Wednesday, November 30, 2005

The iPod Flea Video

The New York Times > Technology > Multimedia > Video

If you're an ipod enthusiast like I am you'll get a kick out of this video. You'll have to wade through a commercial, but the video is well worth it!


Monday, November 28, 2005

Existing home sales fall 2.7%

Economic Report: U.S. Oct. existing home sales fall 2.7% - Real Estate - Economy - Bond Market

Does this really surprise anyone? Notice thought that it doesn't say that prices fell.....

Scott Dauenhauer, CFP, MSFP

China: Friend or Foe?

China: Friend or Foe?: How Not to Ruin Your Life - Yahoo! Finance

Buehler........Buehler.......Buehler......This column, written by Ben Stein (Ferris Buehler's Day Off) has an interesting take on China and one that is not heard very often. I think Ben Stein and Jeremy Siegel are on the right thinking track about China, their prosperity will not end ours, but enhance it.

Scott Dauenhauer, CFP, MSFP

Four Ways to Avoid Overspending This Holiday

Four Ways to Avoid Overspending This Holiday: Money Matters - Yahoo! Finance

Suze certainly annoys me sometimes, I just can't stand watching her show, however she does have some good advice and this article is quite pertinent for the holiday season. One tip that is not included here is that you should start your holiday shopping by determining how much you can spend, then make a list of those people you need to buy for, then apportion your budget accordingly. If you find you don't have enough money to buy for everyone you're going to need to rethink how much you are spending and save more money for the holidays next year.

BTW, though I can't stand watching Suze I do endorse her book "Nine Steps To Financial Freedom."


The Dangerous Lever

The Dangerous Lever

The great Greek Mathematician Archimedes once said "Give me a lever long enough and a fulcrum on which to place it and I shall move the world."  A similar claim is being made these days about a different type of leverage, though this claim has no basis in fact and would not stand up to Archimedes logic.

What lever am I referring to? Home mortgage debt.

The newest pitch from the “charlatan” advisor community is to leverage your home by doing a “cash out” refinance and using the money to buy investment products.  This isn’t exactly new, though they have added a few twists.  

The first twist is the use of the latest mortgage creation, The Option ARM.  The Option ARM mortgage is an adjustable rate mortgage that gives you four different payment options.  The four payment options are:

  • The minimum payment (negative amortization)

  • Interest Only

  • Pay off in 30 years

  • Pay off in 15 years

I have many problems with this loan, the first being that it is an adjustable rate mortgage and for the most part I don’t like adjustable rate mortgages (especially in an era of record low interest rates).  The second is the structure.  Without getting into the confusing details the minimum payment is way below what the actual interest payments are on the loan which means that if you only make the minimum payment you will be adding to the loan balance (called negative amortization), not a smart move.  Option ARM loans should only be used by in certain situations and the people purchasing them should fully understand what they are getting into.

The pitch essentially by these charlatan advisors is to use this new Option ARM loan to refinance your existing property and use the extra cash and the extra cash flow to invest in your retirement.  The theory is that you can make more money by investing than letting is just sit as home equity.  To give you an idea of the difference in monthly cash flow with the Option ARM loan I will show you the payments on a $100,000 loan, as follows:

     30 year fixed rate                    6%          $600

     Interest Only                         6%          $500

     Option ARM 1.25% Start Rate     Minimum Pmt          $333

Additional monthly cash flow over Fully Amortized loan in 1st year:     $267

As you can see, you have freed up $100,000 in cash, plus $267 in cash flow per month to use for investments.  This sounds great, except that you are not paying off the $100,000 loan, it is growing by about $167 per month and you don’t have a fixed rate, which means that if interest rates get out of hand you will have a major problem.  The goal is to get a better rate of return after tax than the interest you are paying, the problem is that you are exposed to interest rate movements and the strategy only works if interest rates stay low, if they don’t, you lose.  Even if rates do stay low you may lose because of the investments you are in, which brings us to the second part of this bad idea.

Typically the investments being offered by the people touting this strategy are annuities.  It used to be just variable annuities, but now these charlatans have discovered another annuity with a higher commission, the Equity Indexed Annuity.  Both variable and equity indexed annuities are loser propositions.  The variable annuity is excessively expensive, typically in the 3-4% range annually, and the equity indexed annuity simply won’t perform as advertised.  The reason either of these products are utilized is because they generate large commissions, anywhere between 7 – 12%.  Of course, the really bad advisors will try to sell you on dumping the extra cash and cash flow into permanent life insurance policies which generate commissions that are much, much higher, but usually provide little value and most likely will hurt your financial situation long term.

