Sunday, May 31, 2009

Bogle on Ethics

John Bogle, the founder of the Vanguard Group, is one of the grand old men of the mutual fund industry, so when he speaks, as he did last week at the annual Morningstar Investment Conference, people pay attention. As beaten-down and battered as mutual funds have been, of course what everyone wanted to know was how the industry was ever going to recover. Bogle's prescription: Tougher ethical standards.

"There are some things that one just didn't do," Bogle said. "That's the way I was brought up. It was black and white. Now, ethical standards seem to be 'if everybody else is doing it, I can too.'" He was talking about the way the fund industry, and too many other investment professionals, have been selling dubious subprime mortgages and derivatives so confusing even Wall Street's rocket scientists didn't fully understand them.

Bogle also blamed the hectic trading pace of some professionals for slicing off ever more of investors' money to Wall Street. He noted that a buy-and-hold investor will keep nearly 100 percent of his or her earnings, as opposed to a more active trader who ends up paying fees constantly.

I would add that ethical behavior itself is a long-term strategy. Poor ethics will always, sooner or later, catch up with you. Shady operators can cut corners to try to make a few extra bucks, but if you are in this for the long haul, as I am and my clients are, there is no substitute for honest aboveboard behavior.

Friday, May 29, 2009

A Lesson from the Godfather of Soul

James Brown, the Godfather of Soul, died two and a half years ago, on Christmas Day 2006. But his estate wasn't settled until this week, when his surviving widow and six children agreed on how to divide up his remaining assets and, more importantly, income from future sales of his records and uses of his likeness.

Brown did some reasonable, prudent planning for his heirs' future. For instance, he had set up a trust to help pay for his grandchildren's education.

But there was one big mistake he made: After marrying for the final time in 2001, Brown neglected to update his will and other documents to reflect that. The courts don't look too kindly on widows being left with nothing in their husband's will. It took two and a half years to unwind that little bit of unfairness.

Brown's case is a useful reminder that your life situation is changing all the time, and so must your estate planning. If you have any concerns at all that your will or estate doesn't reflect your current situation, please give me a call so we can review it.

Thursday, May 28, 2009

Trouble at the Bank

The FDIC has just released its latest assessment of the number of banks it considers in trouble, and it's a record: There are 305 American banks that are thought to have serious financial troubles or problems with management that might threaten their continuing operations.

This figure isn't exactly good news for the American economy, but again, there are some caveats. (The FDIC doesn't release the names of the individual banks for fear of causing runs at any of them.) For one thing, as with a lot of these newly released figures, they are old: this is the number for the first quarter of 2009, which ended in March. Thirty-six banks failed in the first quarter, and all of them were presumably troubled, so we can subtract those from the overall figure.

But that leaves 269 troubled banks, which would still be a record. And the number of assets controlled by those banks is up to $220 billion, whereas it was a mere $159 billion at the previous report. That suggests that more large banks are facing trouble.

The banking sector is uniquely significant to our economy. We need to see a drop in these "troubled bank" figures before we can be sure we're on the road to recovery.

Wednesday, May 27, 2009

Reading the Credit Card Bill

The Library of Congress has compiled a quick list of the most important aspects of the Credit Card Bill that passed the Congress and was signed into law by President Obama last week. Here are some of the ramifications that might affect you:

* Creditors cannot increase the annual percentage rate (APR) during the first 12 months after a cardholder opens an account.

* Creditors must provide consumers with a 45-day advance notice of changes in rates and significant contract changes, not including changes resulting from a change in the index that the rate is based on.

* Promotional rates need to be in effect for at least six months from the beginning date of that promotion.

* Creditors are prohibited from providing credit to people under 18, unless their parent or legal guardian is designated as the primary account holder.

* Creditors are prohibited from opening a credit card account for any college student who does not have any verifiable annual gross income or already maintains a credit card account with that creditor.

A full list of the bill's impact on consumers, in clear, comprehensible English, can be found here.

Monday, May 25, 2009

The Oracle of Omaha Speaks

Warren Buffett lost $25 billion from his net wealth last year, according to Forbes magazine. Losing that much money might put a dent in the household budget for someone like you or me, but it really wasn't all that significant for the Oracle of Omaha. Consider that his investment vehicle, Berkshire Hathaway, had some $44 billion in cash lying around at the beginning of last year, waiting to be invested.

Buffett held his annual shareholders' meeting for Berkshire Hathaway's investors earlier this month in Omaha. As always, he took some hard-earned wisdom and offered it up in a way that made it seem both obvious and profound. Some sample quotes from this year's performance:

“If you need to use a computer or a calculator to make the calculation, you shouldn’t buy it.”

“Leverage is what causes people real trouble in this world. You don’t want to be in a position where someone can pull the rug out from under you or, emotionally, where you pull it out from under yourself.”

“If you have a 150 I.Q., sell 30 points to someone else. You need to be smart, but not a genius.”

"Stocks go up and down; there were three times before when Berkshire shares went down more than 50 percent. This country will do wonderfully over time; it always has."

