Suze has done a pretty good job over the years of selling books and air time for CNBC, and  to give her credit, educating lots of folks with some fairly solid, generic advice. Key word here is generic. Her advice is not specific to you. And let’s face it, she is essentially an entertainer and author.

I’m hoping that readers of this posting don’t use debit cards, but I thought I would explain some of the basics…

1. Absolutely first on the list is the fact that a mistake or fraud with your debit card results in cash from your account, your cash, coming out. Even though there are protections against fraud, unauthorized use and plain old mistakes, the cash is still gone, and you have to deal with it.
2. Debit cards are a huge source of revenue for banks. Now, I am not against any money making enterprise, but you need to understand that debit cards are not provided out of the goodness of your bank’s heart.
3. Any card, debit or credit, tends to encourage spending. Bluntly, there is nothing like the emotion of crisp, fresh, hard-earned dollar bills leaving your fingers. You feel it more.
4. Pre-paid debit cards, like Suze’s, are laden with fees. Suze’s card is not too bad, costing you $3 to open, and $3 a month just to have. She does offer some type of credit protection and credit reporting, so for the thin-file or no-credit file users, her card could be helpful. Most other pre-paid debit cards will nickel and dime you out of your money.
5. Debit cards are a terrible way to pay for travel, rent-a-cars and the like because the acceptor often will place a hold on your cash for potential expense. For example, when you rent a car, you’re not really sure of the ultimate expense until you turn the car in and tally up all the incidentals, and the car rental companies know this and will protect themselves.

Pre-paid debit cards might make some sense for the millions of folks out there without a bank account. That’s about it. If you think a pre-paid debit card will help you, look to Wal-Mart as an alternative.

A secured credit card, one with low fees and a clear, written policy on when a standard credit card will be issued, is a better deal. With a secured credit card, you open a savings account with cash that secures the card use. For example, $500 in a savings account will get a $500 credit line. As you use the card and pay according to the terms, over time, say 6 months to a year, you will be able to qualify for a standard card and have access to your $500.

An even better deal, and one that makes the most sense for most of us, is a cash-back or rewards credit card. A good source for the best deals, and I prefer cash-back over airline miles or rewards, is Bankrate.com. And the best news for any credit card is any fraud or mistake is only a charge against an account, not cash missing of an account.

The best deal if you want to control your spending is cold hard cash. I make few guarantees, but one I do make is that spending cash will limit your spending. Every time.

Keep in mind the magic formula for generating wealth is not any type of card, product or device, but behavior. Yes, behavior. If your behavior is misbehaving, you’re in trouble no matter what you use.

I had a meeting yesterday morning with a friend. He wanted to learn more about my business, and see if it made sense for me to help him manage his accounts. One of them, a trust account for one of his two sons, was being managed by a full-commission broker. This broker managed to turn $9,000 into $3,000 in just one short year. Oh, and by the way, he charged $75 a trade, and traded frequently in and out of micro-cap positions, that is common stocks of very small companies.

I had coffee last week with a woman who was looking for a fee-only advisor. She told me about meeting earlier last year with two very nice and apparently capable guys, who she thought were fee-only. After 3 meetings and about 4 hours of her time, they finally suggested that she purchase a variable annuity. They were not fee-only. Fee-only advisors do not make any money from commissions or transactions.

I had dinner last year at my sister’s house. A friend from high school was visiting. She asked what I was doing now,  and came close to an audible gasp when I told her how I charged for my services and what my fees were. She told me that she paid her financial advisor just $100 the previous year. Her advisor is an insurance saleswoman at John Hancock, and my high school friend had no idea what she had in her portfolio or how much in commissions her “advisor” was making.

I met a woman earlier this summer. She is a widow. We were having a delightful conversation at a mutual friend’s home. She asked me what I did for a living, and when I told her she literally took a step back, away from me, and her entire demeanor changed to the negative. It seems that her “advisor” at the time of her husband’s death executed a couple of transactions that made perfect sense for him, but none for her…his client.

Do you see any pattern here?

The most important thing in choosing an advisor to help with your money is to ask questions. Detailed questions. Probing questions. Questions that uncover the motivations and compensation of the advisor. Questions that are critical for your well being…

1. How are you compensated. Are you paid at any time by a commission or other fee not paid directly by me?
2.  Are all forms of compensation and potential conflicts of interest disclosed in writing before the fact?
3. Are you a fiduciary? Are my interests placed ahead of yours?
4. Who will I be dealing with on an ongoing basis? How do you communicate with clients?
5. Can you tell me about some of your other clients? How do you help them and add value to their situation?
6. Will my assets be held at a third-party custodian? Which one? Can I use one of my choosing?
7. How do I cancel if I am unhappy? Are there any cancelation fees or redemption fees?
8. Can you explain your investment process? Your work experience? Tell me more…
9. Have you ever been disciplined by any regulatory or professional organization?
10. Do you have any professional designations?  What do they mean and what did you have to do to get them?

