What Difference Does an Election Make?

I have been repeatedly asked in recent months "What Difference Does an Election Make"? I strongly believe that this significant watershed mid-term election could provide the ignition the market needs to get back to the 12,000 level. Here are a few bullet points which help to illustrate my thoughts:

· Over the last 60 plus years the market has never declined in the 2 quarters following mid-term elections, with the average market gain being over 18% - that makes Dow 12,500 possible next year.

· A generational event has taken place! Deficits and debt have outraged the public and they demand CHANGE! This deeply concerned public has roared. Washington will see new faces and new ideas. We will find our way back to fiscal responsibility. We need a new tax structure which is fair, easy & predictable. Maybe it is time for a flat tax and VAT. Spending must be brought down. The private sector is able to pick up the slack as the federal monster is shrunk.

· The American people will not tolerate economic failure: They want free enterprise, lower taxes and less government involvement. When new leaders convince the public that a new course is being set that will be the basis for a new mindset. We will return to normalcy. That brings reflation, then inflation.

· Money will start to flow to risk categories and the unemployment rate will start to fall. Many will be stunned at the speed at which the US Economy can turn on a dime. During this process expect volatility to increase in all asset categories. The hiding places people used will become dangerous spaces; the trillion dollars invested at rates under 3% will come running out.

Side effects:
-Equities will be one of the best performing asset categories for the next two or three quarters.
-Managed foreign exchange strategies have the potential to offer equity like returns with little correlation to equities.
-Managed commodity trading strategies also can provide attractive returns as we reflate.
-Water, oil, grains and hogs all look much higher next year.

I hope you will not hesitate to call me to discuss your portfolio or the strategies in which you are enrolled. While I recognize that there will be many challenges ahead, I firmly believe that there are an even greater number of opportunities as well.

How Would You Spend Your Trillion?

Confronting the federal deficit starts with grasping just how colossal that number actually is. So, what would $1 trillion get you?

The figure is almost incomprehensible: $1,000,000,000,000. One trillion dollars. That's a dozen zeros.

The Congressional Budget Office reports that during the first nine months of fiscal 2010 -- which ends September 30 -- the federal government spent $1 trillion more than it took in. That's another $1 trillion added to a total national debt that stood at just over $13 trillion as of the Fourth of July. (On the bright side, the trillion-dollar nine-month deficit was about $80 billion less red ink than flowed during the same period last year.)

Not so long ago, the idea of a "trillion" anything was so farfetched that it evoked a comic response similar to what the use of the word "gazillion" does today. The 1960s comment attributed to then Senate minority leader (and ever-vigilant deficit hawk) Everett Dirksen -- "A billion here, a billion there, and pretty soon you're talking about real money" -- seems downright quaint today. (In 1965, the national debt was a paltry $317 billion.)

But, seriously, how much is $1 trillion? To help you wrap your head around that mind-boggling number, and to try to put deficit spending into perspective, consider what $1 trillion will buy, expressed in terms we can all understand:

$1 Trillion Would Buy ...

40,816,326 New Cars
The 2010 Volkswagen Jetta TDI wins Kiplinger's Best in Class honors for cars in the $20,000-to-$25,000 price range. At a sticker price of $24,500 each, $1 trillion would let you drive away with a fleet of Jettas equivalent to 30% of all the cars already on U.S. highways. (The total U.S. car fleet is more than 135 million, according to the U.S. Department of Transportation, excluding trucks and SUVs.)

5,574,136 Typical American Homes
According to the National Association of Realtors, the national median price for existing single-family homes in May was $179,400. There are about 80 million detached, single-family homes in the U.S., according to the NAR and the Census Bureau.

140 Billion Hours of Labor
That's calculated at the federal minimum wage of $7.25 an hour. Still hard to get your mind around? How about this: One trillion dollars is enough to hire all 2.8 million residents of the state of Kansas -- men, women and children -- in full-time, minimum-wage jobs for the next 23 years.

