Moment on Money

What is GDP?

I have been hard at work putting together my 4^th Quarter Client Letter and Economic Update. It occurred to me that some may not fully understand the basic measurement of our economy, Gross Domestic Product or GDP.

In case you have always wondered or simply feel like you could use a refresher, here is a nicely produced video which explains GDP.

Translating Finglish

What is Finglish? It is a slang term for Financial English. Financial speak is not well understood which is a shame, since most of us really need to understand money. Take a look at this short video taken in Chicago two months ago.

NWNE Heard On The Street from Center for Retirement Research on Vimeo.

DV Financial's mission is about your comfort and understanding of your money. If you need to understand Finglish, let us know. We will be happy to translate it to conversational English for you.

And just so you know, here are some correct translations from the video:

Dollar Cost Averaging - Investing the same dollar amount into the same investment on a regular basis regardless of the investment's current price. When the price is high, your money buys fewer shares. When the price is low, your money buys more shares. The advantage is the average cost of your shares will always be less than the average price of the shares, although even this does not guarantee safety.

Transparent Fees – Let's face it. No one works for free. The concept of transparent fees says that you should be able to know, specifically, how much you are paying and who you are paying it to.

Large Cap Value – There are two concepts which make up this term. The first is Cap size, or capitalization of a stock. To calculate the cap size you multiply the price per share of stock by the total numbers of shares of stock. In other words, what is all the stock in this company worth? While there is no absolute definition of Large, Medium, or Small Cap. Large Cap companies generally refer to companies worth more than $5 billion. The second component of this term, Value, refers to how the stock is expected to grow over time. When buying a Growth stock, the intention is that the company will grow and develop over time, thus making the stock price grow as well. A Value stock is one that is currently selling for less than it is worth and thus represents a value. Almost like buying something on sale. Putting all of that together, Large Cap Value refers to a company worth more than $5 billion whose stock price is currently lower than the investor thinks it is worth.

Bottom Up Analysis – refers to selecting stocks to invest in by starting with the merits or faults of a company itself and considering all the external factors secondary. This is as opposed to Top Down Analysis, where stocks are selected by first analyzing macro-economic conditions, then selecting industries or other demographic factors, and selecting individual investments from those that remain.

Open Architecture – No investment program can include every possible investment option. The more open a program is, the more diverse (and possibly distracting) the potential investments can be.

Beta – Is a statistical measurement of risk. An investment with a Beta of 1.00 is a risk which is supposed to be exactly equal to the reference market. A Beta of less than 1.00 is less risky than the reference market and vice versa.

A Reader Asks #19: Personal Record Retention

A client recently emailed that she was cleaning out old files and wondered how long she should keep certain records. As a result of answering her questions, I have put together some basic guidelines of what to keep and how long to keep it.

	Retention Requirement	Recommendation
Tax Records	3 years min.	7 – 10 years
Bank/Credit Card Statements	None	File with tax records
Deposit Slips/ATM receipts Credit Card Transactions	None	Reconcile with statement then destroy
Pay Stubs	Most recent	File year end with tax records
Medical Records	None	Current physicians, treatments, and mediations. File medical expenses with tax records
Insurance Policies	None	Inforce polices. Maintain list of insurance policies and servicing agent.
Retirement Investment Accounts	None	Year end statement
Non-Retirement Investment Accounts	Cost basis	Year end statements for 7 – 10 years after investment is sold.

Tax Records – Generally the IRS has three years (from the date you filed) to audit your taxes. However, substantial omission of items (generally defined as over/under reporting income by 25%) extends the audit window to six years and there are situations such as filing a false return, willful attempt to avoid taxes, or failure to file a return which may be examined by the IRS at any time without limitation. If you are audited, the IRS can provide a copy of the return(s) you filed, but you need to provide the documentation and information that was used to prepare the return. Many sources recommend destroying tax information after seven years. That is plenty of time to defend yourself in an extended six year audit window. Frankly, you know if you should be concerned about an indefinite tax examination or not. I tend to hold tax documents longer that the standard seven year recommendation. I keep all tax records for ten years. For example, when I filed my 2010 taxes I destroyed my records from the 2000 tax year.

