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Archive of Original Articles
Whether published in our quarterly Knowledgeletter or in other publications, you'll find these articles—all by RightPath founder, Steve Smith—helpful and informative. To view article summaries and download PDFs, click on the titles below.
Behavioral Finance
Market-focused rather than goals-focused investing distracts us from our financial aspirations in significant ways.
Well-thought-out investment planning allows the individual a foundation to draw from when evaluating making changes rather than responding to behavioral mistakes—and becoming their own worst investment enemy.
Psychologically, we have a stronger drive to avoid a loss than we do to seek a gain of the same size. This drive can significantly impact our financial decision making—from being too conservative to hanging on too tightly to a loss that should be let go. Being aware of loss aversion and how it affects our decisions can reduce the negative impact this peccadilloe has on our financial plan.
RightPath introduces an occasional guide to help you reduce those seemingly small mistakes in managing your portfolio that add up over time. Our “Peccadilloes” columns are based upon behavioral finance, for which Princeton Professor Daniel Kahneman won the Nobel Prize in Economics in 2002.
Behavioral finance identifies a laundry list of cognitive and emotional biases—or behavioral mistakes—we all tend to make in our financial decision-making. Think of them as mental traps that, once recognized, we work to avoid in managing our portfolios. We hope you enjoy this inaugural topic and look forward to bringing you a fresh look at practical ideas to improve your financial well-being. This time: Recency Bias.
Bonds
View Online :: Download PDF :: Publication Title: Family Trusts
Bonds can be a good hedge against stock volatility, but you need to invest in the right bonds. Bonds are not for juicing your returns. Homeruns come from stocks. Bonds are for playing defense and for moving the runners along slowly—with bunts and singles.
The Winner is... Bonds, or fixed income securities, play at least a supporting role in almost every investment portfolio, whether as the primary mechanism to reduce the risk of an equity, or stock, portfolio or in providing a steady stream of income for those investors funding current expenses. A critical question for investors is how to hold their fixed income component: direct ownership of government and corporate bonds or ownership of professionally managed bond mutual funds. Our analysis suggests, for the overwhelming majority of investors, mutual funds are the way to go.
Books
If the articles in this issue have panic setting it, here's a little help. We've assembled an 11-work bibliography on retirement and mature life financial issues to help you get some ideas and focus your planning. These mostly recent works can help you understand what you really want out of "retirement" and what steps you can take to get there.
Keeping it in the Family: How Family Members and Their Advisers Preserve Human, Intellectual and Financial Assets for Generations. James E. Hughes, Jr. (Bloomberg Press, 2004). Many families struggle to identify the purposes—for future generations—of the wealth that they have spent a lifetime accumulating and what tools and techniques are available for carrying out those purposes. Family legacy and mission statements, family governance and the use of trusts have historically been the tools of choice. Yet, each family needs to put its own stamp on the core notion that the general purpose of a family is the “happiness” of each of its members. Much of what has been written about these issues, unfortunately, is virtually impenetrable for even sophisticated lay readers and often focuses exclusively on tax-savings strategies. For families just embarking on this journey, there has been little help. A noteworthy exception is the recent—and astonishingly brief—book written by James E. Hughes, Jr., a sixth-generation estate planning attorney, now living and practicing in Aspen, Colorado.
The Number: A Completely Different Way to Think About the Rest of Your Life. Lee Eisenberg (Free Press, 2006). Knowing how much you need to have in the bank to successfully fund the retirement you envision is no easy trick. Developing a philosophy to think about "the number" realistically is even harder. Author Lee Eisenberg offers a refreshing and very funny approach to tackling these issues.
This new work examines how we can “smooth out our consumption” to raise our standard of living—both in our working years and retirement.
You the Smart Patient: An Insider’s Handbook for Getting the Best Medical Treatment. Michael F. Roizen, MD and Mehmet C. Oz, MD, with the Joint Commission (Free Press 2006). Are you really getting all you can out of the health care system? Do you feel confident and comfortable when selecting a physician or surgeon? In today's world of health care, patients must be proactive, well-informed and persistent in getting what they want and need. Authors Roizen and Oz show us how to get started in this useful guide.
