Choosing Value versus Growth Does Make a Difference

Some interesting observations regarding portfolio components. Notice how the Intermediate Diversification porfolio outperforms the Maximum Diversified portfolio. Additional diversification is supposed to first of all, reduce risk and often improve performance. In this case, the maximum diversfied portfolio, that contains mixtures of Value and Growth capitalizations, underperforms the simpler Intermediate portfolio, which only includes large cap, mid cap, small cap. Obviously, I need to do my homework and choose value and growth allocations in a better managed way so those using the Max diversified portfolios don't suffer.



Also, notice how the riskiest (#9) portfolios all outperformed the SP 500, even in the basic allocations. I use the IShares Total Market ETF (IYY) in some of my portfolios. Notice how the IYY has outperformed the SP 500 this year.



Although there are differences between the results of the three diversification models, you can get a good idea of how well your portfolios are meeting benchmark portfolios. If you are underperforming benchmarks for your risk tolerance by a reasonable amount, you might want to consider getting better advice. If you are outperforming these returns by a reasonable amount, you might want to review the amount of risk you are taking.

You should always understand your risk tolerance level and diversify your portfolio accordingly. Keep in mind also that mutual fund fees and expenses can eat away at your net return. You must be aware of your costs as expenses must reduce your return. If you are still getting strong returns despite high costs, then you must be taking more risk in your portfolio.

In the end, always review your investment decisions with a qualified financial planner who is not trying to sell you products.

End of the Year Planning

TIME TO PREPARE

Already it's November! Where has the year gone? For many of us, it has been a very successful year. Our investments rebounded nicely and we find ourselves back on track with our financial goals. For others, times have been rough. Still, we must stay focused on our long-term goals and not let set-backs hurt us more than they should.

YOU CAN MAKE IT IF YOU PLAN

Doesn't matter if your retirement date is five years away or 20. Doesn't matter if you're gainfully employed or laid off. You must have a plan!

Did you know that some 401(k) plans charge very high fees, making it extremely hard for you to make money over time? What should you do? What choices should you make?

Asset Design Center is now offering a concise Retirement Plan that includes a full analysis of your current 401(k) plan expenses and options, analysis of your other IRA accounts along with long-term projections to help you plan for your future. Contact us today at retirement@assetdesigncenter.com to learn about this opportunity. If you are doing it right already, we'll tell you and the consultation will be free.

NEEDS ANALYSIS FOR YOUR OVERALL SITUATION

Move into the end of the year with a special offer on the world famous NaviPlan Needs Analysis. For a low price, we will create your personalized NaviPlan Needs Assessment showing you what important areas of your financial life you need to attend to in 2010. The plan is portable meaning that you can take it to any of your current advisers for implementation if you wish.

As always, should you wish, we will provide you with our unique "Guardian Angel Protection" for your financial affairs so you can be sure that your advisers are working for you! Learn more about the Navi Needs Analysis by writing us at Needs@assetdesigncenter.com.

Slow and Steady ALWAYS Wins the Race

The Case-Schiller Real Estate Index data for August was revealed today showing that for the third straight month, real estate values across the country rose. Those in Minneapolis can rejoice with a 3.3% rise in prices while on average, prices across a 20 city range rose just 1.2%. One must also keep in perspective the level of supply held by banks that has yet to reach the marketplace and first time buyers were helped along with a potential $8,000 tax incentive.

While I remain skeptical on the numbers, it is clear that real estate has outperformed the stock market by a large amount over the past ten years. While I was in California as a financial planning director for a large organization, real estate was an integral component of our financial planning advice. Clearly, accumulating wealth in California required a component in real estate, not only for the nearly 7% average annual gain the market was achieving there but also for the tax breaks that clients were able to take advantage of.

Can you imagine the advice of cutting back on your 401(k) investment to buy a bigger piece of real estate? Well, it made sense. If you think through things logically, while you do get some level of tax reduction from contributions to your 401(k), you also get tax breaks from mortgage interest and real estate taxes when you invest in a home. When you retire, for many of us, the kids are now gone and we don't need so much house. What a great time to downsize. The good news is that when you sell your principle residence and achieve a gain, up to $500,000 of the gain can be tax-exempt!!!! Try taking $500K out of your 401(k) and get the same results. You will be taxed to the max!

As the chart shows, real estate, even with the huge downdraft it has experienced, has still outperformed stocks across the country over the past 10 years! For those who have constantly claimed that real estate was a bubble and too risky, they have failed to see the overall bubble in stocks as well. Again, who is selling what and to whose advantage????

It's clear from the chart above that real estate has been the better investment over the long term and if you plan carefully, probably can help you in your financial dreams if used appropriately and with the proper planning.

THE LOST DECADE

It's unfortunate though that those who have been saving regularly and following their financial adviser's advice could be down significantly over the past 10 years. $100,000 invested ten years ago (not counting dividends, reallocations, etc) would be worth only $77,296 now where as the average real estate investment of $100,000 would now be worth some $162,300. What a difference, no? Those who did purchase homes and had stocks as well can find some comfort in the overall diversification they held. Those who chose to rent and invest the savings lost!!!

