts.

In an article discussing Norton’s finding, a sentence Dr. Seuss might have written caught my eye: “We know that sometimes people think too much, and sometimes they think too little. But we still don't know the right amount to think.”

I suggest that when it comes to financial decisions, it’s always wise to have a trusted financial advisor in your corner who understands the tradeoff between risk and return and how to build a portfolio that suits your risk tolerance level. A financial advisor can help you think and make solid decisions, giving you the best chance of achieving your goals.

Parker also believes investors need help making financial decisions about risk. “Advisors,” he writes, “help us take an objective assessment of the potential risks and rewards of various alternatives, by taking a holistic view of our circumstances and by keeping us free of distraction and focused on our original goals.”

I couldn’t agree more. Invest without the help of an advisor and you may be exposing yourself to unnecessary risks -- whether you’ve thought long and hard about your decision, or just gone with your gut.

Is Cash in the Pocket Better Than Waiting for More?

In a recent article, Why We're Not Wired for Successful Retirements, Philip Moeller explores the psychology behind the answers to that question as documented in new research by Justine Hastings of Yale University and Olivia Mitchell of the University of Pennsylvania. Their paper for the National Bureau of Economic Research reveals the results of two tests they conducted to ascertain why people often fail to make sound financial decisions.

Interestingly, the findings Moeller reports on were based on research with consumers in Chile, not the United States. The first test involved posing six relatively simple questions to gauge respondents’ financial literacy. (Nobody scored 100 percent.) In the second test, people were offered the option of receiving the equivalent of about $8 if they filled out a shopping questionnaire right away, or a larger amount of money if they took the questionnaire with them and mailed it back within four weeks. (Not surprisingly, more than half the people chose the immediate payment; 30 percent chose to wait for more money and 17 percent took the questionnaire with them, yet failed to return it.)

Said the researchers, "We find that the impatience measure strongly predicts respondents' self-reported retirement saving and health investments. Financial literacy is also associated with more retirement saving, but it is less closely associated with sensitivity to framing of investment information."

For me, the research’s real lesson for those saving for retirement comes from reviewing the question most people answered incorrectly. Addressing compound interest, the question asks: Assume that you have $200 in a savings account, and the interest rate that you earn on these savings is 10 percent a year. How much would you have in the account after two years? Not too many people came up with $242. (You earn $20 the first year on 200, then $22 on $220 during the second year.) Understanding the long-term power of compound interest in tax-deferred savings accounts is crucial to motivating investors to sacrifice today for their benefit tomorrow.

The need for immediate gratification, a uniquely American characteristic, can be difficult to overcome, but doing the math may convince you.

Our Thoughts and Prayers are with the People of Japan

The massive March 11th earthquake and tsunami that devastated northeastern Japan left more than 18, 000 people dead and thousands more are still missing. Close to half a million people have been displaced and the nuclear crisis at the Fukushima Dai-ichi plant has the public’s fear mounting. While the overwhelming cost to human life is of paramount importance, many also worry about how Japan's economy will be impacted.

The World Bank recently estimated rebuilding from the worst earthquake and tsunami in 300 years may cost the world’s third largest economy upwards of $235 billion Other numbers, many noted in a recent story Economic Impact of Japan's Quake by Kimberly Amadeo, are staggering.

According to Carl Weinberg, High Frequency Economics, 11 of Japan's 50 nuclear reactors have been shut down. Given that Japan's nuclear industry supplies a third of the country's electricity, production will be limited to less than 80% of pre-quake/tsunami potential for a long time.

According to Kyohei Morita and Yuichiro Nagai of Barclays Capital, the quake hit the north-east section of the country, responsible for 6-8% of Japan's GDP. They figure damages could exceed 15 trillion yen, or 3% of GDP.

With a total of 22 manufacturing plants, including Sony, still closed, the global supply chain of semiconductor equipment and materials will clearly be impacted.

Here are two more numbers to consider: The American Red Cross now lists “Japan Earthquake and Pacific Tsunami” as one of the choices for online donations at the Red Cross. Alternatively, you can make a $10 donation by texting REDCROSS to 90999. Among countless other organizations, UNICEF is also coordinating efforts to help the children of Japan. You can use the form on UNICEF's website to donate 100 percent of your desired amount to their fund designated for victims of the earthquake. Or you can simply text JAPAN to 864233 to donate $10.

Dimensional Stories: People Putting Ideas Into Practice

Someone recently asked me for information about the story of Dimensional Fund Advisors.  I recalled this video and provided a link to it. I enjoyed watching the video again and decided I should share it on my blog.  I hope you find it informative.

If you have questions about Dimensional Fund Advisors, you should consult with your independent registered investment advisory firm.



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Disclaimer: This video contains the opinions of the participants but not necessarily Dimensional Fund Advisors, DFA Securities LLC, or Bernhardt Wealth Management, Inc., and do not represent a recommendation of any particular security, strategy or investment product. The participants' opinions are subject to change without notice. Information discussed in the videos has been obtained from sources believed to be reliable, but is not guaranteed. These videos are made available for educational purposes only and should not be considered investment advice or an offer of any security for sale. Past performance is not indicative of future results and no representation is made that the stated results will be replicated.