Atlanta Planning Guys

On March 9, 2009 the Dow Jones Industrial Average closed at 6547.05.

Today, April 7, 2009 the DJIA closed at 7789.56 – almost 19% higher.

The attached slide meets my criteria for posting on our blog (short and easy to understand) and shows some interesting information about each bear market since 1900.

This slide, courtesy of Wachovia Securities, reinforces many of our previous blogs.  In the past, bear markets have been followed by strong returns in the following 12 months.  Since WWII, for example, the average return for the DJIA was 29.6% one year following the bear market low.

We believe it is impossible to accurately “pick the bottom”, so I do not want to imply that March 9 was the low OR that the next twelve months following a low will behave the same as in the past.  

You can’t know if it was the low until 12 months later – but here’s to hoping it was!

Wachovia Securities is its own broker/dealer.  We are not affiliated with Wachovia Securities.  This attachment is for informational purposes only.  We offer access to securities through LPL Financial, member FINRA/SIPC.

I got the “double dumb” phrase from one of my earliest career mentors, Bill Lohnes.  Bill was the managing director with the company Cass and I worked with before starting our own firm.  Bill used the term “double dumb” quite a bit in the year 2000.  In many cases, he was referring to clients making a terrible financial decision.  Typically, these decisions were emotional in nature and either involved greed or fear.  We have certainly seen our fair share of greed and fear in the market lately.

Twice in the last week, I’ve had a conversation with a client on the topic of benefits.  In both cases, I was informed that our client’s employer had decided to stop matching contributions to their 401k.  Once we worked through the expletives, I uncovered that both of these clients were considering taking all their 401k balances and putting them in cash.  I certainly understand the fear that drives a decision such as this.  However, I advised them to stick it out. 

In both instances, I was able to talk them out of moving money into cash.  Only to have them tell me that if they were going to keep it in the market…then they would at least be cutting their contribution now since there was no longer a match.  Double dumb! 

There are two very time tested investment philosophies that work in the long run: dollar cost averaging* & time “in” the market.

 We have discussed dollar cost averaging* before and will certainly do it again.  For this post, let’s focus on time in the market compared with trying to time the market.  This slide  illustrates the impact being out of the market can have on a portfolio over a substantial period of time.  We don’t know where the bottom of this market is.  No one knows.  Getting out now, parking your money in cash is most likely counterproductive to your portfolio’s long term health.  Stay diversified and in the market.  If history repeats itself, you’ll be glad you did.

*Such a plan involves continuous investment in securities regardless of fluctuation in price levels of such securities.  An investor should consider their ability to continue purchasing through periods of low price levels.  Such a plan does not assure a profit and does not protect against loss in declining markets.

It is no surprise that public figures make an easy target for ridicule when things go south.  I read an article on MSN.com recently throwing Suze Orman under the bus.  It points out the differences between the guidance she provides to her clients versus what she practices in her own portfolio.  Here’s a hint…she doesn’t practice what she preaches.

Financial pundits are all over the place.  We have several very notable ones right here in Atlanta.  The advice handed out over these various mediums is general at best.  It has always amazed me that people are so willing to blindly trust the advice they get from someone they spoken to for less than 90 seconds.  The one thing that all of these so called ‘experts’ seem to have in common is…they know next to nothing about your personal situation!  I’m not begrudging everything that they say.  We could all take a lesson or two from anyone that promotes making smart financial decisions.  My feeling is that many of these so called gurus do one thing extremely well…sell their latest book or seminar program. 

The keys to financial success do not lie within the pages of a book or a 3 disc set that you can order right now for $29.99 plus shipping.  Financial planning and wealth management are practiced on a very personal level with a professional that has the education and experience to guide you through the labyrinth of decisions that must be made in order to reach your goals.  Is it possible to pick up some very helpful hints on improving your financial picture by watching a television show or listening to someone on the radio?  Absolutely!  Are you going to be able to build a sound financial strategy that puts you in the best position possible?  It’s not likely.

The real experts aren’t selling books.  They are meeting with clients and becoming intimately involved with every aspect of their life.  These professionals are the people you should turn to in good times and bad…not the television or radio.

I have been searching for ANY silver lining to the current stormy clouds that almost all investors have been weathering.

2010 should be an exciting year for investors who are still saving for retirement (and even those who may have to start saving again!).

The posting below was originally sent to our clients in mid-2007 – well before the current market decline.   If your balance is lower now than it was then, this strategy might make EVEN MORE sense.

Chappell Mayfield and Associates supports being green.  So, here is a recycled idea…………..        

