How A Poor Financial Adviser Delays Your Retirement Plans

Who cares about the economy? Investing in the stock market seem to be the in thing in town for 2011.

When it comes to investments, you have to monitor your portfolio closely, especially if you are going it alone. Entrusting your wealth to a professional financial adviser sounds like a good idea as they will be doing all the research and analysis work for you.

Though an adviser provides value, you should still know what is happening. It’s the only way you know that the adviser is producing attractive returns at reasonable cost.

The following pitfalls of poor advisers could set your retirement plans back by many years. Pay heed and avoid where possible.

7 Bad Habits of A Lousy Adviser

1. Frequent portfolio changes.


Once you have the right asset allocation, it should work in good and bad markets with little changes except for periodic rebalancing. There should be no wholesale changes unless the adviser is more concerned about his own pocket.

2. Pressure to invest in new products.

Be wary of advisers who pressure you to buy new fancy products. Such products usually lack track record and have high hidden costs. Best to stick with proven managed products with suitable risk-reward instead of shooting for the next star mutual fund or stocks.

3. Aggressive trading.


Excessive trading comes at your expense. End of the day, remember you are paying for the high trading, product and account costs. Also, few professional managers trade well enough to beat a benchmark. Chasing returns with leverage is a faster way to delay your retirement if things go wrong.

The richest investor, Warren Buffett, is not "smart enough" to time the market. Hence, neither should your financial adviser who has to depend on commissions for a living.

4. No return calculations.

You can't tell if you are getting value if the real return you are getting is omitted or buried under complex language.

5. Frequent capital losses.


Obviously, this is not sustainable if your portfolio keeps shrinking under your adviser's charge. When you are constantly selling at a loss, your portfolio has the wrong or risky products and the asset allocation needs to be changed.

6. Too much contact.

Advisers call you rarely to socialize or help out with your house chores. They are mostly to generate commissions, like recommending hot stock or churning products. Such practice can reduce your returns by up to 80%.

7. No contact


This is definitely much safer than too much contact, but it is not a small sum to pay especially when your portfolio is huge. You will be better off relying on yourself by being a long-term value investor.

It is not too late to make changes and get your retirement plan back on track. To ensure that the relationship with your adviser stays healthy, ask for for return calculations.

Then compare with a relevant benchmark and see if your annual costs are too high. If the returns are much lower than the benchmark, and the adviser refuses to change his wayward management, do it yourself or get a new adviser.

Can You Invest and Beat The Market Consistently?

It is possible to beat the market. There are people, stock brokers, hedge fund managers, retail investors, or even your neighbor who reported fantastic gains from doing that.

But the real issue is whether one can do it consistently over the long run. When it comes to investing for retirement, you should not look at the market gyrations over a day, a month, a year, or even five years.

If you want to retire with a comfortable amount, you need to be able to beat the market for the entire time you invest, else you are just wasting your money, time and effort. The reason is simple, the financial crisis of 2008 has shown that a few missteps can wipe away all your gains and even make you bankrupt.

The fact is it is not easy to beat the market consistently. 80% of professional mutual fund managers fail to beat their benchmarks, what more an ordinary investor like us who do not have the skill or resources?

The professionals sift through news, analyze charts, research companies, and have networks that we cannot access or afford. Yet most of them could not beat the market. They are after all humans and are susceptible to mistakes.

Bill Miller of Legg Mason Value fund is a good example. He beat the S&P 500 from 1991 to 2005, but lost to the market in 2006 and bombed in 2008. That failure resulted in the S&P 500 outperforming his Legg Mason Value fund from 1991 to present. Thus, a pro with an illustrious track record can also make mistakes and lose his hard-earned reputation.

Since the odds are against amateurs and selecting the few professionals who outperform is difficult, why not just benchmark your investment to the market by investing in a diversified portfolio of index funds?

Can't Go Wrong Investing In Index Funds

Index funds remain the best choice for investors because of their simplicity, low-cost, and reliability. Picking a good index fund only require some understanding of the underlying components, expense ratio, and other hidden cost.