Bank/Credit Card Statements –These are essentially tax records. File them, by tax year, with tax records. Like all tax documents, keep them for ten years and then destroy them.

Deposit Slips/ATM Receipts/Credit Card Transactions – Save these only until the appropriate statement is received and reconciled. Once you know the statement is correct, it is okay to destroy these.

Pay Stubs – As long as your pay stub contains year-to-date information, you only need to retain your most recent pay stub. Keep the last pay stub of the year with your tax records.

Medical Records – It is a very good idea to keep records with the names and addresses of your family's personal physicians, medical history, and current prescriptions/treatments. Having this information at your fingertips will save you time and energy when you need to see a new doctor or have some other reason to summarize your health such as when purchasing insurance or, in some cases, getting a new job. Receipts and records for expenses related to healthcare should be retained with your tax records if you itemize and deduct your medical expenses.

Insurance Policies – Insurance policies are important, but replaceable. More important that keeping the actual policies is to keep the names and contact information for the agent who services your insurance. If need be, the agent can always get a replacement policy for you. But in a time of crisis, your agent should also be the first person you contact to initiate a claim.

Investment Accounts – what you need to keep really depends on the type of investment account

Retirement Accounts (including IRA's, Roth's, 401(k)'s, Pensions etc) – In general, these accounts are tax deferred so they are fully taxable when money is distributed. Throughout the year, you should retain all confirmations and statements. The final statement of the year will usually summarize all of the activity in the account for the year. You should keep this year end summary with your tax records. Roth accounts have a little greater need for recordkeeping. For Roth's, make sure you keep all your year end statements.

Non-Retirement Accounts – In order to calculate the taxes due when an investment is sold, you need to be able to document your cost basis (that is, how much you have paid in to the investment). If you purchased an investment in one "buy order" that can be pretty simple. But if you are making periodic investments over a long period of time, calculating cost basis may be a bit more difficult. Especially since the IRS allows for a couple different methods of keeping and tracking cost basis and there are special rules which apply to some investments like zero coupon bonds. The good news is, you don't really need to worry about it. Worrying about cost basis is your accountants' job. But you do need to provide your account the information they need. Just like retirement accounts, you need to keep a year end of summary of all your activity in your investment accounts. The difference is that you need to keep this information for as long as you own the investment… even if you own the same investment for decades. You should not consider destroying investment year end summaries for at least seven to ten years AFTER YOU SELL the investment. (By the way, new rules for investment companies will make this easier for investors. Soon investment companies will be required to track cost basis on your behalf).

When cleaning out files (especially after the years end), there can be a lot of documents which no longer need to be kept. Remember that DV Financial has a document shredding procedure which is compliant to military standards. As a service to you, you may bring in your documents and put them in our secure and confidential destruction bin. Your documents will be destroyed at no charge.

Have I missed anything? Let me know!

Is there a financial topic you have a question about? Or is there something you have always wanted to know but were afraid to ask? This is your opportunity! Send me an email and ask your question. I will publish the answer here at the blog and promise to keep your identity confidential. No cost. No obligation. No strings attached.

mail by chona kasinger

Economic Update: August 2011

This morning I awoke to the news that a compromise has been reached in regards to the debt ceiling. I have been holding off posting my quarterly economic update since very little of it mattered with a potential default looming. With that axe no longer over our necks, it seems appropriate to see where the economy stands.

Looking at four key components of the economy - light vehicle sales, inventories, housing starts, and capital goods orders – all appears stable.

Capital goods orders are above average and on the rise. Housing starts are below average, but steady. Given the large surplus of real estate available in the market right now, this is about the best we can hope for. Manufacturing and trade inventories are down which means goods must be produced to meet demand; that is good. The biggest blemish we see is in auto sales and that is explainable. The auto industry is closely linked to manufacturing in Japan. The slowdowns and shutdowns of U.S. automobile plants as a result of the Japanese earthquake and tsunami were well covered by the media. With a shrinking supply, auto dealers felt less compelled to sell cars at bargain prices and as a result, car sales have slowed. Automobile prices have been on the rise, both in the new car and the used car markets.

