Don’t Let Your Emotions Cloud Investment Judgment Ah … the good old days when an investor would pay anything for a pre-construction condo in Boca Raton. Why? When finished, the condo would presumably be worth a quarter of a million dollars more and you’d carry it with borrowed money.

Wrong, in most cases. This has been a painful lesson for many people.

One of the more common behavioral mistakes that investors make involves euphoria. Nick Murray, author of Simple Wealth, Inevitable Wealth, says this is more than greed – people get completely blissed out and lose all sense of danger.

A definition of risk is the chance that an investment will lose value. When you reach out for higher and higher returns because someone else is getting them – and you forget that higher returns mean taking more risk – you have entered the euphoria zone. You have been blinded to the fact that risk rises along with price.

According to Murray, panic (another behavioral mistake) follows, and sometimes accompanies, the euphoria stage. The higher the euphoria, the deeper the panic or capitulation. When prices start to fall, you lose composure and believe your investment price will never come back. You have to get out at any price.

If panic overtakes you, you’ll need to make two decisions:

• First, you must decide when to sell.

• Second, you must decide when to get back into the market.

Your odds of being right on both decisions are very low.

We make other behavioral mistakes as well, says Murray. They include:

• Under-diversification – This involves the often costly narrowing of a portfolio to essentially one idea. This can be a sector (example, technology stocks) or a company. If you worked for Bear Stearns and invested the majority of your assets in the company stock, you found out the hard way of under-diversification.

"When you own one idea, all the lights go out and … pretty quickly," says Murray.

• Over-diversification – This is when you dilute your investment value by trying to own everything. The root of this mistake is the inability to make choices. The solution is to focus a portfolio with a finite number of meaningful investments.

• Making portfolio decisions based on your cost basis – This means you let your cost basis dictate an investment decision just to avoid paying capital gains taxes. This is seldom prudent. When you let taxes drive the decision, you are bound to crash.

• Investing for yield instead of total return – This is the great behavioral mistake of the American retiree. Many go into retirement mistaking current yield as the only source of income. They end up buying a lot of bonds and not a lot of equities. The recent volatility in the bond market has surprised many investors.

Today, when we go to the gas pump or grocery store, we know costs are rising. According to Morningstar, the compounded annual return (after taxes and inflation) from 1929 to 2007 for large stocks was 5%; for long-term government bonds, 0.4%; and for 30-day Treasury bills, -0.7%.

The great long-term financial risk isn’t loss of principal, but erosion of purchasing power. Many of us greatly overestimate the long-term risk of owning stocks, and more insidiously, underestimate the long-term risk of not owning stocks.  7:42 AM •  0 Comments •

The New Place to Spend Retirement: At Work Despite the enduring image that marketers portray of retirees lounging on the beach, the reality is that a greater number of older workers are in the labor force than ever before.

According to the Employee Benefit Research Institute, 45 percent of people age 55 and older are still in the workforce. Twenty-nine percent of people ages 65–69 are still working as well.

Americans of retirement age opt to stay in the working world for many reasons, including to transition their career to part-time, to make extra money, or to start their own companies. Many of us are also living longer and taking better care of ourselves, and we don’t feel like slowing down. In today’s world, retirement can last 20 years or more, so we want something meaningful to do to fill that time.

Some people, however, may not find working into their retirement years a matter of choice. They may need to keep working to add to their savings, keep their insurance coverage, or attain their full retirement age to receive their full social security benefits.

Employers may also find it necessary to hang on to their older workers. Nearly 80 million baby boomers are facing retirement, yet there are only about 50 million Gen-Xers to fill those places in the workforce. Companies are discovering that they need to keep their experienced workers as long as possible and are more amenable to part-time, consultative, or job-sharing arrangements to retain skilled workers.

Regardless of the reasons you may continue working, there are several financial implications you should consider:

You can make more money. According to the Congressional Budget Office, each year that a person of at least age 62 postpones retirement, he or she reduces the need to increase his or her retirement savings by about 5 percent. It also gives that individual more time to earn interest on assets he or she has already accumulated. And getting health coverage, even if an employer only partially subsidizes it, can save you hundreds of dollars a month.

Your social security benefits may be affected. Depending on your financial situation, you may find it best to wait until you reach your full retirement age to start collecting social security. If you start receiving social security before you reach full retirement age, your total benefits may be drastically reduced: for every $2 you earn over $13,560, you will reduce your social security benefits by $1. This applies to work income, not income from investments, pensions, annuities, capital gains, or interest.