A Year's Salary for 14.7 Million Teachers
According to the National Education Association, the average teacher salary in the state of California is about $68,000. The total number of teachers working in the U.S. was estimated at 6.2 million ten years ago, according to the 2000 U.S. Census (the last official estimate). So $1 trillion would pay Golden State salaries to more than twice that number of teachers.

The Annual Salaries of All 535 Members of Congress for the Next 10,742 Years
The current salary for rank-and-file members of the House of Representatives and the U.S. Senate is $174,000. We're not even counting the extras paid to congressional leaders.

The Star Power of LeBron James for the Next 50,000 Years
A lot of numbers are being thrown around about just how much the basketball superstar will be paid for playing for the Miami Heat. But let's say it's just $20 million a year. At that rate, $1 trillion would cover the tab for King James for the next 50 millennia. Heck, King Tut was born less than four millennia ago.

1.33 Trillion Chocolate Bars
Got a hankering for something sweet? A sweet $1 trillion will buy you that many 1.55-ounce Hershey's Milk Chocolate bars at 75 cents apiece. That's 64 million tons of chocolate, equivalent to the weight of more than 150,000 Boeing 747-400s.

1,333 Celebrity Divorce Settlements
It's been widely reported that Tiger Woods may pay $750 million to settle the divorce with his wife, Elin Nordegren. Some commentators say that's a wild exaggeration, and that a mere $100 million will facilitate the split. But let's assume the worst (for Tiger). If it costs $750,000,000 to end his marriage, a trillion dollars would cover plenty more tabloid breakups.

A Guaranteed $6.3 Billion Payout for a 65-Year-Old Man Each Year for the Rest of His Life
or
A Guaranteed $5.8 Billion for a 65-Year-Old Woman Each Year for the Rest of Her Life.

With the demise of the company pension plan -- and its wonderful promise of regular checks in retirement -- immediate-payout annuities are garnering more and more attention. These investments let you trade a lump sum for a guaranteed stream of income for the rest of your life. Even at today's record-low interest rates (the lower the interest rate, the more expensive it is to buy future income), $1 trillion earns its way -- and then some. Because women live longer than men, on average, $1 trillion would buy a 65-year-old woman a little less. But having $5.8 billion a year to fall back on is nothing to sneeze at.

A One-Year CD Yielding $15.5 Billion in Interest
Everyone knows that interest rates on bank accounts, money-market funds and certificates of deposit are ludicrously low. But even at just 1.55% -- the best rate we could find recently -- $1 trillion socked away in a one-year CD would still yield a handsome return.

Annual Base Pay for 59.5 Million U.S. Army Privates
Basic pay for an active-duty U.S. Army private with less than two years of experience is $16,794 a year. So $1 trillion goes a mighty long way, even by military spending standards. To put that in perspective, 59.5 million privates is more than 100 times the total number of active-duty soldiers in the Army today.

Replace Annual Incomes for 19.2 Million American Families
Median household income in the U.S. (half the families earn more, half earn less) was $52,029 in 2008, according to the Bureau of the Census. At that level, $1 trillion would be enough to cover the incomes of a sizable percentage of total U.S. family households. There are no recent official estimates, but the 2000 U.S. Census figured there were about 71.8 million family households.

Pay the Estate Taxes for 2,222 Billionaires
Let's assume that, as we expect, Congress reinstates the federal estate tax retroactively to January 1, 2010, with a $3.5 million exemption and a rate of 45%. And assume that the late George Steinbrenner's taxable estate is $1 billion. The tax bill would be almost $450 million. That $1 trillion would be enough to cover the estate taxes of a lot more billionaires who might die before Congress acts.
by Kevin McCormally, Provided by Kiplinger.com

Did You Know...