Since index funds don't require active trading, you enjoy lower costs and taxes - which will help improve your investment results.

Index funds may be boring (just buy and forget) but they work and will give you consistent results compared to the market. When you track the market (minus cost), you no longer worry about human mistakes erasing all your past gains.

Does It Make Sense To Use Home Equity To Invest?

As a measure of how Main Street is reacting to the stock market rally, we just need to check out some of the popular forums. I recently saw in a forum that discussions about withdrawing home equity for investments is becoming a hot topic again.

I can understand the speculative fervor, after all the stock market is going gang-busters (the rally started in March and shows no sign of dying down after 16 weeks ). At this moment, money seems to be growing on trees, just plonk your money into equities and it is hard not to make money.

Clearly, investors will seek all kinds of leverage to maximise their profits during this "window" of opportunity where fundamentals don't matter. But have we already forgotten the misery from the financial crisis when some of us flirted with financial ruin while those who are more prudent also saw their hard-earned wealth decimated?

More specifically, is it wise to use a home equity loan to speculate or invest in securities? First let's understand the types of home equity loans available.

Types of Home Equity Loans

There are two types of home equity loans: term loans and lines of credit. The former is a one-time lump sum paid off over a predetermined time period, at a predetermined rate of interest.

A home equity line of credit (HELOC) sets a maximum amount for the line and lets the borrower withdraw money up to that point. The interest rate on a HELOC is usually variable and there are minimum requirements (in terms of time and amount) for paying back the principal.

Home Equity Loan Is A Gamble

As far as I am concerned, taking out home equity is a gamble, even if you sugar-coat it as a form of investment. There are risks associated with any investment, nobody can guarantee you make money or preserve your principal. And the basic rule is the higher the returns, then the risker the investment.

If your investment goes sour and you lose a substantial portion of the home equity loan, the collateral supporting the loan (house) is also compromised. That is a terrible fate if you have spent your adult lifetime amassing the equity in your house. In the worst case scenario, you could end up on the streets when you cannot make good on the loan payments as they fall due.

Before you undertake any investments, first evaluate the interest rate on your home equity loan. For example, if your rate is at 5%, then your investment must yield more than 5% or they are not worth the trouble.

One of the advantage being bandied out is that the interest you pay on your home equity loan is tax deductible, thus giving you a "theoretically" higher rate. But you have to remember that the home equity loan must be used for home improvements in order to qualify for the IRS home mortgage interest tax deduction. Using it for other purposes and then claiming that interest may get you penalized.

The next consideration is that payment for the home equity loan is most likely to be monthly. Hence, if your investments do not payout monthly, you will have to fork out home equity loan payment from somewhere else like your savings or the lump sum.

You should also make sure interest on your home equity loan is not a variable amount; if it is, you will need to watch it so that it doesn't go up high enough to wipe out your profits. With the possibility of the Federal Reserve raising the rates once the economy is on a firmer footing, this would be a concern of mine.

There are other options available if you need money to invest in stocks, and they don’t involve the risk of losing your home. However, if you are knowledgable and financially stable (able to cover your mortgage payments from salary rather than investments), the home-equity gamble might be a way to secure low-interest money to use to invest in securities.

Patience Is A Virtue In Investing

I know the stock market is going gang-busters. Many economic pundits say the worst is behind us and the market has bottomed.

Even the revered Nobel Prize winner, Paul Krugman, believes the global economy free-fall may be ending soon.

I am not keen to invest heavily in the stock market and have cautioned my friends and relatives against using margin accounts or leverage to pursue profits. A major correction may happen soon and our money could be trapped. In the worst case scenario, we are forced to accept huge losses from liquidation of our stock holdings.

Patience is a virtue, especially in investing. There are better ways to spend our hard earned money than speculation.

Successful Investing In Certificates of Deposit

The stock market is in rip-roaring form of late. My neighbor just informed me of his killing in the stock market - a cool $90,000 over the past three weeks. To be sure, I am tempted by the easy money which he pocketed almost effortlessly.


