Both Foster Group and Dimensional Fund Advisors believe everything we do should focus on acting in our clients’ best interest. We have partnered with DFA since 1994 as a mutual fund provider to increase the probability that our clients will have a successful investment experience.

The work DFA is doing is being noticed in the industry; Morningstar just published their updated Stewardship report for Dimensional and has upgraded them from a “B” to an “A” – the highest grade they give out.

Here is the link to the full write-up:

http://www.morningstar.com/advisor/t/106288172/dfa-s-disciplined-approach-earns-it-a-top-mark.htm

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Last July, I wrote the blog, “Actively Losing,” which compared Crossfit to investing without much knowledge or the wrong kind of help. It’s not that the Crossfit program is bad, it’s whether you use good technique, the right amount of weight and follow the coaching of an expert. The same goes for investing; while the act of investing itself is not bad, doing so in an uninformed way without the appropriate expertise can have negative results.

For the past few years, I kept telling myself I was going to develop and implement an exercise routine and healthy eating program to lose weight and get back in shape. The problem was that I didn’t have the time, accountability, and expertise to develop a well-rounded program. Finally, on January 2nd of this year, I set out to purchase a new suit and found that I’d exceeded a waistline I never thought I would.

I recalled an e-mail I received in response to my blog last July from someone who is highly involved in Crossfit locally. They had challenged my assertions about Crossfit and encouraged me to try the program, so on January 3rd, that’s exactly what I did. I’ve been at it for five months now and the results have been fantastic. I’m stronger and healthier than I’ve been in ten years. The reason is that I’m paying experts (coaches with degrees in Health and Human Performance and Exercise Science) to develop workout programs, coach my technique, and provide advice on nutrition that produces positive results.

Crossfit certainly isn’t the cheapest gym and, at first, parting with the dollars was a real struggle, but after a couple of weeks I realized that paying for, and delegating to, experts in this area of my life was worth it, given all the benefits I was experiencing.

Foster Group’s role as advisors is similar to the coaches I work with at Crossfit. We do for our clients’ financial health what trainers do for their physical health - both roles can affect a person’s mental health for the better. Hiring experts to create a financial plan, manage investments wisely, and provide accountability should provide results that give people peace of mind and eliminate costly mistakes. There are a few areas of life that, if ignored for too long, can have unfortunate, yet avoidable, results. Consider the progress that might occur if you are willing to spend some resources to hire an expert in these areas. Be healthy….physically and financially!

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Ever wonder why somebody should hire a financial advisor – particularly in this information age when so many tools, spreadsheets, blogs, and articles are so easily accessible online? Yet Foster Group’s 97% five-year average retention rate and long-term client base argues that there is considerable value.

I came across the attached article today that I thought was helpful – identifying seven different roles an advisor plays in a relationship. Check out the article and see if you agree!

http://fostergrp.com/assets/fostergroup/the_seven_roles_of_an_advisor.pdf

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One of the greatest relational tools a person should have ready to use at any given moment is the tool I call the “Disruptive Question”. At first blush, it doesn’t sound too appealing, does it? But the premise behind this tool is to ask a question that causes the person you are engaging to stop and think. It is the kind of question that causes the other person’s eyes to drift up in contemplation. It is a question that challenges them to think outside the box or to process how they might think about their life or a particular topic.

It is amazing what a good question can do to change the scope of a conversation. Imagine sitting with a friend, enjoying a cup of coffee or a glass of wine and asking one of these questions:

“What makes you pound the table with emotion right now?”
“What is the one obstacle that keeps you from really chasing after a dream you have?”

At first, the question may stop the conversation. But wait… don’t be intimidated by silence. A good question deserves a few moments of silence, because what follows could evolve into the kind of discussion that changes a relationship and shapes the scope of your conversations in the future.

This thinking is what lies behind the most crucial part of our planning relationship; the Discovery Meeting. We try to ask enough of the right questions to cause the client to really examine the way they look at money and what they want it to do for them, their family and the causes they believe in. However, without good questions, the answers many go undiscovered. All new clients experience this as they go through the on-boarding process with Foster Group. It helps us know them and serve them better. Clients who have been with us and not gone through the discovery process are all given the opportunity to step back and go through what we call “Re-Discovery.” If you haven’t been through our discovery process and you would like that experience, give us a call and schedule an appointment with your advisor.

In the meantime, think about your “Disruptive Questions” and be ready for some stimulating conversations.

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Tax Wise Charitable Giving as Simple as 1, 2, 3

The April 15th tax deadline is in the rear-view window. As you review your 2014 activity and filings, did you maximize available tax deductions and credits? By partnering with the giving experts at the Community Foundation of Greater Des Moines and your Foster Group financial advisor, meeting your charitable giving goals while maximizing your tax benefits, can be as simple as 1, 2, 3.

1. Establish a Donor Advised Fund to reduce estate taxes.

Donor Advised Funds with the Community Foundation of Greater Des Moines can act as your charitable savings account.  To open a Donor Advised Fund you contribute cash or assets and receive a tax deduction for your gift. By opening a Donor Advised Fund with the Community Foundation you may also be eligible for the Endow Iowa Tax Credit program, a 25% state tax credit. The assets in your fund are then invested by your Foster Group financial advisor to grow your chartable dollars and impact. Donor Advised Funds are very personal and flexible.  You recommend grants from your Donor Advised Fund to the causes and communities you care about while the Community Foundation handles the administrative details of facilitating the gift.

2. Give to a qualified Endow Iowa fund and receive a 25% state tax credit available exclusively through Iowa community foundations.

The Endow Iowa Tax Credit program promotes gifts to qualified permanent endowments by awarding up to 25 percent of the amount donated as a state tax credit when making a gift through Iowa community foundations. Endow Iowa provides an opportunity to make a gift of sustainable support to the causes and communities you care about while receiving a tax credit in recognition of your investment in the future of Iowa charities.

The illustration below provides an example of the potential tax liability and tax benefit available when making a $10,000 gift to an Endow Iowa qualified fund.

Joe & Mary Taxpayer: $10,000 Endow Iowa Contribution                                                            

Assumptions: Married Filing Jointly, $250,000 W-2 income from one spouse is only source of income, only itemized deductions (other than Endow Iowa contribution) is state income tax, $15,000 home mortgage interest and $6,000 real estate taxes. Federal and Iowa income tax liabilities computed on accrual basis to account for cross-deductibility of income taxes.*

3. Do I hold an asset that I could gift to charity and maximize tax benefits?

You have worked with your Foster Group financial advisor to ensure you have developed a financial plan which includes diversified assets. Your charitable giving plan is no different. Our team of giving experts can assist in facilitating a variety of gift types to support the causes you care about while benefiting from maximum tax benefits.

To learn more about partnering with the Community Foundation in meeting your charitable goals reach out to your Foster Group financial advisor or visit us at www.desmoinesfoundation.org.

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One way Foster Group looks to add value for our clients who are accessing their investment accounts for income (due to retirement or otherwise) is by optimizing withdrawals from their accounts and generating income in the most tax-efficient manner. 

For our clients who have the bulk of their investment assets accumulated in tax-deferred accounts (such as an IRA or 401k) there’s not much strategizing to be done – withdrawals will be taxed as ordinary income, subject to our currently progressive tax brackets (the more you take out, the higher your taxes will be – in nominal dollars and as a percentage). 

However, if you also have taxable accounts (such as a brokerage account) and/or tax-exempt accounts (such as a Roth IRA) you will have much more flexibility and developing a withdrawal strategy could significantly extend the life of your investment portfolio.

Conventional wisdom has suggested that withdrawals should first be taken from taxable accounts, then tax-deferred accounts, and finally tax-exempt.  This has been advocated by three large mutual fund families in recent years (Vanguard 2013; Fidelity 2014; American Funds 2014).  However, it’s very possible this conventional wisdom may not be the best plan for you.

Our goal in developing a withdrawal strategy is to minimize tax liability over your lifetime.  Given the progressive nature of current tax law, it’s possible that taking withdrawals from a tax-deferred account while you’re in the lower marginal tax brackets and then additional withdrawals from the taxable account can add years to the longevity of your portfolio.

A recent study published in the March/April issue of the Financial Analysts Journal, “Tax-Efficient Withdrawal Studies” by Kirsten Cook, William Meyer and William Reichenstein, analyzed this conventional wisdom and concluded that the most tax-efficient strategy could extend the longevity of your portfolio by more than three years over the conventional approach. 

The authors of this study used a hypothetical situation to assess the outcome of five different strategies, and while their test case may not look like your own situation, the conclusions from this study are nevertheless informative and thought provoking.  The most efficient strategy for you will depend on the specifics of your situation – and this is where we can help.  The impact may surprise you.

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Well, if you get tired of hearing us talk about timeless financial planning disciplines (aka avoiding pitfalls), then enjoy and embrace this quick read from another source.  Fantastic, simple advice we can all adhere to in bettering our investment experience while increasing probabilities for success.  No magic here.  You can do this, and we can help.  Stay diversified (#6 for those keeping score at home).

http://money.usnews.com/money/personal-finance/mutual-funds/slideshows/7-bad-investing-habits-that-are-holding-you-back/1

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Perspective can be defined in many ways, but when I think of perspective, I think of attitude as well. 

In the past year, I have known of four friends who have been diagnosed with various forms of cancer, and each of them has had a different perspective on their diagnosis. 

One very good friend was diagnosed late last summer with Multiple Myeloma at the age of 52, shortly after a various successful business transaction for him and his employees. In a manner of a couple of months, he went from cloud nine to the fight of his life. 

What struck me early on was the perspective my friend had toward his diagnosis and what was ahead.  Never, in my presence, did he ever utter a negative thought, only the attitude of wanting to get started on treatment so he could get back to living his life. While he has many things to be thankful for, it seemed during the process (from diagnosis to stem cell transplant to news in April that the transplant was successful and he was in remission) his mission was always the same, “Let’s keep moving forward.”

This particular medical situation has provided me perspective for my professional and personal life on a daily basis. Like my good friend, I TRY not to sweat the small things and focus on the positives. While we always want our NMA activities at the Legislature to be successful, we understand that success can be harder to achieve than in past years, with term limits and other forces working against us.  IF we are not successful, while I always wonder how we could have or should have handled something differently, I prefer to focus on the future and how an item or issue will affect us down the road. 

Perspective keeps us grounded and moving forward, and attitude gives our perspective a chance.  I continue to hope all my friends with their recent diagnoses maintain their perspective on the future and that their battles result in positive outcomes. 

I leave you with this:  most mornings I’m heading for the office just as one of the popular morning news shows is coming on the air. Every day I hear the term, “breaking overnight” followed by a story about a catastrophic weather event, a crime, an airline disaster, etc. Just once, I’d like to leave the house after hearing a positive morning story. I’m optimistic that someday I will!

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The answer to, “How much is enough?” is often, “Well, it depends.”  Not very satisfying in the short run, but accurate, nonetheless.  You see, when you want to know how much it takes to retire, quite a few variables are involved.  At what age do you want to retire? How much do you want, or need, to spend? How long do you plan to live?  Do you want to leave funds to heirs or charity or do you want to have nothing left when you leave this world? How are you going to invest your money? How much can you save?  What do you anticipate will be the effect of inflation on your investments? You get the idea.

Don’t despair, even with all of those questions and many others to consider, you can get answers regarding the amount of money you will need, the amount of income you can expect, as well as answers to any number of other questions you have about retirement or other financial planning subjects.

It’s not simply a matter of plugging in a couple of numbers and getting an instant result. It’s a process. And when implemented with an advisor who knows you well and reviews your objectives with you regularly, that process will bring you confidence that you will have enough.  You will know what you can comfortably spend and you can see the effects of all of those “what if” scenarios on your future. 

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It’s kind of the reverse when you are thinking about your investment portfolio.  Most of us focus on what is going on in our lives today, what’s happening in our country and with the biggest US companies. Media reports on what “the market” is doing focus on the 500 largest companies in the US – those represented by the S&P 500 index. That tells you what the S&P 500 is doing today, but it is not THE Market.  Even less helpful is the Dow Jones 30 Industrials Average as a benchmark for our personal investments. Likely, you own shares in one or more of the thirty companies that make up the Dow, but what portion of your portfolio do those shares represent?  In a broadly diversified global portfolio, it’s likely a pretty small percentage.  You probably have a higher percentage in the S&P 500, (which includes all the companies that comprise the Dow).

Many folks stop there with their investment portfolio and call it good. They have a few large American company stocks, or perhaps a somewhat more diverse mutual fund owning large U.S companies, or maybe even more diverse, an S&P 500 Index fund and their portfolio is complete. Broad diversification, however, involves thinking bigger and broader than our own country and its largest companies.  After all, over time it’s the small companies of our country and the rest of the world that have historically provided the most growth.  A broadly-diversified global portfolio includes large and small, value and growth companies from the US as well as developed and emerging foreign markets around the world.

Just a reminder to “zoom out” the next time you think about your own investments or begin to be either very worried or very complacent by the talking heads’ view of  what “the market” is doing or likely to do.  Look at the bigger picture.  Practice the “zoom out” first and then zoom in to see if your portfolio is constructed in a manner that takes advantage of equity markets of the world at large along with a suitable portion of fixed income based on your time horizon for distributions.  But that’s a topic for another day!

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The statistics regarding tax-related identify theft are big - I would say shocking - but most of the public is now all too aware of how prevalent tax-related fraud is.  According to this Forbes article, the IRS paid out $5.8 million in fraudulent refunds in 2013 and, if I were a betting man, I would imagine that number will rise in the coming years.  With significant reductions in funding and staff at the IRS, consumers may find themselves looking for help if this happens to them.  On the IRS website, they recommend taking the following steps to help prevent this type of fraud:

    ·    Don’t routinely carry your Social Security card or any document with your SSN
         on it.
    ·    Don’t give a business your SSN just because they ask – only when absolutely
         necessary.
    ·    Protect your personal financial information at home and on your computer.
    ·    Check your credit report annually.
    ·    Check your Social Security Administration earnings statement annually.
    ·    Protect your personal computers by using firewalls, anti-spam/virus software,
         update security patches and change passwords for internet accounts.
    ·    Don’t give personal information over the phone, through the mail or
         the internet unless you have either initiated the contact or are sure you
         know who is asking.

Should you become a victim, here are the steps the IRS recommends taking:

     ·    File a report with law enforcement.
     ·    File a complaint with the Federal Trade Commission at
          www.identitytheft.gov or the FTC Identity Theft Hotline at 1-877-438-4338
          or TTY 1-866-653-4261.
     ·    Contact one of the three major credit bureaus to place a ‘fraud alert’ on
          your credit records:
          o    Equifax - www.Equifax.com or 1-800-525-6285
          o    Experian - www.Experian.com or 1-888-397-3742
          o    TransUnion - www.TransUnion.com or 1-800-680-7289
     ·    Contact your financial institutions; close any accounts tempered with or
          opened without your permission.
     ·    Check your Social Security Administration earnings statement annually.
          You can create an account online at www.ssa.gov.

You can find additional information on how to protect yourself, and what to do if you become a victim, in the Taxpayer Guide to Identify Theft.

If this happens to you, make sure to contact Foster Group as well so we can help you take the appropriate steps to protect your investment accounts.

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Joe: I love your sketches, and many clients ask about them.  So, I have to ask how you come up with your ideas. They are so simple, yet teach profound truths!

Carl: The sketches actually came out of a moment of desperation. I was trying to explain a relatively complex financial concept to someone. The blank stare I was getting made it clear I wasn’t doing a good job, so I drew it. A few Sharpie strokes later and I could see I’d made a connection.

Joe: I enjoyed the pre-release of your new book. The concept of sacrifice and delayed gratification is woven throughout the book. How is sacrifice part of a financial plan?

Carl: Planning for the future, unless we have unlimited resources, is often just about the tradeoffs. We’re continually weighing those tradeoffs. Sometimes we need to say “no” now so, as Stephen Covey says, we have the option of saying a much bigger “yes” in the future.

Joe. That’s so true – by resisting the call of immediate gratification, one is in a better position to do the things that are most important to them. The final section of the book involves finding a “Real Financial Advisor.   Why do you think that is so important?

Carl: The reason having a real financial advisor is so important is because they’re not you. So often, financial success is more about behavior than it is about skill. It helps to have an unbiased third party helping you to avoid the big mistake that too many investors make, of buying high and selling low.

Joe: You give some very good, practical advice on saving, investing, goal-setting, etc. Millions of financial plans have been developed similarly, never referenced after the “presentation” of the plan. How do you see a person or family using this one-page financial plan? In other words, why would this plan, though shorter, have an impact when so many other plans have simply sat on a shelf?

Carl: That’s a great question and precisely why I titled the book, The One-Page Financial Plan. It doesn’t alleviate the need for all the other planning, but it gives people a much-needed reference point. I recommend hand-writing the goals to reinforce that the goals can be changed. My goal was to get people to commit to the process of planning rather than the plan itself, because things can change. The one-page plan, however, is the manifestation of that commitment. I want people to feel like they can pull out a new piece of paper as needed and commit to the process of planning.

Consider picking up The One Page Financial Plan to take a fresh look at your own plan. I think you’ll agree that being committed to the process of planning – having intentional conversations about you, your values, and your goals – will enhance your ability to stick with your plan when times get tough.  Then call us to walk with you along the way, standing between you and “The Big Mistake.”

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Source for data was First Trust Market Watch, 3/9/15

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When I think of baseball, I think of exciting moments like a home run or a grand slam when that batter crushes the ball out of the park.  But when I think about an actual game of baseball, those exciting moments don’t happen that often.  So, then I think, “What wins a baseball game?”  Lots of singles, doubles and advancing runners around the bases.  A team that does that efficiently, will be a winning team.

We take a similar approach to investing; we aren’t swinging for the fences, but aiming for consistent base hits.  Consistently saving money every month, rebalancing when the markets require it, having a diversified portfolio, setting short-term and long-term goals, these actions aren’t “home runs” but they will deliver desirable results.

It’s not the most glamorous strategy to advocate, but we are interested in our clients’ long-term success.  The reason we have a relationship is to provide advice and make recommendations that might otherwise be overlooked.  We want to take the time to help investors understand the benefits of “base hits,” and how that will result in a high probability of success.

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Investing is risky.  Not investing is also risky.  So, what’s a person to do in seeking a strong financial future and timely retirement?  Right or wrong, many venture into the world of annuities.  Their promise of a stream of income when your working years are complete can be appealing and comforting.

These products are often sold under the premise that they can take the risk out of investing.  In reality, annuities are complex investment vehicles that frequently come with significant fees, restrictions, and risks that may diminish their perceived safety.  Unless all the details are clearly understood, annuities can pose more problems than solutions for investors.

Whether you have an annuity in your portfolio or are considering purchasing one, do yourself a favor by thoroughly researching what this means within the context of your overall financial plan.  Here are some general questions and considerations to make in going through this evaluation process:

• Type of annuity – Fixed, Indexed and Variable annuities all have different risks and benefits.  While the selling point may be a floor to potential losses, most limit the return or success the annuity and you, as the investor, can experience. 

• Read the contract – Sound like fun?  This is daunting, yet critical.  Every annuity is different and comes with restrictions and costs you must understand fully.  There is a reason the SEC has imposed significant regulations on sales tactics of variable annuities, in particular, due to a bevy of complaints and lawsuits from customers.

• Expenses – Most annuities have several layers of fees that can be upward of 3-4% annually, sometimes even higher.  These expenses often come with obscure labeling such as mortality risk, administrative fees, benefit riders, fund expenses, and miscellaneous expenses.  If assets are withdrawn early or exceed an amount specified in the contract, surrender fees may come into play that can be as high as 15-20%. 
• Extras – Riders can be attached to the policy, but carry significant additional cost.  They add benefits that may not be necessary, or appropriate for your situation.   
• Withdrawal Provisions – Withdrawing funds on your terms is often not a luxury afforded the purchaser.  Think twice if you might need access to assets in the future beyond what the annuity contract would allow.
• Performance – Indexed and variable annuities have some exposure to the stock market –direct or indirect – their values, therefore, fluctuate.  Contractual provisions dictate how much market movement can hurt or help your future distributions. 
• Taxable impact – Be sure to talk with your tax advisor when considering an annuity purchase or taking distributions from one you own.  Withdrawals are typically taxed at ordinary income rates, not the more friendly capital gains rates. 
• Situated - Holding a deferred annuity within a traditional IRA or 401(k) account provides no additional tax advantage.  If this is your situation, you are likely paying extra for tax-deferred status that is redundant. 
• Inflation – A dollar today is not worth the same as tomorrow.  Annuity income is usually not adjusted for inflation, thus the distributions you plan on receiving may not have the same purchasing power in the future. 
• Survivor benefit – Be sure you understand what happens if the annuity holder dies.  Outcomes vary wildly between annuity products, both in how much a beneficiary may receive and over what time frame. 
• Flexibility – Annuities can be relatively inflexible investment vehicles.  They are insurance products with contractual provisions dictating how the investor’s dollars are handled.  Your money can become not so much your money anymore! 

Each investor must reach their own conclusions on whether annuities are worth their complexity and a fit for their plan.  While they may seem safe, drawbacks exist that are not always readily apparent.  Other investments certainly exist that can provide less costly and restrictive ways to accomplish similar objectives.  Again, just be sure to do your homework, ask questions, develop a plan with goals, make decisions within the context of that plan…and, of course, stay diversified.

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We’ve learned that legs of our kitchen chairs can be used as chew toys, socks left on the floor will be found and often mangled, and if a strict “potty regimen” is not kept –  yellow puddles appear all over the floor!!        

I can laugh about these now, as our pup has begun to kick most of these habits.  But these were tough lessons learned.  Looking back, I see some analogies that relate to a few key principles of wise portfolio management.  Hopefully, these are lessons none of us need to learn the hard way. 

1.)  Protect the kitchen chairs.

You’ve worked hard to save and invest wisely.  Paying too much in fees can “gnaw” away at returns.  This simply creates extra drag on your account.   Make sure you keep an eye on how much you are paying, especially fund expense ratios and transactions costs. 

2.)  Don’t leave your socks on the floor.

Keep an eye on things – don’t leave your portfolio unattended.  It should be monitored, and rebalanced periodically, to keep it in line with your goals.  It’s dangerous to assume your portfolio is allocated correctly, or say things like, “It’s probably just fine.”  This happens routinely with people who have changed jobs and left their 401(k) in their previous employer’s plan.  Losing track of how the account is invested can lead to a portfolio that may be too aggressive, or too conservative, for your situation.  Both can be detrimental.

3.)  Discipline is the antidote for ‘yellow puddles.’

This is critical. Discipline helps us do things consistently; often things that are hard (such as taking the dog outside every 40 minutes).  But the idea is that we’ll be better off for our efforts in the long run.  Investing certainly takes discipline.  Maintaining a long-term view even though we live moment-by-moment can be challenging, but is important to successful investment outcomes.   It takes discipline to hold a well-diversified portfolio and control emotions in the midst of market swings.  These are all easier said than done, but having the discipline to consistently do the “small things” right should improve our investment experience (and “keep the floors clean”).

Some folks say, “You don’t train the puppy – the puppy trains you.”  In my experience, there’s some truth in that. 

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The financial media has been sending up warning signs for a while now about market valuations, saying the bull market is six years in and can’t run forever.  While I agree with the notion that bull markets don’t last forever, I also caution anyone from trying to predict when the bull becomes a bear.

In this recent article posted by the Wall Street Journal, our own Mark Stadtlander contributes his perspective on how to view current investment markets and why bear markets are actually the friend of long-term investors.

Click here to read the article.

http://www.wsj.com/articles/how-to-prepare-for-a-bear-market-in-stocks-1425870192?KEYWORDS=stadtlander

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PLEASE NOTE LIMITATIONS: Please see Important Blog Disclosure Information and the limitations of any ranking/recognitions, at www.fostergrp.com\disclosures. A copy of our current written disclosure statement as set forth on Part 2A of Form ADV is available at www.adviserinfo.sec.gov.

Each asset class graph will show data for the previous month, calendar year to previous month end, three-, five- and ten-year rates of return for a representative benchmark index as well as funds currently used by Foster Group to represent that asset class in our clients’ managed portfolios.

In addition to these individual asset class graphs, the Asset Class Performance Ranking graph provides a historical view of how these asset classes have compared to each other during each calendar year since 1999. The graph rank-orders the asset classes (as represented by the indices used in the individual asset class charts) from highest to lowest rate of return, in US dollar terms, for the calendar year indicated. This chart gives a visual representation of the apparent randomness or unpredictability of relative asset class performance from year to year. The column of returns on the far right will show the order of asset class returns for the current calendar year through the previous month-end (e.g. January 1, 2015 through February 28, 2015).

We hope you’ll find these new and improved graphs helpful and informative. If you have any comments or questions, please let us know via email at info@fostergrp.com.

PLEASE NOTE LIMITATIONS: Please see Important Blog Disclosure Information and the limitations of any ranking/recognitions, at www.fostergrp.com\disclosures. A copy of our current written disclosure statement as set forth on Part 2A of Form ADV is available at www.adviserinfo.sec.gov.

The landscape of the bond market has undergone massive changes over the years.  What was once a plain-vanilla way to create steady income is now replete with variety as well as risk. 

First, the basics.  Bonds are a form of debt, a loan to a borrower with the promise of future payback of the loan amount, plus interest.  The credit-worthiness of the borrower and the amount of time until the loan is repaid directly impact the interest rate offered.  The more risk you accept when loaning your money, the higher the interest rate should be as compensation.

Prevailing interest rates affect bond prices, and they are inversely related.  Rising interest rates cause bond prices to fall as new bonds, issued at the higher rate, cause bonds with lower rates to be less valuable.  A bond held until maturity will return its initial investment amount provided the issuer doesn’t default.  If you need to sell your bond prior to maturity, though, you may get back less (or more) than your original investment.

Bond mutual funds function a bit differently than individual bonds.  Bond funds do not have a specific maturity date and they invest across a variety, sometimes hundreds or even thousands, of individual bonds.  For the individual investor, building a diversified portfolio of individual bonds can be difficult and expensive.  Bond funds provide an efficient way to achieve broad, inexpensive diversification.

For many investors, bonds are an important portfolio component.  Low interest rates over the past few years have sent many investors on a quest for higher yield and the acceptance, sometimes unwittingly, of significantly more risk.  Consider these principles as you review your bond strategy in this low-interest environment:

How Markets Work

Current bond values reflect everything the market knows and anticipates about economic conditions, inflation, and monetary policy. 

Have a Plan

Understand the overall portfolio allocation (equities vs. bonds) that’s appropriate for you.  Don’t confuse the distinct roles stocks and bonds play in your investment strategy.

Know What You Own

Be educated about your portfolio, especially if an advisor manages your assets.  Don’t assume your plan and their philosophy align - verify.

Risk vs. Reward

There are two primary ways to potentially increase bond returns:  lengthen maturity and reduce credit quality.  Pursuing higher income generally means accepting more risk, increasing the likelihood of losing value if interest rates rise or the issuer defaulting.

Don’t ignore costs

Investment costs can be large relative to a bond portfolio’s return; minimizing these costs is critical.

Diversify

A broadly-diversified portfolio of bonds issued by governments and companies around the world reduces risk.

Summary

Many investors have anticipated an upward interest rate move for several years.  Those seeking higher yields should understand the elevated risks.  Your best solution remains the same:  establish your plan…seek needed return primarily from equities…use bond funds to dampen volatility of your overall investment strategy…and stay diversified.

IMPORTANT BLOG DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Foster Group, Inc.), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Foster Group, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Foster Group, Inc. is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Foster Group, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Many investors are concerned and perhaps a bit anxious because their portfolio returns weren’t as high as the return of “the market” last year.  Don’t panic, otherwise trouble stands ready to pounce.

Remember that what we hear from the media most often is the performance of the Dow Jones 30 Industrials and the S&P 500, both narrow slices of the global market.  Still, the familiarity of both indices makes it easy to assume they represent the health of stocks worldwide.

The Dow and S&P both represent the US large company asset class, and both did well in 2014, turning in the highest return of all broad asset classes, with the exception of US REITs (real estate investment trusts).  So, if you had – which you should – a reasonable degree of diversification in your portfolio (small companies, international stocks, high-quality bonds, etc.) your performance may very well have come in below the returns showing up on the news.  Again, don’t fret.

Remember the 2000s…a “lost decade” of performance for the S&P 500.  Remember 2008, specifically, when the S&P 500 fell 37% in not much more than six months.  Diversification is your portfolio’s best friend, because no one – and I mean no one – knows with certainty which asset classes will be the top, or bottom, performers from month to month or year to year.

Industry studies, recently noted by Vanguard Group, suggest that many investors are assuming a level of risk not seen since 1999 and 2007.  Both years were previous market peaks immediately prior to significant downturns.  People tend to become euphoric in periods of continued positive return and accept undue risk when they feel their portfolio is not performing as it should.  Just be careful.

