The Chicago Federal Reserve Board created a monthly indicator of the health of the overall U.S. economy. This index is called the Chicago Fed National Activity Index (CFNAI) and it’s designed to gauge overall economic activity and related inflationary pressure. The latest report shows continued improvement in the U.S. economy. To quote from yesterday’s report: 

“Led by improvements in production- and employment-related indicators, the Chicago Fed National Activity Index increased to +0.17 in December from –0.46 in November. Two of the four broad categories of indicators that make up the index improved from November, and only the consumption  and housing category’s contribution remained negative in December…Fifty-three of the 85 individual indicators made positive contributions to the index in December, while 32 made negative contributions.” 

It seems that the U.S. economy is slowly climbing out of the Great Recession of 2007—2009. Good news for us all. On the other hand, Europe is another matter as those countries remain mired and floundering in political/economic/monetary policy mud.  I wonder what the Chicago Fed would say about the state of those economies? 

You can read the full report here. If you want to review the economy in general on a monthly basis, I suggest that you subscribe to their regular newsletter feed too.

As the New Year has started, I have had several inquiries from people who want to do some sort of financial planning. I’m always happy to hear from people who want to take action on their personal finances. While not everyone is a fit for me, everyone who calls me asks what it costs to engage a financial advisor. The answer is, it depends. Unlike shopping for a car where the sticker price is posted, financial advisors don’t typically post their prices on their window (or website). But to give you an idea of how financial advisors charge, here is a summary of the four ways that financial advisers charge:

Commission: think of an insurance agent who sells a policy to protect your house or car; he/she gets a commission for helping you to buy the insurance policy. The same is true if you buy life insurance or annuities. Anything that is a product carries a commission.

Commission and fees: this is the way that most financial advisors get paid; you may hear the term “fee-based” that some advisors use; this allows them to both charge their clients a fee for a service and sell them products. Representatives from Edward Jones, Ameriprise, ING, UBS, Merrill Lynch and other brokerage firms use this model.

Salary and bonus: representatives from discount brokerage firms like Schwab, Fidelity and TD Ameritrade use this approach; these advisors get a salary and receive a bonus for customer satisfaction and for extra services they sell to clients.

Fee-only: these are advisors who only receive fees from their clients for their services. Fee only planners are pretty rare. Fee-only planners may charge by the hour, by the project or a percentage of assets you invest with them.

So which approach is best for you? Again, it depends on what you need. That’s the topic we’ll touch on next time.

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BONUS: I’ve written a short paper on How Financial Advisors Get Paid. If you want a copy of this document, please send me an email at steve@finpath.com and I’ll send you the document. Thanks.

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As 2011 moves into the back ground and the New Year looms brightly ahead, there are five things I know to be true about personal finance:

• People feel (and fear) a loss more than they enjoy (or look forward to) a gain. Working with clients this year reminded me of this truth and academic research confirms that my clients are not unusual in this regard.
• The future is un-knowable and everyone understand this, except when it comes to investing. People continue to “bet” their investments on their ability or the ability of an “expert” they choose to predict the future by actively choosing stocks, bonds and mutual funds that they think are under-valued today and will be better-valued in the future.
• Most people are un-prepared for un-expected events. I continually meet with prospective clients who don’t have umbrella liability insurance for themselves, too little life insurance on the major breadwinner, out of date or non-existent basic estate documents (like a will) and too low deductibles on their cars and homes.
• There is no such thing as a free lunch, yet most people want great investment returns without taking risks, or want to take little or no risks and want great returns. This tendency to want something for something is especially evident when people are looking to stash their cash in these times of low interest rates. Many people I talk with want their principal to be secure, but want high returns. It doesn’t work that way. High returns are the reward for risks. You can’t have one without the other.
• There will always be investment bubbles. Gold underperformed the Dow Jones Industrial Average this year, but that did not stop many investors from piling into gold stocks, gold ETFs and buying the precious metal itself.

So what will 2012 bring? I would guess more of the same because each of these truths come from the basic fact that humans are emotional creatures and subject to bouts of behavior that defy logic and rationality. The best way to achieve financial success is to have a personal financial plan that you create in your rational moments that can guide you in your irrational and emotional moments. If you don’t have a basic financial plan that starts with your important goals and details how you’re going to reach those goals, then make that one of your top New Year’s resolutions.

I wish you a Happy and Abundant New Year.

