Waves

Waves Our family loves going to the ocean—the sun, the beach, the waves. The one thing that has always amazed me is the waves and tide. They never stop. There’s constant movement. There are times when the waves are bigger, others smaller. There are cycles when the tide is coming in and when the tide is going out.

Capital (money) works the same way. Thinking of it that way on a global scale gives us a better picture of the investment climate. Capital seeks relative safety and opportunity and is going to flow to those countries that best provide it. Historically, that’s been the United States and is one reason why the USD has been considered the world’s reserve currency. That’s why commodities like oil have been priced in US dollars.

The capital tides are changing, though. And these changes will have both short-term and long-term implications on where we see opportunity and how we invest. Where the world used to seek safety in Washington and New York, it now seeks safety in Toronto and Vancouver, Sydney and Perth. Water flows toward the lowest point and, likewise, capital flows where risk is lower. When capital flows from the U.S. to Canada, the value of the USD is going to decline while the value of the CDN is going to rise. If money flows from the British Pound to the Australian dollar, the Pound is going to decline and the Aussie dollar rise.

That is what is currently taking place and the pace of this changing tide is worthy of note. For industrialized countries, a move of 10% in their currency is very material, 20% is enormous and 30% is almost beyond belief.

One year ago, it took 2.7 Aussie dollars to buy one Pound Sterling. Now it takes slightly more than 1.78 Aussie dollars to buy one Pound. That means the value of the Pound has declined almost 35% in one year!

The USD has declined 16% over the last 6 months alone relative to the Canadian dollar. These are major moves and are evidence of the shift underway where capital is flowing out of the ‘consuming’ nations and into the ‘producing’ nations. Canada and Australia are natural resource rich countries. They have the things the world needs in order to grow. Australia is particularly well positioned to provide those resources to Asia, where demand is strong and growing.

I believe there are some other reasons that we are seeing capital flow out of the U.S. and Great Britain and into countries like Canada. The U.S. government has gone from right-leaning to left-leaning. As a country, the current administration is moving us from conservative policies to liberal policies. On the other hand, the traditionally left-leaning Canadian and German governments have actually moved more to the right of late. Lastly, recent events (government takeovers of private industry where existing bond covenants were nullified, government mandating salaries, etc.) have caused concern over the safety of our investments—the rule of law.

Why You Shouldn't Annuitize

As more companies do away with their pension programs, the insurance industry and the media are heavily promoting the use of immediate annuities to provide a dependable income stream during your retirement. But is that in your best interest? Normally, I say it is not. Read on to find out why.

An immediate annuity is one where you pay an insurance company a lump sum in return for a stream of income. You can decide if the income stream is guaranteed for a certain number of years (period certain), for a set number of years or your lifetime—whichever is greater; and whether your spouse should receive benefits for his/her lifetime after your death. Since you can receive a set payment for life and can also provide for your spouse after your death, this is seen as a ‘perfect’ pension replacement. There are four main reasons that I don’t advise this.

First, when you buy an immediate annuity you exchange a lump sum for a series of monthly payments. The lump sum is gone…forever. At that point your return is dependent on how long you and/or your spouse live (unless you chose period certain). If you live longer than the life insurance company expects then you get a higher overall return on your investment. If you die before then your return drops considerably.

For instance, Jack and Jill are both 62 and buy a joint life annuity for $250,000. In return, they’ll receive $1468 every month for the rest of their lives, regardless of who dies first. After the remaining spouse dies, that’s it. Nothing goes to your children.

Assuming their joint life expectancy is 85 years old, the internal rate of return on the annuity is about 4.6%. If they both die at 75 years old their average annual rate of return is negative 1.3%. If at least one of them lives to age 95 then the return on the investment was 6.1%. So your expected return is 4.6%, but your actual return may be more or less.

That illustrates another reason that I don’t think people should annuitize—all they are doing the first so many years is getting back THEIR money. Picture putting that same $250,000 under your mattress. Then each month you reach in and pull out $1468. You wouldn’t run out of money until 14 years later! That’s if you aren’t earning interest on it.

If you just put the money in a money market earning 3% you could keep using it until age 80. Let’s say interest rates go up (they will at some point) and a money market account pays 4.75%. Use one of those (or buy a 30-year Treasury bond) and you would cover the payments until one of you reached 86.

There are other benefits of not annuitizing. If your situation changes and you want/need access to more than the $1468 a month, you have access to the remaining principal. If you die before the money runs out the remainder can go to your children. The return you receive isn’t based on how long you live but on how it is invested.

Over time, inflation is your greatest risk. Jack and Jill’s annuity payment does not increase for inflation each year. If it did, it would be much lower to start with. Doing it yourself allows you to increase your payments over time if needed and/or based on your return.

Obviously, I feel there are better ways to invest $250,000 than putting it in a money market or CD. Over a similar period of time, a well-managed, well-diversified portfolio of stocks, bonds and real estate should average 8% or more. If so, you can meet the same income payment, adjust it for inflation and possibly never even touch your principal. Even if you end up using some principal, the chances are much greater that there will be money leftover for your heirs.

Some would rather let an insurance company bare the risks for them. There are risks to doing it yourself: interest rate risk, undisciplined spending, market risk, etc. But these are easily mitigated in a well-managed portfolio, and are far outweighed by your ability to earn a higher return while maintaining access and control of your money.

In addition to being a weekly columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide. Goto www.guardingyourwealth.com for additional articles on this and other topics including investing and estate planning.