                        .                                                                                                                                           

Originally sent March 2, 2007

2010: A Roth Odyssey

On May 17, 2006, President Bush signed the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA).  The law contains many provisions, however, there is one provision that is one of the most exciting things I can remember in my 10 years in this business.

 First, let’s review:

• Withdrawals from a traditional IRA at retirement are subject to income tax, withdrawals from a Roth IRA at retirement are not subject to income tax (with few limitations – consult your tax advisor).
• Under current law, a couple (or single for that matter) must have an adjusted gross income of under $100,000 to convert an IRA (or 401k rollover) to a Roth IRA.

Drum roll please…………:

• In 2010 (because of TIPRA), one can convert an IRA, 401k rollover, and virtually any type of retirement plan to a Roth IRA regardless of income.

•   The rules also allow the taxpayer to spread the tax on the conversion over the next two years (2011 and 2012)!

“OK.  So how will this affect me?”

The main advantage of a Roth IRA is that withdrawals are made, after age 59 ½, totally income tax free (as long as it has been 5 years since your date of first contribution or 5 years since each conversion is made).  Also, there is no required minimum distribution after you reach 70 ½, like there is with a traditional IRA.

The decision to convert, or not to convert, will be affected by many issues, such as life expectancy and your tax bracket expectation at retirement.  Needless to say, we will have calculators and other resources to help you make your decision.

 “What can I be doing in the meantime?”

•  It is almost always a good idea to maximize retirement savings. This event makes it even more appealing.
•  If you aren’t able to contribute to a Roth now, contribute to a traditional IRA….we can convert it in 2010.
• If you have an old 401k lying around, don’t automatically roll it into your new 401(k) at work. Consider rolling it over to an IRA and funding it…we can convert it in 2010.
•  Many 401(k) plans allow you to rollover your balance even while you are working. It may be a good idea to beef up your contributions in anticipation of 2010.
•  Imagine having a pool of money to draw from in retirement that is 100% income tax free forever!

For some, this may even impact your 2008 taxes.  There is still enough time to make a substantial impact on your 2010 retirement savings – and beyond.

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice.  We suggest that you discuss your specific tax issues with a qualified tax advisor.

January marks the 5 year anniversary of the Health Savings Account (HSA) legislation being passed.  I still remember, with such excitement and anticipation, making the first call to one of our clients.  The HSA was going to change the face of employee benefits and healthcare.  I was ready to champion the cause.   Let’s get a few things straight before I go into the mechanics:

• 1. HSA’s are not health insurance: they’re accounts that you put money into to pay for health care expenses. They work very similar to IRA’s.
• 2. You must have a High Deductible Health Plan (HDHP) in order to qualify for an HSA.
• 3. The deductible of your HDHP should coincide with your HSA.
• 4. As compared to your traditional health insurance plan (HMO’s, POS’s, PPO’s), HDHP plans tie all of your benefits under one single deductible.

Yes, lots of acronyms and room for confusion.

Bottom line:

• - HDHP plans are designed for the insured to pay the deductible before any benefits are paid out by the insurance company
• - This is the driving force behind HDHP plans usually being potentially far less expensive that traditional plan designs
• - All services; preventative, wellness, prescriptions, in/out patient, hospitalization are all covered under the one deductible.
• - The insured uses money in their HSA Account to pay for the services needed
• - Money can be contributed by either insured or employer
• - If money in HSA is not used, it rolls over to the following calendar year
• - 2009 contribution limits are $3000 for individuals and $5950 for families
• - Plan designs allow for 100% coverage once deductible is satisfied.

I have an HSA plan and we have several clients with them.  I can’t say that it is a good fit for everyone.   However, I strongly encourage any individual or small business to explore the opportunity.  Why does this approach make so much sense for so many people?  HSA plans don’t cost the insurance companies much money until the deductible has been met.  It is this factor that drives the health insurance premium down.  It may be the case that you rarely go to the doctor.  Most people want protection from catastrophic loss right?  Why pay exorbitant premiums for coverage you’re not using?  Here is a brief example to illustrate my point:

Current situation:

• - John & Suzy Q Public have a traditional PPO Plan with Insurance Company X
• - Deductible is $2000 for each of them & $40 to go see the doctor
• - Premium for their insurance is $700/month
• - John hasn’t been to the doctor but twice in the last 4 years and Suzy goes once a year
• - They are spending $8400/year
• - This does not include cost of doctors visits/checkups

HSA Solution

• - John and Suzy switch to a HDHP PPO Plan with Insurance Company Y
• - The deductible for each is $2500 (for a total of $5000)
• - Premium for the HSA Plan is $450/month
• - John and Suzy take the $250/month in savings and put that toward their HSA Account each month
• - Now they are spending $5,400 in premium and saving $3,000 into their HSA Account
• - If they continue to be healthy, very little of the $3,000 savings will be needed
• - Whatever money they save, rolls over to the following year.