One of the critical differentiating factors at Corestates Capital Advisors is our strategic view of investing. Our mission is to sustain acceptable portfolio growth with limited risk. To accomplish this we believe portfolios can no longer be guided by predominantly domestic strategies because they tend to be overly-influenced by US Monetary Policy and US Foreign-Policy. Our 20/20 Global Vision encompasses the 20 critical global issues that will influence portfolio performance over the next 20 years. Listed below are the current 20 issues that we think will have enormous influence.

This YouTube video provides excellent reinforcement for our 20/20 Global Vision philosophy.


Click Here to watch on YouTube

Keynes: Return of the Master (or courting disaster?)

Among the many valuable resources used by the investment professionals at CoreStates, Capitol Reader is a service (www.capitolreader.com) that provides detailed summaries of recently published books on politics and related topics. The following are CoreStates' perspectives on a recently summarized book describing and endorsing the economic principles currently gaining favor in Washington.

The above title, absent our parenthetical addition, is also the title of a just published book (Public Affairs Books; ISBN 9781586488277) by Robert Skidelsky, the preeminent biographer of British economist John Maynard Keynes (1883 – 1946). As the title suggests, Skidelsky considers Keynes to be “the Master,” and the book is a veritable celebration of his return to popularity following the recent “failure of capitalism.” And, Skidelsky is not alone. Keynes’ fans include President Barak Obama and the Democratic majorities in both houses of Congress.

The master . . .
Without question, Keynes contributed greatly to economic thought. His recognition of the discipline as a social/behavioral science as opposed to a mathematical exercise is invaluable in understanding the workings of an economy. Even today, we see too little appreciation for Keynes’ admonition that economists (and their private and public sector clients) not put too much confidence in quantitative economic analysis. Most aspects of the future are simply immeasurable – they are what he describes as unknowable “uncertainty,” not calculable “risk.” To assign probabilities to future economic measures is foolhardy. To act on them is irresponsible.

Or courting disaster?
But, we are troubled by one of the core tenants of Keynesian thought – the belief in the propriety of heavy-handed intervention by governments in their economies. In fact, we believe the recent “failure of capitalism” was more a failure of governments in implementing exactly what Keynes promotes – aggressive fiscal and monetary intervention. Such actions provide little measurable near-term benefit while invariably sowing the seeds of the next economic disaster.
The most recent economic meltdown is a good example. Between the Federal Reserve’s speculation-inducing too-easy money and too-low interest rates in response to past economic slowdowns, and Congress’s steadily ballooning deficit spending, private sector excesses were not only widely encouraged, but were willingly financed. Add Congress’ irresponsible relaxation of mortgage lending standards, and housing became the epicenter of the second worst economic collapse in our nation’s history, and the worst in terms of worldwide losses.

Not only did governments (especially ours) do what they shouldn’t have done, they also failed to do what they should have done. They shirked their responsibility to properly oversee and regulate their public and private sector enterprises. Free-market capitalism excels at building national wealth, but without proper constraints, it can result in unhealthy concentrations of private sector wealth and power, and in alternating excesses of optimism and pessimism. This, too, was a factor in the recent economic maelstrom.

An even more severe criticism of Keynesian principles comes from the Austrian School of economic thought led by Nobel Laureate Friedrich von Hayek. It opines that application of Keynes' policies inevitably leads to excessive state control if not pure socialism, to the severe detriment of international competitiveness, living standards, and personal freedoms.

The core strength of a capitalistic economy accrues from the multitude of small, largely self-interest-motivated economic decisions made daily by its millions of citizens. If properly regulated, this constantly evolving economic organism will produce a more effective, efficient, and stable economy than any central authority could ever be expected to achieve. To us, it’s the economic equivalent of democracy versus oligarchy. The economic “votes” of the citizenry will serve the economy better than the decisions of an elite few, no matter how well intentioned they may be.

