Ric Edelman radio show recap 1-12-08

The show covered many recurring topics but also focused on some timely information. As usual Ric shared his thoughts on keeping our minds on the long term goals and tuning out the short term noise. Major topics this week were 401(k) plans & ETFs. A follow up to the off shore question of two weeks ago. Other topics were capital gains, IRAs, college saving, mortgages, and life insurance. I enjoyed the chair analogy of how our investment plan should be like a four legged chair.

The opening monologue covered the exciting news this week on Wall Street, we’ve had the worst start of the year since 1991, a recession year. This can serve to help us see what we are really made of, psychologically and investment wise. It is easy to feel good when your portfolio is doing well. Being up when your portfolio down is the trick. It can be hard holding on when your portfolio is down and not panic. Investments do fluctuate. People just don’t like downside volatility while no one objects to up side volatility. The rules of investing are you can’t enjoy the upside unless you’re willing to tolerate the downside volatility. It is best not to make short term decisions base on what is going on now. Remember 1991 and what happened? It was a bad year for the economy however what followed it? By 1999 the DOW tripled in value. Morale, this too shall pass if you are invested correctly and have long term goals. If you have a many decade time horizon the short term is irrelevant. If you can’t handle the volatility check your allocation and examine if it is right for you. Build a diversified portfolio to weather the storms without undue worry and risks. Now would be a great time to reexamine what you own and see if you have antiquated mutual funds. Look to upgrade them into institutional share mutual funds or ETFs. In 2007 State Street Global Advisors data shows ETF assets increased 44%. ETF assets grew by $32 Billion last year. More than 270 new ETFs were brought to the market place in 2007. At the end of 2006 there were about 400 ETFs available now the number is over 600. Ric said you should consider ETFs for a portion of your portfolio. New data shows Vanguard now has taken over as the largest fund organization, most of it due to the growth in ETFs. American Funds held the top spot for the previous six years and they have no ETFs. This explains why they lost the top spot. Vanguard ETF assets are surging. Ric sited a study at economist.com titled “And God created alpha”

http://www.economist.com/finance/displaystory.cfm?story_id=10440545

Another advantage to owning ETFs is it gets you away from mutual fund scandals. Some owners of MFS mutual funds are now getting checks in the mail as a result of a settlement due to their involvement in one of the scandals in the industry. Over the past few weeks investors that used to own MFS funds are getting checks of maybe 10 to 40 bucks. Is this taxable income? MFS 9 sends 9 pages of instructions with the check. It tells you how to handle the tax consequence of the windfall. The next paragraph states you should not rely on the statement as tax advice.

A common mistake many investors make it to rely heavily on past performance. One record breaking fund beat S&P index 15 years in a row. Most didn’t hear about it until after the media reported it about year seven of the streak. If you bought the fund after the eighth year and held it yet today you made less than you would have by holding the S&P 500 the whole time. It did poorly the past two years. In 2003 it was in the top one percent of all funds. In 2006 and 2007 it finished in the first percentile. Meaning went from the best to the worst. It was also an exciting week in interest rates. They are now substantially lower than they have been the past couple years. Now would be a good time to consider refinancing. Housing prices are falling and so are rates. A double benefit for buyers that were previously shut out of the housing market. Mortgage applications have sky rocketed the last two weeks.

Caller has a 401k administered by American Funds. Is there anything he can do transfer out? No, Ric said he could ask for ETFs in plan. The caller has an advisor and they should be able to give recommendations on which choices best fit his needs. It is important to take a holistic approach to your investing by considering all holdings to avoid redundancy, overlap, and conflict. The caller can also lobby for changes in the plan. Companies do have a fiduciary responsibility if they sponsor retirement plans and employees can complain to department of labor. Edelman said to his knowledge there are 14 lawsuits pending involving high fees and retirement plan. Also a bill in Congress requires 401(k) providers to fully disclose fees to plan participants on statements.

Caller would like to know the differences between ETF and institutional shares. ETFs can be bought by anyone anywhere often through discount brokerages. Institutional shares often are available directly from fund companies on your own or in some cases are only available through advisors.

Caller is wondering about the costs of dollar cost averaging in ETFs when you are doing small amounts monthly. ETF commissions usually are $10 or $15 per trade. This would not be practical on small purchases of $50 a month. It is worth considering your time horizon and impact of higher front end costs and low long term costs versus no up front cost and higher yearly fees. A couple options are to look at using institutional funds or look at $600 once a year in an ETF. Either should work out well over the long haul. The most important thing is to take a top down approach to allocate assets first. Look at the big picture and start with allocation, which is what drives long term returns.

Two weeks ago a caller inquired if they should move all their money off shore because they heard Bill Clinton did. Ever since Ric has tried but yet to receive a response so he believes from the lack of response it is not likely to be true. However Bloomberg did report The former President did make an investment in an off shore account. Possibly a hedge fund based in the Caribbean. This is not uncommon for high net worth individuals but it is far different than moving all ones money off shore. Ric has not given up and is still seeking comment from Mr. Clinton.

