Monthly Archives: November 2012

Dealing with the Turkeys in Your Life

Peter Guber, a wealthy, successful executive, entrepreneur and author wrote a great article that applies to life, business and financial planning.

Early in my career as Chairman of Sony Pictures Entertainment, Akio Morita, the Founder and Chairman of Sony Corporation, asked me a very reasonable question about one of my divisions, Columbia Pictures, projections of success for its annual slate of movies we had scheduled. Together with my CFO, we responded that they can reasonably expect of the sixteen pictures on the slate, four would be genuine global blockbusters, four would be profitable domestic films, four would be cash break even investments, and four would be flops.   All reasonableness flew out the window as Morita’s CFO exhorted, “Guber-san, why do we have to make the flops?”

Wow!  What a strategy.  Just make hits!  Why didn’t I think of that?!!!

It would be great if we were all masters of our universes and could press a repeat button for success time and time again.  But, we’re not.  I know firsthand.

I’ve had movies, like The Clan of the Cave Bear, which was based on a #1 best-selling novel.  From what it looked like, only one person showed up at the theater to see it.  In music, my partner and I made the brilliant decision to simultaneously release solo albums by each of the four band members of the iconic rock band, KISS, believing we would make four times as much money as our typical single album KISS release. We shipped gold, the public returned platinum.  In television, flops included shows for ABC like Cupid where Jeremy Piven shoots the arrow of love into unsuspecting hearts.  It was my unsuspecting wallet and ego that were shot, instead.

These turkeys were a constant presence and they seemed to breed especially forcefully in tough economic times.  I learned I wasn’t in charge of success.  I was in charge of the process that hopefully would yield more success than failure.  I began to be guided by three navigational stakes:

  1. My process and my diligence to execute was the best I could do.
  2. My attitude and determination to remain positive and confident was a critical catalyst for my success.
  3. My resiliency and ability to see failure as but a speed bump on the road to success allowed me to get back up when I was knocked down.

So, what does it all mean?  Maybe it’s save turkeys for eating on Thanksgiving and try not to create them.  Or perhaps it’s a reminder that turkeys are a part of life.

As a financial planner and wealth manager I am sometimes asked why not everything we invest in does not work out as we had expected.  Don’t we know ahead of time which investments will be duds and which will be home runs?  We have to remind them that we are in charge of the investment process, creating portfolios that meet client needs.  Not every element of our portfolios will be a moon shot.  Some market sectors will exceed their benchmarks and some will lag, and we are not clairvoyant enough to know which is which.  But every part has its role and the objective is to make they entire portfolio generate an acceptable rate of return within the risk parameters we have established.     And then we have to be wise enough to know that “Turkeys are a part of life.”


Tips for snowbirds

“Snowbirds” are those retired couples who live in more than one state.  Usually they live in northern climates in the summer and move to warmer places like Florida or Arizona in the winter months.

From the Wall Street Journal

By the time Gil Stanley retired from teaching in 2009, he’d had enough of the harsh winters in his hometown of York Harbor, Maine. So the now-72-year-old built a home in Florida where he spends about half the year.

But getting his financial life in tune with this new lifestyle was no easy task.

What are some of the issues for people who want to become snowbirds?

  • Make sure you have access to your bank and investment accounts.
  • Decide what state you choose as your primary residence.  Different states have different rules.  Your decision can make a big difference in the taxes you owe.
  • Get professional tax advice.
  • Check with your financial advisor to make sure you can afford it.
  • Use the Internet.  Look into electronic bill payment and billing statements.
  • Be sure to notify vendors and financial advisers of changes of address.  Returned mail can block access to accounts.
  • Check your auto, home and health insurance to make sure you remain covered.
  • Check on health care providers to make sure that you have access when you need it.
  • Arrange for someone to check on you vacant home.

As the Baby Boom generation moves into retirement, many will take advantage of increased longevity to remain active.  Many will become snowbirds or hit the road with their RV, doing the things they have put off while working.    Planning ahead is critical for this to succeed.

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What is an asset class?

Financial professionals constantly talk about asset classes, but what does that mean?  In the broadest sense, asset classes refer to a group of securities that have similar risk/return characteristics.  So, for example, in the broadest terms, stocks, bonds and cash represent the three most common asset classes.  Each has different risk and return characteristics and behave differently in response to a variety of economic and political events.  Stocks react most to corporate profitability, bonds to interest rates and cash to inflation.     That does not mean that these are the only issues that these assets react to but they are the predominant ones.

