Solutions for Wealth Management

Turn Goals into Numbers

June 14th, 2011 - Article

A Small Book with a Big Message

June 14th, 2011 - Article

“The pair threw out one of the most fundamental Wall Street premises – that a smart, diligent person with access to economic forecasts, market statistics and industry intelligence can systematically earn a higher rate of return than market indexes or other benchmark averages.”

The Investment Answer poses the right questions

The recently published book, The Investment Answer: Learn to Manage Your Money and Protect Your Financial Future, has gained a lot of attention based on the inspiring personal story of one of its co-authors, Gordon Murray. Mr. Murray decided to tackle this project only after his doctors told him that the glioblastoma – a type of brain cancer – he had been battling was terminal. The book was literally his last gift and legacy, a short volume that helps individual investors find their way in the complex financial world.

After spending his last months devoting all the energy he could muster to the project, Mr. Murray passed away shortly after the book was published. However this touching back-story does not make it a valuable and important book. The contents do.

Mr. Murray worked for Wall Street firms for more than 25 years. (His co-author, Daniel Goldie is a registered investment advisor.) The book captures the epiphany Mr. Murray experienced in retirement – that the investment industry has long promoted investing practices that serve the interests of brokers and banks, not individual investors.

The authors describe the ultimate result of these practices as: “Most of us end up taking unnecessary risk, not diversifying our portfolios properly, and paying too much in fees and taxes – resulting in poor investment results with too little return and too much risk.”

Enlightened by this epiphany, Mr. Murray worked with his advisor, Mr. Goldie, to rework his own portfolio, and eventually to put into print a better way for investors.

In so doing, the pair threw out one of the most fundamental Wall Street premises – that a smart, diligent person with access to economic forecasts, market statistics and industry intelligence can systematically earn a higher rate of return than market indexes or other benchmark averages. This cornerstone of Wall Street’s value proposition – that individuals will beat the market by paying analysts, economists, researchers and money managers to decide what and when to buy – is just not supported by facts, the authors argue.

Persuaded by extensive empirical research that showed this premise to be a myth – one that Mr. Murray acknowledges he had earned a great deal of money promoting over his career – the authors took the discussion back to square one. What they found was that the entire investment process could be boiled down to five key decisions.

Investors who understand and address these five decisions can achieve good investment results without counting on Wall Street experts to pick the next breakthrough stock, emerging economy or money manager. Furthermore, investors who embrace the authors’ approach need not grind through earnings reports every quarter, read stock charts over breakfast, or weigh the conflicting advice dispensed each day by pundits in the financial media.

The key five decisions are:

• Do it yourself? Should you invest your own portfolio or enlist the help of an investment professional?
• Asset allocation. How should you split your assets among stocks, bonds and cash?
• Diversification. Within each major asset category, what specific asset classes should you hold?
• Active vs. passive. Should your portfolio be actively managed with the goal of outsmarting the market, or should you accept market level returns of passive management?
• Rebalancing. When should you buy and sell assets to bring asset allocations back to desired levels?

 Walking through these five decisions in plain English, the authors illuminate the world of investing in a way few books ever have. Unlike most investment books that are thick, dense and highly technical, this one is very short, clear and understandable by investors of any level of experience.

The book, at less than 90 airy pages, can be read and absorbed in a single sitting. This small investment in time and attention could fundamentally change one’s investment approach and results.

Without question, Mr. Murray left us all a great gift in The Investment Answer.

© 2011 Bright Sky Group, LLC. All rights reserved.

Bright Sky Group, LLC is not a registered investment adviser. The views expressed by Bright Sky Group represent the opinions of members of Bright Sky Group, but should not be construed as financial or investment advice. Further, the views are subject to change and are not intended as a forecast or guarantee of future results. The material provided by Bright Sky Group is for informational purposes only. Statements of future expectations, estimates or projections, and other forward looking statements are based on available information deemed reliable, but the accuracy of such information cannot be guaranteed. Statements are based on assumptions that may involve known and unknown risks and uncertainties. Past performance is not indicative of future results.