This strategy sounds great to the unknowing public, but in reality these strategies are exceptionally dangerous to one’s financial health.  The “advisor” gets paid handsomely, as follows:

     $100,000 Mortgage

     Mortgage Commission      $1,000 - $2,000
     Annuity Commission          $1,000
     Total Commissions          $2-3,000

Of course most of these sales jobs are on much higher amounts; just imagine the commission on a $500,000 cash out refinance combined with annuity commission.

I do not endorse the above strategy, I think it is dangerous.  This is not to say that it couldn’t ever work, just that the probabilities are low and gambling with your home is not the best of ideas.  The Option ARM mortgage is not in and of itself evil, it is a legitimate mortgage product, but it needs to be used carefully and in the right situations.

Utilizing leverage is an age old strategy, but not one that most people should apply and definitely not by using the above mentioned strategy.  If an “advisor” offers to refinance your home and then use the proceeds to purchase investments (especially annuities) you should be on guard and get a second opinion, the transaction is most likely not in your best interest.

Thursday, November 24, 2005

A Hilarious Thanksgiving Turkey Plea!

I had a couple friends and clients send this too me and thought it was too funny not to add to the blog.

Happy Thanksgiving!


Wednesday, November 09, 2005

How Will Ben Bernanke Affect Your Returns?

How Will Ben Bernanke Affect Your Returns?: The Future for Investors - Yahoo! Finance

Who's Ben Bernanke? He just may be more important than the next presidential nominee(s). He has been named to be the head of the Federal Reserve once Alan Greenspan's term is finished in January. He will be confirmed by the senate and the reign of a new Fed chairman will begin, the question remains will it be a good thing or bad? I will be posting articles debating this question, this article is written by Jeremy Siegel, Professor at Wharton. I respect Siegel and value his opinions, you should read this article.

Scott Dauenhauer, CFP, MSFP

Friday, November 04, 2005

High Gas Prices: Blessing in Disguise?

High Gas Prices: Blessing in Disguise?: The Future for Investors - Yahoo! Finance

I think you'll find this balanced article on oil prices and their long term affects to your liking. There appears to be a new trend in long term oil prices that underly Mr. Siegals assertions.

Scott Dauenhauer, CFP, MSFP

SNL Spoof On Brokers - Part II

You're gonna love this!

Scott Dauenhaeur, CFP, MSFP

Biloxi, Mississippi - The Katrina Bomb

As many of you know I spent a week in Mississippi during the month of October. My mission was two fold - repair damaged roofs and tarp them off and to "muck out" houses that had been flooded.

It was a tiring but rewarding week and my heart was warmed by the resiliency of many of these people in the midst of what could only be described as utter disaster. Most of the astonishing damage was done obviously in the coastal areas, and as you'll see when you look at my pictures it literally looks like an atomic bomb went off. Amazingly there were area's that were barely touched, but most people felt some effect.

The first day we helped an 80 year old woman who had lived in her house for 40 years. Our job: remove everything including the drywall, insulation, flooring, and ceilings. When we were finished the house was basically a frame and a foundation, nothing was salvageable. There was a pile of junk probably 16 feet high in her front yard awaiting to be hauled away. You'd think this woman would have been devasted, but she was very up beat and very kind to us. She made it her mission to come back to the house every day to feed a bird that had survived the storm. She was thankful to be alive. I doubt I would have had her attitude had the same thing happened to me.

On a funny note, her neighbor had just purchased a brand new large screen Plasma TV before the hurricane didn't survive, but we didn't have the heart to throw it in the junk pile!

It will take many years to clean up the mess and rebuild, but it will get done and probably quicker than most people think. We saw hundreds of relief workers in Mississippi working hard to bring back America to a place that had suddenly turned into a war zone.

I had a few new experiences as well....

I ate Fried Catfish for the first time
I ate Fried Dill Pickles for the first time
I ate a bunch of fried stuff that I didn't really know what was inside....hopefully for the last time!