Business Matters
Expressing your appreciation creatively can be as rewarding for the giver as it is the receiver. This truth holds for personal as well as business involvement in your community. Finding expression that deeply reflects your values—“who you are”—is a goal worth spending some time on, at the holidays or anytime of year.
Education, ingenuity and hard work are time-tested methods to find personal, financial success. We are experiencing a profound transformation in the traditional career path from upward within an industry, profession and/or company to lateral—involving unprecedented entrepreneurial activity.
Health
While advisors used to suggest that clients plan to spend 80% of their pre-retirement budget after they stopped working, some now recommend planning to spend 20% more. Why the big change? Health care costs. Take a detailed look at the issues involved in funding health care during retirement, and get ideas for how to tackle a review of your plan.
Insurance
None of us relish the idea of shopping for long-term care insurance. Yet, recent changes in tax law make it a virtual necessity to either use savings for long-term care or products such at LTCI. Guest columnist Aaron R. Eisenach reviews those changes and factors to consider when reviewing this important part of your retirement plan.
Successful financial planning requires integrating your investments with other areas, such as wealth management and estate planning. One crucial aspect of such integrated planning is risk management, which is usually covered by insurance and related products. Have the appropriate—but not too much—coverage can mean the difference between keeping your portfolio intact or not.
Investment Planning
No one can say exactly what will happen next with the markets—after all, that is rather the point of investing. But, we might conclude that time-tested practices, like diversification and rebalancing, together with some patience and discipline, seem to still make sense.
Download PDF :: Publication Title: Gaining Trust
The objectivity of your advisor’s guidance, incentives that motivate that advice, and your legal recourse are all impacted by whether or not you choose a fiduciary. New language required by the SEC on brokerage accounts (ruling January 31, 2006): "Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours."
Investors stand to gain in their financial planning when they pay attention to all of the costs and fees associated with their portfolios—and by knowing who benefits from those fees and how their structure may motivate investor and adviser to work against each other.
Delivering a victory to consumers of investment advice, the Financial Planning Association prevailed against the Securities and Exchange Commission, overturning the 2005 “Merrill Lynch rule.” The rule exempted broker-dealers’ fee-based accounts from the fiduciary requirements of the Investment Advisers Act. This decision may seem like just another technicality amidst the endless regulatory structure governing financial professionals. But, every investor should put their lawyer’s cap on and dive into the details of this ruling, because it impacts the most critical and basic fiduciary question: Who’s side is the advisor required to be on?
Download PDF :: Publication Title: Tips on the future for green investing
Socially Responsible Investing “SRI” portfolios employ three basic strategies: screening, shareholder advocacy and community investing. Global climate change, social unrest abroad, the exportation of jobs from home: what types of business risks could “green” investing protect your portfolio from, and will it work?
What the Goldman Sachs Case Means for Ordinary Investors
While Goldman Sachs executives utter nonsense at Senate Committee hearings, what investors really need to know about their risk of being subject to the various games going on in the banking industry is this: does the person I go to for financial advice have an obligation to place my interests before their own? The Goldman Sachs’ case offers some interesting touchstones for answering that question.
Download PDF :: Publication Title: Active or passive? The path to success for investors
Based on the nobel-prize-winning development of modern portfolio theory, passive investing strategies may give investors the edge. Some academic research backs this approach, but investors must diligently diversify and rebalance as a part of their strategy.
Systematic Portfolio Rebalancing May Be the only “Free Lunch” in Investment Management. Investors often fail to meet their goals because they fail to adhere to a coherent investing strategy. One of the key components of a well-thought-out investment strategy is portfolio rebalancing. The concept of rebalancing is simply, determining and stating in advance, under what conditions and in what manner you will return your portfolio to its original strategic asset allocation. Rebalancing your portfolio systematically—or not—can have a tremendous impact on the portfolio's success.
Lowell Miller and Curtis Jensen—veterans of the money management world—have recently sounded off on what role dividends play in portfolios. Their opinions represent opposite ends of the spectrum. With such divergent advice being handed down from luminaries, our advice is simple: portfolios, like life, require balance.