Bright Sky Group member firms are each registered investment advisers, which are independently owned and operated from each other. Bright Sky Group provides general financial information. The services, securities and financial instruments described by Bright Sky Group may not be available to or suitable for you, and not all strategies are appropriate at all times. The value and income of any of the securities or financial instruments mentioned herein can fall as well as rise, and an investor may get back less than he or she invested. Foreign-currency denominated securities and financial instruments are subject to fluctuations in exchange rates that could have a positive or adverse affect on the value, price or income of such securities and financial instruments. Independent advice should be sought for an investor’s specific needs.

The Secrets to Maximizing Your Social Security Benefits

June 14th, 2011 - Article

“If you were born between 1943 and 1954, you have an FRA age of 66. You would receive only 75 percent of your FRA benefits if you begin taking them at 62.”

Best options depend on individual circumstances

The greatest fear of older Americans today is running out of money during retirement. An important part of most retirees’ income is social security benefits. Unfortunately, most retirees fail to maximize their benefits to which they are entitled.

According to the Employee Benefit Research Institute (www.ebri.org), social security benefits make up an average of 40 percent of older people’s income. Two-thirds of those receiving benefits began taking them at age 62. Nine out of ten people 65 and older receive social security benefits, and for 32 percent of those, it makes up 90 percent of their income.

Patience is rewarded

Social security provides lifelong, inflation-adjusted, government-guaranteed income. If you have worked for 40 quarters (10 years) you could be eligible to begin receiving benefits at age 62. However, if you begin taking benefits before your full retirement age (FRA), your benefits are reduced. For example, if you were born between 1943 and 1954, you have an FRA age of 66. You would receive only 75 percent of your FRA benefits if you begin taking them at 62. On the other hand, each year you delay your benefits beyond FRA, up to age 70, increases your benefit amount by 8 percent. See chart below.

Monthly benefit amount
Based on a hypothetical $2000 monthly benefit at FRA of 66

Delaying payouts is an easy way to significantly increase your benefits if you can afford to wait. When you decide to start your benefits should depend on your need for income and your expected longevity.

Other ways to increase benefits

There are other, more sophisticated methods for maximizing your benefits. One technique for a married couple is to “file and suspend.” The higher-earning spouse, upon reaching FRA, would file for retirement benefits and immediately suspend them. Filing and suspending payments allows the lower earner to claim a higher spousal benefit and the higher earner to continue working (if he/she so chooses) and claim a greater benefit later. This not only helps maximize the couples’ lifetime benefits, but also maximizes the surviving spouse’s benefits.

Another technique for maximizing spousal benefits is known as “double dipping.” Spouses in dual-earner marriages who have reached their FRA can claim social security benefits twice. Each spouse files a claim for spousal benefits while delaying his/her own benefits until later. Each spouse can later file for benefits based on his or her own record and receive higher monthly benefits. This strategy works best for couples with comparable incomes.

A fourth method to increase social security payments is to utilize the higher earner’s benefits. Spouses are entitled to the higher of their benefits or 50% of the higher earner’s benefits. However, the lower earning spouse must wait until he/she reaches FRA to take advantage of this approach. Retired couples in which one spouse did not work or who had low earnings have the most to gain from this technique.

A former spouse could be eligible to claim a spousal benefit under his/her ex-spouse’s record. The marriage must have lasted at least 10 years, the former spouse must be at least 62 years old and unmarried, and the former spouse’s benefits must be less than the ex-spouse’s benefits. The amount of benefits that an ex-spouse claims has no effect on the benefits the worker and his/her current spouse can receive.

Special rules for widows and widowers

Widows and widowers are entitled to the higher earner’s retirement benefits. Eligibility begins at age 60 or at age 50 if disabled. If the widow(er) is at FRA, the survivor benefits will be 100% of the higher earner’s benefits. If the widow(er) takes the benefits before FRA, the amount will be reduced. The surviving member of a dual-earning couple can also claim reduced benefits on one working record and then switch to the other at FRA.

Given the complexity of these options, it is crucial for retirees to carefully consider the best way to maximize their social security benefits before initiating benefits. If you would like more information on your own options, talk with your wealth manager or visit the Social Security Administration’s website at www.socialsecurity.gov.