If you’re married, your spouse may want to delay receiving his or her benefits to reduce your total income for tax purposes and to provide a future income stream.

The good news is that once you reach your full retirement age, you can work as much as you want without reducing your social security. Visit www.socialsecurity.gov/retire2/agereduction.htm to find your full retirement age.

Being your own boss may have certain benefits. If you set up your own incorporated business, you may be able to deduct everyday expenses like work-related phone usage, a new computer, office space rentals, and travel expenses. Plus, you can open up a new retirement plan and contribute to it.

Simplified Employee Pensions (SEPs), Savings Incentive Match Plans for Employees (SIMPLEs), and qualified plans such as Keoghs are designed to benefit small businesses and sole proprietorships. They have the same advantages of tax-deferred growth plans, like 401(k)s and 403(b)s, and contributions are tax-deductible. Your own business could match the contributions you, as an employee, might make.

Working might result in certain penalties or income reduction. Take care that your extra income from working doesn’t bump you into a higher tax bracket. Chances are, you’re probably paying for your retirement from several sources of income, such as a pension, 401(k), IRA, and social security. If you are older than age 70½, you are likely taking the required minimum distribution (RMD) from your retirement plan accounts as well. Add a paycheck to that mix and you might be making more money than you thought. This can also expose more of your social security benefits to income tax.

In addition, if you are or were a state or public employee, check with your retirement board to see whether you are subject to income restrictions or whether working will impact how much pension money you receive.

Does all this mean that working in retirement is pointless? Of course not; it just requires forethought and careful planning on your part—and the guidance of your trusted financial advisor to address your particular questions and concerns.  9:16 AM •  0 Comments •

Pay Yourself First You already pay your bills on time. So, why not treat retirement savings as a regular monthly bill rather than seeing it as optional?

We know we should save, but there are competing priorities; so funding the retirement account often comes last. The kids want to go to college, and you would like a new boat. But treating your retirement savings as another bill that you must pay will keep it at the front of your mind. You won’t miss payments if you realize that, just like with the mortgage or electric bill, getting behind has consequences.

This simple sounding solution comes from the sophisticated world of institutional investing. Pension fund managers, for example, have to treat future obligations (payments to pensioners) as liabilities. That forces them to deal now with something that may be years or decades away. Using actuarial tables, they calculate the cost of future obligations to determine what return they require on their investments and whether the pension fund is adequate.

While you may not use actuarial tables, you can manage your retirement account like a pension fund. First, determine the savings you need to support the lifestyle you want during retirement. Keep in mind that you probably want to fund retirement through age 90 or 95.

Next, determine how many years you have to reach your savings goal. If you are 45 and plan to retire at 62, for example, you have 17 years to fund your retirement account. Finally, determine how much you must save each year and make projections about returns on your investments.

If you’re already funding your retirement goal by contributing to a 401(k) or other plan at work, treating that money along with all of your other retirement savings as a liability may provide you with a more realistic picture about how much you need to put away. It may also help you envision the quality of retirement you should expect and spur you to save more.

A simple way to establish a monthly liability for your retirement obligation is to divide your goal into equal installments. So, if you have 17 years to save $500,000, divide that obligation into 204 monthly payments of just over $2,450 per month. Given the expected growth of your investments, you’re likely to “over-fund” your retirement obligation. If you want to calculate your payments more precisely, include estimates for the impact of inflation, investment returns, and taxes.

By treating your retirement account as a liability, you’ll be paying yourself along with your other debts. Of course, making calculations about how much you need to save today to fund a debt in the future, while also making judgments about inflation, taxes, and selecting the right investments, may require professional help. Create a disciplined system for planning your retirement now and paying yourself first so you can enjoy your leisure years later.  12:19 PM •  0 Comments •

How to Donate Money Effectively Whether it’s the holidays or an unexpected disaster, Americans are always willing to donate to those less fortunate. It’s the easiest thing in the world for us to open our checkbooks to a worthy cause without a second thought.

Yet your donation, regardless of size, should make the largest impact possible on your cherished causes and issues. When you support a charity’s best interests, you’re not selfish to support your own as well.

Give to efficient operations

In a perfect world, every cent you donate would go to fulfilling the mission you support. But some portion of every dollar goes to staff salaries, rent, fundraising, mailings, and possibly professional telemarketers. These expenses may leave your cause with very little.