The biggest factor affecting the economy right now is the consumer. Let us not forget that consumer spending makes up over 70% of our economy.

So perhaps a better measure of our economy is to look at the consumer. As a result of the economic meltdown, the average consumer has responded by increasing savings, and reducing their debt.

But holding the consumer back is a general lack of confidence. Consumers are not as pessimistic as they were before the recession, but they have not regained pre-recession confidence levels.

Unemployment is below its recent peak, but not by much. We lost nearly 9 million jobs in the economic meltdown, but not quite 25% of the loss has been recovered.

But breaking down the unemployment finds that the real problems are geographically concentrated. Perhaps not coincidentally the same regions with the worst unemployment are the same regions which are still feeling the worst of the housing bubble.

This is where, as investors, we must be disciplined. Turn off the news. Quit reading the papers. The media will rarely report good news. But the economic foundation for growth is in place. Corporate earnings per share today are nearly as high as they were before the recession.

Yet the market was 12% lower at the end of the second quarter (S&P500 closed at 1320.64 on June 30, 2011) than it was at the end of the second quarter 2007 (S&P500 closed at 1503.35 on June 29, 2007). That means stocks are cheaper today than they were before the recession but the earning power of each share is about the same. This is not a time to be selling and it may be a great time to be buying.

Fork In The Road: The US Debt Ceiling Impasse

In the last several days the volume of calls have increased and the common question is "Should I go to cash?"

The way I see it, there is only two ways for this to ultimately turn out. Either the government will come to a compromise and raise the debt ceiling, or they won't.

I put the odds of the government letting the August 2^nd deadline come without a resolution to the matter at "very unlikely". There is simply too much for both sides to lose. The only question is how both sides can emerge from the mess they have created, and still declare themselves the winner.

As an investor you have a choice. The market has declined quite a bit this week as uncertainty worked its way into pricing. Selling now and going to cash, you have protected yourself from a potential meltdown next week but you are also locking in the losses. Frankly, if you were to go to cash, the time to do that was about two weeks ago.

I believe that once a compromise is reached in Washington the markets will respond positively. If you are in cash you will miss out on that opportunity to grow or at least recapture the recent declines. Given that I think a political compromise is the most probable outcome, I am making no changes to portfolios unless a client specifically directs me to.

The Fund Evaluation Group, LLC released this summary, perspective, and recommendation yesterday:

July 28, 2011

The following email describes FEG's perspective on the U.S. debt ceiling impasse and our recommendation that clients stay the course with their existing portfolio allocations.

This week the U.S. Congress continued negotiations between its two major political caucuses and the Obama Administration on conditions for raising the United States' legal borrowing limit (i.e., the debt ceiling). The conditions being negotiated include the magnitude of potential spending cuts and/or revenue enhancements targeted to reduce the Federal budget deficit and the size of the debt limit increase, which in turn will dictate how quickly the Administration and Congress will have to start debt ceiling talks all over again. The stakes during these negotiations are especially high because the major credit rating agencies have threatened to downgrade the United States' AAA credit rating.

While Congress has raised the debt ceiling on sixteen previous occasions since 1993, negotiations this time have been particularly challenging as House Republicans hold out for significant spending reductions.

The U.S. hit its borrowing limit on May 16, at which time U.S. Treasury Secretary Timothy Geithner announced he would suspend contributions to Federal retirement funds. The Treasury Department has implemented other measures to keep total borrowing under the legal limit, but it says the U.S. will be forced to default on its financial obligations if the debt ceiling is not increased by August 2.

With the August 2 deadline fast approaching, we would like to share FEG's view on potential ramifications for client portfolios.

First, it is important to recognize the U.S. debt ceiling is a self-imposed political constraint enacted by Congress. Unlike Europe where there is a real debt crisis, the U.S. version is completely manufactured. Congress and the Administration already passed a budget for fiscal year 2011 so the approximate increase in the deficit was well known and the amount of additional borrowing needed to offset the deficit was also transparent.