By Stephen High, CPA, JD, PFS of Kraft Asset Management, an independent founding member of Bright Sky Group.

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© 2011 Bright Sky Group, LLC. All rights reserved.

Bright Sky Group, LLC is not a registered investment adviser. The views expressed by Bright Sky Group represent the opinions of members of Bright Sky Group, but should not be construed as financial or investment advice. Further, the views are subject to change and are not intended as a forecast or guarantee of future results. The material provided by Bright Sky Group is for informational purposes only. Statements of future expectations, estimates or projections, and other forward looking statements are based on available information deemed reliable, but the accuracy of such information cannot be guaranteed. Statements are based on assumptions that may involve known and unknown risks and uncertainties. Past performance is not indicative of future results.

Bright Sky Group member firms are each registered investment advisers, which are owned and operated independently from each other. Bright Sky Group provides general financial information. The services, securities and financial instruments described by Bright Sky Group may not be available to or suitable for you, and not all strategies are appropriate at all times. The value and income of any of the securities or financial instruments mentioned herein can fall as well as rise, and an investor may get back less than he or she invested. Foreign-currency denominated securities and financial instruments are subject to fluctuations in exchange rates that could have a positive or adverse affect on the value, price or income of such securities and financial instruments. Independent advice should be sought for an investor’s specific needs. 

Beware Hot Picks

June 14th, 2011 - Article

“Assuming that last year’s winner will continue to outperform this year is like expecting a craps player in Las Vegas who has rolled five 7’s in a row to just keep rolling them. “

Investing articles may not tell the whole story

On any given Sunday you’ll likely find an article in the business section of the paper that discusses the performance of a hot stock or mutual fund or touts a new strategy for investing in a certain narrow segment of the market.

While each article has its own flavor, a common theme prevails: This investment has done well in the last 6-12 months and looks like it could continue to do well. The recommendation, whether explicitly stated or not, is often this: Get in now; don’t miss out! And it’s not just the Sunday papers that take this approach. Dozens of television commentators and thousands of bloggers ardently recommend investments day in and day out, often based only on strong recent performance.

Hindsight doesn’t count

Two big problems plague these articles. First, they rely on perfect hindsight and questionable foresight. Yes, a mutual fund that returned 40% last year stands out, but expecting a repeat performance this year is another matter. Assuming that last’s year’s winner will continue to outperform this year is like expecting a craps player in Las Vegas who has rolled five 7’s in a row to just keep rolling them.

Past performance is simply not a reliable indicator of future success. As Warren Buffett has said, “The investor of today does not profit from yesterday’s growth.”¹ Spotting outperformance after the fact is simple, but predicting it in advance is more a matter of luck.

The second problem is not about what’s in the articles, but what is not. By focusing exclusively on the allure of specific stocks or mutual funds, many articles completely skip over the fundamental planning steps that should happen first. Writing an investment policy statement helps an investor define financial goals and determine one’s ability, willingness and need to take risk in the market. Without this plan in place, choosing specific stocks or funds is premature at best, like buying kitchen cabinets before having a home to furnish.

There’s no such thing as an average investor

Many people don’t need to be 100 percent invested in the stock market. A mid-career professional may only need to be invested 90, 80 or 60 percent in stocks with the remainder in bonds, while a retiree with greater need for current investment income may be better served with a portfolio that’s more heavily weighted in bonds. There’s no formula that fits all investors; every situation is completely unique. An investment policy statement brings these individual needs into focus.

Once the asset allocation is set, the equity portion of the portfolio should be diversified across different asset classes, such as large cap and small cap, foreign and domestic, and growth and value. Diversifying reduces the exposure to poor performance in any single asset class and evens out performance in a variety of market conditions.

A carefully-considered investment policy statement, prudent asset allocation and a diversified portfolio can provide valuable protection against fickle markets and the hindsight-based stock picks of Sunday columnists and know-it-all neighbors.

¹http://investing-school.com/history/52-must-read-quotes-from-legendary-investor-warren-buffett/

By Timothy J Delaney, CPA, PFS of JDH Wealth Management LLC, an independent member of Bright Sky Group.

© 2011 Bright Sky Group, LLC. All rights reserved.