SLOW AND STEADY

But what if someone had a good understanding of all of the tools available in the marketplace and designed their portfolios to achieve an 8%, after-tax, annual return? Holy Mole!!!, One would have more than $220,000 now with just an 8% annual, after-tax return!!!!

WHERE ARE THEY NOW???

I remember in 2002, so many begged me, Gary, can you get me 5% a year? I would be so happy with this kind of return. Sure, they had experienced account devasting 30% annual losses in 2001 and 2002. How quickly they forgot!!! Markets went crazy again, spurred on by goverment and Federal Reserve policies which cause people to think that they deserve 30% annual gains (at a minimum) or else they just aren't playing the game right. It's incredible how many people I talk to in the course of a month and when I ask them, what kind of stock market return would you expect me to achieve for you? I've not heard less than 25% expectations since 2002!

Yet, if you look at mutual funds or other accounts that experience a lot of year-to-year volatility, you will find that they just don't do as well as Slow-And-Steady. A consistent 8%-10% return is not only obtainable with the right strategies, but will enable you to achieve your goals!! If you are in your 50s or 60s and focusing on retiring soon, can you afford to leave your fate to the whims of institutional investors who gyrate the markets? Can you compete now with the billions of shares traded daily, pushing the market to and fro? Billions go in, billions come out at the mere rumor of news. In the end, we are supposed to ignore the day-to-day fluctuations, but I propose that this is no longer true. YOU MUST BE ACCOUNTABLE and not allow yourself to be at the mercy of a conventional money manager who will allocate you 50-70 percent stocks, 30-40 percent bonds. They are all going to crash as they are all at bubble levels! Real estate too. While it has done well in comparison to stocks, the next downdraft WILL WIPE YOU OUT! if you don't use all of the tools available in the marketplace now.

YOUR CONVENTIONAL MONEY MANAGER CAN'T HELP

No offense to the guy or girl who is recommending the research-proven techniques of asset allocation and diversification. But take it from me. I have been in the market about 35 years now and no system or idea lasts. You must use all of the tools available now. You must at least diversify with real estate and even managed futures if you can but more so, you must use the risk-management derivative tools available in the REGULATED marketplace today to manage your risk. People shy away from derivatives because THEY DON'T UNDERSTAND THEM! Or their friends who might have dabbled in it lost everything!! Derivatives are RISK MANAGEMENT TOOLS!!!! They REDUCE YOUR RISK if used appropriately. They lay off the risk THAT YOU DON"T WANT to those who are more willing to take on high risk.

I propose that it's so easy to make a required rate of return each year that will allow you to achieve your goals. You know, corporatations have a minimum required rate of return that must be expected to achieve in every investment they take on. They pay big bucks for finance managers to understand this stuff and they don't enter into investments without having a good idea that #1, they will achieve their required rate of return, and #2, have a good idea of what other outcomes might occur should they be wrong. I have an MBA from Northwestern in this very specialty so I know how it's supposed to work. Yet when individuals try to manage their financial lives, they fall far short, they have no idea of what they need to achieve, leaving their fate to the whims of the marketplace.

NO MORE

You too can achieve your financial goals just as the corporations do. Doesn't matter how well you are doing in the moment. I know a lot of us are struggling. But what is worse is that most don't even know what they need to be doing. They don't have a clue!!! You know the old cliche, if you were going to take a vacation, how much planning would you do? You research where you want to go and either get a map if you are driving or get plane tickets, etc. You get the hotel, you do all of the planning. But how many people spend even this much time in planning out their end game?

How much money do you need to be earning each year? How much do you need to save? And most importantly, how much do you need to be earning on your assets to achieve your goals? If you are just pouring money into your 401(k) and thinking that you are going to be OK, forget it, you are going to lose. Taxes are going to kill you in the end. You've got to plan it all out and focus on knowing what you need and focusing on your annual rate of return in your investments to get where you need to be.

Who cares if the market is up 30% in the moment. Did you get WHAT YOU NEEDED? What happens if the market drops 50% by the end of the year, did you retain what you needed? All through my blog, I have been comparing the market to Las Vegas. If you are just playing the game, you are going to go home busted and be at the mercy of Social Security (if it even exists down the road). You had better wake up and take responsibility for your financial future. If you think you can do it on your own, best of luck to you. Hate to tell you but this is a big game, just like Texas Hold'em. The players want ALL OF YOUR MONEY. They won't be happy until they have it all. Do you understand the game? Can you compete? Can you keep up with it and also have a full time job? If you can, you are a better person than I. Probably you are in the wrong business and you should be making the 10s of millions a year like some others I know.

