One of the biggest and most difficult transitions in many people’s lives is divorce, and our court system’s adversarial bias can turn the process into one that is highly contentious and destructive for many families.  But wait!  There is an alternative, one that you may have heard of: Collaborative Divorce.  If you, or someone you know, is considering divorce, I encourage you to check out the alternatives to the traditional, court-administered method.

 
Recently, I volunteered to moderate a radio show on this subject, which will air this Saturday, May  12th, at 11:00 a.m., on KLIV AM 1590 in San Jose.  Here is a link to the show, which was recorded in advance.  The subject is “Divorce Alternatives.”

 
         http://krty.gotdns.com/krty/ipad/5_16_12_CollaborativePractice.wav

 
By the way, our local, Silicon Valley Chapter of Collaborative Professionals may be found at http://www.cpsv.us/.

 
With best regards,
Peter W. Johnson, Jr.

To answer this question, it helps to understand just what a financial planner does.  According to the Certified Financial Planner Board of Standards, financial planning is the process of meeting your life goals – such as buying a home, saving for your child’s education, or planning for retirement – through the proper management of your finances.  The financial planning process enables you to work out where you are now, what you may need in the future, and what you must do to reach your goals.  Financial planning provides direction and meaning to your financial decisions and allows you to understand how each financial decision you make affects other areas of your finances.  By viewing each financial decision as part of a whole, you can consider its short and long-term effects on your life goals.  Financial planning also enables you to adapt more easily to life changes and feel more secure that your goals are on track.

There is nothing in the above description that suggests one should invest in stocks, or for that matter any other type of investment.  Investment recommendations for each person should be based on, among other things, that person’s goals, current financial situation, and risk tolerance.  So why does there seem to be a perceived association between financial planners and investing in stocks?

The answer may lie in the ambiguity of the financial planning profession itself.  The Wolfram/Alpha Knowledgebase (sourced from the U.S. Bureau of Labor Statistics) identifies over 150,000 people as being personal financial advisors in the U.S.  However, the CFP Board reports that there are only about 60,000 Certified Financial Planners™.  Who are the other 90,000 financial advisors?  Many are stock and mutual fund salespeople that provide only investment recommendations rather than comprehensive financial planning advice.  But surveys consistently show that the public cannot differentiate between investment/financial advisors and financial planners.  For this very reason, the CFP Board has embarked on a campaign to increase public awareness about CFP® certification as the recognized standard of excellence for personal financial planning.  (For more information, go to www.letsmakeaplan.org).

Most families simply cannot earn and save enough during their working years to build a portfolio large enough to support them throughout their retirement by investing it in nothing more than CDs or money market funds.  They will need to invest at least some portion in assets such as equities that, while riskier than CDs, have the potential to generate much higher returns.  But professional financial planners can help even risk-averse investors manage the risk to a level with which they are comfortable.  Plus there’s a wealth of other advice that a financial planner can provide them – such as strategies to improve tax efficiency – that may be especially valuable for their situation.

In the end, improvement in public financial literacy, whether through self-education or by the increased utilization of professional financial planners, will help people make better financial decisions in their lives.  And that will benefit all of us.

All of the fundamental contradictions inherent in a currency union have now been exposed.  EMU countries currently face increasingly disparate economic conditions.  Some have become uncompetitive, some debt-laden, and others encumbered by a burst housing/credit bubble or a broken banking system.  There exist no effective mechanisms for enforcing fiscal discipline, and only limited labor mobility.  Sooner rather than later, Europeans will be forced to decide for themselves whether or not to try to preserve the monetary union as it is currently configured.

There are advantages to breaking up, according to Joshua N. Feinman, Chief Global Economist at Deutche Bank.  The debt-plagued nations that opt to leave would once again have their own currencies, which would undoubtedly fall sharply in value, helping them regain competitiveness and boost exports.  They’d also presumably choose to default on much of their external debt (although that would have longer-term growth ramifications).  Stronger countries like Germany would no longer have to support their struggling neighbors.  The whole moral hazard issue of different governments borrowing in a single currency would be greatly reduced if not eliminated.

