Why Financial Planning Is Important » define personal financial planning

Conservative Investing, Financial Safety and Retirement Planning

Paul Sutherland — Wed, 27 Oct 2010 09:50:13 +0000

I consider myself a conservative investor, because I don’t like to lose money, but I am also a long-term investor who realizes that investments fluctuate. The markets, cyclical and volatile, are not only historically normal, but a friend to good performance. What’s interesting is that most of the folks making the investment choices to put money into CDs, money markets and bond funds think they are opting for “financial safety,” but it’s simply not true. For a long-term or retired income investor buying the CD today, “to be conservative” flies in the face of reality.

Placebos and Reality

Recently a client contacted me to discuss moving some of their long-term money in CDs for “safety.” The client is retired, healthy and lives on the income generated by both his portfolio and Social Security. Based on a retirement planning calculator, the science of longevity and an actuary’s forecast, this client may need income for a few dozen years or more. Our average preferred stock and equity holding yield in our retirement portfolios, before fees and taxes, averages 5% to 6%. FIM Group’s Hawaii partner, Barry Hyman mentioned that for many stocks, dividends will rise as the companies prosper. We have many international holdings in economies that are growing and prospering. FIM Group’s U.S. holdings are in good, stable industries that we expect will do well into the future regardless of the growth in the United States.

The reality is that the uncertainty of today’s economy has especially affected the confidence of the U.S. investor. Housing sector weakness, 10% unemployment, government as a growth industry and recession fears all feed the “justification” to sit on the sidelines feeling a false sense of safety in CDs, money markets and such. But when will be a better time to invest in income-growing assets (i.e., dividend-paying equities)? Certainly not after stocks rise. If we buy a stock today at $10 and it pays a 50-cent cash dividend, the yield is 5%. If the stock goes up to $20 the cash dividend yield would reduce to 2.5%. The investor who waits on the sidelines for things to stabilize does so at their peril. The very fact that a sideline sitter expects that things will stabilize creates the case for buying today’s bargains. Even the bearish sideline sitter knows that eventually things will change.

Go Where the Growth Is

The growth story, while hard for us to imagine in the U.S., is well-established in China, India and many of the smaller emerging economies of Europe and Asia, like Singapore, Malaysia, Taiwan and Korea. In our own hemisphere, Brazil and Canada, among others, are prospering. Many emerging and prospering countries have learned well from America’s economic history. We have grown well by favoring policies that promote growth, freedom and prosperity. Today, however, our country is burdened with a huge defense budget, social welfare costs and bureaucratic, legal and regulatory impediments for businesses – especially small businesses – to compete and prosper.

The political leaders in other countries favor policies that promote building a strong middle class, entrepreneurs, healthy family structures and responsible citizens. They favor social investing over social welfare, free market entrepreneurial and best practice-oriented education vs. unionized industries and schools. They adopt practices after observing the welfare mistakes of Europe and the U.S. and enact social investing policies rather than dependence-creating bureaucratically incentivized social welfare. Lastly, thanks to the global safety net generously provided by the U.S. armed forces, the emerging star economies are not burdened with a military budget (a fact that would cause President Dwight D. Eisenhower to roll over in his grave). Needless to say, the world gets to “free ride” on America’s decision to be the world’s policeman, while our neighbors and friends reap the economic benefits.

Hundreds of millions of people in emerging democracies and various levels of free market economies are filled with hope and optimism and willing to work hard to move into the world’s middle class. They know the path, and with their leaders (many of whom were trained and educated in the U.S.) they will succeed. Success will come just as it has in America when our policies promoted tolerance, hope, freedom, good citizenship, virtue, a small, efficient and adequate military, responsibility and a government that was just the right size. fimg0z

When Should I Begin Collecting Social Security?

Paul Sutherland — Fri, 08 Oct 2010 22:44:52 +0000

When we explain the financial planning process with our clients, one of the most frequent questions asked by clients approaching retirement is: Should I begin collecting Social Security benefits at age 62?

