Olympics Teach Investors A Lesson

Perhaps the only area outside the financial world where performance is so closely measured is the Olympics. Competition is fierce, and with events measured to the hundredths of a second, athletes go to great lengths to gain even the slightest edge. The Olympics can teach us a lot about investing. Take skiing for example. Whether it’s for cross country or the downhill, each ski team has a group of specialists with one job and one job only: to put the right wax on the skis. They carefully take multiple measurements of factors such as temperature, humidity and even the shape of the snow crystals to determine which wax formula will give their athletes optimum performance. Regardless of the athletes training and ability, it’s the skills of the wax technician that will determine whether the racer wins or loses. These technicians have a number of waxes to choose from and it’s not that one wax is always better than another. Rather, that day’s conditions and the unique needs of each athlete will determine which wax is the top choice. You’d never have a wax specialist say that “Wax A” is always the best, or that only fools would use “Wax B”. They keep their options open and are always looking for new coatings to maximize performance. The job of a wax technician is far different from that of a wax salesman. Picture the wax salesman trying to sell the skier on using his wax (or one of the waxes he sells). The wax salesman isn’t trying to convince the skier that his wax is the best for current conditions, but that it should be relied on in all conditions. Obviously, I’m taking some liberty with the analogy, but can you imagine the skiers’ reaction? As a investor—whether you are putting your money into a CD, an annuity, mutual fund or stock—knowing the difference between the advisor who functions as a wax technician and the one that is a wax salesman is vital to your success. Any advisor who recommends an investment that requires you to keep it for several years is a financial wax salesman. That advisor isn’t trying to help you win the race, he/she is trying to sell wax. There are numerous conflicts of interest between you and a salesman, few between yourself and a technician. There are those of us who realize our job is to be the financial wax technician for our clients. We aren’t committed to any one product or even a particular strategy. We are committed to your success. We recognize that our job is to understand the market and economic conditions, along with your personal situation and risk tolerance. Only then can we recommend the financial wax designed to help you win. It’s easy to understand that an advisor shouldn’t be committed to any specific product. It’s more important to make sure the advisor isn’t committed to a single underlying strategy. For instance, Buy & Hold is an investment strategy. Index investing is an investment strategy. Active management is an investing strategy. Many advisors base their entire practice on a single strategy. That’s like the wax technician that will only use one kind of wax. Financial wax technicians are wise enough to recognize that there aren’t any perfect investments and that there aren’t any perfect strategies. Each investment and each strategy has strengths and weaknesses. Unlike the wax technician, we don’t look at conditions the next few hours, but we recognize that what occurs in the next couple of years can be far different from what happens over the next 7-10 years. We form a long-term strategy but make tactical adjustments based on shorter-term (1-3 years) conditions. I’ve developed several proprietary strategies that I use in my clients’ accounts. That doesn’t mean I always use them. Some years they have a larger place, other years a smaller one. It all depends on the client and current conditions. More importantly, I’m willing to admit when something isn’t working and to make adjustments. A skier’s success is dependent on his/her wax technician. Likewise, your financial success is greatly influenced by the advisor you work with. Choose wisely and you’ll have a podium finish! Have a financial question? Send me an email and I’ll personally respond, free of charge. 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.

