Summit Financial Advisorshttp://www.summit-advisors.com/summit-financial-advisors/en-US2010-03-13T01:02:16ZSquarespace Site Server v5.9.2 (http://www.squarespace.com/)4 Retirement Reality Checkshttp://www.summit-advisors.com/summit-financial-advisors/2009/12/11/4-retirement-reality-checks.htmlRafael Velez2009-12-12T06:57:38ZFinancial Planning RetirementLiving a comfortable retirement means planning for how much you will need now, when you have the ability to put away the money to do so.  What is your picture perfect retirement?  Are you…

• Living on a boat, seeing the world one coast at a time…
• Travelling, seeing all of those places you have imagined over the years…
• Spending time at home with your grandchildren, enjoying friends….
• Starting a business or investing more time in a lifelong hobby.

 

Today's retirees are doing much more than they used to….and the costs of retirement are also much different.  In order to better understand how much in assets you need to accumulate (and earn in company pensions and social security), to live the type of life you want…you should know what your retirement life is really going to be like.  What should you be planning for?

]]>Overconfidence & Attribution Biashttp://www.summit-advisors.com/summit-financial-advisors/2009/5/28/overconfidence-attribution-bias.htmlRafael Velez2009-05-28T10:37:45ZPsychology & BehaviorDream road is littered with great ideas that were going to solve everything. Many proposals were so sure to be successful that money fell out of the sky to fund them. In sports, talent at times can be so dominant that any opposition is a futile. Remember when the New England Patriots were so dominant that the New York Giants had no chance in the SuperBowl?

I’ve learned to be rather quiet about absolute convictions. Loud conviction likes to make a mockery of its believers. How did Eli Manning make that throw? It was as if the gods of irony all agreed to make bumbling fools of the experts. It just goes to show how dangerous overconfidence can be. Overconfidence will have you ordering the championship cake before the first quarter starts...only to give it embarrassingly to the stadium security staff later that evening.

No one wants to believe they may be in their own way, especially when it comes to investing. Yet, research has shown there are several common biases that can cause an investor to make decisions based more on emotion, than on strategy or science. This can impair investment returns...and in some cases, a total loss of capital.]]>Margin of Safetyhttp://www.summit-advisors.com/summit-financial-advisors/2009/4/17/margin-of-safety.htmlRafael Velez2009-04-17T01:42:14ZInvestmentsThe world around us has many risks that we cannot control, so we plan accordingly. Essentially, you give yourself some room for error — or a margin of safety in the event something unexpected occurs or your assessment is overly optimistic. In the investment management process, there’s also a margin of safety. While the term may have many different connotations in finance, the most common usage occurs in security analysis, where it refers to the amount by which a security is priced (or “available for purchase”) below its intrinsic value.

"Price is what you pay -- Value is what you get", said Warren Buffett. Valuing a business is, therefore, a fundamental skill that every value investor must master to be able to discern the intrinsic value of a business. If you’ve already guessed this has something to do with value investing, you’re right. Benjamin Graham, who is often referred to as the father of value investing, first introduced the term in his 1934 book, Security Analysis, which he co-authored with David Dodd. He later revisited it in the much more readable The Intelligent Investor, published in 1949. Today, many well-known value investors, including Warren Buffett (“Berkshire Hathaway”), Mason Hawkins (“Southeastern Asset Management”), Seth Klarman (“The Baupost Group”), Glenn Greenberg (“Chieftain Capital”), Charles Brandes (“Brandes Investment Partners”), Robert Rodriguez (“FPA Capital”) and Joel Greenblatt (“Gotham Capital”) are advocates of the concept.

]]>Allocating Capital and Biashttp://www.summit-advisors.com/summit-financial-advisors/2009/2/13/allocating-capital-and-bias.htmlRafael Velez2009-02-13T16:42:41ZBehavioral FinanceWhy do investors fall in and out of love with stocks at exactly the wrong time? Strong recent performance (“momentum”), fleeting fads and promises of huge growth potential are irresistibly compelling to inexperienced investors as they push their valuations up to unsustainable levels. After investors have experienced negative earnings surprises (which is inevitable), they overreact once more to the prospect of lower growth. What is the driving force behind this? Why do companies doing so well suddenly disappoint? Why do shares which outperform in the short term underperform over longer periods? The answers lay both in the allocation of capital and associated psychological biases or tendencies.