It’s always worth getting a second opinion if you have doubts, and it’s also prudent to remember why you established the current allocation and holdings in your portfolio in the first place.  If you don’t know, then you definitely need a second opinion!  The original, and ongoing, strategy should be one centered on the pursuit of your long-term goals, not merely chasing return outside the context of any plan.  Don’t panic.  Ask good questions.  Have a plan.  Stay diversified.

PLEASE NOTE LIMITATIONS: Please see Important Blog Disclosure Information and the limitations of any ranking/recognitions, at www.fostergrp.com\disclosures. A copy of our current written disclosure statement as set forth on Part 2A of Form ADV is available at www.adviserinfo.sec.gov.

Sometimes the needs around us are such that it seems impossible to make a difference. There are spiritual needs, emotional needs, mental health, refugees, homelessness, educational disparity, natural disasters, economic crises, … the list seems endless. How can an individual or family make a difference?

One way is to focus. When the Foster Group Charitable Giving Team began six years ago, the first item of business was to identify a target. The results of this conversation has guided us through the years, as we consider the many requests for corporate giving that we receive each year. You may find it helpful as well.

Consider an area that you’d like to really impact. For example, perhaps you may want to impact the millions worldwide displaced by war and disease. Next, hone in on a key aspect of this, such as war refugees in Des Moines (or your home town). This is your focus – target a majority of your giving in this area. As requests and needs become known, filter them through this screen, identifying just how close to the “bulls eye” the request is.

In similar fashion, decide what’s OUTSIDE the target – areas you choose not to give to. Yes, it’s okay to say NO! As an example, our team does not give to school or political organizations. While there is certainly nothing wrong with such organizations, we decided as a team not to “open that can of worms.”  So, whenever we get a request in that area, the decision is very simple – “No.”

My wife and I have done this for our charitable giving – we have a primary target, then work out from there in discerning where our charitable dollars are given. Besides the freedom that comes from having the guidelines, the discussions held provide for increased opportunity to stay on the same page . . . and that’s a really good thing!

PLEASE NOTE LIMITATIONS: Please see Important Blog Disclosure Information and the limitations of any ranking/recognitions, at www.fostergrp.com\disclosures. A copy of our current written disclosure statement as set forth on Part 2A of Form ADV is available at www.adviserinfo.sec.gov.

The numbers are critically important. Investment performance, risk and fees are represented using numbers which are the basis for decisions.

But what about professionalism?

The term ‘advisor’ is used by many different types of individuals, however it is not backed by universal standards of practice, training, transparency, ethics or sufficient regulatory oversight. Pretty much anyone can call him or herself an advisor.

It’s no wonder that we regularly hear stories of abuses and fraud. In the extreme, advisors are cheating their clients through illegal actions like lying or outright theft. But more often it’s about the so-called ‘advisors’ whose practices result in huge investor losses, without breaking any laws. These are the insidious cases where the investments are presumed ‘suitable’ for the investor, but are certainly not in his best interest.

These cases are increasingly being reported in the mainstream press. The New York Times ran a story in October about a retired couple that was paying $26,000 per year in investment fees and didn’t realize their ‘advisor’ was not held to a fiduciary standard.

So sadly, as Chip Roame of Tiburon Strategic Advisers puts it, ‘The whole industry is evil…you are lumped in with Madoff’. Excellent advisors therefore need to take decisive measures to demonstrate trust with their clients. They need to prove their professionalism, transparency and oversight in meaningful ways.

The CEFEX-certified advisor does exactly this.

The CEFEX-certified advisor adheres to a standard of fiduciary excellence published by fi360, Inc. a leading training and resource company in Pittsburgh. The standard is based on the best fiduciary practices exhibited by advisors, and substantiated by law and regulation, including the Investment Advisor Act of 1940 and the Employee Retirement Income Security Act (ERISA).

Adherence to the fiduciary standard is verified through independent annual audits. The idea of independent oversight is not new. The Securities & Exchange Commission (SEC) has performed surprise examinations of advisors for decades. The SEC’s objective is simple: to protect investors. Today, the SEC examination program is approximately at a 13-14 year inspection cycle, which is clearly too long. Legislative efforts to either create a Self Regulatory Organization (SRO) to oversee investment advisors or to impose user fees to pay for the exams have gone nowhere in Congress.

So the requirement for oversight is understood, but is not sufficiently in place, except for CEFEX-certified advisors. These firms undertake their own oversight voluntarily. They have an independent Accredited Investment Fiduciary Analyst® (AIFA®) audit their fiduciary practices annually with an on-site visit biennially. This includes a detailed review of investments and client files. Think about it: if you or your own organization has ever been audited, you can appreciate the level of accountability this creates.

Benefits to the investor.

CEFEX-certified advisory firms have documented and structured processes. This is a requirement of certification, and will more likely result in investment portfolios which will perform better. They will be better designed and have lower costs, because structured due diligence processes force rational investment selection, thereby ensuring the best value for the portfolio. Also, documented and repeatable processes are more likely to generate higher returns over time, because they aren’t dependent on timing, luck, ‘in-fashion’ or un-substantiated decisions.

CEFEX-certified advisory firms can deal with a wide range of investment conditions. Their investment process is not hostage to market swings because their process anticipates all types of conditions and can rationally account for investment outcomes. The prudent process also means that fewer mistakes will be made. A well-structured process can virtually eliminate deficiencies in portfolio management, because decision rules would not allow it.

It is this commitment to a prudent process which fosters a culture of continuous improvement at the advisory firm. With an AIFA checking in each year, the firm remains on the hook to maintain excellent fiduciary processes and address opportunities for improvement. Ultimately it guarantees a level of professionalism within the firm.   

Invested assets are definitely shifting towards the registered investment advisor, and CEFEX advisors are growing at twice the pace of their counterparts. The shift is unstoppable because the objective is altruistic: to best serve the institutional and individual investor. So while investors will continue to scrutinize the dollars and cents of financial advice, they must also demand the highest level of professionalism associated with that advice. The CEFEX-certified advisor is committed in this regard.

Please visit www.cefex.org/advisor for more information on this program.      

PLEASE NOTE LIMITATIONS: Please see Important Blog Disclosure Information and the limitations of any ranking/recognitions, at www.fostergrp.com\disclosures. A copy of our current written disclosure statement as set forth on Part 2A of Form ADV is available at www.adviserinfo.sec.gov.

One of the roles I cherish in my work at Foster Group is being part of our Charitable Giving Team. Each year, our group meets regularly to give away money and promote generosity. What fun!

Last fall, the team challenged each Foster Group employee to give away a $50 bill … then share their story. And the stories came in – a $50 tip to an unsuspecting waitress at Red Lobster, buying pizza for a homeless man in Las Vegas (and watching him share the pizza with a friend!), buying a Hy-Vee gift card for an expectant, out-of-work family. Tipping a friendly Target employee, surprising a clerk at a convenience store, helping a single mom of seven, … well, you get the picture. It has been an inspiring time.

Then I received the following email from a client, who decided to pass on an unexpected gift:

“… To my delight it was a card for $100!! (We) looked at each other and thought - someone else needs this much more than we do.  

Well, there is a young, single mom employed by Home Health Care who is helping us with mom every morning and we just thought she would be perfect!!  I wrote a note along with the card thanking her for blessing mom with such loving care and she was so touched!!!  (I was this young lady's kindergarten teacher so it even makes it more special!)

I know this is very simple and small, but the reason I am sharing this with you is so that you can see your generosity truly does grow as we all share with others!"

How about you? Will you add to this story? Perhaps you buy a $50 gift card, then simply look for an opportunity to give it away. It’s a wonderful, freeing experience! I’d sure love to hear about it – email me about it at joeb@fostergrp.com.

P.S. If you want to read more stories like this, check out www.ilikegiving.com/stories !

PLEASE NOTE LIMITATIONS: Please see Important Blog Disclosure Information and the limitations of any ranking/recognitions, at www.fostergrp.com\disclosures. A copy of our current written disclosure statement as set forth on Part 2A of Form ADV is available at www.adviserinfo.sec.gov.

http://www.businessinsider.com/wall-street-market-predictions-2014-2013-12

You can find all kinds of predictions that were made for 2014; it’s really quite fun to look back and see just how few got anything right.  One of my favorites was an analyst who predicted that the road to $150 oil would begin in late 2014 . . . oops!

One of the reasons we build globally diversified portfolios is because history has shown no one can consistently predict which markets will do the best or worst in future time periods.  Just look at the chart below, provided by Dimensional Fund Advisors.  The chart shows asset classes ranked by calendar year return for the years 1999 to 2013. Can you find a pattern in the chart? Would you have predicted that U.S. real estate would be the top performer in 2014 based on how it did in 2013?  If you made the decision to move funds away from U.S. Real Estate at the end of 2013 and into the Russell 2000 index to gain U.S. Small Cap stock exposure because of its performance in 2013, you would have experienced a return slightly less than 5% on those funds in 2014.  That isn’t terrible, but it’s certainly nowhere near the 38% U.S. Small Cap stocks returned in 2013, and also far short of the 32% the Dow Jones US Select REIT Index returned in 2014.

With U.S. Large Cap stocks finishing near the top of the rankings the last two years, a lot of investors may be questioning the wisdom of investing in other market segments.  But doing this could have a negative consequence on your portfolio. According to Vanguard’s chief economist, Joseph Davis, Ph.D. in his September 29, 2014 blog post, The greatest risk in the market today is…, “Any study of historical cash flows has tended to show that cash flows into any investment or asset class trail recent performance and peak when premiums are the slimmest.”    I’m not saying next year won’t be a really good year for the S&P 500, but as the SEC performance disclosure requires, “Past performance is not an indication of future results.”  Stay diversified, folks.

Yogi Berra once said, “It’s tough to make predictions, especially about the future.”  Financial forecasters often cite a return of 8% to 10% as a likely outcome for stock market performance in the year ahead.  As reasonable as this may sound, the S&P 500 Index, over the past 89 years, has never delivered a total return between 8% and 10% in any single calendar year.  Not once.  Rather, in most instances, returns have been substantially higher or lower.  For example, starting in 1926, there have been 28 years with a gain or a loss in excess of 25%.  We are constantly reminded and cautioned by “experts” that the market is extremely over-valued and that a crash is imminent.  When stock prices fell sharply last year in January and the S&P 500 was down over 3.5%, the proverbial sky was falling.  Game over.  Run for the hills.  Except that the S&P ended up with a return of near 14% for the year.  Those who stuck it out certainly didn’t mind.  2015 has already seen its share of market madness.  Forecasters have already staked their claim on how the year will turn out …some good, some bad, some flat, some apocalyptic.  More will be wrong than right.  Most, in fact, will be wrong.  Do yourself a favor…stick to your plan, ignore the noise, and stay diversified.  It’s like déjà vu all over again!  Thanks Yogi.

PLEASE NOTE LIMITATIONS: Please see Important Blog Disclosure Information and the limitations of any ranking/recognitions, at www.fostergrp.com\disclosures. A copy of our current written disclosure statement as set forth on Part 2A of Form ADV is available at www.adviserinfo.sec.gov.

PLEASE NOTE LIMITATIONS: Please see Important Blog Disclosure Information and the limitations of any ranking/recognitions, at www.fostergrp.com\disclosures. A copy of our current written disclosure statement as set forth on Part 2A of Form ADV is available at www.adviserinfo.sec.gov.

Mistakes happen in the personal financial world.  We can learn from our own mistakes, and others’, to improve our results.  Consider this assortment of common investor gaffes, and do a status check of your own plan to ensure these do not inhibit progress toward your long-term goals!   

1. Ignorance is not bliss
“Stay the course,” is a common phrase to describe remaining invested and consistent with your plan through good, and lean, markets.  This does not mean ignoring your portfolio for long periods.  Rebalance periodically to remain consistent with your risk tolerance and long-term goals.  Pay special attention to ongoing fees.

2. Watch costs
Repeating the previous comment is not an oversight, but meant for emphasis.  Overlooking fees can create significant drag on long-term return and, thus, realization of your goals.  The two most common costs are trading frequently (transaction fees and/or commissions) and investment vehicles’ internal costs (expense ratio).  

3. Lack of Diversification
Diversification, executed correctly, is a cornerstone of wise investing.  Unfortunately, it is one of the most misunderstood terms in the financial world.

Few investors realize that a relatively small number of popular stocks form the core of many mutual funds, albeit in different allocations. So, while attempting to diversify with a number of mutual funds, many investors actually end up concentrated in that pool of stocks.

Similar problems arise when you pick a number of individual stocks to own, believing that makes you diversified.  Many times the stocks you choose will behave similarly.  Engaging multiple advisors can also be an ineffective diversification tactic.  This strategy often increases cost and complexity, with no clear benefit.  These mistakes can leave you less prepared to weather a market downturn and, potentially, put you at increased risk of loss. 

4. Letting emotions drive decisions
We’re all irrational.  When that tendency creeps into our investing, bad things happen.  Buying high and selling low because of fear or greed stemming from the latest headline is an all-too-common investor mistake.  Sticking to your long-term plan and allocation is absolutely critical.  Ignore the short-term noise.

5. Start early
The best time to start investing is yesterday.  But it’s never too late to start, regardless how much or little you think you can save.  The market won’t wait for you to decide, either. 

6. Uncle Sam
A cost many investors ignore is the tax ramification of their portfolio.  The tax consequences of dividends or gain from sales in non-qualified accounts can be significant.  An actively-managed investment approach and/or a faulty distribution strategy can result in sizeable tax liability.

In summary, focus on what you can control:

• Minimize costs
• Establish a long-term plan (and stick to it)
• Rebalance systematically
• Manage tax impact
• Save, save, save

And of course, stay diversified.

PLEASE NOTE LIMITATIONS: Please see Important Disclosure Information and the limitations of any ranking/recognitions, at www.fostergrp.com\disclosures. A copy of our current written disclosure statement as set forth on Part 2A of Form ADV is available at www.adviserinfo.sec.gov.

On a more personal level, most investors have probably experienced changes in their family, career, health, goals, and/or finances.  All things considered, year-end is a time to perform a status check on your financial picture.  Start with the question, “How did I do in 2014?”

Most investors would respond with an investment return figure.  While that certainly is important, returns are only a slice of the overall financial pie that dictates the realization of set goals.  In fact, portfolio returns are really just a product of the decisions and subsequent actions you take throughout the course of the year.  Strive to make your goal not one of “maximizing” return, but rather achieving a return over the long-term that is necessary to accomplish your objectives.  Investing without the context of holistic financial and life goals will be forever a frustrating experience.  Consider this time-tested list of good habits:

• Match your investments with your goals.  Don’t pursue return on your dollars outside the scope of your financial plan.  Remember, risk and reward are related!
• Pick an investment allocation that’s right for you and stick with it unless your circumstances change.
• Rebalance your portfolio periodically to ensure your mix doesn’t get more risky than you intend.
• Tune out the noise.  Don’t try to time markets or react to newspaper headlines and TV “talking heads.”  Academics have repeatedly demonstrated that this tactic is not likely to work in your favor.
• Have an emergency fund.  Regardless of earnings and retirement savings, having short-term cash in a liquid account is absolutely prudent for life’s unexpected opportunities or crises.
• Keep investment costs down.  If you don’t know what you are paying today, find out.  If you don’t know whether the amount is high relative to industry averages, do some homework and seek a professional investment second opinion.
• Maximize your 401(k) deferrals to ensure you are receiving your full company match.
• Save more.
• Pay off debt…there is no greater guaranteed return on your dollars than eliminating encumbrances and their associated interest costs.

Just like the list of world events from 2014, the financial checklist is long.  So, how did you do this past year?  Make some headway or need to catch up?  Either way, do yourself a favor and consult with your team of advisors to ensure you are on track toward your goals.  If you don’t have a team, get one.  Make sure it includes someone in a fiduciary capacity.  Oh, and I almost forgot (not really)…stay diversified.

IMPORTANT BLOG DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Foster Group, Inc.), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Foster Group, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Foster Group, Inc. is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Foster Group, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Not unlike most mornings, the top headline was negative, only this morning it was a bit alarming, “Total Global Meltdown: Is Oil to Blame?”  I could see that the market numbers were red, but I hadn’t really looked to see how bad it was.  Futures for the Dow, the S&P 500 and the Nasdaq were all off about 1%.  I quickly checked European markets; sure enough, they were down between 1.5%  and 2.0%.  Certainly, it had not been a good day in Europe so far, and things are not going to get off to a good start in the U.S..  But a total global meltdown?

 When I get sick with the stomach flu or a bad cold, I tend to be a little dramatic.  Occasionally I’ll utter the words, “I feel like I’m dying,” or something like that.  My wife just laughs at me and tells me to get a grip.  We should respond to the media’s coverage of capital markets the same way.

PLEASE NOTE LIMITATIONS: Please see Important Blog Disclosure Information and the limitations of any ranking/recognitions, at www.fostergrp.com\disclosures. A copy of our current written disclosure statement as set forth on Part 2A of Form ADV is available at www.adviserinfo.sec.gov.

Many Foster Group clients use Iowa’s 529 Plan, College Savings Iowa (CSI), to save for their children’s and grandchildren’s future college education expenses. CSI remains an excellent option for Iowa residents to utilize as it provides both immediate tax deductions for certain contributions and virtually tax-free accumulation for future qualified higher education expenses. In addition, Vanguard as the investment provider, creates high-quality, low-cost investment portfolios for program participants.

For the 2014 tax year, ending December 31, 2014, participants can deduct contributions of up to $3,098 per account. Each parent (or grandparent) may have an account for each child. As an example, a family of four with two parents and two children may open a total of four accounts, two accounts per child, one for each parent. This would allow Iowa state tax deductible contributions of $12,392 (4 x $3,098) for 2014.

If you have accounts already opened, but have not contributed the full $3,098 to each account in 2014, you still have the opportunity to do so as long as the contributions are made by December 31, 2014. If you’re not sure how much you have contributed for 2014, you may access this information at www.collegesavingsiowa.com.  Once you have logged in, click on the account number associated with each child and scroll down to “Year-to-Date Contributions” where you’ll see the total contributed for each tax year that the account has been open. If you don’t remember your user name and password, or you would rather just talk with a representative, the phone number for CSI is 888-672-9116 (toll-free).

PLEASE NOTE LIMITATIONS: Please see Important Blog Disclosure Information and the limitations of any ranking/recognitions, at www.fostergrp.com\disclosures. A copy of our current written disclosure statement as set forth on Part 2A of Form ADV is available at www.adviserinfo.sec.gov.

http://www.washingtonpost.com/business/get-there/find-a-financial-adviser-who-will-put-your-interests-first/2014/10/23/21f3a898-596f-11e4-bd61-346aee66ba29_story.html

IMPORTANT BLOG DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Foster Group, Inc.), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Foster Group, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Foster Group, Inc. is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Foster Group, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

I ran across two interesting stats; well, two numbers, really, as reported in Bloomberg Businessweek: $25,000 & $13,000.

$25,000…that represents the amount of money you would have on December 2013 had you invested $10,000 in the Dow Jones Industrial Average in December 1998 and stayed fully invested for that 15 year time period.

$13,000…that represents the amount of money you would have on December 2013 had you invested $10,000 in the Dow Jones Industrial Average in December 1998 and missed the Dow Jones’ ten best days.

Ten days! Out of 15 years (or 5,475 days), ten days represents only 0.18%, but those ten days made a huge difference in the results.

What does this tell us? Markets go up and they go down. Historically, they have gone up more than they have gone down. So build a plan that you trust and stick to it.

PLEASE NOTE LIMITATIONS: Please see Important Disclosure Information and the limitations of any ranking/recognitions, at www.fostergrp.com\disclosures. A copy of our current written disclosure statement as set forth on Part 2A of Form ADV is available at www.adviserinfo.sec.gov.

I am an avid baseball fan and die-hard Kansas City Royals supporter.  Even if you don’t follow sports, you probably were aware that the Royals made it all the way to the World Series.  The epic seven-game series against the San Francisco Giants ended in a heart-breaking 3-2 defeat in the final, and deciding, game seven.  The Royals’ storyline was accentuated by the fact that they had not made the post-season, let alone the World Series, in 29 years.  This playoff drought was easily the longest of any Major League Baseball team, and a test of perseverance for us long-suffering,blue-bleeding fans.

After my tears had dried and reality set in that the season was over, some perspective dawned on me.  Here was a team of relative no-names playing for a franchise that hadn’t found success in nearly three decades, and they were on the very cusp of winning baseball’s biggest prize.  Perspective.  Nobody expected this finish, especially midway through the season when they were floundering, with a losing record and falling fast in the standings.  Hope was evaporating yet again, just like every other year.  Perspective.  Then something happened, or better said, nothing changed.  The Royals and their manager, Ned Yost, implemented a long-term plan many years ago predicated on the disciplined development of young players, the acquisition of missing talent, and the building of a winning culture.  Perspective.

When mid-season 2014 arrived and the Royals were seemingly gasping for breath just to remain relevant, the plan did not change, but rather was allowed to remain in place.  Perspective.  Instead of making drastic moves based on impulse and fear and disrupting the formula to achieve long-term success, the Royals stayed the course.  As fans, we often become impatient with such plans when we do not see immediate results.  Our angst rises when we witness other teams making moves and changes that appear to give them more of an advantage.  Perspective.

Now as I sit here, reflecting on the season and, particularly, on this past month of October, I am forever grateful the Royals stuck to their plan.  The loss in the World Series was painful, but momentary.  The excitement they provided for Royals fans and baseball enthusiasts everywhere gave us memories for a lifetime and certainly set the stage for continued success in the years to come.  Perspective.

Our own personal financial planning parallels, in many ways, the story the Royals have written.  Success or failure rests on our willingness to allow a vetted and tested plan to play itself out.  Changing our strategy mid-stream for reasons that have no relevance to our own personal circumstances is dangerous.  Taking action simply because we see people making investment decisions that appear to be right for them, or making rash decisions to alter our portfolio because of the fear or elation a wild stock market can present, is foolish.  Perspective.

Build your plan.  Stick to your plan.  Trust your plan.  Work hard.  Save lots.  Stay diversified, and go Royals.

PLEASE NOTE LIMITATIONS: Please see Important Disclosure Information and the limitations of any ranking/recognitions, at www.fostergrp.com\disclosures. A copy of our current written disclosure statement as set forth on Part 2A of Form ADV is available at www.adviserinfo.sec.gov.

Despite some international uncertainty the U.S. economy still appears well-positioned heading into 2015.  In an October 9^th Wall Street Journal article, “Conditions Ripe for Stronger Growth, WSJ Survey Says”, the results of the Wall Street Journal’s monthly survey of 46 economists were summarized.   Some of the positives mentioned in the article were:

• Economic expansion to continue at 3% in the fourth quarter
• Projected GDP growth of 2.8%, which is well above the 2.2% average annual rate so far in this recovery
• Expected improvement in the unemployment rate, which is already at 5.9%.  The forecast for unemployment by the end of 2015 is 5.4%
• Declining energy prices leaving more cash in consumers’ pockets

While stagnation in Europe and slowing growth in China were mentioned as concerns, the overall outlook for the U.S. economy for 2015 was good.   While we’ll be the first to admit we don’t have a crystal ball, it is good to remember that there are a lot of good things happening in our economy in spite of recent market volatility.

IMPORTANT BLOG DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Foster Group, Inc.), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Foster Group, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Foster Group, Inc. is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Foster Group, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Through September of this year, the S&P 500 had a total return of 8.34%.  From 1926 through 2013, this widely-regarded US large company index has boasted an average annual total return of just north of 10% according to Morningstar data.  CNBC recently highlighted that the S&P posted fourth quarter gains of 2.5%, on average, since 1946 in mid-term election years…which we find ourselves in today.  This same source pointed out that the best six-month period for equities in the U.S. annually (since post-World War II) has been the November-April time frame with a 15.3% average gain.  What does this all mean?  Nothing, naturally, other than to stay diversified.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

So many today spend so much time trying to emulate Warren Buffett or wonder how they can be the next Mark Zuckerberg, Bill Gates or Elon Musk (think PayPal, Tesla).  Sure, it’s just fun conversation, but it’s also a huge distraction.  Guess what – those identities are taken already by the real Warren Buffett, Bill Gates and Elon Musk.  You, however, are unique.   You can take what you know, seek to know more and be your own success.  It may look different than theirs, but you have potential for success, nonetheless.

The people I admire and learn the most from are many of our clients, young and old, who are a lot like my parents and my grandmother.  They spend less than they make, save some and give some away and seem to be much more satisfied, less affected by market swings or life circumstances and able to focus on where they have real influence.  When they have questions about financial matters they seek wisdom and education rather than act on a “hot tip.” 

The formula for wealth is simple.  The process may be a bit difficult from time to time, but it’s really not very complicated.  Spend less than you make. Commit a percentage to regular saving and giving. Invest funds above and beyond your current needs for short-term, or long-term growth, depending on when you will need the money. Repeat.

I love to read and, as a youngster, I read a fictional account of an elderly woman who had accumulated quite a bit of wealth.  It was a surprise to everyone that she had accumulated such a nest egg because she didn’t appear to have any source of wealth.  She had the discipline to live beneath her means and the forethought to invest the rest to accomplish her particular long-term goal which was to provide funds to a favorite organization.

We don’t always know the lessons we teach our children about money, but just as they learn from our behavior, we can learn from theirs.  There is often a component of what they pick up from example as well as their own personality makeup that tells you quite a bit about what will motivate them.  I think back to my sons’ and daughters’ favorite books as they were little and realize that those said a lot about who they would become, what would motivate them and how they might think about money.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

If you want a good pre-cursor to the book check out this TED talk:

http://www.ted.com/talks/simon_sinek_how_great_leaders_inspire_action#t-47305 

The talk is excellent; if your interest is sustained, jump on Amazon and get the book.  I would love to hear your thoughts on it.  Enjoy.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

 Another question that ranks near the top of the list asks about the latest hot stock to purchase or the next “dog” that should be sold.  Someone in a breakroom conversation suggests that as corn prices continue to fall, China will provoke North and South Korea to go to war with one another so the US has to send additional resources to the Pacific; commodity prices will then rise over the fear of a pending stock market crash.  I know – makes no sense – but on close inspection, neither do most theories that cause investors to act irrationally.  Uncertainties tempt us to consider pursuits that are neither in our best interest nor align with our long-term goals.

While most folks don’t find a question answered with other questions satisfying, here are some important questions that should precede entertaining such investment moves: 

• Do you have a financial plan that outlines a clear path toward achieving life-long goals for you and your family?
• How would this investment fit within your plan and increase the probability of you achieving your goals?
• Do you actually need the return potential (not guarantee) suggested by the investment in order to achieve your goals?
• Can you afford the inherent risk of the investment (remember, risk and reward are inextricably linked), and the potential loss if things go badly?

Think about it this way…say you have $1 million invested today, comprised of your employer’s qualified retirement plan, IRAs, brokerage accounts, and maybe even an ownership interest in a medical practice.  Further, let’s assume you’ve done the math (or in the context of a planning relationship with a trusted advisor) and determined that in order to retire in 15 years with $6 million available for living expenses, you need to invest $100,000 annually with an overall return of near 8%.  Again, based upon your own dynamic circumstances and goals, the annual required rate of return is 8%.  Over the last 10 years, a globally diversified portfolio, passively managed to merely capture market return has earned over 9.5% annualized.  Past performance is absolutely never a guarantee of future results.  Heard that before?  But why open yourself to significantly greater risk of loss in the hope of doubling your return if that’s not what your goals require… with the potential of significant loss?

According to the Journal of Financial Planning’s July, 2014 issue, 23% of millionaire investors say their biggest investing mistake was failing to adequately diversify their portfolio.  In other words, they didn’t believe their mistake was not finding the biggest fish in the pond.  Remember, diversification doesn’t necessarily come from multiple advisors providing competing philosophies, but rather a portfolio offering exposure to multiple global asset classes whose return patterns differ from one another.  Seek the path that can improve your probability of success, not with the one with the thrilling story that may completely derail your hopes and dreams if it doesn’t deliver.  Plan, stick to the plan, and stay diversified.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

• The U.S. had 4.7 million job openings in June, the highest number since 2001
• Single-family home sales are up over 12% from a year ago, with new home sale prices continuing to rise (3% versus last year at this time)
• Cash on corporate balance sheets waiting for deployment, along with overall profitability, are at all-time highs
• Durable goods orders were up 22.6% in July, the biggest increase on record going back to 1958
• Personal income and spending are up 4.3% and 3.6%, respectively, over last year

Our economy is steadily improving and growing.  Technology is booming.  The entrepreneurial spirit is thriving.  The current bull market has lasted over 2,000 days, the fourth-longest since 1928 (as measured by the S&P 500).  Bad news will come, along with new bad news to replace the old bad news.  Just know there will be an assortment of good news underlying those headlines that will not typically attract much attention.  Have a plan and stick to it.  Stay diversified.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

The US Supreme Court recently ruled unanimously that INHERITED IRA’s are NOT protected in bankruptcy court!  Time to review your estate plans…

http://www.forbes.com/sites/jayadkisson/2014/06/12/inherited-ira-not-exempt-from-creditors-in-bankruptcy-says-sotomayor/

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

Job one of your financial advisor is to stand between you and “The Big Mistake”.  In a Morningstar article entitled, “Job One” (click here for the full article) Carl Richards talks about what he calls “The Big Mistake” and how those are all but impossible to recover from. 