And, if after asking and getting the right answers, you find the reality is a bit different, run. Run fast and far. Never forget that it is your money. Yours.

You better understand what is what is going on…

It seems almost every day someone is asking me what I think is going to happen this year. Will the economy improve? How will stocks do? Is it a good time to buy gold?

I wish I knew. It is a tricky business predicting the future. No one knows what is going to happen this year (naturally, I have an opinion, and I’m going to make you read all the way through this post to get to it).

It’s fun going back in time to read what some economic forecasters thought 2011 would bring…

“Deflation will give way to inflation with sharp price increases across most key commodities”…sounded reasonable at the time, but utterly incorrect.

“The stock market will grind higher throughout the year, driven by government stimulus”…again, sounded reasonable, yet markets were essentially flat to slightly down.

“Mining stocks will perform much better than in 2010″…not!

To give this particular predictor credit, he states that his first prediction “is that my forecasting abilities will worsen each year…”

So, what is a person to do?

First and foremost, focus on your individual situation. Ignore the predictions, pay no mind to the media hype and buzz, discount what the experts suggest. In other words, mind your own business and understand just what you can control, namely how you think, believe and react. Because that is where your economic success will flow from. Not from Washington, not from Europe and not from China. From your thoughts.

Have too much debt? Make a plan, write it down and live on less than you make. Be uncomfortable for a while…you’ll never, ever go back in debt.

Want to make more money? What can you read, what course can you take, which coach can you hire to improve your abilities and skills? How far are you willing to venture outside of your comfort zone? Write down your ideas and create a plan.

Want to start your own business? Are you sure? Plan on half the expected revenue and double the expected expense. But go for it if it is your vision and purpose. Write on paper how your new business will work, where your customers will come from, and how you will handle the money part. But first, buy or borrow The E-Myth Revisited.

Want to improve upon your investment returns? Write down on paper before you buy or sell, why am I buying and why will I sell. Treat investing  like a business, and write an investment strategy that matches your objectives and time horizons.

Want to achieve something specific? Have a goal? Write it down, assign a time line for achievement and describe how you will go about accomplishing your vision.

Notice that the above all involve something written. A written plan is a valuable and essential tool for success. It keeps you on track and helps deny any unproductive emotion. If you intend to do something, write it down.

Now, what you all have been reading towards…at the end of 2012, it is my prediction that I will say:  “Wow, I didn’t expect that…”

And so I reflected a bit. Though I have had many challenges this year of 2011, I am happy, healthy and living life each day. There are many that care for me, and most of those I care for are doing well.

My business is helping folks plan for the future. I believe a plan is essential for making the most of what we have right now, and feeling comfortable about what may or may not occur in an unknown future. I find more and more, however, that I am focusing on helping my clients get more out of the present. To realize the blessings they have, and to stay flexible with their plan.

My wish for each and everyone one of you is just that:  live in the present and enjoy all the little pleasures that come your way, have a plan for the future and keep it flexible.

Merry Christmas…

Do you think there is more to The Buffett Rule?  You know the one. The one that President Obama has been touting on his jobs-bill  crusade. The one where Warren Buffett thinks it is unfair for him to pay a lower tax rate on his income than his secretary.

Well, I’d like to dig a bit, open the hood and have a generous look-see at the numbers behind Mr. Buffett’s claim and President Obama’s rhetoric…

First, a couple of definitions:

1. Earned income is income a person earns from labor, work, enterprise. Typically, it is reported on a W-2 statement or a 1099. Earned income is taxed at what is referred to as ordinary income tax rates, which ranges today from 10% to 35% depending upon how much you earn. It is a progressive tax in that the more you earn, the higher the tax rate on those last dollars of taxable income. (Interest earned is also taxed at ordinary income tax rates)
2. Investment income is income earned from investing activities. Typically, it is from investments in capital assets like real estate and stocks. Capital assets held longer than one year are subject to long-term capital gains tax rates, which, again depending upon your taxable income, will either be 5% or 15% of the realized gain. ( Capital assets held less than one year that sold for a profit are considered short-term capital gains and are taxed as ordinary income)

Warren Buffet makes most of his money from long-term capital investments. His secretary makes most of her money from working for Berkshire Hathaway. So, he is technically correct that he pays a lower tax rate than his secretary. But, there are some things he is leaving out, things that opening the hood and looking around with a flashlight will reveal.

