Three Big Do-It-Yourself Investor Mistakes The media is not your friend.

It’s quite common to come across people who think they know how to manage their investments. And the fact is, some people do a very good job of it. But experience shows that competent do-it-yourself (DIY) investors are in a minority compared to the masses getting “hot tips” from friends, family, and the media. Ultimately, these tips often wind up costing novice investors dearly. In no particular order, here are three common mistakes DIY investors make that could wind up costing money:

1. “I was watching Suze Orman on Oprah and she said…”

Many DIY investors don’t realize the media is not their friend. Journalists certainly aren’t professional investment managers. Following the media’s “free” advice could ultimately wind up being very expensive! Their objective is not to inform, educate, and provide ongoing prudent advice, but to sell print subscriptions, TV and radio ads, e-mail lists, etc. Discerning investors realize this and understand the value a professional advisor provides relative to “free” advice. Why else would Endowment Funds like Harvard, Yale, and Princeton spend millions every year for professional financial advice? If hiring financial pros didn’t make sense these billion dollar funds would stop doing it. And, while hiring a seasoned pro doesn’t necessarily guarantee outstanding results, it’s nonetheless something for the DIY investor to seriously think about.

2. “I don’t need a financial advisor because I subscribe to Money Magazine.”

This is related to #1 above, but with a twist. High quality financial advisors seek long-term relationships with their clients and meet with them regularly to review and update accounts based on the unique needs of the client. Compare that approach to a DIY investor reading the following story in November 2007 on CNNMoney.com by editor Michael Spivey:

Tech stocks should lead the rebound
Leaders in the technology sector are growing fast and aren't hurt by subprime issues or soaring oil prices.

Remember, this was November of 2007. Mr. Spivey went on to recommend a variety of investments including one which, according to CNNMoney.com, was selling for a little over $28 per share at the time. Fast-forward about 16 months and the same investment was trading for a little over $13 per share in March of 2009; again according to CNNMoney.com. What’s the dear reader to do? You can be sure Mr. Spivey wasn’t taking calls from subscribers asking for advice now that they’d lost over half of their money based on one of his suggestions.

3. “I can save money by doing it myself.”

Remember the old saying, “Penny wise and pound foolish?” Do-it-yourself investors often have difficulty understanding the difference between price and value. The media has done a good job of convincing many consumers that they are foolish to pay for financial advice since it’s easily obtained for free or very cheaply. In the late 1990s, during the dot.com bubble, a TV commercial was airing where a distinguished 60-something man was cooking dinner for his wife. In between stirring his gravy and checking on the pot roast he would dance over to his laptop for stock tips and quickly execute buy and sell orders for only $7.95 per trade! Of course, hiring a professional financial advisor doesn’t guarantee investment success. Financial advisors make mistakes, too. But, a disciplined, serious approach to investing with a seasoned professional may yield better results over time than focusing on how little it costs to make trades in the portfolio.

In short, investors need to recognize that there is a cost to any kind of advice. Free magazine advice that winds up losing the reader half of their investment may not be such a good deal. And, while it may be fun to pretend that media resources are practically free, the cold, hard fact is that the media’s interests are not necessarily aligned with their readers/viewers. Engaging a professional financial advisor may not guarantee investment success, but professional fees could wind up being much less expensive in the long run compared to “free” advice from the media.

Source: http://money.cnn.com/2007/11/19/pf/tech_rebound.moneymag/index.htm  3:50 PM •  0 Comments •

Spend Time Now Planning for Your Financial Future Are you "thinking” about retirement?

As early as 1968, the co-authors of the book, Social Security: Perspectives for Reform, observed:

“There is a widespread myopia with respect to retirement needs. Empirical evidence shows that most people fail to save enough to prevent catastrophic drops in post-retirement income. Not only do people fail to plan ahead carefully for retirement, even in the later years of their working life, many remain unaware of impending retirement needs."

