Ric Edelman radio show recap 12-29-07

This week’s show had a wide array of topics and valuable information. 2007 was quickly reviewed noting the volatility, money new year resolutions were also discussed. A few client questions about suspect ads and solicitations were shared. Taxes were also a topic including information on the AMT relief bill passed on the last day congress was in session. Also covered were loans, college savings, and trusts. Sprinkling in a couple questions about International equities and fixed income investing, add in insurance, portfolio construction, and mutual fund distributions. I think one of best subjects was, do you really need diversity in financial advisors?

Ric is ready for 2007 to be over. It has been a volatile year in the U.S. stock market. In May Edelman financial services sent clients an update noting the market was up 9% and warned them not to get cocky. They were concerned about the housing market and subprime lending. Not to forget the war and other problems in the Middle East. In the last eight months we’ve given back half the gain of the first four months of 2007. The Dow Jones real estate index is down 17% YTD. Not all sector are off, oil is up 58% and gold is up double digits. Edelman said 2007 is a great example of why it is unwise to make big bets or guesses. Instead build a highly diverse and strategic portfolio that invests across all asset classes. This lowers risk and volatility while delivering the returns you need to achieve your objectives.

New Years resolutions, money is often near the top of the list. Some money themes include paying off debt, saving more, and making smarter decisions. Ric was floored by the last one. How do you define that? Decisions that work out well? Using that criteria you can’t know if it was smart or not until after the fact and that won’t help you. Instead Ric thinks it wise to make educated & informed decisions as opposed to shooting from the hip, gut instinct, or hold your nose and close your eyes. Ric went on to say investing is not just an art but also a science. There is an academic scientific approach to proper portfolio management. All to often that eludes most retail consumers and is available to big institutions. This is no longer true, if you have questions call and ask Ric or if you can’t get through on the air as always you are welcome to call his office during the week and his staff will be glad help you. The same number works for both situations 1-888-752-6742.

Before taking calls Ric shared an e-mail from a listener questioning an ad that was heard on a previous program. It was felt the ad for an investment opportunity was questionable and contrary to the type Ric offered on the program. Ric said the program is syndicated on the ABC radio network and broadcast over most of the largest markets across the Country. You do need to be aware the advertising during the show is independent of the show itself. The question was why this is allowed to air on the show. Ric has no involvement or control over ads. Edelman advised all to use same consumer protection strategy and attitudes that you use anywhere else. Another e-mail was forwarded to Ric from a client. It was a pitch from an advisor try to sell an IRA account. The e-mail made this claimed “Fellow planners for my clients from Edelman Financial have encouraged our client to take advantage of this IRA”… in short it was a claim this person was being endorsed by Ric. This is false. On occasion this happens, if you get one of these solicitations you are encouraged to send it to Ric and ask. That is not to say all ads are false. There are some Ric is familiar with is happy to say he is aware of them and it is true. You are just as likely if not more to get an answer back saying he never heard of them and doesn’t know what they are doing, be careful. Trust but verify. In yet another item sent to Edelman by a client was a claim of fabulous returns. Investment advisors are required by SEC rules to report performance data. They have to use specific method that assures fairly and completely the returns that clients receive. The method used is Global Investment Performance Standards (GIPS®). http://www.gipsstandards.org/

Edelman is in procession of a document from a very large well known money management firm that has published performance data for itself and it is not GIPS certified. It lacks their fee in the calculation of performance. It also does not include all the portfolios for all the clients. It is miss leading and not legitimate. For example they show a one year return of 24%. Only by reading the fine print you learn it is not Jan-Dec. it is July- June. Also buried in the fine print is this statement “back tested and model performances have certain limitations and do not reflect actual client performance. Actual client accounts vary significantly. The performance figures do not take into consideration actual trading, advisor fees, or transaction costs. All of which when deducted would reduce returns. The back tested performance results also differ from actual performance because it is achieved through the retroactive application of our models.” It would be funny if it weren’t so sad the lengths some will go to in order to drum up business.