Keep Up Your Guard

Do you like being taken advantage of? I sure don’t. In fact, I hate it! Worse, it seems like it is happening more and more. Now, more than ever, it is buyer-beware. Read on for some specific examples and to learn how you can protect yourself. Trust is involved when we buy a company’s products of services. Companies spend millions of dollars a year in advertising trying to gain our trust. Employees, especially salespeople, are trained in what to say to build our trust in them and their company. When I take the bait and find out that the product or service doesn’t meet my expectations, I feel my trust has been violated. I’ve been taken advantage of just so the company could make another dollar. It used to be rare. Now it’s common. Take AARP for example. Founded as the American Association for Retired Persons, it quickly became the largest defender of senior’s rights. It is still one of the most powerful lobbying groups in Washington. Its members trust it to act in their best interest. That’s why so many of them were surprised when AARP suddenly changed course and supported the Medicare Drug Bill. AARP even spent $7 million advertising their support! Members were stunned--only 18% of them supported it. What could have caused this trusted voice of seniors to stop acting on their behalf? I’m not going to judge motives, but isn’t it interesting that AARP stands to make millions of dollars selling its new prescription drug insurance called MedicareRX? Hmmm. AARP receives more money from licensing the AARP name to products and services then it does from membership dues. They’re becoming more of a marketing firm then a lobbying firm. Are their products truly in their member’s best interest? Not always. AARP mutual funds are a perfect example. Managed by Scudder, not a single one has performed in the top 20% of its category. Those who invested because of the AARP name have forgone thousands and thousands of dollars of growth due to low returns—while AARP has pocketed tens of millions of dollars. The key point is that you shouldn’t trust a product just because it has a familiar name associated with it. Do you homework and compare it to its competitors. We can be taken advantage of in other ways. I recently responded to an offer for a ‘free credit report’. It was provided by one of the largest credit reporting companies in the world. Surely it could be trusted. Nope. Buried in the fine print is that fact that anyone who receives the ‘free’ credit report is automatically signed up for their credit monitoring service. Until you call and cancel, your credit card is billed each month. Since I used my debit card, I didn’t notice the charge right away. The lesson? Be careful when signing up for ‘free’ offers, read all the fine print, and don’t use your debit card for online purchases. Lastly, I recently bought an electronic book online as part of some research I was doing on Equity-Indexed Annuities. The sales pitch explained that ‘shocking’ truths about annuities would be revealed. It’s easy to find people promoting annuities and I was looking for an opposing view. This seemed to be it. When I went to purchase it I learned that the information I was looking for wasn’t included in the ‘shocking truths’ and that I had to upgrade to learn those secrets. The entire package cost $97, double what was initially advertised. Worse, the material ended up being a sales pitch FOR annuities! I read the terms and conditions. They sell your information to list brokers and insurance agents. One of the ‘bonus’ services was the ability to talk with a live person about your situation. In reality, you would be connected to an insurance salesperson and received biased advice. It shouldn’t be this way. We shouldn’t have to constantly keep our guard up to protect ourselves. But we do. Be careful who you trust—especially a financial salesperson. The people and companies that provide the products and services you use should repeatedly earn your trust. If not, they don’t deserve your business. Have a financial question? Send me an email and I’ll personally respond, free of charge. 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.

Avoid More Financial Razor Blades

Our nation has just enjoyed one of its most popular annual rituals: the Super Bowl. One can draw many lessons from the drama on the gridiron and all the hoopla surrounding it. But as I watched this year’s spectacle, one thing in particular caught my eye. And what I saw can teach a very valuable lesson about investing. Why do so many Americans watch the Super Bowl every year, anyway? For the commercials, of course! And every year, companies try to wow us with their outrageous ads, or use the national spotlight to launch their newest product. This year was no exception, as one famous consumer products company introduced a ground-breaking improvement: a razor with five blades. That’s right, not a razor with four blades, which is so old-fashioned, but one with five, yes, count them, five blades! Razor blade companies aren’t the only ones trying to sell us on the latest and greatest must-have upgrades. Have you shopped for toothpaste lately? Talk about brand extension! Why do products that work fine to start with need to be upgraded and improved? There is one reason: sales. If one company comes out with a new improved version, it means that all of its competitors have to also. Otherwise, they might lose sales to the improved version. These improvements aren’t free. Take a quick look at the cost of a five-blade razor and you realize all these bells and whistles carry a hefty price tag, especially when compared to the ‘old-fashioned’ version. The same ‘brand extension’ occurs in the financial industry as well. They’re always adding an ‘extra blade’ to their ‘razor’ or ‘micro-cleansing beads’ to their ‘toothpaste’. Annuities are a perfect example. The first annuity in America was offered in 1759. The first variable annuity was offered by TIAA-CREF in 1952 for use in college retirement programs. The purpose of the variable annuity was to allow a teacher to grow their nest egg during their working years and then convert that growth into a steady income stream when they retired. In effect, they were creating their own pension. You would have a hard time recognizing that product today. A guaranteed minimum death benefit was introduced in 1980. The guarantee minimum income benefit in 1996, enhance earnings benefits in 2000, the guaranteed minimum withdrawal benefit and the guaranteed minimum account balance in 2002. With each ‘improvement’ the costs have gone up as well. Whereas variable annuities used to be a low-cost way to create your own pension, now they are bloated, expensive all-things-to-all-people products offering every bell and whistle you can imagine. The total cost associated with variable annuities can quickly climb to 3% or more with just the basic features—higher if you add all the ‘benefits’. The main purpose of a variable annuity is to provide greater returns then a fixed-annuity. All these costs make that much harder to achieve. Moreover, these costs essentially are transferring a large portion of the growth from your nest egg to the insurance company. Worse, few of these benefits are ever used. The key selling point of a variable annuity is supposed to be a lifetime income stream, but less than 5% of variable contracts are ever annuitized. If they are a long-term vehicle designed to save for retirement, why are so many being sold to people already retired? Why are 70 and 80-year olds being sold variable annuities? I say ‘being sold’ because only 2% of people choose to buy an annuity on their own. The rest are sold by banks, brokers and agents. Could the fact that the commission is so high be a cause? Call me old-fashioned. I still shave with a two-blade razor. It works well and saves me money. If you want the traditional benefits of a variable annuity, choose the two-blade kind. They are the low-cost, plain vanilla variable annuities sold by companies like Vanguard. You already know what next year’s Super Bowl advertisement will be: a razor with six blades! And you know what your commission-based advisor will be pushing soon: an investment with another costly feature! Don’t fall for it! Ignore the hype. Find low-cost solutions to your financial goals and keep control of your money Have a financial question? Send me an email and I’ll personally respond, free of charge. 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.