Well-run organizations put most of your money toward their services or programs, not their operational overhead. The American Institute for Philanthropy recommends that no more than 40 percent of your charitable donation should go to overhead expenses; other charity watchdogs advise 25 percent. (This may not apply to newer, smaller, or more obscure causes.)

This percentage can be determined by requesting a charity’s IRS Form 990, required for a nonprofit to prove its tax-exempt status. Federal law requires charities to provide the form for the past three years to anyone who asks. Divide line 13 (Program Services) by line 17 (Total Expenses) to calculate the percentage paid to services and programs versus overhead expenses.

You can research charities with The American Institute of Philanthropy’s www.charitywatch.org, the Better Business Bureau Wise Giving Alliance’s Give.org, or Philanthropic Research, Inc’s. www.guidestar.org. All provide information on charities and their efficiencies.

You can also ask for the charity’s annual reports. The report should include the mission statement, board of directors, and the year’s accomplishments and finances. See if the charity’s goals seem reasonable and achievable. If the charity tells you a report isn’t available, is too expensive to mail, or otherwise discourages your interest, don’t contribute.

Avoid the scam artists

Unfortunately, there are people who try to take advantage of others’ generosity. Here are ways to reduce your chances of falling victim:

• If a solicitor mentions previous pledges you don’t remember, check your records first. Don’t fund donations you didn’t make.

• Don’t provide personal financial information in an e-mail, over the phone, or to door-to-door fundraisers. Use a website like www.networkforgood.org to donate safely with your credit card to over one million organizations. Ignore email solicitations from organizations you don’t support.

• Never give cash, or make checks out to Cash, or to an individual. Write checks out to the charity’s exact name, not initials. Some scammers use names that are similar to well-known ones.

• Don’t be swayed by on-the-spot high-pressure tactics or emotional sad stories. Ask for written information, or check the charity out online first.

• While many representatives for charitable causes are genuine, be aware of swindlers who often pretend to represent causes for missing children, soldiers or veterans, firefighters and police, or whatever disaster is in the news.

Know your tax benefits

Your philanthropy may provide possible tax advantages. Tax exempt organizations are not required to pay taxes. Tax-deductible donations are those you can deduct from your taxes if you itemize. The IRS has a listing of organizations to which deductions are tax-deductible per section 501(c)(3) of the Internal Revenue Code.

The IRS now requires actual receipts for all tax-deductible contributions of $250 or more. You should use an independent appraiser when donating property worth more than $5,000. The IRS won’t take your or the charity’s word for it. Consult your tax advisor for more help.

Reduce your solicitations

Many charities rent or trade their donor lists to other organizations to raise much-needed funds. As a result, you might get more requests in the mail the more you donate. The National Do Not Call Registry doesn’t apply to nonprofit organizations.

You can send a letter, along with your donations, asking that the recipient not rent, sell, or trade your personal information, name, or donation history to anyone. Or ask the recipient to limit its solicitations to only a few times a year. Explain that your future support is contingent on its cooperation.

When your charity complies with your request, consider increasing your donations to reward it and to offset any lost revenue from renting your name.

If you are receiving unsolicited address labels, note cards, pens, pads, or other gifts from charities, you are not obligated to make a donation in return. To stop receiving these mailings, return the charity’s envelope with a note requesting that your name be removed from its list. Be aware, however, that the organization might not be able to remove your name if it rented the list from a list provider.

Politely decline in-person solicitations by saying, “I limit my support to charities that I know well and support the causes that are most important to me.” Consider concentrating your support to singular missions, such as curing cancer; or to helping institutions in your hometown.

Become a stakeholder in the cause you support. You deserve to know how your money is used. With a little research, you can feel confident your donations are being used wisely to better the world.


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Gary Williams is a financial adviser and the President of Williams Asset Management practicing at 8850 Columbia 100 Parkway, Suite 204, Columbia, MD 21045. He offers securities and advisory services as an investment adviser representative of Commonwealth Financial Network®—a member firm of FINRA/SIPC and a Registered Investment Adviser. He can be reached at (410) 740-0220 or at Gary@WilliamsAssetManagement.com.

Labels: Charitable gifts, Donations

  9:15 AM •  0 Comments •

Is Your Credit Score as High as You Think? It is common to assume that paying bills on time automatically means having a high credit score. Unfortunately, that’s not always the case. There are many misperceptions about how scores are calculated—and yours could be lower than you might expect.