In the final day of the Congressional session a crisis was averted for 20 million new victims of the AMT. The AMT, or Alternative Minimum Tax was put on hold for 2007. If they don’t act in 2008 35 million of us will get hit. The bill will cost $51 billion in lost revenues but spending was not cut to pay for it so we can pretty well count on taxes increasing in the future. In case you didn’t know the IRS will need 7 weeks to program the computers. If you have to file the AMT you filing will have to be delayed 5 weeks and if you are due a refund it could be delayed by as much as a month.

Caller is 45 years old married and been saving for years. He currently has $124,000 4.9% money market accounts, bonds of $104,000, a few assorted stocks, EE bonds, and three houses one of which they live in, the other two are rented. Edelman complimented him on amassing that amount at the tender age of 45. He went on to highlight the difference between making money and managing money, they are two different skill sets. This a perfect occasion to assemble a strategically academically applied portfolio. It should invest in a highly diverse manor. The current stocks were selected by talking to relatives. Ric equated it to stuffing stuff in the attic. Then years later asking where did all this stuff come from! A good way to start is write down all the assets on one piece of paper so you know what you have and where it is. Then you examine your goals and objectives which in this case is a retirement home and income beginning in 15 or 20 years. This time horizon allows a comprehensive portfolio without unnecessary worry about volatility. It would go beyond the current mix of stocks, bonds and real estate. It would also include International securities and natural resources. This would lower risks while yielding a long term competitive return. You can learn more about this in Ric’s new book “The Lies about Money” or at his web site under the GPS section. https://www.advisorlynx.com/secure/edelman/

E.C. I've looked this over and find it a very useful starting point. If you are on track it will verify this for you.

Caller has a home equity variable line of credit that started at 8% and is now 7.25% and is wondering if that lowering trend will continue the next year or two. Ric’s answer, nobody knows for sure. The best advice is to convert it to a fixed rate. This should be in the six to seven percent range. If rates go up you’re happy if they go down refinance.

Caller noted Israel has many highly successful high tech companies and is wondering about clustering investment money in Israel. Ric is not a fan of making any big bets investing, This year Japan is down about 11% after several good years. This year the Israel stock market is up 32%, Brazil was up 44% in 2007, India is up 46% this year. Hong Kong is up 37% this year, China 165%!!! If you buy aggressively in any of those markets now you will be buying high. You maybe no better served by buying in Countries that are down either. A better approach is to buy them all by investing very broadly Internationally. This can be done using an ETF.

This caller is aware of a bank offering foreign CDs in one case from Iceland paying 11% for 3 months. Last year Edelman heard similar pitches for Swiss annuities now it is Icelandic CDs. The bank in Iceland will not have FDIC protection and the currency risk is unknown. It is highly unlikely your actual return will be 11%. If it was likely you would receive 11% everybody would be doing it. You still would pay U.S. taxes on what ever you obtain. If there is a tax treaty with Iceland you wouldn’t have to worry about double taxation. If you do receive a tax credit to avoid the taxes it would cost more in tax preparation fees. All in all better to avoid this offer.

Ric started hour two warning listeners that mutual funds have or will be making distributions that will trigger taxes in non sheltered accounts. This year those distributions are likely to be higher than normal due to the volatile year and funds doing disproportionate amount of trading. It is possible you could be facing a hefty tax bill, even on funds that lost money for the year. The way to avoid this problem is to seek funds with low turn over. Typically a good place to start your search is to look for institutional funds and exchange traded funds.

Caller has been in a home for 19 years and has a $200,000 mortgage in her name and that of her deceased spouse. They both have revocable living trusts set up and the lender is not aware of his passing. When she sells the house will she have to pay off the loan from the sale, his trust, or will she have to pay half the balance from her funds? Edelman said years ago trusts were used to avoid paying debts. That is not so prevalent today, trusts are an estate planning tool. Ric said it would be best to go to the attorney that set up the trust and get advised on how to structure the transaction.