It’s time to explore the opportunities available with an HSA.  Talk to your financial professional or the human resources director at your employer.  Depending on your situation, this may be a great way to save money and make you a wiser consumer of health insurance.

Any and all earnings in an HSA grow tax deferred. Withdrawals used for medical expenses (must be considered qualified per IRS definitions) are not subject to income taxation.  If funds are withdrawn for any other reason, income taxes apply and any distribution prior to age 59 ½ may be subject to a 10% penalty.

I turn 35 in less than a month.  To me, the significance of an event can be judged by whether one remembers where they were when the event occurred.  “Snapshot Events” (as I call them), the ones which will forever be burned into our memory, vary by impact (tragedy or triumph) and by relative importance (the “grand scheme of things”).

I frequently ask people if they remember where they were when certain events occurred.  Most of the events on my list (below) are obvious, having the effect of time-stamping a particular era in our personal histories.   The car we were driving, the TV we saw the event on, who was in the room, the time of day, what we did immediately AFTER the event….it all quickly comes back as we recount the stories.                      

Regardless of your political affiliation, the swearing in of Barack Obama will be one of the most memorable events of our lifetime.  To say that it means different things to different people is a dramatic understatement.  The social and political effects of this are far beyond the scope of our blog. 

I spent most of my time on CNN today.  One of the hosts said that this may eclipse the final episode of M*A*S*H as the most watched event in the history of television.  Oddly enough, this final episode was aired on February 28, 1983 and I have NO IDEA where I was or what I was doing when this happened (I would have just turned 9, but as some of you know, I was an AVID watcher of 80’s TV shows).

No disrespect to M*A*S*H, but I sincerely hope that today’s events eclipse the record.

My list is below.   I must emphasize that this list doesn’t begin until the early 80’s (my earliest memories) and that some of these events are not very important, although most are.

• Ronald Reagan shot
• The first space shuttle blows up
• Death of Len Bias
• San Francisco earthquake
• Buster Douglas knocks out Mike Tyson
• The beginning of the first gulf war
• O.J. and the bronco
• O.J. verdict
• 1996 Olympic Bomber
• Princess Diana dies
• 9/11
• Barack Obama inauguration

As financial planners, we are frequently asked about “sustainable withdrawal ratios”, or in other words, “How much money do I need to retire?”

It seems as if there are as many articles and books written on the topic as there are people looking for the answer.  Our withdrawal philosophy has been molded via several sources, but the system of William Bengen has been the most influential on our practice.

Simplifying our system, and I mean REALLY simplifying our system, looks like this:

·      Nest egg (NE) is invested between 60% – 75% in stocks AT ALL TIMES

·      10% of NE in alternative investments (usually managed futures)

·      Remainder of NE is invested in bonds

·      The initial withdrawal is 4.4% of NE

·      This withdrawal (WD) is adjusted each year, by the preceding year’s consumer price index (CPI)

An example is in order:

Just two years ago I had serious doubts about this withdrawal ratio.  I was beginning to think it was far too conservative.  Average returns (at that point) for many of our clients were much higher than the initial 4.4% rate.  The bursting of the internet bubble seemed like a distant memory of an event that was a fluke to begin with.  Many popular media writers and several financial planning magazines were also challenging this conservative philosophy, discounting the worst case scenarios (think Great Depression) as mere tales of a time never to be re-visited. 

Most investors were reluctant to accept the fact that their nest egg needed to be roughly 22 times their initial withdrawal – “my gosh, we will NEVER be able to save that much!”

Needless to say, this past year has grounded me with respect to the sustainable withdrawal ratio.

2008 provided three powerful reminders:

1.  Market events of the past, no matter how severe, can repeat themselves

2.   A model built to withstand the most troublesome market environment will appear overly conservative during bull markets – and feel comforting during reigns of the bear.

3.  The 100 (or so) years of market statistics that most researchers use is NOT the complete set of market outcomes.  Things that have never happened before are bound to happen in the future.  The market in 2008 was chock full of first-time occurrences that will undoubtedly be researched for years to come.

We have laid a solid foundation for accomplishing your New Years Resolution.  Let’s close out this article with some real life examples for you and a few more tips for the road.

 Tip # 1:  Find an accountability partner.  There should be at least one person in your life that can make sure you are keeping up with your resolution and offer the support necessary to achieve it.  This can be more than one person (as you will see in the example below).

 Tip # 2:  Write it down.  Resolutions, goals, affirmations…they are all so much more powerful when you write them down and revisit them frequently.