Twenty years later in 1988, author Venita Vancaspel discussed financial literacy in the United States in her book, Money Dynamics for the 1990s. She wrote:

"There is an educational void in our nation, and unfortunately we are raising a generation of financial illiterates. Even many college graduates cannot figure simple percentages. They are not teaching the one subject that they will need to live well in our free enterprise system – how to manage money. This vacuum is so great that the average couple cannot begin to confront the financial uncertainties and the multitude of choices they face in our complex society.”

All stages of life require us to make financial decisions and plan for economic security. No other life stage, however, is likely to create "the financial uncertainties and multitude of choices" as does retirement.

In 1998, author Robert Stoneman noted in his book, High Finance, Hard Sell, that millions of Americans were finally starting to understand that they must take more responsibility for their long-term financial security. He wrote that many individuals were turning to financial planning books, magazines, and television programs for money management and investment knowledge.

Stoneman also observed that millions of others were making little headway because of financial illiteracy. One of the biggest challenges facing financial companies was to "persuade consumers to forego things they could have now on behalf of building wealth and security for their future."

Inarguably, many individuals today would be in much stronger financial positions had they focused earlier on building future wealth.

A 1991 study by researcher, consultant, and President of Money Quotient, Carol Anderson, investigated factors that either enhance or hinder resource management and asset accumulation for retirement planning. Resource management in this context means using our personal resources (time, energy, skills, money) to achieve our goals efficiently and purposefully.

A surprising result of the study was that the variable "thinking about retirement" proved to be a stronger predictor of pre-retirement resource management than any other variable tested, including whether one was expecting a pension, the level of family income, and age. In addition, "extent of thinking about retirement" proved to be nearly as powerful a predictor of retirement asset accumulation as did family income and was decidedly more influential than education level, occupation level, proximity to retirement, and pension expectations.

These findings demonstrate that engaging in reflective and productive thinking about our future retirement can influence our financial planning for it and help to counteract potential negative influences such as lower income, lower occupation status, and lower education levels. The study also indicates the importance of how cognitive processes – thinking – can influence financial behaviors, motivate planning activities, and initiate positive change.

What was written more than forty years ago remains true today. It is important to spend time now planning for your future.

Are you “thinking” about retirement?


Gary S. Williams, CFP®, CRPC® is President of Williams Asset Management. Gary is also an Investment Adviser Representative of, and offers securities and advisory services through, Commonwealth Financial Network, Member FINRA/SIPC, a registered investment adviser. Williams Asset Management is located at 8850 Columbia 100 Parkway, Suite 204, Columbia, MD and can be reached via phone at (410) 740-0220 or via email at Gary@WilliamsAssetManagement.com. This material was prepared by PEAK.  3:17 PM •  0 Comments •

Responding to the Recession Do you barricade yourself in your home when it rains, to emerge only on a beautifully sunny, 70 degree day? Of course not. Think of what you’d miss. Similarly, while everyone wants to invest in a bull market, in a downturn, it’s a different story. Just as you prepare for bad weather by wearing a raincoat or carrying an umbrella, investing wisely for retirement in a recession requires a little more planning.

According to a recent study by the Washington, DC-based Employee Benefit Research Institute (EBRI), Americans are, in fact, planning carefully in the wake of the recession. Although EBRI’s annual Retirement Confidence Survey (RCS) measured a decline in confidence about the security of retirement (a record-low 13% this year say they are very confident of having enough money to live comfortably in retirement), investors are taking action to gain control. For example, 81% say they have reduced their expenses. Others are changing the way they invest their money (43%), working more hours or a second job (38%), saving more money (25%), and seeking advice from a financial professional (25%). Most notably, among all workers, 75%, one of the highest levels ever measured by the RCS, say they and/or their spouse have saved money for retirement.

The RCS also recorded some lifestyle shifts. For example, 28% of workers say the age at which they expect to retire has changed in the past year, with the vast majority (89%) noting their expected retirement age has increased. Additionally, 72% of workers say they plan to work for pay after they retire, an increase from 66% in 2007.

To position your portfolio to survive the recession:

• Review your investment strategy with an emphasis on risk. You know your investment strategy is a function of your time horizon, goals, and tolerance for risk. While your goals and time horizon are fairly straightforward, risk is often difficult to ascertain in theory. In fact, now facing real portfolio declines, many investors feel the need to make some adjustments.