Most investors can afford to make small mistakes, such as using a small portion of their account to try day-trading or investing a portion of their portfolio in a particular stock they have a good feeling about.  It is the duty of a financial advisor to prevent clients from making the big mistakes, like buying high and selling low.

In the medical world, doctors take the oath to “first, do no harm.” Similarly, your financial advisor should be helping you avoid the big mistake for your lifetime.  No one wants to get to retirement and not have the choice to stop working because of a big mistake that could have been avoided.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

I love volatility.  I also love conversations with people that ask me “what did the market do today?”……and then are perplexed when I tell them that I haven’t checked it in the past few hours.  If everyone would adopt that mentality, we could all worry about things that really matter…..but that’s another blog for another time!  Volatility brings opportunity.  If investing was easy, everyone would be doing it and returns would be much lower.  Thankfully, investing isn’t easy for most people and most professionals, so there are countless opportunities for true investors to take advantage of the fear and greed that drive millions of people into bad decisions.

I love our clients.  Over the 17 years that I’ve been at Foster Group, I’ve had the privilege of working with hundreds of kind, generous, hard-working and competent clients.  My basic conclusion is this:  If you can keep things simple, be great at the fundamentals, save a little each month, eliminate debts early, insure the things you can insure, live within your means, delegate the tasks you don’t enjoy or aren’t an expert in…..you will enjoy life, family, and the freedom to work and bless others.

Keep it simple team!

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

 The Employee Benefit Research Institute this past year said upwards of 49% of workers are “not at all confident” about their retirement prospects.  Just keeping the lights on in a larger-than-necessary house is a huge cost burden, not to mention the mortgage, property taxes, insurance and maintenance associated with it. 

 But we need a bigger house to keep all our stuff, right?  Note that more stuff comes with more cost, as well.  A good friend of mine just downsized at age 37, after having their 4^th child, to a home that is comfortable, adequate, and less costly than their previous home.  The move will allow them to eliminate debt sooner, accelerate savings, and start creating more life-experiences and memories through vacations and outings with the excess liquidity. 

 I’m not advocating everyone put a for-sale sign out in their front yard after reading this.  Rather, in regularly evaluating your situation and plan – which alone is good financial practice – consider where your largest expenses and biggest roadblocks are to strengthening your net worth.  Start there, and simply ask the question, “Why?”  Maybe there are opportunities to mitigate the dollar outflow.  Speak with a trusted advisor to get a second opinion and objective feedback.  There’s no harm in just talking.  It might just lead to an even more secure financial position for you and your family.  All the while, stay diversified.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

The conventional rule of thumb with mortgage refinances is you shouldn’t refinance unless you are going to shave at least 1% from your current rate.  Like all rules of thumb, it doesn’t fit everyone.  It also begs the question, “Why 1% -  why not 0.5% or 2%?”  The fact is, your refinance comes with a cost.  As much as $3,000-$6,000, or higher, depending on your loan balance.  From there, it is simple break-even analysis done with any amortization tool.  The idea behind the 1% rule of thumb is that you are able to break even between years two and three.  Another option is a fixed-rate home equity loan.  A fixed rate home equity loan?  Yes, it accomplishes the goal of refinancing, at a fraction of the cost.  If you itemize deductions, interest is still deductible up to $100,000 – be sure to consult your tax advisor.  Rates are good, with a local financial institution offering 2.99% on a 10-year fixed rate with closing costs as low as $200.  It comes with a “disclaimer,” meaning a few things need to align to get one, but you get my point, it’s significantly cheaper.

So, you ask, am I a good candidate for this home equity option? 

1. If your loan-to-value is around 65% or under, you are a good candidate.  Some institutions will do a home equity loan up to 80% loan-to-value.
2. If you are retiring in five to ten years or less, and do not want to take a fixed-cost mortgage into retirement, you are a good candidate.
3. If it’s for your primary residence, you are a good candidate.
4. If you are toward the end of your current mortgage and the principal is declining quickly, but it’s in the 5% (or higher) range, you are a good candidate.

The idea that costs matter falls directly in line with our investment philosophy.   Minimize cost in the portfolio, and you lower the hurdle you need to overcome to maximize return.  Same with the refinance; lower the closing cost and you shorten, or possibly eliminate, the break-even period.

Like most things, it is not a fit for everyone.  Consider the home equity option as another arrow in your quiver if you are considering a mortgage refinance. 

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

Are you talking to your children or grandchildren about saving and spending habits?  According to a recent study done by TIAA-CREF, chances are you’re not talking to them as much as you could be.  The study looked at grandparents and grandchildren and found that only 8 percent of grandparents are talking with their grandchildren about saving for college and spending habits, while 85% of those young adults say they are open to conversation.  (Click here for TIAA-CREF’s report)

The study shows that the top topic grandchildren would like to talk about is their grandparent’s memories and past experiences.  This is a huge opportunity to share your financial choices, both good and bad, and how those choices impacted your personal story.

One big concern on the minds of young adults is the cost of college, and that cost keeps going up.  This report also shows that grandparents are largely unaware of the cost of college today.  From the College Board Trends Pricing report for 2013-2014 (click here for the full report), a moderate, in-state 4-year public college cost around $100,000 while a private 4-year college education averages around $164,000.

Joseph Coughlin, Ph.D., director of the Massachusetts Institute of Technology AgeLab, who collaborated with TIAA-CREF on the study said, “When you empower children to understand financial decisions, they develop a lifelong sense of confidence and trust in themselves, helping them become successful adults.”

So, start having those conversations with your children and grandchildren. You have a big opportunity to make a positive impact on their future financial success.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

If you are uncertain, let us give you a second opinion. 

http://www.forbes.com/sites/johnwasik/2014/07/23/do-you-have-the-best-or-worst-401k-plan/

Just don’t forget to stay diversified.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

Like a lot of people growing up in rural Iowa, I did not play soccer nor do I know much about it.  Given my lack of soccer knowledge, I was surprised at how excited I was watching the U.S. soccer team work their way through the group stage of the World Cup and into the “Round of 16” - terminology I did not know a month ago. I watched some of every U.S. game and was on the edge of my seat, cheering like a lifelong soccer fan during the final minutes of their last game against Belgium.  I thought my interest in soccer would last through the rest of the World Cup and continue after it was over. That was 3 weeks ago, and I haven’t watched another soccer game since the U.S. lost.  I probably won’t give it much thought for another four years until the next World Cup.  Whether it was replaced by work, family activities or golf, I was surprised at how quickly my interest faded.

I think you can make some comparisons to how we plan for our financial future.  Every few years, we might be excited about the idea of retirement and start to plan for the future, but very quickly we get busy with work, kids’ activities, etc. and before you know it, years have gone by and we haven’t thought about what has changed in our financial life.

In that length of time, your "goals" might have changed, so it’s important to review your "game plan" more frequently to make sure you’re still on track.  If you would like some help, seek the guidance of a trusted financial advisor who can work with you (ideally, more than once every four years!) to make sure you’re headed in the right direction.  Odds are, it won’t be as exciting as the U.S. game against Belgium, but it will be well worth your time. 

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

There is an inverse relationship between fund expenses and returns.  In short, costs matter. Nobel Laureate Dr. William Sharpe points to this in his landmark article, “The Arithmetic of Active Management,” in which he asserts simply:

“If active and passive management styles are defined in sensible ways, it must be the case that (1) before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar, and (2) after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar. These assertions will hold for any time period. Moreover, they depend only on the laws of addition, subtraction, multiplication and division. Nothing else is required.”

Hard to argue with the facts.  Though it is extremely difficult to overcome the high cost hurdle of active management and attempting to time the market, many managers and investors go down trying.  Their constant pursuit of “alpha,” the risk-adjusted measure of return above an appropriate benchmark, more often than not brings about complexity, stress, and a lighter wallet. Significant, consistent alpha is required for an active manager to match the performance of an appropriate indexed or passive strategy due to the additional costs borne. The figure below tells a powerful story.

In addition to high internal expenses on actively-managed funds, other costs inherent in such strategies create further headwinds.  “Wrap” accounts commonly charge 1-3% of assets under management.  12b-1 fees serve to offset marketing costs in many actively managed funds, increasing costs to investors. Transaction costs can also be significant, due to high turnover attributable to market timing and security selection, leading to tax inefficiency and, potentially, a bigger bill from Uncle Sam.

Once all costs, taxes, expenses and commissions are compiled, total costs not only negate most gains made by pursuing alpha but often result in returns that significantly lag market indices.  Remember, a penny saved is a penny earned.  Stay diversified. 

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

Has anyone ever asked you, “Hey, what do you think of Crossfit?”   Crossfit is a popular fitness program that involves many types of exercises, including a form of powerlifting.  In a recent conversation I had with a friend, they commented that Chiropractors love Crossfit because it provides them with so much business!  Very similar to Orthopaedics loving 40 plus year olds that still play competitive basketball!  The challenge is that people who aren’t really knowledgeable about lifting weights are jumping into these intense programs with highly technical exercises and bad results are happening WAY too frequently.  In some cases there may be a short period of positive results but in the end an injury can negate all or most of the progress.  For further verification, just search “Crossfit Fails” on Youtube.

Investing is similar; there are many well-intentioned investors and fund managers who think they know what they are doing, but in the end, too many mistakes are made and the cost is far greater than the benefit.  According to a recent Wall Street Journal article, "Stock Pickers Have Tough Time in 2014” 74% of actively-managed U.S. large company mutual funds are underperforming the S&P 500 index year-to-date. A similar Yahoo article points out that this is, “a disheartening reversal from 2013 when 50% of actively-managed funds were able to keep up with the S&P.”  Research would suggest this really isn’t news at all.

Vanguard recently released data for all five year periods ended 1998 through 2013 showing the percentage of actively-managed funds that underperformed their index.  For large cap blend funds, in all but two of the 16 time periods measured, more than 50% of actively managed funds underperformed their index.  On average, 68% of the funds underperformed their benchmark for those 16 periods.  The reasons for this are numerous, including turnover and market timing.

Active management is an attempt to outperform a benchmark by trying to predict the future through a) selecting a small group of stocks that a fund manager expects to perform better than the market as a whole and/or b) timing when to enter or exit the market.  This significantly increases costs and can cause investors to miss significant returns.   As an example, many active managers have let cash pile up over the past six to twelve months expecting a market correction. That cash has missed out on over 7% growth that occurred in large US stocks in the last six months and almost 25% in the last twelve months.

The data continues to support Foster Group’s philosophy of making the market your ally rather than your adversary and that timing the market is a dangerous exercise.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

NBC News recently reported that “Americans are giving more to charitable causes than ever before…Total giving by individuals, companies and foundations hit a record $335.17 billion last year, driven mainly by wealthy individuals, according to the annual report from Giving USA Foundation and the Indiana University Lilly Family School.”

This is encouraging for a country that possesses a large portion of the world’s wealth. We are a nation tremendously blessed compared to the rest of the world. The upward trend of generosity indicates a continued shift in our overall attitude about generosity. People are considering how their wealth will be used while they are alive and how it might be distributed when they are gone, as we’ve never seen before.

Our vision at Foster Group states, “We will influence all whom we serve with wise financial counsel and help change the paradigm of meaningful living and generous giving.” What exactly is “meaningful living” and “generous giving”? That is a personal question that can be answered only by the individual being asking the question. What we are finding in our work with clients is that meaningful living for most people will include purposeful conversations about generosity. One is difficult to attain without the other.  Asking the right questions about wealth helps bring clarity around the topic.

How much is enough?

How much inheritance would be helpful to my heirs?

How much inheritance would be harmful to my heirs?

How do I want to be remembered?

What will be my legacy?

I believe Americans are beginning to ask these kinds of questions in a time of unprecedented wealth. These conversations are facilitating the shift in thinking that is helping change the paradigm of generosity. As we change our view of generosity, I believe we will begin to experience meaningful living in ways we never before imagined.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

The latest issue of Investment News I pulled from my mailbox included the headline, “Clients Warily Turn to Stocks”.  Nothing new, same sad story of folks who have continued to avoid market exposure and thus significant growth and/or recovery in their portfolio.  What really caught my attention was the sub-headline:  “Unloved bull market has advisers thinking the time is right to put clients’ cash to work.”  What?  Talk about a hot mess.  Two head-shakers here.  First, how can a bull market be unloved?  There are no fast turtles, healthy hot dogs or unloved market run-ups.  Those who have no passion for positive stock returns are those who have gambled with derivatives, shorts, and other investment alternatives of various flavors hoping to capitalize on timing the market correctly.  Their opinion doesn’t count.  Second SMH (shake-my-head for those not speaking Twitter-language) is “advisers thinking the time is right to put clients’ cash to work”.  You think?  Talk about a fiduciary crisis born long ago.  The time is certainly right, as it was right last month, last year, and at all points in the past.  The returns missed over the past 5+ years now are incredible and the opportunity cost of trying to avoid volatility and uncertainty significant.  Granted, investors must be prudent in keeping the appropriate amount of cash in an emergency fund.  That’s basic financial planning.  Beyond that, deploying cash in one’s investment portfolio with an appropriate, long-term stock/bond mix is also a pillar of strong financial planning.  As recommended, reiterated and rehashed in every blog before, stay diversified.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

Avoiding Probate.  Probate is the court-supervised process of transferring property from a decedent’s estate to the named heirs.  Much has been made of the “need” to avoid probate under the theory that the process is expensive, time-consuming, and public, meaning otherwise private information becomes part of the public record.  Those with real estate in multiple states may find it very advantageous to avoid multiple probate proceedings. 

To avoid probate, a collection of will substitutes are available including trusts, joint ownership, Transfer on Death registration, and beneficiary designations.  Make sure all assets are registered somehow in one of these forms.  Also, make sure to coordinate these will substitutes and map out which assets are intended to go where.  It is all too common to have people diligently list their wishes in a trust or will, yet have assets end up elsewhere by virtue of joint ownership or outdated beneficiary designations.

Durable Powers of Attorney, Healthcare Power of Attorney and Living Will.  Most estate planning practitioners will prepare ancillary documents for their clients.  A durable power of attorney grants another person the authority to make financial decisions on your behalf.  A healthcare power of attorney similarly gives another person authority on medical decisions.  The living will or healthcare advance directive allows an individual to provide a written set of instructions specifying which, if any, medical treatments or care they want should they later be unable to make such decisions because of illness or incapacity. 

Special Needs Trusts:  In certain circumstances, special needs trusts are needed to assist beneficiaries who face disabilities.  Some of these trusts are designed to assist with personal planning needs such as helping with investment or spending decisions, and some are created to improve the quality of a person’s life without disqualifying the beneficiary from receiving governmental benefits.

Diminished Capacity.  Executing a will or trust and most any financial transaction require a person be legally competent.  Dementia is estimated to affect 1.5% of Americans age 65-69, and nearly half of the seniors in their nineties.[1]  Varying legal standards of competency exist for different acts (e.g., marriage, executing a contract, or implementing a will).  It is often difficult to define when a person clearly moves from competent to incompetent.  Sometimes, as mental capacity diminishes, people become more susceptible to influence.  Proactive planning can help ensure a person’s wishes are carried out throughout this struggle.

Asset Protection.  Protecting assets with well-designed trusts is especially important for medical professionals.  The liability within this vocation is high, and advanced strategic planning is critical to ensure assets are not unjustly taken.

Bottom line, do not delay.  Surround yourself with a team of professionals that can ask you good questions, help you determine what’s most important, and then assist with the implementation of a solid plan.  Stay diversified.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

Gallup's most recent Economy and Personal Finance poll, released April 22, revealed that 59 percent of Americans were either "very worried" or "moderately worried" about not being able to comfortably retire. That majority affirmed retirement savings' place atop the list of financial worries, of which there were eight other options posed for respondents. The notion isn't particularly new, however, given that every year since 2001, more than half of poll participants have said they were at least somewhat worried about retirement.

Compared with the darkest days of the recession, stress about retirement is not as widespread, but that concern still overrides any others weighing on the minds of most Americans. In 2010, for example, retirement planning was a major issue for 66 percent of Americans, while in 2007 - just before the housing market and stock market crises - only 56 percent of respondents expressed the same sentiment.

Evolving health care concerns and persistent debt dilemmas 
Paying for unexpected medical costs, meanwhile, seems to have become less of a concern. Where 62 percent of respondents were moderately to very worried about health care-related bills in 2012, that figure is down to 53 percent. Whether that's related to the recent enactment of the Affordable Care Act is uncertain, since all concerns were generally heightened during the worst years of the recession, but more Americans at least have access to coverage in 2014 and may not fear unforeseen medical issues in the same way. Similarly, maintaining a certain standard of living is becoming less of a concern, with 48 percent of respondents expressing moderate to very serious concern about that aspect of their financial plans, compared with 55 percent in 2011. Those two issues, along with retirement planning, were the most frequently cited by poll participants referencing their heaviest concerns.

The poll also noted that four in 10 American adults remain burdened by whether or not they'll be able to pay off their debts - an issue that was included as an option for the first time in 2014. This concern was most prevalent among younger respondents, with 47 percent of 18 to 29 year-olds and 45 percent of 30 to 49 year-olds listing it as an aspect of their finances that has them moderately to very worried. In contrast, only 20 percent of seniors expressed such concerns with paying off outstanding debts, further illustrating the divide between the generations. Younger Americans are still consumed with debt, most notably from student loans, and it is affecting everything from their ability to save and be approved for future loans to their financial outlook, as expressed in polls like Gallup's.

Not being able to pay medical costs, however, ranked as the most oft-referenced major concern for the 18-to-29 year-old demographic, along with not being able to maintain a standard of living. Each category garnered a 52 percent "moderate" to "very" concerned response rate from the youngest poll group. Gallup noted that the uninsured rate is highest among this population, so their fears of incurring unforeseen medical costs are both different - since their options for treatment are more limited - and understandably heightened.

Older Americans were concerned with not being able to manage medical expenses, too, albeit for entirely different reasons. Few members of this group of respondents are uninsured, but their concerns often have to do with uncertainty about what medical conditions may await and whether their coverage plans can stand up to those costs. And while seniors are generally less concerned about any of the financial planning pitfalls that stress the other age groups, medical costs ranked highest among their real worries, at 43 percent, just above maintaining a comfortable standard of living. 

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

Foster Group’s marketing material (1) should  not be construed by any existing or prospective client as a guarantee that they will experience a certain level of results if they engage or continue to engage the advisor’s services; (2) should not be construed as a current or past endorsement of the advisor by any of its clients; and (3) includes lists or rankings published by magazines and other sources which are generally based exclusively on information prepared and submitted by the recognized advisor.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

At Foster Group, we love talking with our clients about charitable giving, gifting to kids or grandkids, or anything else related to generosity. Some find that unusual for a financial advisor – but we understand it’s really an important part of any successful financial plan.

Recently, Carl Richards shared some thoughts about a succinct post from author Seth Godin that I thought was great! We want to help our clients have a high probability of success … and generosity leads to success!

The generosity boomerang

Here's conventional wisdom:

Success makes you happy. Happiness permits you to be generous.

In fact, it actually works like this:

Generosity makes you happy. Happy people are more likely to be successful.

Click here to read Carl’s whole blog: The-path-to-happiness.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

Foster Group wants our clients to know we were not affected by this bug.  We have confirmed that Schwab websites are also secure and have stated there is no need to change your unique login credentials and passwords on Schwab.com.  Vanguard, Fidelity, and TD Ameritrade have confirmed their sites are okay as well.

A list of websites that are prone to the OpenSSl vulnerability can be located at inferese.com.  A couple things you can do if you feel your personal accounts may have been affected by the bug are: 1) change passwords at those specific sites after confirming the site has been patched; 2) email websites important to you and inquire about the Heartbleed bug; or, 3) sit and wait.  Web providers are providing constant communication on this issue and should alert you if there is anything that needs to be done. 

For more information please visit http://heartbleed.com or http://www.cnet.com/news/heartbleed-bug-what-you-need-to-know-faq.

Following three-plus months of mostly uninspiring domestic returns, the Conference Board index showed that consumer attitudes rose a full four points - from a rating of 78.3 in February to 82.3 - for the final month of the first quarter. The March index figure represented the highest reading since January 2008, when the effects of the recession were just beginning to show up. It also greatly exceeded the expectations of economists who called for a reading of just 78.6, according to a Reuters report.

"The economy is showing signs of shaking off the weather effect," said one West Chester, Pa.-based senior economist. "We are going to get a big lift to second-quarter growth from the weather."

While gains in the labor and manufacturing sectors have also been adversely affected by the harsh winter weather seen across the Midwest and throughout the Northeast over the past few months, consumers are offering reasons for optimism. Many analysts have concluded that those conditions played a role in holding back hiring - especially in terms of staffing for many new construction projects - and undercut spending across the board. The outlook for the second quarter, therefore, is stronger than might be expected based on early-year returns. First-quarter growth is expected to pale in comparison to the annualized pace of 2.4 percent seen during fourth quarter 2013, though the data is not yet completely compiled.

Banking on better data, better weather 

Bloomberg reported that many Americans are holding out hope for greater signs of progress from the next jobs report. The past three employment situation summaries from the Bureau of Labor Statistics have offered only modest signs of expansion and salary increases, though the consensus has been that those returns were skewed by weather conditions more than any hitch in business opportunity. Based on that optimism for upcoming labor expansion, the public appears hopeful as the deep freeze thaws.

"Signs of spring might be evident and might be getting people a little more optimistic that the future is going to be better," Joe LaVorgna, a chief U.S. economist for Deutsche Bank Securities Inc., in New York, told Bloomberg. "As these weather effects dissipate and we get payback, you'll see confidence improve even more."

Following the release of the Conference Board data, the stock market and the US dollar exhibited gains reflecting the surge in public sentiment. In a separate report, the S&P/Case-Shiller composite in

dex, which measures median home prices across 20 major metro areas, revealed only negligible movement in terms of property values from December to January. While prices did rise 13.2 percent from January 2013, continuing a string of consecutive year-over-year gains, the shortage of housing inventory across the country continued to boost prices on average.

"The broad-based recovery in home prices which started just under two years ago remains well underway," another New York-based economist told Reuters. "While home price appreciation is likely to slow later this year, the steady pace of home price gains should help further support the housing market recovery during the year."

The inventory issue continues to plague the sales rate, however, as a lack of new construction - in part due to the weather delays - limits the options for prospective buyers. Separate data from the Commerce Department revealed that new home sales fell 3.3 percent in February, the lowest annualized monthly rate since September. 

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

 http://www.forbes.com/sites/rickferri/2014/01/23/gurus-achieve-an-astounding-47-4-accuracy/

 The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

Consider this if you’re still in doubt….Morningstar’s most recently released data show that at the end of 2013, the average US equity mutual fund had a 10-year average return of 8.18%.  Meanwhile, the average investor only earned 6.52% during that same stretch.  Why the 1.66% return difference?  Investors held their equity positions on average for only six months, missing out on the “ups” more than they avoided the “downs,” all the while creating higher costs for themselves.

The majority of investors, and their advisors, govern their portfolios with emotion and the premise that they are somehow privy to some bit of information known only to them, and actively trade on this perceived proprietary information.  The notion that what you just read in the paper or heard on a cable financial show is somehow “new” information that you can now leverage to improve your portfolio returns is fundamentally flawed.  By the time you hear it or read it, information is already old and market prices have likely already adjusted before you have the opportunity to “take advantage.”

In the words of on of Buffet’s more famous quotes: “Benign neglect, bordering on sloth, remains that hallmark of our investment process.” 

Stay diversified folks.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

Ed Green hosts our February update and covers a month with very solid returns in global equities markets. After a weak start in January, most asset classes recovered their losses and pushed into positive year-to-date return territory by the end of February. Ed also spends time discussing some of Foster Group’s thought process around determining appropriate proportions of U.S. and foreign equities in client portfolios.

To listen to the audio recording, click here.

Our government is at it again.  The proposed 2015 budget coming from the White House includes a few modifications to retirement accounts.  Most of the proposed changes reared their ugly heads in last year’s initial budget proposal, but all were eventually nixed before becoming law.  One new piece of legislation, however, targets Roth IRA accounts and would require those accounts be subjected to the same annual Required Minimum Distribution rules as are traditional (pre-tax) IRA’s.

The likelihood of this proposal being implemented is low, but serves as another good reminder of the uncertainty of basing your personal financial planning projections and strategies on current tax law, which is easily changed.  Take advantage of what you know now.  Save diligently.  Put away as much as you can pre-tax and keep dollars in your pocket – not the IRS’s – for as long as possible.  At the same time, stay diversified.

 For a look at the other proposed retirement plan changes, visit http://www.theslottreport.com/2014/03/president-obamas-2015-budget-includes.html

 
The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

A grounding force
Some investors may make good decisions with their assets in relatively stable conditions. However, in the event of a seemingly significant market change - whether positive or negative - many are susceptible to making emotion-laden decisions and altering their investing strategy in a manner that does not align with best practice or their best interest.

For the most part, the underlying principles that guide successful investing do not change. Unless ground-breaking research rebuilds those structures, most financial planners support the pursuit of long-term goals instead of chasing short-term gains. Even if an article in a financial magazine says that now is the best time to invest more in emerging markets or high-yield (low credit quality) bonds, your financial planner can help you determine whether following such advice is best suited to your long-term objectives and offers you the appropriate balance of return and risk management.

Responding to changes
Of course, the long-term nature of best practices for investing hardly means that your overall financial strategy does not need to be updated periodically. Financial plans involve not only investment portfolios, but estate plans, risk management and insurance, tax planning and providing for education and retirement. If, for instance, your will and/or trust has not been revised in five years, it may be based on tax laws that have changed significantly, or perhaps some of your beneficiaries are now deceased or your financial circumstances have changed in other ways. If any of these examples are true, your previous estate planning strategy may not be as effective today and may need to be revised.

Informing your own research
Of course, you may have access to much of the same news, research and statistics as your financial planner. With today's widely available amount of information, it's not surprising for you to have heard about the same trends as your advisor. While gathering your own data is helpful, a knowledgeable financial planner can point you to the most reputable sources and help you distinguish useful news and information from those that may be questionable or not well-suited to your financial circumstances. They can give you the kind of educated and individualized financial advice that no website, magazine or newspaper can offer.

Whether your financial circumstances and goals are changing or remaining relatively stable, you need to regularly check on the health and well-being of your financial and investment strategies. Financial planners are your guide to maintaining a healthy financial lifestyle.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

Nothing wrong with free money, and the 401(k) structure and governing rules provide investors with a fantastic retirement savings tool.  One troubling trend, though, as evidenced in recent industry studies indicates that many employees are cashing out their 401(k) account balances when switching jobs.  Rather than executing a rollover of their assets to the new employer’s retirement plan or a self-directed IRA, avoiding taxes and penalties, 30-40% of Americans making a career change are opting to cash out.  This may place a large strain on the retirement preparedness of those investors and can cost them a lot in terms of income tax (distributions treated as ordinary income), penalty (10%, if received prior to age 59-1/2), and lost future growth (removing the dollars from a tax-deferred savings vehicle).  If cash is needed during a job change, and there is no other feasible source of liquidity beyond one’s 401(k), a better alternative may be to still move the assets into the new employer’s 401(k) plan or a self-directed IRA, then execute a distribution or loan in a potentially smaller amount, rather than cash out the entire balance.  Taking this approach, you will want to first research the distribution provisions within the new plan.  If you are a business owner offering a group retirement plan, be certain to provide education and financial advisory resources that your employees can access to help them make informed decisions when making changes like these.  We’re all in this together; let’s avoid costly mistakes.  Stay diversified, too. 

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

Having a conversation with your kids about finances is no easy task, but it is important to educate your children on effective money management.

The importance of teaching such skills to children was most recently substantiated by a 2013 survey conducted by Junior Achievement. The results showed that teens who feel that they will be able to support themselves without parental assistance between the ages of 18 and 24 declined to 59% in 2013, noticeably down from 75% in 2011. Some of this is a result of general economic conditions and the challenging job-market.  Other causes, though, certainly could be found in the lack of financial acumen within our younger generations.  Hard lessons are being learned more and more as kids transition off of mom and dad’s payroll

Equipping children to better understand and manage financial resources should start early and be done with patience and persistence. With a few simple steps, you may be able to give your kids an age-appropriate understanding of how money is used and why properly managing finances is necessary. Some considerations to make in establishing your financial "curriculum":

• Start early. Talking with a 4-year-old about the intricacies of mutual funds may be a fruitless venture, but that doesn't mean you can't teach your kids about income and expenses and the need to save. As they get older, you will be able to move on to more complicated topics, such as taxes, insurance and retirement.
• Give them an allowance. Allowances can give your kids a concept of how finite money can be. This provides them with the experience of seeing money dwindle or accrue based upon their handling of it.
• Set up a budget. Help them create a budget. For instance, you can allow them to spend a certain amount of their money on entertainment, but the remaining amount should be set aside for savings and charity.
• Pay them. Consider paying your kids for at least one of their chores to show your children that money is not free and comes in exchange for hard work. In that same vein, once your kids start driving, it's a good idea to remind them that gas isn't free. There are few faster ways to teach the importance of being conservative with money and resources than to have your kids start paying at the pump each time they take the car out for a spin.
• Open checking & savings accounts. Help them create vehicles to facilitate their spending and saving. Walk them through how to balance a checkbook, the benefit of earning interest, and to be mindful of service charges and fees where applicable.
• Set the example. Put theory into practice by showing your children your own money-saving strategies at work. Take them grocery shopping with you and stick to a strict list to demonstrate successful budgeting.
• Talk often. Speaking with your kids about money is not a one-time discussion. They need guidance throughout their lifetime, even after they are adults themselves. Be an open ear for their concerns and offer advice when necessary.
  