Conflicting conclusions
Skidelsky concludes his arguments with the contention that Keynesian principles have historically delivered better economic results. He cites the period between 1951 and 2009, and suggests that what he identifies as the Keynesian period (1951 – 1973) saw higher GDP growth, less disparity of family incomes, and less unemployment than the Neo-Classical period (1980 – 2009). The inflation rate was slightly lower in the Neo-Classical period, but most importantly to Skidelsky, it suffered five periods of economic contraction versus none during the Keynesian period.

Our views differ, but not just for the reasons cited above. Even if government intervention can, or is believed to, moderate business cycles, it brings unintended and very unfavorable consequences. Individuals and companies throughout the economy see the moderated cycles as license to undertake increasingly risky behaviors (more debt, speculative trading, etc.). Eventually, these create excesses, often in the form of price bubbles, which are unsustainable and lead to collapsing markets that are beyond the government’s ability to contain, at least not without creating even more severe problems in the future. The financial system meltdown, still deflating housing bubble, and fiscally irresponsible government response provide a resounding example.

Much like the levees of New Orleans, the government “protections” espoused by Keynes and pursued by our government the last several years may have “worked.” But, they also created over-confidence and unwitting exposure to unpredictable and immeasurable calamities. In the end, these well-meaning “protections” exposed the citizenry to losses far in excess of what would have been incurred simply letting the economy (or river) flow through its natural cycles. Not only would the economic damage have been less, the public and private sector participants would have gained a better understanding of the risks and their responsibilities in a market-based economy.
www.corestates.us

Beyond California: States in Fiscal Peril

The Pew Center on the States recently released a report entitled “Beyond California: States in Fiscal Peril”. The report examined the impact of the recession on the finances of the states, highlighting nine other states facing similar stresses to California. This report received
widespread press coverage, including both the Inquirer and the Wall St Journal. Below are brief comments regarding several states where we have client concentrations.

The full report can be found at http://www.pewcenteronthestates.org/

Pennsylvania: We have previously distributed positive comments regarding PA’s relative position among the states. It is gratifying to see the Pew Center list PA among the 10 states “least like California”. PA’s revenue decline of only 5.5% is well below the national average of 11.7%. The budget deficit of 18% of the general fund is close to the national average of 17.7%. The increase in unemployment has been 3%, compared to the average of 4.4%. PA was particularly cited for having established and funded its rainy day funds. Several states had set up such funds but never really deposited any money into them.

Maryland: MD’s revenue decline of only 1.2% was among the smallest drop of any state. Despite that, its budget gap is 18.7%, above both PA and the average. Similarly to PA, its real estate market had neither run up nor collapsed as much as the national averages. General financial management and employment levels are also above average. MD scored just outside the 10 best states.

Delaware: DE also had a modest drop in revenues of only 3%, well better than average. Its budget gap at 17.6% was close to the national average. The 3.6% increase in unemployment was better than the national average but worse than its regional peers. The financial management was scored very high. DE’s overall score was slightly behind MD.

New Jersey: NJ scored as one of the 10 worst states, most like California. Pressured by several factors, its revenue declined 15.8%, well above the average. The budget gap at 29.9% was among the worst. The 3.7% increase in unemployment was not as bad as the average. However, only 2 states scored worse than NJ regarding financial management and practices. We continue to believe that NJ residents should diversify some of their municipal holdings outside the state in order to lessen risk.

Virginia: VA scored very highly regarding its financial practices. Unemployment has only risen 3.2%, well better than average. The budget gap of only 10.9% also reflects well. A revenue decline of 19% is probably the only reason VA scores just outside the 10 best states and even with MD’s score.

Florida: FL’s ranking among the 10 states most affected by the recession should not be a surprise as its real estate difficulties have been well documented. The foreclosure rate of 2.72% is effectively twice the national average of 1.37%. The revenue drop of 11.5% is better than might have been expected. The unemployment increase of 4.4% is at the national average. The state has mixed scores on political and financial management issues. FL does not have a state income tax, so client portfolios are national portfolios, already diversified outside the state.