Tug of War

Tug of War

A novice investor recently asked me, “Why don’t you just buy what’s going up and sell what’s going down?” If it were only that easy, we’d all be millionaires! Read on to learn a simple analogy that seeks to explain the underlying forces that move the markets.

Think of investing in the stock markets as a game of tug of war. We all remember playing this game in gym class, with people pulling on either end of a rope, with a flag tied in the middle. The goal is to get the flag to your side as quickly as possible, and of course, to embarrass the other side by your superior display of strength. Of course, it didn’t always work out that way and I have been on the side of the falling team more than once!

This is how investing works in the stock markets. We often think that the value of a stock is based on the company behind it, but that is only partly true. Think of the company as the rope in a game of tug of war. It’s not just the quality of the rope that will decide which team wins, it’s the players competing on each side.

On one side of a ‘stock’ rope, you have investors who believe the stock is going up in price. On the other side is another group of investors equally convinced the stock price will go down. The side that puts up the most money will determine the direction of the stock price.

Unlike in real tug of war, the players in the stock market can change the amount they have invested and even the side they are on at any time. Some players might change several times in a day. Others might stay on one side for years.

This switching of sides is what results in huge swings in the stock price. If one side of the rope becomes overloaded, then they have the power to quickly pull the rope their way. If you have a lot of people and money on one side it’s not going to be much of a contest.

In the real game of tug of war, the game is won once the flag moves a set distance. Then both sides quite and move on. The stock market tug of war is much more fluid. Players can come and go. Some might quickly take their profit or cut their loss short. Others may wait until it looks like one side has won before joining the game on the opposite side.

Moreover, each player may have a different strategy that determines what side they play on—or whether they play at all. Some focus on the quality of the company (the rope). Others look at the statistics of what’s happened in that tug of war in the past. And there are some that just seem to walk up and pick a side without any rhyme or reason.

Outside events also play a role in the quality of the rope and the decisions of the players. There might be a hurricane affecting the oil supply. The expected outcome of an election could impact regulation. Housing prices can go up or down.

The decisions made by professional players have a much greater impact on the outcome of the game than do those of individual investors. That’s because they have a lot more money to invest. If all the professional investors switch to the same side, the individuals on the other side are going to get embarrassed!

Looking at a single game of tug of war allows us to get a general understanding of the underlying dynamics involved in the movement of the price of a stock. The movement of a market or a market index is really the sum of all the underlying battles taking place. The S&P 500 index represents the result of the tug of war occurring in 500 specific companies. The Dow Jones Industrial Average represents 30 select companies.

Successful investing isn’t solely about choosing which rope, but also choosing the right side. And it’s vital that you take into account what the other players are or will do. You won’t always get it right (nor should you expect to), but understanding why markets move will help you make more logical and informed investment decisions.

Mr. Voudrie is a Certified Financial Planning Practitioner and provides personal, private money management services to clients nationwide. Find out more at www.guardingyourwealth.com.

Oil Barrel: Half Empty or Half Full?

Every coin has two sides and so does every story. The current oil crisis is no exception. Those who wish to protect the environment at all costs have made an art of spinning every oil news story into one that discourages any additional domestic drilling. Of course those on the side of the oil industry are no dummies in the spin department, either. But here’s a recent example that shows how the spin zone works. And you can decide for yourself if the glass, or the oil barrel, is really half full or half empty.

Increasing supply is one of the many solutions being offered to solve the world’s oil crisis. Naturally this alone will not solve the problem, but with the long-term increasing demand from developing nations, obviously a growth in supply would be highly beneficial.

Recently, the US Geological Survey released a study that concerns the Arctic region’s potential supply of oil and natural gas. You can view this assessment for yourself at www.usgs.gov, but here are a few selected quotes: “The area north of the Arctic Circle has an estimated 90 billion barrels of undiscovered, technically recoverable oil, 1,670 trillion cubic feet of technically recoverable natural gas, and 44 billion barrels of technically recoverable natural gas liquids in 25 geologically defined areas thought to have potential for petroleum.”

“These resources account for about 22 percent of the undiscovered, technically recoverable resources in the world. The Arctic accounts for about 13 percent of the undiscovered oil, 30 percent of the undiscovered natural gas, and 20 percent of the undiscovered natural gas liquids in the world. About 84 percent of the estimated resources are expected to occur offshore.”

The Arctic region covers a large area, including Siberia, Greenland, Canada and upper Alaska. While we can’t influence exploration in most of those regions, we certainly can in Alaska. Arguments about opening up ANWAR to drilling have been going on for years and this report is certain to add fuel to the fire.

This is especially true since this report points out that Arctic Alaska is one of the three geological provinces that make up “more than half of the undiscovered oil resources” and “more than 70 percent of the undiscovered natural gas.” The undiscovered oil resources in Arctic Alaska are estimated to be 30 billion barrels.

Sounds like great news, doesn’t it? But not to those who oppose any and all oil drilling. They have come out with their own interpretation of the data, saying that all the oil in the Arctic would only supply the world for three years. So why put the Arctic environment at risk for such a small return?

One problem with this argument is the way in which these environmentalists came up with their three year figure. They took the world’s annual use of 30 billion barrels a year (that’s 83 million barrels a day) and divided it into the 90 billion barrels said to exist in the Arctic. But this isn’t really a valid argument. One of the main reasons that oil prices are so high right now is that there is very little margin between world demand and world supply. Any additional oil put into the supply line would lessen these margins and bring down prices.