All investors need protection from three basic risks. First, there’s market risk, the possibility that events in financial markets may lead to a decrease in the value of your investment. Investors in bonds are subject to interest rate risk. Interest rates and bond prices generally move in opposite directions: when interest rates go up, bond prices go down, and when interest rates go down, bond prices go up. Finally, in today’s rollercoaster market, it may seem safest to preserve your money with bank certificates of deposit. However, that exposes you to inflation risk. That is, if the rate of inflation outpaces your interest rate, you’ll have diminished purchasing power.

How much risk you decide to take going forward depends on how much volatility you can tolerate. Think of volatility as a change in value of your account. Generally, while stock portfolios experience greater short-term swings in value than do bonds, there is an important tradeoff. Equities reward you with greater potential for long-term gains. Accordingly, a major factor to consider when thinking about your risk tolerance is how long it will be until you expect to tap into your investment account. If you have three decades until retirement, you may be better able to stomach a market downturn. After all, you have plenty of time to recover. Conversely, if you are in or approaching retirement, you have less time to benefit from the market’s eventual upturn and may worry more about a down market.

• Re-commit to saving. History shows that market gains can occur in a few strong, but unpredictable, trading days. Sticking with your retirement savings plan ensures you invest a fixed amount at regular intervals. This “dollar cost averaging” can result in a better average share price than trying to time your purchases because your set contributions buy fewer shares when the market is up and more shares when the markets are down, resulting in an optimal average cost per share over time. Such a plan involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through periods of low price levels. Such a plan does not assure a profit and does not protect against loss in declining markets. Also, check that your assets are spread across stocks, bonds, and short-term investments. The best-performing asset classes vary from year to year and combining investments that respond differently to market conditions helps control risk. Rather than focus on a sector you perceive as safe, continue to make broad-based contributions on a regular basis. You also might consider rolling old retirement plans into an IRA to facilitate monitoring your portfolio.

• Work on making rational decisions. Financial decisions can be difficult even in good times, but the extreme emotions triggered by the recession can impede your ability to think logically. Rather than get upset and react to newspaper headlines or discussions around the water cooler, base your decisions on solid information and careful analysis of your own personal economy. Resist making what you perceive as a quick fix portfolio move, and strive to lengthen your perspective by keeping your long-term goals in mind. When you take the time to run your retirement numbers, you may be surprised. Your diversified portfolio may not have suffered as much as the broader market. What’s more, as with many of the workers responding to the EBRI’s RCS, putting off retirement for a year might not be the worst possible scenario. More importantly, looking at future projections can help you to think more about your current spending, helping you to become a more mindful consumer and make better choices that can further boost your retirement savings.

Although there are certainly some positive signs on the economic horizon, there will be plenty of cloudy days ahead. However, as the economy battles its way out of the recession, anything you can do to feel more in control and focused on your long-term goals will enhance your ability to make sound investment decisions and position your portfolio to benefit from the market’s eventual rebound.  9:48 AM •  0 Comments •

What Are We Learning From These Difficult Times? The markets suffered tremendous losses in 2008. Hardly any asset class was spared. Even well-designed asset allocation plans, meant to reduce volatility, have not weathered this storm.

Still, we have reason for cautious optimism. While I believe we have a very difficult recovery and restructuring ahead of us, I also think we will be much more stable in the future.

Investing is hard work. It requires a tolerance for discomfort when things seem to be not working, and it requires an ability to avoid overconfidence when things are going well. Risk tolerance means different things to different people. Your definition of acceptable risk from three years ago could be significantly different now.

I believe each of us will be better served by looking carefully at our goals, our circumstances, and our resources, and, as logically as we can, developing or confirming investment and spending strategies that will increase the likelihood of reaching our goals.

The first step is to maintain sufficient cash or cash equivalents to cover your short-term needs. Short-term means anything for which you require funds in the next three years.

One of the more important things you can do for your financial security is to keep your spending within the limits of what your resources can support. Live within your means. Taking on debt makes you vulnerable. Are there any spending categories you can reduce and shift the money into more meaningful expenditures? Long-term damage to retirement plans often results from overspending.