However, skepticism of this stock market rally lingers in my mind and I am not in a hurry to risk any of my hard-earned money to chase the bull. It wasn't too long ago that this same neighbor who exalted about his new found wealth was losing sleep over his credit card debts and impending foreclosure.

One will have thought he has learned a valuable lesson but the robust stock market rally has enticed him back to his speculative ways. I am less than impressed with his behavior but since I am in no position to lecture him, I can only review my own portfolio and investment strategy to see if any adjustments need to be made, in light of the exuberance.

Before we commit to any investment, we have to understand that it entails an element of risk and the higher the risk, the bigger your returns. This is the basic tenet of investing. So if your risk profile is high, you can choose to invest in stocks, bonds or commodities.

I have a low risk appetite, hence, over the years, I invested substantial savings in Certificates of Deposits. While the returns are not eye-catching, my wealth wasn't decimated by the financial crisis. On the whole, I am satisfied that the investment strategy is sound and I am sticking to it for my retirement goals.

There are very few secrets to successful investing in Certificates of Deposits. I mean, you don't have to deal with complex financial jargon or formula. Here are some reasons why I love CDs as well as tips to excel with this simple financial instrument.

1. Your Investment Is Safe.

Unlike many investments, the money deposited in a Certificate of Deposit is safe, meaning it is guaranteed by the federal government. As long as you purchase the Certificate of Deposit through an FDIC insured bank and don't withdraw the money before the CD matures, you aren't at risk of losing your money.

2. Only Invest Money You Don't Need In A CD.

As I just mentioned, you should not pull out your money before the maturity date, in order to receive the maximum benefit of a CD.

If you take money out of a Certificate of Deposit before it “matured”, you pay a penalty fee. Depending on how hefty the penalty is, it can decrease the amount of interest you earn or even eat into your principal (ie. you withdraw less than your original deposit).

Hence, you must be prepared to invest for the long haul. That excludes your emergency fund which must be liquid.

3. CDs Have Higher Interest Rates Than Savings Accounts.

I know there are many online savings account which offer attractive interest rates, but rarely will they surpass the interest rate from a Certificate of Deposit. The reason is because you are essentially giving the bank a loan when you deposit money for a specific period of time in a CD.

The time frame for the "loan" can range from 3 months, 6 months, 1 year or 10 years and in exchange, the banks have to provide a higher rate of interest than a savings account.

On the other hand, savings accounts can be withdrawn at any time, without any penalty, and therefore this money is less reliable for the bank to make any meaningful investment. Hence the lower interest rates.

4.Using A Certificate of Deposit Ladder.

Laddering will maximize your savings through certificates of deposit. CD laddering is a method of staggering your maturity dates on multiple Certificate of Deposits, which enables you access to parts of your money at different intervals.

Each time a CD matures, you can withdraw without penalty or re-invest into another Certificate of Deposit or investment of your choice. This will lower the chances of any premature termination of CDs because of tight cashflow.

5. Comparison Shop Before Investing In Certificates of Deposit.

Many people assume that Certificates of Deposit are the same everywhere. Well, CDs do vary and you should comparison shop for the best.

While the traditional, plain-vanilla Certificate of Deposit is the most popular, there are also “bump up” CDs which allows you to receive more interest if the interest rates rise before your CD matures.

“Liquid” Certificates of Deposit makes it possible to withdraw money penalty free before maturity is reached. Other CD variations include callable, zero-coupon, brokerage and high-yield, which all have slight variations of the traditional Certificate of Deposit.

With these 5 tips, you should be doing relatively well in your investment on Certificates of Deposits.

Investing for People With Low Incomes

In this recession where many people are either unemployed or working part time jobs, it is hard to have thousands of dollars set aside each month for investment.

Some people cannot maintain a a checking account, not to mention a fully funded retirement account, but they can still invest and grow passive income. Even investing small amounts gradually will smooth out big money events.