Comparisons to Greece's debt situation are inevitable, but the differences between the U.S. and Greece (and other European Union nations) could not be more stark. The U.S. issues its own fiat currency and its debts are denominated in that currency. That means it is physically impossible for the U.S. to default on its debt unless it chooses to do so willingly. It can always print more currency to make interest payments and pay down debt.

Furthermore, the U.S. does not issue debt or raise taxes in order to have money to spend. Under a fiat currency system, it spends electronically by debiting bank reserves and checking accounts. With a fiat currency, the only reason to issue debt or raise taxes is to manage the money supply so as to avoid inflation. Consequently, the U.S. is not going to run out of money and it can easily meet its financial obligations if Congress and the Administration so chooses.

That is why we believe S&P's and Moody's credit rating for the U.S. is not really an outlook on the nation's solvency but more an opinion on the nation's political process.

Meanwhile, Greece, as a member of the European Union, does not control its own sovereign currency, and consequently, has no means of paying outstanding liabilities, which are denominated in the euro, unless it raises tax revenues or imposes massive spending cuts. Greece and other peripheral European nations face real debt crises, while the U.S. short-term debt crisis is artificial. Debt ratings in Europe truly are a reflection of those nations' solvency.

The bond market understands the difference between Greece and the U.S. without the help of the major rating agencies. That is why weeks before the potential default of both countries, two-year bonds in Greece are yielding over 27% while in the U.S. they yield a meager 0.4%, although volatility in the U.S. has recently picked up. ¹

A second important consideration is the August 2 deadline is not firm. Again, with a fiat currency the constraint is not when will the U.S. run out of money, as it certainly will not. The real constraint is when will the U.S. Treasury Department no longer have the political authority to spend because the U.S. has hit its self imposed debt limit and tax receipts are no longer sufficient to offset expenditures. By offset, we mean from an accounting perspective not a cash flow perspective.

The debt ceiling was reached in May, and since then the Treasury Department has deferred some expenses in favor of others. With an estimated $29 billion in interest on the debt due in August compared to an estimated $200 billion in tax receipts, it remains unlikely that the Treasury Department would elect to not pay scheduled interest payments and incur a default. ²

Still, having already reached the debt limit, the Treasury Department will be forced to defer more and more financial obligations. It is these ongoing deferrals and the severity and timing of reductions in government expenditures that gives us concern and potentially has negative consequences for risk assets.

The deficit as a percent of GDP remains extraordinarily high because the private sector is still in recovery mode. During the recession, tax receipts plummeted as corporate profitability and household incomes fell while government transfer payments increased due to high unemployment. Additional stimulus measures were also taken to jump-start the economy. Only recently have tax receipts begun to recover and expenditures decline as a percent of GDP.

Consequently, there is a risk that the recovery will falter if government cuts are both significant and accelerated and the private sector does not step in to fill the void. A significantly higher tax burden could also hurt the recovery. Given that households continue to struggle with high debt burdens and miniscule income growth, the corporate sector will need to replace the drop-off in government spending through capital investment and hiring. Perhaps corporations are hesitant to invest due to the uncertainty regarding the U.S. fiscal situation, which is all the more reason Congress needs to act expeditiously to raise the debt ceiling.

We continue to believe the risk of U.S. default is low. Congressional negotiations have focused more on timing and the size of a debt ceiling / deficit reduction package rather than whether one should be passed at all. Only a few have suggested the U.S. should not raise the debt ceiling.

Nevertheless, political brinkmanship can go awry so a default is still a possibility. The ripple effect and unintended consequences of a default and/or credit down grade is what is most disconcerting. Given the complexity of financial markets and proliferation of derivative securities, such as credit default swaps, no one knows the potential cascade of secondary and tertiary consequences such a default/downgrade could set in motion. When the risk-free rate is no longer risk-free because Congress did not raise the debt ceiling in time, the market reaction could be quite volatile, particularly if there are forced liquidations and/or settlements of securities and derivatives priced off of or tied to formerly "risk-free" Treasuries.

On the other hand, a successful resolution of the debt crisis could be favorable to capital markets.

