Making Cents | John P Napolitano: November 2012

Saturday, November 24, 2012

MAKING CENTS: A time for taking stock.

Now that Thanksgiving is behind us, don’t leave behind the expression of gratitude for what is working out well in your life. Today, instead of reminding you of yet another financial issue that you should attend to, we are here to give celebration for those things that you have done to improve your financial situation in the past 12 months.

With record low interest rates, were you able to get a lower rate on any outstanding loans? Bankers tell us that the mortgage markets have become more available to many, but I still see many FICO credit scores that are crushing people’s ability to take advantage of the low rate situation from late payments dating back to the height of the financial crisis in 2008. If you were not able to take advantage of low rates, hire a specialist to help with your credit score.

Have you paid down debt? The trend in the U.S. is still one of de-levering, or paying down debt. If you made progress reducing your debt, celebrate. This step is vitally important to the U.S. economy as a whole and may mean the difference between a successful financial plan and one plagued by interest expenses.

How about helping out a family member? Were you able to lend money or other resources to help out a friend or family member in need? If you did, celebrate that act of kindness. If it is your intention to collect repayment for that loan, document the loan with an interest rate that perfects your right to receive repayment.

Did you finally get a current will and the other estate documents needed to protect your dependents should you not make it until next Thanksgiving? While obtaining or updating an estate plan is not most people’s idea of a fun date, you should feel good about not leaving your dependents and financial realities up to your state of residence to decide what happens to your assets upon your death. And for those with greater than $5 million in assets, this could be the last call for estate tax savings.

Have you had a sit down with the family about money? All levels of wealth may benefit from this. At the lower level, your kids need a basic understanding of budgeting, fiscal responsibility and coming to grips about your financial realities - and what you can do to make them more to your liking. This discussion is even more significant for those with a family business or an estate plan that involves your children’s services as a trustee or executor. This is especially significant where assets such as a family business or a family vacation home are involved.

And the last word of celebration is for you. Congratulations to those who took control over what you can control to make the most of your one and only life on this planet? Do you love your job? Did you get professional advice? Are you taking the time to be with loved ones? Did you get involved in activities that make your life more meaningful or fun?

John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthcompanies.com or on Facebook as JohnPNapolitano and US Wealth

John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

Securities offered through LPL Financial, Member FINRA/SIPC.

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Saturday, November 17, 2012

MAKING CENTS: Who do you trust when it comes to your investments?

Have you earned your own trust? I recently signed on to a popular financial site, and there was one of those quick pop up polls. The poll was asking who you trust when it comes to your investments. Seventy-four percent of survey respondents said that they trust themselves first. Roughly 9 percent voted their dog as second and almost 7 percent said that they trusted their independent financial advisor.

It doesn’t take a math major to realize that the rest of the investment field combined only garnered about 10 percent of the survey respondents’ trust. Considering that nearly every day of the week I am presented with a do-it-yourselfer’s portfolio that looks more like a monkey and dartboard portfolio, I wonder how these self-trusting investors would rank themselves in terms of the quality of their do-it-yourself portfolios?

For those with enough courage, put your portfolio through some of the diagnostic and review tests that a professional would do, and see if you have earned the trust that many apparently have in their money management skills.

The first test most want to do is a performance test. Sure, performance matters, but relative performance is even more meaningful than absolute performance. Absolute performance means your actual raw returns expressed as a plus or minus. But relative performance takes that absolute performance number and asks questions regarding risk.

Exactly how much risk did you take in order to earn that rate of return? If you took abnormally high risk, and returned market-like returns, your absolute performance would not be very good. If on the other hand, you took very little risk and earned market-like returns or better, your absolute performance is good.

If you own only a few investments, you may have relative returns that look pretty good when examined in a vacuum, but then you must consider the risk of a large concentrated position. That inherently adds risk to a portfolio simply because of the inherent risk of any given single holding.