For those in a low-income situation, the best places to invest are low risk and easily accessible accounts. If you don't have an emergency fund (ideally 3-6 months expenses), then establishing one is the first step.

When I say emergency fund, I don't mean stashing money under your mattress or a low rate savings account. You should consider Money Market Accounts (MMAs) which offer a higher interest rate than checking or savings while its FDIC insured status gives you a peace of mind. It is also a good source of overdraft protection for checking.

Money market accounts are available in most banks and can be easily set up. You can make unlimited withdrawals and transfers without any penalties. Many MMAs are available with low to no opening requirement. In fact, some banks offer cash incentives for opening an MMA. The devil is in the details though, so read the fine print on the minimum amount and time for your money to be held in that account.

Money market accounts are also a convenient way to invest because you can set up automatic deposits. I recommend the minimum automated deposit as you can invest on a regular basis without over-drafting your regular account. Whenever you have extra money, you can invest that and grow your nest egg.

If you like to tune your investment according to interest rates, you can consider Certificates of Deposit (CDs). In periods of declining interest rates, the rate of return on a MMA will adjust downwards but a CD will hold it's value. You continue to get a fixed rate of return for the duration of the deposit.

Conversely, rising interest rates could leave you stuck with 2-3% less for the money you're investing. I recommend investing in Certificates of Deposit for a period of 6 months to 3 years so that you do not miss out on lucrative returns.

However, if you are very risk averse or an impulsive spender, you can commit to a long term Certificates of Deposit because withdrawing money involves paperwork and penalties. These hurdles should keep your temptations at bay and ensure an intact principal.

Another place to invest is in a Health Savings Account (HSA). If insurance isn't available through your employer, this is one way to keep yourself insured and invest for the future.

Health savings account have a high deductible that must be met before the plan provides any benefits. On the upside, you have a lower monthly premium and money you deposit into the account earns interest.

If you have few medical bills or go to the doctor rarely consider them as a way to both invest and take care of your health. The most important investment you can make is your health. Going without medical care is costly - most bankruptcies are caused by medical bills, not credit debt.

Once you've established an emergency fund and obtained health insurance, look at Roth IRAs as a place to put pre-tax money. These investments earn interest until you retire, at which time you make withdrawals and, presumably, pay less in tax on the money.

Finally, the most important investment advice for people with low incomes is - invest in yourself. Knowledge is priceless. Keep reading articles like this and think critically about the advice that's given. Invest time in developing your skills or acquiring new ones to increase your earning power.

Global Reactions To Bernard Madoff's Ponzi Scam

Wall Street Journal: Spielberg and Katzenberg Get Hit

A few years ago, Hollywood financial adviser Gerald Breslauer shed most of his clients to focus on two top entertainment-industry figures: director Steven Spielberg and DreamWorks Animation chief executive Jeffrey Katzenberg.

Now both of Mr. Breslauer's remaining clients have been hit by the alleged fraud by New York money manager Bernard Madoff.

New York Times: Inquiry Finds No Signs Family Aided Madoff

Federal investigators have found no evidence so far that members of Bernard L. Madoff’s family helped him carry out what may be the largest financial fraud in history.

Los Angeles Times: Madoff debacle hits region's Jewish community

Wall Street financier Bernard L. Madoff's alleged $50-billion Ponzi scheme appears to have extended deeply into Southern California's Jewish community, with millions of dollars in losses tallied by charitable organisations, Hollywood executive Jeffrey Katzenberg and a foundation bankrolled by director Steven Spielberg.

The Boston Globe: MassMutual entity loses all client funds to Madoff

A hedge fund group owned by Massachusetts Mutual Life Insuranc of Springfield has lost all of its clients' money--more than $3 billion--to Bernard L. Madoff, the New York trader who confessed last week to losing $50 billion of his clients' funds in a Ponzi scheme, the Globe reported.

The Jerusalem Post: Madoff scam rocks Jewish charities

At least $600m in Jewish charitable funds have been wiped out by the collapse of Bernard Madoff's Wall Street investment firm. Yet much is still hidden about what may amount to the most spectacular financial disaster to hit Jewish life since the Great Depression, with unconfirmed losses totaling up to $1.5bn, the Post said.