There is no right time to begin collecting Social Security benefits, but the age at which you begin receiving benefits will affect how much retirement income you will receive over your lifetime, so you should weigh the consequences carefully. Keep in mind that if you collect Social Security before your full retirement age, your benefit will be permanently reduced. Depending on the year you were born, you’ll receive between 25% and 30% less per month if you collect benefits at age 62 than if you wait until full retirement age. However, this doesn’t necessarily mean that collecting benefits at age 62 is unwise. In fact, unless you live to an especially old age, you may actually end up with more money if you start collecting Social Security benefits at age 62 than if you wait until full retirement age, because you’ll receive more benefit checks.

There are, however, good reasons to wait until full retirement age to start collecting benefits. For example, if you work full-time past age 62, you’ll have the opportunity to increase your eventual retirement benefit, particularly if you are in your peak earnings years, because your benefit will be figured using your 35 highest earnings years. Additionally, if you’ll barely scrape by after you retire, you may want to receive as much as possible from Social Security each month.

If you begin to receive Social Security retirement (or survivor’s) benefits before you reach full retirement age, money you earn over a certain limit will reduce the amount of your Social Security benefit. In 2010, your benefit will be reduced by $1 for every $2 of earnings in excess of $14,160.

Other things to consider include whether other people will be eligible to receive benefits based on your work record, your estimated life expectancy and if you have other income to support you if you delay taking your benefits.

On the flip side, if you delay collecting Social Security after full retirement age, you will receive a bigger check every month. However, how much bigger depends upon what year you reach full retirement age and how long you postpone collecting benefits. The chart below shows how much more you’ll receive for every year you delay collecting benefits past your full retirement age, based on the year you were born (up to age 70, when you automatically start receiving Social Security).

The Social Security Administration has several online benefit estimators available that can help you make an informed decision. In addition, our advisers at FIM Group are always happy to answer your questions or discuss your unique situation.

I have also posted on our website, www.fimg.net, some unusual strategies for claiming Social Security benefits that might help you maximize the amount you can claim under the program.

Dreams and Nightmares

When I was a kid, my dad, older brother and I took a summer road trip through the Southwest desert. When my dad wanted to stop for the night he would just search for a cheap motel and one night we drove for hours unable to find any vacancies. Apparently, the Army was engaged in desert training, but soldiers were finding rattlesnakes in their tents and sleeping bags, so the soldiers were stacked in the local motels. Many investors are sleeping in rattlesnake-infested areas unaware of the dangers. Interest rates on CDs could remain low for years to come, as evidenced by Japan, which has endured nearly 19 years of recession, super-slow growth and deflation. Imagine needing 5% income on your portfolio and getting only a 2% yield – leaving you with a decreasing principal, a decreasing yield and, therefore, a decreasing amount to invest. The insidious decline in value of the 2% yielding portfolio would be further eroded by taxes and (potential and real) inflation. It’s a nightmare that many do-it-yourself 2% investors will wake up to in the future. Better to sleep well and dream of nice income generated by entrepreneurial companies the world over. Thankfully, just like the U.S. military, my dad had the sense of placing us in a safe hotel room, so we could dream of the magnificence and splendor of the Grand Canyon and the Rocky Mountains rather than worry about rattlesnakes.

Don’t Worry … Be Happy

In all sincerity, our goal at FIM Group is to help our clients sleep well and be happy. Our hope is that you will delegate the “worry” to us and regard your role as making sure we are rational and realistic in our portfolio construction. Having managed global portfolios for 25 years, I don’t shy away if the financials are in yen, Euros, Australian or Singapore dollars, francs or ringgits. I know the difference and realize that Singapore is much different than Thailand, even thought they are both democratic, smaller, Asian economies. Today the investing world wants to paint the world as “U.S. and non-U.S.,” and that is just plain illogical. There are many great U.S. companies that have significant earnings from overseas. For example, GE, Johnson & Johnson and DuPont earn more than 50% of their revenues from non-U.S. operations. They have savvy managers who understand where opportunity exists in the world and invest accordingly. You can bet they are not buying 2% CDs. fimg0z

Values, Virtue & Investment Philosophy

Paul Sutherland — Thu, 25 Feb 2010 18:02:08 +0000

At FIM Group we are forward-looking, value-oriented investors who believe that we are compensated for risk by including a margin of error in each investment we make. The margin of error comes from paying the right price. We use diversification, asset allocation, careful security selection and emotional peace as our investment tools, and we are always weary of the “five poisons” that can affect the investment decision-making process.