Even the democrats in Congress are pushing for a release of petroleum from our Strategic Oil Reserve for this very reason. They know that adding some supply would put downward pressure on current oil prices. You don’t hear them explaining that the 706 million barrels in our Strategic Oil Reserve would only supply the world’s needs for 8 ½ days, so why bother tapping it at all? And yet, they argue that we shouldn’t open up new drilling in Alaska, or anywhere else where there is domestic oil, because the 30 billion barrels or more we could access wouldn’t fill the world’s demand for more than a few years. It’s hypocritical to say the least!

Increases in technology will only add to the available reserves already existing in the Arctic. And think of those 90 billion barrels this way: if the Arctic could add 2 million barrels of oil a day to the world’s supply, that oil would last 123 years. You can spin it however you want, but without increased oil supply, our oil crisis will only get worse.

Mr. Voudrie is a Certified Financial Planning Practitioner and provides personal, private money management services to clients nationwide. Find out more at www.guardingyourwealth.com.

De-Stressing the Markets

For the first in time in about seven years, we find ourselves in a true bear market. The problems in the financial sector, pervasive gloom and doom forecasts and ever increasing oil prices have combined to create one of the most tumultuous financial climates of recent history. Inflation fears, the credit crisis, mortgage foreclosures, tension with Iran, recession woes: it’s enough to give even the most seasoned investor sweaty palms. How can you navigate these tough times without losing your cool?

There are two levels where you can de-stress the influences of the market. The first is in your own portfolio. No matter how your portfolio is structured, there are several key points to remember. Most important, is that you cannot control the market and shouldn’t act hastily. Any portfolio adjustments should be well reasoned. Some investors make the mistake of knee-jerk reactions when markets turn sour and make mistakes that cost them thousands of dollars down the road.

The second thing to remember is that you need to focus on minimizing loss, but recognize that you cannot eliminate it. Some people want to turn to all fixed investments during hard times, thinking they are ‘safe.’ But today, what used to be some of the most conservative investments are becoming some of the most risky. Financial stocks are the perfect example.

To avoid loss completely, some investors are tempted to liquidate all equity holdings and move 100% into cash. You might gain some temporary peace of mind, but you end up costing yourself in the end. Another common mistake during difficult markets is for investors to fall for all-encompassing products that appear to promise them market gains without any risk of loss. These include variable annuities with their guaranteed income riders and equity indexed annuities. If you are tempted to purchase either one of these products, please take the time to do your research and at least read some of my past articles on the subject!

Here’s what I’m doing for my clients. I have their portfolios well diversified between a number of holdings, across a broad range of sectors and strategies. This includes a division between short term and longer term holdings. My shorter term holdings have more trades, to take advantage of trends and special opportunities. I am apt to move these holdings to cash more quickly as the markets turn down.

My longer term holdings include those with long term growth potential and stocks purchased for their high dividend yields. When markets are trending up, I’ll have more money in these longer-term holdings than in shorter term ones. But when markets are trending down like they are now, buy and hold strategies get hammered. So I am more weighted in shorter term holdings, where I move a higher percentage into cash as necessary. However, I’m not as quick to liquidate my high-dividend holdings, since they’re paying us along the way.

If you have most of your money in mutual funds, I certainly wouldn’t leave it up to the fund money managers to decide what is in your best interest. Look at how your money is divided and make sure you aren’t over exposed in one area. Some investors think they are well diversified because they own several funds, not realizing that all of those funds are basically investing in the same pool of stocks.

For mutual fund investors, pre-determine how much loss you are willing to tolerate. Based on that, you may decide that if Fund A drops 10% that you’ll liquidate 25%, etc. That way you are limiting the downside risk but still in a position to benefit should the market turn around..

The second area where you need to de-stress is on the personal side. Keeping the right perspective can make all the difference. As bad as times seem to be, they are temporary. Remember all that we have come through before: wars, the inflation of the 70s, the terrorist attacks of 9/11, etc. We will see our way through today’s challenges as well.

If you find yourself losing sleep, maybe you should take a break from the news coverage for a bit. Focus on what really matters: your family, your faith, your friends. Those are the things that will outlast high gas prices and inflation, and are what make life worth living in the first place. After you’ve relaxed, re-visit portfolio decisions.

Mr. Voudrie is a Certified Financial Planning Practitioner and provides personal, private money management services to clients nationwide. Find out more at www.guardingyourwealth.com.

Going Green, Part 2

As the summer heats up, so does the rhetoric about the energy crisis. The presidential candidates are taking political shots at each other’s solutions to the problems, while everyone else in Washington is playing the blame game. Even OPEC is washing their hands of the matter, blaming ‘speculators’ for the current crisis.

As investors, all the arguments and finger pointing do nothing to help our bottom line. If we wait for our own government or powers abroad to take action to benefit us, I’m afraid we’ll be waiting a very long time.

But the good news is that you aren’t at the mercy of feuding politicians or oil-producing nations. There are steps you can take to protect your nest egg and your standard of living.

One important factor to understand so that you can navigate these turbulent times is that the issue isn’t just the price of oil. The supply/demand problem we discussed last week is occurring across the board with all natural resources. Just as China and India are increasing their demand for oil, they’re also increasing the demand for food products, such as soy beans, corn, and wheat.

As supplies tighten and demand increases, we’re seeing a world-wide increase in food costs. Ethanol production and drought conditions in some wheat-growing areas like Australia are only adding to the problem. The recent floods in the Midwest have also destroyed many acres of grain crops. All of this means that consumers shouldn’t expect to see relief at the checkout any time soon.