That leaves investors in the uncomfortable position of deciding whether to reduce risk to mitigate a low probability, highly politicized event with unknown consequences of uncertain duration. These types of unknown unknowns are typically dealt with through diversification.

Therefore, FEG recommends long-term investors stay the course for now. If the economy shows signs of contracting and/or market sentiment deteriorates, we will work with clients to take appropriate portfolio actions.

¹ Bloomberg
² "Debt Limit Analysis", Bipartisan Policy Center, July 2011

Fork in the road by Leo Reynolds

Letter to Clients: 3rd Quarter 2011

"Money will always flow toward opportunity, and there is an abundance of that in America… Human potential is far from exhausted, and the American system for unleashing that potential… remains alive and effective"

- Warren Buffett, February 2011

"We are telling investors if you're worried about sovereign credits, if you worry about U.S. Treasuries, there may be greater safety in equities, especially high-dividend stocks."

- Larry Fink, June 29, 2011

"In terms of the stock market, there are amazing opportunities… [Compared to U.S. government bonds,] there's a huge gap and a huge differential."

- Bill Gross, June 7, 2011

"We've almost never seen valuations [on the U.S. stock market] this low when interest rates are as low as they are today… Relative to bonds today, I've almost never seen such compelling values."

- Professor Jeremy Siegel, June 28, 2011

 

Dear Clients and Friends:

Have you ever seen the headline "Don't panic. Everything will be okay"? I never have but strangely enough, despite many complicated global problems, everything usually turns out okay. The message of calm and peace just does not draw an audience as large as the message of doom and gloom so our news is seldom optimistic.

Given the recent concerns about European debt and uncertainty about economic growth, in this quarter's letter I am sharing recent perspectives from three of today's most respected stock market observers; Warren Buffett, PIMCO fund manager Bill Gross, and Wharton professor Jeremy Siegel.

Before recapping the market so far and getting into their views, some quick housekeeping. I have been updating and improving our database so that we can better customize services in the future. For example, I have had some requests to receive this letter via email instead of a printed copy. That capability should be available before the end of the year. If you prefer an email version instead of a paper copy, please make certain we know of your preference and double check that we have your preferred email address.

Market Performance in the First Half

Developed markets registered solid gains in the first quarter, despite the setback from March's earthquake and tsunami in Japan.

The second quarter was quite a different story with concerns arising from growing inflation threats in emerging markets, sovereign debt worries in Europe, and a downgrading of growth forecasts for the global economy. Below are first-half results for key markets. Note that these are reflected in local currencies, so that the effects of swings in the dollar are not reflected here.

Warren Buffett: "Betting on America"

In November 2009, Berkshire Hathaway spent $26 billion to buy the 77% of rail giant Burlington Northern that it didn't already own. Warren Buffett referred to this as "betting on America". Buffett has been consistent in his positive outlook for the U.S. economy, looking past short-term events to focus on America's ingenuity, resolve, and its ability to attract the best and brightest from around the world.

Buffett is consistently voted the greatest investor of all time. In the 46 years he has run Berkshire Hathaway, annual growth in book value has exceeded 20%, more than twice the gains for the U.S. stock market index. Even more remarkable, Buffett's numbers are after tax while the index's gains are pre-tax. Even though he had lagged in individual years, in his last letter to shareholders, Buffett pointed out that there has never been a five-year period where Berkshire Hathaway has under-performed the S&P.

To put his record in dollar terms, $1,000 invested in the S&P index at the start of 1965 would have risen to $62,620 by the end of 2010. By contrast, the same $1,000 under Buffett's stewardship would have grown to over $4,000,000.

Here is an excerpt from this year's letter to investors, published in February:

Last year - in the face of widespread pessimism about our economy – we demonstrated our enthusiasm for capital investment at Berkshire by spending $6 billion on property and equipment. Of this amount, $5.4 billion – or 90% of the total – was spent in the United States. Certainly our businesses will expand abroad in the future, but an overwhelming part of their future investments will be at home. In 2011, we will set a new record for capital spending - $8 billion – and spend all of the $2 billion increase in the United States.

Money will always flow toward opportunity, and there is an abundance of that in America. Commentators often talk of "great uncertainty". Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America.

Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is certain; Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective.

Larry Fink: "Greater safety in equities"

The next two experts are not nearly as well known to the investing public, but they are household names among professional investors.

Larry Fink is the CEO of Blackrock, the world's largest asset manager at over $3 trillion. Blackrock's roots are in bond investing. Despite that, here's what Fink said in a June 29 interview with CNBC: "Corporations worldwide are bigger than ever… [T]heir cash holds are gigantic right now… We are telling investors if you're worried about sovereign credits, if you're worried about U.S. Treasuries, there may be greater safety in equities, especially high-dividend stocks, and there may be greater safety in a very high-quality corporate bonds worldwide."

Bill Gross: The case for dividend paying stocks

As manager of PIMCO Total Return Fund, the world's largest bond fund, Bill Gross turned in a track record matched by few others and was named Morningstar Fixed Income Manager of the Decade. In part, this stems from his willingness to take contrarian views: in 2010 he went on record talking about the "new normal" of lower growth, higher inflation, and increased risk in holding debt of governments around the world.

He has recently turned negative on U.S. government bonds, recommending high-quality corporate bonds and Canadian and Australian government bonds instead of U.S. Treasuries. In a June 7 interview on CNBC, he also discussed the appeal of brand-name stocks that pay dividends:

In terms of the stock market, there are amazing opportunities in real interest space. I mean, a Procter, a Johnson & Johnson, a utility company, Southern, Duke, as a whole they yield 3.5% to 4% in terms of their dividend, compared to a negative 0.5% in Treasury space on that five-year. And so there's a huge gap and a huge differential if an investor is willing to take a minor downgrade in terms of credit.

Corporations are in the catbird seat. They've got cheap financing, cheap leverage. They've got cheap labor and the ability to move from one country to another at their will. And so corporations basically have done very well, will probably continue to do very well.

Gross did add a note of caution:

But to expect their margins to expand at the expense of labor here in the United States, at the expense of laying off additional workers, relative to their wages, real wages, and their total nominal wage growth I think is an unrealistic expectation. I think corporations basically are at the top in terms of profit margins. Doesn't mean that stocks are going up or down. It simply means that the catbird seat basically has been taken advantage of and that the heyday is probably in the past as opposed to the future.

Jeremy Siegel: "Why valuations are attractive"

The final expert is Wharton's Jeremy Siegel, considered today's leading stock market historian. His book Stocks for the Long Run examined 200 years of financial market performance and has been ranked as one of the most influential investment texts of all time. Among Siegel's claims to fame is a March 2000 Wall Street Journal article about the excesses in tech stock valuations at the peak of the Internet bubble.

In a June 28 interview on Business News Network, he explained why he is bullish on U.S. stocks: "We've almost never seen valuations [on the U.S. stock market] this low when interest rates are as low as they are today… relative to bonds today, I've almost never seen such compelling values."

And here's why he, like Bill Gross, likes dividend-paying stocks: "History shows that dividend-paying stocks beat inflation and are good investments for income, especially in the early stages of a financial recovery such as we see today. The top 100 dividend yielding stocks of the S&P 500 over the last half century beat the index by 2.5% and did so with lower risk."

What all of this means

In today's low interest rate environment, it is hard to make a compelling case for cash except as a portfolio diversifier and as a source of liquidity. As for bonds, Bill Gross represents the growing sentiment that the risk in bonds is rising as economies recover and interest rates start to rise.

When it comes to stocks, it does not matter if you adopt the "lesser of two evils" view of stocks as opposed to bonds like Larry Fink and Bill Gross, or join Warren Buffett and Jeremy Siegel in embracing stocks more enthusiastically, there are clear values to be found in stocks.

For almost two years, I've tilted the equity component of client portfolios toward stocks with strong cash flows and prefer strong dividends. These "higher-quality" positions have not always outperformed firms with weaker balance sheets and low or no dividends. In 2008, all stocks dropped dramatically regardless of quality. Since the spring of 2009, we have seen a rally in highly leveraged firms which have benefited from the low interest rates. I don't believe that's likely to continue, as over time quality stocks will outperform.

