Dream a Little Dream: Know where you want to go

July 10, 2012

People often think defining an investment strategy is the first step in creating a solid financial plan. Slow down. Before you even begin to gather all the information you’ll need to form an investment strategy, sit down on the porch or patio or in front of the fireplace (with your spouse or partner if you have one) and let your mind roam.

What do you really want from life? If you could do anything you want, what would you do? Don’t put financial restrictions on yourself now. Dream. Stretch a little. Once you have that dream defined and you know roughly where you want to go, you can begin to determine what role a financial plan can have in helping you live that dream. 

A good investment strategy begins by identifying your specific individual goals and the time you have to achieve them. Those highly personal decisions, very often driven by your love of others, will suggest your strategy. Your strategy may include shorter- and longer-term objectives.

Are you investing to buy a house, pay for college or to retire with sufficient income to support the lifestyle you desire? How much money will you want for each objective? When will you need it? How can you get there? Will you have to make trade-offs to achieve those goals? Which take the highest priority?

The answers to all of those questions will help you determine your individual strategy. Without that strategy it is nearly impossible to know how to invest.


Uncertain Fed Means Certain Outcome – Part 3

October 7, 2010

Uncertainty is to be expected given the challenges facing an economy in the early stages of growth following an unprecedented upheaval. The sentiment of unusual uncertainty is expressed in this excerpt from the pages of TIME magazine:
“If America’s economic landscape seems suddenly alien and hostile to many citizens, there is good reason: they have never seen anything like it. Nothing in memory has prepared consumers for such turbulent, epochal change, the sort of upheaval that happens once in 50 years.”

“The outward sign of the change is an economy that stubbornly refuses to recover. In a normal rebound, Americans would be witnessing a flurry of hiring, new investment and lending, and buoyant growth. But the U.S. economy remains almost comatose a full year and a half after the recession officially ended. Unemployment is still high; real wages are declining.”

“The current slump already ranks as the longest period of sustained weakness since the Great Depression. That was the last time the economy staggered under as many “structural” burdens, as opposed to the familiar “cyclical” problems that create temporary recessions once or twice a decade. The structural faults represent once-in-a-lifetime dislocations that will take years to work out. Among them: the job drought, the debt hangover, the defense-industry contraction, the savings and loan collapse, the real estate depression, the health-care cost explosion and the runaway federal deficit.”
This excerpt is from September 28, 1992. The same article quoted an economist as saying, “this is a sick economy that won’t respond to traditional remedies. There’s going to be a lot of trauma before it’s over.” But it was over.
The recession ended in 1991 and real GDP was an above average +3.4% in 1992 (about the same pace of growth the economy has averaged this year). Yet, in September 1992, TIME described the economy as “comatose”. When the article was published, the economy had already been growing for six quarters. Hiring had weakened to averaging only +77,000 jobs per month in the four months leading up to this article, but in the following four months it averaged +210,000. In addition, while the structural problems apparent then seemed unsolvable for years to come, real GDP was +2.9% the following year.

In 1992, the uncertainty expressed in the sentiment from the Fed and in the media at the end of the third quarter set the stock market up for a solid fourth quarter rally after a relatively flat year for stocks in the first three quarters. The stock market in 1992 ended with a modest single-digit total return (including dividends) of 7.6%, very similar to our outlook for a modest single-digit gain this year.

Uncertain Fed Means Certain Outcome – Part 1

September 30, 2010

In his recent testimony to Congress, Federal Reserve Chairman Ben Bernanke used the phrase “unusually uncertain” to describe the U.S. economic outlook. The word uncertain was used five times in the statement released at the conclusion of the June 23 meeting, and was used 16 times in the minutes released on July 28.

The economy again began to grow last summer, putting the current bout of early cycle uncertainty at about four quarters since the end of the recession. In contrast to Chairman Bernanke’s remark, the current uncertainty is not all that unusual at this early stage of an economic cycle. In fact, based on the Fed’s own words, the current level of uncertainty is actually common at this stage of the economic cycle.
• In March 2003, about five quarters after the 2001 recession had ended, the Fed’s Beige Book used the word “uncertain” 30 times to describe the economic environment, almost twice as often as the July 2010 Beige Book. Also, the minutes of the March 2003 Fed meeting used the word “uncertain” 16 times, three times as often as the five times it was used in the June 2010 meeting minutes.
• In October 1992, about six quarters after the end of the 1991 recession, the word “uncertain” appeared 23 times in the transcript of the October 1992 Fed meeting.