The combination of low interest rates and declining account values might require you to take a closer look at your expenses. If you are retired, a general rule of thumb is that you can withdraw 4% of the value of your account each year. If you are spending more than that, even the good cycles may not sustain your account throughout retirement.

Many people are holding a high percentage of their assets in cash. Just as people were scared to miss out on the frenzied bull market of a few years ago – afraid to be left behind – many will be afraid to get back into the markets near the bottom. That is precisely the time to reinvest. None of us can know, until after the fact, when the market has hit rock bottom. We do know historically that when the market has been oversold by a fearful populace, the long-term result may be excellent.

John Hussman, president of Hussman Investment Trust, says that if the S&P 500 were to decline to between 500 and 550, it would match the worst historical troughs for market valuations. These levels are emphatically not forecasts – they represent extreme outcomes. Unfortunately, they also cannot be ruled out in the context of a de-leveraging cycle plagued by utterly misguided policy responses.

But understanding the upside is essential. At those levels, S&P 500 stocks would be priced to deliver total returns over the following decade in the likely range of 14% to 17% annually, according to Hussman. Lower valuations imply higher long-term returns. Do you think anyone in the midst of the Great Depression would have forecast an increase of almost 150% over the following 10 years and almost 1,300% over the following 20?

My own sense of the world tells me that we tend to lose sight of the important things in life. Compared with ages past, we live a remarkably comfortable existence. In our individual lives, we are often wise enough to see trauma or misfortune as a catalyst to positive change, as motivation to move out of a comfortable rut and take chances that will lead to something better.

Our society will emerge from this trauma with more wisdom about saving and investing, and spending and consuming, and about what is really important. We will no longer take so many things in our economic world for granted.

We are learning a lot from these difficult times.  9:25 AM •  0 Comments •

Is Now the Time to Buy Your First Home? For years rapidly rising prices kept many potential first-time home buyers on the sidelines, stuck in the rental market. However, with home values continuing to plummet and interest rates hovering at historic lows, that may be about to change. Yet, while the recession and job uncertainty may cause median home prices to fall even further, general economic uncertainty also prompts the question: Is now a good time to buy a home?

Apparently, many people think so as the housing market is already warming ahead of the usual seasonal uptick of the spring market. According to the National Association of Realtors, February existing home sales rose by 5.1% to an annual rate of 4.72 million, up from 4.49 million units in January. That was the largest sales jump since July 2003. However, the Realtors group points out that about 45% of sales nationwide are foreclosures or other distressed properties that are selling for about 20% less than other homes.

While fire sale prices may be attracting new homebuyers, it’s also worth noting the impact of the $8,000 tax credit for new homebuyers included in the economic stimulus package. While proponents of home ownership traditionally stress the positive tax implications such as deductions for mortgage interest deductions for real estate taxes, this new $8,000 tax credit is available to first-time homebuyers who purchase their home on or after January 1, 2009, but before December 1, 2009, and who close on the sale during this period. A first-time homebuyer is defined as a buyer who has not owned a principal residence during the three-year period prior to the purchase. All U.S. citizens who file taxes are eligible to participate in the program and the credit does not have to be repaid unless the homeowner sells the home within three years of the purchase.

Homebuyers who file as single or head-of-household taxpayers can claim the full $8,000 credit if their modified adjusted gross income (MAGI) is less than $75,000. For married couples filing a joint return, the income limit doubles to $150,000. Single or head-of-household taxpayers who earn between $75,000 and $95,000 are eligible to receive a partial first-time home buyer tax credit, and married couples who earn between $150,000 and $170,000 are also eligible to receive a partial first-time home buyer tax credit. The credit is not available for single taxpayers whose MAGI is greater than $95,000 and married couples whose MAGI exceeds $170,000.