Sunday, May 24, 2009

A Thought for Memorial Day

"I have never been able to think of the day as one of mourning; I have never quite been able to feel that half-masted flags were appropriate on Decoration Day. I have rather felt that the flag should be at the peak, because those whose dying we commemorate rejoiced in seeing it where their valor placed it. We honor them in a joyous, thankful, triumphant commemoration of what they did." ~Benjamin Harrison, America's 23rd President. Memorial Day was known as Decoration Day until after World War II.

Friday, May 22, 2009

Looking Backward

The story in yesterday's Wall Street Journal looks pretty dire: World Economies Plummet! Steep declines in the economies of three of the U.S.'s biggest trading partners!

But let's take a closer look: the story focuses on reports of shocking declines in the economies of Mexico, Japan and Germany. Those nations posted their worst quarterly declines in anywhere from 14 years (for Mexico) to 44 years (for Japan). Mexico's economy contracted at an annualized rate of more than 20 percent.

All that news results from the economic figures being posted for the first quarter of 2009. So these drops aren't something that those countries are living through right now; they reflect their economic performance through the end of March.

We already knew that the world economy was in serious trouble in the beginning of this year; the WSJ article simply confirms that. It doesn't say anything about what's been going on in the world economy in the past couple of months. Whether or not the Japanese and German economies have rebounded yet is something no one knows.

Remember, economic statistics are mostly backwards-looking. Most of the reports you see in the papers concern things that have happened in the past.

Thursday, May 21, 2009

Small Banks to the Rescue

There was another article in this weekend's New York Times that I found fscinating. This one was in the magazine, and concerned the health of smaller banks around the country, which have weathered the financial crisis much better than behemoths like Citigroup.

The story focuses on MidSouth Bank, based in Lafayette, Louisiana. MidSouth is so strong that it's taken out billboards around Louisiana announcing "We have $200 million to lend." Their problem is that they can't find anyone to lend it to - businesses are too wary of the economy to go heavily into debt.

This story points out a way that we might emerge from this downturn. Everyone understands that a big part of the recovery is getting the credit markets moving again, so businesses can grow and new businesses can start and people can find work again. But when they hear about the troubles at the major lenders like Bank of America and Citigroup, it's hard to see how we'll lend enough money to resurface.

Maybe it's banks like MidSouth that will pull us out of this. And maybe it's America's smaller cities that will create the companies that lead the way.

Wednesday, May 20, 2009

The Recession in Historical Terms

We mentioned the other day that the current recession has now been in effect for 18 months, having begun back in November 2007. That's pretty lengthy, as recessions go. In the postwar period, here are the dates and lengths of the previous times when America's economy has been in recession:

November 1948 - October 1949 (12 months)
July 1953 - May 1954 (11 months)
August 1957 - April 1958 (9 months)
April 1960 - February 1961 (11 months)
December 1969 - November 1970 (12 months)
November 1973 - March 1975 (17 months)
January 1980 - July 1980 (7 months)
July 1981 - November 1982 (17 months)
July 1990 - March 1991 (9 months)
March 2001 - November 2001 (9 months)

So you can see, we've already endured the longest American recession since World War II.

Monday, May 18, 2009

The Architecture of Wealth Management

We've talked before about the role of the wealth manager as your personal CFO. I thought of another analogy for you to consider, an analogy that occurred to me while I was looking at some of the beautiful old homes we have here in central New Jersey.

The wealth manager's role is similar to that of an architect. An architect has to see the big picture, knows what he wants the end result to be, and draws up the plans to make sure everything comes to fruition.

But the architect doesn't build the house. He doesn't hammer in a single nail or pour the foundation. He is responsible for assembling a team of builders to make sure his vision is carried out, but once the plans are drawn up, the execution is up to others - others who are experts in their own field, whether that's carpentry, plumbing, landscaping, or whatever.

That's not unlike the role of a wealth manager. We will set forth the vision for your financial future, hire experts in the various fields to carry out the plans, then make sure they do everything that is required to help bring that vision to reality.

Sunday, May 17, 2009

A Ray of Hope?

A story in the weekend's New York Times suggested that there's a growing belief that the recession may be nearing an end. A report from Watson Wyatt, a human-resources consulting firm that talked to HR directors nationwide, found that most companies assume the bulk of their layoffs and cost-cutting measures are now behind them.

That may not mean a whole lot in and of itself, but one of the things that needs to happen to get the economy moving again is for consumer confidence to be restored. If businesses are starting to regain confidence, that's a healthy first step.

Now, as I said the other day, I don't know when the economy and the markets are going to recover, and these HR executives don't know either. But I would also point out that the recession started way back in November 2007, or 18 months ago. That's already a pretty long time, historically speaking, for the American economy to be in recession. So saying "I don't know when it will end" shouldn't be taken as too pessimistic; it can also mean, as the Watson Wyatt survey suggests, that daylight might be right around the corner.

Friday, May 15, 2009

Your Personal CFO

We have talked before on this blog about the fact that we design financial strategies for our clients that recognize the occasional rough times, like those we've seen for the past year or so. One of the foremost ways we do this is with our Private CFO Process.