Companies do not exist in a vacuum. Their fortune is determined, to some extent, by the activities of other businesses. Relating a company to its environment is the essence of determining sustainable competitive advantage; which some believe is the prime determinant of investment success when combined with purchasing an interest below a conservative estimate of intrinsic value. In the book Competitive Strategy by Professor Michael Porter of Harvard Business School, he outlines five forces which influence a firm’s strategic position.

]]>Real Cost of Retirement Livinghttp://www.summit-advisors.com/summit-financial-advisors/2008/12/22/real-cost-of-retirement-living.htmlRafael Velez2008-12-22T17:27:28ZFinancial Planning RetirementYour long-term goals and medical condition will dramatically impact the true cost of retirement. In the past, it was common for people to enter retirement facilities such as nursing homes when they were too old to care for themselves or their home. Today, most people intend to stay in their home as long as possible but are willing to consider alternative living arrangements such as retirement communities and assisted living facilities to provide them with sense of community and assistance they need.

As you plan for retirement, you must take into consideration the true cost of retirement housing, in any form. Retirement communities, assisted living or skilled nursing facilities or simply staying in your home are all viable options. The question is what are the likely costs of each of these decisions?

Senior Independent Living Facilities

Long Term Health Care

Skilled Nursing Facilities

Staying Home

]]>Buffett Partnership Letters, Part 2http://www.summit-advisors.com/summit-financial-advisors/2008/11/13/buffett-partnership-letters-part-2.htmlRafael Velez2008-11-13T12:25:56ZInvestmentsWhen you run money, you run people.  Unlike money, people make phone calls, write letters, send emails and basically toss more logs on the fire.  In the first few years of the partnership, Warren Buffet was only managing a few million dollars.  The beginning sentiment in his letters was one of a confident, yet cautious optimism.  A reading of the letters from 1963-1966 finds Warren Buffett a bit frustrated, albeit still very focused and successful.

It is refreshing to see that Mr. Buffett actually does have veins with red stuff in them.  He is not a money-making machine with total mastery of emotions at every human juncture.  At one point (and one that I appreciate more every year) he basically tells his investors, “If you don’t like the way I measure success, get out.”  Interesting that the partners question him after phenomenal year over year performances.

The principal of compounding became a frequent topic in the mid-year communications. Either we compound our money or figure out how to live longer is the sentiment. The clear point is, your money is going to have to go ahead of you and establish your future.

]]>Employee Stock Optionshttp://www.summit-advisors.com/summit-financial-advisors/2008/10/31/employee-stock-options.htmlRafael Velez2008-10-31T16:31:04ZFinancial PlanningIn 1960, American corporate executives earned approximately 12 times the wage of an average employee.  In 1980, the multiple had grown to 42 times the average employee.  Today, according to Mercer Human Resource Consulting, executive salaries are over 550 times an average salary.

These surveys neglect to take into consideration one new class of professional.  One that is changing the classical connotation of "average salary." I call them EE's for elite-employees.  EE's are represented by relatively young, well-educated, and technologically elite professionals that are generally not members of corporate boards.  They don't maintain traditional executive titles, but are paid as though they do.  Many work within the internet, or one of its highly-skilled peripheral industries. Although they receive great salaries, a large portion of EE wealth is, or will be generated via incentives.

Incentives have become vital to the increase in salaries, and can make up more than half of a total compensation package.  The most popular incentive is the stock option. Closely tied to company stock performance, the financial benefit gained from this granting derivative can be substantial.  The option allows one to purchase the underlying corporate stock at greatly reduced prices, and at much later dates. If your employee stock options represent a substantial portion of your net worth, you must begin to view yourself as the CEO of your own personal stock option enterprise.  Properly managing these options is mission critical.
]]>Leverage has its Riskshttp://www.summit-advisors.com/summit-financial-advisors/2008/10/17/leverage-has-its-risks.htmlRafael Velez2008-10-17T16:35:16ZInvestmentsThe bear stock market of 1980-1982 (Dow 776) ended in the fall of 1982.  A short time before, BusinessWeek issued a cover story proclaiming:  “The Death of Equities”.  That’s how America felt then, because risk-taking had become so out of favor.  Investment expectations had become so low.  A short time later, the greatest bull market in history began!
 