 Tip # 3:  Don’t be scared to think long term.  We all suffer from the instant gratification bug these days.  We feel that results must be now or never.  Even with your resolutions, don’t be afraid to give yourself the whole year to accomplish things.

 And now the details behind my most recent resolution…I hope this example can serve as a spring-board to the happier, healthier, wealthier you.

 Charles’ resolution: to quit smokeless tobacco

     Step 1: Research the requirements

• - Got information from American Cancer Society
• - Learned I had to establish a quit date (October 27^th was mine)
• - Read up on my enemy (nicotine), used the addictive aspect as my motivator

    Step 2: Put the plan in Place

• - Announced my quit date to family and close group of friends
• - Started slowly reducing intake
• - Wrote out my reasons to quit

    Step 3:  The Quit Begins

• - Had my last tobacco on October 26^th, 2008
• - Got lots of support in my first 3 days (critical)
• - Made plenty of jerky to chew on
• - Focused on a written journal of how I was feeling and keeping track of cravings

    Step 4:  Celebrate

• - Everyday without tobacco is a celebration
• - What good is change unless you are happy about it
• - Share your accomplishments…show others they can do it to (very powerful stuff)

Wishing you all a tremendous 2009!   I can’t wait to hear about those incredible resolutions coming true.

Let’s talk about the particular aspects of a New Years Resolution and how someone should approach setting one.  The first thing I would like to get out of the way is changing the name of this resolution to simply a goal.  What is a goal?  It’s a desired outcome.  The secret in goal setting is making it such that achievement is in fact possible.  Allow me to offer up the following criteria for your New Year’s Goal that will make it easier to track and follow through with:

-         A goal should be measureable

-         Goals need to have a specific time frame to be accomplished

*In this case, certainly within a year

-         They must be realistic

-         Must be personal goals (meaning they need to be yours…not someone else’s)

Goals with these characteristics should give you a leg up on actually seeing them through to the end.

A survey done by USA.gov found that 3 out of the top 5 New Years resolutions were financial in nature (the other two were health).  When considering what your resolution will be for 2009, please try to stick to the rules mentioned above.  Here is a little further explanation of each:

1. Measurable: Saving more money in 2009 is not measureable enough.  How about (if eligible) saving $4000 in an IRA in 2009?  Maximizing a contribution to my 401k is also measureable enough.
   1. The more specific you are with your ‘measure’, the more on task you can stay
2. Specific Time frame:  “I’m going to quit smoking”…no, that doesn’t work.  Try, “I’m going to quit smoking on February 5^th 2009”.
   1. That gives me time to plan how to achieve my goal
   2. It allows me time to recruit people to assist me with my goal
3. Realistic:  I don’t know if you necessarily need an example here since reality is quite different for all of us.  However, most of us live within certain common themes.  A great example would be the recent stock market woes we have seen.  We are all subjected to that influence in our lives.  Don’t tie the performance of an uncontrollable factor into your goals success (like the stock market).
4. Personal Ownership:  We are all guilty of jumping on the New Years Resolution band wagon.  Don’t be pressured into coming up with something.  This happens so many times with close friends and spouses.  We are backed into a lifestyle change that we may not be ready for or willing to give up.

If you’re going to take the time to build a goal, you might as well do it right.  This will only increase your chances of success and therefore your chances of positive change in your life.

We have all made at least one in our lives…more than likely several each year.  The New Years Resolution has long been the quintessential method by which we attempt to remove all those bad habits that accumulate over the months leading up to the countdown.  These proclamations of improvement often involve a lifestyle change to some degree, generally directed at improving either your health or wealth.  These resolutions also carry another common theme…they are rarely realized.  A recent study conducted by Quirkology found that only 12% of New Years Resolutions were accomplished despite 52% of those surveyed having confidence that they would achieve their goals (http://www.quirkology.com/USA/Experiment_resolution.shtml).   Frankly, I’m not all that surprised by this statistic.  Many of us don’t put a great deal of thought and planning into our New Years Resolution.  It comes as an afterthought following all the holiday parties and football games.

It is at this point I should inject my own thoughts on New Years and its resolutions.  Personally, I despise this day as a means to launch into some life changing persona.  My thoughts have always been that if I want to make positive changes in my life…why wait until New Years?  Please understand that I realize the importance of having a targeted date to begin this change.  But don’t you think that date should be determined by you…and not some silly calendar?

OK, so what is going to be your resolution for the coming year?  Should it be just one or maybe several?  What needs to change in my life for me to feel/look/be better?  Go ahead and put some thought into a resolution or two.  Keep your eyes out for parts 2 & 3 of this blog series.  Hopefully I can help improve that 12% success rate.