All Things Financial Planning Blog

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Want to Buy Some Russian Bonds?

Are you feeling as frustrated as I am about the low interest rates available out there these days for those of us who are retired, wary of the global stock market and mostly living on a fixed income from safe investments? Five hundred thousand dollars invested down at your friendly local bank in a low-risk six-month CD at the current 0.8% rate will earn you only around $4,000 in interest — and that’s before taxes! Even with the low inflation rates – up around 2.2 percent over the last 12 months according the May, 2010 Bureau of Labor report – your purchasing power is losing ground, with modest interest returns being eaten up by the higher cost of living.

So where can an investor seeking a higher income rate try these days? It doesn’t look good anywhere in the usual places where you and I might traditionally invest some of our retirement portfolio and try to live off the interest income.

Security Type Current Return Example
6-month CD 0.80% Local bank
Money Market Fund 0.83% $10,000 minimum
Short-Term Bond Mutual Fund 1.34% Vanguard (VBISX)
GNMA Mutual Fund 2.97% Vanguard (VFINX)
10-Year Treasury Bond Mutual Fund 2.34% Vanguard (VFITX)
Long-Term Treasury Bond Mutual Fund 4.85% Vanguard (VBLTX)

Our Federal Reserve Bank has been pushing – and successfully keeping – short-term interest rates down close to zero for several years in their attempt to kick-start the U.S. economy and make low-cost capital available to the business sector as the economy recovers and the resulting expansion creates new jobs and businesses. That hasn’t happened yet but the huge budget deficits Uncle Sam is piling up will eventually force the Fed to raise rates in order to keep investors satisfied that the increasing risk of continued investment in US debt are appropriately compensated for by higher interest rates.

And what will happen to existing bond values when interest rates do start to rise? Old bonds will lose value and the longer the maturity of the bond involved – like the average 23-year maturity of the bonds held in the Vanguard long-term treasury mutual fund – the greater will be the decrease in market value!

Most of us have lived in an era of ever-decreasing interest rates. Since December 1980, the U.S. prime rate has more or less steadily declined for 30 years, from an all-time high back then of 21.5% to its current level of 3.25%. Most economists believe rates will have to rise soon; indeed Canada just last month made the first such move amongst the industrialized nations.

So what can a retired investor to do in search of higher income?

  • Option One is to stay with the safety of short-term stuff like CDs and short-term bonds and just accept you are not getting any real return for your investment until interest rates move higher in the future.
  • Option Two is to move out further on the risk curve and look for higher yields offered by riskier investments like junk bonds, master limited partnerships or un-hedged foreign bonds, seeking those mythical 5% return levels of yesteryear.

Which brings me back to those Russian bonds.

A few months ago, I wrote an article for this FPA web page titled “What Would Grandpa Do?” which was all about the investing adventures of my grandfather. Faced with his own coming of age in the first half of the 20th century, during a 50-year period that turned out to be witness to economic and social upheavals perhaps equal to our own time, Grandpa turned to Option Two. In 1916, during a time when U.S. Treasury bonds yielded around 2.5%, his banker (who was also his investment adviser) convinced him that bonds issued by the Russian Czar’s Imperial Treasury that boasted a coupon rate of 7.5% were as good as gold. So Granddad bought Russian bonds – about $10,000 worth. He got to clip exactly three of those high-yielding coupons before the October Revolution of 1917 hit and the new Bolshevik government defaulted on all the Czar’s capitalist obligations.

That default meant Grandpa’s Russian bonds were worthless! Today they are a lovely framed poster on my den wall; a curiosity and conversation piece. The moral of the story is that there is never any free lunch in investing. Risk and reward are irrevocably joined and if you take on too much risk, sometimes you lose. As the Stranger says to the Dude in The Big Lebowski: “Sometimes you eat the bear and sometimes the bear eats you.”

Me? I’m staying with Option One and just cutting back a bit on our discretionary expenses until this storm blows over. While nobody knows what the future will hold, as a retiree, I’d rather be safe than sorry!