Ohio: Perhaps surprisingly, OH fares better than many of its Midwestern neighbors. Unemployment has increased at the national average of 4.4%. Despite that, revenues fell a less than average 9%. The budget gap is a better than average 12.3%. OH also scores well regarding financial practices. Its overall score is equal to DE.

Stocks For the Long Term? Why Bother?

Stocks got pummeled in 2008 and early 2009. Although most markets have since shown good recovery, the message lingers – stock returns are much more volatile in the short-term and much less dependable over the long-term than most investors were led to believe.

In fact, as 2009 began, the average annual return from stocks over the entire preceding decade was negative (S&P 500 average annual return -1.36%) – a loss! For the same 10-year period, “no risk” US Treasury Bills provided a 3.16% average annual return. And, long-term Treasurys led them both with a 6.59% return (all figures courtesy of Ibbotson).

Now, as 2009 comes to a close and stocks have rebounded some 60% from their March lows, astute investors are wondering if investing in equities is worth the agony. Why don’t we just cash out what’s left of our stock portfolios and settle for the 3% to 6% returns provided by bills and bonds?

Our answer – we would if they (bills and bonds) could. But, regrettably, the confluence of factors that allowed bonds to provide this level of returns over the last decade, actually the last few decades, is highly unlikely to occur in the coming decade. The environment is more likely to be just the opposite.

It’s different this time . . . really.

The return earned on a bond portfolio consists primarily of the interest payments received on the bonds – the portfolio “yield.” The level of yield is determined by the types and quality of bonds owned in the portfolio, and by market interest rate levels prevailing when the bonds are bought – initially and ongoing as interest payments and proceeds of maturities are reinvested. A much smaller but still important component of a bond portfolio’s return is any change in price of the bonds owned – the “appreciation or depreciation.”

To understand why bonds aren’t likely to provide the level of returns of the last few decades, consider the current state of each of the factors noted above.

1. Beginning market yields – The level of interest rates at the time a bond portfolio is initially assembled is the primary factor in determining a portfolio’s ultimate return, at least through the first several years. And, as this table shows, we’re starting from much lower levels than 10, 20 or 30 years ago.

Interest Rate Levels – United States Federal Reserve

2. Direction of change in market yields – The above table also shows that market rates have been steadily declining. This means yields on existing managed portfolios would have steadily declined as interest payments and proceeds of bond maturities were reinvested at ever-lower rates over this period. Over the last several years, this made bond portfolio returns decline relative to their beginning yield levels. And, with interest rates now virtually at half-century lows, most bond portfolios’ yields should continue to decline until market interest rates begin to rise.

3. Current or ending market yields – Market values of bonds vary to reflect changes in the general level of interest rates. If market rates are generally lower than when a bond portfolio was initially purchased, the bonds’ prices will have gone up, and vice versa. (This might sound backwards, but think of it this way – declines in available yields make bonds bought earlier at higher yields more valuable, and vice versa.) So, looking back over the last few decades, bond investors have benefitted greatly from price appreciation as interest rates steadily declined. Going forward, with rates already near zero, such declines are simply not possible (unless our bankers decide to pay borrowers to take their money, which, we suppose, may not be all that unreasonable to expect now that the government is running the banks!).

4. Types of bonds in the portfolio – The final factor influencing bond portfolio returns is the composition of the bonds in the portfolios. Managers can increase yields by investing in lower quality, longer maturity, and more price volatile bonds. In recent months, however, the additional returns to be gained by such increases in risk have shrunk dramatically. And, should such spreads widen again, the bonds could suffer significant price depreciation, more than offsetting the riskier bonds’ initial modestly higher yields.

So, what of stocks?

Even if bonds can’t be expected to do as well as in the past, can stocks be expected to do better? We think so, based on a similar evaluation of their yield and appreciation prospects. The S&P 500 currently provides a dividend yield (which for most investors is taxed more favorably than interest income) in excess of 2%. Many individual stocks of sound companies provide twice this level of yield or more.