Despite popular media, there are excellent opportunities that exist in the investment marketplaces. Should you have any questions about your portfolio, this letter, or any other issue please give me a call. I would be happy to answer your questions.

In the meantime, I thank you for your trust and confidence. Use us as a resource. We are here to serve you.

Sincerely,

Art Dinkin, CFP®

Line in the Sand

Iowa is generally on the leading edge of regulatory issues. Last Friday the State Insurance Division issued two significant Commissioner's Bulletins. Both titled Licensing Requirements and Permitted Activities, bulletin 11-4 is the insurance version and bulletin 11-S-1 is the securities version. These documents detail both permissible and prohibited activities of "Insurance-Only Persons" and "Securities-Only Persons".

There is a lot of confusion in today's financial market place and the debate rages over what is and is not a security product, who can offer advice, and the standards to which the advice-giver must adhere. I applaud Iowa for taking a pro-active role in establishing clear and definitive lines. Specifically the guidelines dictate that an "Insurance-Only Person" may not:

• Discuss risks specific to the consumer's individual securities portfolio.
• Provide advice regarding the consumer's specific securities or securities investment performance, or comparing the consumer's specific securities or securities investment performance with other financial products, including annuity contracts or life insurance policies.
• Recommend the liquidation of specific securities, or identifying specific securities that could be used to fund an annuity or life insurance product.
• Recommend specific allocations, in dollars or percentages, between insurance and securities products.
• Offer research, analysis or recommendations to a consumer regarding specific securities.
• Complete securities forms, except for:
  • providing general information to the consumer related to the consumer's existing or new annuity or life insurance product;
  • assisting with forms that are required by the insurance company to complete an insurance transaction;
  • assisting with forms that are required by Iowa insurance regulations.
• Use the terms: investment adviser, securities agent, or investment adviser representative or similar titles that tend to indicate to customers that the individual is licensed to provide investment advice, that the individual is licensed to sell securities, or otherwise holding the individual out as providing investment advice to others.

A "Securities-Only Person" may not:

• Discuss insurance, its cost versus benefits, in specific terms relating to the consumer's individual or group insurance policies.
• Provide advice regarding the consumer's specific insurance policy performance, or comparing the consumer's specific insurance policy performance with securities.
• Recommend the liquidation of an insurance policy, the lapsing of an insurance policy, the taking of policy loans, withdrawals, or surrenders, or otherwise providing any insurance advice or recommendations related to the purchase of a security.
• Recommend specific allocation, in dollars or percentages, between securities and insurance products.
• Offer research, analysis or recommendations to a prospective consumer regarding specific insurance products or policies.
• Complete insurance forms, except for:
  • providing general information to the consumer related to the consumer's existing or new securities product;
  • assisting with forms that are required by the insurance company to complete a securities transaction;
  • assisting with forms that are required by Iowa securities regulations.
• Use the terms insurance professional, agent, producer or similar titles that tend to indicate to customers that an individual is licensed to provide insurance advice, or otherwise holding the individual out as providing insurance advice to others when the individual is not so licensed.

Essentially, the State of Iowa has officially documented what should have been obvious, but was often obscured. No longer can financial professionals in Iowa skirt around the edges of insurance and securities related advice.

It also emphasizes the need to work with someone who is properly licensed in regulated both as an insurance agent as well as registered for securities advice. Otherwise, your financial professional may not be able to provide advice or recommendations regarding your total financial well-being.

I tip my hat to the Iowa regulators. Job well done.

Drew a line in the sand by bJORk(D)mAN

Milkshakes and Prophecy

It is really interesting when completely separate components of your life intersect. This happened to me when I read a Runner's World magazine article in which Ambry Burfoot referenced a recently published Yale Study "Mind Over Milkshakes". A non-technical summary of the study can be found at the Mother Nature Network website, but I can give you a quick synopsis.

