Identiy Theft – financial planning tips on protecting your computer

On line usage is up, but so is identity theft.

One example we hear of often is an e-mail purporting to be from the IRS regarding a refund. The IRS has said categorically that they do not send out e-mails, so this is clearly a scam to get personal information.

So, as a financial planning matter, what do to protect your computer and your personal information?

Here are several good tips from WebRoot, a software company that provides related software, worth applying to your computers:

1. Keep Your Security Software Up to Date: At a minimum, your PC should have current antispyware, antivirus and firewall protection.
2. Watch Out for Email Scams: Never click on links sent in unsolicited emails, even if it appears to be from a legitimate source [the IRS example above is but one….].
3. Use Strong, Unique Passwords: Create passwords that are difficult to guess, and use different passwords for each of your accounts.
4. Shop and Bank on Secure Connections: Hackers can intercept data sent over unsecure wireless connections, so exercise caution when performing sensitive online transactions in public places.
5. Erase Cookies: Get in the habit of clearing cookies off your hard drive after you browse the web. Some privacy protection software can automatically do this for you

Be sure you have applied all of the tips to any computer not already protected. And, let me know if you have questions or concerns



Investments: the right fund does not have to be a winner

When building your portfolio, what criteria do you use to select the component investments? With the recent market dive, and then the surge this year, how do you know what works?

The Moringstar article reprinted below responds to the idea some investors have of trying to find The Best fund or manager by saying: “But the real question is why even try. Investing is about identifying options that help fulfill goals, not about finding that lone fund that is superior to all others. Splitting hairs in a quest for one be-all-and-end-all fund has diminishing returns and often can do more harm than good”

This is why financial planners and investment advisors build a portfolio to meet long-term goals. Much of the return generated over time comes from your asset allocation, not the specific fund selection. Having a winner in one year may mean having a loser in another. It is better to have good, steady performance over time in order to meet your goals.

Here is an example of how the goal drives the fund selection: We all know that money market funds have very low yields now, so it is tempting to use short-term bond funds as an alternative. However, if the money is for a big purchase, such as a car, or for college tuition, the risk of a loss even in a short-term bond fund is too great – the goal says stick with the money market fund.

Let me know if have questions on investment selection and portfolio construction.



Seek the Right Fund, Not the ‘Best’ Fund

by Eric Jacobson | 01-14-10

With such extreme returns over the past couple of years it’s worth reiterating some basic tenets of fund evaluation that can be overlooked when the market is zooming back and forth.

The Highest Return Does Not the Best Manager Make
During short time periods, some funds stand out with such remarkable gains that those returns alone appear to be proof positive of a manager’s superior talent. However, there are plenty of reasons such numbers don’t guarantee superior management. The most obvious and important is that single periods are reflective of factors that may not be repeated the next time around. Many funds with outstanding 2009 returns could serve as an example. One of the clearest is the closed-end Eaton Vance New York Muni EVY, now appearing prominently on 2009 leaders’ lists. This fund’s NAV went up 62% in 2009 while its market price soared an incredible 94%. But the firm’s own executives say those gains were largely the flip side of a harrowing 48% 2008 loss–one of its category’s worst declines–that was in part due to the same portfolio leverage that fueled it in 2009. Therefore, only by evaluating the fund’s performance over a much longer period of time could one reasonably evaluate its managers’ true abilities. Just as important: Banking on this fund to again produce anything close to the kind of returns it earned in 2009 would be a mistake.

Longer Periods Can Prove Arbitrary and Thus Misleading
Is a single calendar year any more relevant to judging the skill of an investor than a period of a different length? Are one-, three-, and five-year trailing periods any more valid than those covering two-, four-, and six-year returns? The investment industry uses the first set of specific periods out of convention and convenience, and for the purposes of comparison they have some utility. But short periods can easily cause unusual distortions even in longer-term performance numbers; a fund’s history of trailing returns can shoot up or crumble in the face of a severe short-term gain or loss. For this reason, looking only at a few select periods doesn’t fully reflect the investor experience over time. We see the effects of this problem every so often whenever the debate over indexing versus active management heats up. At any given time historical returns may confirm what everyone knows, which is that indexing beats active management–except during all those times when the opposite is proved.

The best assessment of a manager or strategy has to involve looking at multiple periods over time, sometimes slicing them up to better understand the effects of market moves, and to include as many as possible. Rolling returns are good for this purpose and provide insights unavailable in trailing or calendar-based periods.

Certainty Is Elusive
There’s a clear desire for many of us to come to final conclusions that one fund or style is demonstrably and conclusively better than another. That’s understandable, because that search is almost always undertaken when preparing to make an investment decision. For such an important task, it makes perfect sense to seek out conclusive proof that the decision you’re about to make is the right one.

But while one can do a pretty good job of narrowing down a big universe of investment choices to a handful of good options–ideally sifting out most of the truly bad and many of the mediocre ones–identifying the “best” fund of any particular kind is a lot more difficult.

Aside from the time-period factors, there’s a fundamental issue that in the mutual fund world, in particular, there’s a surprising variety of differences when it comes to the actual investment mandates and parameters of funds. Even two with almost identical names in the same category may have quite different management styles. On the equity side, for example, we often see this most starkly among value funds. A fairly conventional one might define its approach primarily in terms of selecting stocks that are demonstrably cheaper by some measures than, say, the average name in the S&P 500. Another might be a much “deeper” value player, though, or even one that focuses on companies in distressed situations.