Where did Mr. Buffett get the money to invest? Where did it come from? At some point, he had to earn it. And pay ordinary income taxes on it.

Let’s say that Warren earned $1000. Let’s say that his tax rate for those earnings was 25%, and he paid $250 in income tax to the government. That leaves Warren with $750 to invest. Following so far??

Warren then takes his $750 and invests it in ABC, Inc. After one year, his $750 investment is worth $1000. He sells his investment for a $250 profit, or gain. That $250 gain is subject to the long-term capital gains tax rate of 15%. So, Warren owes the government $37.50. Which means that Warren’s original $1000 that he earned has now been taxed twice, once at the ordinary income tax rate and again at the long-term capital gains tax rate. At this point, he has paid some $288 in taxes to the government, or almost 28%. Not just 15%.

You know that Warren Buffett is going to reinvest his money, right? Then what happens? He holds the investment for at least a year, sells it for a profit, realizes a gain and a new tax. His original $1000 is taxed yet again. And again.

How about another angle of view? Let’s say that Warren doesn’t sell his investment, but keeps it for a while. He does receive a dividend payment of $100 on his investment in ABC, Inc. (A dividend is an owner’s share of profits that the company doesn’t need for operations or other investment). That $100 dividend is also subject to a long-term capital gains tax rate of 15%. But, ABC, Inc. had to pay corporate income tax on its earnings before it could ever declare the dividend. Let’s say that ABC earned $200. It has a corporate income tax rate of, say 25%, (corporate income tax rates are progressive, just like ordinary income tax rates, and range from 15% to 38%. Unlike what you may believe, most companies pay corporate income tax). Of the $200 earned, ABC gets to keep $150. ABC then pays a dividend to its shareholders of $100, that will be taxed at 15% on the shareholder level as capital gains. But, as you already know, taxes of $50 have already been paid, meaning that of the original $200 earned, the government gets $65, or 32.5%.

One last angle of view. Capital gain income is not indexed for inflation. Let’s say that Warren buys a capital asset and holds it for 10 years. He doubles his money over that time, growing $1000 to $2000. Unfortunately, inflation has been growing at around 2% a year. So, he really hasn’t doubled his money…his $2000 is only worth $1630; a 7% return has just been knocked down to a real 5%. But, taxes are due on the inflated value. Warren is paying taxes on some $400 of phantom value.

There are reasons why investment income is subject to different tax treatment. I’m not saying those reasons are right or wrong, only that they have been left out of the national conversation. And when it comes to numbers, and actually most anything, never, ever  accept at face value what someone is telling you. Look under the hood. From different perspectives and angles of view. Like my father warned me many, many years ago, in skilled hands numbers can tell any story.

But how?

Many have tapped out or drawn down cash reserves, and few assets are worth selling at today’s depressed prices. So, where to find the cash to take advantage of low, low prices for homes…

How about your IRA?

But not in the sense that many purveyors of self-directed IRAs would have you follow. No, not at all.

Why, you ask?

Many reasons. The first of which involves the numerous tax advantages rental real estate affords. Tax advantages like depreciation. Like capital gains tax treatment for property held longer than one year. Like certain losses offsetting certain gains or other income. All of those tax advantages disappear inside of an IRA. And any tax deferred money coming out of an IRA will be taxed at ordinary income tax rates, regardless of income source.

Next, since the property will be titled in the name of your IRA, not you personally, you can forget about securing any loan for the real estate. No bank will lend to an IRA.

And third, you must maintain funds in the IRA to pay for taxes, maintenance, casualty losses, etc. Often, the etc. is what does you in…

Bottom line, if you want to own real estate inside of your IRA, the only thing that makes sense is raw land. There’s no depreciation, no casualty losses, no maintenance. Just property taxes.

So, what might make sense for rental property? If you want to be a landlord, have some experience with rental real estate, the ownership of rental property fits within your portfolio strategy, and you have the income and assets to qualify for a loan…buy the property personally. You can peel off a portion of your IRA into a rollover IRA, one with enough assets to pay the note on your personally held bank note, and set up what is called a 72t election to take a series of equal periodic distributions from your rollover IRA completely penalty-free.  Tax, of course, will be due, but you can offset the tax due from the IRA distribution with the depreciation, interest, maintenance, etc. for the rental property.