Sydney Morning Herald: HSBC caught in Madoff's alleged fraud

Europe's biggest bank, HSBC, joined a list of top names in world finance admitting huge potential losses on Monday in a suspected fraud scam run by ex-Wall Street heavyweight Bernard Madoff.

Invest Money While In College Using Saving Bonds

College education these days are necessary but oh, so expensive. I have a most memorable time juggling my studies and part time work to foot my own expenses for food, transportation, lodging and entertainment.

Most college students are deep in debt as they took up loans to pay for their education. If your kid is smart, he/she can apply for grants and scholarships to lessen the burden, but most students do not have such a luxury.

Is it possible to invest money while in college? The answer is yes. With a successful college investment program, students can pay off their loans faster. There are actually several ways to do so but some offer more earnings (like stocks and commodities) at higher risks.

I recommend two ways to invest money while in college that are less risky - bank accounts and savings bonds.

1. Banks

Banks offer savings account which earns minimal interest but being FDIC insured, they are virtually risk free. The minimum balance is usually $300 so if the balance falls short, the account will incur additional fees.

Banks also provide money market accounts. Money markets require a higher balance than savings accounts, but they offer a higher interest rate. The minimum balance for these accounts can be anywhere from $1,500 to $5,000. If the balance drops below the minimum balance, a $20 fee may be incurred.

For those with substantial money to invest while in college but are risk averse, money market accounts are the way to go.

2. Savings bonds

Savings bonds are best bought when a student is at a young age. You buy the bonds at half the face value and over a period of 10 to 20 years, the bond eventually reaches its face value.

If the bond is not cashed in when it reaches face value, it will still continue to gain interest. Bonds do not drop in value. However, the interest rates on them do vary from time to time. They are considered a safe investment but are also slow to increase.

Investing money while in college can be done, despite the fact that students have limited earnings power and are most likely laden with student loan and credit card loans.

Embarking on an investing program (risk free and running on auto-pilot) gives you a head start compared to your peers who are spending money freely and wallowing in debt when they begin their careers.

Interesting Money Blog Snippets #1

1. Global Stock Markets - Halloween Relief?

Here is Richard Russell’s (Dow Theory Letters) take on matters: “Things are looking better. After a series of 90% down-days, we had a 90% up-day on Tuesday, October 28. Since then, the market action has been fairly good. With bonds appearing to have topped out, I’m beginning to think that there’s a fairly good chance the market has bottomed. Adding to the bullish case, Lowry’s published a significant contraction in selling pressure today.”

2. Bear's Last Stand

Yes, I now believe the ultimate low is already in. We're still in a bottoming process but the low will not be violated and we're set to have a really good multiyear rally.

The BEAR is dead, for good. This is "Bears' Last Stand" and the hole underneath them just busted wide open and they are falling in one by one. Sucked in like the Black Hole sucks anything in. Their fate is sealed. Goodbye Elliott Wavers.

3. The Rise And Fall of Nokia

Nokia investors have experienced a very wild ride in a short period since the start of 2006. From a low near $16, Nokia rose to $40 per share in two years (though not exceeding is 2000 split-adjusted $55 high) and then has spent the better part of 2008 in virtually total free-fall.

I did want to point out a larger “accumulation-distribution” pattern (or cycle) that was evident in the stock.

4. Flush DBS High Notes 5 Down The Drain

Let’s take a leaf out of J.P. Morgan, Jr’s philosophy of wanting his bank to be known for ‘doing only first-class business… in a first-class way.’ This is a statement he made before the Sub-Committee of the Committee on Banking and Currency of the U.S. Senate in 1933.

5. Rate Cut May Be Too Late For Baby-boomers

The rate cut may be too late for the baby boomers …

As many baby boomers are facing retirement, this recent meltdown in the stock market has put many in a precarious position. Money they had counted on for their golden years has quickly disappeared and will not likely return anytime soon.