That week in Biloxi taught me how fortunate we are, but it also assured me that if we experience a disaster in California (earthquake anybody?) that we will have an onslaught of Americans on our doorsteps ready to help us pick up the pieces and move on.

As a side note, the organization that I was working under was Samaritan's Purse, which is run by Franklin Graham (Billy Graham's son).

Please take some time to view the photos by clicking on the link above. There are a lot and some may not make much sense, I haven't had time to edit them....

Scott Dauenhauer

The Myth of the "Independent" Advisor


Prospect: Tell me Mr. Advisor, what makes you qualified to give planning advice and manage my money? Also, are you fee-only?

Advisor: Well, for one thing I am completely independent and I am fee-based. I don't work for any of those evil brokerage firms you see advertised on TV.

Prospect: Wow, let's get started then!


So this little parody is a bit over the top, but it is demonstrative of the sales pitch used by most registered representatives today. Everybody is using the term independent (and also Fee-based) to try to make them appear to be better than someone else. Now, I fully endorse trying to separate yourself from the pack, I do it myself, however when I state my credentials they are actually true. When most registered reps (term used to describe advisors regulated by the National Association of Securities Dealers) tell you they are independent they fail to define what independence means for them. The only true independent advisors are the ones who are Registered Investment Advisors and are fee-only (meaning their compensation comes from their clients directly). All others are basically charlatans if they represent themselves as Independent.

Why? As a registered representative you must affiliate yourself with what is called a Broker/Dealer (hereinafter referred to as a B/D). A B/D is basically an entity that provides oversight of other brokers, the technical definition is "any individual or firm in the business of buying or selling securities for itself and others." There are many types of B/D's, but in the most basic sense you have the big brokerage firms (Merrill, Morgan, Smith Barney) and the "Independents". They are referred to as independents because typically the registered rep is not an employee of the B/D (as they are at the big firms), they are separate businesses.

Despite the fact that they are separate businesses the registered reps affiliated with B/D's have similar restrictions as to what they can sell to you as the reps at the big brokerage firms. The main difference is that reps at "independent" B/D's get to take home a bigger chunk of the commissions they earn. In fact, that is the main difference (as it applies to the consumer). An rep at an "independent" B/D has the same restrictions on what can be sold, the same conflicts of interests, and the same regulatory structure as the big brokerage firms. Actually, the regulatory oversight is usually less at an indepedent B/D, thus you have more risk of being sold a bad product. Iindependent B/D's got slapped just as hard as the big brokerage firms in the "shelf space" scandal in which it was learned that big mutual fund and annuity companies paid the B/D's money so that their products would receive preferred selling status.

What you should know about reps who claim to be independent is that this basically refers to how they receive their commissions. They are independent because they are not an employee, though they are regulated much of the time as if they were. The main reason reps go independent is because they get to keep more of their commissions (I'm all for that). However, being independent does NOT mean they are unbiased, does NOT mean they will act as a Fiduciary, and does Not mean they are fee-only. I have seen more people hurt by the so called "independent" planner than I care to talk about. In the end most independents are about product sales.

You must ask yourself, do you want an Independent, or someone who will put your interests first? Actually you can have both. As a Registered Investment Advisor with no outside affiliations to pull my strings I can give unbiased, independent advice that is free of product sales and commissions. Make sure you know who you are dealing with and always ask as many questions as possible, especially if someone is claiming the term "Independent" as a credential.

Scott Dauenhauer, CFP, MSFP

Wednesday, November 02, 2005

Impact to Retirement Plans of New Roth 401(k)

The above link will take you to a summary of the study with a link to the full study. The study points to the Roth 401k/403b as a new benefit available for employers to adopt beginning January 1, 2006 and shows how it can benefit employees.

I believe the Roth 401k/403b is a great option for a lot of people, not just the highly paid. I think a new concept in investing is beginning to take shape, that of tax diversfication and the Roth is at the center of it.

Tax Diversification refers to diversifying your investments into accounts other than just pre-tax, tax-deferred options. You should aim to have money in tax-deferred accounts, but you should also try to accumulate money in tax-free accounts, such as Roth IRA's and 401(k)/403(b)'s, this gives you the ability manage your taxes better in retirement in order to minimize what you owe.

I have a few interesting strategies for the Roth 401k/403b for people who have inherited money or expect to inherit money in the future to take a look at.