This is not a strategy that fits everyone. But, it might fit you. Want to learn more? Absolutely consult with your tax advisor before jumping in. And be sure you are jumping in the deep end and not the shallow end.

Is it safe?

With stock prices  still inflicting daily pain or joy, much like Sir Laurence’s dental pick or camphor, I bet many of you are asking that very same question today. Is it safe to buy stocks? I bet you would love to know the answer…

Well, as always, it depends upon your situation, objectives and tolerances. I think for some the answer is yes. For some, the answer is no. For me, I am adding to some of my positions. And adding to positions for some of my clients. And, I am in the enviable position of having two new clients with nothing but cash, money received from a divorce settlement…it’s a bit like being a kid in a candy shop, as both have at least 15 years before either one plans on needing this money and there are what could be some very promising buys on good companies.

Here are 5 individual companies and 3 exchange traded funds that might make sense for you. Might…

Teva Pharmaceuticals, TEVA, is an Israeli based company. It is the world’s largest generic drug manufacturer. Teva has operations in 60 countries. The stock is priced at around $39.00 per ADR, American Depository Receipt, down from a high of $57 about a year ago.

Balchem Corporation, BCPC, is a relatively small company based in New York State. It is  a specialty chemical processor engaged in the development, manufacture and marketing of ingredients and products for the food, nutritional, feed, pharmaceutical and medical sterilization industries. The stock is currently priced around $39 a share, down from a fairly recent high of $47.00.

Danaher, DHR, is essentially a serial acquirer of companies. It has been compared by some to Warren Buffet’s Berkshire Hathaway. Started by brothers Steven and Mitchell Rales back in the 1980s and named after the Danaher River in western Montana, company management is meticulous about operating details. The stock is priced around $42 a share, down from $56.

Novo-Nordisk A/S, NVO, is a Danish pharmaceutical company. It has been around for some 90 years, and is a global leader in diabetes care. The stock is priced around $100 per ADR, down from a high of $134.

Arcelor Mittal, MT, is a global steel and iron producer originally founded in Calcutta, India in 1976 by Lakshmi Mittal.  It is now based in Luxembourg, with steel-making operations in 40 countries spread across the Americas, Europe, Asia and Africa. It is selling for $20 and some change per ADR share, about at levels seen in March of 2009, the bottom of the stock market plunge, and down from a high of $39 as of last December.

Power Shares FTSE RAFI US 1000, PRF, is an exchange traded fund that mirrors the Research Associates Fundamental Index of the 1000 largest companies in America. It is selling for around $51, down from $61.

Vanguard Emerging Markets ETF, VWO, is a low-cost exchange traded fund that mirrors the MCSI Emerging Markets Index. The price is $41 and some change, down from $51.00.

Vanguard Europe Pacific ETF, VEA, is a low-cost exchange traded fund that mirrors the MCSI EAFE Index, which includes common stocks of some 22 countries in Europe, Australia , Asia and the Far East. It sells for close to $33 a share, down from $40.

The best time to buy stocks is when others are selling. One of the world’s most savvy investors, John Templeton, rightly said, “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” I have no idea if this is a bottom, if more pain is coming. But I certainly know that it’s not euphoria.

I own positions in all of the above for either myself or my clients, along with a widely diversified portfolio consisting of primarily low-cost index-oriented funds. I don’t suggest or recommend that the above companies are or may be suitable for you. Check with your own financial advisor before making any purchases or sells. My purpose here is informational only.

Happy hunting.

Run through these few income tax items with me to help ensure you will pay as little as possible next April…