Bright Sky Group, LLC is not a registered investment adviser. The views expressed by Bright Sky Group represent the opinions of members of Bright Sky Group, but should not be construed as financial or investment advice. Further, the views are subject to change and are not intended as a forecast or guarantee of future results. The material provided by Bright Sky Group is for informational purposes only. Statements of future expectations, estimates or projections, and other forward looking statements are based on available information deemed reliable, but the accuracy of such information cannot be guaranteed. Statements are based on assumptions that may involve known and unknown risks and uncertainties. Past performance is not indicative of future results.

Bright Sky Group member firms are each registered investment advisers, which are independently owned and operated from each other. Bright Sky Group provides general financial information. The services, securities and financial instruments described by Bright Sky Group may not be available to or suitable for you, and not all strategies are appropriate at all times. The value and income of any of the securities or financial instruments mentioned herein can fall as well as rise, and an investor may get back less than he or she invested. Foreign-currency denominated securities and financial instruments are subject to fluctuations in exchange rates that could have a positive or adverse affect on the value, price or income of such securities and financial instruments. Independent advice should be sought for an investor’s specific needs.

Inflation or Deflation: Watching for Warning Signs

June 14th, 2011 - Article

 Download a PDF Copy:  Inflation or Deflation: Watching for Warning Signs

Avoiding a Long-Term Care Crisis

February 2nd, 2011 - Article

“Adult children may be forced to make difficult choices – such as college tuition for their children or nursing care for their parents – or jeopardize their own preparations for old age. “

Planning is the only cure

Long-term care may soon overtake Social Security and Medicare as our country’s most pressing social challenge. With an enormous and rapidly aging baby boom population and the rising cost of delivering healthcare, long-term care looks like a national crisis in the making. However it need not be a personal crisis. With forethought and careful financial planning, many families can prepare for the expenses of long-term care and maintain choices late in life.

Currently, 55 percent of the population over age 85 is receiving long-term care. About 70 percent of individuals over 65 will require at least some type of long-term care services during their lifetime. More than 40 percent will need care in a nursing home for some period of time.¹ And it is not strictly an elder care issue. According to the U.S. Government Accountability Office, about 40 percent of individuals receiving long-term care are under the age of 65.²

The cost of care

Long-term care is very expensive. According to the MetLife Mature Market Institute, the 2009 average daily rate for a private room in a nursing home was $219 or $79,935 annually.³ Based on the average length of stay in a nursing home of 2.8 years,⁴ a patient would need $223,818 for an average stay. Meanwhile the median U.S. household income is $49,777.⁵

Home healthcare can be even more expensive. The average cost of a home healthcare aide in the U.S. was $21 an hour in 2009.⁶ At that rate, those requiring 24-hour care would run up a bill of $183,960 per year.

These costs are very high, and have risen faster than inflation or incomes. Government programs provide only limited support, an estimated 16 percent of the more than $200 billion spent each year on long-term care.⁷ When government programs are available, they often cover only a portion of costs, sometimes in less than desirable facilities.

Lack of planning

Despite these sobering facts, a 2006 national survey by Public Opinion Strategies found that 65 percent of Americans had made no long-term care plans for themselves or their spouse. Why? It is human nature not to worry about events until they happen. Few want to think about disease and frailty that await us years or decades down the road. In addition, many individuals may expect Medicare and Medicaid will provide more assistance than is actually available.

This lack of planning – resulting in many decisions being made on a crisis basis – can compromise the care received and is likely to have severe consequences for the individual’s family. A spouse or children may be forced to provide constant, demanding care or make significant financial sacrifices. Adult children may be forced to make difficult choices – such as college tuition for their children or nursing care for their parents – or jeopardize their own preparations for old age. For those with no immediate family, long-term care can be a burden to extended family members.

Get ready

What should you do to develop a long-term care plan for yourself and your spouse? Here are some starting points:

Start early. The first step is to start planning early. Do not put it off. The need for long-term care is not limited to the elderly. You need to gain some level of knowledge and understanding of what the issues are. This will help you prevent crisis planning, save money, save valuable time, and expand the options available.

