Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010

As usual, Congress has passed a new spending bill with a long, complex name. Despite the tax savings (tax rate preservation) that comes with this bill, it also includes additional deficit spending, which has become the normal way of doing things in Washington the past several years. Political opinions aside, I will summarize a few of the highlights of this bill:

1) Extension of all current tax rates through 2012

2) Temporary modification of Estate, Gift and Generation-Skipping Transfer Tax for 2010-2012

3) AMT Patch for 2010 and 2011

4) Extension of "tax extenders" for 2010 and 2011

5) Temporary Employee Payroll Tax Cut

The average American might wonder what all of this means. With the exception of the new estate tax rates, Congress and the President have left our tax system very similar to how it is now for an additional two years. Most tax filers will see a tax return similar to 2009 for 2010 and 2011. One temporary tax reduction is the payroll tax "holiday" that reduces payroll taxes by 2%, saving most working Americans between $800 and $2,000 during 2011.

Although keeping tax rates low and temporarily reducing the payroll tax will provide a short-term boost to the economy, I feel that a better, longer-term, strategic approach to providing government services and funding our government is needed. We should let Americans work hard and innovate as they have in the past and the jobs and prosperity will follow. In the meantime, each of us should take a hard look at our personal financial situations and make any necessary adjustments in order to put our individual financial houses in order.

Long-Term Solutions

The bipartisan National Commission on Fiscal Responsibility and Reform has recently released some suggestions about how to reduce the massive federal budget deficit in the United States. One area that is being addressed is Social Security. In order to avoid massive reductions in benefits in the year 2037 (coincidentally the year I turn 65), the commission has recommended taxing more earnings, adjusting the benefit formula and indexing the retirement age, among other things. Although I don't want to debate the political merits of the various proposals at this point, I do feel that addressing significant problems with the federal budget with sustainable long-term solutions is exactly what our government should be doing. Although the outcome is yet to be determined, it is encouraging to see solutions being proposed.

I feel that my role as a financial planner is also to provide long-term solutions. My professional responsibilities can be compared to a doctor focused on health and prevention. I recommend that my clients have a financial "check-up" at least once a year. At these meetings I "prescribe" adjustments that will keep my clients' financial lives "healthy" and avoid "diseases" that might develop if financial "health" is not maintained. As it is in many areas of life, focusing on long-term solutions as opposed to short-term "band-aids" is the key to keeping our households and our nation on a "healthy" path.

Hard Work & Determination

I have heard about several employers recently that have positions to fill but are having trouble keeping them filled due to inadequate employee contributions. The news headlines might tell us otherwise, but there are jobs available to those willing to work hard, develop skills and be adaptable to change and progress. I realize that there have been dramatic shifts in the economy and things aren't the way they were before, but I feel like many of our problems could be solved by some more hard work and determination.

Although there might be a few rare exceptions, the key to a comfortable financial future is based on the same things. A realistic financial plan involves assessing one's current situation, setting realistic goals for the future and then putting in the hard work of saving, sacrificing and being determined to reach one's financial goals. In addition, it's the journey that often provides most of the fulfillment, not the destination.

I recently heard a presentation from a financially independent individual who encourages more hard work. Why would someone who doesn't "have to work" encourage the opposite. He has experienced a period in his life without work and it did not fulfill him. As a result, he has filled his life with meaningful service and reaped the fulfilling rewards that service provides. I would encourage more hard work and determination in all areas of our lives. This is what has led our country to where we are and it is what will help us move beyond our challenges in the future.

The True Principles of Investing

There are numerous sources of investment information in the world, many claiming to have something that will provide an above average return or provide access to exclusive, profitable information. Although I'm open to new sources of investment information, I often view these sources somewhat skeptically until I understand the source of the information and how tried and tested it is.

Although things are changing in the world every day, there are some principles of investing that are as close to truth as it gets in the financial world. First of all, markets work. Various types of investments provide an expected return based on the risk of the investment and markets price these securities commensurate to the risk and expected return.

Second, and related to the first principle, is that investors are rewarded in proportion to the risk they take. This may not seem true in the short run, but over longer periods of time, this is almost always the case.

Third, diversification is a critical investment tool. It allows investors to capture risks that generate expected return but reduce risks that do not. The common phrase for diversification is "Don't put all your eggs in one basket."

Fourth, the appropriate risk or asset allocation is unique to each investor. The various rules of thumb do not apply to every investor. A customized approach considering the risk the investor can tolerate is best.

Finally, costs are variable and should be considered. Although two similar investments may provide similar returns, two investors could end up with vastly different sums of money because of the costs related to accessing these two similar investments. As consumers, we should be aware of the various costs of investing and comfortable with their appropriateness to our situation.