Since consumers world wide have to spend more of their money on food, we see two obvious results. First, they are less optimistic about their financial situation, and second, because food and fuel is consuming a larger percentage of their disposable income, they are cutting back their spending in other areas. We’ve already seen this here in the United States, where one large home improvement chain recently reported a decrease in big ticket purchases and a sharp increase in repair items.

When consumers are feeling the pinch, it’s usually a hard time for the stock market. The temptation might be to pull out of equities all together and head for the ‘safety’ of cash, bonds or CDs, but these investments have their own set of risks. Interest rates are quite low and these investments give you no protection from inflation.

Real estate often performs well in an inflationary environment, but we are still feeling the effects of the real estate bubble and sub-prime mess. Savvy investors can take advantage of the situation, but if you don’t know what you’re doing, you can certainly get burned.

In these uncertain times, investors can make an even more costly mistake: believing the hype about ‘miracle’ investments that promise to solve all your problems. These products are promoted as ways to protect your money and give you a bonus for investing, but instead they lock up your money for years, give below-average returns, and provide a handsome payday for the advisor.

If ever there was a time to keep control, access and flexibility over your money, it’s now. In these difficult markets, you must be able to take quick action to protect your money and have the flexibility to take advantage of changing opportunities.

The good news for investors is that you can be in control of your financial future. You don’t just have to sit back and take what the markets give you. Yes, you will need to tread cautiously and be highly selective in the sectors and countries in which you choose to invest. But you don’t have to be at the mercy of pre-packaged, mass-marketed products that do little to help you meet your financial goals.

There are times you might need to ‘stand aside’ and let the markets work through an issue. Remember, all the money managers are seeing the same trends and what used to take several days to play out is now happening in a single day. This is increasing volatility.

Don’t let the current energy crisis turn into a financial one for you. Maintain control, access and flexibility over your money and keep a close eye on your investments. This isn’t the time to simply buy an investment and hope it does OK over the long-term. Instead, opportunities and risks must be closely managed—something few advisors do.

In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide. For more information go to www.guardingyourwealth.com.

Going Green

Going Green

Everyone is feeling the pinch at the pump. And just about everywhere else it seems. No matter where you look: the grocery store, utility bills or airline tickets; prices are going up. We all hope these increases are just a temporary road bump, on the financial landscape, but unfortunately, I believe we'll be experiencing the effects of the energy crisis for years to come.

With all the talk about going green, for the environment, it's time for investors to go green, with their portfolio. And I don't mean investing only in earth-friendly, companies (though you certainly can.) What I mean is positioning your portfolio so that you add enough green, to your bottom line to allow you to weather the effects of inflation and without lowering your standard of living.

First, let's take a closer look at the current energy crisis. To make a long story short, the problem is based mainly on supply and demand. As the standard of living has been rising around the globe, and particularly in large Asian nations such as China and India, the demand for oil has exploded. And this trend will only continue.

While demand has risen, supply has not. Non-OPEC countries are actually seeing supply decrease, while our domestic exploration has been hindered by environmental concerns. So while China can drill off the coast of Cuba, we aren't tapping new oil off our own coast or in ANWAR. While it is true our known reserves would not solve the current crisis, they would certainly lessen our energy dependence and help keep prices in check.

There are only three ways to solve a supply and demand issue: reduce demand, increase supply, or do both. On the demand side, there is no way we can simply conserve, our way out of this mess. Any oil we conserve in our nation will be more than offset by rising demand globally. That's not to say that hybrids, carpooling and alternative energy sources are bad ideas, just that they aren't enough.

Take wind farms for instance. They work great, as long as the wind is blowing. But the power grid must have a constant flow of energy into it. And because wind energy flow isn't constant, traditional power plants have to be constructed to cover the energy needs when the wind farm isn't generating power.

On the demand side, we need to open up more drilling and exploration. Environmentalists will resist this move, but the fact remains that currently there is no viable substitute for oil. The world will continue to depend on oil to survive for years to come, even with all the research going on in alternative fuels. We can't go back to horse and buggy days while waiting on a miracle solution.

Ethanol, bio diesel and other sources won't make the problem go away, either. And they each have their own issues to contend with. Take ethanol for example. Increased production has caused corn prices to rise, affecting food costs across the board, not to mention the energy it takes to produce it.

To combat the energy crisis, we will need to pursue all means available to both reduce demand and increase supply. This will be a herculean task to accomplish, but a lesson from history can give us hope. My youngest daughter and I have been watching a new television series on the early days of the space program that put man on the moon. Our country had the will, determination and desire to accomplish the impossible. And we did it. It took the hard work, ingenuity and creativity of a multitude of motivated people. It also took a large investment of time and money to bring about. But in the end, a giant leap for mankind touched not only America, but the entire world.

And we can do it again. As prices continue to rise at the pump, I am optimistic that we as a nation will gain the political grit to do what it takes to attack this issue head on. We still have some of the brightest minds on the planet, and if we could put a man on the moon, surely we can find a way to solve the energy crisis.

Next week, we'll look at how you can add some green, to your bottom line and avoid turning the energy crisis into a financial one.

In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide. For more information go to www.guardingyourwealth.com.

Death and Taxes

The old saying is that there are only two certainties in life, death and taxes. Now that we know who the two nominees are for this year's presidential election, it's time to take a look at what might happen regarding taxes and how we should adjust our portfolios.

The bottom line is that regardless of who wins the White House, our taxes are going to go up. That is going to impact the money that we have to spend at the shopping center. The result is that we may see U.S. economic growth continue to lag.

