Do Your Advisors Have The Eye Of The Tiger?

"It's the eye of the tiger
It's the thrill of the fight
Rising up to the challenge of our rival
And the last known survivor
Stalks his prey in the night
And he's watching us all with the eye of the tiger"
Eye of the Tiger by Survivor. #1 Hit 1982

It's The Little Things That Can Get You
In the wild, being aware of the little things can make the difference between life and death, feast or famine. The predator has to use stealth, surprise, speed and quickness when pursuing its prey. One little sound or even approaching from the wrong wind direction can lead to failure and an empty stomach.

In life, it's also the little things that can trip us up and cause unintended consequences. A surgeon does a fantastic job performing a surgery. The surgery is successful. But what happens if someone in housekeeping didn't do their job, or someone in food service? They didn't handwash properly? The patient could end up with a MRSA infection. So that great surgery was severely compromised. Why? Because of the surgery, which was the big thing? Or what was the thing that got the patient? Yes, the little thing.

The "Little" Things in Personal Finance

Most people have good advisors, attorneys, accountants and brokers. These advisors do all of the big things. Unfortunately, they often overlook the little things. One such area is Powers of Attorney(POA). Of the thousands of POAs that we have looked at, although they were all perfectly legal, they were missing important things.

For example: The Social Security Administration, Veteran's Administration, and the IRS will not honor your POA unless it has specific language pertaining to those areas. Knowing what you know about the government, what's the likelihood that the language used by these entities are all the same? Exactly, none of them do! That's just one of nine things that we find that basic POAs are missing. Why is this important? Because you use POAs to withdraw money.

Banks and Brokerages

Even though a POA is completely legal, if it's missing these nine things, many banks and brokerages will turn them down. What's the advantage to a bank or brokerage for turning down a POA? They get to hold on to the funds longer and continue to make more money. They have no financial reason to honor it. It's actually negative financially for them to honor it. In fact, if they honor it and find out later that it wasn't the most current or correct POA, they could end up getting sued.

21-Point Checklist

If you're going on a long roadtrip, it's important to make sure that your vehicle is checked and ready. You take it to a mechanic, and they would perform a 10-or-12-Point Check. Similarly, you should have your personal financial situation checked out. There are actually 21 common "little" things that can bite you. And they can cause BIG problems. These 21 different things are important items that your bankers, brokers, attorneys and accountants miss.

Don't let the "little" things trip up you and your family. Make sure that the Eye of the Tiger is watching out for you!$

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Outlive My Retirement Savings? I Can't Go For That (No Can Do)

"I'll do almost anything that you want me to
But I can't go for that,
No can do."
Hall & Oates, 1981 #1 Hit



Prior to 2007, whenever Americans were asked about their retirement goals, the most common responses boiled down to "retiring early" and "accumulating as much wealth as possible." Asked the same question today, however, and the dominant answers are likely to be "dealing with healthcare expenses" and "not outliving my income."



Today, investors are demanding a smarter balance of growth and security to achieve their retirement goals effectively and to create a sustainable stream of lifetime income. The old "60/40" investment mix in retirement (bonds/stocks) will not sustain a retirement that can last 20-30 years.

A leading independent actuarial consulting firm studied the effectiveness of three popular investment strategies in creating a sustainable retirement income for various joint and single life retirement scenarios. Success was defined as annually meeting the needs of an inflation-adjusted income. The study assumed a $1 million investment, an initial withdrawal rate of 4.5 percent and annual inflation adjustment every year until death. The base case analyzed systematic withdrawals form hypothetical mutual fund portfolios comprising a combination of equity and fixed income. Next, the mutual fund portfolio was paired with an annuity providing a Guaranteed Lifetime Withdrawal Benefit (GLWB). Using a Monte Carlo analysis, the study sought to determine the best allocations to optimize chances for success in each case. Risk was defined as the probability of running out of money while still alive. Return was defined as the average amount of remaining assets upon death.