But if you are the normal person, you had better focus on your work and your income and leave this other stuff to people who know it well. Not only do the professional FINANCIAL PLANNERS have the ability to find ways for you to reduce fees and taxes as well as improve your budgeting, some of us who know the range of risk management tools can help you not only develop your plan but help you achieve it.

ACCOUNTS OPENING UP FOR 2010

Our focused stock accounts gained 15% by June and now hold just a 1050 SP December call short that will provide us with a 20% annual gain should the SP be below 1050 at the end of December. It's 1067 right now. Our managed interest rate accounts gained 30% by the beginning of June. We are done until January. You too can achieve your required rate of return but do you even know what it is? If you are moving forward without having a comprehensive financial plan that covers your financial position (budget, cash flow, net worth, debt, ..), income taxes, insurance coverage, investments and other areas; chances are high that you are going to fail. Start right, manage your budget, establish a budget. Even if you are a do-it-yourselfer, take the right steps. I will guide you on this path. Those who want to receive the Homework Package to start doing their own financial planning (FOR FREE), be sure to contact me.

I will give it all to you for free if I must. Otherwise, the big bankers and investment houses are going to take it all away from you. You have nothing to lose and more than 30 years of my experience to gain. I invite you to write if you wish. Otherwise, the homework package to you is free and I will deliver it to you if you are on my list.

All the best and good luck for the end of the year. If you want to achieve your goals, be sure to write and I will show you how you can do it!

Is a Merrill Lynch Broker Targeting You???

Merrill Lynch has been aggressively recruiting brokers from other firms with huge bonus incentives. According to an article published in Financial Planning, new Merrill recruits can earn 140% of their trailing 12 month production in addition to annual bonuses as high as 60% of their annual production!

As you can imagine, Merrill brokers (as well as others) have a tremendous incentives to increase their assets under management. The use of aggressive bonus policies has given Federal regulators cause for concern. SEC Chief Warns Broker Firms of Aggressive Recruiting Tactics .

WHO'S LOOKING OUT FOR YOU?

It goes without saying that investors need to be more cautious than ever regarding their financial decisions. If the Bernie Madoff case doesn't show you how easy it is to get duped, then your are setting yourself up for disaster. Needless to say, in tough economic times, more and more people are out to get your money. Who's Looking Out For You? Certainly you can't expect your salesperson to be looking out for you. He or she only has an obligation to offer you products that are "suitable" for you. It doesn't matter that the products are loaded with front-end or back-end fees, or that the salesperson is making a huge commission off of the sale. It's all legal!!

Is the Government Looking Out For You?

This thought might even cause you to chuckle a little. Favorability ratings for the government continue to drop to new lows while the politicians live the high life at our expense. Taxes keep going up, government perks keep going up and government effectiveness falls. If you have been following the analysis of the SEC's action in the Bernie Madoff case, you should be aware that the government IS NOT looking out for you. And even if they were, laws currently in place do not seem to be very effective.

I was once a regulator and remember speaking with a person who was grossly violating the law. I talked to him and he clearly and logically explained his actions to me and why he would not stop doing it. He told me that he was making millions of dollars a day doing what he was doing and what would we do about it? The maximum penalty would be a $10,000 fine! He said that the fine was merely the cost of doing business.

YOU CAN'T AFFORD NOT TO HAVE A PERSONAL FINANCIAL CONSULTANT

The financial world is getting way too complex and product salespeople often just sell you the sizzle. You generally don't ever find out that you are getting ripped off until you talk with another broker who is trying to get your business. Only then do you learn of the high fees and commissions you paid for some product that really wasn't in your best interest. And then what does this new salesperson do? I'll leave it to your imagination.

Each week I meet with people who not only make costly decisions about their money but it doesn't stop there. Mistakes are found in nearly every aspect of their financial life: taxes, insurance, estate planning and so forth. How sad it is that so many aren't willing to spend the money to hire competent advisers who are free of conflicts of interest. In the end, they lose so much more than the fee they might pay for such service. Usually only after it is too late do they seek advice.

WHO CAN YOU TRUST?

When choosing an adviser, be weary of someone who also sells products or manages money. If they call themselves financial planners and are also engaged in selling products or gathering assets under management, their goal is but one thing - to sell you products or get your assets under management. How can you expect them to provide you with the best advice possible? You can't.

Check Their ADVs or U4s

Every Investment Adviser or Investment Adviser Representative is required to fill out certain government forms in order to be registered. It is your right to review these documents and you should. Not only does it disclose all conflicts of interest (other ways the adviser makes money), it also discloses all unethical actions, complaints and undesirable actions that the adviser had been involved in. It is your right to know and your obligation to review this information. If you hire an adviser to provide you with comprehensive planning, make sure that this person is not trying to replace all of your other advisers (investment broker, insurance agent, etc.). Instead, direct your adviser to research all of your current advisers to be sure that they are living up to the standards that you expect.

For more information on how to protect yourself against high fees, taxes, and fraudulent financial practices, contact me at gary@assetdesigncenter.com.