Average daily cost of a private room in a nursing home is $209 daily, only $15 more than a semi-private room. A home health aid will cost you on average over $37 per hour. At some point one out of every two of those over age 65 will require long term care services. So be prepared.

Caller is 63 retired and collecting social security. He has $600,000 in IRAs at Fidelity. Last summer he was considering moving half or all of it to Ric’s firm. He was advised not to split it and only move half by an Edelman rep. He wanted to divide it in order to compare performance. Ric is not so concerned that he would only be moving half his money but the reason why. Generally investors are in the habit of trying things out before jumping in all the way, and this is a good attitude but it can be counter productive. If he moves half is account after a year the caller will discover one of the two accounts did better than the other. Edelman said the trap is the caller could make a long term investment decision based on one year’s data. This can lead to buying high or selling low. It is much better to use a long term perspective. Ric’s firm has been in business twenty years and uses a two hundred year history in the markets to build portfolios. Why make a long term investment decision on only one persons experience over one year? It is not that they want all his account or none. Ric sited several examples of folks trying something new before making a big commitment; with a new beverage do you sip or chug, we test drive cars before we buy them, check previews before going to the movies, ask about a new restaurant, look at a home before buying, people have even been known to date before getting married. This mind-set can be a problem in the investment advisor selection process. If you try a new drink and take a sip you can be sure all the other sips in that glass will be the same. Unfortunately that doesn’t work with investing. The performance of the next twelve months has nothing to do with the last twelve months or the next ten years after that. Many things that affect our investments are in a constant state of flux. Interest rates change, inflation changes, value of the Dollar changes, Stock market valuations change, the economic environment and political winds change. Social attitudes and natural disasters happen. All these things affect our investing performance. Some investors buy last years hot fund or sector only to be disappointed when they realize after the fact circumstances have changed and so have the returns they were expecting.

After the break Ric elaborated on splitting accounts among several advisors. He pointed out by doing so you could be making errors. No questions about it by having multiple accounts and advisors you do achieve diversification, or do you? You could be getting conflicting advice, then how do you decide which to follow? You could also be getting redundant advice and being over weighted or under weighted in certain asset classes. In this case you could end up doing more paper work and receiving no benefit. It is possible you will pay higher fees. Most firms charge based on account values and the rate decreases as the amount increases.

Caller has questions about off shore accounts and wants to know how to go about this. Ric got a good laugh when he asked why. The caller heard on the radio Former President Clinton has all his money in the Cayman Islands. Ric said during the week he will attempt to verify if President Clinton does indeed have his money off shore. Stay tuned. There are two ways to move money off shore, one legal the other not. When you move money off shore you still have to report everything you do with accounts to the IRS just as you do the standard on shore accounts. Failure to do so is tax fraud and can lead to jail time. Some people move accounts off shore not to avoid taxes but creditors, by and large due to lawsuits. Money can be moved by wire transfers. If you do so you can’t move the money back, as Ric said you have to go there and visit your money. It is really impractical.

Caller owns a fund that hired a new manager they came in and sold a great deal of the holdings. Prior to cleaning house the fund price was around $21. The long term distribution was $9.41, the short term was $1.25. The total distribution was about 53% of the share value. It is a long term holding and the current value is below his cost when he bought it. If he sells it on Monday can he take it as a loss on his taxes. Edelman said yes he should do so and that will help off set the gains from the distribution. Use the proceeds to purchase a new investment. Just make sure you don’t buy back the same one unless you wait more than 30 days to avoid the wash sale rule. Ric said this a horrific example of the business practice of the retail mutual fund industry. Look at buying funds with low turn over in the past 5 or 10 years and how long the manage has been there. They on average stay four years and frequently like in this case the new manager sells many of the assets and triggers huge capital gains. Edelman said just because a fund is old and been in business for years don’t treat it like an old fund. If they get a new manager treat it like a new investment. When you get news of a manger change you might have to act.

E.C. might be a good idea to set a Google alert with you fund name.