Mutual Fund Spend-Down Strategy

A balanced portfolio of 60 percent equities and 40 percent fixed income provided a maximum probability of success (82 percent) when using a mutual fund-only strategy. The best-case scenario for a mutual fund-only strategy suggested that one in five retirees could run out of retirement income prior to death.

Mutual Fund Spend-Down Strategy + Variable Annuity

Combining the mutual fund stratgegy and a VA with GLWB revealed that a 45 percent allocation to the VA with GLWB revealed that a 45 percent allocation to the VA and, for the remaining 55 percent of assets, a fund portfolio of 55 percent equities and 45 percent fixed income would be the most effective or optimal mix. However, the likelihood of success increased by just 3 percent to 85 percent. Withdrawals from the mutual fund portfolio would provide income during the first 10 years. Thereafter, lifetime benefit withdrawals from the VA combined with withdrawals from the mutual fund portfolio would fund the income stream. While there is improvement over the mutual fund spend down alone, there is still a one out of six failure rate, meaning a one in six chance of outliving your income.

Indexed Annuities (IAs) Enhance Odds of Success to 97.5 Percent

Finally, the study examined mutual fund systematic withdrawals paired with a contemporary IA with GLWB. The probability of success greatly enhanced, to 97.5 percent, when a 50 percent allocation to the IA was combined with a mutual fund mix of 25 percent equities and 75 percent fixed income. As with the VA/.mutual fund strategy, mutual funds would provide income for 10 years before lifetime withdrawals from the IA were initiated. With retirees seeking retirement income, this strategy provides the greatest probability of success, moving from a one in five or one in six failure rate to a one in 40 failure rate. That is a significant improvement as compared to the VA with GLWB strategy.

Know Your Options!

The significant improvement in the probability of success should capture the attention of pre- and post-retirees. Being in position for little to no market risk, a guarantee of principal, potential for portfolio growth and retirement income requires a series of well-executed plays. Improved retirement outcomes, flexibility to respond to a variety of needs and market conditions, and retaining control of the assets are driving today's retirement game. All these goals are achievable by combining the mutual fund drawdown strategy with a contemporary IA with GLWB.$

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Advisors: "Gotta Give the People What They Want"!

"You got to give the people,
Give the people what they want
Well, well, well, well."
The O'Jays, 1975 #1 Hit

I was listening to a national Investment Advisor's radio show this morning (Saturday). A listener called in and asked the following: "I'm 55 and have $200,000 in a 401(k) that is invested in a fixed annuity. I'm getting ready to retire, and cannot afford to lose this money. What should I do?"

The hosts' response: "It depends, what is your risk tolerance? On a scale of 1-10, where would you say you fit in on the risk scale?" The caller replied "about a 4". The hosts went on about asset allocation and fund selection to help him meet his objective. And typically, they described how it was a bad decision to put a qualified savings vehicle inside of an annuity. "You already have tax-deferral, and now you are adding more fees to your investment". "Anyone that recommends that you should rollover your 401(k) into an annuity is just after a commission." And of course, the hosts were more than willing to get his contact information and help him with that $200,000!

At the very beginning of the call, the caller stated that he could not afford to lose ANY of this money. He already answered the risk tolerance question. This individual would not sleep easy knowing that he was exposed to any loss, no matter how small. There is not an asset allocation model that can guarantee against a loss of principal due to market conditions. Fixed/indexed annuities are a viable solution to risk-adverse savers who are concerned with outliving their retirement income. Americans need credible and reliable information on financial services products now, more than ever. There is no excuse for the perpetuation of inaccurate information. Consumers deserve the most appropriate product for their needs.