As for appreciation prospects, stocks represent ownership in their underlying economy, and history has shown that as that economy grows, the economic value of stocks generally grows at a similar or greater rate. The 3.5% US GDP growth reported for the third quarter of 2009 may falter in the coming quarters, but should average at least 3% over the next few years. The resulting 5+% theoretical return is twice the current yield of the highest quality bonds.

In regard to valuations, the S&P 500 at 1100 is trading at approximately 15 times current annual earnings of the underlying companies. Said differently, stockholders currently earn back about 1/15th of the cost of the index annually. So, the “earnings yield” of the index is currently 1/15 or 6.7%. And, that’s before any growth in earnings in the years ahead.

To us at CoreStates, these measures qualify stocks as a worthy investment – with this core return expectation in excess of 5%, current earnings return of 6.7%, and good prospects for additional return from increasing earnings and expansion of valuations as the world economy stabilizes and growth resumes its historical patterns. Bonds also have a role in many portfolios, but a reduced role relative to that of the last few decades given their much-reduced future return prospects.

But, the key to investment success for 21st century investors will be to diversify well beyond these two traditional asset classes, carefully select managers capable of taking both long and short positions, and actively manage allocations among the several asset classes based on relative evaluations of the type summarized here for stocks and bonds. Our 8-Cylinder portfolio engine, SCORE manager evaluation process, and 20/20 Global Vision asset allocation perspectives are designed to provide our clients with exactly these capabilities.

They are the foundation of our overarching commitment to clients – to protect their lifestyles and preserve their legacies throughout their investing lifetimes.

Our favorite allocation as of November 17th, 2009:

Stocks 45% Bonds 25% Cash 5% Real Estate 5% Currency 8% Energy 2% Gold & PM 2% Managed Futures 8%

CoreStates Economic Survey

Last quarter, we sent out an email inviting all CoreStates clients to participate in an Economic Survey. We asked you to go to our website and give us your opinion on several important segments of our economy. We asked if you thought these key economic indicators would increase, decrease or remain unchanged over the next six months. Here are the results from a terrific cross-section of our client base. Thank you everyone who participated.



66% of the respondents felt that the stock market would improve over the next six months, while 80% thought oil prices would increase. 64% of respondents think the unemployment rate will increase with 42% seeing lower home values. 58% are predicting higher inflation most likely led by the cost of medical insurance (78%), increased government spending (86%) and the declining value of the dollar. 56% of those surveyed think the income taxes will increase over the next six months. 51% think that the consumer confidence will improve and 39% believe the automobile sales will increase.

We hope that you will compare your responses to those individuals who participated in the survey. Keep in mind this is not a scientific survey. We just wanted to provide a forum for people to tell us what they thought. Please look for more investor surveys in future newsletters. We greatly appreciate your involvement in making CoreStates a special place.

Top 10 Investing Mistakes

Once you've made it... Mistakes can still take it!

We all know the formula for investment success is to invest early, invest often and invest broadly. These are the core principles of achieving wealth through saving and investing. Do this diligently over an entire working career and you are virtually assured of a lifetime of financial security. But, for those who have already done this, or who for any other reason find themselves responsible for a substantial sum of money, the rules are a little different. The focus must change from accumulating assets to protecting wealth and preserving purchasing power. And, the mentality of the investor must change. Investing “right” still matters, but the greater concern must be not investing “wrong.” At this stage, mistakes can be lethal to your financial security, largely because the time needed for recovery from any setbacks is limited.

So, what are the most common miscues investors make in this wealth preservation stage?

1. Maintaining insufficient liquidity
This is the big one. You must never have to sell an investment to raise needed spending money. All spending should come from stable value investments and accounts – like short-term fixed income securities and checking, savings, or money market accounts. You want to sell investments (stocks, bonds, real estate, commodities, etc.) to fund the stable accounts only when the investments are trading at favorable prices. Second best (and more practical for most of us) is to liquidate investments only on a regular, periodic basis – the opposite of dollar cost averaging in. Neither approach can be achieved if your checking account is empty and bills are due.