However, a break-up could also unleash a wave of turmoil, bank runs, and insolvencies that might not be confined solely to the countries that exit.  Contagion fears would likely spread to the remaining core countries, which would face massive bank recapitalizations and collapsing exports if the Euro were to appreciate after its weaker members left.  And the global implications could be substantial.

Encouragingly, Greece and Italy appear to be following through on reforms, austerity, and a debt agreement with the rest of Europe. What’s unclear is whether or not the details – the specifics of the Greek debt restructuring and bank recapitalization, the enforcement mechanisms, and the ability to entice private-sector investors to purchase peripheral government debt – can be worked out.

Eric Stein, Vice President of Eaton Vance’s Global Fixed-Income Team, believes that it’s ultimately up to Germany to save the European Union.  He sees three choices:

• Create a full-fledged fiscal transfer union, where all debt, regardless of country, is treated the same.  Stein believes this would be the least likely solution.
• Allow the European Central Bank to simply print money and purchase government bonds, thus acting much like the Fed.  This option may cause inflation, and Germany’s been strongly against that, but it’s doable.
• Recapitalize not only the German banking sector, but also other banks throughout the EU.

None of these choices are particularly appealing to Germany, but Feinman believes even they recognize that the collapse of the EMU would be much worse than taking some painful steps to save it.  If the EMU ultimately is preserved, it will still need to improve competitiveness and coordinate economic policies in all its member nations in order to  restore economic growth and ensure that the restructured debts can be serviced.

The economic path for Europe is turning out to be a long and painful one whatever choices its member countries choose to make.  The world will be watching closely.

One way is through an intra-family loan, typically from a parent to an adult child.  The advantage to the parent is a higher return than CDs and bonds, while the child is able to borrow at a lower interest rate than that offered by a financial institution.

Intra-family loans are commonly used to support children with first time borrowing (such as for a house), for financing start-up businesses, or for the purchase of investment properties.  You can even loan your son or daughter money for college rather than paying for it yourself, although you should discuss the tax consequences of such a move with your accountant or financial planner.

It’s important to write such a loan using the applicable federal interest rate (AFR) established by the government for short-term, mid-term and long-term periods.  This is to ensure that the rates are not considered “below-interest” by the IRS, which could result in gift taxes being applied to the parent.  You can find the latest rates at http://www.irs.gov/app/picklist/list/federalRates.html.  If you’re lending against a house, you should additionally hire a lawyer to draw up a formal mortgage and promissory note.  The borrower should also obtain adequate homeowner’s insurance, just as a bank would require.  If the loan is unsecured (e.g. education financing), a simple promissory note should suffice.  Since the interest portion of each payment is income to you (and consequently taxable), be sure to report the total to the IRS each year on your tax return.

The biggest risk to the lender – that the borrower defaults on the payments or even on the principal – may be small when the borrower is your child.  On the one hand, the child may be more conscientious about paying the loan back since it’s for the benefit of his or her parents.  Or, the parent may not care if the child defaults if the money would have been given as a gift in any case.

There are also estate planning benefits to an intra-family loan.  Often, such a loan is forgiven if a lending parent dies.  And making real estate loans to children (rather than the parent owning the property) removes the appreciation of the property from the parent’s estate.

Intra-family loans are not without risks.  But they represent an additional tool that can help other family members while at the same time improve your own cash flow.

First, as with all investment decisions, cost matters, especially over time.  Plan costs primarily include program management fees as well as mutual fund annual expenses.  Interestingly, Morningstar found that in most plans the fund expenses were higher than the expenses for the equivalent open-ended publicly traded funds.  But that disadvantage has been decreasing over time, and is offset by the tax advantages of owning 529 plans. Morningstar rates 529 plans every year, primarily with an eye toward costs.  You can find their latest report at http://news.morningstar.com/articlenet/article.aspx?id=436794.

Next, be aware that there are two types of plans: those that are direct sold – you can sign up yourself online – and those that are broker-sold.  For the latter you pay a commission out of your contributions to the advisor recommending the plan, which makes them more expensive.  Unless you need a lot of advice from your advisor on your 529 investments, we’d recommend sticking with the cheaper direct-sold plans.