It is important to note that the radio show hosts are investment advisors. Their background is in the securities business, not the insurance business. This is important to readers and listeners to know because registered representatives' solution for "safety and accumulation" is offering stocks and bonds (which are securities products that carry risk of loss). By contrast, the insurance agent's solution for the same problem is a fixed or indexed annuity (which are insurance products with no risk of loss due to market volatility). Why isn't the registered representative/advisor a fan of the fixed/indexed annuity? For starters, he is familiar with the processes and routines that are associated with the SEC's regulation (which is very different than those of insurance products' NAIC regulation.) In addition, securities products pay generous, consistent commissions (trails and AUM) where fixed/indexed annuities pay commissions only one time, at point-of-sale. For this reason, it is very likely that the financial advisor does not sell fixed/indexed annuities at all. And if he/she is not selling fixed/indexed annuities, then he/she is competing against insurance agents and advisors that do. Our nation's financial advisors and insurance agents have long fought a battle to control 100% of their clients' assets. It is a shame that everyone cannot learn to "play together" and ensure that the client has ALL of their financial needs met, using THE most appropriate products for their needs, regardless of whom is able to sell it to them.$

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Algorithmic Trading: How Algorithms Came To Rule Our Investment World

Algorithmic trading is a system that uses very advanced mathematical models for making transaction decisions in the financial markets. The system attempts to determine the optimal time for an order to be placed that will cause the least amount of impact on a stock's price. Algorithmic trading is widely used by investment banks, pension funds, mutual funds, and other buy-side (investor-driven) institutional traders, to divide large trades into several smaller trades to manage market impact and risk. Sell side traders, such as market makers and some hedge funds, provide liquidity to the market, generating and executing orders automatically.

The main objective of algorithmic trading is not necessarily to maximize profits but rather to control execution costs and market risk.

Algorithms started as tools for institutional investors in the beginning of the 1990s. Decimalization, direct market access (DMA), 100% electronic exchanges, reduction of commissions and exchange fees, rebates, the creation of new markets aside from NYSE and NASDAQ and Reg NMS led to an explosion of algorithmic trading.

Algorithims Replacing Wall Street Analysts, Investors

Computerized algorithms are quickly replacing single-stock analysts and investors, leading to big changes in the way the stock market will value companies and increasing the chance that software glitches or hack attacks will jeopardize market stability. Algorithmic trading may be used in any investment strategy, including market making, inter-market spreading, arbitrage, or pure speculation.

A third of all European Union and United States stock trades in 2006 were driven by automatic programs, or algorithms. As of 2009, studies suggested High-Frequency Trading (HFT) firms accounted for 60-73% of all US equity trading volume, with that number falling to approximately 50% in 2012.

Technological forces - including HFT, an explosion in exchange-traded funds and the proliferation of free information via social media - are behind this shift.

The changes that started with high-frequency and algorithmic trading are just the first step to an entirely different process of determining stock prices. Computers and decimalization have chipped away at the ranks of human traders in the past decade. Now, smarter machines are taking aim at the very people who analyze a company's merits and who make buying and selling decisions based on that analysis.

These algorithms tend to see the market from a machine's point of view, which can be very different from a human's. Rather than focus on the behavior of individual stocks, for instance, many prop-trading algorithms look at the market as a vast weather system, with trends and movements that can be predicted and capitalized upon. These patterns may not be visible to humans, but computers, with their ability to analyze massive amounts of data at lightening speed, can sense them.

Boon for Individual Investors

For individual investors, trading with algorithms has been a boon. Today, they can buy and sell stocks much faster, cheaper, and easier than ever before. But from a systemic perspective, the stock market risks spinning out of control. Even if each individual algorithm makes perfect sense, collectively they obey an emergent logic - artificial intelligence. It is simply, alien, operating at the natural scale of silicon, not neurons and synapses. We may be able to slow it down, but we can never contain, control, of comprehend it. It's the machines' market now; we just trade in it.$

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Wall Street: Rise of the Machines

The Future Has Arrived - On Wall Street!

Can professional money managers still beat the market? It has always been a difficult task for investors to consistently beat their index benchmarks. Lately, it has been nearly impossible. The reason: the rise of sophisticated computer-trading programs.

There were 51 advisers out of more than 200 on the Hulbert Financial Digest's list who beat the market in the decade-long period ended April 30, 2012, as measured by the Wilshire 5000 Total Market index, including reinvested dividends.

Of that group, just 11 - or 22% - have outperformed the overall market since then. Over the past year, on average, the group has lagged the Wilshire index by 6.2 percentage points.