Caller’s Mother inherited and IRA from her brother of $380,000. Her taxable income is about $25,000 per year. Is it better to transfer it as an inherited IRA to stretch out the taxes or take it all at once in a lump sum and being in the highest tax bracket for one year. The mother is 85 and the deceased was 80. Edelman said depending if it is a inherited IRA or a decedent IRA they could take distributions bases on the brother’s age. Chances are in this case no matter what, mom will be in the top tax bracket. It is best to do a tax analysis to find out and verify. You may discover taking it out slowly over a period of years may be pointless. Perhaps the money could be put to use better for family needs or improved lifestyle.

Caller asked about changes to the capital gains in 2008 making it zero if one is in the lowest bracket of less than $30,650. Ric didn’t know the numbers off the top of his head. But verified for some people it could be zero. Caller is not currently working. He lives off investment income which should be under the limit. His plan is to sell some of the low cost basis investments just to reestablish a higher cost basis. Edelman said to wait until near the end of the year and see if he will stay under the limit. Ric warned to be careful of the wash sale rule. You can’t buy an identical investment 30 days before or after and comply with the wash sale rule. For mutual funds you can buy a similar or equivalent fund just not the identical investment?

Caller asked if it is too late to open an IRA for 2007. No, as long as you do it before April 15^th. Don’t file tax return until after you open and fund the account. IRAs are more flexible than other types of retirement accounts in that you don’t have to fund them until April 15, 2008. Keogh and SEP IRAs etc. do have to be opened prior to December 31, 2007 but can be funded up until April 15, 2008.

Caller asked about a call last week concerning 529 plans and saving bonds being tax free. In this case they are not tax free because the caller bought them for her grandchildren’s college education. To be tax free for education requires digging into the fine print. Some of the requirements are; they have to be purchased by the parents, meet income guidelines, only for certain college expenses, and purchased after 1989. http://www.irs.gov/publications/p970/ch10.html

Caller asked if there are regulations on what types of investments have to be offered in 401(k) plans. None with regard to ETFs but section 404(c) of Department of Labor regulations that require the employer to offer sufficient diversification opportunities. An effective alternative solution is the use of ETFs. As of now Ric knows of only two major providers that offer ETFs within 401(k) plans. Some employers are offering a brokerage type accounts where you can pick what ever you want, this fulfills their fiduciary responsibility. It is starting to come to light in some cases mutual fund companies pay kick backs to the employers to offer their funds within a plan. This is a conflict of interest and a violation of their fiduciary obligation under ERISA.

Caller has a 15 year mortgage and is considering doing a refinance with a 30 year. Ric thinks the idea is worth exploring because rates are lower now than a couple years ago, by going to a 30 year loan the payment will be lower and the tax deduction will be higher. Edelman suggested checking with a mortgage broker and running the numbers, it might save her a few hundred dollars a month.

Fees are not the only thing that matters when it comes to investing. Ric used an analogy of a four legged chair that includes; risk, performance, service, along with fees. You need to get all four right or the chair can fall over. The GAO gave congress a report on 401(k) plans. http://www.gao.gov/new.items/d0721.pdf One point was, by increasing fees by one percent a year by retirement the decrease in account balance goes down by 17%. Now we know why Ric harps on the point about fees.

Caller is 70 ½ and has done IRAs since inception. In the past he had 5 years of non deductible contributions and did do a form 8606. All contributions were commingled into one account. Can he take out the non deductible amount first? No, when doing required minimum distributions it has to be done on a pro-rata basis. The good news is he has the records to avoid paying taxes twice. Most tax software isn’t equipped to handle this type of calculation. It might be best to hire tax preparation this year and see how it works. Then in subsequent years he should be able to do it correctly. This is important to avoid a 50% penalty in addition to the tax due. Yes he said fifty percent penalty! Upon further discussion we find out he thought he needed to take a RMD last year and did. Come to find out he would not have needed to until April 2009. For this reason Ric likes the idea of using an accountant instead of tax software.

Caller lives in Virginia and looking at the Virginia 529 plan for their seven year old. His wife has a 529 plan through a financial services company for the child. Should the current plan be transferred to the new Virginia plan? The rules give you wide discretion. The current plan has monthly automatic contributions and each month they are charged a fee for them “assisting” in investing the new money. Ric said yes get out of that plan. The best way is to open a new 529 plan in Virginia College America Plan and then transfer the old into the new with no tax liability. The new plan should help with the transfer. It would be good to know the fees charged to close the old account before making a final decision.

In 2001 a financial company advised a couple to borrow against their home and use the money to invest in life insurance policies. Time was running short so Ric held the caller over after the show ended but did share some thoughts for the listeners. It is a really bad idea and it needs to be undone because long term it is not in the caller’s best interests. In this case it looks like the primary beneficiary was the mortgage company and life insurance sales person.

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.