Sam Hull, CFP®, ACC®, MBA
Business & Personal Life Coach
Riverbank Consultants, LLC
Bedford, NH

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Seven Investing Secrets for Someone Starting Over Again

I recently was asked by a friend of mine to offer some financial planning advice to his adult son. The son is rebuilding his life, having recently shut down his unsuccessful business, completed personal bankruptcy and emerged from a bitter divorce. He has no IRA or retirement plans, shares custody of his two teen-age children and has very little money beyond what he needs to maintain a modest lifestyle in a small rental apartment. The bright spots in his life are that he works hard at keeping a great relationship with the kids, has landed a decent new job with a good employer and in the divorce settlement was awarded a low six-figure amount in the division of assets. His former stockbroker recently called to urge him to invest this money in stocks and mutual funds that should “out-perform the market”.

Here’s what I told the son:

  1. Set up an emergency fund at your bank. I suggested he use a local credit union savings account- their interest rates are better. This fund should be six times his monthly non-discretionary expense needs; if six months is too much, then make it four months. Don’t touch this unless it is a real emergency- not for vacations or “Disneyland Daddy” spending on the kids.
  2. Keep things simple. That means until such time that his retirement and investment assets –his “portfolio”- gets to the size that he needs to introduce complexity in order to undertake more sophisticated tax planning, estate planning or specific investment alternatives, keep life simple (and inexpensive).
  3. Save, Save, Save! His goal is to have 20% of his paycheck going into building future financial security. When he starts to have enough cash flow, start a regular transfer monthly into a taxable investment account, invested in accordance with his asset allocation strategy. The folk’s at most good mutual fund companies can also offer advice on how to set things up- and it’s free!
  4. Focus on what he can control and ignore the Wall Street fluff. The only factor in investment or retirement portfolio success he can control is costs. Nobody can foretell the future and predict returns. Controlling costs means not only the “expense ratio” that a mutual fund or exchange-traded fund (ETF) discloses but also watching out for the hidden costs incurred by a fund in buying and selling stocks (called a “turnover ratio”). Ignore sales claims of “outperformed the market” or “Top Morningstar rated manager” or other stuff. Such records are either luck (tossing heads 10 times in a row) or marketing. Instead seek out the lowest cost passively managed or index funds he can find. Actively managed funds (see # 5 below) cost four to five times as much and no one’s figured out yet how to consistently beat the market.
  5. Accept that no one can consistently out-perform the market. (See # 4 above). Play par golf; don’t always try for birdies or eagles. You might get lucky and make it now and then but it’s tough getting back to par after you dump two or three balls in the pond! Most of the long-term success of accumulating wealth is due to setting and maintaining a consistent asset allocation strategy. That’s the real secret. First divide the total portfolio assets (after taking out what he needs for that emergency fund) something like 40%/60%. The 40% to go into bonds are for safety and reducing risk of loss of market value; the 60% allocated to stocks are for growth. This can come both from increases in market value as well as from periodic dividends. All the bond money should go into a short-term bond fund for now. Split the 60% between passive (also called “index”), or when needed low cost actively managed, mutual funds as follows:  50% total U.S. stock market, 30% total International stock market, 10% real estate investment trust (REITs) and 10% natural resources (energy, precious metals and natural resources). He can do this all with one mutual fund company like Vanguard but accept that such a simple approach is totally against the grain of the stuff pushed by Wall Street.
  6. Manage the total portfolio. That means looking at all the pieces together. Contributions he makes to his new employers 401(k), the new mutual fund IRA to take the rollover from his former spouse’s 401(k) plan and a new low-cost taxable account for anything he can invest beyond that make up the total portfolio. Rebalance the portfolio back to his target asset allocation annually –say in the fall of every year. He can do this himself on-line. What – you say this is too complicated or you don’t have time or interest? I say, get real. Make time and get interested because it’s your future and you must care enough to take control. Keeping things simple can make it easier.
  7. Know the difference between investing and speculating! Until he has at least (say) $500,000 in portfolio assets, he should be investing not speculating with any of his portfolio assets. Speculation is a gamble that you are smarter or know something that the market doesn’t and as with all such gambles, you have to be able to afford to lose your money if you’re wrong. At his age, he doesn’t have that luxury, even though he may hope he can make up lost ground by landing a big winner or two. Spend $10 a month and play the lottery if you hope for the big payday-but don’t gamble with your future!