Most managers divide these broad assets classes into subgroups that act differently at different times.  Stocks, for example, can be divided into large cap, small cap, foreign or domestic.  Bonds can be subdivided into government, agency, municipal, corporate, foreign or domestic.  These classes can be divided again into their own subgroups.   The challenge for the investor is to find ways of participating in these investments.  This is where the expertise of the professional investment advisor comes into play.

Why is this important?  Because investment management is often about risk control and this is often achieved by balancing various assets classes to achieve the degree of risk to which a portfolio is subjected.  Modern portfolio theory demonstrates that investment with low correlation to the rest of the portfolio can lower over-all volatility even if the underlying investment itself is volatile.


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Don’t Make Any Sudden Moves

When a panic attack strikes, the best thing to do is sit down, take a deep breath, and do nothing.  Keep in mind that not doing anything is an action, and it’s very often the best one when one is tempted top act out of emotion.

While policymakers in Washington D.C. are calling for a “balanced approach” to resolve the fiscal cliff.  That’s good advice for investors.  Act rationally, take advantage of tax breaks you know are there and be aware that no one actually knows how the negotiations are going got turn out.

Leaders in Washington have agreed to try and find compromises in order to resolve the changes in the tax hikes and budget reductions set to take effect in January.

One of the marks of prudent investment management is that the strategies employed should be robust enough to withstand all but the most extreme market disruptions.  If your investment strategy requires you to anticipate market moves, either up or down, there is a good chance you will be wrong often enough to offset any benefits you derive from being right.


Some more reasons to give thanks.

We have a tendency to romanticize the past and are not nearly thankful enough for the present.  This is especially true of technology.  If you see those Currier and Ives prints that are so popular around Christmas we can be nostalgic, but we can be thankful that we live in the modern day.   A market maven I read frequently make the point in a most compelling way.

But the biggest inconvenience was the lack of running water. Every drop of water for laundry, cooking, and indoor chamber pots had to be hauled in by the housewife, and waste-water hauled out. The average North Carolina housewife in 1885 had to walk 148 miles per year while carrying 35 tonnes of water. Coal or wood for open-hearth fires had to be carried in and ashes had to be collected and carried out. There was no more important event that liberated women than the invention of running water and indoor plumbing, which happened in urban America between 1890 and 1930.

And we all know that the automobile produces smog and may contribute to global warming. We should all yearn for those idyllic days before the internal combustion engine – or maybe not.  While the railroad connected the cities, there were horses on every urban street. Within the cities, steam power was not practical, so everything was hauled by horses. The average horse produced 20 to 50 pounds of manure and a gallon of urine daily, applied without restraint to stables and streets. The daily amount of manure worked out to between 5 and 10 tonnes per urban square mile, all requiring disgusting human labor to remove. The low standard of living reflected not just the small amount that people could purchase but also the amount of effort at the workplace and at home where they had to expend to perform ordinary tasks.

So unless you belonged to the upper class who had servants to carry water and wood and clean the byproducts of horses from the streets, be thankful for running water, central heating and air conditioning and the automobile.  Life in earlier times was often, in Hobbes words: “solitary, poor, nasty, brutish, and short.”


Higher Taxes In Your Future?

American Century has a new brochure out that may help.  it covers …

  1. Understand the impact of taxes on your income.
  2. Consider the benefits of municipal bonds
  3. Navigate the “New” Municipal Bond Market with Mutual Funds
  4. Choose a Leader for Smart Tax Solutions

Contact us for a copy.

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When is the New York Stock Exchange Closed?

The holiday schedule for the NY Stock exchange for 2013 is:

  • New Year’s Day  – January 1
  • Martin Luther King’s Birthday – January 21
  • Presidents Day – February 18
  • Good Friday – March 29
  • Memorial Day – May 27
  • Independence Day – July 4
  • Labor Day – September 2
  • Thanksgiving Day – November 28
    • Day after Thanksgiving close @ 1:00 PM
  • Christmas Day – December 25

Regular trading hours are 9:30 AM – 4:00 PM Eastern time.


What is a TOD account?

Suppose you are single and want to leave your investment account to a good friend, a relative or someone who has taken care of you as you age.  You can set up the accounts as a “joint tenants with rights of survivorship” account (JT/WROS) but that could complicate your friend’s tax life.  So you set up your account to pass to your friend at your death by designating your account as a TOD account.