There have been a few key—and genuine—economic issues fueling the current market downturn. But, bear markets always look ugly—and interminably bad—while we are enduring them. So, is your plan firmly in place to take advantage of the good side of this downturn: affordable securities? Even when things look their bleakest, sticking to a comprehensive strategy usually provides the best approach over the long haul.
From a wager with a $1 million outcome to an investment with a $50 billion risk, Warren Buffet—Berkshire Hathaway’s “Oracle of Omaha”—puts his dollars into low-cost index funds or their equivalent. Historically, this strategy has been “on the money.” Buffet believes it will continue to be a winner—should you take stock in it, too?
New Morningstar ratings on “investor returns” don’t have much good news for fund managers. Why? Because what we are learning is that, even when a manager produces a solid annualized return, most investors are reaping all of it. The cause of this discrepancy is that investors are jumping in and out of funds too fast—and usually too late.
Creation of an IPS effectively documents an individuals long-term financial goals and strategy and can be used as a roadmap for an investor to reference when confronted with concerns with short-term market fluctuations.
Philanthropy
Estate planning, caring for loved ones, creating a meaningful legacy: all of these issues intertwine to create a seemingly daunting planning task. Here are a few tips to get a foothold—and a solid start—on planning your family's legacy.
With the economy and the capital markets finding some stability, now is a good time to discuss how we can contribute to our communities—making them stronger and better. Steve Smith looks at some of his community activity, from riding the Courage Classic to non-profit board work.
Retirement
A banker becomes a dog trainer for a week—and then for life! Others test-drive custom mural creation, pastry cheffing, graphic design or beer brewing. How about traveling the world to help set up solar ovens in poor communities? If trying something really new sounds like a good pre-retirement (or mid-retirement) experience, the resources to do just that are in abundant supply.
Since 1935, life expectancies in the U.S. have risen from 63 years to 77. At the same time, average retirement age has dropped from age 65 to 62. What's more, one partner out of every married couple has a 50% chance of living to 92. While the numbers are staggering, the social, physical and emotional impacts of how our retirement years are changing can be even more overwhelming. This article takes a top level look at many of the key issues involved in retirement and provides tools for beginning the process of preparing yourself.
If you received the double whammy of taking a required minimum distribution (RMD) on an account such as an IRA and seeing that account lose significant value—help is on the way. RMDs has been suspended for 2009. Plus, see what else may impact your 2009 tax planning in the 2009 Tax Numbers from our “Planning Tools.”
While many retirees (and their advisors) are focusing on securities selection, we show you how turning your attention to portfolio management fundamentals can really pay off in terms of your portfolio's longevity or funding your goals. It may not be glamorous, but learning about safe withdrawal rates, budgeting, tax management and cash flow can greatly impact your plan's success.
Tax Planning
What the Heck is Going on with the Estate Tax?
Get your sense of humor ready if you need to tackle estate tax planning adjustments in 2010. The tug-of-war between the conservative and moderate/liberal sides of Congress have left families and estate planners in a legislative morass until the end of the year. From changes in the exemption amounts to impacts on what carry-over basis is used, the EGTRRA mess inherited by the Obama administration will require agility to navigate.
Trusts
Download PDF :: Publication Title: Investment Stewards
Whether a trustee of a family trust, a guardian to another individual, a member of a community non-profit board or responsible in some manner for a 401(k), you are a fiduciary. Is your focus on whether a well-thought-out process has been deployed? If not, you may need to reexamine your responsibilities and how you are approaching them.
Download PDF :: Publication Title: Trust Portfolios
Trusts have become the vehicle of choice for estate planners and their clients to pass on property to their beneficiaries. For beneficiaries who are minors, financially naïve, or those with special needs, a trust is an ideal mechanism for providing for loved ones.
View Online :: Download PDF :: Publication Title: Family Trusts
With 43 states adopting the Uniform Prudent Investor Act or UPIA, trustees must now make two important investment policy decisions: how to strike the proper balance in the portfolio between income and growth.
View Online :: Download PDF :: Publication Title: Trust Portfolios, done well, can serve generations
Balancing risk and return is the goal, but in trusts more "passive" investments can be prudent. The trustees must balance the beneficiaries’ collective requirements for returns with their overall tolerance for risk—including their varying time frames for using trust proceeds.