Understand services. There are several levels of long-term care, including adult care, home care, retirement housing, assisted living, and nursing homes. Services for these levels of care range from providing help around the house with meals, housekeeping, and shopping to 24-hour nursing care, each with different costs and constraints.

Get help. Long-term care services are complicated and expensive. Using professional care advisors is the most cost effective and efficient way to plan for yourself or a loved one. Care advisors include professional care managers, long-term care and financial planning specialists, elder care attorneys, elder mediators, and CPAs.

Use all the financial tools. Alternatives for paying for long-term care typically include one or more of the following: personal assets, long-term care insurance, Medicare, Medicaid, IRAs, reverse mortgages, and life insurance arrangements. Preparing for expenses may mean changing one’s investment asset allocation, reducing spending, or increasing savings. With proper planning many individuals can remain in their homes to receive long-term care and avoid going to an institution or hospital.

Explore insurance. Many individuals consider purchasing long-term care insurance policies to fund care. These policies are meant specifically for nursing home or other specialized care. Premiums vary widely based on age at purchase and extent of coverage. Consumers may find fewer options for long-term care insurance in years ahead. Some providers, finding it difficult to make money on the policies, are no longer writing new policies or are raising premiums. For instance, John Hancock has filed for permission to raise premiums for about 80 percent of its customers by an average of 40 percent.⁸

Get on the same page. People planning for long-term care must make their wishes known to family or other involved caregivers, choose a care advocate, provide funding, and have their legal documents drafted and in place. No plan is complete without a formal meeting and a written care agreement that is understood, agreed upon, and retained by everyone involved. Clear instructions and checklists should also be provided to follow when the time for care comes.

Planning for long-term care takes time. But the investment may allow you to avoid some of the sleepless nights that many families without a good plan suffer through. Your wealth manager or financial planner can help you understand the financial realities of long-term care and create a proactive plan to prepare for what lies ahead.

By Stephen High, CPA, JD, PFS, Chief Manager of Kraft Asset Management, LLC, an independent founding member of Bright Sky Group. © 2010 All rights reserved.

¹ National Clearinghouse for Long-Term Care Information www.longtermcare.gov
² US General Accounting Office, www.gao.gov
³ The 2009 MetLife Market Survey of Nursing Home, Assisted Living, Adult Day Services, and Home Care Costs, October 2009
⁴ Genworth 2009 Cost of Care Survey, Genworth Financial, April 2009
⁵ Income, Poverty, and Health Insurance Coverage in the United States: 2009, page 4, US Census Bureau, www.census.gov
⁶ National Clearinghouse for Long-Term Care Information www.longtermcare.gov
⁷ U.S. Department of Health and Human Services, www.hhs.gov
⁸ “When a Safety Net Is Yanked Away,” by Ron Lieber, New York Times, November 12, 2010

Bright Sky Group, LLC is not a registered investment adviser. The views expressed by Bright Sky Group represent the opinions of members of Bright Sky Group, but should not be construed as financial or investment advice. Further, the views are subject to change and are not intended as a forecast or guarantee of future results. The material provided by Bright Sky Group is for informational purposes only. Statements of future expectations, estimates or projections, and other forward looking statements are based on available information deemed reliable, but the accuracy of such information cannot be guaranteed. Statements are based on assumptions that may involve known and unknown risks and uncertainties. Past performance is not indicative of future results.

Bright Sky Group member firms are each registered investment advisers, which are owned and operated independentlyfrom each other. Bright Sky Group provides general financial information. The services, securities and financial instruments described by Bright Sky Group may not be available to or suitable for you, and not all strategies are appropriate at all times. The value and income of any of the securities or financial instruments mentioned herein can fall as well as rise, and an investor may get back less than he or she invested. Foreign-currency denominated securities and financial instruments are subject to fluctuations in exchange rates that could have a positive or adverse affect on the value, price or income of such securities and financial instruments. Independent advice should be sought for an investor’s specific needs.

Entreprenuers and Their Portfolios

February 2nd, 2011 - Article

“By tinkering, experimenting and reworking, an entrepreneur can turn a struggling business into a thriving one. However the same approach may not deliver the same success in investing.”