I seek for true principles in any area of my life that help me make more informed, reliable decisions. The investing world has been analyzed and researched for many years in order to uncover what things work when it comes to capital markets. I welcome feedback and discussion as I continue to seek and implement the true principles of investing in my profession.

Uncertainties & Opportunities

The one thing that I become more certain about as life progresses is that life is uncertain. Unexpected illnesses, financial volatility, natural disasters and irresponsible politicians all contribute to this reality. So if this is the case, what is one to do? Considering that this is a financial blog, how does one navigate the uncertainties in the practical areas of life?

1) Expect the unexpected - No matter how certain or predictable something is, consider the alternative. Certain things that were considered reliable in the economy are not as reliable right now, so have a back-up plan in mind.

2) Leave some wiggle room - The American way is often to live life on the edge, take risks and focus on the here and now. America is unique because of our founders' willingness to take risks, but we should consider the risks we are taking on a day-to-day basis and determine if they are really necessary.

3) Accept reality - It is easy to deny dramatic changes in our lives and refuse to adjust to a new reality. When it comes to financial matters, accepting the new reality and making adjustments to it is better than sticking to an outdated way of thinking. This allows for more flexibility is working through challenges and a more reliable plan for the future.

4) Keep a positive attitude - The news headlines and other negative influences can make it easy to get down and give up the fight. We are all better off when we focus on what is in our control and take positive steps to improve our situation. Life might not always turn out how we imagined, but a positive frame of mind is often the key to conquering practical challenges.

I enjoy the challenge of assessing a financial situation, collecting the relevant information and developing a workable plan to move forward. Let me know your questions and challenges and I am happy to see where I might be of assistance.

Is the "Good Life" Only About Money?

As someone who designs financial plans and manages investment portfolios, I'm keenly aware of money and the significant role it plays in our lives. I also understand the peace of mind that comes with having enough money to pay the bills and meet future goals. It is actually this peace of mind and fulfillment that has directed me towards the profession that I'm involved in.

As humans, we are all searching for the "Good Life," where we feel we are spiritually, physically and emotionally healthy. We all want to have good family relationships and friendships that contribute to this state of well being. A certain amount of money or wealth can contribute to this state, but an excessive pursuit of wealth can also detract. As this article summarizes, a sense of purpose really is critical to achieving the good life.

So how does one achieve this sense of purpose? As a financial planner, I work with clients to assess their current financial situation by taking a snapshot of their current assets, liabilities, etc. This can also be done in other areas of ones life. I then discuss goals and dreams with clients to see if they are on track to achieve these aspirations. In addition to finances, one can look to the future in relationships, health and other areas to picture where he or she wants to be. In order to achieve this future state, one must then determine realistic steps along the way that will help to get you where you want to be.

Are you living the "good life?" If not, why not?--and what is your plan to get there? Good luck and enjoy the journey!

The Financial Planning Profession

When choosing a service provider, one often looks for someone with a professional license or credential. While a professional certification is not a guarantee that the service professional will be completely reliable, it does go a long way in guaranteeing that you are working with someone who has met professional educational standards and is subject to an ongoing level of learning.

Although the Certified Public Accountant (CPA) is widely recognized in the fields of financial accounting and tax preparation, a bit of public confusion exists when it comes to the best professional for personal financial advice. Although many titles and designations exist in regards to financial advice, the most recognized and reliable credential is the Certified Financial Planner (CFP) professional. In this unsettling period of economic volatility, it's critical to have a professional that will help you make and keep a financial plan that's best for you and only you.

The Certified Financial Planner Board of Standards was founded 25 years ago this week to foster the highest standards of excellence for financial planners. In order to become a CFP practitioner, one must complete advanced college level studies on nearly 100 topics, compile at least three years of work experience, pass a 10-hour, two day exam and most importantly, agree to uphold the fiduciary standard--which means putting the client's interest first above all others. Does your financial advisor meet these standards?

Risk & Diversification

The headlines have been dominated recently by the BP oil disaster in the Gulf of Mexico. This story and the dramatic effect it has had on the value of BP stock are yet another example of the risks inherent in investing. Considering these risks, why do people invest and how can one invest without exposing oneself to too many of these risks?

Many people consider large, established companies to be good investments. There are several reasons that this is true, but putting too much of ones investment portfolio into the stock or bonds of a single or small number of companies is still a risky proposition. BP and GM are dramatic, recent examples.

So how does one reduce the risks of investing in the "wrong" company? The simple answer is diversification. The common phrase used to define this term is "Don't Put All Your Eggs in One Basket." By owning stocks and bonds from a variety of companies, large and small, domestic and international, the risk of losing large amounts of wealth is reduced.