Let's look at the candidate's position on capital gains, income, payroll, and estate taxes. This information is derived from analysis of comments made by the candidates themselves and from interviews with campaign advisors.

The issue that has the greatest potential of affecting those who are retired or near retirement is capital gains. We know that President Bush reduced the dividend and capital gains tax rates to a maximum of 15% and that those cuts are set to expire in 2010. That means that unless new legislation is drafted extending them (or making them permanent) that capital gains tax rates will go up.

Senator McCain has stated that he wants to make the current capital gains rate permanent. Senator Obama favors increasing the capital gains rate to 20-25%. Many retirees rely on dividends and capital gains to supplement their Social Security, so increasing the capital gains tax rate will directly affect them. Also, increasing the capital gains tax rate on dividends may negatively affect the share prices of stocks in general.

Regarding estate taxes; currently there is an exemption of $2 million dollars per person with a top estate tax rate of 45%. The personal exemption is set to rise to $3.5 million in 2009. In 2010, there isn't any estate tax, but then in 2011 the personal exemption goes back to $1 million dollars. It's amazing what they can come up with in Washington!

Senator McCain proposes an exemption on estates less than $10 million with the highest tax rate on estates larger than that being 15%. Senator Obama proposes exempting estates less than $10.5 million, but has a sliding tax rate that tops out at 45%.

On the positive side, the expiration of the existing estate tax rates has made long-term estate planning very difficult. Getting a new plan in place will allow that planning to be done much easier.

Positions on income taxes differ between candidates as well. Senator McCain wants to maintain the current maximum of 35% and Senator Obama may potentially move the maximum rate from 35% to 52%. I haven't been able to find out each candidate's position on the Alternative Minimum Tax (AMT). The AMT, which isn't indexed to inflation, is resulting in many middle-income Americans paying a much higher tax rate, so whether or not this is changed is just as important as what the maximum tax rate will be.

Lastly, Senator Obama advocates removing the OEcap, on earnings subject to FICA (Social Security) tax. Self-employed individuals currently pay a 12.4% FICA tax on their wages. Employees of companies pay half that while the employer pays the other half. Currently, FICA tax is only paid on wages up to $102,000. Senator Obama has stated that he wants to remove the cap for those earning $200,000 or more per year. I don't know Senator McCain's position on payroll taxes.

Keep in mind that small business owners have their profits taxed as wages, so that is really a tax on small business. Remember also, that employment growth the past several years hasn't come from major corporations but small businesses. So this additional tax has the potential to affect employment.

Should democrats control the Congress, the chances of the current tax rates becoming permanent are low. If Senator Obama wins the election, the likelihood of passing higher taxes is high. All indications are that the democrats will control Congress.

From an investment standpoint, I am concerned about the impact higher taxes will have on our economy. Moreover, higher taxes won't be used to pay down our nation's debt but to fund additional programs. The effect of taxes, inflation, and the decline of the Dollar causes me to favor foreign investments. As always, selection and proper management is tantamount.

Reader Questions Advisor Recommendation

I recently received a question from a reader in Florida who is taking an early retirement. Like many investors, he was confused after meeting with a couple advisors. My advice to him might save you from making a wrong decision, too.

"Phil" (not his real name), has the option of taking either a lump sum payment or a monthly pension from his employer. He goes on to detail his financial situation: 401k, money market accounts, house paid for, no debt, low monthly expenses. Phil has lived beneath his means, saved his money and achieved financial freedom.

Phil writes: "I met informally with 2 CFP's. They are working with people at [my company]...but they seem to only push annuities. After reading your articles on annuities I am cautious...I have always been conservative with my finances, but I realize that to retire at 55 I might have to expose myself to the equity markets. I would like to talk with an advisor who will show me multiple options and talk straight, with no fluff."

Here's a shortened version of my actual response:

"You are in one of the most important times of your life, and are facing what may be your biggest financial decision. Whatever you do, be careful.

It looks like one of your initial questions is whether you should take a lump sum. Generally speaking, I feel that people should take the lump sum because it gives them greater control, flexibility and access. It also becomes an asset that can increase in value and be passed on at death to your heirs.

There is risk in doing so, though. Many retirees have been duped by advisors into investments that weren't in their best interest and ended up losing large portions of it as a result. You have to be willing to invest some time and energy finding the advisor that is right for you. Even then, you will want to keep track of what is going on at least on a monthly/quarterly basis, so you can alert the advisor if you become concerned.

There are several things to keep in mind regarding choosing an advisor.

First, you aren't going to know if the advisor (or investments) you've chosen is the right one for you until probably 6-12 months down the road. Commission-based salespeople with their packaged products needlessly force you to make a 7-10 year time commitment. That's why it is VITAL that you not be in a situation where it will cost you thousands and thousands of dollars to make a change.

On the other hand, fee-based advisors like me only get paid for the time you use our services. There's no commission, no time commitment and no automatic surrender penalty. This gives you significant control and flexibility. You remain the boss. If I don't keep you satisfied then I'm not going to keep you as a client.

Second, beware of the advisor that promotes buy and hold. They're the ones that tell you to "just hang in there" while they watch your account drop in value--and do nothing. The diversification I use combined with the technological safeguards I've created result in my clients being comfortable going for the growth because they know I'll take action should things not go as expected.

Third, don't feel pressured by anybody to make a decision. There's no investment so great that you need to rush into it. You can take your time to find someone you feel comfortable with. Talk to their references (existing clients). Even then, only start with a portion of your nest egg and let the advisor prove him/herself."