The pace of that great movement of dollars into stocks, which really started in 1982, picked up speed in 1995.  By this time, the fear of taking risks had disappeared, but there was still at least a reasonable respect for risk.  But that respect quickly dissipated. So much wealth had been created in the world over the preceding 20 years from spreading prosperity, rising asset values, and business success that the appetite for risk-taking started to accelerate dramatically.  The “story” was the internet.  It was going to revolutionize the world and create never-ending wealth which would grow to the sky.  That created the first bubble.

The popping of that bubble had some fairly predictable, as well as some unanticipated, consequences.  The foundation was in place for the perfect storm, the creation of the second bubble – “alternative” investments.  To fuel this second bubble, we had the combination of a laissez faire government and the unlimited, cheap money made available by the Federal Reserve in its panicked response to the bursting of the internet bubble.  These funds were made available for speculation in all manner of alternatives to stocks.  Fed Chairman Greenspan sold our political and business leaders on the idea that big business was infinitely trustworthy, that derivatives reduced (rather than increased) systemic risks in our financial system, and that regulation would stifle the forces of markets.  Thus, interest in hedge funds, private equity, highly-leveraged real estate investments, commodities and foreign stocks soared, creating the next bubble.  The “story” this time was that in China, India and other emerging markets...

]]>Sequence of Returns Matterhttp://www.summit-advisors.com/summit-financial-advisors/2008/10/2/sequence-of-returns-matter.htmlRafael Velez2008-10-02T01:09:56ZRetirementGetting off on the right foot is nowhere more important than in retirement.  This is true in general, but especially about portfolio returns.  The better the portfolio returns in the early years of retirement, the better the chance of having the picture book retirement scenario we all strive to create.   If this is so, why do so many portfolio illustrations use an average rate of return of 8%?  Not nearly enough information for retirement income planning purposes.  How do portfolio projections differ before and after retirement and what are the factors that impact portfolio sustainability?  A quick look at these issues can give a better understanding of recommendations for withdrawal rates, multi-tiered income strategies and other retirement funding techniques that can be utilized to secure reliable retirement income.

There has yet to be a period of time where the market consistently returned 8% per annum.  But the popularity of using 8% average rate of return for financial illustrations is very common.  These simple projections are adequate for pre-retirement portfolios as the fluctuations in returns have less impact during the accumulation phase.  Ideally, with regular contributions and average market returns the portfolio will grow because it only has to contend with fees and tax expenses.  The added burden of withdrawals that begin upon retirement is the major differentiating factor on portfolio performance.   Contrary to the accumulation phase, once withdrawals are added to the mix, the timing of the returns becomes dramatically more important.  To understand why, an explanation of the components used in retirement income simulations will be helpful.  Retirement income simulations have at least four components...

]]>1987 Stock Market Crashhttp://www.summit-advisors.com/summit-financial-advisors/2008/9/17/1987-stock-market-crash.htmlRafael Velez2008-09-17T04:08:01ZInvestments

On Monday, October 19, 1987, the Dow Jones Industrial Average* took a 508-point nosedive, falling 22.6% in a single day. The following Friday, at the end of a volatile week, “Wall Street Week” with Louis Rukeyser looked at what was behind the crash that came to be known as Black Monday—and what lasting lessons it might teach us.  (You can watch the entire October 23, 1987, "Wall Street Week" episode at the end of this article.)

Although a number of issues—rising interest rates, the trade deficit, budget problems and leadership worries—dominated economic discussions in the months preceding Black Monday, no one single event seemed to cause it.  The only major external developments over the weekend preceding the crash were a U.S. attack in the Persian Gulf and Treasury Secretary Jim Baker starting a public feud with monetary authorities in West Germany.

Still, the losses continued in the days after the crash...

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