Steve Juetten, CFP®

I saw a notice in the paper the other day that Bill Miller is going to retire in April 2012. If you don’t recognize the name, Bill has been the fund manager for the Legg Mason Capital Management Value Trust for 30 years. In the early part of his stewardship, his fund beat the index he measures against, the S&P 500 Index, for something like 15 years in a row. The financial industry and general media proclaimed him a genius and his fund welcomed great sums of money from individuals and institutions.

But a funny think happened in the last ten years: Bill became less genius. Since 2001, his fund ranks in the bottom 2% of funds in his category. That’s right, 98% of funds like his have done better! The average annual return over the last 10 years for this fund has been -1.14%. The Vanguard S&P 500 Index returned 2.80% per year in the last ten years. How many investors do you think have stayed with the Legg Mason Capital Management Value Trust over that time frame?

The point here is that for a long stretch of time, Bill was lucky. Once his luck ran out, he operated like any other active fund manager and made big bets with his clients’ money and guessed wrong more times than he guessd right. Many investors were fooled by randomness and paid the price. My suggestion: follow the proven method of investing that doesn’t rely on luck to succeed. Invest in a well-diversified portfolio of passively managed mutual funds. Leave the guessing games to the casino.

I know we’re all weary of poor economic news and the media does a great job of reminding us that things are not rosy. However, push aside the negative journalism and there is some good news.  The following is an excerpt from a press release the Chicago Federal Reserve Bank sent out today:

“Led by improvements in production-related indicators, the Chicago Fed National Activity Index edged up in October from September. Two of the four broad categories of indicators that make up the index improved from September, and only the consumption and housing category remained negative in October.

The Chicago Fed National Activity Index (CFNAI) is a monthly index designed to gauge overall economic activity and related inflationary pressure. The index is a weighted average of 85 indicators of national economic activity. The indicators are drawn from four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories.”

What this means to you is to keep doing the things you can do:

• Spend less than you make
• Save as much as you can
• Invest wisely
• Protect yourself against un-expected losses.

To read more on current economic issues without a bias, check out the Chicago National Federal Reserve Bank website.

According to the Associated Press, hedge-fund boss Raj Rajarathnam, whose 11-year prison sentence is the longest in U.S. history for insider trading, was ordered to pay a record $92.8 million fine in a civil case brought by the SEC.

I was chatting with a fellow soccer Dad over the weekend and he thinks someone is making lots of money from the recent stock market volatility and he is not. His assumption is that some big hedge funds are profiting at the expense of us little people. I told him that’s not true.

The tendency is to think the “big boys”, the big Wall Street traders, are making a killing at our expense. But the reality is different. Every time a big Wall Street trading house buys or sells securities, they are buying or selling with another big Wall Street trading house who also thinks they’re right. This is the essence of the efficient market theory that I so passionately believe in.

In every security trade, there is a buyer and a seller and they both think they’re right about the same security. Since the future is un-knowable, both the buyer and the seller are guessing and they both can’t be right. One is and one isn’t. The data shows that even the best mutual funds guess wrong more than right. In 2010, more than 2/3 of large cap mutual funds did worse than the S&P 500 Index.  The reason is that trading costs and the un-knowable nature of the future makes it impossible to beat a passive index over time.

So the next time you feel like everyone is making money in the investment markets but you, think again. If you’re following the SmartMoney Rules™ approach to investing, you may be doing better than all the so-called smart money on Wall Street.

The volatile stock market since May has been mostly about debt: the U.S. debt ceiling debate and the debt crisis in Europe. And this will continue for some time I’m guessing. The media doesn’t make it any easier as they report every squirm and squiggle and giggle about the European debt issues as if it were last night’s college basketball score. So what does it mean to you? Let me make a few suggestions.

Expect continued volatility in the stock market. The U.S. debt ceiling debate is just heating up as we draw near to the deadline for the bi-partisan committee to come up with recommendations. They have until Thanksgiving to develop their list or the automatic measures go into effect. Those are scheduled to take effect in 2013, but the debate will soon take center stage.

In the meantime, the Euro debt crisis will continue to rage on. The Greeks are on the main stage now, but the other teetering countries — Ireland, Spain, Portugal, Italy — will have their time in the spotlight too.