Some people have questioned the value of diversification because nearly every type of investment lost value during 2008. While this is true, a 40-year study that was presented at a recent financial planning conference showed that a year like 2008 was truly an anomaly. Diversification has provided significant protection in 38 of the last 40 years. Although disasters and market shifts will continue to pose risks for companies of all types, diversification is one way to have exposure to the upside of investing, without taking on too much risk.

New Opportunities

As someone who is interested in the automobile industry, I took special interest in the announcement today of a partnership between Tesla and Toyota. Tesla is a young, Silicon Valley start-up electric automobile manufacturer and Toyota is the large global auto giant that has gotten a bit of bad press recently. So what does this announcement have to do with investing?

Tesla has been producing a very expensive electric roadster that has sold well to those who can pay over $100,000 for a car. Tesla's next product is an electric sedan that should be affordable to more buyers at about $50,000. Toyota (along with most auto manufacturers) has experienced a slowdown the past couple years and recently closed a large auto factory in the San Francisco Bay Area, which was formerly a joint venture with General Motors.

Today's announcement was that Tesla would buy the closed factory from Toyota to manufacture its future products and learn from Toyota's expertise in manufacturing. Toyota announced that it would invest $50 million in Tesla to learn from some of its young, venture-like thinking and methodologies and jointly produce electric vehicles in the future.

In my opinion, this announcement is a great example of the transitions that happen in a free-market economy and the opportunities that news ways of thinking and doing things can provide. Tesla is focused on the future of automobiles, without being restricted by oil or labor unions. Toyota is looking to improve its image and rekindle some energy that large organizations tend to lose over time. A well structured investment portfolio can be designed to take advantage of these transitions and the opportunities they provide. Although an economic downturn causes a lot of pain and upheaval, it also opens new doors and allows new ways of thinking. As an investor, I like to look forward for the growth and changes that might be just around the corner.

Risk & Volatility

Anyone who follows the news headlines heard about the dramatic drop in the stock market yesterday. Although it was followed by a significant recovery, there was a point yesterday where the Dow Jones Industrial Average was down almost 1,000 points. What caused this to happen and what does it mean about the risk of investing in the stock market?

There is speculation about the exact cause of yesterday's volatility, but it was most likely caused by a combination of global economic uncertainty, computerized trading programs and human trading actions. All of these factors confirm that investing in equities does carry risk and this risk becomes more apparent when uncertainty exists. Our world economy has become more volatile and uncertain in recent times and the changes in the market show this.

Despite the volatility, developing a well-diversified, long-term investment portfolio is still the way to achieve returns that stay ahead of inflation and to build real wealth over a long period of time. Recent events confirm the need to have a well-thought-out financial plan and appropriate investments which support the risk this financial plan allows. Having a plan like this in place allows the short-term emotion of the markets to be viewed as "noise" and the long-term goals remain the primary concern.

Financial Lessons Learned

With another tax season behind us and some hopeful economic signs appearing on the horizon, I've taken an opportunity to reflect a bit on the past couple years. There are some lessons that have been learned or relearned by myself and many of you out there. If you haven't learned any lessons then this post might give you some more financial insight.

1. "Good Times" can't last forever. Although we are blessed as Americans to have a unique form of government that has fostered much success and prosperity throughout our history, we are still subject to the economic ups and downs of a free market economy. If anything, we are subject to these even more than some more socialist or heavily regulated economies.

2. Freedom isn't free. Somewhat related to my previous point, we have to pay a price for the "ups" in our economic cycles with the "downs" that inevitably follow. More government involvement in our economic lives my flatten these cycle out a bit, but the price of more government is less freedom.

3. There is a cost to everything. The recent downturn has brought out a sort of panic reaction which says we need to pull ourselves out of this downturn--quickly and at any cost. The cost of some of the recent government legislation is very significant. It might not be immediately apparent, but we are burdening our future generations with more taxes without giving them a say in the decision. There are also costs to the substandard moral behavior which brought on much of this crisis. The cost has been severe and not just to those who acted unethically.

4. Economic cycles are beneficial. Although this recent recession has caused much financial pain in many people's lives, changes are often made which will pay future dividends. Companies have improved processes and removed excess costs. Families have reevaluated purchasing decisions and paid down debt. Governments have been forced to provide services more efficiently or in a more need-based manner. Many of these changes will strengthen our country to allow for future growth cycles.

5. Despite the financial challenges, we should be grateful. We are blessed with families, friendships, freedoms and opportunities that many people in the world could never imagine. Let's not forget those things because of some short-term disappointments and surprises.

Emotional Buying

I recently attending a church fundraising auction which was an enormous success. Considering that $$ and purchases were involved, the evening gave me some food for thought about how people buy things. The auctioneer was very talented and humorous and made the evening enjoyable for everyone. His performance, along with the fact that the bidding got a bit competitive all led to the success of the evening. The upbeat emotions of the evening led people to have fun and spend money. I have been involved in several charity auctions and this is often the case.