The more prepared and educated your children are on managing their own piggy bank, the better their chances of making sound financial decisions. Not to mention fewer calls to mom and dad for money!

According to Bloomberg, recent IRS data found that U.S. taxpayers reported $122 billion in tax-free gifts in 2012. Of that total, $84 billion was attributed to gifts valued above $1 million, and fewer than 30,000 people were responsible for this portion. Furthermore, the total amount of reported tax-free gifts was four times higher than the totals in 2011 and 2010.

When the law was first implemented, Congress had intended for it to be temporary, as it was set to expire in December 2012. Wealthy Americans were aware of the planned end date and rushed to make their tax-free gifts while they had the chance. In regard to estate planning, these non-taxable gifts allowed individuals to pass on large sums of money to their heirs without having to pay estate taxes.

A mad dash
Given the December 2012 deadline for giving gifts under the raised tax threshold, many estate planning consultants instructed their clients to take advantage of the higher limit before the expiration date. As a result, 2012 was a busy year for the transfer of tax-free gifts, especially given that it did not seem as though Congress would be extending the law.

However, lawmakers decided in January 2013 to permanently extend the law. Instead of having a set limit, it will adjust each year to match inflation.  For 2014, the estate, gift and generation-skipping exemption is $5,340,000, so there is ample opportunity for tax-free wealth transfer to loved ones.

Slowdown expected
Now that the law is here to stay, the rate of tax-free gifts in the future is expected to taper greatly from the spike seen in 2012. Even still, making non-taxable, lifetime gifts may still remain a viable option for passing on the highest amount possible to heirs.

In the fiscal year that ended Sept. 30, the U.S. collected $18.9 billion in estate and gift taxes. Additionally, the gift tax rate is currently at 40 percent, up from 35 percent between 2010 and 2012. It should be noted, however, that the lifetime exclusion is applicable in addition to the current $14,000 annual gift tax exclusion.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

http://www.behaviorgap.com/tactical-asset-allocation-market-timing-another-name/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+behaviorgapfeed+%28Behavior+Gap%29

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

Individuals should set in motion arrangements for the future of their assets and employ an array of strategies to ensure that those assets go to the intended parties and that their survivors are supported financially.

Transfer of assets
There are multiple vehicles available for distributing your property following the end of your life.

If you die "intestate"- without leaving a Will - state law will determine how your property will be distributed and while officials often attempt to do this fairly, it may not satisfy your intentions and may be a lengthy and cumbersome process for your loved ones.

A Will names recipients and an executor of your estate. It is a legal document prepared under state law to ensure there are no ambiguities about your wishes. Following your death, a court-supervised distribution of your assets - known as probate - will occur unless your estate planning documents and beneficiary designations are constructed so that all of your property is distributed without need of probate. This can reduce costs and allow for a more timely and confidential settlement of your estate.

Trusts may be used for transferring some of your assets. An individual or corporate entity is named as the trustee, who is responsible for managing the assets transferred to the trust for your benefit or for your designated trust beneficiaries. There are various types of trusts, each with their own advantages and uses.

Many people own assets as join tenants with rights of survivorship.  As such, ownership will automatically transfer to the surviving owner under operation of law.

In the case of certain assets like qualified retirement plans and life insurance policies, you will name beneficiaries to receive your account balance and policy death benefits.

Caring for survivors
Estate planning should take into account your survivors, including your spouse, children and other dependents.

Some of your assets may require gradual liquidity, such as funds distributed to minor children. Guardians should be designated to care for any children who may be under 18 years of age in the event that both you and your spouse die prematurely. Life insurance can also be used as a means of establishing an estate to support for your family.

Minimizing transfer costs
Effective estate planning incorporates measures to minimize taxes and legal costs to distribute as much as possible for your heirs.

Trusts can be used to avoid the expenses associated with probate. Strategies such as charitable giving, bypass trusts, marital deduction and lifetime gifts can all be employed to limit estate taxes.

Once measures are put in place for the transfer of your assets, you should review your estate planning documents and beneficiary designations annually to make any needed changes.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

The truth is, those with charitable intent have been asked to write checks for so long, and so often, that questions have emerged among donors: “Who am I giving this money to, what impact will it have, and who will hold the recipient accountable for positive results?”

Though the days of writing a check are by no means gone, this new approach better answers those questions, centering on what can be achieved, and how “generosity” can create “social capital.” This new perspective on giving is life-changing; with this approach, you can actually create opportunities with lasting impact.

Micro-Lending, for instance, and similar projects that create sustainable businesses, are on the rise. Donors and entrepreneurs who fund such work want to create something sustainable, with a lasting impact. They don’t want the gift to be an end in itself.

Creating social capital opens doors to people who may not have thought about the impact of their giving. Jerry Foster, founder of Foster Group, a wealth management and investment advisory firm, says, “Generosity can be a tool for changing the way people view the world, while also transforming their hearts. People don’t often view generosity in a transformative way. But when generosity is seen differently, as life-changing and transformational, it liberates those who give and those who receive. This can multiply the effect of the gift.”

People love to give to all sorts of causes and for very different reasons. Some are intrigued by creating opportunities with social capital, while others give to minimize tax implications. Whatever the case is for you, remember that when you give it can become an expression of your individual passion. Your giving can provide opportunities for others that can transform their lives.

Things have changed. People are becoming more intentional. They think more about ways to give and change they can create, rather than simply reacting to an appeal. They want to make a bigger difference, and the return on investment they seek is not merely financial in nature. Instead, they’re looking for a meaningful return on their generosity, and the social capital it creates.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

Click here to listen to the audio update as Brad Rempe reviews November 2013.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

Most people think of “tax time” as sometime between March and April and, depending on how long you procrastinate, maybe just April 15.  However, when it’s actually time to prepare your taxes it’s probably too late to implement any strategy that will positively impact your tax situation.  For this reason, we believe now is the best time to check in with your tax professional, especially if you’ve had any major changes in your financial situation recently.  Examples might include home sales or purchases, other major asset sales , income that is higher or lower than you expected, high medical expenses, a job change, a spouse going back to work, the birth of a child or an adoption.  

A quick conversation with your CPA now could result in adjustments that save you time and/or money at tax time.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

*The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

While media outlets exhaustively covered the latest debt ceiling showdown (as they will start doing again shortly), many equity markets around the world have reached either record or multi-year highs.  Sadly, investors have withdrawn over $400 billion from US stock funds since early 2009 which, coincidentally, marked the start of one of the largest bull runs in market history.  Ouch.  Time to stop fooling – and hurting – ourselves.

As investors, it’s important to acknowledge that living with short-term uncertainty is the required price for the return premium we expect when putting our long-term investment capital at risk – remember, risk and reward are related.  Crises come and go; there will always be something to be nervous about. Politics is premised on conflict between differing ideals.  Each of us can have an opinion about likely outcomes, but basing our investment decisions purely on forecasts about politics, economics or anything else, offers little reliability.  Focus on what you can control, rather than what you can’t control, in the context of what really matters to your situation.  Don’t put your long-term plan in peril by trying to guess how markets will react to a never-ending list of uncertainties and potential calamities.  Even if we feel certain our government will fail to reach timely consensus on a budget deal, predicting whether markets will ultimately respond positively or negatively is far from certain.  Stay diversified.


The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

With cash gifts, the recipient “wins.” But taking a step back and looking at your larger financial picture can reveal other ways of giving that make the process a bigger “win-win,” for both you and the recipient. One way this applies is when you give appreciated securities that you’ve held for more than one year and one day.

If you want to see how this method of giving can impact your overall net worth, save you money, and increase the value of your gift for the recipient, read this article.

One of Professor Fama’s research assistants at the University of Chicago Graduate School of Business, David Booth, founded Dimensional Fund Advisors (DFA) shortly after graduation and built the company as a way to apply Professor Fama’s findings in ways real-world investors could access. Professor Fama agreed to serve on DFA’s original Board of Directors and still serves in that capacity today, along with other notable academics.  Foster Group enjoys a unique relationship with DFA as an approved investment advisor, maintaining close ties with the company’s ongoing research and education efforts.  DFA is now the eighth-largest mutual fund company in the United States, and recently the University of Chicago added “Booth” to its business school name in recognition of David Booth’s significant contribution to the school.

For more information about Professor Fama and the Nobel Prize, you may follow these links.

http://www.dfaus.com/2013/10/eugene-fama-awarded-nobel-prize-in-economics.html

http://www.uchicago.edu/features/nobel_awarded_to_fama_and_hansen

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

Why? Well, maybe you’re a parent or grandparent who financially supports children and/or grandchildren, and you want to minimize capital gains taxation. Perhaps you’re a higher-income taxpayer who no longer qualifies for certain tax credits and exemptions, but you’re still hopeful of finding a strategy that legally protects your assets. Or you may simply be tired of hearing that the wealthy get all the tax breaks, when your tax return apparently didn’t get the memo.

It’s important to think strategically about how to position our resources in order to reap the benefits of the tax code. With a little understanding, you can take advantage of a benefit that’s easy to miss.

Read more about how to avoid the kiddie tax in this article . . .

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

Few joys in life rival giving to someone who is genuinely in need. Not only does it feel satisfying, but studies show that giving can positively impact one’s own health and well-being. While many of us give to charities and not-for-profit organizations each year, there are other opportunities to give that can go unnoticed.

That’s one reason why Foster Group focuses on individual financial needs and goals. By taking a personal approach, we discover key drivers for our clients on every level, including those areas of life where ideas, passions, and aspirations exist. This is not merely an intellectual exercise; we help clients tangibly bring their visions to life. Client generosity is one of our favorite areas of discussion, and the synergy that develops between Foster Group and a client can multiply the effect of those dollars.

Recently, a generous Foster Group client came up with an exciting idea. Though unsure of how to make it a reality, they wanted to give anonymous college scholarships to two young people with whom they were acquainted. This client simply thought the world of these kids, and knew what hard workers they were. The hope was that this amazing gift would show each young person how special they are, that their hard work had not gone unnoticed, and that someone ‘out there’ was willing to support their future which, to this client, looked bright.

Foster Group arranged setting up the necessary accounts, worked on the logistics of anonymity, distributed a letter in which the benefactors shared their thoughts and feelings, a process that required reaching out to the recipients multiple times in multiple ways to assuage their understandable disbelief. Each family was invited to meet, and Foster Group had the privilege of presenting the gifts to the students and their parents. At first, they wondered what was going on. Then, as it began to settle in, they looked overwhelmed; their expressions seemed to ask, “Is this really possible?” They left the meeting with a new vision for their future, a new sense of hope, new possibilities, and—in essence—a new reality. Not long after, a wonderful “thank you” note came from one of the recipients detailing the change the award made in her life.

This isn’t an isolated incident. Another client wanted to do something for a recent acquaintance—a young girl who had to drop out of college due to illness. She would need a tutor and some financial assistance. Foster Group helped facilitate this act of kindness, setting up the necessary tutoring that would prepare her for re-entry into college. The tutor ultimately decided not to charge for service upon hearing the story of how this benefactor was so selflessly helping the student. Now this young person is so grateful, so happy. This gift came at the right time for her, and will never be forgotten. You see, the more we share our thoughts and actions of generosity, the more opportunities for generosity we see. It becomes an exponential thing.

Sometimes we place charitable giving on autopilot, and the results of our giving show up on an arbitrary page within our tax filings. But it can be so much more than writing a check to a favorite non-profit. It can be an extension of our own passion , our personality, the realization of our desire for success in someone who may not have had the opportunities we did. It can change the course of someone’s life.

Perhaps there’s something you’ve been thinking about, and you’re not quite sure how to go about accomplishing it—whether it involves money, time, or expertise. Are there things you want to do that you haven’t been able to do? Foster Group can show you how to make that vision a reality.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax and legal matters before taking any action.

To read our whitepaper titled, “Wealth Protection - Planning, Providing and Protecting” written by Ross Polking, Brad Rempe and Phil Kruzan, click here.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

The long-term care (LTC) insurance industry has gone through, and continues to go through, massive changes.  Less than a decade ago, there were over 100 insurers selling LTC products. Today, the landscape is much different; a mere 10-15 reputable carriers offer policies to the general public.  The fact that the government tried and failed, through healthcare reform, to offer an LTC platform evidences just how difficult it is to operate in this space.  Uncertainty at the carrier level increases complexity and confusion at the policyholder level.  The idea of transferring risk to an insurance company to provide protection if sustained medical care is needed is obviously a good one.  The issues of timing, cost, contractual provisions, governmental influence and individual circumstances, however, make the ultimate purchase decision rather difficult. 

To learn more about LTC, read our article titled Long Term Care Insurance, Hope for the Best...Prepare for the Worst.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

•     Serve my best interest, without fail?
•     Disclose all aspects of my financial transactions?
•     Objectively act on principle?
•     Be trustworthy with my assets in every way?

If you answered “Yes” to the above (and most people do), you’re likely to find a fee-only relationship with a fiduciary advisor ideal for your financial goals. Again, who you work with does matter. To learn the specific differences between fiduciary and brokerage relationships, take a look at this article, or contact Foster Group at 800.798.1012.

The information and material provided in this blog is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax and legal matters before taking any action.

Recently I had the opportunity to travel to southeast Asia and coach some amazing men and women on the principles of running a small business. One was an industrious, amazing woman named Lin Wan, who used to live in Labutta Township, Myanmar (Burma). If that sounds vaguely familiar, you may remember a cyclone (we call them hurricanes in the Western Hemisphere!) named Nargis that rolled into Labutta Township as a category 4 and across Yangun, killing between 88,000 and 145,000 people, including her husband and 100 other members of her family. And nearly her.


She told me about being swept out to sea, desperately clinging to her two children. Giving up hope, she prepared to die … when a log floated by and the three of them were able to stay afloat for six hours on the open sea, in the dead of night, while the rain poured relentlessly down upon them.


As I listened to her story, I thought to myself, “She did it! She achieved financial independence!” At that point, Lin Wan had achieved what many of us long for – to be completely free of worry about money. Lin Wan and her children had no need of anything financial; they were exceedingly grateful for a random piece of driftwood that floated across their path. They thought about their family and relationships, of those near and dear to them; things in life that are free.


As we celebrate our independence this July fourth, it’s an interesting time for us to think about financial independence as well. When you think about that statement, however, one is never really independent of finances – near as I can tell, most everything still costs something.


Except love, family, relationships, being kind, considering others’ needs first, making a difference in others’ lives …  those things are free.


So maybe there is a way to be financially independent.


The good news is Lin Wan and her children were swept back to shore, clinging to a firmly rooted tree until the sun rose and the rain decreased enough to wade to a nearby shelter. Today she runs a small business, bringing trade back to the Township as it seeks to rebuild after the devastation of Nargis.
Wishing you and your family a wonderful, relaxing and blessed celebration of Independence Day!

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

http://cbsn.ws/1cj3Mba

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

Carl Richards (www.behaviorgap.com) is a master of simplicity. 

Fantastic perspective here on these nasty market downturns in response to the Fed possibly slowing their bond-buying/market-stimulus efforts.  Remember to breathe...and stay diversified.  

Click here  to read Carl's blog

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

Full Article

The efficacy of this approach has been demonstrated through rigorous academic research and overwhelming numerical evidence. It suggests that investment success lies along a path of reliably capturing the return of entire markets and  asset classes. Day after day, year after year . . .

 Full Article

What’s your plan when it comes to deploying your assets into a well-thought-out portfolio of investments? Let’s take a look at some possible strategies that may make for smooth sailing . . .

Full Article

It’s a fast and easy way to communicate with family and friends or even with clients. In the financial industry, you might have seen or heard what could be considered a slow start in the social media world or maybe even “negative nancies.” You might hear words such as, “compliance issues,” “endorsements,” “SEC,” “FINRA.” But really, we understand the need and want to take steps to make it easier for clients, strategic partners and prospective clients to see and hear what Foster Group is doing.

Our advisors are blogging, producing articles that pertain to you and your financial goals, and yes—some are even tweeting. Did you know Foster Group was the 2012 recipient of the Charles Schwab IMPACT^® Best-in-Business award? It’s on YouTube!

So, although we might be making a slow start, we do want you to see the content we are producing and blogs we are posting. Social media is a quick way for you to receive information that could potentially help you.

Don’t forget to check in with the Foster Group team from time to time. But for now, start “following us”!

LinkedIn Foster Group Home Page

Twitter – @Foster_Group

Foster Group Blog – http://www.fostergrp.com/resource-center/blog

The late author and motivational speaker Zig Ziglar once uttered a famous line suggesting that “if you aim at nothing, you will hit it every time.”

Although they have some negative connotations, his words actually can be read in a positive light when it comes to investing. Narrowing your sights and considerations while you’re seeking returns is rife with danger. Check out one of investment researcher Larry Swedroe’s more recent blogs (www.cbsnews.com) for some interesting perspective, data and caution on attempting to time the market and select individual stocks.

When a small number of stocks are often responsible for the lion’s share of market return every year . . . well, stay diversified, my friends.

#   #   #   #

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

The information and material provided in this article is for informational purposes and is intended to be educational in nature. We recommend that individuals consult with a professional advisor familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

Here’s a little Q&A to get everyone up to speed.
 

Where is this place? It’s a little island-nation in the Mediterranean Sea, just east of Greece and south of Turkey. Population: approx. 1 million.

What exactly is the issue? Similar to Greece, Ireland, Portugal and Spain, Cyprus has a banking system that’s on the verge of collapse. Its banks have recently approached the European Central Bank, asking for a bailout, thus becoming the fifth nation in the 17-member European Monetary Union to seek assistance since the financial crisis broke out three years ago. Their overexposure to bad Greek debt is the primary reason for the potential bankruptcy.
 

Why such a stir when the powers-that-be in Europe found a way to avert the crises in the aforementioned countries? Why would Cyprus be any different? Fantastic questions considering Cyprus’ GDP of around $25 billion is equivalent to that of Vermont! Here’s what’s different this time . . . EU leaders have proposed that actual bank depositors in Cyprus—everyday folks with accounts at their local bank—be forced to pay for a portion of the bailout through the siphoning of their accounts. Think of it as a tax. A penalty. Robbery maybe? This would be the first time that savers’ bank accounts are targeted as a source of funds to help avoid a pending collapse. Other bailed-out countries have raised funds through varying methods that didn’t infringe upon the assumed security and protection of individual depositors’ funds. On top of it all, Cyprus has mandated that all banks (and ATM machines) be kept shuttered for the time being until they can get the mess sorted out, thus avoiding a “run” on the banks. The government has made it impossible to transfer money out of the country. Naturally, panic has ensued, not only within the country but also beyond its borders. Bank customers in other troubled nations now see this potential shift in bailout policy as a threat to their own accounts and their country’s banks. So they, in turn, may very well start pulling funds, leaving a teetering European banking system closer to outright collapse. Analysts worldwide have suggested that this attempt to confiscate money from depositors has opened a “Pandora’s box.”
 

So what’s next? The European Union leadership and Cypriot government are still working toward a deal that would create a lifeline for the banking system. Cypriot lawmakers have already voted down the initial measure allowing for the extraction of depositor funds. However, the mere fact that it was considered and made public has thrown a scare into other depositors at weak banks all over Europe and, for that matter, the world. The important question no one can answer, unfortunately, is whether or not this is the beginning of a new era of bank bailouts, an era when bank depositors are continually at risk of the confiscation of some of their money. If so, credibility and trust in the banking sector takes another major hit. If people elsewhere start yanking their assets, do the financial conditions of those banks go from weak to insolvent? Does the mounting crisis require more bailout than the Eurozone can provide, thus sucking other international monetary powers (IMF, China, United States, etc.) into the morass? Where does it start? Or stop? 

At least, now we all know where Cyprus is. Stay diversified.

When was the time? March 9, 2009, when the Dow Jones Industrial Average hit the “great recession” bottom of 6,547. But many investors had by then totally thrown in the towel and felt like the last place they could trust their money was in the stock market. Since then, we’ve seen an historical run-up in markets. In fact, as of close of business yesterday March 5, the Dow Jones Industrial average eclipsed its previous high and, perhaps, continued erasing those memories and lessons we might have previously learned.  Markets have a funny way of playing with our emotions. Human beings are not rational, and they’re seldom more irrational than when investing in the stock market. This is your friendly reminder to do your best to check your feelings at the market’s doorstep to best avoid bad decisions. The time to invest in equities is always, so long as your circumstances allow.

Now’s the time?? Investors liquidated $289 billion from traditional open-end equity mutual funds from March 2009 through December 2012, according to data from the Investment Company Institute. Yet over that span the S&P 500 returned more than 130%. Talk about running the wrong way. Many of these same experts saying that now might be “the time” were saying otherwise back in March of 2009. For most investors, market timing is a no-win game. History has proven that. Unfortunately, emotions can get in the way of us being good investors. We hear or read something in the news, or lend an ear to a friend who suggests a different course of action…and we come away certain that we have proprietary knowledge of where the market is headed.

The right time to change course or allocation is generally when one’s life circumstances have changed: goals, retirement timeline, obligations, career, etc. Changing in response to, or anticipation of, news is playing the market and gambling with precious resources. Remember, the greatest risk and detriment to successful investing is not necessarily avoiding the downturns but sitting on the sidelines during the upturns. Quit playing the timing game. Stay diversified.

The old saying, “Money doesn’t buy happiness,” may be slightly overstated. It appears that accumulating at least a certain amount of wealth that leads to financial freedom and independence may contribute to stronger relationships and a more satisfying work and family life.

http://yhoo.it/15TBp2Q

U.S. Federal Government finances improving…for now.

While much work remains to shore up the long-term financial health of our country, the recent government revenue and spending direction is improving on the whole.  If allowed to continue, these recent trends would balance our federal budget within 7 years or so. 

The following link to Scott Grannis’ blog provides some further information and data which many Americans may find surprising.

http://scottgrannis.blogspot.com/2013/02/federal-budget-continues-to-improve.html

To be clear, there are sizeable issues standing in the way of maintaining these trends.  However, for now there’s a bit of good news to share - I’ll take advantage of the opportunity.

However, GDP is made up of several core components:  private/personal consumption (the largest factor), business investment, net exports and government spending.  Government spending was a significant drag on fourth quarter GDP due to the largest drop in defense spending and inventories since the close of the Vietnam War in 1973.  Consumption and businesses, however, combined for a 3.4% annual growth rate, suggesting consumers are still spending, businesses are still hiring and private sector growth is still marching forward.

Reductions in government purchases may hurt in the short run, but think glass half-full here for a moment: lower inventories mean more showrooms and shelves will need to be stocked, and less government equates to lower deficits and the potential for lower taxes (or at least fewer future tax hikes).  These factors, in combination, ultimately create more room for private enterprise and capitalism to do what they do best:  grow our economy.  That’s good news!

The same question can be asked of working with a financial advisor – "Is what I’m getting worth what I’m paying?"

Recently, I was able to participate in the discussion for an online article that addressed this question directly. A link to that article follows; I trust you’ll enjoy it!

http://www.advisorone.com/2013/02/01/whats-an-advisors-value

While the data in the graph below is a bit dated, the concept remains valid.

The "Fiscal Cliff, Part 1" seems to have been averted through a last-, last-, very-last-minute compromise bill which has already received so much attention that we hesitate to write even one more word about it. However, since we feel a very high sense of responsibility to provide relevant information to those who trust us for investment and financial counsel, here are some comments on the ramifications of the "American Taxpayer Relief Act of 2012," as passed by the Senate and House.

First, some very good news with regard to estate and gift tax laws. The lifetime personal exemption had risen to $5.12 million per person in 2012 and was scheduled to decrease to $1 million in 2013. The new law made the $5 million indexed-for-inflation (now $5.25 million) exemption permanent. It also made permanent the transferability of the exemption between spouses, meaning married couples will be able to pass over $10 million to their heirs, in most cases, without Federal estate and/or gift tax. Finally, the new law kept the $5 million lifetime exemption "unified," meaning people can choose to do their gifting or transfers during their lifetime, at death, or some combination of the two. The only "negative" in this part of the bill was the increase in the tax rate applied to taxable estates. It rises from 35% to 40%.

Also, the charitable donation of IRA assets for people 70 ½ or older was given a two-year extension, applying to 2012 and 2013 calendar years.

For most tax filers (upward of 98% of households), the only immediate change will be the expiration of the payroll tax "holiday." This temporary two-percent reduction, put in place in 2011, will be allowed to expire, bringing the employee portion of the payroll tax for Social Security back to 6.2%.

Most other significant changes (re: tax increases) will affect taxpayers whose income is above $200,000 for single filers and $250,000 for joint filers. These changes include:

• 3.8% additional tax on "investment income," per the Affordable Care Act.
• Capital gains and dividend tax rates will increase from 15% to 20% for joint filers with taxable income over $450,000.
• A "new" 39.6% marginal tax bracket for taxable income over $400,000 for individuals and $450,000 for joint filers is created.
• Itemized deductions (e.g., mortgage interest, charitable contributions, etc.) will be phased out for couples with over $300,000 of Adjusted Gross Income ($250,000 for single filers)

Of course there are a host of other items addressed in the law, many of which simply extend, and make permanent, provisions of the 2012 tax laws and rules which were set to expire on December 31, 2012.

The Congress and the President chose not to address spending cuts in this compromise bill, instead extending the deadline for dealing with the budget sequester’s automatic cuts until March 1, 2013. They also passed a debt ceiling extension which will allow the government to continue to operate until approximately March 27, 2013.

This is just a short summary of some of the major provisions on this "cliff-dive-averting" bill agreed to by Congress and signed by President Obama. We will be providing more details about tax provisions as well as a complete review of investment markets in our 2012 year-end review which will be available around January 15^th.

You can’t avoid it; it’s coming and there’s nothing you can do about it.  No, not the fiscal cliff, but rather the annual ritual of making New Year’s resolutions!  Our good intentions to make changes that will improve health, relationships, eating habits, etc. often flounder.  80% of all such resolutions, on average, fail by January 20!

For those resolving to improve their financial standing in the coming year, we offer the following simple “resolution checklist” for your consideration:

Resolution #1: Make sure your investments (including your overall stock/bond exposure) align with your financial plan.  If you don’t have a financial plan, make that resolution #1.

Resolution #2: Understand what you own in your investment accounts.  Don’t assume your advisor is simply taking care of things for you. 

Resolution #3: Diversify your investments.  This doesn’t mean holding a handful of different stock in your portfolio.  It means having exposure to multiple asset classes around the world that behave differently from one another.

Resolution #4: Keep costs down.  It’s one of the very few things in investing that you can really control.  Not sure what, if anything, your investments cost you?  Don’t think for one second any of them are free; look at commissions, transaction fees, and expense ratios.  Those tend to be common expenses borne by all investors, and often not well-disclosed.

Resolution #5: Tune out the noise.  “Advice” from television talking heads is not specific to your situation and may have little or no relevance.  Screaming newspaper headlines striking fear or advertisements promoting once-in-a-lifetime opportunities are also generally not helpful.  Emotions always have a way of clouding our decision-making ability.

Resolution #6: Stay the course and resist the urge to “tweak” your current allocation in response to (or in anticipation of) market, economic or political events.  Markets factor all this information into prices very rapidly, so there’s a good chance the risk is already priced in by the time you take action.  Remember, you’re not the only one out there who’s thinking about these things.  Of course, if your own financial circumstances change, that may be a valid reason to consider changing your allocation as a result.
 
Resolution #7:  Rebalance your portfolio periodically so your intended allocation remains intact.  This keeps you somewhat close to your intended risk target on a consistent basis.  Be conscious of not rebalancing too frequently; transaction costs can begin to eat up return.

Following these suggestions will help hold you accountable to yourself.  It will also make the likelihood of your investment success greater than your likelihood of keeping off those ten pesky pounds you want to lose this holiday season!

As we enter another year that promises uncertainty, complexity, challenges and changes in the world of medical professionals, we extend our best wishes for a happy holiday season to you and your family.  If a no-obligation second opinion from us would help ensure your success in achieving these financial resolutions, please let us know.  We are absolutely committed to the well-being of NMA and its members, and are humbled by the privilege to serve you all.

http://www.nytimes.com/2012/11/16/us/politics/the-fiscal-cliff-explained.html?partner=rss&emc=rss&smid=tw-nytimes 

If we can help you by offering insight and perspective on how this could impact your personal situation, connect with us in whatever way is most convenient for you.  Stay diversified.