As with Phil, you too need to beware of financial salespeople pushing pre-packaged solutions. If it's designed for the masses it's not designed for you. Don't give in to sales pressure. Take your time--this may be the biggest financial decision of your life. A wrong move is costly.

Just because someone has the right initials behind his or her name doesn't mean they will act in your best interest. Most won't. Be very skeptical. Do some independent research.

It didn't cost Phil a penny to get my opinion. It won't cost you anything either. If an investment is being recommended that you aren't sure about, I'll be happy to provide a second expert's opinion. Go to www.guardingyourwealth.com and click on Ask Jeff.

In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.

Advisor Commissions Revealed

Most investors have absolutely no idea how much money advisors earn from their investments. There's certainly nothing wrong with advisors being compensated for their work. The problem arises when there is a lack of transparency in the advisor/client relationship. You should know exactly how much you are paying, for the investments and services you receive. Only then can you make an informed decision on whether or not you are receiving a good value for your money.

I can't tell you how many times people have told me, "Oh, I didn't pay my advisor anything. The insurance company paid him, not me." Or I'll hear, "Commission? What commission? I just bought a muni bond, not a stock." The problem with commissions is that you don't always see them. But trust me, there is no such thing as a free lunch. You are paying something, whether you realize it or not.

On some investments, the commission is quite obvious. On others, you have to dig a little deeper to uncover the charge. In an effort to level the playing field, I'm going to reveal the typical commissions paid on a variety of investments. Be aware that these commissions can vary between different providers.

Let's start with one of the most popular investments; mutual funds. No load funds charge no up front commission, but do have a yearly management fee that can range from .25% to 2% per year. Load mutual funds, the kind you would buy from a commission-based advisor, can top out at 5.75% for equity funds, and 4.5% for bond funds. But breakpoints can greatly decrease the commission you pay. So the more you invest, the less commission you pay.

The commission paid on individual stocks can be as low as $10 a trade. Because there is so much competition in both stock trading and mutual funds, commissions on both are dramatically less than they used to be.

The commission on individual bonds is much harder to see, because it is built into the price. Commissions increase with the bond's maturity length, usually topping out around 3%. But the only way you'll know for sure is to try to get a price for the same bond from a discount house.

Now we'll get into the higher commission products where the fees are especially tricky for the investor to uncover. For example, variable annuities typically pay the broker between 6% and 7%, yet most investors think they're not paying anything when they buy them. If they ask their advisor about it, they're often told that the insurance company pays the advisor, not the investor. But it's amazing how the surrender penalty amount closely resembles the amount the agent received in commission.

Investors may not realize that no-load annuities are available. These "plain vanilla" products lack some of the flashy features of their high-cost cousins, but they deliver the same basic result at a dramatically lower cost.

Commissions are considerably higher for equity-indexed annuities. Rates of 10% or more are common, with some charging less. But these are by far the highest commissions charged in the financial services industry. Is it any wonder that these are promoted so heavily?

One of the main problems with commissions on insurance products is that the insurance companies realize their real client is the agent, not the investor. If they don't pay a high enough commission, an agent will simply sell an annuity from another company. And since the commission isn't clearly understood by the investor, sky-high commissions are the result.

Agents will argue that the additional features of these annuities are worth the money paid. But I disagree. If it were such a good deal, then why not use these high fees as a selling point, instead of hiding them in pages of fine print?

Here's the commission the advisor receives if you move a $500,000 IRA or 401k into each product: Mutual Fund - $12,500, Individual long-term bond - $15,000, Variable annuity - $30,000 and $50,000 for an equity-indexed annuity. How many months/years did it take you to save the amount the advisor will be getting?

I feel there is a conflict of interest when these details aren't disclosed. How can you make an informed decision unless you know what the advisor is making? How can you compare various options? Frankly, you can't.

Do You Need A Trust Or Foundation?

Trusts and private foundations aren't just for the rich and famous like Warren Buffet or Bill Gates. Nowadays, even people of modest means are realizing the great benefits trust and foundations can provide. Read on to see what they can do for you.

There are many different kinds of trusts and foundations, but they all share a common element; control. Using them, you can control what happens to your assets while you are alive, in the event of incapacity, and for generations to come.

For instance, a trust is highly recommended if you and your spouse each have children from a previous marriage and you want to avoid any conflict when one of you passes away or becomes incapacitated. A trust can be just the thing if you are concerned about a child losing their inheritance in a divorce. And, in today's litigious society, trusts can be used to shield assets from lawsuits. A trust can be as simple or as complicated as you need it to be.

Foundations have many similarities to a trust. The main difference, though, is that foundations are designed specifically for charitable, religious, educational, scientific or literary purposes. Like a trust, a foundation allows you to control how the assets are invested, who they are distributed to, and when. Plus, there are tax benefits for transferring assets into a foundation, that aren't available with most trusts.

If you expect to leave several hundred thousand dollars in assets to charity, a foundation may be right for you. That's especially true if you want the assets to be invested and each year's earnings distributed to a special cause.

There's more involved in setting up a foundation as compared to a trust. They also require more work. Accurate records must be kept and informational tax returns must be filed. For those with much smaller contributions, it may be easier to donate the money or assets to an existing organization, as opposed to forming your own.

Still, it may be easier to donate a significant amount than you think. You might have had a life insurance policy for years and you no longer need it. Instead of canceling it, you can name your foundation as the beneficiary. In fact, life insurance is a great way to not only provide the initial funding for a foundation, but also to help it increase in size over time.