Sam Hull, CFP®, ACC®, MBA
Business & Personal Life Coach
Riverbank Consultants, LLC
Bedford, NH


Beating the Big Bank Bunch

I don’t know about you, but I’m really angry at the way the big banks – Citicorp, Bank of America, Wells Fargo and the rest of the “Big Bank Bunch” that now control over 40 percent of the country’s total bank deposits and two-thirds of the credit cards – made so much profit out of our pain and then had the gall to pay out multi-million dollar paychecks and bonuses to the very same knaves who caused most of the mess we’re in now!

So I wondered. What can I do all on my own to get the banks’ attention while I’m waiting for Congress to do something to fix banking so that this can’t happen to us again? Certainly Big Banks’ growth in clout isn’t being accompanied by better service, fewer penalties or lower fees, is it? There must be a place to safeguard my money and still get more satisfactory personal checking, loans and credit cards from somebody who knows and cares about me.

Well, Dorothy, there is such a place and it’s not in Oz. Your local credit union may fill the bill and if enough people shift their banking and credit relationship to credit unions, maybe the Big Bank Bunch will notice. Nothing gets their attention as fast as lots of money going out the door.

Credit unions are financial institutions formed by an organized group of people with a common bond. Members of credit unions pool their assets to provide loans and other financial services to each other. Credit unions have a mission to look out for their members’ interests and provide a level of service that is not generally available at other financial institutions. Whether it’s providing a loan to help a member cover unexpected medical bills, giving financial counseling to a member whose company closed its doors, or simply offering a better deal on a used car loan or a home mortgage, credit unions make a difference for their members and the communities they serve. Basically, a credit union is, as one newspaper put it back in the Great Depression, a local institution that is “not for profit, not for charity, but for service.”

Credit unions differ from banks in several ways:

Credit unions:

  • Not-for-profit cooperatives
  • Owned by members
  • Operated by volunteer boards

Banks & Other Financial Institutions:

  • Profit-making corporations
  • Owned by outside stockholders
  • Controlled by paid boards of directors

Credit unions can operate more efficiently, pay dividends to their members (not shareholders) and offer lower loan rates, higher savings rates and fewer service fees.

Great, but are they safe? What happens if a credit union fails or goes broke? The National Credit Union Administration (NCUA) is the federal agency that charters and supervises federal credit unions. They insure accounts in federal and most state-chartered credit unions across the country and are backed by the full faith and credit of the United States government.

Accounts in federally insured credit unions are insured up to $250,000 under current Federal law, just like banks. You may obtain additional separate coverage on multiple accounts if you have different ownership interests or rights in such accounts. For example, if you have a savings account and an Individual Retirement Account (IRA) at the same credit union, the savings account is insured up to $250,000 and the IRA is separately insured up to $250,000.

Credit unions are generally open to everyone, but the law places some simple rules on who can become a member of any given credit union; these are defined in its charter as the “field of membership,” which could be an employer, church, school, or community. For example, anyone working for an employer that sponsors a credit union is eligible to join that credit union.

Here’s how to find a credit union:

  1. Ask your boss. Your company may sponsor a credit union, or may be a select employee group (SEG) that has access to a credit union. Many employers offer direct deposit of payroll to your credit union.
  2. Poll your family. Does your spouse’s employer sponsor a credit union? Most credit unions allow credit union members’ families to join. Each credit union, however, may define “family” differently. At some, only members of your immediate family are eligible. At other credit unions, family may include extended family members, such as cousins, uncles, and aunts.
  3. Quiz the neighbors. Some credit unions have a “community” field of membership, serving a region defined by geography rather than by employment or some other association. Ask friends in the community if they know of a credit union you may join.
  4. Read the yellow pages. Some credit unions advertise, so look them up. A yellow pages display ad may state a credit union’s field of membership. If not, at least you’ll know what number to call to ask about membership eligibility.
  5. Check the online database of credit unions. Go to There are about 8,000 active federally insured credit unions across the country with nearly 90 million members who have over $679 billion on deposit.

I think it’s time for us to stop enabling the bad behavior of the Big Bank Bunch and hit them where it hurts – right in the pocketbook!

Sam Hull, CFP®, ACC
Whitewater Transitions, LLC
Arundel, ME

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Ac-Cent-Tchu-Ate the Positive

I’ve just come back from a wonderful week in beautiful Savannah, Georgia and had a chance to visit the Mercer mansion there. Johnny Mercer, a Savannah native and legendary contributor to the Great American Songbook, wrote a hit song back in 1944 called “Accentuate the Positive, Eliminate the Negative –and Don’t Mess with Mr. In Between!” that came to mind recently as I watched the news.