The response by the Fed to uncertainty over the economic environment has been anything but uncertain. They have always provided the economy with one last booster shot of stimulus. During the past four decades, the Fed has cut rates one last time well after the recession had ended when a soft spot emerged. For example, related to the above examples of Fed uncertainty, the Fed cut the Federal Funds target rate in June 2003 and in September 1992.

Vacation Properties and Income – Part 1

September 9, 2010

If you have a vacation home, you’re already aware of the enjoyment it provides and the benefits it can offer at tax time. But you may not be aware of how vacation property can be used to generate income in retirement or how it can play into an estate plan. In fact, vacation properties offer retirees a number of different options in managing their finances and estate.
Vacation property may be used to generate income in several different ways. The first, and most obvious, is renting it. The IRS allows you to deduct mortgage interest on your primary residence and one additional property up to a limit of $1 million in combined mortgage debt for mortgages taken out after 1987. Current tax rules also allow you to rent out a second home for up to 14 days per year without having to report the rent as income. If you rent for more than 14 days, the home is considered investment property, and rent must be reported as income. Converting the property to an investment property, however, allows you to deduct rental expenses, such as insurance and utilities, if you have a net profit on the property (deductions are limited if you report a loss). You can still use an income-producing property for personal use while maintaining your tax advantages — but only for the greater of 14 days or 10 percent of the total days it is rented. Maintenance days do not count as personal-use days, but use by in-laws or other part-owners does, even if rent is charged.

Spring Cleaning

April 23, 2010

As the snow melts away and the grass begins to green, many of us start our “spring cleaning” projects around the house. It is also a great time to clean up, organize, and review your financial affairs. Consider these six suggestions:

Review account beneficiary forms to confirm that you have a named primary and a contingent beneficiary that reflect your wishes.
Discuss with your attorney and review your estate planning documents, such as your will, trusts, health care directives, and durable powers of attorney to confirm that the documents you have in place take full advantage of current estate tax laws. If you have not yet prepared these documents, consider meeting with an attorney to discuss whether they are appropriate for your situation. Be sure to advise your heirs and executor where your estate planning and account documentation can be found in case of your death or incapacitation.
Review your current property/casualty, life, disability, and long-term care insurance coverage with your wealth manager and other insurance advisor(s) to determine if you are properly insured.
Review contributions to employer retirement plans. The maximum contribution in 2010 to a 401(k), 403(b) or 457 plan is $16,500, and taxpayers age 50 and older may make “catch-up” contributions of $5,500. The maximum contribution to a SIMPLE Plan in 2010 is $11,500 with a “catch-up” contribution of $2,500 for taxpayers age 50 and older.
Review contributions to traditional and Roth IRAs. The maximum contribution, if you qualify, is $5,000 in 2010 and taxpayers age 50 and older may make “catch-up” contributions of $1,000.
Review your overall investment allocation and consider rebalancing as necessary. Contact a Wealth Enhancement Group advisor to discuss these and other opportunities that may exist.

The Loss Damage Waiver

October 15, 2009

You’re standing at the rental car counter and the car agent asks if you would like to purchase the insurance on the car you are about to rent. The insurance seems so expensive. What do you do?

The insurance the rental car companies are trying to sell you is called “the loss damage waiver”. Purchasing this coverage from the rental agency relieves you of any responsibility for damage to a rented vehicle. Sounds good on the surface, but is it? It’s possible that you have probably already purchased the majority of what the rental agent is offering. When you purchase physical damage coverage (comprehensive and collision) for a car you own, the coverage will extend to any short-term rental vehicle. In some states (Minnesota included) the coverage for the rental vehicle extends from the liability coverage you purchased for your own personal vehicle.

Think twice before you purchase coverage you may very well already have.

Plan To Get There!

October 13, 2009

Planning is the only way to make sense of the five things you can do with money. If you don’t plan, you will likely spend more, save less, invest less, and do nothing to reduce your taxes.

Don’t sell yourself short by planning your retirement based on some arbitrary percentage of your income. “Needs planning” is a good start for someone who has given no thought to retirement savings. It’s one way to convince people that they should save something, but it’s not good for people who want to do better than just get by. Don’t settle for mediocrity in your investment planning; try to excel. It’s fine to set a floor for what you will need, but then aim higher-and plan to get there! Become a “wants” planner, instead of a “needs” planner. Only when you determine what you want from life can you determine the role that money will play in helping you achieve your dreams.