I mentioned tax incentives. Appreciated assets like real estate or stocks can be transferred into a foundation (and certain charitable trusts). That way, capital gains taxes don't have to be paid, and you still get a tax deduction for the contribution. The result is that your charity receives more money than if you sold the asset, paid the taxes and donated the remainder.

There are different versions of charitable trusts. Some allow you to donate an appreciated asset, get a tax deduction, and receive an income stream for life. When you die, the remainder can be used by your favorite charity. Another version is similar, but the charity receives the income stream during your life, and your heirs receive the remainder at your death. This can be beneficial if you have investment property that has greatly appreciated, you need income and you don't want to pay all the taxes.

In can cost thousands of dollars to set up a trust that allows you to avoid probate and protect your child's inheritance from a lawsuit. Foundations can be even more expensive. But they don't have to be.

If you are comfortable doing research on your own and are willing to take the time, you can set up a trust and/or foundation on your own very inexpensively. Legally, you can serve as your own attorney and draft your own estate documents. There are many sources that provide templates. If your situation is straightforward, all you have to do is fill in the blanks.

For those with more involved situations an experienced attorney is recommended. Even if you do it yourself, it's not a bad idea to have an attorney review it. Lastly, a trust does nothing for you unless you transfer assets into it. Don't forget that step, or all your work will have been for naught.

Why Investors Lose Money on Wall Street

Investors fear losing money, but they are almost as afraid of losing out, of not making money when they could have. This is referred to as the fear and greed cycle and is one reason the Wall Street pros make money while the individual investor often loses it.

Here's what typically happens. Let’s use a hypothetical investor named Sam. Sam hears about how much money his buddies are making in the stock market. So, Sam decides to invest his retirement money in the market. He goes to his local advisor who promptly throws his money into the market, while Sam imagines all the money he's going to make.

Well before long, the market starts to go down, maybe it loses 3%. (By the way, there will always be times when the markets go down.) Sam figures the market will turn around in a few days, and often it does.

But this is one of those times when the market continues to go down. Now Sam thinks, "What if this keeps dropping? I'm losing money, not making it!" So Sam calls his advisor, and inevitably the advisor tells him to just hang in there, it will come back.

But this isn't a normal correction and the market continues to decline. It's up one day and down the next, but it's down more than it's up. This goes on for days and then for weeks. Before Sam knows it, his account is down 7-8%.

Sam is really getting nervous at this point. Everything he hears tells him that the market and the economy are in terrible shape. And now, the thought of losing even more money is keeping him up at night. (By the way, Sam hasn't heard from his advisor all during this time.)

The next morning he can't take it any more. He calls his advisor and tells the advisor to sell everything! The problem, though, is that there are millions of “Sams” out there and they are all calling their advisors and saying the same thing. You can imagine what the markets do that week! When there are more sellers than buyers the prices drop, and drop quickly.

In the end, Sam loses around 10% and vows to never invest in the stock market again, or at least to wait until things turn around. Soon, sometimes within days, the markets start going back up. Sam hears about it on the news, but the pundits are still saying that the economy is in terrible shape. So he decides it isn’t time to get back in.

After a while, the markets are up so much that everyone on the news is talking about how great the markets are. Those same experts that were saying the economy was so bad are now saying the crisis is over and that the markets will continue to go up and up.

At last, Sam thinks the danger is past. He calls his advisor and moves his money back into the market. Remember, there are millions of “Sams” out there and they are all calling their advisors and saying the same thing. The markets may continue to go up for a while, but before long they will start to correct.

I think you get the picture. It seems like all that Sam does is lose money. Why? Because, he's acting just like everyone else. And that's the problem. To make money in the markets you need to buy before everyone else buys and you need to sell before everyone else sells. Professionals call this the fear and greed cycle. Professionals are well aware of what the Sams of the investing world are thinking and the actions they will take.

Investing in the stock market is a zero sum game. What that means is that every time one person is making a dollar, someone else is losing one. Whenever you buy a stock there is someone selling it to you and vice versa. Who do you think was buying Sam's stock when the markets were down 10%? It's the professionals. Who do you think was selling that same stock back to Sam later when the market was up 10-15%? That's right, the professionals.

That's why it's the professionals that make money on Wall Street and not the individual investors that are following the advice of their traditional just hang in there, advisors.

In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide. Read more of Jeff's financial and investing articles or ask Jeff a financial question.

The Wolf Among the Lambs

For years, I've been warning seniors about the dangers of equity indexed annuities. And I've taken quite a bit of heat over it from those in the insurance industry. While many agents, and some readers, have discounted my views, the uproar against equity-indexed annuities, and the tactics used to sell them, is growing louder and louder. And now the national media has entered the fray.

On Sunday, April 13th, 2008, Dateline NBC aired a hidden-camera investigative report titled "Tricks of the Trade" with reporter Chris Hanson. They recorded actual insurance agents selling equity-indexed annuities to seniors, went to their seminars, and even attended training sessions for agents.

Agents might dismiss my claims when I say that equity-indexed annuities are a horrible investment, but it's hard to disqualify the comments of Joseph Borg, the Alabama Securities Commissioner. When asked by Mr. Hanson if he would recommend an equity indexed annuity to his own mother, Mr. Borg responds, "I wouldn't. I wouldn't recommend them to anybody."

Mr. Hanson also talks to the Minnesota Attorney General Lori Swanson about the sales tactics agents use to convince seniors to buy these investments. She says, "What is tragic about it is when those agents go into the seniors' homes, it is literally the wolf among the lambs. It's happening all around the country and it's happening on large scales and these insurance companies need to knock it off."