My brother dropped by my house recently and said, “Did you know Warren Buffett is a Buddhist?” “Yes! He said that emotional peace is one of the keys to his success!” We chatted about that for a while, and then I told him about another investor who had virtue written all over him – Sir John Templeton. There is no single investor who has had more influence on our firm’s wealth management advisor “old-timers” – namely, Jeff Lokken and me – and our investment philosophy. In his foreword to the book Investing the Templeton Way, Templeton stated that he relied on the following motto throughout his investing career: “To buy when others are despondently selling and to sell when others are avidly buying requires the greatest of fortitude and pays the greatest ultimate rewards.”

While he did not specifically mention “inner peace,” I think Templeton’s use of the word “fortitude” communicates the same message. Templeton, like Buffett, didn’t allow the noise of politics, self-serving Wall Street and the hype of investment fads to sway him from his mission. Both he and Buffett stayed true to their investing theme of searching worldwide to be compensated for taking on the risk of investing, and to be goal-oriented – not fad-oriented – in their investment approach. I can find little approval for indexing, benchmarking, passive asset allocation, laddering, hedge fund leveraging, using trust companies as advisers, or consultants that can give you history but not discuss the future.

Both Buffett and Templeton knew about the future, and both had The Intelligent Investor by Benjamin Graham (1949) on their bookshelf.

Sin of Sloth

Growing up, I attended catechism classes at St. Phillips, but I was not allowed to go to confession because I lacked one important criterion – I was not Catholic. So despite giggles and notes being passed during class, I managed to learn a bit about sin and virtue. The “high scholars” we were, we interpreted sloth, one of Catholicism’s “seven deadly sins” as simply, doing anything that we found fun. While the priest talked about attractive, seductive distractions and how they could lead us to sin, we of course thought about those attractive, seductive, distractions and let the sin part lie at the steps of St. Phillips.

Today, I realize that I have recently succumbed to the sin of sloth. Over the past few months I have allowed myself to get caught up in a dialogue that really has little to do with investing, but which both Jeff Lokken and I love to discuss: politics and political economy. While politics does have something to do with investing, it is not investing, and it certainly is a waste of time to spend valuable newsletter time writing about politics. In other words, it is part of the landscape, but is not the landscape. Chatting about tax laws, Obama’s philosophy on health care, McCain’s fix for the banking industry or Clinton’s Internet globalization agenda, while useful and seductively interesting, is in large part a waste of time in the world of investing.

Politics in Perspective

Global political dialogue is interesting and can indeed influence capital flows, but it is merely one input among thousands than can affect investing. And for investors to concentrate their efforts on the political influence on any one investment, then, really is an insidious, irresponsible, slothful waste. Americans seem to especially enjoy wallowing in politics, the slimy underbelly of our American life. My gosh, if you’ve listened to talk radio or Fox News lately, you would think that the future of capitalism and the free world rests on the ability of unions, associations and businesses to continue to buy votes unencumbered, which of course concerns us here at FIM Group as Americans, but really just helps certain industries and creates barriers for others. So I confess I was slothfully giving various political commentators more time than they were worth. America is too big, and we are too smart to let a few Republicans or Democrats ruin our democracy or capitalism for that matter. Capitalism is what works in the world. It is messy, politicians will mess with it, populists will sway the masses, large businesses will create barriers to competition and creative destruction will happen in America because we are capitalists.

Templeton’s ’10′

Back in the 1970′s, we set out to find our place in the overhyped, seductive, oversimplified world of investing that was full of guaranteed annuities, “Nifty Nifties,” blue chips, gold bugs and real estate partnerships, and we felt that Sir John Templeton’s long-term, values, virtue and common-sense approach would be our fort. Templeton had 10 maxims* that we incorporated and made our own. While Sir John may no longer be with us, his words are as timely today as they were back then and, of course, we have now nearly 35 years of working on the fortitude and inner peace bit of his core teaching.