Chasing Performance
In other words, going with a recent market beater doesn't increase your odds of future success. Before the era of computer-dominated trading, it was a bit easier to identify wining advisers. You could more easily understand and evaluate what they were doing.

Rise of the Machines
One major reason why machines are winning is our inability to process lots of financial data, which is getting more complex and voluminous every year. Also, there used to be another human being on the other side of the trade when a stock was bought or sold . Now it's a supercomputer that is competing with traders. Even if you are a Grandmaster, you are bound to lose competing with "Deep Blue".

Man consistently loses out to machine in a wide variety of pursuits, ranging from medicine to economics, business, psychology and even things like predicting the winners of football games and judging the quality of Bordeaux wine. In each of these domains, the accuracy of experts was matched or exceeded by a simple algorithm.

Betting on the Pros
Some traders hold out the hope that they can beat the market by following the lead of an investment adviser. But it is close to impossible to identify these advisers in advance. The average reader of financial publications simply cannot identify these market-beating advisers. Repeated studies have shown that even the best institutional investors have been unable to identify them in advance.

There's another reason why it is so hard for top-performing advisers to beat the index over the long term. Once the adviser turns in impressive performance, lots of new money flocks to his fund, diluting the ability to continue performing well.

This appears to be what contributed to the downfall of legendary fund manager Bill Miller of Legg Mason Value Trust. At the end of 2005, Mr. Miller had one of the hottest hands in U.S. mutual-fund history, beating the Standard & Poor's 500-stock index for each of the previous 15 years. His fund attracted lots of new money, and he found it impossible to continue his remarkable record.

From 2006 to 2011, he lagged the market in all but one year, and in 2012 he resigned as manager of that fund.

The Trading Trap
So, what's an individual investor to do? Where do you turn? For one thing, don't trade. Short-term trading has become so dominated by Wall Street's computers that individuals - and professional managers - almost certainly will lose out to them over time. The alternative: to buy and hold diversified index funds with very low expenses.

Age Matters
An important note: When you are young and in the accumulation stage, you can afford to be aggressive while building up your assets. You have time to ride out the market's ups and downs. But as you near retirement, it is time to go into protective mode. Time is no longer on your side to make up steep losses. Your serious money, money that you absolutely cannot afford to lose, should not be tied up in risk assets. In poll-after-poll of pre- and post-retirees, the most common retirement goals include guarantee of principal, potential for portfolio growth and a steady income stream.$

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Chickens, Pigs, Bulls and Bears: The Stock Market is a Barnyard

The great novel Animal Farm, written by the legendary author George Orwell, is about animals and how they live together in a hierarchical society. As it turns out, he may have been talking about the stock market.  The market is full of these named animals and each has a different place on the investment pole.

Pigs are greedy, chickens fearful, bears hide and sleep, bulls charge ahead. Over the years, these names have become synonymous with a person’s investment interest or view of how the market is going to move. Really, the names of the animals signify an individual’s approach or philosophical investment strategy.

Here are the animal definitions converted to investment philosophies:

Bull: A Bull Market means the economy is growing and means investor confidence and anticipation of market growth.

Bear: A Bear Market is the opposite, the economy is weakened or expected to weaken.  The stock market is expected to be lower in the future.

Pig: A Pig Market is a high risk big score (or big loss) position. Pigs are impatient, greedy and emotional towards their investments and only think of themselves.  Pigs normally get slaughtered.

Chicken: A Chicken Market is fear.  Chickens have no specific plan and are driven by fear of losing their money. Fear overrides common sense and any plan is quickly changed if a loss occurs.
If you have a plan based on reality you are probably not a pig or a chicken.  It means you have used good, available information and are heading towards your goal.  As we age, the goal can also change, from accumulation to income.

But what about this….what if you can’t afford to lose any of your important money!  How do you evolve from the barnyard descriptions with a philosophy that makes sense to you?  In other words, how does your retirement plans relate to safety, security and stability?

While no one approach makes sense for everyone, using a new financial vehicle called a Fixed Indexed Annuity with an income rider attached really works for many people.  The annuity provides total protection from any downside movement in the stock market while providing a guaranteed yield in the range of 4% to8% when used as income. (income rider)

If it is time to take a new approach to some of your important retirement funds, consider this powerful option, then maybe you will no longer be a barnyard animal, you could be soaring like an eagle.