Finally, you should decide what kind of investing strategy you’d like to follow.  If you’d prefer to actively manage the assets in the account, you should choose a plan that offers high-quality funds across a broad range of asset classes (e.g. large cap U.S. stocks, small cap U.S. stocks, foreign stocks, U.S. treasury bonds, U.S. corporate bonds, foreign bonds, real estate, commodities, etc.).  If the funds are publicly traded, so much the better – you’ll be able to track performance and get analyses through multiple sources.  Keep in mind, though, that you are limited to changing your investments no more than once each calendar year.

If instead you’d prefer not to have to make any investment decisions, the best plan for you would be one that allows you to specify up front how to allocate your contributions across stocks, bonds, and cash in such a way as to match your own risk tolerance.  Even better would be a plan that automatically adjusts those allocations to reduce risk as the child becomes older, again following a model with which you are comfortable.  Most plans offer both capabilities, but the specific allocations are different.  It’s important to select the one that’s right for you.  You can find details of every 529 plan’s investment choices at http://www.savingforcollege.com/ (select Compare 529 Plans, All Types, Compare By Features, then click on all the investment choices).

The burden of paying for college keeps getting heavier as college cost increases continue to outpace inflation by a wide margin.  Your primary goal, regardless of 529 plan chosen, should be to ensure you are generating a reasonable but safe return on your college savings funds.

Surprisingly, the U.S. stock market is on track to achieve its best month since 1974 (over 25 years!), with a gain of about 10% in the past 27 days.   I say surprisingly, since many people we talked to had been so worried over the past few weeks.

There are two lessons here.

The first is that trying to time markets can be hazardous to one’s wealth, because markets can and do move quickly.

The second lesson is that investing based on feelings (and the thoughts that go with them) is a bankrupt strategy.  It’s important to stay the course during downdrafts, because that’s when the greatest opportunities are present.  When “the news” is filled with doom and gloom, and people (you and I) are worried, that’s the time to buy, not sell.

The problem during rough times is that even investment professionals cannot guarantee that the world as we know it isn’t coming to an end.  And, it may take some time — even years — to demonstrate that confidence is a winning strategy.  But in the end, the world (so far) has continued to go on.

Today is a good day to reflect on the fruits of our patience and fortitude through the recent market turbulence, and to remember that just days ago we weren’t so sure of the outcome, so that next time we’ll be just a little less tempted to bail when the going gets tough.

We’re grateful for the gains we’ve seen this month, and for the fact that over the long run, investors have been compensated for the use of their money.  We’re also grateful that the governments of Europe are working to find answers to the difficult problems they face in their region.

     Teleconference Format — about 45 minutes

     Held Thursday, October 20th

     Click here to listen to a recording of the call

…

But don’t take our word for it.  Dalbar, Inc., a large financial services market research firm, has been performing an annual Quantitative Analysis of Investor Behavior study since 1994 that measures the effects of investor decisions to buy, sell, and switch into and out of mutual funds over both short and long term time frames.  Their analyses have consistently shown that investment results are more dependent on the behavior of investors than on the performance of their investments.  The most recent 2010 study found that over the 20-year period from 1991 through 2010, the average annual return of the S&P 500 was 9.1%, while the average annual return of the average equity mutual fund investor was only 3.8%.  That’s a huge difference!  What caused it?  Basically, it’s investors changing their behavior from aggressive to conservative after markets have fallen, or vice-versa after markets have taken off.  This causes them to sell assets when their prices have fallen and buy them when their prices are high.  They enter and exit the markets at precisely the wrong times.  And it’s their emotions that are driving these decisions.

We know that markets are incredibly volatile at the moment.  They may be reacting less to economic and financial fundamentals than to a lack of confidence in the U.S. and European political leadership and their ability (or inability) to find solutions to the world’s economic and financial problems.  But as long as our economic system rewards profit-driven individuals and enterprises that deliver goods and services to consumers who want to buy them, economic growth will return in the longer term regardless of what the politicians do, and that is what will ultimately drive investment growth.