Weekday evenings I try to watch the MacNeil/Lehrer News Hour at 7 PM on Maine Public TV as part of my daily ritual in switching from “work time” into “family time.” Frankly, it’s hard not to feel really discouraged and overwhelmed by what I see – and that’s not factoring in what I don’t see by not exposing myself to the semi-hysterical business news presented by the folks on CNBC and Fox Business News!

The bad news keeps rolling in every night- all real and all tragic, to those who are experiencing it, to be certain. And right now it seems as if that’s all we have to look forward to – more hard times and bad news. Living in the aftermath of the global debt catastrophe is like looking into the wicked witch’s cauldron. It bubbles and seethes with glimpses of new mischief awaiting us in the unholy brew that is the result of unregulated credit default swaps, over-leveraged hedge funds and whatever else may have been dreamed up by the geniuses of financial engineering. We are still learning what the Law of Unintended Consequences really means!

Congress appears to be taking a “pass” on doing anything meaningful about fixing the structural dislocations in our financial markets that got us into this mess, demonstrating once again how much the functioning of our Government has been hobbled by the power (and money) of special interest groups, both public and private. We seem to be wasting a once in a generation opportunity to reform our system of government regulation and administration. So here we are, living in our own Great Recession, with a $12 ½ trillion dollar public debt (that’s $40,000 per person, adult & infant) and 10% (at least) unemployment as far ahead as the mind can see, with no obvious plan to get us out of trouble.

Now add to the economic & financial muck, natural disasters like the huge earthquakes in Haiti and Chile, devastating snow storms in places where it usually doesn’t snow, avian flu, Orange Level terrorist alert conditions and never-ending war in Afghanistan and it’s easy (and human nature) to think that there is nowhere to go but down. It’s very easy to get discouraged, isn’t it? One’s natural urge is to just hunker down, pull in your wings and wait the storm out, living a joyless life until somehow we’re certain the storm has passed. But guess what? Suppose this storm is just replaced by another (and another) storm? Is living in fear what you want for yourself and your loved ones? Equally as important, are you missing out on a great opportunity here?

My suggestion is to try to take a different perspective. Consciously be aware of your choice on how to see yourself and your future. Stay out of the natural landing spot in the Valley of Despair where just absorbing all the bad news can put you if you stay an unaware participant in the drama of daily life. But where can you find a different perspective –a Hill of Possibility?

Well, let’s start with the unbelievable resiliency and inventiveness of the human race as the foundation of building some really high ground to stand on while we look down at the seeming chaos of today’s life and think about our future. While the arrow of time is linear, the arc of technology (and progress) seems to be exponential. Did you know that the computing power in your Blackberry or iPod cell phone is thousands of times greater than all of NASA’s computers when man first walked on the moon – and is a million times less costly and smaller? I grew up using a slide rule in school and my first personal computer back in 1984 was an Apple IIC with 128 kb of memory and a 5” floppy drive. Can you even start to imagine what internet magic and new technology will be there for your great-grandchildren- and will be as natural for them to use then as driving a car is for you today?

How about the future of better (and cheaper) health care, affordable (and green) energy, more (and healthier) food, safer (and more efficient) transportation and all the other basics of a good life? Do you really think discovery and inventiveness to improve these fundamentals of life will slow down and even stop or will technology and human inventiveness accelerate the pace of progress as we continue into the future? Think about how your grandparents lived, fed themselves, what they had for health care and transportation. Now compare that to your life today – and then imagine your grandchildren’s world. That always makes me feel a lot better.

Fine, you say- that’s OK for the rich countries. How about the developing world, where life is too often mean, short and hard? I’ve lived in countries like the Philippines and Pakistan where grinding poverty tears away at the human spirit but I’ve also seen how micro-financing programs and people’s creative capitalism can spark entrepreneurial success and restore human dignity. The transformational impact of the internet age and continued technology innovation will surely be greater in Dacca than Dallas- and that’s good news for all of us.