So how does this relate to our everyday and not so routine purchasing decisions? We often head into a store to buy something and come out with something else or more than we intended to buy. Our mood and the presentation of the store affect our purchasing behavior. This might be common sense to most, but it is often forgotten, especially when larger purchases are involved.

As a financial planner and as a rational consumer, I try to have a plan in place before I am in a situation to spend money. This doesn't always work and isn't always necessary with small, insignificant purchases, but is recommended behavior for the big decisions in life. Next time you are choosing a home, car or large appliance, keep this in mind. I would also recommend a plan or a referral in choosing important services providers, like doctors, dentists, financial advisors and the like.

Are You Wealthy in More Ways Than One?

Wealth is often measured by money in the bank, real estate, cars or other material possessions. The traditional way to measure one's wealth or personal net worth is to add up all the assets, subtract the liabilities and the difference is the net wealth of an individual. Although I do these calculations as a professional, I also like to consider things like time commitments, stress levels and appropriateness of debt, among other things.

Have you ever considered if you are "time affluent" as the online columnist Laura Rowley has observed? Do you have all the time you desire to be with friends and family and enjoy the material possessions that you have acquired or do you find yourself spending all your time acquiring the material possessions?

Do you have unnecessary stress in your life? Is some of this stress related to financial decisions and burdens that may have been unintentionally placed upon yourself or your family? Do you make other poor decisions because of the stress that you are feeling?

Finally, are you comfortable with the amount of debt you have taken on? Have you ever considered the appropriateness of your debt? Even if you can afford the payments is debt always necessary to acquire what you really need in life?

I don't want to sound like a psychologist, since I'm not trained as one, but finance definitely involves more than a net worth statement or debits and credits. In addition to preparing professional financial statements and using institutional money management techniques, I like to assess how balanced people are in their lives and how financial decisions are adding to or detracting from ones total "wealth" in life. I think this is something we can do better with, especially as Americans in an economy that seems to be all about acquiring things.

What's Ahead for Taxes?

As tax time comes around, many people are wondering what the future holds for taxes in the United States. If President Obama gets what he wants, tax rates will go higher for higher-income Americans. His recently proposed budget has the Bush tax cuts going away at the end of 2010 for individuals making $200,000 or more and couples making $250,000 or more (sounds like a marriage penalty to me).

The budget proposes that the top two tax rates would go from 33 to 36 percent and 35 to 39.6 percent. Capital gains taxes are also proposed to go from 15 to 20 percent for this same group of high-income Americans. It is also expected that the estate tax will be reinstated retroactive to January 1st at a 45 percent rate.

No one likes to see tax rates increase, and these changes aren't a sure thing, but we do need some fiscal changes at the Federal level in order to protect the future generations in America. As opposed to playing political games with tax policy, I would prefer that the President and Congress enact fair tax policy for all Americans so we all have "some skin in the game," as opposed to deciding who is rich and who is poor and who should be rewarded or punished for his or her political leanings. I would also appreciate greater consideration of the spending side of the equation. Consistent, increased spending seems to be a given, despite the economic ups and downs that American households face. We would all be on a path to bankruptcy if we increased household spending year after year without considering where the income was coming from.

All this being said, these tax changes can be managed and muted somewhat by staying informed of what's ahead and working with a licensed financial professional, when needed. We should do our best as citizens to influence the policies in Washington and then stay informed to deal with the good or bad consequences of those decisions.

What a Difference a Year Makes!

Although unemployment remains high and the media may continue to focus on the negatives of the past couple years, things have turned around dramatically in the stock markets. For example:

S&P 500 (Large U.S. Companies)

Down 38.49% in 2008

Up 23.45% in 2009

EAFE Index (Large International Companies)

Down 45.09% in 2008

Up 27.75% in 2009

MSCI Emerging Markets Index (International Companies from Developing Nations)

Down 54.48% in 2008

Up 74.50% in 2009

The trend is quite similar for many other stock indices in 2008 and 2009 and the positive returns are even more dramatic from the point the markets bottomed on March 9, 2009.

Pessimists might say that although we have seen positive returns in the markets of late, we still aren't back to the 2007 peak and we don't know where we're going from here. Both of these points are valid, but a more positive view would be that we've made great progress in coming back and the markets (which typically forecast 6-9 months forward in the economy) are forecasting significant economic improvements.

A couple conclusions from this short analysis would be that markets are volatile (2008-09 were an extremely dramatic example) and that investing is a long-term proposition with bumps along the road. This recent period once again confirms the need to have a realistic, diversified investment plan and to stay disciplined through the ups and downs.