Caller is looking at a 529 plan in Maryland and has two options. One prepaid college tuition trust and one a college investment plan. Does the prepaid option make sense? Ric said for all states not just in Maryland it isn’t a good idea. The prepaid plan only pays tuition, which is about half the cost of attending college. Room and board can also be significant costs plus it requires the child to go to school in one particular State school. What if you move before the child begins college? Ric also doesn’t like the rate of return since it only keeps pace with inflation. Ric much prefers the college saving plan. You can expect a higher return and use the money for any college in the Nation. It can also be used for all college expenses like room & board, books, and computers.

Caller’s husband is a retired teacher and they bought a long term care plan when they retired 19 years ago from Penn Treaty. The premiums have been going up dramatically the past few years. Ric says years ago Penn Treaty had a reputation for offering policies at a lower price than other companies then dramatically bumping them up. Edelman suggested looking at it from this stand point; If the premiums had not gone up they would have gone out of business and you’d have no coverage, what you are paying now is what you would have been paying all along with another policy, if you switch to a new policy now due to age the premiums will as high if not higher. Still it is worth checking into a new policy and compare. It is also a good idea to contact the State Insurance commissioner and see if Penn Treaty is financially sound.

Ric Edelman radio show recap 12-8-07

Ric opened by sharing some statistics that demonstrate not all Real Estate values are dropping across the Nation. For example according to Forbes magazine in Salt Lake City prices have climbed over the past year by 22%. Redding PA up 11%, Glen Falls NY up 11%, Cumberland MD up 9%, Binghampton NY up 20%, Spokane WA up 10%, Salem OR up 17%. Ric wonders if the angst is affecting as many people as the media suggests. Unless you are buying or selling a house you really don’t need to worry about any of the headlines.

Caller 51 years old makes $40,000 per year and has yet to beginning investing in mutual funds for retirement. He owns three real estate properties valued at $1.2 Million, one he lives in. The other two are worth about 500K and the 250K they have mortgages of 100K and 125K respectively. Both have positive cash flow and he has owned them for 12 years and 2 years. Both have appreciated in value since purchase. Edelman says this shows there are lots of ways to build wealth. However Ric is worried about liquidity. The lack of liquidity is one of the things that makes real estate risky compared to stocks or bonds. Also his asset allocation is not diverse. He is 100% in local residential real estate. Ric prefers a plan to sell one of the properties and use the proceeds to diversify into other asset classes. The liquidity and diversification would help lower risks without lowering the rates of return. In fact in the long haul it may improve the returns. Over the last fifty years returns in the stock market average twice that of real estate.

Caller would like to know the differences between Index Funds and ETFs. In some cases an Index Fund and ETF are pretty much the same. The big difference is the ETFs in general are much cheaper to own. Vanguard for example built a reputation on low cost Index funds and Ric doesn’t use any of them, he does use some of their ETFs due to the lower expense ratio. Other advantages to ETFs are better management. Many Indexes are constructed in a poor fashion for investors. For example the S&P 500 was built as a means to gauge the U.S. economy not as an investment vehicle. Ric goes into detail in this in many of his books. ETFs also allow for intra day current pricing.

Caller in the Army phoned from Iraq. He is seeking advice on where to put his money now. While deployed all his income is excluded from taxes. He is contributing to the Thrift savings plan to the maximum. Is that worth continuing since he is not paying taxes this year? Edelman says to continue contributing to maintain the tax deferral of those funds after he returns home. Since he is in a tax free situation this year it would be a great time to start a Roth IRA. In addition the caller has no expenses and wonders what to do with of the remainder of his income while he is in this unique position. Ric says to invest what ever is available into ordinary investments using mutual funds and ETFs. As always do so in a highly diverse way to balance return with risk. The best way to reduce risk is to reduce the percentages of money in any one investment.