1. Do you have a flexible spending account, FSA, at work? Any money left in it? Or have you overspent? Take a look see at your balances and make plans accordingly, either to put off expenses until after January 1st, or speed up next year’s expenses to take advantage of this year’s deductions.
2. If no FSA, how are doing on medical and dental expenses? You can deduct these expenses, which include a bunch of items and services, that exceed 7.5% of your adjusted gross income. If you haven’t spent much this year, you may want o to put off until next year what you can. And vice-versa.
3. Now may be great time to fund a Roth IRA. Stock prices are depressed, and the earnings inside a Roth will never be taxed.
4. Ditto for a traditional IRA. If you have the money now, go ahead and contribute. Stock prices may be lower next April, but they might also be higher. As a rule, make IRA contributions every month, not just in April.
5. How about any charitable contributions? Like IRAs, it is helpful to you and the organization to make them monthly.
6. Need any energy saving appliances, windows or doors, or insulation? Or how about a new hybrid or electric car? Might make sense to get them this year and take the state and federal credits allowed.
7. How’s your income going? If you are self-employed or have any self-employment income, you can set up a retirement plan that suits your particular situation to shelter some of your income, and have the opportunity to deduct a variety of business-related expenses.
8. On the other side of this coin, many are taking early withdrawals from retirement accounts to close the gaps in personal budgets. Early withdrawals are subject to ordinary income tax plus a 10% penalty.
9. Any one go through a short sale this year? Some come with forgiven debt, which translates to income, and income taxes, for the IRS. Find out now.
10. If you have any capital losses, it might make sense to sell some stocks with a gain to offset those losses…maybe, or maybe not, but take a look now before the end of the year.
11. Divorcing? If your divorce is final on December 30th, you are considered divorced for the entire tax year. Ditto for having a child or adoption…a child born or adopted before January 1st gets you an entire year’s dependent exemption. Sometimes you can’t plan a baby, but you can plan a divorce settlement.

There are plenty of tips, most dependent on your own particular situation. One the best that applies to everyone…get and keep your paperwork in order. It will be much easier come tax filing time. And don’t wait until December 30th to do your year-end tax planning. Do it now.

The Dow Jones Industrial Average, a price weighted average of 30 US companies, has fallen by some 15% in the last 3 months, more than 10% since the beginning of the month, down around 600 points on Monday, up then down then up over 400 points on Tuesday, down over 500 points yesterday and back up over 400 points today. What is a rational investor to think?

There is only one thing to think, one thing to learn, one fact to take away…markets are not rational. Let me repeat, markets are not rational. Markets are driven by people, and people are emotional beings. Subject to herd mentality and bouts of irrationality. Fear and greed. Perhaps markets are efficient over the long term, that is priced correctly, but certainly not over short time horizons.

Can you find some way to take advantage of human irrationality? To actually make money in a market like this? Two suggestions:

First, if you have a strategy, a process, are paying attention and can keep your mind about you by not following the crowd and succumbing to fear or greed, irrationality can be your friend. Great volatility provides opportunity to buy or sell stocks or funds for a profit. In today’s market, you need to be on the lookout for bargains. Look at the fundamentals and valuations.  Look for stocks priced cheaper than the intrinsic value of the company. Surely, easier said than done, but there are some genuine opportunities to either purchase good stocks at a good price (and don’t confuse a good stock with a good company…not always the same), or add to your existing good stocks or funds. In a falling market such as this, one consumed with fear, buying can take some guts. Remember, any buy or sell must be a part of an overall strategy, a process. It must be a business decision.

Second, for some a Roth conversion might make a lot of sense. To refresh you, a Roth IRA is a tax advantaged account that is funded with after-tax dollars. The great beauty of a Roth is that the earnings are never taxed. A conversion occurs when you move money from a  traditional IRA to a Roth IRA. This triggers a taxable event, and taxes will need to be paid at your ordinary income tax rate on the amount converted. But, let’s say you have an IRA that was worth $50,000 this past May. It is now worth around $40,000. A conversion will only create a taxable event on the $40,000 value, not your previous $50,000 value. And at some point the Roth will gain value back to the $50,000 level, saving you income taxes on $10,000. That gain back to somewhere around fair value is completely tax free. And if Mr. Market is stubborn and still forgets to take his meds, you have until October of 2012 to change your mind if you need to. This is called a recharacterization. A recharacterization is a process where you undo a Roth conversion or contribution and can be performed as late as the IRS will allow to file a tax return, which with extensions is October 15, 2012.

What’s the one fact you are supposed to take form this? Markets are not rational, and opportunities abound in irrationality.

Momentum is a powerful force in the stock market. Once it gains a foothold and traction, it will typically rise a stock or asset class higher than it should go, or drop a stock or asset class lower than it should go. We are now witnessing downward momentum. In a big way. Fear and pessimism has gripped the market, or more precisely traders and investors, like a cold dread, with hand-wringing anxiety. Keynes’s haunting refrain lingers in the air:  “Markets can stay irrational longer than you can stay solvent.”

So, what is an investor to do?

First, don’t panic. Don’t succumb to the fear. Don’t glue yourself to the TV or your iPhone to catch every nuance of CNBC. Control what you can and do your best to ignore what you can’t. This won’t last forever.

Second, do evaluate your strategy. Does it still make sense? Do you have sufficient cash and safe savings to ride out a storm? Consider selling some or parts of your weaker or lesser quality holdings. Remember that markets do this; it’s part of investing…stocks don’t travel in straight lines. But they do trend up over time, so be sure your stock holdings are for longer-term time horizons and don’t worry.