Bargain basement prices and tax credits are attractive carrots to dangle in front of renters, but before you start on the home house circuit, it’s wise to consider how the recession may have changed the playing field. Big picture, just as “flipping,” where a buyer would purchase a home, invest a little sweat equity, and sell at a tidy profit just months later, has gone out of vogue, so too, has the home financing market transformed. That is, if you are in the market for a mortgage, you’d better have a secure job and be ready to meet lenders' much stricter income and credit requirements. You may also have to come up with a higher down payment than was required just a few years ago. In general, in contrast with the housing boom when lenders were all too ready to allow buyers to take risky loans and max out their home equity lines, staying within budget is the mantra of today’s homebuyers.

If you venture into the real estate market, keep these three pointers in mind:

• Determine what you can afford. Typically, you should spend no more than 28% of your gross monthly income on mortgage payments, real estate taxes, and home insurance. Online calculators at RealEstateJournal.com or Bankrate.com make these calculations a snap. Once you know your budget, get preapproved for a loan. Also, be sure to factor in extra cash for moving expenses; closing costs, which typically run between 2% and 3% of the home’s price; and ongoing home maintenance, especially if issues arise in your home inspection. In today’s uncertain economy, you also need to asses your job security. If you lost your job, could you make mortgage payments for six months while you looked for new employment?

• Know your market. The real estate market is different depending on where you live in the country, so pay close attention to what is happening in your own backyard. Now, more than ever, location is crucial. You can conduct your preliminary research online at websites like Zillow.com, Trulia.com, and GreatSchools.net.

• Be Patient. If you are looking for a bargain you might consider buying a short-sale property where a homeowner's lender agrees to accept less than is owed on the mortgage. Be aware, however, that these negotiations often progress at a snail’s pace if lenders are considering multiple offers. Most importantly, first-time home buyers don't generally purchase the house of their dreams. However, in today’s down market, experts suggest you should buy a home only if you intend to live there for seven to ten years. In fact, even commercials on television combine optimistic assessments such as “Now is a good time to consider buying a home” with sobering disclaimers like “On average, a residential home appreciates in value over 10 years.”

If your finances are solid and you can afford a home you could live in for seven to ten years, the time may be right to jump into the real estate market. However, although your home is the biggest investment you likely will ever make, your decision involves much more than finances. That is, whatever’s going on in the market is secondary to what’s going on in your own life. The fact is, new jobs, a marriage, or the impending arrival of a child are often deciding factors when it comes to deciding when to purchase your first home.  4:36 PM •  0 Comments •

Is the Ponzi Scheme the Exception or the Rule? Ponzi schemes fraudulently pay returns from money collected from investors rather than from investment profit.

These schemes usually offer abnormally high short-term returns to entice new investors. Such high returns require an ever-increasing flow of money from investors to sustain the scheme.

Because the payments exceed earnings, if any, the scheme is destined to collapse. Usually, legal authorities interrupt the scheme before then because they suspect a Ponzi or because the promoter is selling unregistered securities. As more investors become involved, the greater the likelihood that authorities will notice.

Today a growing number of commentators believe the U.S. Treasury is unintentionally setting our economy on such a path. Are they right or just expressing the latest panic we’ve seen in an increasingly bizarre series of economic twists and turns? Is blind faith leading the U.S. Treasury astray?

In 2008, Bernard L. Madoff Investment Securities LLC collapsed with losses of between $34 billion and $50 billion; depressing evidence that the Ponzi scheme lives.

In 2009, fears are increasing that such a scheme, albeit inadvertent, may manifest itself anew. The Federal Reserve already has announced it is considering issuing its own debt for the first time. The reasoning is sound enough, as the move would give the central bank additional flexibility as it tries to stabilize rocky financial markets.

But the fact that the Fed is even considering such a dramatic, and some would say desperate, action highlights the gravity of the ongoing financial crisis.

The key motivator is undoubtedly the Fed's balance sheet, which has exploded from less than $900 billion to more than $2 trillion since August. And the more the Fed backstops ailing companies and financial institutions, the greater this debt will become. That is already creating additional problems.

Until now, officials were able to fund programs by drawing against Treasury bonds, but today there are concerns that this stockpile is falling dangerously low – approximately $476 billion.

