Will America Still be No. 1?

The recent economic times have caused some to question whether America will continue to be the economic superpower it has been in the past. The World Economic Forum recently ranked the United States number two behind Switzerland amongst the world's most competitive economies. While I'm a strong believer in a free-market economy and the uniqueness of America rooted in the ideals of our founding fathers, no one can say how the American economy will compare to other world economies several generations into the future.

As an investor, what should you do to adjust to this potential new reality? It really comes back to one of the basic principles of investing - diversification. Any well-designed investment portfolio should take a world view and include more than just U.S. stocks and bonds. Developed and emerging international markets should also be considered. European and other developed economies, along with emerging markets like China and India, can diversify the risk of a portfolio while potentially increasing the return.

Which countries should be invested in and in what ratio? More emphasis should be put on developed economies because of a longer track record and stronger government regulation and controls. Emerging markets offer enticing potential returns, but they bring increased volatility and the added risk of unstable governments or unethical practices. Limited emerging market investments are appropriate for most investors. The world economic landscape is always changing, but these changes create opportunities to adjust a portfolio to capitalize on the new economic realities.

Finance - It's About More than Money

Finance types like me might view money as a practical, unemotional topic. It's all about what comes and what goes out in dollars and cents, right? My professional and life experiences have taught me that it is often a lot more than that.

I attended a presentation this morning at my local chapter of the Financial Planning Association. The speaker, a counselor and expert on the emotional sides of money confirmed the role emotions often play. She pointed out that Adam Smith, the famous economist who wrote "The Wealth of Nations" in 1776, first wrote about how our mental fallacies can influence economics in "The Theory of Moral Sentiments" in 1759.

Money is a representation of our efforts, our blessings, and our good fortune. It can be used to provide for the necessities of life or to acquire the luxuries of the world. What we do with that money is largely determined by our values, morals, habits and desire for instant versus long-term gratification. How a husband and wife feel about money is often illustrated when they make a significant financial decision together. These feelings are often rooted in much more than the item at hand. Children often model the behavior they see in their parents.

As an individual, I try to consider what is behind my financial decisions and consider all parties involved and the greater good, not just my own biases. As a financial professional I use my education and experience and the non-emotional role I play in significant financial decisions to help my clients. I care greatly about their financial successes, but I separate myself from the emotional decisions that may be holding them back from even greater practical success in their lives.

The Value of a Certified Financial Planner

A select group of professionals have attained the CFP® certification and are referred to as a CERTIFIED FINANCIAL PLANNER™. Other individuals may use the title "financial planner," but have not earned the official designation. What is a CERTIFIED FINANCIAL PLANNER™ and what should one expect from a financial plan?

CFP® certificants are individuals who have met the CFP Board's education, examination and experience requirements, have agreed to adhere to high ethical standards and complete biennial continuing education requirements. Although many other respected financial designations exist, the CFP® is considered by many to be the best example of a professional qualified to give comprehensive financial advice to individuals and families.

Most CFP® certificants will work with individuals to prepare a comprehensive financial plan. Like any goal in life, it is difficult to reach financial goals without a plan. This plan is unique to each individual, but it should cover the areas of saving for future goals, investing, taxes, risk assessment, insurance, and estate planning. Although these considerations are overwhelming to many people, a good CERTIFIED FINANCIAL PLANNER™should help reduce these burdens by boiling down significant financial decisions into manageable tasks. A good financial plan will involve an significant investment of time and money by the individual, but it will pay for itself many times over if it is properly implemented and updated over time.

Is it different this time?

The significant economic events of the past year have caused many to proclaim that traditional buy and hold investing is no longer valid. Supposed experts have also proclaimed that modern portfolio theory is dead. I've also read that the efficient market hypothesis no longer works. Have things changed in the U.S. or world economies so much that the tested, proven and researched tenets of modern investing no longer hold?

I would argue that things haven't changed and the modern ideas of investing are still correct. History has changed. Although history tends to repeat itself and what we've seen recently has happened before, many of us are seeing economic events occur that have not happened in our lifetimes. The reaction to these recent events by individuals and our government has been somewhat unprecedented, but that is a political discussion I don't want to get into at this point.

The efficient market hypothesis states that markets are efficient and asset prices reflect all known information or instantly change to reflect new information. The enormous amount of market volatility that we've seen recently has been due to the enormous amount of economic uncertainty. Once the uncertainty starts to recede, the market will react, as we've seen with some of the positive information being reported recently and the corresponding positive move in the markets.

The efficient market hypothesis is the best working model of how world markets function. The best way to invest in markets is to develop a diversified portfolio (Modern Portfolio Theory) with the appropriate amount of risk exposure. As opposed to markets "failing," much of recent economic history has been due to investors reassessing their level of risk and making appropriate adjustments. Despite the economic pain that has been inflicted on many, recent events have been an opportunity to really experience market risk and why the return premiums from holding equities (stocks and mutual funds) exist. Can we learn valuable lessons from this or are we bound to repeat these cycles again some time in the future?

Watch this eight minute video to hear Eugene Fama, the father of the efficient market hypothesis, share his views.