The U.S. Federal Reserve Bank has pledged to keep interest rates low until mid-2013 and there is no reason not to believe them, but if there is an uptick in inflation, expect the Fed to change direction quickly and dramatically. If you hold long term bond funds, you’ll see them get pummelled when interest rates rise. Remember, a ten year bond will lose 10% of its value when interest rates rise by 1%. A five year bond will lose 5% of its value with interest rates rising by 1%. Bond funds will similar maturities will have the same reaction.

Finally, even with interest rates low, the mortgage lenders are looking very carefully at loan to value ratios for mortgages. A client recently found out that their house was appraised at a much, much lower number than they expected, which put their refinance at risk. The residential mortgage lenders got burned badly in the Great Recession so they don’t want to take on debt that is not verified and secure.

So it’s all about debt these days: yours, theirs, ours. My best advice: don’t worry about someone else’s debt; worry about your own.

This may seem like a shameless plug to hire me, but (a) I wouldn’t write it if I didn’t believe it and (b) I wouldn’t believe it unless I could PROVE it. Here’s the proof of the value of paying an adviser to help you with your personal finances.

Proof #1: Dalbar study

The Dalbar research group is an independent company that provides information to the financial services industry. They study, among other things, how individual investors act. According to Dalbar, over the last 20 years, the individual investor has earned investment returns that are about 5%/year less than if the individual investor had simply put their money in an un-managed stock index and left it alone.

If you go it alone as an investor, you are very susceptible to the twin rocks that sink most investors’ success: fear and greed. An investment adviser has one primary job: help you to avoid these rocks that sink so many well-intentioned investors. Want to increase your investment returns? Hire a fee-only adviser to help you with your investments and commit to taking the action steps you develop with him/her and stick with it!

Proof #2: Brightwork Partners study

In a study that was completed in the first quarter of 2011, Brightwork Partners found that people without professional financial planning advice are on track to replace 61% of their income in retirement; people who use an advisor are on track to replace 82% of their income at retirement. This advantage is consistent at every income level.

Let me put this into perspective for you: if you cannot replace at least 80% of your income in retirement, you are going to be very un-happy. In fact, 80% is probably way too low, but replacing 60% of your pre-retirement income when you retire means you’re going to be working way beyond age 65 and probably living well below your current lifestyle. Does that scare you? Good. Hire a fee-only financial adviser and commit to doing what it takes to get to the 90% income replacement level NOW!

Think your securities broker is on your side and has only your interests in mind? Think again. A securities broker from companies like Merril Lynch, Morgan Stanley, UBS, and Edward Jones is a sales person who is paid by the company that employs him or her and is therefore interested in that company’s best interests, not yours. Let me say this again. A BROKER IS A SALES PERSON WHO WORKS FOR SOMEONE ELSE! They get paid by selling you stuff and charging you for buying that product, sometimes illegally too much.

Need proof. Here is a note from the September 30, 2011 AdvisorOne Compliance Watch newsletter (a securities publication):

“The Financial Industry Regulatory Authority (FINRA) announced Thursday that it had ordered Raymond James & Associates, Inc. (RJA) and Raymond James Financial Services, Inc. (RJFS) to pay restitution of $1.69 million to more than 15,500 investors who were charged unfair and unreasonable commissions on securities transactions.”

And what did Raymond James have to say about this?

“Steve Hollister, public relations manager for Raymond James, told AdvisorOne in an email message that Raymond James was “pleased to have resolved this matter with FINRA.” The commissions that would be refunded under the agreement with FINRA, he said, “involved primarily low-priced securities that were determined by an automated commission schedule, which we revised on July 1, 2011, upon notification of FINRA’s findings.”

In other words, Raymond James stopped over-charging their customers when they were caught, but did not admit guilt.

This is not an isolated incident, just the latest. Want more evidence that your broker is NOT on your side? Read the book “Does Your Broker Owe You Money?” by Daniel R. Solin. In his book, Mr. Solin cites example after example of brokers whose interests are at odds with their customers. It will curl your hair and make you sick if you’re still using a broker. So the next time your broker calls, ask him or her if they’ve seen anything on this latest act of a brokerage firm pilfering from its clients (or, better yet, send them a link to this blog post). And for goodness sake, if you’re still using a sales person to “help” you with your investments (broker or insurance agent), please consider switching to a fee-only financial advisor who agrees to act as a fiduciary on your behalf (meaning he or she is legally bound to act in your best interests).