Invest for real returns - The true objective for any long-term investor is maximum total real return after taxes.
Keep an open mind – Never adopt permanently any type of asset or any selection method. Try to stay flexible, open-minded and skeptical.
Why follow the crowd? – If you buy the same securities as other people, you will have the same results as other people… To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest reward.
Everything changes – Bear markets have always been temporary. And so have bull markets.
Consider avoiding the popular – Too many investors can spoil any share selection method or any market timing formula.
Learn from your mistakes – ‘This time is different’ are among the most costly four words in market history.
Buy during times of market pessimism – The time of maximum pessimism can be the best time to buy, and the time of maximum optimism can be the best time to sell.
Hunt for value and bargains – In the stock market, the only way to get a bargain is to buy considering what most investors are selling.
Search worldwide – If you search worldwide, you will find more bargains and better bargains than by studying only one nation.
No one knows everything – An investor who has all the answers doesn’t even understand the questions.

I believe that because of John Templeton’s deep faith and worldview, he felt it was self-evident that virtue, ethics, honesty, transparency, a common good orientation and sustainable business models were important and should be included in any investment philosophy statement. I also believe that he felt that adding them to his maxims would be as redundant as reminding an adult to “play nice.”

If you interested in reading the book Investing the Templeton Way; The Market-Beating Strategies of Value Investing’s Legendary Bargain Hunter e-mail info@fimg.net. This e-mail address is being protected from spambots – you need JavaScript enabled to view it – or call 231.929.4500, and we will be happy to send you a complimentary copy. Additionally, you can also get in touch with a FIM Group diversified portfolio manager via through this email or phone number.

Investment Risk Tolerance

Paul Sutherland — Mon, 25 Jan 2010 18:03:28 +0000

What comes to mind when you think of risk? Danger? Uncertainty? Opportunity? Thrill? Risk means different things to different people, and each of us has our own comfort zone and appetite for risk. Some people are attracted to the thrill it provides, and these folks may choose to climb high mountains, drive racecars or sail solo around the world. Others, however, may view these activities as extremely dangerous and would never participate in them. The rest of us fall somewhere in between. There is risk in any situation where there is uncertainty of outcome. The level of risk a person will normally choose is best thought of as a continuum ranging from risk-avoiders to risk-seekers. This is also true for tolerating financial risk.

As your wealth management adviser it is important for us to understand your specific risk tolerance, or the level of risk at which you are comfortable. This, along with understanding your financial goals, time horizons and risk capacity (i.e., your ability to sustain a market decline without suffering an unacceptable loss of lifestyle now or in the future) all go into ensuring that the most appropriate FIM Group investment strategy is selected for you. Said another way, risk “tolerance” addresses your emotional requirements, and all the rest is about the financial requirements for achieving your long-term goals. Often the emotional and financial requirements are aligned. At times, though, they may be at odds, such as when a higher level of financial risk is required to reach a specific financial goal. When this occurs, the alternatives to consider, either individually or in some combination, are: take on more risk, invest more, or delay or reevaluate your goals. Generally, though, we don’t recommend taking on any level of risk greater than you’re comfortable with, since that may lead to sleepless nights, panic or making irrational investment decisions (like selling at or near market bottoms).

Risk tolerance has been the subject of numerous research studies. It is now believed that risk tolerance is a psychological trait that can be measured and is relatively enduring. To assist with assessing a client’s specific risk tolerance, FIM Group recently began utilizing a test developed by FinaMetrica, an Australian company. The test is comprised of 25 multiplechoice questions and takes about 15 minutes to complete. This is a highly respected tool and is considered to be one of the best for judging the psychological aspects of financial risk.

If you would like to complete the assessment, please contact your local office. You will receive a detailed report on the results, and a copy will also be provided to us. For couples, it is recommended that each person takes the test in order to best assess and accommodate the joint decisionmaking process.

The FinaMetrica risk assessment is not a substitute for an in-depth risk profile discussion between a client and adviser, but it does serve as a useful tool for providing an objective and more focused discussion.

To learn about wealth management advice from the best wealth management firm, Financial & Investment Management Group -more please visit www.FIMG.net or call 800.632.5528.

Explaining the Financial Planning Process

Paul Sutherland — Sat, 22 Aug 2009 18:53:03 +0000

Financial planning helps you focus on the “big picture.” It is designed to help you meet your life goals through the proper management of your finances while incorporating your personal values in the planning process. Life goals can include buying a home, saving for your children’s education, planning for retirement, addressing long-term health care concerns, dealing with special needs situations in the family, or planning the transition of your estate to the people and causes that are dear to you.