You can request more information and a free annuity quote by filling out the form on our website.

Or you can research annuities further in our Annuities 101 section.$

www.RayBuckner.retirevillage.com

Your Guide To Choosing A Tax Professional

Choosing a tax professional is vital to proper financial management, and most advice-oriented articles will tell you that your tax professional is the person you should consult for any and all tax-related matters. If you don’t have a tax professional, now is the time to find one, and this guide can help you.

Why Do I Need A Tax Professional?

Taxes are complicated, and full of regulations and ever changing laws. Depending on your situation, your tax return may be simple, or involve a series of very detailed steps. If you don’t know what you’re doing, tackling a complicated tax return by yourself can potentially create problems, i.e. audits. Trusting a local tax preparation service isn’t always a foolproof option either. A trusted tax professional, someone whom you’ve selected and whom you feel comfortable working with, is a valuable asset, and depending on their expertise, the tax professional you choose may be able to save you more money on your returns.

Are There Different Types of Tax Professionals?

Tax professionals can be either Certified Public Accountants (CPA) Enrolled Attorneys (EA) or certified and non-certified tax preparers. The obvious caveat in choosing a licensed or non-licensed tax preparer is that only a CPA or an EA can represent in you in court, should the need arise, and the local tax preparer many not be as knowledgeable as a CPA or EA.

CPA:

When most people say that they are looking for a personal accountant, they are really looking for a CPA. CPA’s are best for those with more complex taxes, like small business owners, and for those who are looking for a long term relationship with a tax professional who can help them discover tax saving strategies. It is important to do careful research in order to find a CPA who is properly qualified to meet your more complicated tax needs. The first step in finding a good CPA is to check with the State Boards of Accountancy to make sure that a potential CPA has been licensed and has not been subjected to any disciplinary actions. All CPA’s are licensed at the state level, but it is important to know that licensing requirements can vary from state to state. CPA’s in the Virgin Islands, for example, are only required to have a high school diploma, while CPA’s in Ohio are required to have completed 150 hours of college course work, and have a concentration in accounting. You should also inquire as to whether a CPA is a member of the American Institute of Certified Public Accountants, a professional organization that offers some disciplinary oversight.

Enrolled Agents:

Enrolled agents are a better choice for many tax filers, since they are less expensive and more dedicated to preparing individual returns. Enrolled agents are also licensed by the IRS, and like Tax Attorneys and CPA’s, are required to meet certain criteria in order to practice. This group is not regulated at the state level, however, so the IRS will not be able to inform you about any ongoing complaints. You can call to see if an ERA has been suspended or disbarred.

Tax Attorney:

If you anticipate problems with the IRS, it makes sense to have a Tax Attorney in your corner. This could happen if you’ve had a complicated sale of a small business over the past year, or if you’ve neglected to file your taxes for a period of several years. Tax attorneys are also occasionally used to file returns that deal with complicated estate and trust issues. If none of these scenarios apply to you, however, you most likely don’t need a tax attorney.

Choosing A Tax Professional: Ask The Right Questions

You may get a good referral from a friend, co worker, or even your personal financial planner, but you should always check the background and qualifications of the person in question, before you meet them face to face. Once you do sit down for that first meeting, the following is a list of questions that you should ask:

• What types of tax services do you offer?
• Are there any areas that you focus on?
• What other services do you offer?
• Who will prepare my return?
• How aggressive or conservative are you regarding the tax law?
• What is your experience with audits?
• How does your fee structure work?
• What qualifies you to be a tax advisor?
• Do you carry liability insurance?
• Can you provide references of clients who have financial situations similar to mine?

 Regardless of the type of tax return that you use, make sure that you read all documents carefully, before you sign on the dotted line. Tax time doesn’t have to be stressful, and it shouldn’t be, as long as you take the time to research your next tax preparer thoroughly.$
www.RayBuckner.RetireVillage.com