Does the entrepreneurial approach translate to personal investing?

Not every startup business venture nets a big payday for the entrepreneur behind it. But when that does happen, an important question emerges: Who should manage the money? Should entrepreneurs manage their own portfolios, or should they rely on a professional advisor?

Some would dismiss this issue with the easy generalization that entrepreneurs thrive on risk and will gamble away their spoils on needlessly risky investments. While this may be true for some, to paint millions of entrepreneurs with a single brushstroke oversimplifies a very diverse population.

The pop culture caricature of entrepreneurs as a class of Richard Bransons – charismatic, adventurous and fearless – is far too simplistic to capture the diversity of the entrepreneurial population. A few startups rocket to prominence on the bold visionary moves of their founders, but most entrepreneurs start with humble businesses that grow quietly and slowly through years of blood, sweat and tears. Yes, entrepreneurs must continually weigh opportunity against cost, but the idea that they crave risk for its own sake is largely an empty stereotype.

What really sets entrepreneurs apart may not be an appetite for risk, but a bias for action. Having built their businesses by continually exploring opportunities – from revamping products and entering new markets to luring top talent from competitors – successful entrepreneurs rarely just sit and wait for their business to perform to expectation.

Running a portfolio is different
By tinkering, experimenting and reworking, an entrepreneur can turn a struggling business into a thriving one. However the same approach may not deliver the same success in investing. Reaping the benefits of a sound investment plan not only requires specialized knowledge and skills that a business owner may not have; it also often demands the discipline to not tinker when the urge is strongest – during economic slowdowns, political uncertainty and market dips. Whereas entrepreneurs succeed in business by making tough decisions on a day-to-day basis, success in investing is often about resisting the temptation to make more decisions once a plan is in place.

Investors can upend the long-term performance of a portfolio through many behavioral missteps. These behaviors include:

• Extrapolating past performance to the future
• Overestimating one’s ability to pick winners
• Failing to adequately diversify
• Quickly abandoning securities that do not meet short-term expectations
• Overweighting investments in companies, industries or geographies of personal experience
• Chasing media darlings and other fad investments
• Seeking exotic or “exclusive” investments
• Ignoring the impact of expenses and taxes

Entrepreneurs are not immune to these mistakes, and driven by a bias for action and desire for control, may make them sooner and more often. Seeking to make the most of their investments, entrepreneurs may actually reduce portfolio returns or take on more risk than necessary to achieve a given return. It may be hard for entrepreneurs to accept the idea that working longer and harder than everyone else – which made them wealthy in business – can lead to poor results as an investor.

Working with an advisor
In addition to their own hard work, many entrepreneurs achieve business success by capitalizing on the knowledge and skills of experts – whether they be engineers, programmers, chefs or mechanics. A similar approach may be appropriate in investing, working with a trusted advisor to avoid the perilous decision-making errors that can derail even the most diligent individual investors.

© 2011 Bright Sky Group, LLC. All rights reserved.

Bright Sky Group, LLC is not a registered investment adviser. The views expressed by Bright Sky Group represent the opinions of members of Bright Sky Group, but should not be construed as financial or investment advice. Further, the views are subject to change and are not intended as a forecast or guarantee of future results. The material provided by Bright Sky Group is for informational purposes only. Statements of future expectations, estimates or projections, and other forward looking statements are based on available information deemed reliable, but the accuracy of such information cannot be guaranteed. Statements are based on assumptions that may involve known and unknown risks and uncertainties. Past performance is not indicative of future results.

Bright Sky Group member firms are each registered investment advisers, which are owned and operated independently from each other. Bright Sky Group provides general financial information. The services, securities and financial instruments described by Bright Sky Group may not be available to or suitable for you, and not all strategies are appropriate at all times. The value and income of any of the securities or financial instruments mentioned herein can fall as well as rise, and an investor may get back less than he or she invested. Foreign-currency denominated securities and financial instruments are subject to fluctuations in exchange rates that could have a positive or adverse affect on the value, price or income of such securities and financial instruments. Independent advice should be sought for an investor’s specific needs.

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2010 Review: Economy & Markets

January 18th, 2011 - Article

2010 Review: Economy & Markets