The Fed also has tried to kick-start the economy by pouring self-created funds (bank reserves) into the system. The results have been depressingly minimal and have caused concern among some economists that removing this cash from the system at a later date could prove impossible. If they can't, the system runs the risk of inflation. The additional cash also makes managing interest rates more difficult.

More worrisome is the question of legality.

Vincent Reinhart, economist at the American Enterprise Institute and a former senior Fed staffer, has already gone on record saying, “I had always worked under the assumption that the Federal Reserve couldn't issue debt.”

Desperate times demand desperate measures. But will the risk of fueling future monetary hyperinflation in this way prove to be too desperate?  5:34 PM •  0 Comments •

Planning a Cost-Effective Job Search Whether you’ve already cleaned out your desk or are expecting your department to be next at work for cuts, in this economy, it definitely makes sense to plan a job search before you actually have to do one. Call it a response plan.

Here are some basic steps in getting that process started:

Start or build your emergency fund: Unemployment insurance won’t even come close to meeting your cash needs when you’re out of a job. Start slashing your spending and funnel that extra cash into an emergency fund that won’t be touched for anything but essentials – housing payments, food and insurance expenses. Get a head start on building an amount equal to 3-6 months of those expenses as soon as you can, first by cutting your basic spending and then possibly by paying the minimums on debt purchases until you get that fund in good shape. If you’ve still got your job after you hit your emergency fund target, then keep your tight spending in force and go back to attacking any debt that you have more forcefully.

Get advice on finances, taxes and possible legal issues: There’s nothing better than going into an exit interview with a plan to put yourself in the best situation possible when you lose your job. You might start by talking with a CERTIFIED FINANCIAL PLANNER™ professional and a tax expert about any spending, saving or tax specifics you should focus on now as a way to blunt the damage from lost income later. And depending on the situation and your room to negotiate, it might not be a bad idea to invest in the services of a workplace attorney to make sure you know what to ask for in an exit package. Always ask if you can build unused vacation and sick days into a package and see what you can do about extending health benefits before you start having to pick up the cost via COBRA. COBRA refers to the Consolidated Omnibus Budget Reconciliation Act, which gives workers and their families who lose their health benefits the right to choose to continue them under their group plan for a limited time.

Research health coverage beforehand: The recently passed federal stimulus package provides 65 percent subsidy for COBRA premiums for up to 9 months, which is good news because COBRA can be very expensive. In any event, it makes sense to research individual, high-deductible coverage that might be an affordable alternative to staying on your employer’s health plan while you’re looking for your next job. Many quality carriers offer enrollment online, but ask around and see if friends or associates know good agents who can find coverage that fits you so you’ll be prepared if you need it.

Get personal disability coverage now: Disability coverage offered through your workplace may barely cover you if you are disabled while working, but once your job is gone, there goes your coverage. It’s always a good idea for individuals to have some personal disability coverage of your own, and you should buy it while you’re employed because you need to prove income before you can get the maximum coverage based on your current income.

Understand your unemployment benefits: Generally, it’s a good idea to file immediately for unemployment benefits, even if you’re getting severance. Check on these provisions as soon as you can. Also remember that the federal stimulus plan applies here as well. Benefits will increase by $25 per week for some 20 million jobless workers, while the first $2,400 they receive in benefits will be exempt from federal taxes. Also, if you get a job before your severance or unemployment runs out, use those funds to top off your emergency fund and then attack debt so you’re in a good position to weather any future storms.

Take advantage of any free job advice and assistance you can: If your employer is providing office space, resume-writing assistance or any other benefits to help you transition to your next job, by all means, take advantage of them. It’s particularly smart to get advice with resume writing because as industries change, the type of experience that hiring executives want to see on resumes changes as well.

Network: Make sure you’ve identified key professional groups both locally or nationally that will allow you to meet colleagues and hiring executives in your industry or the industry you hope to work in next. And plan to do little things that keep you in touch with potential employers – make sure your cell phone, e-mail and voicemail are always working, and make sure you have resumes, cover letters and an interview outfit always at the ready in case you have a sudden opportunity to interview..  4:33 PM •  0 Comments •