The research was focused around how the mind and body achieves satisfaction from hunger after consuming different foods. The participants took two taste tests separated by about a week. In one test, they were asked to drink a healthy 140 calorie milkshake. In the other, they were asked to drink an "indulgent" 620 calorie shake. Before, during, and after the taste tests the researchers sampled the participant's blood and examined the protein ghrelin. When you are hungry, your ghrelin levels elevate. The less ghrelin you have, the less you desire food and your hunger is satisfied. As you might expect, after drinking the calorie rich "indulgent" shake, not only did ghrelin levels decrease but the participants reported being full and satisfied. Conversely, after consuming the healthy but lighter shake, ghrelin levels did not decrease much and the participants reported still being hungry.

Now let's get to the interesting part. There was no healthy or indulgent shake. Each time the participants were given the same 360 calorie shake. In other words, the physical manifestation of hunger was more dependent on the participant's mindset than it was of the actual nutrition the body digested! Think about this for a minute. Scientists have now documented that you can mentally regulate your hunger, and override the calorie and nutrient content of your food.

I was thinking about this article on a recent run and that is when I suddenly saw the parallel to investing. As investors we need to independently analyze data for what it is (the calorie and nutritional value) and we should not let the media or politicians "mentally regulate" our investment results. This has played out far too many times but yet we continue to fall into the same patterns... we believe what we hear in the news. For example, it is easy now to look back and see the dot-com bubble of the late 1990's was unsustainable but most of us bought in to the concept of the "new normal". Just this past couple weeks the market had a short string of bad days. In a matter of moments the pundits were on CNBC with cries of doom and a "double dip". Yet just as quickly as it started, suddenly, the markets turned around again and began to climb back up. Nothing changed, just the direction of the market. Why did the markets retreat? The markets were reacting negatively since the economy was not growing as fast "they" thought it should… but the bottom line is the economy was still growing.

Here is the lesson for both milkshakes and investing. Be aware of your mindset. The self-professing prophecy is real.

Milkshake by c.a.s.e.y

Is the National Debt the Real Problem?

A couple weeks ago I had the opportunity to attend a meeting hosted by First Trust. There I had the opportunity to hear the latest perspective from their Chief Economist, Chief Investment Officer, lead analysts from Equity Strategy Research and Closed-End Funds. The presentations were good, but having been attending their meetings whenever possible I have become acquainted with some of them individually. I think I learn more in our one on one discussions then I do in the formal programs.

The Chief Executive Officer, Jim Bowen, also made a fantastic presentation. He brings a unique and unfiltered perspective which I find refreshing. This particular presentation had one point which I have not been able to get out of my mind ever since.

We have all heard about our growing national debt and the forecast of hellfire it is bringing our way. Jim did not condone our national debt, but he did provide an original view of the situation. He started by pointing out that when President Eisenhower left office, defense spending was more than 60% of federal spending. Since then, it has decreased to about 20%. Conversely, payments to individuals used to be about 20% of federal spending and now it is in excess of 60% (and growing). At the same time, net interest has fluctuated but seems to keep within the 5% - 10% range.

So which should be a bigger concern; our rising national debt or our entitlement programs?

Perhaps even more interesting to me was the breakdown of the payments to individuals.

One role of government is to care for those citizens who are unable to care for themselves, but 76% of payments to individuals is through the Social Security and Medicare/Medicaid programs. These two areas alone represent over 45% of federal spending! The shocking realization to me is that we could conceivably fix our budget problems without withholding services from those who truly need them.

So as we enter the 2012 election season (already?!), if you are concerned about the federal budget, ask yourself which programs could have the biggest impact on our future economic stability. (Hint: It's not our interest payments).

CFP® Board’s “Let’s Make a Plan” Campaign

Have you seen the new public awareness campaign launched by the Certified Financial Planner Board of Standards, Inc? Here is the first TV spot:

The campaign is designed to help educate Americans about the importance of sound financial planning and raise awareness about the significance of the CFP® certification and the need for competent and ethical financial planning. "The CFP® mark truly serves as the gold standard for personal financial planning," said CFP Board CEO Kevin R. Keller, CAE. "Just about anyone can use the term 'financial planner.' But only those individuals who have passed a rigorous set of criteria and meet our strict ethical qualifications can call themselves a CFP® professional."

In addition to the advertising there is also a website with additional resources, LetsMakeAPlan.org.