As part of the process, we help you understand where you are now, what you may need in the future and what you must do to reach your goals. The process also involves gathering relevant financial information, setting and clarifying life goals, examining your current financial status and coming up with strategies to achieve your goals. Explaining the financial planning process may touch on many areas, including budgeting, saving, taxes, investments, insurance, retirement and estate planning.

Like investing, financial planning is a dynamic process. Your financial goals may change over the years due to changes in your life or circumstances. Life events such as inheritance, marriage, birth, health, house purchase or change of job status can all have a significant effect on your financial planning strategy. It is important to revisit your financial plan as time goes by to reflect the changes in your life so that you can stay on track with your long-term goals.

To learn more please visit www.FIMG.net or call 800-632-5528.

Wealth Management Advice from a Children’s Story

Paul Sutherland — Thu, 13 Aug 2009 16:23:52 +0000

As a young child, my mom shared with my siblings and me the fable titled, “The Sky is Falling.” This is a great story about Henny Penny, a chicken, who gets hit on the head with an acorn while eating her lunch and concludes that a piece of the sky has fallen. Henny Penny decides she must alert the King of this critical information. Along the way, she comes across other animals, such as Cocky Locky and Goosey Loosey, and convinces them of the imminent danger. They decide to join Henny Penny’s expedition and forewarn others of the risk. En route, the swarm of believers meets up with Foxy Loxy who is ruthless and takes advantage of the fear and panic in the crowd.

I guess that years ago it was completely acceptable in a children’s story to have characters eaten by other dishonest creatures.

After nine straight weeks of gains, the market decided to reverse its course in the second and third weeks of May. This market upswing seemingly came as an utter surprise to many investors, considering that just a short while ago many of these same investors were of the strong Henny Penny belief system that stock prices would never, ever rise again.

The rally then began again roughly one week later. Many stocks posted historical low price levels on March 9, 2009, and since that time have recorded incredible gains. At the time this article was written, the S&P 500 had returned 32.92% (gross dividends reinvested into the index) from the low on March 9. “So,” I ask, “why aren’t more investors pleased with the positive market returns?” Most likely because stock prices are still down roughly 40 percent from their peak in 2007.

Many investors are agitated because they missed out on the gains. They define personal financial planning as trying to time the market, or chasing the latest stock or sector. Fear and greed are behavioral emotions used by many in their investing habits. Overwhelming fear pushed many investors to the sidelines. Investing in low-rate certificates of deposit were people who bought into the doom and gloom that prevailed throughout the early months of 2009. These are the investors (Henny Penny, Cocky Locky and Goosey Loosey) who got on the bandwagon and were convinced that the sky was falling.

If fear and greed are the defining emotions of investing, then there is nothing like a missed opportunity to bring out the greed. So many investors who accepted as true the doomsday picture were unwilling to accept that stocks would recover anytime soon. Loads of money bet against the market ended up in negative-returning U.S. Treasuries and cash. The lemmings were all happy with their “perceived” riskless actions. For some it was no longer a matter of the market rising and/or falling. These investors could no longer stomach a plummeting stock market and needed to bail to finally sleep at night.

These are times when rational investors should go against the grain. The point is that no one is right all the time, and there is no way to predict when a market will make a turndown and/or turnaround. These recent market gyrations were an important learning experience for anyone who deviates from rational investing and gets caught up in emotions. In my 16 years of investing experience, decisions based on emotion usually always turn into mistakes. Keep in mind that the rational decision is often the opposite of the emotionally based decision. Thoughtful long-term investors recognize that problems get solved. The economy can and does sputter along even though banks fail, insurance businesses close, car companies file bankruptcy and other entities fall like acorns. The truth is acorns are pulled down by gravity and markets fluctuate. On a short-term basis anyone can use information to his or her advantage or disadvantage to appear either smart or not so smart.

In 2009, FIM Group celebrates 25 years of investing. We are and have always been long-term investors. We do not speculate the longterm security of our clients, and we try never to be guided by fear.

The moral of the fable is to be wary of all the Henny Pennys in the marketplace and watch out for mass hysteria conclusions. I am not asking you to necessarily become an unscrupulous fox. Rather, I am suggesting that you should have thegood sense to recognize that making decisions outside of the masses can often lead to more positive outcomes.

To learn more please visit www.FIMG.net or call 800-632-5528.