Through this process, we oversee a team of experts who are at the top of the wealth management industry in terms of knowledge, experience and devotion to client satisfaction. Working with them, we will design and implement a wealth management plan specifically for you. We will also work very closely with you, staying fully engaged at every step, to make sure it directly serves your financial goals and desires and that remains true to your deepest objectives over time.

But the process doesn't end when the financial plan is completed. We will meet with you in person a minimum of once every three months for the first year of our relationship. Following that, we will meet with you at the interval that you decide is most comfortable for you, but no less than once per year. If you have questions about anything, you will receive a response within 24 hours - in most cases within 12 hours.

We believe in keeping the lines of communication open. We will maintain contact with you systematically according to our communication plan, and we are always available to answer your questions and hear your concerns. Especially in turbulent times like these, we feel it is vital for our clients to know that there is always someone on top of things for them, putting their interests first.

Thursday, May 14, 2009

Market Watching

The big news out of Wall Street yesterday was another rough day for the stock market: The Dow Jones average and the S&P 500 index both lost more than 2 percent of their value.

But this doesn't mean we're retreating from the gains that have been posted in recent weeks. In fact, it probably doesn't mean much of anything at all. We're going to see a lot of turbulence in the markets as they get back on their feet, and we can't expect every day to be positive. To look at the bigger picture, the S&P 500 is still higher than it's been since the very early part of the year.

More importantly, there's no reason to react to the daily movement of the market. I realize I am breaking my own rule by even writing about the market today, but I would advise you not to pay attention to the day-to-day gyrations of the Dow and the S&P. We're in this for the long haul. All that you get by obsessively checking the Dow, or your own portfolio, every day - or even worse, every hour - is a bad case of indigestion.

Wednesday, May 13, 2009

Under the TARP

The big financial news this week is that several major U.S banks have announced stock sales in order to raise money to pay back the funds they got from the federal government under TARP (the Troubled Assets Relief Program). Bank of America plans to raise over $15 billion in capital through a sale of common stock. Credit card giant Capital One also annouced a stock sale, and U.S. Bancorp and Bank of New York Mellon's are expected to raise over $1 billion each through sales of their own.

The stated purpose of these sales is to pay back the TARP funds; Bank of America got $45 billion of that money from the government. It certainly would be a good sign for the health of the banking industry if big banks like B of A were able to pay that money back. And a healthy banking industry is very important to getting us along the road to recovery.

But I wouldn't be too optimistic yet. Goldman Sachs said in February it wanted to pay back $10 billion in TARP funds, to remove the stigma of being in debt to the government as well as the restrictions that come along with it, but they haven't paid anything back yet. Don't pay much attention to what the banks say they are going to do; pay attention to what they do.

Tuesday, May 12, 2009

Working With Russell

I wanted to take a moment to explain how we handle investments here at Echelon Wealth. We don't do any in-house asset management. Rather, we rely upon the investment intellectual capital at one of the leaders in the field, Russell Investments, to execute the custom asset allocation solutions that we design for each client portfolio.

Russell is best known for its small company indexes - the Russell 2000, the Russell 3000, etc. But they also have more than a billion dollars under management and work with such major companies as Alcoa, Boeing and the Bill Gates Foundation.

What I like about Russell's investment management is that they use a multi-asset, multi-style, multi-manager approach. We have always known that diversification is crucial to building a prudent portfolio, particularly when negotiating troubled times like these. Russell's broad-based approach is very well suited for helping to preserve our clients' wealth.

We'll explain more about you relationship with Russell in further posts. If you have any questions, please feel free to leave a comment or send me an email at

Thursday, May 7, 2009

When Are the Markets Coming Back?

The primary question that my clients have been asking me lately is: “When are the markets coming back?” And the answer to that question is: I don’t know, Tim Geithner doesn’t know, Warren Buffett doesn’t know, and nobody else knows either. If we knew that, we’d jump back in just as soon as it was ready to start roaring again.

But we do know this: The markets will come back. The American economy has proved extremely resilient over time, even at those times when things looked worse than they do now. During the worst part of the Great Depression, from 1930 to 1932, the S&P 500 lost 80 percent of its value. But the record for the single best one-year performance of the S&P is 139.8 percent, for the period from July 1932 to July 1933.

The 1973-74 recession was followed by a bull market that lasted till the end of the Seventies. The scary recession of 1982 gave way to a huge bull run from 1983 to 1987, when the value of the S&P 500 nearly tripled. And so on.

The other thing to keep in mind is that no one expects the markets to be a one-way upward climb. Our portfolios and financial strategies are designed to help you endure tough times as well as to succeed during the boom times. And one day, this crisis will be over, and we'll see those boom times again.

Welcome to the Blog

Welcome to the Echelon Wealth Strategies blog. We’ve set this up to give you another resource to turn to for advice on your financial goals and reactions to the economic news of the day, as well as a place for you to ask questions and interact with me.

It is no secret that the current economic crisis has left many of us nervous about our financial futures and wondering if the paths we’ve chosen are the right ones. We hope this blog will help calm your fears and allow you take a little greater control over the changes that are affecting all of us.

Feel free to leave a comment after any post, or to send me an email at if there are any specific topics you’d like to discuss. And thanks for reading.