2. Ignoring inflation
The end of the accumulation phase of an investment program is not the end of the investment program. Tempting as it may be to seek the “safety” of stable investments with all of your investment dollars, this safety comes only at the expense of significant risk to your purchasing power. If your future spending needs extend five or more years into the future, it is simply not prudent to expect to fund those future needs with current dollars. This is especially true with today’s rampant Federal spending, which almost assures significant inflation in the years ahead.

3. Forgetting your legacy
Investors with the good fortune to have assets well in excess of their personal or immediate family needs may be able to ignore inflation. They have virtually no risk of running out of money. But, based on our many years of experience working with such people, even those who start out with a strong preservation focus often begin to see their role not as owner, but as temporary custodian of their assets. They come to realize that they have the ability to favorably influence the lives of others, now and well beyond the end of their own lives. This sometimes encourages immediate gifting and donations. Or, it may introduce a much longer investment time horizon within their own portfolio, which warrants a much different investment approach with that portion of their net worth that exceeds their personal lifetime financial needs.

4. Carelessly selecting an advisor
The Bernard Madoff scandal provides a vivid warning to all investors not to pick their advisor based on image, reputation, or social standing. Some homework is required. Visit the CoreStates website at www.corestates.us and see our “Qualifications of a Financial Advisor” and “Commitment to Fiduciary Responsibility” (both located under the “Learning” tab) for our list of the key criteria that every investor can and should look for before entrusting assets to any financial advisor.

5. Settling for hazy investment objectives
Risk tolerance, time horizon, return objectives – these are important concepts. But, they are only concepts. It is important for you and your advisor to have a clear, mutual understanding of your current and anticipated financial resources, expected additions to your investment account, expected needs to be funded from your investment account, and how much flexibility you have in how and when these needs are met. And then, keep your advisor updated. Only by discussing your particular situation in these very tangible terms can you maximize your chances of long-term financial security.

6. Pursuing investment fads and fashions
Besides their financial aspects, investments can serve a valuable recreational purpose. Investing can be fun and exciting, and can convey intellectual and emotional prestige. To capitalize on this, financial product marketers provide a constant flow of new investment ideas. Most are merely the old standards repackaged, but many are much more insidious, and some, as we just learned, are downright toxic. All investments differ in only two meaningful respects – the expected amount and timing of cash returns to be provided, and the certainty (or potential variability) of those future cash returns. If you don’t understand how these two variables compare to more straightforward investments like CDs, bonds, and stocks, don’t buy them. And, if you do understand the differences, make sure they add value. In most cases, they won’t.

7. Obsessing over the parts while ignoring the whole
An investment’s price really matters at only two times – when you buy it and when you sell it. If that investment is part of a well-constructed portfolio, your manager will have the discretion to buy it and sell it whenever the price is deemed to be favorable. And, a well diversified portfolio will at all times have some investments at favorable prices and some . . . not so much. That’s how portfolio diversification works. So, if you see some investments that currently “aren’t working,” they may signify only that the portfolio is effectively diversified, and is behaving exactly as it should.

8. Confusing a Net Worth Statement with Cash Flow Analysis
While the net worth statement is a great way of assessing your financial well being, it captures only a single frame of your financial picture at one point in time.
Unlike your net worth statement, the cash flow analysis tracks your income/expense ratios over an extended period of time. That is like comparing the features of a picture camera and video camera.
For an individual investor, no diagnostic approach is more important than the Cash Flow Analysis. Not only will you become acutely aware of how expenses, taxes and inflation affect your lifestyle, you and your advisor will also have the proper basis for making investment decisions.
And because you are recording all your transactions, coming in or going out, this makes your cash flow analysis dynamic, allowing you to review your financial decisions from time to time.
There are many approaches to control expenses and spending habits. But the critical starting point is to generate and maintain your own Cash Flow Analysis.