Understanding Long Term Care Insurance

Today’s seniors are living longer than ever, but as life spans increase, so do the needs for additional care. The majority of today’s retirees will need some form of special care as they age, whether that help is delivered in their own residence, in an assisted living facility or at a nursing home. The cost of such care is skyrocketing and many find they are unable to afford it. Our recent series of articles has discussed this situation in great detail, exposing the gap that exists between what seniors need and what government programs actually provide. The best way, by far, to fill this gap is with Long Term Care Insurance. Long Term Care Insurance (LTCi) is an insurance policy that covers your care when you can no longer perform at least two of six daily functions. These ‘activities of daily living’ are bathing, dressing, eating, toilet use, urine and bowel continence, and getting in and out of a bed or chair. Each LTCi policy works a little differently. Some require you to cover the first 90 days of care before coverage begins, while others waive that waiting period if the need is for in-home care. Some pay so much per day, while others pay actual expenses up to a certain amount. Some have care coordinators that arrange for all the care, so you don’t see the bills or have to handle any paperwork. Anyone seeking to purchase LTCi has to medically qualify. The underwriters look at your health differently than if you were applying for life insurance. LTCi underwriters are more concerned about illnesses and diseases that are likely to keep you from caring for yourself, not those that will cause death. Osteoporosis and diabetes are examples. Most companies have preferred rates for those in excellent health, with normal rates for the rest. LTCi premiums are also based on your age. That means the longer you wait the higher the premium will be. There is a two in ten chance of needing long-term care after age 50, a two in five chance after age 65, and a seven in ten chance after age 75. As a result, it is better to buy LTCi sooner as opposed to later. This should be seen as a pre-retirement purchase. I recommend strongly considering it around age 50. There are many factors to consider when choosing a LTCi provider. Since this coverage is so critical, only do business with insurance companies rated at least AAA or AA by Standard and Poors. Beware of companies that have just entered the market. Check how many LTCi policies they have issued. If they haven’t issued LTCi policies for at least 10 years and aren’t one of the major players, stay away. Many companies (including some that are major household names) entered the business, only to exit it a few years later. Others don’t have the actuarial experience to properly price policies and end up raising premiums. Either way the policy holders suffer. Don’t choose a company that has raised rates on existing policy holders. Don’t choose a plan that requires you to buy additional insurance every three years to protect yourself from inflation. It’s better to have inflation protection automatically built into the policy. You get to choose how much coverage to buy. Don’t purchase three years of coverage just because that’s the length of the average nursing home stay. This is ridiculous! The majority of people use LTCi to remain independent, at home, as long as possible. They get LTCi because they don’t want to go into a nursing home! Get unlimited coverage if you can afford it. In my experience, the best Long Term Care insurance company is General Electric (GE). They are the biggest kid on the block, doing LTCi business since the 1970s. No one that has purchased a policy from them has ever had a rate increase. GE sets the Gold Standard in the industry. Don’t try to save a few dollars by going with a questionable company. This is insurance that could pay back 10-100 times what it costs you. There’s a 50% chance you will use it. Don’t skimp—what you save today may cost you much more down the road. Have a financial question? Send me an email and I’ll personally respond, free of charge. Go to http://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.