Next examine the volatility of your portfolio. Volatility is a measurement of instability or the range of expectations for your investments, either one-by-one or for your portfolio as a whole. Most individual investors have not been exposed to how much volatility may be inherent in their holdings. This may be enlightening to those with the courage to check.

It may also be wise to look at each individual holding, and examine how your holding compares with alternative holdings in the same industry, sector or country. If you learn that you have a dog compared to the alternatives available, consider a change.

Saturday, November 10, 2012

MAKING CENTS: Precautions can mitigate losses in next storm

Witnessing back-to-back storms right in our backyard sends a strong message. Stuff happens, and there are obvious natural disasters that no one can prevent. But getting your house in order to protect what is important to you is something that you can start to fix today.

What would bother me, for example, are the drawers of old photos from my childhood and then of raising a family myself. While I don’t frequently look at these old photos, losing them would feel like a material loss to me. The solution could be to get these photos and negatives scanned and saved in some digital format, and then stored in a safe place.

If your house includes things that are of material value, take a look at insuring these possessions. Most homeowner policies have limitations on home contents, and items of great value will frequently not be covered for full value unless specifically identified and separately named in the policy. Items that may fall into this category include collectibles, art, jewelry and furs.

Take time to inventory your valuable items, and save this inventory in a safe place. Be specific with the details of each item, and back them up with an appraisal or an invoice from the purchase. Some insurance professionals even recommend a photo or video library to show exactly what you are protecting.

Also look at your coverage for a second home, a rented home or one that a dependent child may be renting while away at college. Do not assume that everything is covered through your homeowner’s policy without having a discussion with your insurance agent.

Financial records often reside in the basement. When these documents get destroyed, praying that you never need them simply isn’t strong enough. Like your old photos, either store these offsite in a protected place or scan them into electronic files.

Discard most records older than 7 years. Older documents that should be retained are items such as invoices and cancelled checks for material home improvements, purchase documents for a residence and any original information regarding insurance policies or loan agreements that are still outstanding.

While you cannot control or determine when the next storms will hit, you can call a tree company now to rid yourself of dead trees and limbs that may cause harm in a future weather event. As you may have learned, if you wait to make that call until the wind blows your tree down, you’ll pay a lot more for the same service.

Friday, November 2, 2012

MAKING CENTS: The election won't end all uncertainty for the markets

The next time you read this column, some of the uncertainty clouding the financial markets will begin to unravel.

We will know our next president, the Senate race will be over and the financial markets will begin the process of digesting the consequences of each.

But don’t think for a minute that these are the only issues that will continue to weigh heavy on all of the financial markets. Issues such as tax rates, interest rates, Europe and the Middle East will linger just like issues we haven’t considered yet shall arise.

You cannot control any of these issues. Yet if these issues keep you awake at night, fearful of the consequences to your tax bill, the rate of inflation or the return on your investments, address them one by one.

Start with the expiration of the Bush era tax cuts. If you feel that the increase in the capital gains tax rates and the increase in the taxation of dividends is more than you can tolerate, consider the consequences of selling now. These consequences may include the amount of current taxes that you’ll pay and the implications of this type of drain to your nest egg. It also raises the question of what to do with the money after you sell your holding.

Some feel that these tax increases alone may cause investors to reduce their exposure to these assets if the tax cost will rise so dramatically. And even if there are not more sellers than buyers to depress prices, others wonder whether these types of assets may be worth less in general because of the additional taxes to pay on the dividend income and eventual capital gain.

If your anxiety is from the possible volatility increase in financial assets as these issues come to a head, assess the consequences of both selling and holding. Ask yourself what type of annual returns you need on your nest egg to reach savings objectives? If you need a rate greater than what is available in today’s low interest rate environment, but simply can’t stand the volatility, then look at how much you may need to reduce your monthly spending in order to minimize your mental anguish.

At the end of the day, there are only a few items that matter. They start with who you are and what you want to do with your time. Beyond that, the financial issues that you control and will matter the most in your financial future are how much you make and how much you spend. Don’t guess, know what you spend each month.

How much you save and how much you earn on those savings is the second component.