The differences among bond funds might be less obvious, but two otherwise conventional intermediate-term bond funds can have very similar mandates, use the same benchmark, and still differ meaningfully. One that pursues a so-called core-plus strategy (a tag common to the institutional market), for example, might do so by including as much as 15% or 25% in high-yield bonds. Another might do so by focusing a similarly sized bucket on high-quality, non dollar bonds. And yet others might reserve a bucket eligible for either and perhaps even throw in some emerging-markets debt.

One can reduce lists of funds down to a handful of demonstrably very good managers yet find it almost impossible to conclusively determine that one is objectively “better” than the others given the variations in their styles.

But the real question is why even try. Investing is about identifying options that help fulfill goals, not about finding that lone fund that is superior to all others. Splitting hairs in a quest for one be-all-and-end-all fund has diminishing returns and often can do more harm than good.

Eric Jacobson is a mutual fund analyst with Morningstar.

Let us know if you have questions or comments. Thanks,


Financial planning – what is it and when do you use it?

Articles on line discuss how planners get paid, whether you should trust them or not and what they do.

However, the best point made may be the distinction between “answer person” and “counselor” (or “financial guide”).

You can access so much on line today that some people believe that a financial advisor is only needed when the answer cannot be found. This misses much of what a good financial planner can do for clients.

A good planner applies experience and knowledge to each client’s goals and resources to help guide them in the decisions that they face. This is real value added, but also requires a compensation scheme that allows the planner to ignore commission and other incentives so that the best advice can be given.

Furthermore, this type of guidance can involve encouraging changes in behavior, expectations and overall knowledge of finances. This takes time and cooperation between the financial planner and client. So, again, the incentives have to be correctly set.

This is why our firm charges for time, and dedicates the planning work to the individual goals of each client. There is no confusion from commissions or fees based on assets under management.

If you have comments on this, please let me know.



Economics of the downturn – thoughts for investing

Researchers are still trying to explain why we had a bubble that burst, or if we had a bubble at all….

The January 11, 2010 issue of the New Yorker has a great article on Posner, the Chicago School of Economics and other matters that have come from the sub-prime mortgage mess (a summary appears below).

Also, there is a humorous video on line, comparing Keynes and Hayek on their approaches in rap format at:

Let me know what you think



John Cassidy, Letter from Chicago, “After the Blowup,” The New Yorker, January 11, 2010, p. 28

Read more:


LETTER FROM CHICAGO about the state of the Chicago School of economics after the financial crash. Earlier this year, Judge Richard A. Posner published “A Failure of Capitalism,” in which he argues that lax monetary policy and deregulation helped bring on the current economic slump. Posner has been a leading figure in the conservative Chicago School of economics for decades. In September, he came out as a Keynesian. As acts of betrayal go, this was roughly akin to Johnny Damon’s forsaking the Red Sox Nation and joining the Yankees. Ever since Milton Friedman, George Stigler, and others founded the Chicago School, in the nineteen-forties and fifties, one of its goals has been to displace Keynesianism, and it had largely succeeded. In the areas of regulation, trade, anti-trust laws, taxes, interest rates, and welfare, Chicago thinking greatly influenced policymaking in the U.S. and many other parts of the world. But in the year after the crash Keynes’s name appeared to be everywhere. In “A Failure of Capitalism,” Posner singles out several economists, including Robert Lucas and John Cochrane, both of the Chicago School, for failing to appreciate the magnitude of the subprime crisis, and he questioned the entire methodology that Lucas and his colleagues pioneered. Its basic notions were the efficient-markets hypothesis and the rational-expectations theory. In Posner’s view, older, less dogmatic theories better explained how the problems in the financial sector dragged down the rest of the economy. In the course of a few days, the writer talked to economists from various branches of the subject. The over-all reaction he encountered put him in mind of what happened to cosmology after the astronomer Edwin Hubble discovered that the universe was expanding, and was much larger than scientists believed. The profession fell into turmoil, with some physicists sticking to existing theories, while others came up with the big-bang theory. Eugene Fama, of Chicago’s Booth School of Business, was firmly in the denial camp. He defended the efficient-markets hypothesis, which underpinned the deregulation of the banking system championed by Alan Greenspan and others. He insisted that the real culprit in the mortgage mess was the federal government. Mentions John Cochrane. Gary Becker, who won the Nobel in 1992, says that Posner and others raised fair critiques of Chicago economics. Mentions Robert Lucas and James Heckman. If the economic equivalent of a big-bang theory is to emerge, it will almost certainly come from scholars much less invested in the old doctrines than Fama and Lucas. Mentions Richard Thaler. Raghuram Rajan, an Indian-born Chicago professor, is one of the few economists who warned about the dangers of the financial crisis. In 2005, he said that deregulation, trading in complex financial products, and the proliferation of bonuses for traders had greatly increased the risk of a blowup. In a new book he’s working on, “Fault Lines,” Rajan argues that the initial causes of the breakdown were stagnant wages and rising inequality. With the purchasing power of many middle-class households lagging behind the cost of living, there was an urgent demand for credit. The side effects of unrestrained credit growth turned out to be devastating. The impact of the financial crisis shouldn’t be underestimated, especially for Chicago-style economics. “Keynes is back,” Posner said, “and behavioral finance is on the march.”

Read more:

Let us know if you have questions or comments. Thanks,


Tax planning: donations for Haiti

Under a new rule, donations for the Haiti earthquake relief made in January and February of 2010 can be deducted on 2009 tax returns. The contributions that count include cash, check, credit card and cell phone text messages. The donation must be made to U.S. charities.

Be sure to let your tax preparer know if you made a contribution in 2010. The issue will be whether 2009 or 2010 is the best year to take the deduction.

Let us know if you have questions or comments. Thanks,