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2013 - Issue #3  
Chris LongI hope you are enjoying your fall.  The US has temporarily avoided defaulting on its debt and the government has reopened but we are facing a possible replay of both crises early next year.  In the run up to the current agreement several of you asked me if you should change your portfolio in anticipation of a default.  My advice was not to make any changes in your portfolio for four reasons:
  1. I do not recommend making changes to your long-term investment strategy based on short-term events that are somewhat unpredictable.  

     
  2. What happens if there is not a default, if you guessed wrong you could be burned.
     
  3. It would be difficult to predict what the consequences of a debt default would be.  The results may be counter-intuitive.  For example, when the US debt rating was cut by Standard and Poors, the prices of US debt actually rose even though those were the assets that were just downgraded.  
     
  4. Most of the gains in the stock market in a given year happen on a small number of days.  If you are in and out of the market you may miss most of the gain when the market rises. 
There will be other crises and economic turmoil in the future.  Your long-term portfolio should incorporates these risks, limiting your potential downside to an amount that fits your risk-return profile.  

This is so important to understand that I walk through the 2008-9 decline with all of my Full Plan clients to show them how much they would have lost in percentage and dollar terms, and how long it would have taken to recover their losses based on the recommended portfolio.   Everyone should have a clear understanding of this so that you don't panic and sell at precisely the wrong time.


In today's articles, there are some new enhancements to our Full Plan client's websites, I do some Q & A, and the Wall Street Journal discusses how some stockbrokers are pretending to be Fee-Only™ advisors when they are not.  Beware, and Happy Halloween!

PS:  If any client would like a current copy of our ADV Form Part 2 please
contact us at and put 'Form ADV' in the subject line.
 
Take care,

 
 





Chris Long, CFP®
Long Financial Planning


For Retainer Clients -- New Enhancements to Your Personal Website

What's NewA couple of new features have been added to your website this month: 
  • Cobrowsing -- This feature allows me to share my advisor website with you.  It does not require you to download anything.  All you have to do is log-in to your website and type in the code that I give you.  It's that simple. This feature will make it easy for us to have a quick meeting to review something in between our regular update meetings. 
     
  • Alerts -- This feature allows you to set up custom alerts for a number of things.  For example, you can set up an alert to let you know if you have overspent in a particular category. Read more about the new alerts feature here.   


Some Q & ASome Q & A

I have become a contributor to the Nerd Wallet and BrightScope websites, answering questions from people about their finances.  

Here are a some recent examples:


I have my 401K and a roth IRA as well as a 529 with Merrill Edge.  Can you tell me where they fare in regards to fees?

I do not know the answer to your specific question, I wonder if you are asking because you think they are too high or because they are being evasive when you ask them about fees?  Some important questions to ask are:  1) How are you compensated? 2) What is the total compensation you are receiving? 3) Are you working solely in my best interests and would you sign a written oath stating that?  If they are not forthcoming or not working in your best interests then maybe it's time to reevaluate your relationship.  If you want to find advisors who fully disclose their fees and work solely in your best interests you should check out the National Association of Personal Financial Advisors - www.napfa.org

Can a financial advisor charge a fee and collect commission from a stock company for investing his clients in that stock?
 
If you mean a mutual fund when you say "stock company" then the answer is yes.  Most financial advisors who sell products will collect a commission on that the sale of that product.  Brokers who work for large banks will often try to sell the bank's own products whether or not they are the best fit for the client.  If you want to get advice that is not conflicted by a product sale you should work with a Fee-Only(tm) advisor.  This is not the same as a "Fee-Based" advisor who charges a fee but still collects commissions on product sales.
  
My 401k isn't matched, but the rate of return, or interest, is between 13%-20%. Is this good, unusual, or does it matter? Will it still be wiser to contribute to a Roth IRA?
 
This is complicated question so I'm going to break it down into pieces.

Re: Return on your 401k plan

It is important to understand that the return in your 401k plan is determined by the investments that you have selected not that fact that they are in a 401k plan.  The 401k plan just governs the tax treatment of the investment not its return.  The rate of return in the stock market has been quite high over the last year, it is important to look at long term trends vs. the past year.  A more reasonable rate of return to plan for may be in the 7-8% range.

Also, your rate of return is not the same as the interest.The rate of return is composed of capital gains (how much the value of the stocks you own increased), dividends (payments that companies make to shareholders from their earnings), and interest (which is paid by bonds). You would generally only receive true interest on bond mutual funds that you own.


Re: 401k vs. Roth IRA.
 
If you are younger <50 and in a lower tax bracket and your company does not match your 401k plan contribution a Roth IRA contribution may be a better choice for the first $5,500 of your savings.  If you do not feel that you know enough to do this, I strongly recommend using a  target retirement fund based on low cost index funds(e.g. Vanguard). 

I hope this is helpful.



Beware of the Fake Fee-only Advisor

CautionAn interesting article in the Wall Street Journal points out that 11% of advisors listed on the Certified Financial Planner (CFP®) as Fee-Only™ are lying.

These are brokers from firms like Merrill Lynch, UBS, JPMorgan Chase, LPL, and Ameriprise. They can never be Fee-Only™ advisors since they all sell products and receive commissions.  They know the public is looking for Fee-Only™ advisors so they decide to pull bait and switch' games.  

The article cites an example of an advisor who boldly posts that he is a 'Fee-Only' advisor but in his SEC filings admits that he accepts commissions.  When confronted with the discrepancy, the advisor blamed his web designer and said that his website was describing the characteristics of Fee-Only™ advisors, not that he actually was one.   Read the entire article here.

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