Therefore, don’t be frightened by short-term market gyrations.  Keep your focus on the investment strategy you or your financial planner has developed for you, and try to ignore the market swings and the inevitably dramatic negative news stories accompanying them.  It’s not easy, but it will pay off in the future!

Actually, there are.  They are called, uncreatively enough, alternative investments.  And, according to a recent research paper by the Financial Planning Association, some 90% of investment advisors are putting on average over 10% of clients’ portfolios into them.  What are they and what’s good about them?

Alternatives include asset classes such as real estate, commodities, managed futures, energy Master Limited Partnerships (MLPs), currency exchange rates, options, and merger arbitrage, to name a few.  What makes these asset classes “alternative” is primarily the fact that they have very low correlation to stocks & bonds and that the drivers of their returns are not directly related to financial markets.  Events that impact stock and bonds prices tend to have little effect on the prices of many of these alternatives.  This can be seen during last month’s extreme market swings.  From its July peak to its August trough, the S&P 500 dropped close to 18%.  By contrast, the S&P CTI Index (a measure of commodities futures) fell less than 8%, and Morningstar’s Managed Futures Index (an average of all managed futures mutual funds) declined less than 2% during this same period.

Uncorrelated doesn’t mean, however, that investments in alternative asset classes will do better than stocks or bonds in all situations.  But it does mean that a stock & bond portfolio that includes alternatives should exhibit less overall volatility over time than one without them, while at the same time providing a return that has a much better probability of beating inflation than an investment in money market funds or CDs.

Previously the only way most investors were able to access alternatives was through hedge funds.  Their high minimum investments and high fees limited their availability primarily to high net worth individuals.  Today you can invest in many of these alternative asset classes through mutual funds or exchange-traded notes (ETNs), significantly reducing both the cost of investing as well as the liquidity risk.

Alternatives are not for everybody, and carry their own set of risks and rewards, just like any investment.  If you’d like to find out more about them, and about whether or not they make sense for you, talk to your financial planner.

Gardner pulls together compelling evidence to explain that expert predictions fail for two main reasons.  First, the world is too complicated to be predicted.  Think about how many variables influence economic growth.  Or stock prices.  We simply do not have the mathematical and computational tools to predict these kinds of things with any sort of accuracy.  But the second reason may be even more profound.  It’s the way our brains are wired.  People have an instinctive aversion to uncertainty.  We want to know what is happening now and what will happen in the future, so we try to eliminate uncertainty any way we can.  We see patterns where there are none.  We treat random results as if they were meaningful.  And we embrace simple narratives that replace the complexity and uncertainty of reality.

Enter the experts.  They have certifications, awards, and most of all, confidence.  These are the kinds of people the media loves, with its preference for the simple and the dramatic.  These experts communicate as if they are certain what will happen, and we like that because that is the way we want to feel.  We believe them because we want to believe them.  And therein lies the trap.  The truth is there are no crystal balls and no techniques for predicting the future.  But there will always be fortune-tellers and prognosticators as long as we want to hear what they are telling us.

In addition to many examples of experts that got it completely wrong – he recalls Stanford University biologist Paul Ehrlich’s wildly pessimistic prediction in The  Population Bomb (1968) that by the end of the 1970s there would be massive famines because the world would be unable to feed its exploding population – Gardner cites numerous studies that explain many of the emotional biases towards investing that come under the field of behavioral finance.  And he points out that most expert predictions tend to be a continuation of current thinking rather than something unique.  It’s a lot easier to see down a straight road than to see around a curve.  Remember December 2008?  How many experts at that time were predicting that by the end of 2009 the S&P 500 would bounce back over 26%?

You owe it to yourself to heed what this book is saying.  As much as investors might like to believe what someone like Jim Cramer is telling them, Gardner makes it clear that such people know no more than you do about future stock performance.  The safer way to invest is simply to keep your portfolio as diversified as possible across asset classes that tend not to be highly correlated with each other.  That way you don’t even need to worry about predicting the future.  As long as there is economic growth over time, the value of such a portfolio should continue to increase.

Never forget the words of that famous malaprop Yogi Berra:  “It’s hard to make predictions…especially about the future!”