One item a charitably-inclined taxpayer might actually consider postponing until 2013 is making tax-deductible gifts.  The reason for that is simple math, as long as the gift is not subject to limitation based on your income; higher future tax rates mean the deduction is mathematically “worth” more on your income tax return in future years.

Another consideration is donating appreciated securities with long-term gains, if possible, rather than using cash.  This avoids the realization of gain for tax purposes and the accompanying capital gains tax on the sale.  Again, using this strategy in 2013 will yield a bigger “bang for your buck” from a tax standpoint as long-term capital gain tax rates are set to increase to varying degrees based on income level. 

Bottom line, consult your tax and financial advisors on your gifting strategy.  There are many “what-ifs,” and everyone’s situation is unique.  However, as things currently stand with our evolving tax code, there are opportunities to make good and impactful decisions with your money.  Extend influence…and stay diversified.

       a) Contact Foster Group
       b) Read the linked blog post below, which appeared recently on Financial Planning’s website: 

http://www.financial-planning.com/blogs/sheldon-geller-erisa-advisors-service-provider-disclosure-requirements-2680731-1.html

The 401(k) world is literally changing before our eyes.  Liability is immense.  Be sure you know exactly what is changing and what is required of you.  The risk, otherwise, is incredible.

Gabby Douglas, who trained in West Des Moines, and I have attended the same church for the past couple years. So it was with great personal interest that my family cheered wildly for her and the rest of the “Fierce Five” as they became the Olympic team champion … followed by Gabby’s amazing run to individual all-around gold medalist! Wow – to have a personal connection to an Olympic gold medalist is pretty rare, and made the Olympic Games particularly special for our family this year.

As I watched the gymnastics play out, for both men and women, I was struck by one profound observation: the one who makes the least mistakes wins. Almost without exception, athlete after athlete took themselves out of contention by making a big mistake. That might be stepping out of bounds on the floor exercise or falling off the balance beam, but simply put, the winners didn’t make big mistakes!

The same is true for you and your financial plan. The very best thing you can do to “win” is to not make big mistakes with your money. Stay invested through good times and bad. Stay diversified. Keep setting aside money from each paycheck into your retirement plan and/or after-tax investments. Keep paying your insurance premiums.

In short – keep communicating with your Foster Group advisor.

We work for you, to help you avoid mistakes and increase your probability of being successful.

http://scottgrannis.blogspot.com/2012/08/what-if-something-goes-right.html

Personally preparing for what is to come is challenging; the election results are anyone’s best guess.  Keep in mind that economic policy post-November 6 has as much to do with the result of Congressional elections and future appointees to our court system as with the presidential election.  Markets in the past have shown several tendencies when it comes to election results; a) prices will reflect what market participants collectively assume will happen, both pre- and post-election and, b) overall market returns have shown little or no sustained correlation to the make-up of our executive and legislative branches, regardless of which party is in control.

My prediction at this point is that either Romney or Obama will win the presidency, and that the following day the market will either go up or down.  What’s that mean?  Let me get to my typical tag line early: stay diversified.  Don’t get distracted by what all the talking heads will be shouting at you.  Instead, plan for what we’ve been told by our government is coming, such as estate and tax law changes scheduled to be in place January 1, 2013.  Could those provisions be modified, postponed or eliminated?  Most likely yes, but planning accordingly rather than procrastinating only strengthens your situation.  Give us a call if you’d like to discuss how we can better prepare for your situation, based upon what we “know” is coming…at least until it doesn’t!

During a weak global economy and uncertain financial markets, many investors tout the benefits of holding gold. Some proponents claim that gold deserves a significant weighting in most investors’ portfolios. Gold’s often-cited portfolio benefits include a strong long-term return, a hedge against inflation, and safe haven during turbulent times.

But does the evidence build a case for holding gold as a separate asset class? In previous blogs, we busted the myths that gold is a good long-term investment and that it is an effective hedge against inflation. In this, the third in a series of three, we consider the Myth, “Gold is an investment.”

Proponents often claim that gold offers a portfolio diversification benefit due to its low historical correlation with stocks. (Correlation measures how closely two securities or asset groups perform relative to each other over a given time period. 3) This may be true when gold is held as an incremental part of a broader diversified commodity strategy within a portfolio. But correlation is not the only factor to consider in diversification. Volatility also matters, and history shows that, while gold has a long-term return similar to the S&P 500 Index, its volatility approaches that of US small value stocks, an asset class that historically has demonstrated a higher average return for the higher risk. So, holding gold as an asset class can make a portfolio considerably more volatile, which may offset the potential benefit of low correlation.

However, a more fundamental question exists. According to modern financial principles, the components of a portfolio should have an expected return. This is where gold falls short of being an investment: it does not offer the potential for generating income or earnings. Its only source of return is price appreciation caused by shifting supply and demand. As shown in historical performance, price appreciation is not a certainty.

These characteristics make gold a speculative asset, like currency or collectibles. If you put gold in a vault and wait a few decades, it will not produce anything, and its value will reflect the current spot market price. In fact, holding physical bullion may incur negative cash flows due to storage, insurance, and other costs. In contrast, a stock reflects ownership in a business enterprise that seeks to generate profits and produce more wealth. Investors who put their capital to work in the economy expect a potential return from cash flows and appreciation.

The evidence makes it clear that this myth, like the other two, is BUSTED!

All of the evidence raises doubt about gold as an essential component in a portfolio. Over time, gold has not delivered significant growth relative to equities. While in real terms gold has preserved its value, it may not closely track inflation over shorter time periods. Moreover, gold’s early and recent performance should not obscure the two decades in which it depreciated considerably. Finally, gold is more volatile than other asset groups and does not generate positive cash flows, reducing its potential benefit as a portfolio stabilizer.

Famed investor Warren Buffett aptly summarized gold’s speculative nature, non-productive quality, and high opportunity cost in a Fortune article in February:

Today, the world’s gold stock is about 170,000 metric tons. If it were all melded together, it would form a cube of about 68 feet per side (fitting within a baseball infield). At $1,750 per ounce, it would be worth $9.6 trillion.

With the same amount of money, you could buy all US cropland (400 million acres with output of $200 billion annually) plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually), and still have about $1 trillion in cash.4

Some investors may prefer to hold a modest measure of gold in their portfolio, if only to feel better about uncertain times, or to include gold as one of several components in a broader commodity strategy. But they should think hard before concentrating a large part of their wealth in it.

Stay invested!
 
Notes
3. Correlation is computed into what is known as the correlation coefficient, which ranges between ?1.0 and +1.0. Assets that have negative correlation tend to move in opposite directions, while assets with positive correlation have more similar performance. A zero correlation indicates no relation in performance. From 1971 to 2011, gold had a slightly negative long-term correlation with the US large cap stocks (?0.001) and one-month US T-bills (?0.07), and low correlation with US small cap stocks (+0.022). Correlation with non-US stocks was moderately positive (+0.21).
4. Warren Buffett, “Why Stocks Beat Gold and Bonds,” Fortune, February 9, 2012.

During a weak global economy and uncertain financial markets, many investors tout the benefits of holding gold. Some proponents claim that gold deserves a significant weighting in most investors’ portfolios. Gold’s often-cited portfolio benefits include a strong long-term return, a hedge against inflation, and safe haven during turbulent times.

But does the evidence support these claims? Last week we saw that the evidence does not support the argument that gold provides superior long-term investment returns.  This week, in part two of three, we will look at historical returns for the answer to the myth that “Gold serves as a hedge against inflation.”

Gold as an Inflation Hedge
Some investors perceive gold as a good hedge against inflation and point to its recent record prices as evidence. Figure 1 below shows gold’s performance in nominal and inflation-adjusted terms from its price peak in 1980 through 2011. Gold’s price has climbed substantially in nominal terms. But when adjusted for inflation, a dollar of gold in 1980 was worth $1.04 at the end of 2011.

Figure 1: 
 

Source: Commodities data provided by Bloomberg. Past performance is no guarantee of future results, and there is always the risk that an investor may lose money. For illustrative purposes only.

Of course, gold’s performance relative to inflation has varied according to the time frame measured. In some periods, gold has outperformed inflation, while in other periods gold has failed to match it. For example, from 1970 through 2005, consumer prices more than doubled while gold lost 20% of its value.1 Gold’s unreliable performance relative to inflation also comes with much higher volatility. Since 1970, its standard deviation has been over 19%, compared with 1.2% for the Consumer Price Index (CPI).2 By this measure, gold is over fifteen times more volatile than the CPI.
Clearly, there are time periods where may serve as an inflation hedge – but, like trying to time the market with other investments, the real question is how to identify those time periods BEFORE they occur. And, if that’s even possible, what is the best way to actually execute the strategy?

As we review the evidence for using gold as a hedge against inflation, it’s clear this myth is BUSTED!

Stay invested.

Notes
1. Francesco Guerrera, “A Golden Age for Gold Loses Some of Its Luster,” Wall Street Journal, October 4, 2011.
2. Standard deviation is the statistical measure of the degree to which an individual value in a probability distribution tends to vary from the mean of the distribution.
 

During a weak global economy and uncertain financial markets, many investors tout the benefits of holding gold. Some proponents claim that gold deserves a significant weighting in most investors’ portfolios. Gold’s often-cited portfolio benefits include a strong long-term return, a hedge against inflation, and safe haven during turbulent times.

But does the evidence build a case for holding gold as a separate asset class? This is the first in a series of three blogs in which we examine three myths about gold by looking at historical returns for our answers.

Gold’s Long-Term Performance
Investors who think of gold as having strong long-term returns base their belief on two strong performance periods in the past four decades—the most recent decade and the 1970s. These periods account for most of gold’s price appreciation, with much of gold’s strongest performance period coming since 2008—and investors can still recall the emotional and financial stress that came with the mortgage meltdown, volatile financial markets, and worldwide recession.

Figure 1:
 

For illustrative purposes only. Sources for all figures: CRSP data provided by the Center for Research in Security Prices, University of Chicago; the S&P data are provided by Standard & Poor's Index Services Group; securities and commodities data provided by Bloomberg; MSCI data copyright 2012, all rights reserved. Past performance is no guarantee of future results, and there is always the risk that an investor may lose money. The indices are not available for direct investment. Performance does not reflect the expenses associated with the management of an actual portfolio.

At first this looks pretty good – One dollar invested in 1971 would have grown to $7.33 in 40 years, which compares favorably with the indices illustrated. However, individual investors were not able to own gold prior to 1975, so we really must exclude that time period. Doing so drops gold’s long-term performance substantially. From 1975 through 2011, gold produced a real annualized return of only 1.82% and grew an invested dollar to only $1.95 (versus the $7.33 shown above). US small cap stocks returned 10.6% ($41.73), the S&P 500 returned 7.1% ($13.07), and non-US stocks returned 5.5% ($7.49).

So, from a long-term perspective, gold has not experienced a reliable or sustained rise in value. In fact, its price appreciation has been limited to unpredictable, isolated episodes of high demand. Investors who attempted to time these episodes exposed their wealth to potentially higher risk and to the opportunity cost of missing out on stock market growth.

After looking at the hard evidence, we find this myth BUSTED. Next week we will take a look at using gold as a hedge against inflation. In the meantime, stay invested!

So, who do you believe?  Can you afford to be wrong?  One of these two will likely be.  Stay diversified.

A recent survey of affluent Americans revealed that nearly 40% of respondents said they would wait for an improved job market and less market volatility before they started investing again.  I seem to remember a time when market volatility was primarily to the upside and the job market was extremely strong, giving consumers and investors record-high confidence levels…October 2007.  I also remember a time when we seemed on the brink of economic and market Armageddon, when many were considering burying their money in their back yard…March 2009. 
The point of maximum financial risk is when confidence levels are soaring (October ‘07), while the point of maximum financial opportunity is when most appear to have just given up hope (March ‘09).

These are simple lessons in time that will likely repeat, though maybe not to such extremes as the two time periods I mentioned.  Nonetheless, reacting to how we feel about markets often leads to trouble and financial peril.  History has proven time and time again that our irrationality can reduce the returns we actually experience from what the global equity markets produce.  The S&P 500 has posted a cumulative total return of nearly 100% since its low point reached March 9, 2009, yet there have been only nine months of positive inflows to U.S. stock funds over that span.

Partnering with a trusted advisor that can help minimize the emotion in your investing and financial planning decisions is invaluable.  Don't fall prey to our inherent human irrationality; it will hurt more times than not.  Stay strong, and stay diversified.

Mr. Wasendorf has apparently impersonated a model advisor for more than 20 years, according to his suicide note. He lived in his own private fantasy for years, misappropriating over $200 million in client funds. As seems unfortunately common these days, rather than take responsibility for his actions, he attempted to blame the regulators for doing this to him.

This couldn't come at a worse time for our industry, and it causes investors concern that more schemes and frauds like MF Global and Peregrine are out there. We get to hear about different "amazing opportunities" almost every day in our business. Bank debentures, off-shore accounts, questionable limited partnerships, real-estate schemes, wine futures and every other dog-and-pony-show imaginable. “Caveat emptor” has never been more appropriate . . . "Let the buyer beware!”

Foster Group began operations in 1989, one year prior to Peregrine; we will soon celebrate our twenty-fifth anniversary of serving clients with complete honesty and transparency. This has been, and continues to be, critical to our success as a firm; it’s in our DNA.

Some key items contribute to this transparency and, hopefully, give you confidence your money is safe and that we’re worthy of your trust:

1. We never take receipt of client funds. Your money is completely segregated and secure at an independent, third-party custodian (for most, this is Charles Schwab & Co., Inc.). 
2. Each month, you receive a statement directly from the custodian, confirming valuation and showing activity for the prior month.  This monthly statement essentially verifies your quarterly summaries from our office. 
3. By the custodial agreements you sign, we have only Limited Power of Attorney to do certain things on your behalf: 
1. Execute the investment strategy that we agreed on together through your Investment Policy Statement. 
2. Bill the account for our management fees.  Schwab deducts that amount from the account and reports the transaction on their statement. We also mail a copy of the billing statement to you, showing the calculation of the amount. 
3. Request that Schwab send funds to your address of record or to a bank account you have previously authorized. Funds cannot be sent to us. 
4. Annually, we undergo an independent, third-party audit to maintain our CEFEX (The Centre for Fiduciary Excellence) advisor certification as a registered fiduciary. This is separate of, and in addition to, random periodic examinations by the Securities and Exchange Commission. The CEFEX certification is only granted to firms demonstrating adherence to the highest standards of fiduciary excellence and industry best practices.

We believe being completely transparent with our business practices protects both our clients and our firm from tragedies like Peregrine and MF Global. Please don't hesitate to contact our office with any questions or concerns you may have regarding the safety of your money and our service to you.

        And it got worse... 

        His best friend deserted him.

        There was no dessert in his lunch bag.

        And, on top of all that, there were lima beans for dinner and kissing on TV!”

Judith Viorst’s classic book paints a decidedly un-rosy picture of a day in the life of a child … that everything that can go wrong … does! Even kissing on TV … Blech!!!

My 2011 seemed like one long “Alexander” day … my father passed away, a texting teen T-boned me, totaling my car, two other relatives died, my sister had a significant accident on (off) a horse, my brother was forced to move his family from Florida … well, you get the picture! As my family walked through those dark days, we felt like they would never end. Now, a year later, my mom is doing great, we have a new vehicle, my sister is fully recovered, my brother and his family have settled into their new home, …  and life continues to move forward.

I was thinking about this through the past quarter, as markets retracted from their great first quarter returns.  “Will this market ever turn back around?” I thought, somewhat frustrated. With bad news and worry in Greece and Spain, political uncertainty in America, higher than normal unemployment and media pundits predicting another recession, it seems like there is no hope in sight.

If you’ve felt this way, too, the question is, “What do I do as an investor? Shouldn’t there be some way I can protect myself from the “inevitable” market downturn that is coming?

And the answer is … (drum roll please!) … you’ve already taken action!

When we worked together to determine an appropriate asset allocation for your portfolio, we knew volatile times would come along and determined the allocation based on what’s needed long-term. While you may feel some anxiety in the meantime, you can still sleep well tonight, knowing that your portfolio has been strategically positioned for your long-term goals. Since risk and return are fundamentally related, our willingness to endure the volatility and stay invested through erratic times is precisely what gives us a higher expected rate of return long term.

This discipline allows us to avoid what Carl Richards calls “The Behavior Gap.” 
 

A recent study by researchers at Dalbar showed that the S&P 500 returned 9.14% a year over the 20-year period ended 2010, but the average investor earned only 3.83% a year. Why? Primarily because they bought and sold at the wrong times -- getting into the market just as stocks were expensive and bailing out just as they got cheap.

Another study found that mutual fund investors earned an actual annual return of 1.6% below their funds' stated performance from 1991 to 2004, again due to buying high and selling low.

So what do we do? Maintain perspective. Alexander woke up to a new day, and my tumultuous 2011 ended.  Similarly, markets will turn around; we just don’t know exactly when.  Our job as investors is to remain invested and fully diversified so we’re ready when that finally happens.

Some days are like Alexander’s. Some years are like my 2011. And some periods in the market feel particularly scary. Stay the course!

Naturally, many clients are asking about their exposure to the countries at the center of the crisis, what protections are in place, our view of the situation and how we would respond if events deteriorated further.

First, an update to the situation itself.  A Greek run-off poll took place on June 17 with the two largest pro-bailout parties (the center-right New Democracy and its traditional opposition, the Socialist Pasok party) winning enough seats to form a parliamentary majority.  This provided some immediate reassurance to markets.  Even so, the incoming government must still convince official lenders of its capacity to push through required reforms before securing further bailout funding.

For their part, European governments have indicated a willingness to adjust the terms of the bailout as long as a new government emerges “swiftly.”  And central bank officials from leading developed economies have indicated they stand ready to flood the financial system with cash at signs of any credit squeeze.

Even after the latest elections, however, there are still a lot of unknowns around the future of Greece in the euro and the next steps of collective European leadership.  Some market participants speculate about Greece hanging in there, others predict a complete break-up of the euro, while still others believe a smaller union will emerge, built around Germany, France, Italy and Spain.

Conclusion?  Nobody knows.  All we know with certainty is that current equity and bond markets reflect current assumptions about the possible outcomes in Europe.  Speculating (and reacting) about whether markets are priced appropriately on this situation is no different than buying Facebook stock at its initial public offering because you are certain the share price is going to take off.  Oops.
Our investment committee continues to follow the situation with the help of institutional investment companies we utilize (Dimensional, Schwab, Vanguard) and review our clients’ exposure to Greece.  In a globally diversified portfolio, clients have less than 0.25% exposure to Greek equities and no exposure to Greek sovereign debt.   

Circumstances such as this affirm our belief that basing investment decisions on forecasts is counter-productive; something even more true in such a rapidly developing and multi-stranded story.  As always, news is quickly reflected in prices and there is little to be gained from speculating about likely outcomes.  We are always happy to answer your questions and stand ready to provide any further clarification you may need.  Stay diversified.

Remember when we were young and blissfully ignorant of the comforts and security of home?  To the extent that some of us experienced that one moment where we "threatened" to run away?  We didn't get our way and felt the best way to deal with it was to pack our bags and hit the road.

We might have made it to the end of the driveway or, if we were really bold, maybe halfway down the block, but then returned home at the thought of missing our next meal.

Greece is on the brink of “running away” from the Eurozone and reverting to using their local currency, the drachma.  They spent everyone else's money and now appear to believe their own printing presses could pull them out of their self-created mess.

Imagine taking your Monopoly money to the grocery store.  Same result - worthless.  Even if Greece attempts to leave, they'll be back.  They can’t afford to do otherwise.  The Euro is the best thing they have going right now.  Fortunately for them they have a safety net, a place to run back to.

There remains hope that all the fiscal and monetary challenges being dealt with in Europe will make the monetary union stronger in the long run.  This all too familiar “printing press” strategy and "running out of other people's money" syndrome is certainly not a road the US wants to continue down.  We have no place to run.  Stay diversified.

While this type of influence is what we strive for with our clients, there is yet another opportunity for impact that happens when we put ourselves in a position of serving others with one purpose; to be a beacon of light and hope.   Recently, the Foster Group team spent a day at Hope Ministries, which is a shelter for the homeless in Des Moines.  Interestingly, the mission of Hope Ministries is “Giving Hope, Changing Lives”. 

We spent the day serving meals, cleaning and organizing the Hope Ministries facility.  There was minimal interaction with the people Hope Ministries serves, but all of us at Foster Group left that day with a sense of satisfaction that we had been a beacon of light and hope.   The satisfaction we experienced came as a result of “coming alongside” the staff at Hope, who have been building relationships and investing into the lives of the homeless for years.   The best way we could serve them was to let them know that their work matters and the impact of their efforts are worth the time.

Serving can be a lonely job at times.  Progress at a place like Hope Ministries is measured in tiny steps, not giant leaps.  The people who work in that space need our encouragement.  They need cheerleaders.  They need to know that there are others who “have their back”. 

Upon leaving Hope Ministries after a day of work, I couldn’t help but think that we really were “catalysts for positive life change".   We would probably never know how, but in the end it didn’t matter.  What really mattered was the smile on the faces of the workers who strive every day to make a difference in the lives of people who measure progress one small step at time.  We were there to give a simple boost, a pat on the back and to utter the words “WELL  DONE”.   We all need to hear that sometimes.

Wisdom comes in all forms, little green men with pointy ears among them.  Yoda, the Jedi master from the Star Wars movies had more one-liners than the rest of cinematic history combined.  His every utterance brimmed with deep thought.  One such phrase was, "Size matters not."  While he was not talking about the world of investing, let's just pretend he was . . . 

Globally, individuals and institutions have approximately $12.5 trillion dollars invested in over 15,000 mutual funds.  Exclude cash equivalents like money market funds and the total dips to slightly below $10 trillion.  Follow me now. . . . the top 100 funds, ranked by their net assets, hold nearly $3.5 trillion.  This means less than 1% of mutual funds control close to 35% of the capital. 

Interestingly, these “top” funds have seen significant inflows from new investors over the past three years (an average increase of 62% in asset base).  This is due, in large part, to their previous history of outperforming their peers and the subsequent attention and excitement that outperformance generated (you know those snazzy ads and commercials?).  And yet, these same funds have tended to struggle since achieving such magnitude, underperforming nearly 60% of their competitors during this time frame.   

Not-so-much-truth:  The more time you spend (or pay to have someone spend) researching which stocks to buy and sell, the better your chances of beating the market.

Truth:  75% of all actively-managed mutual funds fail, after fees, to outperform their industry benchmarks.

Not-so-much-truth:  Investment complexity and high returns are directly correlated.

Conclusion:  Don't drive a mile to buy a lottery ticket, and stay diversified.

“My 401k doesn’t cost me anything.”  I’ve now heard that comment over 329 times . . . give or take a few.  If you agree with that statement, I have some bad news.  Nearly 71% of 401k investors assume they don’t pay any fees for the operation and management of their employer's retirement plan.  That means investors are in for a major shock, come mid-year.

Effective July 1, thanks to the Dodd-Frank financial reform legislation and other pressures on Wall Street to increase transparency for investors, all fees associated with a group retirement plan must be disclosed, in line item form, to the plan sponsor.  Falling under section 408(b)(2) of the Employee Retirement & Income Security Act (ERISA), the goal is to provide employers with information that allows them to better perform their fiduciary due-diligence on the providers serving their 401(k) plan.

Originally set to roll out April 1, the implementation date was pushed back to allow service providers to make final preparations for delivering this information.  Translation:  most service providers are not being transparent with their fees today, have no idea how they are going to deliver the data and are dreading what they’ll say when employers call asking where in the world these fees came from.  Insurance companies are pouring millions of dollars into lobbying the IRS, the SEC and other governmental bodies to hold off implementation as long as possible, hoping the requirement will just "go away." 

If you’re an employer offering a retirement plan to your staff, a trustee serving as a decision-maker for the betterment of your group retirement plan or simply an investor in your organization's retirement platform, pay close attention.  Hopefully, those in the role of third-party administrator, custodian, investment advisor, and/or record-keeper for your plan have been clearly disclosing their fees all along.  Even if you think they have, you should still pay attention.  It’s required of them to provide more detail than most ever have.  Later in the year, section 404(a)(5) will come into effect, requiring that all fees withdrawn from individual participant accounts be disclosed to the participant on their statement.

If you’re in a leadership or decision-making capacity for your company's plan, get ready for questions - and plenty of them - from concerned/shocked/enraged employees (remember, 71% assume they are paying nothing!).  It's not uncommon for “all-in” plan costs to be siphoning upward of 2% from investors' accounts annually.  Retirement preparedness and confidence has been rocked over the past few years, and undisclosed - often excessive - fees do nothing to help the situation. 

Foster Group has always provided full disclosure of the costs of our services and has operated in a fiduciary capacity as long as we’ve served retirement plans.  If you have questions or are interested in a second opinion on your retirement plan platform, please let us know.  Pay attention.  Stay diversified.

How would your investing confidence, and perception of overall economic strength, change if the Dow Jones Industrial Average was trading near 15,000 rather than its present level around 12,800?

I imagine most of our internal confidence barometers would be much higher in that case.  Yet a somewhat subjective decision by the editors of The Wall Street Journal (which owns Dow Jones & Co.) back in June of 2009 is the cause of those two widely dispersed valuations.  This group of newsroom authorities select the companies that make up the Dow, an index of thirty large, publicly-traded US companies that (in the editors’ minds) represent "the market."

They chose to include Cisco Systems, rather than Apple, when they dropped General Motors from their iconic tracking mechanism.  The inclusion of Apple, based on its value today relative to Cisco, would have propelled the Dow to be trading just short of 15,000.

What’s this all mean?  Nothing really, but amazing how much credence we give to subjective snippets of market data and how these considerations can sway our decision-making.  I’ve read countless stories and testimonies from investors holding out on equity exposure until the Dow reaches a particular point.  This Apple vs. Cisco anecdote exposes the pitfalls that come with too much tunnel vision.

Just imagine how this difference in Dow value would impact the confidence and general psyche of investors, the attractiveness of stocks, the assertiveness of employers, and perhaps eradicate a level of financial fear arguably not seen in 80 years.  No question that element of fear has added a significant ball-and-chain to our economic recovery.

And now we know that some really smart people in a board room back in 2009 unknowingly and unintentionally hindered the road to global recovery because Cisco received more thumbs-up than Apple.  Someone's MacBook must have froze up that day and ruffled a few feathers.  Imagine that.  Stay diversified.

Where did this seemingly "great" idea go so wrong?  Simple; shared monetary policy but no corresponding shared fiscal policy.  They agreed on what to use, but not how to do so responsibly.  The Euro was an invitation to mis-manage spending rather than drive economic development; doomed to fail from the start.  The little guys (Greece, Portugal, Ireland, etc.) obviously saw this as an opportunity to play with the big boys.  Keep in mind the biggest of those boys – Britain – declined at the inception to participate in the Euro game.  Recently, they again declined to participate in a treaty to more closely align fiscal measures.  They are taking a bad rap from socialist societies with historical unemployment rates averaging over 8%, in order to protect their sovereignty and not be brought down by other countries’ irresponsibility.  Hard to blame them, but it certainly puts a crimp on resolving the problem in the short-term.

While the world watches, and to some degree offers their helping hand, Europe may continue to dictate market volatility over the coming weeks and months.  Many investors find this reason enough to exclude international equity exposure from their portfolio.  Many of those same investors found the economic downturn in 2008 to be reason to detach from stock exposure, effectively locking in losses and missing a historic rally in prices that began in early 2009.  Volatility is a fact of life as an equity investor.  Markets are forward-looking; they have already priced into equities an assumed outcome of the European mess with all public information currently available.

America has learned some lessons over the past few years.  Hopefully, we’ll stay attuned to those and maintain our changed behaviors.  Ideally, Europe will do the same as they sort out their collective mess.  As investors, we need to conduct our own introspection and ensure that we’re learning as well . . . not to over-react to the perceived incompetence of governments world-wide.  Equity markets will go up, and down, and repeat.  That's my bold prediction for the year.  Just remember - when they go down, those of us who choose to maintain our exposure are being offered more in future expected returns for putting our capital at risk.  Stay diversified.  

Political maneuvering will drive the ultimate fate of both items, especially in light of this being an election year.  While these pieces of tax legislation serve only as a snippet of the Congressionally-supported and IRS-enforced complexities we are faced with as investors, it serves as a good reminder to worry about what you can control . . . saving as much as possible, remaining diversified, avoiding debt, and using your American right to speak with your vote in next November’s elections.

Motivation comes from many sources, elves notwithstanding.  This time of year, children have a particular interest in the potential treasures awaiting them under the Christmas tree.  To ensure their wish list objectives are met in full, kids put on their West Point-finest behavior and march in line like never before.

The latest phenomenon to ensure this order-following continues throughout the month of December is the arrival of the Elf on the Shelf.  If you’re unfamiliar, check it out here: www.elfontheshelf.com.  With this Elf comes an element of mystery, fear, respect, and an almost guaranteed "yes-sir, yes ma'am" household.  So, the billion-dollar industry of books coaching parents on how to garner obedience from their children has now been rendered useless...apparently.  All you need is the Elf.  Yep.