Third, salivate a bit. Every serious and experienced investor will have a stash of cash for such an opportunity. The real question now is , When to buy? No one can really answer that question, but in a full-fledged panic and strong downward momentum, wait until surprise has passed, wait until anger has passed, wait until despair has passed, wait until investors are wrung out and just don’t care anymore. Then look for the tasty and tantalizingly cheap high quality companies you have waiting to buy, or add to your existing high-quality companies.

Fourth, remember every get-out-of-the-market decision is actually two decisions:   At some point, you have to decide when to get back in. And for many of us, we get both decisions wrong. I know folks that got out of the market too late, like February or March 2009, and then bought back in, full of optimism, in March or April of 2011.

I don’t care how experienced an investor anyone is, it hurts to lose money. Anytime. It’s bad enough when we as individuals do something stupid, but it’s truly galling when other forces, such as the ineptitude and arrogance of politicians, roil what could be and should be a good time. If you find yourself sliding down a hole of darkness, ask yourself:  Would Warren Buffet be selling now? How about Clark Howard?

This is all easy to say. But, if your strategy is sound and you can think through tactical corrections and be flexible without fluster or losing control, then stay with your plan. You will get to where you want to go.

Not to suggest that too many of us are weak-minded, but too many of us do stupid things with our money. Why?

The July 2011 issue of  Money magazine had a feature story  titled, “Keeping The Sharks At Bay“. Unfortunately, it is not available on the web, or else I’d include a link because it’s worth reading. The feature starts off with the sad tale of 79 year-old Art Tener, a retired service scheduler for a Northern California auto dealer. Lucky Mr. Tener had made a new friend. His new friend escorted him to meals and museums and the like. Turned out that the new friend was an insurance salesman. He suggested that Art take a look at a new deferred annuity. Never mind that the this fabulous new product tied up Art’s money for up to 16 years, or that Art had a terminal illness that would likely end his life within 2 years, or that Art had to pay $11,000 in penalties out of the $113,000 he rolled from an existing annuity. You see,  Art was worried about how he might pay for nursing home care for his wife, who was afflicted with Parkinson’s disease. He was led to believe that the new annuity would help. It did not, and because of huge surrender fees built into the new annuity that essentially handcuffed his money, “instead of enjoying the last nine months of his life, he didn’t have $100 to spare.“

I have a relatively new client with a similar but much better ending story. She met an experienced and charismatic  insurance salesman who sold her a variable deferred annuity to fund a Roth IRA. Like Mr. Tener, the annuity was wholly unsuitable for her situation, was subject to significant surrender penalties and included high management expense. To add insult to injury, a Roth IRA is already a tax advantaged account. Why on earth would anyone put a variable annuity, which provides tax deferral on earnings, inside a vehicle that provides complete tax freedom on earnings? Luckily, there was not a lot of money involved, so not too much harm or foul, just a little bit dumb tax.

Much too often, many of us are unwilling to do the heavy lifting of managing our affairs prudently and asking the difficult questions. Bluntly, we love quick fixes sold with pleasing conversation and pearly whites, just sign here for all this to go away. The Force, or perhaps more appropriately The Dark Side is at times irresistibly seductive. We want to believe.

Believe me, most people selling a financial product of any kind need mindful scrutiny. Always. And most permanent insurance products and/ or variable or deferred annuities are not suitable for but a select few, typically for folks with high incomes well into six-figures or with a particular situation that can only be solved with insurance.

I wish I did know a good joke about the credit rating agencies. Lord knows most of us could use a smile these days. Speaking of these days, it seems that most every other day or so a new headline screams, “US Debt To Be Downgraded” or “Rating Agencies Take a Closer Look At Greece”. Just who does this “downgrade” or “takes a closer look”?

Moody’s Investors Service, Standard & Poor’s and Fitch Ratings are the big kahunas of corporate or government  creditworthiness in America. All are private, for-profit  companies (Moody’s is the only publically traded company, and trades on the NYSE under the symbol MCO. It was a favored holding of Warren Buffett), and all began their business in the early 1900s. John Moody was first, setting up shop in 1909 and analyzing the stocks and bonds of American railroads.  Poor’s Publishing was next in 1916, and Fitch came in third in 1924. Moody was the one to initiate the use a letter grade (A, B, C and so on) to describe the overall credit worthiness of a particular security, company or institution. Designations today are typically AAA, AA, A, or Aaa, Aa, A and so forth…once a rating gets below Baa or BBB, that security becomes non-investment grade or “junk” or “high-yield”.

