Five Financial Resolutions for 2009

I like New Year's resolutions -- even though they're often futile and left by the wayside within days, sometimes hours. Because once in a while a resolution sticks and we succeed in making real change. Here are some financial resolutions for 2009 you're welcome to adopt:

1. Procrastinate in a productive way. We're all great at procrastinating-- I do it constantly when it comes to tedious work, household chores, doctor's appointments and other less than exciting activities. Try taking that natural ability to procrastinate and using it to postpone and maybe avoid unproductive habits, like impulsive spending. Put off buying those great new shoes for a few day; wait another month to shop for a new rug. It's likely you'll forget about the items that seemed so essential and move on. This sometimes works for binge eating too (admittedly not a financial issue). Wait an hour to eat the cookie that is calling your name (I hear one now). The craving may pass and you'll be glad you waited.


2. Save and invest regardless of market conditions. This is important for a couple of reasons. First, saving and investing consistently is by far the best way to build wealth over your lifetime. Stopping because of market conditions (or because you have increased your spending) puts you at risk of dropping a good habit. Moreover, investing when the market is beaten up, as it is now, is like buying everything on sale. Many advisors and economists think that we are in for higher than average growth in the markets over the next few years as a result of the dramatic declines that occurred in 2008. There's no guarantee this will happen, but it's a good bet that this is a bad time to stay completely out of the equity markets.


3. Start a family conversation about money issues. This might be with your parents, your children, your siblings or your spouse. Money is one of the last taboos -- most people would rather talk about their sex lives than discuss money with their family. Do you know if your parents have adequate resources to support themselves through their lifetimes? Have they prepared wills, durable powers of attorney and any other appropriate estate planning documents? If you explaing why, even young children can understand that saving for the future is an important family value and we can't buy everything we want just because we want it. It's much easier to learn and keep good habits when you are young than it is to change bad habits as an adult. Are you and your spouse on the same page when it comes to spending, saving and charitable giving? Opening the lines of communication with your family about financial matters a good way to avoid hurt feelings and potentially unwelcome surprises down the line.


4. Have your estate planning documents reviewed. If your documents are more than five years old or you have had significant changes in your life or family structure (e.g. birth or death of an immediate family member, divorce, all children now over 21) it's likely you'll need to update your estate plan. There have been changes in estate planning laws in many states that make it important to update the language in any wills or trusts as well. And if you don't have, at a minimum, a will, a general, durable power-of-attorney, and a medical power-of-attorney you need to see an attorney who specializes in estate planning to draft and execute these basic documents. Estate planning documents that are clear and properly drafted are especially important for unmarried partners who are not protected by most states' laws.


5. Diversify, diversify, diversify! Yes, every asset class was hit this year, but some more than others. No one can consistently predict the future (even the smartest guys in the room) and successful investing is more often than not the result of diversifying as broadly as possible and keeping your emotions out of your investments. Falling in love with a stock or a piece of property (we saw a lot of this in recent years with real estate investments) will almost inevitably break your heart and your bank.

Here's to a better year. Cheers!

Annette Simon

Copyright 2009 Garnet Group LLC

A Lesson Learned from Madoff

“Those with the biggest financial gains generally had their money managed by Madoff. It was an honor having him handle your fortune. He didn’t take just anybody. He turned down all kinds of people, and that made you want to give the man even more of your money. When he took your fortune, he told you that he would tell you nothing about how he achieved his returns.”-Laurence Leamer, a Palm Beach based journalist, writing in the New York Post, December 13.

Reading this reminded me of past meetings with clients -- during which a client has told us she or he wonders if we should be putting some money into a can't miss investment recommended by a brother, a friend, a son.... It's a hedge fund managed by a brilliant guy with a Midas touch, or stock in a new company started by a genius who has never failed to turn pennies into millions. It's a special version of the American Dream -- that we will invest in the next McDonalds, the next Microsoft, the next Google. It's sexy and exciting and so hard to resist.

But the truth is, picking the next megasuccess is the longest of long shots. Are there indicators that help us identify companies that will be wildly profitable? None that are a sure thing. It's like an ugly twist on the old fairy tale -- where the princess kisses a frog and he turns into her prince. In investing (and often in dating I'm told) you're likely to kiss hundreds, even thousands of frogs before you ever find a prince. Chasing after can't-miss investments is a terrific way to fritter away your money leaving yourself with little to show for it in the end.

Bernie Madoff's investors believed he was different because he didn't promise extraordinary returns. His promise was guaranteed returns of 8-9% each year. The victims convinced themselves that they were not being greedy, just seeking safe, steady returns. But anyone who has been investing in the past 10 or more years knows that there is no way to achieve a guaranteed return that high year after year. Madoff pulled it off while the market was strong, but as soon as returns dropped off he was forced to borrow from Peter to pay Paul. When the bottom dropped out of the market last fall his entire house of cards came crashing down. The cost of Madoff's crimes is truly terrible. We can measure the dollars, but we can't put a number on the loss of trust he has triggered in millions of people around the world who were not his clients but believed something like this could not happen in the American financial system.

Successful investing, like success in other areas of life is the result of keeping at it, putting money away year after year, spreading your risk as broadly as possible by using diversified, publicly traded mutual funds that hold liquid publicly traded securities. Fortunes are not built overnight and you cannot expect to get something for nothing. This is just common sense, but too often we convince ourselves that our own case is special, or a particular opportunity is a once-in-a-lifetime chance, too good to pass up.

If any good can come from this, I hope it is that people learn, once and for all, that when something sounds too good to be true, it almost certainly is not true. It's time we stopped believing in fairy tales.

Annette Simon

Copyright 2009 Garnet Group LLC

It's Harvest Time

The market this year has been absolutely punishing – there’s just no way around it. But there is a thin silver lining on the cloud if you have losses in your taxable investment accounts. This is a great opportunity to harvest tax losses you can use to reduce your income taxes, perhaps for years to come.

Harvesting losses refers to a two-step process:

1. Sell securities you now hold that are in a loss position (you will need to know your original cost basis to determine whether your securities are in loss territory).

2. Immediately purchase another under-valued security. We use low-cost, diversified mutual funds. By doing this, you capture the loss, which has great value for tax purposes, but you are NOT losing anything because you’re holding a basket of securities that will rise when the market recovers.

Most people have an immediate gut reaction to this idea – “I don’t want to take a loss! I’m going to wait for it to come back.” Some people grow attached to the securities they have picked. Others feel it would be wrong to sell stocks they inherited from their parents or grandparents.

Let it go!

One of the first rules of good investing is to approach it rationally, not emotionally. Securities are financial vehicles, not keepsakes or expressions of your personal style. When your portfolio is too concentrated – for example, you are holding more than 5% of a single stock or most of your investments are in a single industry or country – you are assuming excessive risk and probably receiving no extra compensation (in the form of higher returns) for doing so. By waiting for the market to recover, you will limit or lose the opportunity to harvest losses and miss the chance to diversify your portfolio and reduce your taxes for years to come. There is really no rationale for doing this.

Harvesting losses is a smart tax strategy, not an admission of defeat. Avoiding it makes no sense at all – it is passing up an opportunity to reduce the risk in your portfolio and your future taxes, an opportunity that costs you almost nothing at all (there may be incidental trading costs).

Annette Simon

Copyright 2009 Garnet Group LLC