Credit scores are used by financial institutions to determine whether they should lend money to a potential borrower and, if so, what interest rate should be charged. A higher score means an applicant is statistically less likely to default on the loan so they get a lower interest rate.

Ignoring your credit score could be a costly mistake. As an example, let’s say you bought a $400,000 house with a 30-year fixed-rate mortgage at a 6-percent interest rate. Over the term of the loan, you would pay interest charges of $463,354. If, however, you had a lower score and your bank bumped your interest rate up to 8 percent, you would pay interest charges of $656,619. That’s a hefty difference of $193,265.

There are many credit scoring systems available to lenders, but FICO scores are by far the most commonly used. The system was developed by the Fair Isaac Corporation back in the 1960s. Technically, you have three different FICO scores—one for each of the three major credit reporting agencies.

Knowing how FICO scores are calculated can help you make better decisions about your credit. At a minimum, you should be aware of some of the most common misperceptions:

I always pay my bills on time so I must have a high credit score.
Paying your bills on time is clearly a critical factor, but it only accounts for 35 percent of your overall FICO score. It also looks at four other components: the amount of debt you owe (30 percent), the length of your credit history (15 percent), the number of credit accounts you’ve recently opened (10 percent), and the types of credit you use (10 percent).

Consolidating multiple credit cards will increase my score.
Consolidating credit cards could make it easier to pay down debt, but your FICO score could actually decrease if you consolidate to fewer accounts with balances that are closer to the maximum available credit. FICO considers you a lower risk if you have multiple credit accounts, keep the payments up-to-date, and maintain balances between 25 percent and 35 percent of the available credit.

I don’t have any credit cards or other major debt so I can’t have a low score.
Your FICO score doesn’t take into account your net worth or your income level—it only looks at your past borrowing history. Your FICO score will be lower if you haven’t established a long-term borrowing history with multiple creditors.

Closing a credit card is better for my score than keeping it open.
Closing a credit card will not necessarily hurt your score in the short term, but you will eventually lose the positive effects of the long-term credit history that you’ve established with that lender.

I shouldn’t shop around for a mortgage or other large loan because credit inquiries hurt my score.
A large number of credit inquiries will lower your score, but FICO is smart enough to know when you are rate shopping. Inquiries for similar types of credit are bundled if they’re made within the same 14-day period.

I shouldn’t check my credit report more than once a year because credit inquiries hurt my score.
Checking your own credit report does not affect your score, so feel free to check it as many times as you’d like.

If you want to learn more about how FICO scores are calculated, visit Fair Isaac’s web site at www.myfico.com. They offer a host of informational materials and credit score tips. And while you’re at it, you can also order your three scores for a small fee.

Becoming more knowledgeable about FICO scores could help you to keep those pesky interest rates at a minimum. With just a small investment of time, you will be able to make smarter credit decisions and take proactive steps to increase your score.

Labels: credit cards, credit scores, FICO

  3:37 PM •  0 Comments •

Investments Should Be Guided By Reason, Not Emotion What makes for a good investor?

Driven by emotions more than logic, we typically buy high and sell low. What may surprise you is how big a penalty you can pay in the long run if fear and greed dictate your investment decisions. People in or near retirement seem particularly prone to such temptations. The financial media had plenty to talk about this spring and summer. How did you react to all the news?

As you ponder your own investor behavior, keep in mind this observation from the Dalbar report: "It is easier to make the right decision when the markets are rising and the fear of loss is on the back burner. The really smart decision, that most investors get wrong, is to invest when the market is down. If you don't know when to get out, it is better to stay in."

Most investors do not clearly understand their own risk tolerance. According to Nick Murray, author of several books including Simple Wealth, Inevitable Wealth, there are three great truths about risk tolerance.

First, far from being fixed, immutable, knowledgeable, and even quantifiable, risk tolerance in the individual investor is as volatile as are all his other emotions, because it is from his emotions, and not his intellect, that his risk tolerance is derived at any given moment.

Second, people change their risk tolerance in reaction to, rather than in anticipation of, market movements. That is, risk tolerance is essentially a lagged response. Thus, changing one's risk tolerance in response to market events, regardless of how one is changing it, must be a losing strategy, and a formula for substandard returns.

Third, the individual investor reacts to market movements by altering his risk tolerance pro-cyclically rather than counter-cyclically. That is, as prices rise, and especially if they rise sharply thus extinguishing value, the investor perceives that risk in those assets/markets is actually declining, when in fact it is rising.