9. Losing faith in your investment program
Investors must play a continuous game of emotional “chicken” with the market. Don’t let it scare you to the sidelines, or hype you into a high-risk investment position. A sound investment program will respond to the market cycles in a prudent way at the manager/investment selection level. Major revamping of the overall portfolio in response to market swings is almost always detrimental to your long-term wealth. It may help to remind your self that, by definition, the market is at its low when investor fear is greatest, and at its high when enthusiasm peaks. Acting on your emotions will almost guarantee buying high and selling low.

10. Forgetting that wealth is the means, not the end
In a capitalist economy and a culture focused on continually improving living standards, money becomes a measure of success. But, that’s not all it is. It is also a means to less tangible ends. It can support favored causes, facilitate desired change, and promote higher principles. It can allow you to accept the challenge of the great religious leader, Mahatma Gandhi: “You must be the change you want to see in the world.” Let it help you to be the person you want to be, in the country where you want to live, and in the world you want to leave to succeeding generations.

Are you Underinsured?

Check your automobile insurance coverage! Look at the declarations page. Make sure you have enough coverage to protect yourself and loved ones.

All of us who drive know that Pennsylvania Law requires that we carry automobile insurance. However, Pennsylvania Law requires that we carry only minimal coverage: $15,000 for liability and $5,000 in medical coverage. But that is not nearly enough to protect yourself or your loved ones. Please allow me to tell you some horror stories that will help emphasize my point. The names have been changed to protect their anonymity.

John Houseman was driving his fiancé home after having seen a movie. It was a little after midnight. He was traveling through a steady green light at the intersection of Grant Avenue and Academy Road when suddenly he was struck in the driver’s side by a Ford F-150 driven by a drunk driver. The force of the collision propelled John from the car into the intersection. He suffered massive internal injuries and a brain injury leaving him in a coma for several months. Now, several years after the accident, John remains totally disabled from being able to perform any work. The driver carried automobile coverage of only $50,000.00. John carried no underinsured motorist coverage. The bar that served the drunk driver alcohol prior to the accident was uninsured. At trial, John was awarded $3,600,000 in damages. However, this was a pyrrhic victory as only $50,000.00 was able to be recovered, the drunk drivers automobile insurance coverage. My Attorney, Anthony Barratta, represented John for free and continued to represent him at no charge attempting to collect against whatever assets they could locate against the bar. However, things might have been easier for John had he carried Underinsured Motorist Coverage.

Another young man, Igor Cominsky, a college student at the University of Pennsylvania, was riding his motorcycle through the intersection of Bustleton Avenue and Hellerman Street. He had a steady green signal. A motor vehicle driven by another young man, turned left in front of the motorcycle. This driver was on his way to Church and did not see the motorcyclist. Igor had no time to slow down and slammed into the passenger side of the Church-going SUV, striking his chest hard across the frame of the left-turning vehicle. The young man died instantly. The driver of the other vehicle carried insurance coverage of only $25,000.00. Igor had no Underinsured Motorcyclist Coverage. When Igor died, he owed $50,000.00 in college loans for which is family is now responsible.

The message is clear: Please buy Underinsured Motorist protection. Many motorists buy only minimal coverage because their only concern is driving legally. The only way to protect yourself from injury caused by an underinsured driver is to purchase Underinsured Motorist Coverage. If you have more than one vehicle, you should also stack your coverages. This will permit you to multiply the amount of your Underinsured Motorist Coverage by the number of vehicles insured.

Should you have any questions about any aspect of your automobile insurance policy and how to protect yourself in the event of an accident, please call your attorney, or insurance company. No matter how safely you drive, you cannot control the actions of some other driver. Please protect yourself and your family by being prepared.