In the early days, the credit rating agencies charged the investor for their research, and business grew slowly but steadily. With the stock market crash in 1929 and the ensuing Great Depression, financial regulation became the order of the day, and regulators increasingly came to rely upon the three to evaluate the health of banks and other “of interest” entities. So, name recognition was enhanced for the trio, as was profitability.

With the economy stabilizing in the post WWII era and beyond, the profiles, and profits, of the big three diminished, until federal regulators once again rode in to the rescue. In 1975, the SEC, The Securities and Exchange Commission, established “NRSRO”, or Nationally Recognized Statistical Rating Organizations. A NRSRO is a credit rating agency that the SEC permits other financial firms to use for certain regulatory purposes. In other words, the opinions of credit rating agencies with such a designation satisfy various regulatory conditions for bank and broker-dealer net capital requirements, certain bond issuances, insurance company strength, safety of money market funds and on and on. Initially, there were seven NRSROs. Over time, that number dwindled down to three in the early 2000s. Today, there are ten.

Coincidentally, as the NRSRO designation became significant for continued commerce and profitability, the business model of the big three changed. It went from investor pays to issuer pays, setting up a potentially huge conflict of interest. In more definitive words, the very firms that paid for the rating were dependent on that rating. Naturally, this wasn’t any big deal until of course it was. The 2007+ financial meltdown was in part precipitated by the bid three’s blessings of AAA status of what is now considered to be toxic mortgage assets, and brought the conflict of interest into the public spotlight.

What’s more important here, at least to me, is that the credit rating agencies, like most other seers of the future, look into the rear-view mirror in order to predict the future creditworthiness of various institutions. When you combine their back seat vision with their primary profits coming from the very folks they judge, their judgments become quite suspect. So what does this mean for you? For us? Will a downgrade of US debt obligations spell the end of life as we know it?

Probably not. To be sure, three lesser known credit rating agencies, one with NRSRO status,  have already downgraded US debt, with little or no impact.

So what will keep us afloat? Bluntly, most any fool can see that US debt is out of control and not likely to end well. Hopefully, it will. The bright side of where we are can be compared with the Willie Sutton maxim, “Why do you rob banks? Because that is where the money is.” For our particular situation, “Where will the world borrow?”  America, because that is where the money, still the best opportunity on the planet, is. And that, despite our politicians best efforts of late,  is not likely to change for some time.

Most people think that when they buy an fund that tracks the S&P 500 they are well-diversified and equally invested among America’s 500 largest companies. But that is not quite the case. The top 50 companies, or 10% of the index, represents over 50% of the index concentration, and the top 100 companies represent over 67%. The bottom 100 companies represent less than 5%, and would have to move more than 20 times the movement of the top 100 to have the same impact on the index. So, as it turns out, the S&P 500 is more of huge company index comprised of around 100 huge companies. And that’s okay if that is what you want. In truth, market capitalization weighting has an inherent bias that tends to give too much weight to the largest and at times overpriced securities and too little weight to smaller and at times underpriced securities. And this tends to perpetuate the unprofitable behavior of most investors to buy high and sell low.

What are the alternatives?

One alternative is an equal-weight index, where all components have the same representation within the fund. Such a fund was introduced in 2003. The Rydex S&P 500 Equal Weight EFT, RSP, has well-outperformed the market-weighted S&P 500, gaining around 80% vs. 40% , over the past 8 years. Of course, 8 years is a relatively short amount of time to judge the soundness of a particular strategy and past performance is not indicative of future results, but so far so good.

I think it gets even a little better. Introduced in 2005 is the fundamental index. Fundamental indexing was developed, tested and put into practice by Rob Arnott and his firm Research Associates. Fundamental indexing weights the individual companies of an index not by size and not equally but by various company fundamentals such as cash flow, book value, dividends and sales. It is in essence a value-weighted index. During test runs, it beat the S&P 500 by some 2% a year over a 43-year time span,  and advanced at an annual rate of return of some 5.3% from inception at the end of 2005 through May of this year vs. 3.2% for Vanguard’s S&P 500 Index fund. Now that is potentially huge over the long term, and several players such as PowerShares, Schwab and Fidelity have introduced funds that track or mimic Arnott’s RAFI indexes. And why not…smaller company and value oriented portfolios have outperformed larger company and growth oriented portfolios over time. Not year in and year out, mind you, but over time.