The best approach for most investors is to have a well-diversified portfolio, ignore the noise from the media, continue to educate themselves about their finances, and be patient. By doing so you are on your way to being a good investor.

Labels: finance, investments, risk

  1:15 PM •  0 Comments •

Does Your Money Buy You Happiness? Another Thanksgiving has come and gone. As a financial professional, I always count on two things: the stores open for the after-Thanksgiving sales earlier than they do the previous year, and the TV news always try to predict how retailers will fare during the holiday shopping season. This year is running true to form.

Now, granted, a healthy retail sector is good for the stock market. And it certainly makes my job easier when my clients are satisfied with how the Dow is doing.

But it’s also part of my job to talk with my clients about their goals in life and about their values and feelings about money. It helps me pinpoint their financial destination and how able they are to get there.

I work with many people who are, by most standards, financially successful. They make decent or comfortable salaries. They have lovely homes, stable marriages, and wonderful families. But they can feel stressed or dissatisfied. Some work jobs that give them little personal satisfaction or less family time. They’re concerned they won’t ever have enough for their own or their children’s futures.

When we examine their spending habits, we often make some crucial discoveries. Some spend more money than they should on things they don’t need. When they realize this, we make significant progress toward reducing their concerns.

Now I’m not suggesting that we give away our belongings and live in the mountains. And not all purchases are bad: we all have hobbies and interests that give us sustained and long-lasting pleasure and make us well-rounded and interesting people. But some careful consideration of our spending may pay off in greater levels of personal happiness and financial security.

Think before you buy.
With all the online shopping, shopping malls, shopping channels, and catalog shopping, it’s not surprising that Americans are carrying a record level of credit card debt. We often forget that what we can pay for and what we can afford can be two separate, very different, things.

So I propose a little experiment: for two weeks, pause before you buy anything that’s not related to a true human need like food, health care, or shelter. It can have a great impact on your personal finances.

Some people make a list of what they want and wait a month before they buy it. Or they freeze their credit cards in a bowl of water and buy things only when the ice defrosts. Or they leave the store immediately to think, giving themselves time to let their urge to splurge cool off.

Next time you have an impulse to purchase, ask yourself if the item you crave fulfills a want or a need. If you carry a credit card balance, how many months of additional minimum payments will purchasing this item obligate you to? Does this purchase get you closer to accomplishing the most cherished dreams you have for your life?

Don’t buy more things, buy more experiences.
According to the National Association of Home Builders, the average American home size has increased by 40 percent since 1970. We’ve got more closets, bathrooms, and kitchen cupboards than ever before. But the size of the average American family has decreased.

What happens with all that extra space? We fill it with possessions, many of which we upgrade or trade in far before they outlive their usefulness. If we charge these purchases, we may pay for them long after we’ve gotten rid of them. If we’ve bought too much house, we may be tied to more mortgage, utility, and upkeep payments than necessary. These can add to our stress level and our worries about financial security.

So instead of a flat-screen TV in your mud room, for instance, take a family vacation—you’ll have photographs and memories you’ll treasure far longer.

Better yet, buy your freedom.
Our retirement years are supposed to be our “golden years”—the reward we finally earn after working hard for decades. It’s our time to call the shots and live our life the way we want. But is golden really good enough in this age of platinum and titanium credit cards?

Many of us put our desire for instant gratification ahead of our need to live a financially secure life. We don’t pay enough attention to funding our retirement until it manages to sneak up on us. And then we get worried.

Many of us work to maintain a lifestyle, not a life. When we know the difference between the two, we can make sounder financial choices that reduce worry.

If you do well, spend some money on doing good.
We’re lucky to live in a great country, but there are people across the globe—or even across the street—who are not so blessed. Helping the less fortunate can give our personal wealth and the sacrifices we make for it much greater meaning than buying a new car every three years. And, in many cases, charitable giving can reap tax benefits for you, too.

Be happy with what you have.
Some experts suggest making a list of all of the things that make us truly happy, paying specific attention to those things you can’t buy—like the love of our families and our good health. When we refer to that list regularly, it helps us stay focused on what’s really important.

And maybe a little thanksgiving every day, instead of once a year, can help us eliminate our emptiness and empower us to make smarter financial choices.

Labels: Happiness, Money

  1:42 PM •  0 Comments •