A TOD account works much like an IRA beneficiary designation. The account transfers to your beneficiary at your death outside of the probate process, which can sometimes be lengthy and possibly costly (in terms of legal fees, not probate fees).  The TOD beneficiary can be anyone, occasionally a spouse, often a child or sometimes a friend.  It is a simple, free alternative to setting up a trust to bypass probate.

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Would you want to live in a hotel?

Some very rich people have given up their homes and just live in a hotel.  Here is the story of a comedian, Louie Anderson, who decided to make a Las Vegas hotel his home.

Have you ever been lying in bed, everyone else is asleep, and you think to yourself, “Gosh, I just want a bite of ice cream. Just a spoon. Something sweet. But there’s nothing in the house.”

Well, in my case I just have to pick up the phone and in about 30 minutes (less time than it would take for me to get dressed, get in the car and go to the store), somebody could be setting a tray of it on my bed. Now, I’m not saying you should eat ice cream at 2 in the morning, or that someone should serve it to you then. I’m just saying that if I want it, I can have it. This should not be your only criterion for moving into a hotel that is also your home. But, it is a good start.

I guess it’s no surprise that I’ve ended up living in a hotel, even when I’m not on the road. After all, I’ve stayed in 5,000 or more hotels in my 33-year career as a stand-up comic. So it’s always been my home away from home. And now, it’s my home at home.


As we headed toward the elevator, he explained the security system and that no one could get upstairs without a special key fob. I mumbled, “Batman could.” “What?” he asked. I said, “Um, that’s good!” He said the residence living starts on the 23rd floor, and we arrived at the unit in an elevator that moved so fast, my ears popped from the pressure change.

Before we entered the unit, the director pointed to a small adjacent door and said, “That’s your butler’s closet. We can leave items for you such as packages, dry cleaning and even food without ever disturbing anyone.” He then opened the door to the unit and we were greeted by floor-to-ceiling windows that offered a panoramic view of most of Las Vegas.

“It’s pretty bright in here, you know…I’m kind of a cave-dwelling comic,” I said.

“Too bright? No worries!” he said, and with a flick of his hand, he pushed a button and down came a waterfall of blinds blocking out the city and the sun. Perfect! Personally, I don’t need to actually see a good view, I just need to know it’s there behind the blinds. Finally, I asked him, “Do you have room service?” He smiled and said, “Yes, 24 hours.”

So, two years later, here I am. Overall it has been a great experience, though it hasn’t all been roses. Vegas is Vegas, after all, and it can be noisy around here, like when the pool party goes a little late at the Cosmopolitan or the karaoke guy across the street decides to sing all of Journey’s hits, once in English and then again in Spanish.

It is possible that Anderson is getting his “home” comped by the hotel, or that he can afford the rent.  But I recently read about a billionaire who’s doing the same thing.  It beats having to mow the lawn or shovel the driveway.

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The risks of bond investing.

For many investors, bonds are more mysterious than stocks.  Most people know that a bond is a loan and you are the lender. Who’s the borrower? Usually, it’s either the U.S. government, a state, a local municipality or a big company like General Motors. All of these entities need money to operate — to fund the federal deficit, for instance, or to build roads and finance factories — so they borrow capital from the public by issuing bonds.

There are several risks that you take when you buy a bond (or to put it another way, lend your money).

  • The first risk that you need to be concerned about is “credit risk.”  This is the risk that the bond issuer (the borrower) can’t pay the interest or principal back.  You may know how that works if you lend money to a friend.  It works exactly the same way in the bond world.  If a bond issuer can’t pay, the bond is said to be in “default.”  At that point you cannot be sure if you will get any of your money back.
  • A second risk with bonds is known as “interest rate risk.”  When a bond is issued it has a stated interest rate which is usually fixed for the life of the bond.   If interest rates go up during the bond’s lifetime, the value of the bond will go down.  If you need to sell it during this time you may get back less than you paid.
  • A third risk is the erosion of your “purchasing power.”  When you buy a bond, your money has a known purchasing power.  As an example, you know that you can get a cup of coffee at most places for about $1.25 (more at Starbucks) .   If you buy a bond that does not come due for 30 years you can be fairly sure that that same cup of coffee will cost a lot more due to inflation.  Yet if you buy the typical bond for $1000, you will get back $1000 at maturity and that may not buy nearly as many cups of coffee.  That lost purchasing power needs to be offset by the interest payment you receive.

This is a greatly simplified discussion of bond risk, but it gives you a starting point to try to determine how bond investing should be viewed.

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