Caller asked for a definition of stock options. Ric said there are two types of stock options. The kind you buy on your own and those obtained from the company you work for. Furthermore the kind you can get from work can be either non qualified or ISO (incentive stock options). Edelman’s book “The Truth about Money” goes into greater detail on how to handle stock options at work. All options are the same regardless of if you buy them or get them as a result of employment. If you buy a stock you need all the cost to buy each share and have all that money at risk. With options you normally buy the right to buy or sell the stock at some point in the future at a specific price. This costs much less than the share price. You then decide to buy it or “exercise” your option. This can get complex, there are eight types of options. You can buy the right to buy or sell a stock, you sell the right to buy it or sell the right to sell it. All of these can be done while owning or not owning the stock. Six out of eight of these are very speculative. And frequently end up as a 100% loss. Some are defensive in nature. Around 50% of people that invest in options lose money before commissions. Factoring in commissions around 80% lose money. However if you are given stock options at work this can be a valuable benefit.

Caller asked if renting is a terrible idea. Not everyone is a good candidate for home ownership. You don’t need to worry about budgeting for maintenance and taxes. It is a lifestyle choice keeping in mind unless you plan to stay 7 years it is probably a good idea to rent from a financial perspective.

Caller was reassigned a new advisor after his old one left the firm. The new one has suggested and implemented a 10% stop loss orders on all his stock holdings. So far this has resulted in selling low in the recent market environment. To make matters worse in most cases the stock price has recovered. Ric explained briefly how a stop loss works and went on to say he is not a fan of that strategy. In some circumstances after a nice gain or a stock hits a price target you may use a stop lose to protect that gain. Edelman says the best way to avoid this whole problem is get out of individual stocks and into mutual funds. Perhaps this new advisor is churning the account. Ric said the caller chose his original advisor, don’t let the firm choose the successor.

Caller has been nervous about his equity investments the last couple years and is now in money market funds. His long term plans are retirement in ten years plus. Ric asked the caller for a prediction on if the stock market will be higher in ten years. He thought he would be and so did Edelman. If this is the case invest today and not worry about current market volatility, this will be irrelevant ten years from now. If watching the daily gyrations bothers you stop looking instead of stop investing. Ignore the short term volatility and stay focused on the long term trend. Be sure to invest in a highly diverse manor. Diversification breeds the safety of a competitive return without taking the big risks. Often the problem is not so much the investments but the attitude about those investments and being unwilling to hold onto them over a long time frame.

Caller has 401(k) money form a previous job and would like to know where to move it or if he should keep it in the plan it is currently in. He is getting a pitch to move it into an AXA “accumulator” proprietary product with a 6% guarantee. Ric said it sounds like an annuity and if that is what it is Edelman says not to go that way. You don’t need the tax deferral since it is a retirement account or the annuity expense. Get a second opinion from a fee based advisor versus a commissioned sales person to get objective advice.

Caller has a 529 plan for grandchildren ages 9 and 11 with about $55,000 in each account. All the money is in one fund. Ric said there are other choices available in the plan she is in. The good news is they can stop contributing new money to the plans unless they can be very confident they will be going on to advanced degrees. If there is money left after the kids graduate the remainder withdrawn will have to pay taxes plus a 10% penalty. Unused money can also be transferred to 529 account for a child related to the one it was set up for. One could set up an additional trust account for the retirement of the children using a Retirement InCome for Everyone Trust. http://www.ricetrust.com/q.asp

Caller has been investing for around ten years and thinks he may be to diversified. In that time his account has gained one percent. Ric said it is possible to have to much diversity, it can get to the point of redundancy. The idea is to have a proper asset allocation model that you receive competitive returns. The goal of diversity is not to lose the ability to generate positive results but to reduce volatility. On a risk adjusted basis diversification should allow you earn competitive returns without suffering much downside. Edelman suggested either his allocation is not proper or he is using sub-standard investments. To identify the problem and find a solution Ric suggested running it by a financial advisor. Ric and his staff routinely do this for clients and invited anyone to get any questions answered by calling his office at 1-888-752-6742 during the week.

I’ve used the tool on Ric’s site called “Guide to Portfolio Selection” and find it helpful.

https://www.advisorlynx.com/secure/edelman/