These comments come, not from other financial advisors like myself, but from public servants entrusted to protect the citizens of their states. And these aren't the only public officials who feel this way. Many states are taking action against the insurance industry and the tactics used by agents selling these products.

One of the biggest bones of contention is the common sales tactic of gaining credibility with the investor through the use of deceptive credentials. Often, those selling these products are life insurance salesmen who have little if any training, background and experience in investing. In fact, for most it is against the law for them to render financial advice. But isn't that exactly what they are doing?

Dateline showed this scheme in great detail when they secretly attended Annuity University, a training seminar for agents selling equity indexed annuities. They discovered, that for the right price, an agent can make it appear they've written books, magazine articles, and have been interviewed by a national radio show. You can even have your name and face on a magazine cover that contains a large picture of Federal Reserve Chairman Ben Bernanke.

All of this is designed to make the insurance agent sound more qualified than they might otherwise be. And it works. Many seniors follow the agent's advice because of these credentials. Minnesota Attorney General Lori Swanson is not amused with these tactics and doesn't pull any punches in her response. She says it's like "handing them [the agents] loaded guns so they can walk into the senior's home and rip them off."

Ms. Swanson goes on to say that "this is part of the marketing ploy, build trust, show you're reputable." Dateline reporter Chris Hanson, who is not an agent, was able to get his own picture and name on a magazine for $1,500. "That's terrible, and you've captured it right on tape," responds Ms. Swanson, "what we're hearing in all of these cases and investigations that we're bringing [is] that these agents are not telling the truth."

Speaking of not telling the truth, Dateline captured instructors at Annuity University training agents to frighten seniors by telling them that their money isn't safe at the local bank, because the FDIC is insolvent. This simply is not true and there has never been a single instance when the FDIC has failed to pay out on a valid claim.

Ms. Swanson also believes agents aren't being truthful when discussing surrender penalties with potential investors. After viewing the typical sales pitch caught on hidden camera, she replies, "It's absolutely misleading. I mean really, they need to deal with these seniors straight."

So don't just take my word for it. Be very careful when considering any investment. Do your own research. Read the contracts and the fine print. If you can't understand it then don't invest.

In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide. Find more articles about annuities or investing or ask Jeff's advice about your personal financial situation.

Harmed Investor Gets Justice

Countless investors have lost large portions of their investments. Some have been in investments where they lost everything. But investors looking for help in recouping losses often find there are few places to turn for assistance. Read on to learn about one investor that finally got justice.

Many an investor has been harmed by their advisor's inaction or being put in unsuitable investments. It's natural that those feeling wronged seek retribution. So, where do investors turn if they need justice?

For securities investments such as stocks, bonds, mutual funds and variable annuities, it's to the National Association of Securities Dealers (NASD). The NASD is a self-regulatory organization created by the securities industry, not a government agency.

In 1987, the Supreme Court ruled that investors can be required to waive their right to sue in court in order to open a brokerage account. Now all grievances with a brokerage firm must first go through arbitration.

Fifty-five percent of arbitration cases rule in the investor's favor. But the average settlement is about 12 cents on the dollar. It so happens that the judges (even those deemed to be independent) are from the securities industry! No wonder brokerage firms prefer arbitration!

It is a long, expensive process to pursue arbitration on an individual basis. When you look at the average settlement, you will be lucky to cover your legal expenses. Your chances can be greatly improved, though, if you are one of many members in a group that had similar experiences with the same broker or firm. Think of it as class-action arbitration.

That's how Bob finally got justice. He invested $750,000 in a variable annuity recommended by an advisor in 2000. Three years later Bob's investment was only worth $350,000. When Bob became my client in November of 2002, there was little recourse he could take.

About a year later, though, he saw an advertisement in the local newspaper about a seminar just for those retirees of his company. It was put on by an out-of-state attorney that specialized in handling arbitration cases.

It turns out Bob, wasn't the only victim. Many of his fellow retirees used the same advisor that he did. Almost all had virtually the same experience. Collectively, they were able to get more of the attention they deserved during arbitration.

After 3 long years, Bob has received a settlement check for $166,000. It doesn't make Bob whole, but it sure helps ease the pain. Bob was one of the lucky ones.

Guess what happened to the broker? Not much. There won't even be any hint of the problems he caused on his permanent record. That means other investors will never know what this advisor did to Bob, and his fellow retirees. That means it can happen to them, too.

You see, the advisor you use could have lost investors hundreds of thousands of dollars and you will never know about it. There's no way to know if your advisor has had cases go to arbitration in the past. There's no way to know if he/she has any current cases in arbitration.

So what can you do to protect yourself?

First, ask your advisor if they have ever had any written complaints and/or cases that went to arbitration. You should also do a broker check at www.nasd.com.

Second, find out how the advisor will monitor and manage your investments on a day-to-day basis. Beware of the advisor that does nothing. Look for an advisor that has specific procedures in place to monitor and manage your account. Few do.

Third, make sure you have the ability to make changes should something go wrong. That's why I am so adamantly opposed to investments that have long-time commitments or big surrender penalties. They limit your options, making it expensive to switch investments down the road.

Fourth, if you've been wronged, try to see if there are others in the same boat. Search the internet for existing class-action lawsuits and see if you can join.

Typically, the problem is the advisor, not the type of investment. Use an advisor that will prevent a significant loss from happening in the first place. Bob was able to recover a portion of his loss. Justice was served, at least partially. Of course, the best strategy is to do your research before you invest your hard-earned money.

In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide. Find more articles or ask Jeff a financial question at www.guardingyourwealth.com.