Just like kids, we adults know certain behaviors are required when it comes to planning for the future.  The idea of a successful retirement serves as our Elf on the Shelf, driving certain elements of fear, motivation and discipline into our planning and strategizing.  The key with the Elf, though, is that it must be visible.  You have to know that Santa's helper is ever-present, always watching; otherwise, you assume you can get away with anything.  If your plan isn’t written down, reviewed often and revised as needed, the likelihood of realizing your long-term goals decreases dramatically.  If you aim at nothing, you will hit it every time.  As the Elf purportedly says (or insinuates, because I've never heard him talk) . . . "Behave, or I'll tell Santa." 

College Savings Iowa – What’s the Maximum Deductible Limit?  Also, Some Changes are Coming!

For 2011, you may deduct from your Adjusted Gross Income a maximum contribution to College Savings Iowa of $2,865 per beneficiary on your State of Iowa income tax return.  If you’re married, your spouse may contribute that amount as well.  There’s still time left to contribute.  Make sure your check is postmarked or your automatic deposit is posted no later than December 31, 2011.

If you’re planning for 2012, the maximum allowable deduction will be $2,975 per beneficiary. That’s right; 2 parents, 2 kids, 4 accounts - a total of $11,900 of allowable deductions!  Not to mention a great way to accumulate tax-deferred growth for college.  Remember, this is for contributions made January 1, 2012 or later.

Oh, and you might be interested to know that College Savings Iowa is making some changes to available investment options which may affect your existing accounts.  If your accounts are invested in the age-based tracks, their objective will now be included in their name to give you a better idea of the investment style of each track.

More significant to note: the age-based tracks will increase their international stock exposure from 20% to 30% of the stock portion of each portfolio.  While some of the underlying holdings will change as well, they’ll continue to have well-diversified domestic and international stock and bond holdings, all managed by Vanguard Funds.  Fund expenses are not expected to increase.  If you have existing accounts invested in an age-based track, you won’t need to take any action; the changes will happen automatically.  If you’ve created a custom portfolio from the individual funds, you might consider the new international fund option, Total International Stock Index Portfolio, to see if it’s suitable as part of your allocation.

Complete details can be found at:

https://a248.e.akamai.net/f/248/21630/7d/im.uprinv.com/rc/sr2/ia/newsletter_supplement.pdf

Below is a summary of name and allocation changes for the track options:

In our ever-evolving and never-ending personal battle of needs vs. wants, author Carl Richards frames up the issue in a style much better than I can.  Enjoy and relate...

http://bucks.blogs.nytimes.com/2011/10/17/the-struggle-to-define-what-we-truly-need/

An agenda topic in many client meetings is portfolio allocation. Generally, when we talk about allocation, we’re referring to the percentage of equities (stocks or stock-owning mutual funds) and the percentage of fixed income (bonds or bond-owning mutual funds) held in your portfolio. We’re asking if the mix you currently hold remains appropriate or if it should be changed for some reason. Perhaps you plan to retire sooner than you had thought or you’re receiving an unexpected inheritance.

Why is allocation important? Because it’s the largest single factor determining the risk of your portfolio. We want you to participate in equity markets for long term-growth and, ideally, have enough fixed income in your portfolio so that any necessary distributions will not require you to sell equities in a down market cycle. Planned selling of equities to rebalance your portfolio or to intentionally realize a gain makes sense when managing a portfolio, but being forced to sell equities when their values are depressed is not a good thing. Having adequate funds available in short-term, high-quality fixed income funds, allows needed distributions to be taken from that portion of your portfolio, giving equity positions time to recover.

Sometimes (i.e., late 2008 into early 2009) equities markets experience negative cycles lasting several months or as long as several years. When this happens, it’s pretty uncomfortable for most investors. Having been through this multiple times in my career (that’s right, I’m old!) I can tell you that a significant percentage of folks who are comfortable with high equity exposure most of the time (i.e. when equity markets are positive) feel much less confident in these down market cycles. No one likes watching their portfolio value decline.

A well-thought-out allocation devoting plenty of funds to short term, high quality fixed income positions that will plug away and hold their value, ready to come to your aid should you need cash, allows you to more easily stomach the lurches of a negative equity market period. How much should you devote to these types of positions? That differs for each investor and depends on a number of factors including your age, how long you plan to work, other financial resources you may have in addition to your portfolio and what we refer to as your "sleep well factor."

As a rule of thumb, here is a broad generalization: If you are within five years of retirement, work toward moving your allocation so that at retirement you have about 8 years of planned distributions held in fixed income. Don’t assume more risk than necessary. In other words, if you have a sizeable portfolio - more than you’ll reasonably need for lifestyle expenses during your lifetime - you may not need to take much risk, so why would you want to do so?

If you’re just beginning your investing career and have a long time until you plan to need distributions, say 15 to 20 years or more, a higher level of equity exposure may be appropriate. You might be comfortable investing 70, 80 or even as much as 90% of your portfolio in equities. This might be appropriate for you, assuming you sleep well with your portfolio invested heavily in equities, even when the stock market is declining for months on end. Cautionary Note: you won’t accurately understand your "sleep well factor" until you’ve been through a down market cycle or two. It’s a factor based on emotion, not intellect or reason and - trust me on this - you are not immune.

If you haven’t had an allocation discussion with your advisor recently, think about adding it to the agenda of your next meeting to make certain the allocation you have is appropriate for your future. If not, together you can decide what needs to change.

It’s that time of year again! Your mail box is filling with requests for donations. Maybe your phone is ringing or your neighbor is at the door asking for a donation for his favorite organization. How does that make you feel?

Do you have an intentional giving strategy for your family or, like so many, do you respond to requests for contributions based on who approaches you or what comes in your mailbox, and then find that you have little left to give to causes you’d really like to support? Planned giving can provide some structure to your gifts and allow you to feel more intentional about your choices. It’s really not so difficult and step one is to identify an annual giving amount - an estimate is ok - and it becomes a starting point allowing you to use your dollars in a manner that provides the benefit where you hope to have impact.

Step two is the fun part; deciding who or which organizations will receive contributions, how much and when. Including your family in this process makes charitable giving a family affair. Whether your children are youngsters or adults with children of their own, it’s never too early or too late to start intentional family giving conversations and to reap the rewards of shared strategies. Allowing everyone a voice in the use of the funds can establish a pattern of giving for your family members for the future and allow you to use your charitable dollars in a way that aligns with your personal beliefs and the causes that are dear to your heart and those of your family members. It can also lead to some pretty neat conversations on why you support each organization or individual you choose and the impact you would like to have. It can also be a way to connect the past to the present … and to the future, if you are honoring a loved one by contributing to a cause that was influential in their life.

You might consider a family activity giving of your time together to benefit an organization that your family would like to support.

So, how do you respond to that request that doesn’t fit your giving strategy for this year? Communicating that you have a family giving plan and that the funds for this year are already committed is a pretty strong reply and, in my experience, is usually respected and seen as a positive response. If it’s a cause of interest to you, you might say you will consider a gift next year.

We all tend to be a little more focused on gratitude around Thanksgiving and that makes this a perfect time to think about our year-end giving as well as planning for the year ahead. If you have thoughts to share on this subject, I would love to hear from you!

Is Greece the world’s “Canary in the coal mine?”

There was a time when caged canaries were used in coal mining as sacrificial warning signs of the presence of toxic gases.  When the canaries stopped singing, the miners knew it was time to get out.

While Greece has been receiving much of the attention, the size of Greece and magnitude of their potential default doesn’t seem to be in line with the markets’ response of late.  In his blog, linked below, Scott Grannis discusses this issue and suggests the magnitude of recent market reactions to the back-and-forth of a potential Greek default may be a realization that many other governments around the world are traveling down the same road.

Regardless of your political leaning, there is a significant silver lining to this issue.  It’s the broad realization that we have a problem and something needs to change.  There have been issues in the past which America has solved and dark periods from which we’ve emerged, and I am a firm believer it can happen again.  Admittedly, the road to fiscal recovery may be long and winding, but as the saying goes, “The first step is admitting you have a problem.” 

http://scottgrannis.blogspot.com/2011/11/why-is-greek-tail-wagging-global-dog.html

Policy Update 

Last week, you should have received a letter or e-mail from us, letting you know about modifications to a couple of our internal procedures.  The purpose of these changes was first to continue protecting the financial interest of our clients and, second, to comply with regulatory mandates by the Securities and Exchange Commission (SEC).  At the risk of over- communicating, we thought it might be helpful to summarize these changes on our blog as well.

Client Verification

This change applies to releasing any type of account information, or making any changes to an existing account.  Prior to taking any action, we will be asking you to verify your identify.  Any of the following pieces of information will satisfy this requirement:   

• The Schwab account number and account registration (the way the account is
   titled)
•  The last four digits of your Social Security number
•  Your date of birth
•  The address of record for the account 

This is a way for us to ensure that the person making the request is actually the account holder.  While this is a common procedure among most financial service providers today, we understand it may be a bit of a hassle.  Remember that it’s designed to protect you against someone fraudulently gaining access to your account. 

Distribution Requests

The second change involves requesting distributions or moving assets from an account.  Legally, these requests can only be made by the account holder himself or herself.  We will, therefore, require that the account holder be on the phone to make the request.  A spouse or other family member will not be able make a request on behalf of another account holder.

In order for a non-account holder to make changes or initiate asset movement from an account where they’re not listed as an account holder, a full Power of Attorney for that account will be required.  It’s important to note that this document must be drafted by the client’s attorney.

Again, we do realize these changes may be an inconvenience for some clients, and we apologize in advance for that.  We are committed to doing all we can to make the implementation and application of these new procedures as seamless, and painless, as possible. 

If you’d like more information, please give us a call and we’ll be glad to talk through this

The current renewed volatility in financial markets is reviving unwelcome feelings among many investors – ultimately creating a sense of powerlessness.  The sovereign debt strains in the US and Europe, renewed worries over financial institutions and fears of another recession are leading market participants to apply a greater discount to risky assets. It’s reminiscent of the fall of 2008 and early 2009, when the collapse of Lehman Brothers and the sub-prime mortgage crisis triggered a global market correction. This time, however, the focus of concern has turned from the private sector to public-sector balance sheets.  The personified markets are expressing their uncertainty and anxiety!

As for what happens next, no one knows for sure; that is the nature of risk.  But there are a few points investors can keep in mind to make living with this volatility more bearable:

Markets are unpredictable and do not always react the way “experts” predict they will.  The recent downgrade by Standard & Poor's of the US government's credit rating actually led to a strengthening in US Treasury bonds.

Quitting equity markets at a time like this is like running away from a sale.  Prices have been discounted to reflect higher risk, which is another way of saying future expected returns are higher. And while the media headlines proclaim, "Investors are dumping stocks," remember someone is buying them; there is no such thing as “orphan shares.”

Market recoveries can happen as abruptly as did the prior correction.  Recall that in March 2009 - when market sentiment was last this bad - the S&P 500 reversed course and put up seven consecutive months of gains totaling almost 80%.  This is not to predict that a similarly shaped recovery is imminent now.  Rather, it’s a reminder of the danger, for long-term investors, of turning paper losses into real ones and paying for the risk without waiting around for the recovery.

Markets and economies are different things.  The world economy is forever changing, and new forces are replacing old ones.  The IMF noted in its April 2011 World Economic Outlook that while advanced economies seek to repair public and private balance sheets, emerging market economies are thriving.  A globally-diversified portfolio takes account of these shifts.

Nothing lasts forever.  Just as smart investors temper their enthusiasm during booms, they maintain a degree of optimism during busts.  And just as loading up on risk when prices are high can leave you exposed to a correction, dumping risk altogether when prices are low means you can miss the turn when it comes.

Market volatility is worrisome. The feelings generated are completely understandable.  But through discipline, diversification, and understanding how markets work, the ride can be bearable.  At some point, value will re-emerge, appetite for risk will re-awaken and, for those who acknowledged their emotions without acting on them, relief will replace anxiety.

We‘re all barraged by TV, the internet, e-mail, texts and tweets.  New vehicles for interacting are constantly being introduced; we’re assaulted from all directions.  Especially disconcerting are the messages bombarding us with the information that the stock market is going down or up, and suggesting we should take action - now.

For that matter, it’s not just messages about the stock market, it’s concern about political action or inaction, social issues, sports teams and celebrities.  You name it, if it’s of public interest, our attention is constantly being demanded to keep us “informed.”

But what if you were to disconnect from the sources demanding your attention on matters where you likely have no influence and chose, instead, to intentionally connect where you do have influence?  How about giving a fraction of your attention and time to the things that matter to you personally?  Let’s face it, today’s newsworthy political candidate who says or does something ridiculous, the Housewives of Wherever and someone’s favorite sports player will continue to have every action publicized as long as it causes sensationalism.  You can always catch up on any of that “news” if you really care to, but take a bit of time away from it and you might find you really don’t care.

 I hate to break the news to you, but most of us really don’t have influence over much, if any, of the above.  I know that hurts, but it’s true.  The good news is that you can be informed AND have a life of your own as well.

Are you the person who is in constant contact by phone or internet; checking messages during conversations with family, even during meals and subtly under the table, at meetings and gatherings?  Guess what?  You’re not fooling anyone.  Everyone sees and knows your behavior, even your kids, or should I say, especially your kids.  What behavior are you modeling?  What’s really important and what or who really has your attention?

Try disconnecting.  Try it for 60 minutes a day if you’re strong, 30 if you’re not and just 15 if you’re a real wimp.  Be intentional and do it every day for, say . . . . a week.  The idea is to connect where you do have influence, like your spouse, your kids, your employees or coworkers - maybe most importantly, yourself.  That’s right, how are you doing?  What do you want to accomplish?  How’s that going for you?  How do you make a difference?  Are you burning out or supercharged?  Take some time to find your real power.

Good news!!

I was 14 when I fell in love for the first time - with a sweet, 20-year old riding lawn mower! With keen business sense, I approached my dad with an offer: "I'll mow our lawn all summer AND pay you back if you'll ‘front me the money' for the mower." I had visions of riches as we closed the deal, and a week later I was proudly rolling down our street to my first lawn-cutting job. But as I mowed lawn after lawn (including ours) through the summer, I got weary of handing over all my profits to my dad. After two months, I celebrated my last payment ... and graduated with my "Debt Stinks" diploma from the School of the Real World.

I've thought of that summer often, particularly over the last few years. While there are often excellent, practical reasons for borrowing money, it's nearly always true that a person OUT of debt is in a financially stronger position than someone who still owes others money. We see this playing out in significant ways as our nation's leaders debate our national debt.

Of course, for those with old-fashioned, Midwest values, this may be nothing new. Research recently released ranked average indebtedness (excluding student debt) by state, and Iowa and Nebraska were both in the top ten least-indebted states. You can read the article, and see the rankings here.

What does this mean for you? Work with your advisor to develop a strategy to eliminate the liabilities from your balance sheet, then be sure to implement the strategy with automated payments.
And if you fall in love with a sweet-looking antique lawn mower ... pay with cash!

NOTE: [[[Link address: http://moneywatch.bnet.com/saving-money/blog/devil-details/debt-in-america-most-least-indebted-states/4899/]]]

People matter most.  There are so many things in life that occupy my mind and become the object of my pursuits.  Most are good things and deserve my attention.  But when push comes to shove, it’s my family and friends who show up, stand beside me and support me through the tough times.  During these past few months, there were many people who inspired me to keep fighting.  While I need to be responsible for investing in my career, retirement and financial well-being, all of these should take a back seat to investing in people.

Having a plan is critical.  In a matter of hours, or even minutes, I was thrust into a circumstance of urgency.  There wasn't panic, because I knew I had my "house in order."  I had completed my planning, but found myself thinking about issues that I had not considered.  Things like; did my wife know the passwords to key account information?  Did she know where to find the key to the safety deposit box?  Would my files be easy for my executor to go through?  It pushed me to take my planning to another level and to consider all the "what ifs," and minimize as many uncertainties as possible.

My most trusted advisors have my ear and most influence my decision-making.  When the news of cancer hit, I found myself in an autopilot mode of operation.  There was so much to think about; so many things to consider.  I could only really hear the advice of the people who had already earned my trust; my wife and family, of course, my accountability partners of thirty years and my financial advisors who knew my circumstances and understood my wishes (even if they were a bit cloudy for me while dealing with the shock of this news).  It confirmed for me the importance of having trusted advisors in place before being faced with uncertainty. 

I will leave a legacy in this world.  The question I need to ask myself is, “Will it be the one I want?”  Facing the certainty of my mortality caused me to think about the people I care about the most.  Each of these relationships deserved the very best from me.  Were they getting my best?  Were there other things in life that had edged above them on my priority list?  It doesn't happen intentionally; life just has a way of squeezing us and misappropriating our attentions.  I heard it said once, “When death is certain, life becomes rich.”  I wasn't necessarily facing death at that moment, but it revealed to me what I obviously knew; that I would die someday.  Being told you have cancer causes you to look at mortality differently.  I have learned over this past year to live each day as if it were my last.  It has forced me to pay attention to things that are most important.  It has helped me to be much more strategic and intentional in investing in my legacy.  What I have come to realize is that the legacy I leave will be dependent on the life I am living now.

I am not in control.  Though I live my life with intentionality, there are some things I just can't control.  This is the hardest lesson of all, because my human nature wants to control every aspect of my life and the circumstances in which I live.  When the doctor gave me the diagnosis of cancer and an uncertain prognosis, it was truly the first time in my life that I felt totally out of control.  This is inevitable for each of us, so it makes sense that we mentally and emotionally prepare ourselves for those times when all we can do is embrace the moment and learn the valuable lessons of difficult circumstances.  Coming to grips with this reality that I am not in control has helped me to start living with a new level of abandonment and joy.

My education about living life with cancer is far from over, but I can honestly say that this past year has been rich beyond measure.  I am looking forward to new lessons about living life with passion in the days, months and years to come.

The investment world tends to work this way as well.  Financial markets actually need bad days.  Yep, go back and read that part again.  Actually - let's all say it together and then hug.  Financial markets actually need bad days.  If there were no bad days, weeks, months, or years, long-term returns would be drastically lower.  Without those down periods, investors would have no reason to demand higher return potential for supplying their capital and putting it at risk.

Professors Eugene Fama (University of Chicago Booth School of Business) and Kenneth French (Tuck School of Business at Dartmouth College) answered this question in a short blog post dated March 11, 2009, which, in hindsight, was within days of "the" market low point following the 2007-2008 financial crisis.  At the time, they wrote this: 

"The market has declined sharply in response to rough times and forecasts of future rough times.  The decline in market prices combines two effects: (i) lower current and expected future profits, and (ii) higher discount rates for the expected future profits.  The discount rate, in turn, has increased because uncertainty about future profits (in other words, risk) has increased and, apparently, because investors have become more risk averse.  Higher discount rates for expected profits translate into higher expected stock returns.

 In short, the two of us believe that the expected return on stocks is currently high.  But beware: the high expected return is compensation for the risks associated with different possible outcomes.  If the quite pessimistic assessments of future economic performance built into current market prices turn out to be right (which is our best single guess), realized returns will be high.  In other words, we will get the currently high expected return if the market's pessimistic expectations of future economic performance are realized.  On the positive side, there is a substantial chance that the current assessments of future economic performance built into market prices turn out to be too pessimistic.  If so, realized returns will be even higher than expected.  But there is also a substantial chance that the current quite pessimistic assessments of economic performance built into market prices turn out to be too optimistic.  In that case realized returns will be low, perhaps quite low. This is always the general nature of the risks in stock market investing.  The story is more poignant at the moment because risk is so high."*

Professors Fama and French make three critical observations worth re-reading and considering in today's economic environment.  The first is that investors have responded to bad economic news by demanding a higher return for stock investments.  This demand for higher return (what Fama and French refer to as the "discount rate") results in lower prices being paid for a company's expected future earnings.  Investors, as a group, currently think those earnings are at greater risk of declining.  Interestingly, in 2011 so far, actual corporate earnings have been relatively strong.

The second key point is captured in the statement, "In short, the two of us believe that the expected return on stocks is currently high."  Why?  Neither professor believed then (or now) in market timing or in making predictions.  They have written extensively about why these practices should not be trusted.  What they were saying is that the decline in prices reflects a de facto increase in the risk premium demanded by investors. Any positive return from these lower prices, mathematically, must be greater than if the stock price rose from a previously higher price.  For example an investor's percentage return on a stock rising from $10 to $20 is higher than it is on an increase from $15 to $20.  In both cases, the stock rises to $20, but the investor who bought (or held) at $10 will get a 100% return while the investor who bought (or buys) at $15 will "only" receive a 33% return on investment.

Finally, their perspective on risk is extremely important.  Risk does not guarantee higher return, but as risk increases, investors require the possibility of a higher return.  Fama and French envisioned three possible outcomes in 2009; the expected outcome, the better-than-expected outcome, and the worse-than-expected outcome.  None could then, or now, be guaranteed.  Current market prices factor in the pessimistic economic news that is known by the universe of investors.  So, when the professors say that the higher rate of return is their "single best guess", they are not suggesting they know more than the market. They are, rather, observing that this is now what the market expects.  As a result, the market of all buyers and sellers was requiring lower prices for equities in March of 2009 than in late 2007.  This same observation holds today in September 2011 relative to stock prices in June 2011. 

In retrospect, 2009 and 2010 were years of very high returns for stocks around the world.  This growth reversed direction in July 2011 as the European banking crisis became a larger issue and world economic growth slowed.  Both of these circumstances increased the perceived risk of investing in stocks, driving prices lower.  At today's lower price, expected returns have again risen.  The risks are real, but patient investors have been rewarded in the past for participating in stock markets and it is our expectation that they will be rewarded in the future as well. 

*http://www.dimensional.com/famafrench/2009/03/qa-expected-return-in-a-bad-economy.html

A July/August 2011 Financial Analysts Journal article* by University of Illinois Professor Scott Willenbrock references a thought-provoking example of what seems like modern-day alchemy; what he calls the "Diversification Return" that can be realized through the practice of portfolio rebalancing.  He cites the result of a simulation by researchers Erb and Harvey who created 40 hypothetical uncorrelated assets, each with an average annual return of 0%, but a standard deviation of 30%.  You could say that these 40 investment assets were "sand," in that they had no positive long-term return.  Willenbrock summarizes their findings this way: 

"Running 10,000 simulations over 45 years, they found an equally-weighted, rebalanced portfolio had an average return of 4.3%.  They dubbed this result, "turning water into wine." *

It was portfolio alchemy!  Each portfolio asset had a total return of 0% (e.g., worthless sand) for the period.  But the portfolio of all 40 assets combined produced a positive return of 4.3% (e.g., gold).  How is this possible?  Regular rebalancing is the answer.

Foster Group has consistently advised clients to allow for the regular rebalancing of their investment portfolios regardless of the near-term investment environment.  The basic premise of rebalancing is that investors have increased success when they "buy low" and "sell high," adopting a consistently dispassionate, almost contrarian viewpoint.

Here's an example of how it worked in the very volatile two-year period ended December 31, 2010.  If the investor had simply owned the S&P 500 for the period, they would have experienced an average annual return of -2.86%. Had the investor invested only in US small companies, represented by the Russell 2000 index, they would have experienced a 2.22% annual return.  If a third investor had only held US real estate investment trusts, as represented by the Dow Jones US REIT index, their return would have netted an annualized 0.01%.  A fourth investor, very cautiously invested in only short-term US Treasury bills, would have been rewarded with a 0.63% annual return.

But a fifth investor - the "portfolio alchemist"- who utilized regular rebalancing, could have seen their return for the period, using these same more or less "sandy" assets, grow by 2.68%.  How?  If the fifth investor had simply held these assets in equal weights (25 cents of each dollar to each asset class), and every six months "rebalanced" back to the 25% target, selling the assets that grew and buying the assets that declined, the rebalancing "alchemy" could take place.  This "alchemy" provided a better result than any of the individual investments over the 24-month period.

Additionally, the rebalanced portfolio exceeded a simple buy-and-hold approach where an investor took a 25% position in each of the assets in 2008, making no further buys or sells over the two-year period.  The buy-and-hold portfolio would have produced a 0.04% annualized return vs. the 2.68% return of the rebalanced portfolio.

Admittedly, testing portfolios in differing time periods with different rebalancing intervals yields a variety of results.  But the principle confirming the potential value of rebalancing has been shown to hold in most all investment environments and time periods where the outcome of what will turn out to be the “best” investment can only be known in retrospect.  In today's uncertain financial markets, investors can be tempted to hold onto every last penny of bonds and cash in the face of very volatile, often declining, equity markets.  However, long-term portfolio success can be enhanced by the regular practice of rebalancing to the Investment Policy allocation suitable to the individual investor’s circumstances and goals.  Yale University Endowment portfolio director David Swensen calls it, “the  rebalancing bonus."  Willenbrock describes it as the "free dessert" of portfolio management.  Either way, it works a bit like the legendary alchemy of old.

*Willenbrock, Scott. 2011. “Diversification Return, Portfolio Rebalancing, and the Commodity Return Puzzle.” Financial Analysts Journal, vol. 67, no. 4 (July/August): 42-49

Here's a not-so-well-publicized anecdote that may help you avoid further bouts of hyperventilation…

Seems many corporate executives are recognizing opportunity amid the recent market freefall.  As of mid-August, these higher-ups have individually purchased, or increased corporate buybacks of, their own company’s stock to the tune of $900 million. That is the most for a single month since insiders bought $1 billion in stock in March 2009, "ironically” coinciding with the bottom of the last bear market. Thirty-five insiders thus far have each purchased in excess of $1 million of their company’s stock, and U.S. companies have already bought back more in share value this year (over $300 billion) than they did for all of 2010.

If you were an owner or executive of a company and lacked complete confidence that its share price would return to previous levels, would you have any reason to buy back shares now held by the public?  Since you would theoretically be as knowledgeable as anyone concerning the strength and viability of your organization both short- and long-term, this would be a rather informed buying decision reflecting some positive intuition.

Keep this tidbit in mind to add some balance among the 359 other "newsworthy" headlines you're sure to see and hear this week, suggesting that doom and gloom is here to stay. 

The 1954 "B" movie, "Them" is based on the premise that irradiated ants in New Mexico grow to an enormous size and then threaten to end civilization.  While I have not seen the movie (and who really needs to?), the basis for many "B" horror movies is to take relatively small threats in ordinary life and put them under the magnifying glass so that they look truly terrifying on the big screen.

The US and European stock markets opened to an immediate sell-off this morning, down over 4% in the first 60 minutes of trading on US exchanges.  Why was there so much volatility?  It's usually hard to say if there was any one thing caused the initial drop, but fear usually magnifies whatever actual problems there may be.  The Labor department released data showing initial jobless claims rising by 9,000 to 408,000, though the four-week moving average dropped to 402,500; both relatively small changes.  Inflation numbers were mixed, slightly higher when including gasoline, but lower than expected when excluding food and energy.

Of course, European banks and sovereign debt are still looming issues, but S&P did reiterate France's AAA rating, still higher than the US.  However, 10-year US Treasury yields dropped below 2% briefly this morning, showing that investors, if not S&P, still view US government debt to be of the highest quality.  What will actually happen in the Euro-zone is still uncertain; nothing new there, either.

So, today's economic numbers are not improving, but neither did they fall off the cliff overnight.  The circumstances are still as uncertain economically and politically today as they were yesterday.

Markets Under the Magnifying Glass

I think most people recognized long ago that we are facing a host of difficult circumstances globally; problems that will not be resolved quickly.  Most of these issues have been known for many months, if not years.  The day-to-day and monthly numbers describing these problems are not dramatically changing.  So, the ongoing problems remain large and real, but these dramatic market reactions to short-term readings are like putting on magnifying glasses while looking at ants and then acting as though dramatically newer and larger threats exist, that didn't the day before.  This magnifying glass point of view causes some participants in equity markets to make and re-make what should be five- and ten-year decisions on each day's new data.

While running the risk of sounding like a broken record, a well-diversified portfolio with an adequate allocation to bonds and cash (e.g., 5-10 years of expenses for those contemplating retirement in the next few years) is built to weather the short- (1-year) and even intermediate-term (3-5 year) volatility of stock markets.  For investors with long-term goals, long-term strategies still make the most sense.  Yes, it's unnerving and discouraging to watch the reported daily values of our investments gyrate the way they have recently.  However, short-term reserves in high-quality bonds have held their values and continue to pay interest.  Stock dividend yields are actually rising above Treasury yields as prices fall, and long-term portfolios for those contemplating retirement still have the same amount of liquidity they had 30 days ago.  Maybe a trip to the movies for a romantic comedy is in order instead of another night of MSNBC, Fox News and CNBC with "Them"?

That was the headline of this morning's (Monday, August 8, 2011) Wall Street Journal op-ed by celebrated Princeton economics professor emeritus, Burton Malkiel.  