What does this mean for you? Perhaps nothing. Maybe something. Hopefully, you have learned a bit and will want to learn more about what is really in your portfolio and whether what’s there is working for your objectives. I like equal weight and fundamental weight indexing. Though they typically carry somewhat higher expense ratios than the traditional market cap weighted index fund, I think they are worth it. If you are interested in learning more, be sure to ask your advisor about the suitability of equal weight and fundamental weight indexing for your particular situation.

Let’s start off with Tom Candiotti. After a 17-year career as a pitcher for major league baseball, he found himself on the short end of investable assets, that is cash and fairly liquid securities, and two young-ish kids to deal with and get though college. Enter retired fellow big-leaguer Todd Stottlemyre, who just happened to have passed his state insurance exam and was now an employee of venerable Merrill Lynch. Stottlemyre convinced Candiotti that Merrill had the perfect product to solve his concerns…

What Stottlemyer and a Merrill insurance and wealth planning specialist pitched was an $18M Variable Life Insurance policy. Actually, the pitch was two policies:  one with a $17M face value and the second with a $1.35M face value. Now, a variable life insurance policy is a form of permanent insurance. Inside this type of insurance are a few moving pieces:  First, there is the death benefit portion, or face value, that is paid out upon eventual death. Next, there is an investment component with an expected accumulation of cash value, which can be borrowed from the policy. Then, there is the  ”variable” part, which means that the returns on the investment portion can vary…hopefully, these returns will somewhat mirror the brochure illustrations, but there is no guarantee of that.

At the time, Candiotti was making around $170,000 a year as a broadcaster for the Arizona diamondbacks. No way could he afford the premiums on $18M+ of life insurance. To make all this happen, Merrill enlisted the help of a company called AI Credit. AI would finance the premium payments, allowing Candiotti to get the policies for no money down. According to the policy illustrations (which are just that…illustrations and not fact), the investments inside the life insurance policies would generate enough income to pay off AI’s loans. Of course, the loan repayments would deplete any cash value in the policies, but Candiotti would be left with some $18M of death benefits, in force for the rest of his life.

As any of you can guess, this tale doesn’t end well for anyone. Stottlemyer states:  “My job was to put the firm’s (Merrill) specialist in front of the client.” Candiotti says, “I didn’t ask a lot of questions because I just trusted him (Stottlemyer).” Merrill pushes the can along with:  “…(We) encourage clients to seek input and involvement from outside, independent advisors in those strategies.”

Not all insurance is bad; there is a place for variable life insurance for some. And not all insurance salespeople are unsavory. But virtually all insurance salespeople earn their income from the commission on the products they sell. And any salesperson will look for an edge to exploit or to lever their prospecting. That’s why they love affinity marketing. Finding some common bond or connection that to one degree or another ties completely independent individuals together is a great introduction. Don’t think you have  to be someone famous or wealthy to fall for an affinity scheme. Some of the more common affinity ploys come in the form of church or pastor introductions, and involve relatively small amounts of money. Just stay aware and be wary. Remember it’s your money on the line.

No one ever knows the future. You hope for good times, but need to plan for, or at least contemplate, the inevitable bad times. A tragic case in point, one that is certainly an extreme, is the sad tale of a Indiana family who, like lightening striking twice in same spot, suffered two individual plane crashes 8 years apart with the same pilot flying either to or from the same vacation home located in northern Michigan.

The second crash happened last Friday. Dr. Stephen Hatch, an experienced and avid aviator,  was piloting his single engine Beechcraft Bonanza to the family get-a-away on Walloon Lake in northern Michigan. Dr. Hatch, his second wife Kim and one of the family dogs were killed in the crash. Amazingly, Dr. Hatch’s son, 16 year old Austin, and his dog Brady, a white-colored Labradoodle, survived the impact. Even more amazing, Austin survived a similar plane crash 8 years earlier, on a return flight home from the same family vacation home. In that crash, his mom, 11 year old sister Lindsay and 5 year old brother Ian were killed. His dad escaped with treatable burns, having thrown young Austin from the burning plane as it skidded to a halt after clipping a utility pole just short of Fort Wayne International Airport in September 2003.

Like so much of reality, you just can’t make this stuff up. In the wise words of Tom Clancy, “The difference between fiction and real life is that in fiction the story ultimately has to make sense”.

I view my job as one of a risk manager of individual lives. I try to understand and measure different risks that can harm my clients. Try as I might, I doubt I would have ever seen the above. Most of time, we just have to take what life gives us, make the most of it and remember the everyday little blessings we enjoy.