Cash for Clunkers

Considering my personal interest in automobiles and the recent headlines, I decided to write a bit today about the "Cash for Clunkers" government program. This program was set up to encourage people to trade in older, less-efficient cars and replace them with new, more efficient cars. This trade was encouraged by making $3,500 or $4,500 government rebates available to automobile dealers. The auto industry has been suffering lately because of the overall economic situation so this program was set up to encourage additional new car demand, which has been sorely lacking in the last several months.

The overall idea of the program sounds nice, but there are several unintended consequences and costs that seem to be ignored or set aside. Some of these are also political considerations, but I will try to present an objective analysis.

1) Should we (as taxpayers) be using $1,000,000,000 (soon to be $3,000,000,000) to subsidize and encourage automobile purchases for a very small subset of our citizenry? Are the resulting economic effects great enough to consider this investment?

2) Should the government decide for us or narrow our choices when it comes to purchasing an automobile? I am a strong believer in efficiency and economy in all areas of our lives, but we sacrifice more and more of our personal liberties as we grant our government control over more and more of our decisions. A market economy, with the painful, yet necessary and beneficial ups and downs will take care of these decisions naturally, but often on a differently timetable than those in government might like.

3) What about the independent auto repair shops that have been servicing these clunkers? These are small businesses in America that also contribute to the economy. Once again, I am a forward thinker that embraces progress, but removing so many older cars so quickly is an abrupt end to a part of many mechanics' livelihood.

4) Should the government play such a role in influencing consumer behavior? Should we encourage people to continue spending when overspending caused many of the problems we're seeing in the economy right now? I know of several people who have sped up or delayed auto purchase decisions because of this program.

5) What is the best future for the U.S. transportation industry? Should the government be making these decisions or should the private industry respond to what consumers want? The government can help to influence some of the decisions of the uneducated masses, but when does this become a threat to our personal liberties?

The recent changes in the U.S. and world economy have brought significant amounts of government involvement in economic decisions. Although some of this has been beneficial, many of these decisions are made more effectively on a local or family level. I am relieved to see some positive signs in the economy of late, but I am also wary of unintended consequences that our "helpful" elected officials might be bringing upon us.

Do You Need a Fiduciary?

In order to answer this question, one must first know what a fiduciary is. A simple definition is someone who puts your interests first, or someone who is working for you. Considering the importance of financial affairs in our lives, I would assume that almost anyone would want to know that his or her financial advisor was held to a fiduciary standard.

Although the perception amongst the American public is that financial advisors are working with their clients' interest in mind, this is often not the case. Brokers are not held to the fiduciary standard. Instead, they are supposed to follow a suitability standard. This standard only requires that a client is presented a suitable investment product, versus considering the clients' needs first, as a fiduciary would. As a result, investors are often paying too much for a "suitable" investment, when a lower cost alternative might be available.

The recent financial turmoil has brought this inequity to light for many more Americans. Earlier today, the House Financial Services Committee held a hearing titled, “Industry Perspectives on the Obama Administration’s Financial Regulatory Reform Proposals.” The Financial Planning Coalition, made up of like-minded financial advisors who put their clients' interests first, testified in favor of a proposal that would require all financial intermediaries who offer broad-based financial advice to be subjected to the high standards of a fiduciary. Although regulation should be carefully implemented in order to prevent too much government intervention in our economy, this new standard would be a benefit to many Americans and their financial well-being. I encourage you to contact your U.S. government representative to express your feeling if you agree.

Is Real Estate Investing a Good Idea?

Real estate is something that will always be there. It is the ground we live on or the structure we work and live in. For this reason, it is something of value. The population of the earth isn't decreasing and the prime places to live and work aren't increasing. This seems like an obvious formula for success as an investment. Many people have made fortunes investing in real estate, but the average investor doesn't always have this experience. Why is this and what has recent history taught us about investing in real estate?

Many Americans are homeowners and, as a result, they became aware of the significant increases in home prices of recent years. This seemed to be a ride that many people were taking to easy prosperity. No one wanted to be left behind so more and more people jumped on for the ride. Like any speculative bubble, the residential real estate market has come crashing down and many novice investors have suffered with the crash. Many people are now avoiding real estate of any form and regretting their decision to invest in this market. Is this the best thing to do?

Your home is often your most valuable asset. Not only does it provide a place to live, but it allows for tax breaks and a forced savings plan (through paying down a mortgage and building equity over time). As a result, buying a home within ones means is not a bad decision. The idea of your home as the primary means to build wealth does not always make sense, though. Over the past twenty years (which included the housing bubble) home prices have averaged gains of just 3.6% a year. Stocks, on the other hand, have averaged gains of 8.4% per year (including the recent downtown in the stock market).

I'm not saying there isn't a place for real estate in a diversified investment portfolio. There are professional real estate managers and ways to invest in commercial real estate in a prudent, diversified manner. My experience and history have taught me that a home should be primarily a home and investing in real estate beyond that should be done carefully, prudently and with a long-term, diversified approach, just like the rest of the investment portfolio.