As Professor Malkiel forecast, stock markets around the world have experienced eye-popping losses today, the first day of trading since S&P indicated that it would downgrade US Government debt.  In the article, he catalogued the negatives facing the US economy and markets including stalling GDP growth, stubborn unemployment, sluggish housing, and dysfunctional government policy making. Then he writes this:

"Is it time to sell all your stocks, which are still well above their lows of 2009? I think not. No one can predict what the stock market will do in this and the coming weeks. Stocks may continue their decline, but I believe it would be a serious mistake for investors to panic and sell out. There are several reasons for optimism that in the long-run we will see higher, not lower, market valuations."

For the remainder of the article, he then highlights the relatively low price-earnings ratios for stocks, decent dividend yields (2.5%) and unusually healthy corporate balance sheets.  All of these items, and a few more, indicate to him that the longer-term picture for stock investors should be better, not worse.

In closing, he writes:

"A strong dose of modesty is clearly in order.  We all need to be aware of the limits of our ability to forecast future stock prices.  No one can tell you when the stock market will end its decline, but there are some things that we do know.  Investors who have sold out their stocks at times when there have been very large declines in the market have invariably been wrong.  We have abundant evidence that the average investor tends to put money into the market at or near the top and tends to sell out during periods of extreme decline and volatility..."

"My advice for investors is to stay the course.  No one has ever become rich by being a long-term bear on the fortunes of the United States, and I doubt that anyone will do so in the future.  This is still the most flexible and innovative economy in the world.  Indeed, it is in times like this that investors should consider rebalancing their portfolios.  If increases in bond prices and declines in equities have produced an asset allocation that is heavier in fixed income than is appropriate, given your time horizon and tolerance for risk, then sell some bonds and buy stocks.  Years from now you will be glad you did."

At Foster Group, we are inclined to agree wholeheartedly with Professor Malkiel.  Experiencing the kind of downward volatility of the past few weeks is very disconcerting, however we are reminded that stocks are for the long-term portion of our portfolios and that patient discipline applied to a balanced, globally diversified portfolio has been rewarded time after time.

For a limited time, you can find the entire article here:

http://online.wsj.com/article_email/SB10001424053111903366504576492512709525754-lMyQjAxMTAxMDAwODEwNDgyWj.html?mod=wsj_share_email

You can count on all manner of dire predictions in the wake of this sell-off.  Market forecasts will be altered, there will be predictions of shifts in volatility and risk premiums and it will almost certainly be said that this is the beginning of the next recession or depression.  While the economy and the stock market certainly interact with one another, which is cause and which is effect is far from clear.

What is clear is that declines of this magnitude, while happening infrequently, are not uncommon.  Statistically, one would be expected less than once in every 1000 trading days.  In reality, they occur much more frequently than that; statisticians refer to this as a "fat-tailed distribution."  Unfortunately, most investors would like to believe markets are even less volatile than statistics would predict, let alone the way they behave in reality.  For that reason, a day like August 4 is particularly unsettling. 

Such declines occur in both good and bad markets, as well as good and bad economic times. The mere fact that such a drop occurred doesn't tell us much of anything about markets' next move, but there's a tendency to read an awful lot into a market decline.  There's far more randomness than we'd like to believe and nothing is the inevitable consequence of what happens in the stock market. 

None of this, however, means the current sell-off will end soon.  But corrections - all corrections - ultimately end.  While it's attractive to think about altering your portfolio to avoid the present risk, we don't believe that's the smart play.  We can't time markets, nor have we seen anyone else who can do it reliably.  We continue to believe investors are better served sticking with their present allocation, as uncomfortable as that may be.

Remember Mr. Holland's Opus? Mr. Holland, played by Richard Dreyfuss, is an aging high school music teacher who's taught most of the community leaders, including current members of the school board, which is looking to shut down the music program because of budget cuts (whew - that's a one-sentence summary of a two hour movie!).  There's a great line in the dialogue when a board member explains to Mr. Holland that they've looked for other solutions, but just can't find any.  With a delivery drawn from years of teaching music, Mr. Holland commands the board member, "Look harder - just like I taught you in high school!"

Sometimes, I think our representatives in Washington need to go back to their roots and just "work harder" at finding a solution to the problems confronting our country. Then I stumbled across the website below and realize an awful lot of work is actually going on!

http://ssa.gov/OACT/solvency/provisions/index.html

The site contains a summary of the impact of numerous proposals to "tweak" the Social Security system to make it solvent.  It's not for everyone, but if you are a "datahead" like me you just may enjoy perusing the various proposals.  It's surprising which ones have a substantial impact ... and which are nearly insignificant!

It may even seem like you're going back to school!

Patience - what a virtue! It's invaluable, when we know what we want amid choices and limitations, and are willing to wait for it. Creating a plan is one thing - sticking to it is another. Securing a solid financial future is something we all seek, yet many do so by taking uninformed and, sometimes, unnecessary risks. Financial misfortune results from costly mistakes more often than from missed opportunities. There will always be "opportunities" to achieve this desired comfort, but all opportunities come with some form of risk, many not worth taking and "too good to be true."

You need to check your map, your direction, and your location with some regularity. That's what we do for our clients - act as a sounding board, solution provider, complexity reducer, and accountability creator. Remember, if you know what you want - Mountain Dew included - have a plan and be patient!

*Disclaimer and reminder to all readers that mothers are still always right and should be listened to and obeyed without fail.

How about you - what would being debt-free be like for you? Might be worth celebrating with a parade and fireworks!

Ever play Monopoly?  You know that space you land on, or that card you pick that directs you to, "Go Directly to Jail, Do Not Pass Go, Do Not Collect $200"?  Not fun, nor did the chuckle from your competition add to your enjoyment.  If you don't have a will in place, or haven't reviewed yours in years, please follow those same instructions - just replace "jail" with, "your preferred estate planning attorney."

I recently met with a middle-aged couple who have several children and no estate planning documents whatsoever.  Upon that discovery, I contemplated stopping the meeting and driving them to a trusted estate planning attorney . . . and I'm only half kidding.  When it comes to having a well- balanced and secure financial plan, having a proper will is a critical part of the foundation.

Think there's no need based upon your circumstances?  No problem, so long as you fall into the following, narrowly-defined camp:  you have no family and you'd love for the government to have everything you own after your passing.  If that's not you, get a will in place.

Don't know of a good attorney?  Ask a trusted friend, professional advisor, or us for a referral.  The process is fairly straightforward and painless, but absolutely essential in protecting what's most important to you.  Once done, you are "out of jail" and best wishes on not landing on anyone's properties, especially if they have hotels!

Remember those Looney Toon cartoons when a character would dig straight down into the ground and eventually pop out in China? The typical scene would highlight a bewildered look on the face of the portrayed rice farmer as Bugs Bunny does a quick u-turn back to the states. China has for the bulk of history been an unknown and mysterious entity...undeveloped, overcrowded, and ripe with political and religious suppression. While the latter components remain intact, recent history is evidencing a change in our global landscape. Reality has emerged that China has and will further become an ever-present fixture on our world's economic platform. So much so that to some, their growing prowess is creating relative discomfort. You can argue both sides, but most tend to take the stance of this not necessarily being a good thing. China owns so much of our debt...China is absorbing many jobs...China is driving our trade deficit...they have served notice of their arrival.

The linked article by Larry Swedroe is a very interesting yet practical view from the other end of the spectrum, however. China's emergence can be seen as a good thing (considering the alternative), so rather than me trying to sum it up, have a quick read...

 http://moneywatch.bnet.com/investing/blog/wise-investing/why-chinas-economy-surpassing-the-uss-is-a-good-thing/2336/?utm_medium=twitter&utm_source=twitterfeed

With the looming inflation bug starting to sink its teeth in, uncertainty surrounding the implications of healthcare reform, unrest in the Middle East, and devastation in Japan, businesses may not seem to be hurrying to deploy record-level cash holdings.  Cash you say?  Companies are stock-piling cash?  These cash reserves, estimated to be in excess of $2 trillion, if unleashed, would certainly provide added momentum to the global economy.   Unfortunately, the elephant – make that a herd of elephants - in the room is our spiraling governmental debt.  As the formula goes, every dollar taken via taxation is one less dollar available for investment by private enterprise.  While the latter is the more resourceful and efficient of the two, the ever-increasing national debt offers indirect warning that corporate tax bills may be headed north. 

Companies today are reluctant to reinvest earnings from foreign operations domestically.  Those entities represented by the Standard & Poor's 500 Index have approximately $1 trillion in profits that have been kept overseas to avoid U.S. taxation.  The hard reality these organizations face is that if they bring home these revenues, a 35% marginal tax rate awaits those dollars.  They get a credit for any taxes paid to foreign governments - but since the corporate tax rate in the U.S. is one of the world's highest, most companies are in no rush to bring the money home.  By keeping those earnings abroad, U.S. companies indefinitely defer their day of reckoning with the IRS.

While employment figures seem to have bottomed and, in fact, have begun inching upward, corporate growth is being closely watched by all.  Behavioral finance suggests we’re much more attuned to the pain of loss than the pleasure of gain.  This, combined with the recency effect, (suggesting we’re more influenced by recent events than distant past), may mean a slow pace of reinvestment at the corporate level.  However, those entities willing to take what could be perceived as a more aggressive - yet calculated - approach to growing their business may very well emerge as front-runners in the long term.  Over half of today’s S&P 500 companies were born during past recessionary periods, suggesting that sound strategy and boldness are married to create successful organizations during times of unrest.  Labor, technology, real estate and liquidity are cheap right now.  Buy low and sell high is a mantra we all understand.  Whether corporations have the will to get ahead of the curve with their excess cash resources, and whether Uncle Sam can avoid over-indulging, could determine how quickly the corporate landscape re-emerges as a sign of American strength. 

Markets have recovered significantly from the “bottom” of March 9, 2009, and there’s a tendency to feel the worst is behind us and better days lie ahead.  While that may be true, we’ll undoubtedly experience declining markets again.  Understanding your exposure to these negative time periods is important and often misunderstood.  The term given to this is “Sequence Risk,” which Investopedia.com defines as:

 “The risk of receiving lower or negative returns early in a period when withdrawals are made from the underlying investments.”

There has been a marked increase in the amount of attention given to the idea of “Sequence Risk” since the markets of late Q4 2007 through Q1 2009.  This idea focuses on the mathematical reality that in retirement, the sustainability of your portfolio can be dramatically affected by the order in which investment returns are experienced.   To help explain this, consider the following:

Scenario #1 : You enter retirement at the beginning of 1973 with an investment portfolio of $1,000,000 (for those of you old enough to remember, this was a frightening time to be an investor - equity returns over the next two years were down over 40%.)  Your living expenses require a monthly withdrawal of $4,000 from your portfolio, an annual withdrawal rate of 4.8% based on your total portfolio value.  This withdrawal will increase at the rate of inflation and continue for the next ten years.

Scenario #2 : Identical to Scenario #1, except the sequence, or order, of your monthly investment returns over the ten-year period are reversed from Scenario #1.

The end result of each scenario is as follows:

Scenario #1 leaves you with $1,850,094 at the end of the ten years.  That doesn’t sound too bad, but because of inflation you are now withdrawing over $9,000 a month which has actually increased your annual withdrawal rate to 5.9%.  Said another way, while your assets have increased in absolute dollar terms, your purchasing power has declined by almost 20%, as compared to 1973 dollars.

In Scenario #2, you ended 1982 with $2,468,517.  Your annual withdrawal rate decreased to 4.4%.  In this scenario, your purchasing power actually increased by almost 8%.   

The only difference in these scenarios is the experienced sequence of returns. In Scenario #1, investment return for the first two years was -18.72% and -25.19%, respectively; your withdrawals depleted principal right out of the gate. Conversely, scenario 2 returns were much more favorable; 32.52% and 17.72% in the first two years, more than covering the withdrawals and adding to the value of the portfolio.

To be clear, sequence risk only matters if cash flows occur in the portfolio. If there are no cash flows to or from the portfolio, the sequence of returns will not change the ending value. To illustrate this point, consider the following:

Scenario #3 : You have accumulated $1,000,000 at the beginning of 1973. No contributions or withdrawals will be made for the next ten years.

Scenario #4 : Identical to scenario 3, except that the sequence of your monthly investment returns over the ten-year period are reversed from Scenario #3.

The following chart illustrates the value of your portfolio over this ten year period. While the portfolio values vary greatly along the way, they end at exactly the same point.

As markets have recovered nicely and investors are becoming more confident, now may be a perfect time to consider what you can do to protect against sequence risk. Stay tuned . . . this will be the topic of my next piece.

Lost count of the number of times we’ve stressed the importance of diversification?  Does consistent reiteration of a balanced portfolio start to sound like Charlie Brown's mom on the phone?  Well, good news . . . we’re not the only ones promoting the crucial benefits of avoiding the "all-your-eggs-in-one-basket" approach.  T. Rowe Price, one of the top mutual fund families in the world based on the value of assets under their management, conducted a recent study (described in the linked article below) demonstrating the benefits and high probabilities of success by maintaining a long-term, disciplined, diversified portfolio.  While we all know past performance is no guarantee of future results, this study adds yet again to the growing mountain of academic evidence strongly suggesting that avoidance of security selection and market timing may produce better outcomes for investors.

For the full text or the article referenced, click here:

T.Rowe Price Study Shows Benefits of Diversification

The devastation that's taken place in Japan recently as a result of the natural disaster is almost beyond human comprehension. Nature has a way of reminding us from time to time how truly vulnerable we are.

The added specter of a possible nuclear disaster only heightens the concern. The outcome of that situation could reverberate, not only in Japan, but in policy decisions around the world, for many years, as did the accidents at Three Mile Island in 1979 and Chernobyl in 1986.

At times of human tragedy, making observations about impact on markets and economies can seem insensitive, even inappropriate. We mean no disrespect, nor do we seek to minimize the human element; we fully realize thousands of lives have been lost and literally hundreds of thousands of others impacted; economic and market considerations are secondary. We know, however, that our clients look to us for perspective in times like we're witnessing today.

As with any disaster, there is an economic component to the Japanese tsunami. Early estimates of cost range near the $100 billion mark. This is similar to the $80 billion-plus impact Hurricane Katrina had on the US. The good news is that the heaviest damage in Japan is in areas that represent a small part of Japanese economic output.

Japan's economy is the third-largest in the world, having just recently been surpassed by China. It is a major player in finance, industry and technology. Japan has spent the last twenty years struggling to recover from its real estate and stock market collapses of the early 1990's. This added burden will make that task more difficult, but not impossible. It may have a near-term effect on Japan's GDP; perhaps an increased risk of a Japanese recession. This is far from a certainty, however. Many foresaw recession in the US as a result of Hurricane Katrina, which never materialized.

History clearly shows the resilience and determination of the Japanese people. They have recovered and rebuilt from many disastrous situations, both natural and man-made, over the past several decades. It is highly likely they will do so again, hopefully with the assistance of the world community.

From a market perspective, it's safe to assume the level of near-term volatility is likely to be higher than normal. Events of significant emotional impact typically create anxiety in investors, causing many to seek what they perceive as "safety" and avoid risk. This is likely to cause prices to fall in the short run. We do not believe these losses will be permanent, and we encourage our clients to maintain their present allocation, unless there's been a substantive change in their personal financial situation that might of itself dictate a change.

In this tragedy, we can see again the wisdom of broad diversification. Any market can suffer an unexpected crisis, whether economic or financial. Any country can suffer a disaster, natural or man-made. The best defense against all of these is to diversify broadly across countries, across segments of the market and across asset classes. This preparation was made in our client portfolios long before the current disaster occurred.

We are firm believers in the long-term resilience of markets and the human spirit. We believe Japan, the world and the markets will overcome.

I don’t know how many of you have DirecTV, but over the past two weeks I have become somewhat addicted to the DirecTV News Mix channel.  One channel with eight windows, simultaneously showing CNN, CNBC, Fox News, Fox Business, Bloomberg, MSNBC, Headline News and The Weather Channel.  It is wall-to-wall, 24/7, non-stop “news.”
The opportunity for my “news” addiction came as a result of some back surgery that has kept me at home for a few weeks of recovery, allowing me to experience the nature and impact of this constant news barrage.  During my home-bound recovery, Japan has had an historic earthquake and tsunami resulting in a nuclear emergency, Libya continues in civil war, and other parts of the Mideast are uneasy, at best.  Of course, investment markets declined abruptly as a result of these news items and the uncertainty surrounding the timing of their resolution.
While these market swings would be disquieting under normal circumstances, I have found first-hand that they are even more so when one is exposed to the non-stop info-tainment “analysis” that now passes for news.  On Wednesday, March 16th, I watched the Dow Jones Industrials first move down over 150 points on prepared remarks from a European energy commissioner (whose comments were later shown to be 24 hours old and without specific facts) and then up 100 points on a story that the Tokyo utility company was “close” to restoring some power to the overheating reactors (this didn’t happen for three more days). Both movements show how over-reactive markets can be to even a whiff of “news,” in this case, news that amounted to nothing!
Here are a couple observations that may be worth considering if this recent round of natural disaster and political unrest has you wondering if you should “do something” about how you are invested:
First, the natural disaster in northern Japan is tragic, especially for the people in the epicenter. “Fukutsu no sieshin” is the Japanese phrase for “never give up.”  The brave and purposeful Japanese people are once again proving their ability to persevere in the face of heavy adversity.  I spent some months in Japan during the late 1980’s and, as a nation, they are extremely disciplined and hard working; truly incredible people.
But this disaster will ultimately come to a conclusion and be absorbed in the much larger Japanese and world economy (remember our own experience with Hurricane Katrina and the Deepwater Horizon Oil Spill in the Gulf).  Diligent, enterprising and creative people will rise to the task of rebuilding.  People will find ways to recover and businesses and markets will recover as well.
Turning to the Middle East and the yo-yo of oil prices, one thing to remember is that oil-producing countries need oil-consuming economies to buy their oil.  When prices get too high, consumers use less and the oil producers are left with lower revenue.  If foreign oil prices rise even more dramatically, alternative fuels, including bio-fuels, natural gas, solar, wind, and even domestic oil production become relatively more cost-effective and threaten foreign oil producers’ long-term economic health.  The bottom line here is that Libya represents only 2% of world oil production and they need oil money in a worse way than the world needs their oil.  It seems that even Colonel Gadhafi may understand this as he has quickly announced today that he would not fight the UN “No-Fly Zone” resolution. What the Colonel actually does on the ground is anybody’s guess, as history has shown him to be a very unreliable leader.
Successful investing is still a long-term proposition regardless how much “news” is dispensed by the media every minute of every day.  As Foster Group Portfolio Director Ed Green has written in his recent blog post on portfolio strategy in light of the Japan situation, “In this tragedy, we can see again the wisdom of broad diversification.  Any market can suffer an unexpected crisis, whether economic or financial.  Any country can suffer a disaster, natural or man-made.  The best defense against all of these is to diversify broadly across countries, across segments of the market and across asset classes.”

Finally! That was the response of many individuals and both legal and financial professionals as the long awaited tax agreement was passed by Congress and then signed by President Obama in December of 2010.  The agreement presents a number of opportunities for individuals and families as they consider their financial and estate planning goals.  Here is an example of one important opportunity for investors to consider.
The tax on long-term capital gains will now remain at 15% for another two years.  Throughout 2010, it seemed likely this key tax rate would rise to at least 20% and potentially be tied to even higher ordinary income tax rates.  For investors holding appreciated securities, the tax agreement means that you now have another two years to carefully, and relatively inexpensively, reposition portfolios that
     1. May hold too much of one company's stock (a concentrated position), or
     2. Need to be rebalanced due to significant gains in particular asset classes (e.g. emerging markets)
Investors would be wise to consider repositioning in either of these situations for at least two reasons.  First, all indications continue point toward higher tax rates sometime in the future.  The US fiscal situation will require both budget and tax reforms to resolve, but for at least the next two tax years, we have access to this historically low rate.  Beyond that point, especially if the economy continues to recover, higher tax rates are likely.
The second reason to take action involves managing risk exposure in your portfolio.  When you're not required to do so, realizing gain and paying taxes now may seem counterintuitive.  Investors should remember, though, that if an asset is ever to be sold and the proceeds used, taxes will be incurred.  Additionally, there is no guarantee that any specific investment won't decline in value by more than the current 15% tax bill.  As an advisor to many families, we've seen investors hold on to investments because "the tax cost of selling would be too high", only to see the market value of the stock subsequently decline by significantly more than the tax rate, in some cases, all the way zero.  In retrospect, paying the 15% tax on the gain to diversify the portfolio risk would have been very inexpensive indeed.

Now that we’ve landed in Omaha, I'm struck by the level of connectivity within the community.  Not unlike Iowa, everyone seems to know everyone.  Folks here find strength in camaraderie, and success in hard work and handshakes.  The welcome mat laid out for us has appeared endless as clients, strategic alliances, friends and neighbors have ignored our Iowa State Cyclone license plates and made our transition rather seamless. 
 
We’re excited about what lies ahead for our firm, our clients and the expansion of our services to those west of the Missouri river.  While the business environment here, similar to the rest of the country, is still recovering from the economic downturn, people are looking more than ever to better prepare themselves, their families and their organizations for the future.  Foster Group is, and always will be, in the business of reducing complexity for our clients and seeking to deliver financial solutions that deliver high probabilities of success.  We strongly believe in the world-class experience and value we bring to our clients.  We have spent much time building, implementing and refining our processes and deliverables.  We certainly side with Warren Buffet, arguably the most famous and successful Omaha resident, when he stated:

"Your premium brand had better be delivering something special, or it's not going to get the business." 

Foster Group is a special place with people of amazing talent and processes to deliver that “something special.”  Our firm is prepared for, and delighted with, the opportunity to expand our reach in significantly impacting lives and communities for the better.  Please give us a call or email with any questions, if you would like to hear more about our Omaha office, or if you have contacts in the area we might engage in an introduction!

Foster Group is a Registered Investment Adviser, working independently of any other entities or conflicts of interests to ensure that our guidance is most appropriate for your financial success.  We are a fiduciary.

Unfortunately, many investors do not enjoy this type of transparent relationship.  Recent industry studies (see linked article) show most investors are not aware their adviser may not be legally obligated to provide the best direction, but may offer recommendations that are merely suitable.  This misunderstanding is not the fault of investors; the current standards governing financial service providers allow this line to be blurred.

Here are two questions you should ask anyone you work with, now or in the future:  "How do you get paid?" and "How are your dollars invested?"  Any hesitation or hedging in the answer should suggest taking caution and slowly backing away!

http://www.businessweek.com/news/2010-09-15/-clueless-investors-think-brokers-are-fiduciaries-survey-says.html

 Dr. David B. Nash, MD, MBA, Dean of the Jefferson School of Population Health at Thomas Jefferson University and Medical School in Philadelphia cited this finding during his recent keynote presentation at the Iowa Health Collaborative's annual meeting on quality initiatives in health care.  I had the opportunity to hear Dr. Nash make two presentations during this meeting and could not help but see the similarities between "the ideal" and "reality" in health care as well as in investing.

Here's what I mean . . .

 Dr. Nash said one of the most effective ways to improve care and reduce costs in the system (the holy grail of healthcare reform) would be to expand the 18% of what we know works and apply that knowledge rigorously.  The higher the percentage of treatments available that we KNOW work (or that we know don't work) the less wasteful we'll be in the treatment of disease and injury and the better the outcomes we'll see as a percentage of cases.  We'll spend less across the entire system and restore more people to good health.

 That sounds like progress we can all believe in!

 Investors face a very similar circumstance.  What we KNOW about how economies and markets work, based on statistically-sound, evidence-based science that is always correct in a predictive sense is far less than 50%.  We want to know how to create immediate and lasting economic growth.  We want to know when the stock market has "bottomed."  However, the actual evidence-based science for how to do these things consistently is lacking.

 How can we observe this lack of knowledge?  One example is a recent study of professional money managers versus their benchmark market indices.  This study found that over the 10-year period ending December 31, 2009, between 60% and 90% of these professional managers underperformed their benchmark.*  That indicates a "success rate" of between 10% and 40%.  Those are not the odds that patients or investors are looking for.

 What's an investor (or patient) to do?

 First, when given the opportunity, we should apply any and all solutions that we KNOW (as a result of rigorous academic research, applied trials and practice) work.  Where we have good science, it seems foolish to ignore it.  For example, current evidence seems to support the idea that investors will likely have better long-term results investing in markets as opposed to placing their money with managers who are attempting to beat markets.

 Second, we need to recognize that there are very few "SURE THINGS" (True 100% of the time).  So, we need to move forward with prudence and caution and listen to those who have had a number of consistently good outcomes.  When the facts aren't conclusive, we may want a second opinion.

 In healthcare, informed patients seek out individual physicians and institutions that seem to have a good grasp of the science as well as the art of care.  Investors would be wise to do the same thing.

 Foster Group attempts to combine the best available academic research about markets and investing with our years of experience in prudent and comprehensive wealth management.  We believe this approach gives our clients a much greater probability of achieving their most highly desired outcomes.

 *Source: Standard and Poor's Indices Versus Active Funds Scorecard, March 30, 2010

In today's environment of "change," it's becoming more important than ever to remember what we can and cannot control, especially with regard to our financial well-being.

 I've become a follower of a blogger named Carl Richards (behaviorgap.com) over the past year.  Carl has a knack for creating "napkin art" that communicates simple, but important points.  Here's my own "napkin art," describing the result of how we focus our thinking and activity.                                 

What kinds of things go in the "Things we can't control sphere?"  Here's a very
partial list - the comprehensive list is way too long, but you'll get the picture:

1. Stock market returns
2. Interest rates
3. Inflation
4. Tax policy
5. United States unemployment / employment
6. Government spending & deficits
7. Next week's Lotto numbers
8. The weather on your next vacation

Ok, so that's kind of a distressing list.  Here's a partial list of what goes in the "Things we can control" sphere:

1. Increases or decreases to our personal debt level
2. Lifestyle spending
3. How much we save and invest
4. How much insurance we carry
5. The allocation of our investment portfolios to stocks, bonds, cash and other alternatives
6. How much we give, and to which people and causes
7. Who and what we read, listen to and watch
8. Whether to take a vacation  

We're all adults reading this, so let's just admit that we know where this is going.  Good, common sense advice is to focus on the things we can control, while at the same time preparing, as best we can, for those things that are out of our control and unpredictable (e.g., why we purchase life insurance).  Each of us has a limited amount of time and energy to focus on what's truly important, and we'll make the most progress toward our goals if we focus that time and energy on activities that are effective. 

"The problem, of course, is essentially one of human emotion. We are essentially somewhere between Armageddon and  Nirvana"
David Rosenberg, Chief Economist at Gluskin Sheff as cited in Bloomberg Businessweek, June 20, 2010

Things are certainly uncertain! 

I don't know about you, but everyday the "news" seems to provide less clarity about the future and what to expect than the day before.  Whether we're talking health care policy, tax rates, soundness in the world banking system, employment, housing, oil spills, where LeBron James will play basketball (Miami) what we mean by "financial regulatory reform"... well, you get the picture.  It's a little like Iowa weather, if you don't like it, just stick around for a day or two, I'm sure it will change!

A few weeks ago, I penned a short article about how in times of great disruption there is potential great opportunity.  As we've experienced the return of greater intra-day volatility to stock markets (May and June daily volatility in the S&P 500 was double what we experienced in March and April) I believe we can see that this disruption has created a "hangover" called uncertainty.  Our uncertainty is expressed through wild swings in market indices from day to day, or even within the same trading day.  Every little bit of information is parsed and pored over to see if it holds the key to the return of economic growth or is the harbinger of ultimate financial disaster.

Of course the truth (as we all know in our more sane moments) is that the world is a very complex place and no single piece of monthly financial data is going to save or sink our economic ship.  But we're led to feel like it may, because that's the nature of our news cycle, which reflects and plays to our human nature as well.  We want more certainty, even if it's negative because then we will KNOW what's going to happen next and we'll KNOW what to do.

But, as an investor, don't we really need some uncertainty?  When an outcome is certain (or very close to certain) there is little risk present.  If you purchase a 30-day Treasury Bill, you'll be paid very little interest.  Why?  Because no one (well, at least very few people) expect the US Government to default on its debt in the next 30 days.  Where there is very little risk (uncertainty), there is very little potential return.

However, if you're buying shares of BP right now, the success of your investment five years from now is far less certain.  The Gulf oil spill could bankrupt the company in claims and litigation.  Or the problem leak could be plugged in July or early August, and in eighteen months BP could be back to paying dividends and making relatively large profits.  So, what will happen?  It's uncertain and that uncertainty means the range of possible outcomes is very wide.  This also explains why BP's stock price has fallen so far, so fast.  Investors are unwilling to pay a high price for taking on such risk, such uncertainty. 

If BP returns to financial strength, those brave souls who are buying the stock today will be rewarded generously.  If it goes into bankruptcy, those same brave souls may be called "foolish" for making such a bet.  In either event, it's the uncertainty that presents the opportunity.