So what does this all mean in a blog about financial planning? Well to me it means that the technology revolution is not over- not by a long shot – and the transformative power of the internet and computers has just started to take effect on the shape of our future world. If you can find the courage to change your perspective and look at things from atop your own Hill of Possibility, then now is the time to steadfastly believe – and invest – in the power of human creativity and imagination. Those who cower down in doubt and wrap themselves in CDs and cash will miss the opportunity (as they always do) to share in the rewards – both financial and emotional – that the future will bring to those who see their world with courage and from the high ground of optimism.

Sam Hull, CFP®, ACC
Whitewater Transitions, LLC
Arundel, ME

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“You can always tell a Harvard man…”

I sometimes wonder if we don’t trip ourselves up with our supposed intelligence and constant search for a way to make our future more secure. Did you ever wonder if maybe the KISS (Keep It Simple, Stupid!) principle is the right way to plan for the future? By definition (think of your own experience) the future is unknowable to any of us. I suggest we too often add to the confusion and noise by being too smart for our own good and coming up with really complex ways to try to beat the odds.

For instance, the New York Times recently reported on a study of 2009 endowment results released by the National Association of College & University Business Officers and Commonfund showing that during the stock market turmoil last year, the endowment fund at Harvard lost $11 billion dollars, dropping 30 percent. The nine universities with the next highest endowments also suffered losses from 29 percent to 23 percent. During the same period however, the managers of these 10 biggest college endowments increased their allocations (as a group) in what’s called “alternative investments” from an average of 52 percent to 61 percent of their total portfolio. At smaller schools with less than $25 million, alternative investments were only 13 percent in 2009, up 2 percent from the previous year.

I read this with amazement, since the people who manage these huge endowments at some of the most competitive schools in America are obviously among the best and brightest investment managers in the world. How can it be that they, with all their brains and resources, could do so much worse than the average balanced investor? For instance, the Vanguard Wellington Fund – a mutual fund that uses a simple asset allocation of 65 percent equities and 35 percent in bonds and is available to most individual investors – earned a 22 percent gain in 2009!

The answer must lie in the heavy reliance the endowment managers put on alternative investments. Within alternative strategies used by the endowment managers, the asset mix was:

  • Private equity: 21 percent
  • Marketable alternative strategies: 43 percent
  • Venture capital: 7 percent
  • Private equity real estate: 12 percent
  • Energy and natural resources: 12 percent
  • Distressed debt: 5 percent

OK, what’s so compelling about those “marketable alternative strategies”? Well, turns out it is some old friends that we’ve all been reading about in the news; nasty things like derivatives, hedge funds and other complex strategies invented by some really smart people to try to beat the market (and by the way, usually make themselves gobs of money from high fees and incentives, in a sort of “heads you lose, tails I win” way).

What does this all mean to you and me? Well, for me, the older I get the more I realize that simplicity is often the best strategy in planning for my future. Back in the 13th century William of Occam posited that the simplest explanation to a problem is usually the best. The great physicist Albert Einstein put it another way: “Make everything as simple as possible, but not simpler.”

So what does being simple mean for my financial life planning?

Well, first I try to keep my investment portfolio really simple, using low-cost passively managed (or index) mutual funds and exchange traded funds (ETFs) in a globally diversified portfolio of equity & high-quality short-term bonds. Nothing sexy or fancy – no “marketable alternative strategies”!

Second, since my ability to grasp what my future might look like goes out about five years, I focus on my cash flow during those five out years. I think about what my income should be, how much I know I will have to spend, what I might be surprised by and then add a 10 percent cushion for stuff that comes completely out of the blue. The stuff that’s really far out is way too fuzzy for me to worry about now.

Third, we make sure that no-one or nothing can take away the “stuff” of our life that is necessary or precious. Our home mortgage is paid off. Our credit card (we have only one) is paid off every month. Our health insurance is paid on time and Health Savings Account is funded. We take time to keep our relationships with families, friends and each other strong, and get great joy out of each day of our lives. Albert Einstein also said something else of great wisdom:”Not everything that counts in life can be counted.”

So, I challenge you. Make your life more simple, one small step at a time. You’ll like how you feel.

By the way, the complete quote at the top is: “You can always tell a Harvard man, but you can’t tell him much!” (This was obviously written before Harvard was a co-ed school.)

Sam Hull, CFP®, ACC
Whitewater Transitions, LLC
Arundel, ME