On a larger scale, this is what investors are faced with in terms of general stock market investing.  Instead of an oil spill affecting one company, we've had a financial crisis affecting many companies and countries.  So, the question is, five or ten years from now will we look back and see a cleaner Gulf of Mexico as well as a clearer economic environment?  History supports the idea that we'll find solutions to problems like the ones we are facing today, whether oil spills or economic disruption.  When will we find the solutions?  That's entirely uncertain.  And therein lies the opportunity!

"Good questions outrank easy answers."
Economist, Paul E. Samuelson

Do you have questions about the future of global investment markets and the world's biggest economies? Who doesn't! What if you could ask one of the brightest thinkers in the investment world today your number one question?  What would you ask?

On October 7, 2010, Foster Group will host our Fall 2010 Foster Group Lecture Series event, "Global Markets: Has Everything Changed?" featuring Eduardo Repetto.  Mr. Repetto is Co-CEO and Chief Investment Officer of Dimensional Fund Advisors (DFA) and is, literally, a "rocket scientist" (more on this later).

At past Foster Group Lecture Series events, we've asked our distinguished guest speakers to give presentations about topics of particular interest to them with only limited time for client questions at the end. This year, we've decided to allocate the majority of our time with Mr. Repetto to an interview format where we'll be asking him your most compelling questions.

 We need your help! Send us your GOOD, TOUGH, NAGGING questions!

In order to make sure that our clients' most important, compelling and widespread questions are addressed, we need to hear from you.  We'll be collecting your questions and comments over the next three months and building an interview-style presentation with Eduardo and Foster Group partner, Kent Kramer.  By gathering questions in advance, we hope to identify your most common concerns along with related follow-up queries. We'll have conversations with Eduardo in advance of the October event so he has ample time to develop the kinds of answers and supporting material that we hope will make this a truly relevant and informative event.   

 Here's how to "Ask Eduardo"

 As you think of questions you'd like to ask, go to the end of this blog entry and submit your question in the "Responses to Ask Eduardo" fields.

 Did I mention he was a rocket scientist?

If you haven't already listened to our most recent quarterly audio update, you can click here and listen to a short interview that Foster Group partner Ed Green conducted with Eduardo in early July.  In the interview Eduardo shares how his path to the world of finance included aeronautical engineering ("rocket science") first as a student and then as a professor at Cal Tech.

 So, yes, this event really will be rocket science!

We've also written on the merits of conversion, and why it's important to evaluate this closely before proceeding:  http://www.fostergrp.com/assets/fostergroup/RothIRAConversion.pdf.  In one of our recent Wise Wealth Lecture Series events, Kent Kramer provided a fantastic overview of how and why the new rules on conversion came into existence, why a conversion may not be so black and white, and some brief examples of how the math behind conversion actually works.  Kent's presentation is available here:  http://www.fostergrp.com/resource-center/wise-wealth-lecture/kent-roth-ira.

The variables influencing this analysis are really limitless, but it almost always hinges on comparing the taxes you will pay today (to convert) to the taxes you expect to pay in the future when you withdraw dollars from the IRA (if you don't convert) - which brings us to the point of this blog.  If, in retirement, you have charitable gifts, medical bills, long-term care expenses, mortgage interest or property taxes, the tax-deductibility of these items could be lost or minimized without income to support the deductions.  Let's use one of these as an example to illustrate:  

Let's say I have an elderly friend who is forced to enter a long-term care facility which charges $200 per day, or $73,000 annually, for his care.  Let's also assume the entire $73,000 is paid by withdrawals from his IRA, requiring him to recognize this as income.  However, because long-term care expenses are considered deductible medical expenses, he can deduct these expenses to the degree that they exceed 7.5% of his adjusted gross income.  So of the $73,000 withdrawn from the IRA, only $5,475 remains taxable.  His personal exemption amount of $3,650 {for 2010} further reduces his taxable income to $1,825, putting him in the 10% tax bracket and incurring a tax liability of $182.50 {or 0.25% of $73,000}.

As a comparison, someone in the 33% federal and 8.98% (Iowa) state tax brackets would incur a tax liability of $30,645.40 in 2010 to convert this same $73,000 to a Roth IRA {or 41.98%}. 

For those who are charitably inclined, there may be an even greater cost of converting IRA assets to a Roth.  Charities can be named as beneficiaries of traditional IRA assets, essentially converting them to 'non-taxed' dollars at your death, to the charity of choice.

To be clear, there are certainly circumstances that warrant the conversion of IRA assets to a Roth.  We've seen several that are virtual 'no brainers'.  However, the tax liability from eventual withdrawals from your IRA may not be as much as you think.

Could you be at your peak effectiveness regarding financial decision-making right now?  It’s quite possible you are very near that point, if we accept a couple of ideas about how our brains function.

Since October 2007, most investors have seen the value of their portfolios decline precipitously (global stocks lost 53% between October 1, 2007 and February 29, 2009) and rebound dramatically (those same global stocks have risen 69% from March 1, 2009 through March 31, 2010 **).  So, while portfolio values are likely still well below those peak 2007 values, they are likely well above their early 2009 lows.

Sitting here with your coffee (or tea) on April 1, 2010, which experience - the big drop or the rapid rebound - is having the most influence on your thinking and actions today?

“Recency Bias,” an accepted psychological phenomenon, would lead us to conclude that the most recent events (rapid rebound) would likely leave the strongest impression.  But University of Oregon Professor Paul Slovic observes that another aspect of our brain function means, “it takes far more good news to build our confidence than it takes bad news to destroy it”.  He goes on to say that, “In the past few years, we’ve seen a lot of things that caused us to lose faith in the institutions that we would like to be able to trust.  These feelings tend to override our ability to analyze things in a logical way.”  (As quoted in the April 2010 edition of Money Magazine).

By acknowledging both influences on our thinking, we may be entering a unique opportunity for good thinking and decision making.  Our tendency toward Recency Bias as we look at the strong market returns of the past 13 months - which could lead us into feelings of overconfidence and greed - is being tempered by our tendency to hold onto negative experiences too long and project those feelings forward indefinitely.  Perhaps we are at a balancing point, moving away from fear but not yet to overconfidence.  This would be a very good place from which to make sound, long-term financial decisions.  This balance is achieved not by forgetting the extreme experiences of the past 2 years, but by clearly looking at them together, and making decisions we can live with, knowing that we will likely go through many more short-term boom-and-bust cycles in investment markets.

So, if you’ve been wondering when to revisit your portfolio balance between stocks, bonds and cash, or how long you may need to work to realistically achieve your long-term lifestyle expectations, perhaps now is the ideal time for assessment and taking action.

**  As measured by the MSCI AC World  

The significant rebound in equities markets over the past year notwithstanding, much of what we hear and read about the national economy these days is dismal.  In fact, you could easily get the impression that these are the worst economic times we’ve ever been through.  From our Fall 2009 Wise Wealth Lecture Series event, our featured speaker Brian Wesbury offers some historical perspective on that notion.  He also addresses what he believes were contributors to the financial panic of late 2008 and early 2009.

To watch Brian’s entire presentation, including the audience Q&A, click here: (Presentation – 43 minutes; Q&A – 22 minutes)

Many clients have asked some form of this question over the past year.  It’s a great question, because if inflation gets out of control, the ability to maintain current lifestyle is threatened.

I have begun following the recent bi-monthly US Treasury auctions of regular Treasury Notes and Bonds as well as Treasury Inflation Protected Securities (TIPS) to get an idea of what “The Market” is predicting for inflation.  By “The Market,” I’m referring to all of the investors (institutional and individual) who are buying these securities month after month.

One measure of the expected rate of inflation is the “spread”, or interest rate differential, between issues of 10-Year Treasury Notes and 10-Year TIPS.  The January 15, 2010 auction of 10-Year TIPS sold at a coupon rate of 1.375%. The February 15, 2010 auction of 10-Year Treasury Notes sold at a coupon rate of 3.625%, a difference of 2.25%.  This means that the buyers of both types of bonds were expecting inflation to average 2.25%, which would equalize the overall returns achieved by all holders at the end of 10 years. The regular Treasury would provide level 3.625% interest payments each year. The TIPS holders would see their coupon payments rise over 10 years as observed inflation increased the value of the bond, so that the final average annual return would equal 3.625%.

At that same February 15, 2010 auction, 30-Year Treasury Bonds sold at 4.625% and 30-Year TIPS sold at 2.125%, an implied inflation rate “prediction” of 2.5%.

We would make two observations regarding the implications of these recent Treasury interest rates:

1. This is only one measure of expected inflation.  It represents the opinion of hundreds of institutions and thousands of individuals who together set the rates as they “bid” and purchase regular Treasuries and TIPS.  These auctions happen every two weeks and the “inflation spreads” have been fairly consistent between 2 and 2.5%, depending on years to maturity.  If you think (as Foster Group does) that “The Market” sets reasonable prices between willing buyers and sellers, this “inflation spread” likely represents as defensible an estimate of future inflation as any other.
2. For Foster Group clients who have engaged us to do financial planning, you may remember that our Required Rate of Return (the growth rate assumption we use to project your retirement portfolio growth) is normally between 6% and 7%.  We also assume a 4% inflation factor on your ongoing living expenses.  The recent 30-Year TIPS yield of 2.125% would actually exceed our required rate of return of 6%, which works out to a 2% real rate of return when adjusted for inflation (6% return less 4% inflation equals 2% real rate of return).  We point this out not to encourage you to adopt a 100% TIPS portfolio, but to show how conservative Foster Group’s assumptions are when we make projections regarding your future financial security.  

If you would like check out these Treasury Rates for yourself you can find the results of each week’s auctions at www.treasurydirect.gov.

In the aftermath of the financial panic of late 2008 and early 2009, investors have questioned virtually every previously-accepted tenet of investment ideology. One long-held assumption, that stocks outperform bonds over longer time frames, came under intense scrutiny after a widely-known financial personality published findings which appeared to show that, in fact, bonds outperformed stocks instead.

At our Fall 2009 Wise Wealth Lecture Series event, featured speaker Brian Wesbury, addressed this seeming contradiction and offered his take on which view investors should accept.

To watch Brian’s entire presentation, including the audience Q&A, clickhere: (Presentation – 43 minutes; Q&A – 22 minutes)

Debate has raged for years about whether markets are “rational.” In late 2008 and early 2009, that certainly didn’t appear to be the case! Many investors interpret “rational” to mean that all market participants must make rational, perhaps even unemotional, investing decisions in order for the premise to be true.

At our Wise Wealth Lecture Series event last October, featured speaker and economist Brian Wesbury addressed this question in his talk and described how irrational investors combine to create the rational market.

To watch Brian’s entire presentation, including the audience Q&A, click here: (Presentation – 43 minutes; Q&A – 22 minutes)

Does it make sense to increase exposure to the stocks of foreign companies relative to US companies? Many US investors are wondering if our current economic policies will prevent US-based companies from continuing to be among the world’s highest-performing and what this might mean for overall US stock market returns.

“48% of the revenue being generated by S&P 500 companies already comes from their overseas sales,” was part of the response given by economist Brian Wesbury in this clip from Foster Group’s WiseWealth 2009 Fall Lecture Series event. His answer implies that even investors who hold only shares in domestic companies already participate in the global economy. However, Wesbury goes on to say that if the regulatory and tax environment in the US becomes less favorable relative to other countries, investors may be rewarded in the medium- and long-term by increasing their allocation to foreign stocks.

To watch Brian’s entire presentation, including the audience Q&A, click here: (Presentation - 43 minutes; Q&A – 22 minutes

We don’t have to look far to find someone bemoaning tHe loss of US manufacturing jobs. The thought expreSsed generally goes something like this: “The United States can’t remain a leader in the global economy if we continue losing manufacturing jobs. We’re not making much here in the US any longer; we can’t base our whole economy on information and services.” This is an understandable, but incomplete, assessmentof what’s really taking place in our ever-changing economy. Brian Wesbury, featured speaker for our October 2009 Wise Wealth Lecture Series event, says this sort of change is not new; we’ve been here before.

To watch Brian’s entire presentation, including the audience Q&A, please clickhere: (Brian’s talk - 43 minutes, Q&A - 22 minutes)

To watch Brian’s entire presentation, including the audience Q&A, please click here: (Brian’s talk - 43 minutes, Q&A - 22 minutes)

Uncertainty.  Turbulence.  Two words describing the economic environment physicians are coping with today.  Between the general economic conditions found in the United States as we recover from 2008’s financial crisis, and the twists and turns of the national healthcare reform debate, physicians can feel like they are looking at live weather radar showing two storms simultaneously tracking toward them from the east and the west.

Storm A: Healthcare Reform

On October 8, 2009, physicians gathered at the Embassy Suites in downtown Des Moines to hear about these storms. IMS President Michael Kitchell, MD led off the evening describing the current legislative proposals being debated in Washington, D.C.  Referring to the problems created by having over 40 million uninsured Americans, Dr. Kitchell helpfully differentiated between the “Public Option” for creating universal coverage in the House bill (government-funded and government-run) versus the private insurance approaches in the current Senate bill.  Proposals in the Senate bill include a health benefit exchange where “affordability credits” are offered to lower-income Americans so that every American can, and likely will be mandated to, purchase health insurance coverage.

The bigger question about how damaging this “storm” could be for physicians becomes who will ultimately pay for the goal of reducing healthcare costs while accomplishing universal coverage.  Iowa physicians are already “paying” some of these costs through the geographic penalty imposed by Medicare reimbursement formulas (only North Dakota and Arkansas doctors are paid less), even though Iowa is ranked second  in the nation by the Commonwealth Fund for healthcare quality and value.  Dr. Kitchell cited numerous statistics and examples, including the fact that physicians are effectively being reimbursed by Medicare at 1998 levels, but the bottom line seemed to be that while lawmakers are hoping for a “magic bullet” solution, the likelihood is that it will take multiple strategies to get there.  Key cost drivers that must be addressed include:

1. 75% of all medical bills are related to treatment of chronic diseases, many of which could be reduced through healthier lifestyles,
2. 3% of the population is responsible for 50% of the healthcare costs in the U.S.,
3. On average, physicians are spending $68,000 per year filling out pre-authorization and related paperwork, and
4. “Defensive Medicine” due to the threat of litigation, seems to imply that some form of tort reform must be a part of the solution.

Without some type of healthcare reform, Iowa physicians are already set to receive a 21% reduction in Medicare payments on January 1, 2010.

Storm B: Economic Uncertainty

Immediately following Dr. Kitchell, nationally known economist Brian Wesbury addressed an even larger group of physicians and investors about the condition of the US and world economies, as well as investment markets.  Wesbury, a regular contributor to the Wall Street Journal, commentator on CNBC and Fox Business and the economics editor of the American Spectator magazine, started his comments answering the question “Has capitalism failed us?”  The short answer according to Wesbury was that capitalism had not failed; rather government (the Federal Reserve and Treasury) had failed by creating and sustaining artificially low interest rates during the mid 1990s and again in the early 2000s.  These low interest rates created an “unnaturally” low cost of capital that led people to take risks that higher rates would have discouraged.  

While Wesbury had a number of reasons to explain how and why the “panic” of 2008 happened, his comments on the future centered on the strength of capitalism to create recovery and growth.  Citing historical examples ranging from the banking crisis of 1907 to the recession of 1972-1973 to the banking and lending problems of the 1980s, Wesbury expressed confidence the “V-shaped” recovery of the stock market that began in March 2009 would continue.  This “V-shaped” recovery seems to indicate the recession has indeed ended, and that job losses will continue to slow and turn to job creation, possibly by year-end.

What to do about the radar warnings

Both experts, Dr. Kitchell and Mr. Wesbury, were quick to point out that many uncertainties still exist, so the end result is far from certain.  In an interview immediately following his talk, Dr. Kitchell reflected that he thought the healthcare reform debate was likely in the fifth inning of a nine inning baseball game, and that there would be many arguments and surprises before any laws were signed by President Obama. 

For his part, Wesbury, who was named the top economic forecaster by the Wall Street Journal in 2001 and one of the top ten forecasters in 2004 by USA Today, admitted that he originally believed the U.S would not go into recession in 2008.  But Congress’ commitment to “mark-to-market” accounting created problems not seen since the Great Depression (coincidentally, strict “mark-to-market” accounting rules were modified in 1938, helping end the Great Depression, only to be reinstated in 2007 when they at least contributed to the 2007-2008 economic decline).  So, while there are no guarantees regarding the economy, the title of Wesbury’s new book, due out in November, reflects his optimism:  It’s Not as Bad as You Think -  Why capitalism trumps fear and the economy will thrive.

In light of both presentations, Foster Group is more committed than ever to offering evidence-based, comprehensive financial planning and investment management.  In uncertain environments of any kind, managing risk by preparing for a variety of future outcomes is always wise.  In this current uncertain financial “weather pattern,” Foster Group is offering a “Second Opinion” service to physicians who would like a no-obligation, unbiased review of their current portfolio and general financial condition.  If this is of interest to you, please contact us at (800) 798-1012 or go to www.fostergrp.com/second-opinion for more information. We continue to consider it a privilege to be a trusted advisor to physicians like you.

“A thunderstorm is never as bad on the inside of an airplane as it appears on the outside.  It’s worse.”

Accepted pilot wisdom

Turbulence - it causes stomachs to flip-flop while traveling through storms in airplanes as well as when trying to ride out investment markets during times of economic uncertainty.

When pilots engage in steep turns they can experience vertigo which, in the extreme, can feel like a straight and level descent when the plane is actually plummeting in a tight, ever-steepening turn known as a “graveyard spiral”.  In the book “Mastering Instrument Flying,” would-be pilots are reminded that when they are flying at night, or in turbulence, they may experience

 “…vertigo, or spatial disorientation as it is technically called.  One cardinal rule for coping with any kind of vertigo, dizziness, or confusion between what your eyes see on the instruments and what your senses are telling you is trust your instruments.  Accept the fact that in many circumstances the senses are wrong when the instruments are correct. When flying by reference to instruments, the eyes are seeing symbolic rather than actual references.  The input is not as strong nor as vivid as the real world.  Other senses – particularly the motion senses – tend to take over the eyes' role.”

Note that the vividness of how we “feel” makes it very hard to trust the instruments and to act in accordance with what they are telling us about reality.

Pilots rely on altimeters for altitude, attitude indicators for staying level with the horizon, and directional gyros for course correction.  Wouldn’t it be helpful if there were gauges for the condition and performance of investment portfolios?

While there are no fool-proof indicators, there are at least five “gauges” that any investor can, and should, check often, regardless of the economic turbulence.

1. Directional Gyro

“Never let an airplane take you somewhere your brain didn’t get to five minutes earlier.”  

Do you know the goals or “destinations” of your investments?  When do you need to access money from the portfolio?  How much and for how long?  These are very basic, but important, questions that can be answered within the context of a financial plan.  Before we send our money on a journey, we should know where and when we want it to arrive!

2. Fuel Gauge

“The only time you have too much fuel is when you are on fire.”

In our earning years, when we are converting our human capital into financial capital, how much human capital we have left can represent the amount of fuel in the financial tank.  The more earning years remaining, along with the prospects for increasing pay, the longer we can stay in the air, until we choose to land (retire). 

In retirement, fuel can be represented by liquidity.  How many years of living expenses do we have in cash and conservative fixed income?  If you need $100,000/year for lifestyle expenses, then $800,000 of short-term (1-2 year maturity) high-quality bonds and cash means you have, at minimum, 8 years of fuel. This liquidity allows investors to ride out equity market turbulence, waiting for better times to convert stocks to cash.

3.  Airspeed Indicator 

“A fool and his money are soon flying more airplane than he can handle.” 

To make the portfolio perform at higher rates of return (go or grow faster), investors have traditionally looked to stock-type investments.  But all stocks are not created equal in terms of expected and observed returns.  While there are many ideas being thrown around today, three factors still stand out as academically-supportable ways to increase the probability of higher portfolio returns over the long term (10-20 years).

• Factor 1: The Market.  Favor stocks (“the market”) over cash or traditional bonds.
• Factor 2: Small vs. Big.  Favor small company stocks over large company stocks.
• Factor 3: Value vs. Growth.  Favor value company stocks over growth company stocks. 

Investors who emphasize these factors, in a broadly diversified portfolio, have historically achieved higher returns over periods of 10 years and longer.

4. Altimeter

“If speed is life, altitude is life insurance.  No one has ever collided with the sky.” 

One thing that investors seem to be learning (again) is that no one can reliably predict the future, especially the near-term future, when it comes to investment market direction. If that’s true, then broad diversification in our portfolios is like having lots of altitude while flying.  If some of our investments do poorly when they encounter a turbulent stretch, we have many other types of investments in the portfolio to keep us in the air.  US large and small companies, foreign large and small companies, emerging markets, real estate, bonds, cash, and insurance contracts all represent types of diversification available to investors today.

5. Artificial Horizon / Attitude Indicator

“Accept the fact that in many circumstances the senses are wrong when the instruments are correct.” 

A good Investment Policy Statement (IPS) describes the long-term goals of the portfolio in terms of return requirement, potential risks, liquidity requirements, acceptable investments, the underlying principles of the portfolio’s management style and how success will be measured.  When these are in place prior to “take-off”, investors have a much better chance of surviving the turbulence that they are certain to encounter.  They can refer back to the IPS and see that turbulence was an expected condition, and that their financial plan and portfolio were prepared for it. If we have carefully chosen and calibrated our instruments prior to take-off, they can see us through even a very rough ride.

If, during this very turbulent time, you’ve been feeling like your investments are going in the wrong direction or that you need some gauges to check, perhaps a meeting with your financial advisor to discuss these ideas and your financial plan and portfolio is in order.  At Foster Group, we are offering a “Second Opinion” to investors.  We will review your financial plan and current financial condition along with your portfolio, at no charge or obligation to you.  We will then present you with an evaluation, our “opinion,” regarding the general “flight-readiness” of your investment portfolio and overall financial health.  You can learn more about our Second Opinion offer at www.fostergrp.com/second-opinion.

Professor Gene Fama reflects on recent stock market volatility and the Efficient Markets Hypothesis.

2008 and 2009 stock market events left may investors wondering about the long term viability of capital markets and whether there were irrefutable signs that investors should have seen early on (e.g. the Bear Stearns collapse in May of 2008) that would have led them to exit the stock market avoiding it’s “predictable collapse” in September and October of 2008.

These types of questions are addressed by an idea called “The Efficient Markets Hypothesis” (EMH) first proposed by Professor Eugene Fama, an academic at the University of Chicago.  Dr. Fama’s research demonstrated that there was little to no actionable information regarding stock prices that was not already factored into the current stock price.  In essence, the “market”, made up of millions of investors, sets stock prices every day, all day, based on all information available.

In a recent interview, Dr. Fama took a few minutes to explain and defend the ongoing empirical evidence for the EMH and what that means for investors.  To summarize, Dr. Fama’s counsel to investors is that they are (still) best served by holding a highly diversified portfolio of stocks and bonds. The way to mitigate risk is to hold a smaller percentage of stocks relative to cash and that higher returns require exposure to increased risk, i.e. more stocks.

In the interview Dr. Fama also addresses questions about whether the incredible increase in price volatility somehow weakens or contradicts the Efficient Market Hypothesis.  His answer was given in two parts:

1.       The market can only know what is knowable, it cannot resolve uncertainty.

2.       The increase in volatility (in 2008) was to be expected given the incredible economic uncertainty of the previous 12 months.

On reflection I think we can all agree that economic uncertainty was at an all time high in mid to late 2008.  Every day brought about new “revelations” of weakness in financial companies and by extension in larger economies.  In addition the US government and foreign governments were taking unprecedented actions to try and stabilize the world economy.  Each of these revelations (something new for the market to know) created more volatility, in this case downward volatility.

The lesson for investors though, according to Dr. Fama, is not to think that they should have made better decisions about when to exit or enter the market (that knowledge did not reliably exist), but whether they have an appetite or tolerance for risk commensurate with the volatility associated with the amount of stocks that they owned. 

Dimensional Fund Advisors (on whose Board of Directors Dr. Fama still serves) has made this interview available on their public website.  It’s eight and one half minutes long and well worth watching.  You can find it at:

http://www.dimensional.com/famafrench/2009/08/fama-on-market-efficiency-in-a-volatile-market.html

Read aloud Question #1 below and answer it before reading and thinking about Question #2.

Question #1: What do you expect your stock portfolio to be worth when the economy recovers?

Question #2: How much was your stock portfolio worth prior to October of 2008?

Now, ask yourself these same questions again, but start with Question #2.

In their book “Nudge,” behavioral economists Richard Thaler and Cass Sunstein have a chapter entitled “Biases and Blunders” in which they cite a concept called “anchoring”.  To illustrate this bias / blunder in the way we automatically think, they offer examples that show, “We can influence the figure you will choose in a particular situation by ever so subtly suggesting a starting point for your thought process.”

If you are like the majority of investors, Thaler and Sunstein’s research would suggest that when you answer Question #2 first, the answer to Question #1 will be relatively close to your answer for Question #2.  For example, if your stock portfolio was worth $500,000 in mid-2008 and you answered Question #2 first, your answer to Question #1 about how much your portfolio should be worth when the economy recovers is likely to be close to $500,000.  Your answer to Question #2 has “anchored” your estimation of the “right” portfolio value.

In recent conversations with investors I have introduced this idea of anchoring as we discuss what kinds of results it will take for people to be happy with their portfolio again.  For some, they are focused on getting back to “break even” and break even represents the high point of their portfolio value, likely somewhere in mid- to late-2007.  The Dow Jones 30 Industrials index closed at 14,165 on October 10, 2007.  On March 9, 2009 the Dow closed at 6,547, a decline of 53.7%.  So if an investor was 100% invested in these 30 large US companies, their portfolio that had been worth $500,000 was now worth $231,098, a “loss” of $268,902.

The question I ask next is whether they think the Dow was fairly valued in October of 2007.  We now know that there were all sorts of undisclosed and little-understood risks in the financial system at that date.  Mortgage-backed securities that were rated AAA were really sub-prime, investment banks and hedge funds were dramatically over-leveraged, and it would only take a slight economic headwind to blow the whole thing over.  Usually, on reflection, investors think that the stock market was probably over-valued by at least 20%.  Translated into our $500,000 portfolio, that means it really “should” have been worth only $400,000 (20% lower). 

Back to March 9^th and our portfolio is still worth only $231,098, but measured from our new starting point of $400,000, our dollar loss has shrunk to $168,902.  We still don’t feel good, but our loss is “lower” by $100,000.  It’s lower because we are now “anchored” to a different number.

So, is $500,000 or $400,000 the “correct” expectation of what our portfolio should be worth when the economy recovers?  The answer is, there is no correct answer!  Anchoring is a “Blunder or Bias” because we assume that there is a correct answer to a question that has no single, or permanent, answer.  Stock market price levels are temporary and the direction and degree of price movements from day to day tend toward randomness.  This is what makes anchoring such a crazy-maker for investors.  Every time we anchor a value, our portfolios push or pull us away from that number.

Investment writer Nick Murray once observed of world stock markets that, “The advance is permanent.  The declines are temporary.”  In terms of modern economic history (at least since the mid- 1860’s in the United States for example) his observation has been absolutely correct.  In 1947, during the first post-World War II recession, the S&P 500 stood at 19.6.  Today (August 27, 2009), that same stock index stands at 1,031.  There have been declines along the way, to be sure, but the advance looks to be permanent.

For most of us, the major function of our investment portfolio is to provide for long-term financial independence in retirement.  We will not need 100% of our portfolio on any single day, month or even year.  We cannot afford to have our portfolio anchored at one value.  We need it to grow over relatively long periods of time, keeping us ahead of inflation and providing income for 25 to 35 years.  Instead of being anchored to a past or future number, refocus on a reasonable long-term growth rate from today forward.  It’s a much more achievable goal, and a more important one, as it relates to your long-term financial security.

Recent history for gold as an inflation hedge is less than conclusive. 

“In the five highest inflation years since World War II – 1946, 1974, 1975, 1979 and 1980 – the average real return on stocks, as measured by the Dow, was minus 12.33 percent compared to 130.4 percent for gold, according to metals dealer Blanchard & Co.  But there are problems with relying on gold alone as a hedge to inflation.  Specifically from 1980 to 2001, prices in general doubled, but gold’s price fell from $850 to $257.”  Research Magazine, July 2009, Inflation Proofing

Investors thinking about gold as a hedge or alternative to equity markets need to look carefully at gold’s price history.  As the article mentions, gold’s price in 1980 (29 years ago) was $850 / ounce.  Gold was trading in the mid $800’s as recently as December 2008 representing a 0% return over 29 years, before inflation.  That would have been an expensive “hedge” compared to stock and bond returns over the same period.  To capture positive return from gold, investors must be able to buy and sell at the right time.  Historically, the ability for any investor to consistently do this has proven to be very, very difficult.   

Compared to gold, using TIPS as a long-term hedge against inflation should prove to be far more effective if investors can buy and hold them to maturity.  TIPS are government bonds whose principal value is adjusted monthly based on changes in the CPI-U.  Future coupon payments are based on this adjusted principal value.  At maturity, the inflation adjusted par value is repaid to the investor. If the period has been deflationary, the principal value repaid would not fall below the original par value.