Inside Personal Finance

Ric EdElman’s inside Personal Finance maRcH 2009 RicEdElman.com 1

Another Crisis in the Making?

It’s a sad fact that some consumers do stupid things when they are scared. They sell low and buy high. They aban-

don the stock market altogether and park all their cash in savings accounts. Or they load up on bonds.

A lot of people think bonds are a safe, quiet place to ride out investment turmoil. But if in the so-called flight to safety you’ve loaded up your portfolio with a bunch of bonds (regardless of whether they are government, municipal or corporate), I’m worried for you.

Bonds are subject to two prominent risks that can expose investors to substantial losses. If you own bonds or are thinking about buying them, be aware of these risks.

The first is interest-rate risk. Interest rates and bond prices have an inverse relation-ship: When one rises, the other falls. This is not conjecture; it’s mathematical fact.

In normal times, investors debate whether interest rates will rise or fall. But these days

there is no debate, because the Federal Re-serve has set its interest-rate target at zero. Rates cannot go into negative territory, so they only have one direction to go: up. It may take months or even years for that to happen, but eventually rates will rise.

When that happens, bond values will drop.

Why? You can thank the simple law of supply and demand. Say the government issues a 1% bond and you buy it. Later, say that the government raises rates to 2% and you decide to sell your bond. Would an investor rather buy your 1% bond or a new one that pays 2%?

Clearly, the 2% bond is the better choice. In order to find a buyer for your bond, then, you’ll have to offer a higher interest rate. Oops — you can’t do that! What you can do, though, is lower your price. By selling the bond for less than its face value, the buyer is compensated for your bond’s lower interest rate.

How much lower? Let’s look at the math. Say you buy a $10,000 10-year AAA-rated bond paying 3.9%. If rates rise 1% and you try to sell your bond, you’d lose 7% — $700 — of your money. If interest rates go up 2%, you lose 14%, or $1,400.

And interest-rate risk isn’t the only risk. There’s another, called credit risk.

continued on page 2

InsidePersonalFinanceRicEdelman.com 888-PLAN-RIC MARCH 2009

RIC EDELMAN’S

Notice something different?

We have a new look! Let me know what you think! Email me at [email protected].

That flight to safety is about to crash into a mountain

Featured in This Issue

Volume 15, No. 3

The Best & Worst of Times3

Is the Stork Headed Your Way?9

Social Security Myths10Q&A12

Top 10 Scams of 20084

2 Ric EdElman’s inside Personal Finance maRcH 2009 RicEdElman.com

Ric Edelman’s Inside Personal Finance® is published monthly by Edelman Financial, 4000 Legato Road, 9th Floor, Fairfax, VA 22033-4055, (888) 752-6742. ISSN 1098-402X. Subscription rates are $69.95 per year. For foreign postage, add $18 per year for Mexico or Canada and $40 per year for airmail overseas. © 2009 Edelman Financial. This material may be reproduced only with our express written permission, which we’re likely to give. Periodicals postage paid at Fairfax, Va., and at additional mailing offices.

POSTMASTER: Send address changes to Ric Edelman’s Inside Personal Finance, 4000 Legato Road, 9th Floor, Fairfax, VA 22033-4055.

Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as tax or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. This is particularly true for mutual funds.

Edelman Financial is a marketing name for two affiliated registered investment advisors. Edelman Financial Services LLC primarily serves the Washington, D.C., area; Edelman Financial Advisors LLC serves clients nationwide via its own advisors and unaffiliated registered investment advisors. Ric is a registered representative of and offers securities products and services through SMH Capital Inc., an independent broker/dealer, member FINRA/SIPC. He is separately registered as an investment advisor representative and offers Investment Advisory services through Edelman Financial Services LLC, a registered advisory firm. The information and opinions expressed are Ric’s own and not those of SMH Capital Inc.

SUBSCRIPTIONS P.O. Box 3000, Denville, NJ 07834 or call toll-free (888) 987-7526 SPEAKING ENGAGEMENTS Contact Maribeth Bluyus at (703) 818-0800 EDITORIAL 4000 Legato Road, 9th Floor, Fairfax, VA 22033-4055 or call (888) 752-6742 fax (703) 818-1910 toll-free fax (866) 742-7222

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Another Crisis in the Making? ...continued from page 1

As companies experience financial difficul-ties, their bond ratings get downgraded. If an AAA bond falls to AA, the bond’s value drops 8%.

And watch out if interest rates rise and bond ratings decline at the same time. If your AAA bond falls to AA at the same time that interest rates rise 1%, you’d lose 15% of your money. If interest rates rise to 3% and the bond falls to DDD, you lose 44% of your money. And in a truly terrible but possible scenario, if interest rates rise to 3% while a bond falls to junk value (BB), you would face a whopping 83% loss.

Fortunately, there are several ways you can reduce these risks. First, pay attention to a bond’s duration. That term refers to the life of the bond. (It’s not the same as maturity, which is the date the issuer is to return your principal; duration refers to the average life of a bond, which is usually shorter than its maturity. Ginnie Maes, for example, have a 30-year maturity date but typically have a duration of only seven or so years because people refinance, default or sell their homes — thus paying off their mortgages — long before the loan is due to mature.)

Long-term bonds are more sensitive to interest rates than short-term bonds. Therefore, you can cut your interest-rate risk by limiting your bonds to those that have durations of seven years or less — and the shorter the duration, the less risk.

Second, limit your bonds to those that are unlikely to experience cuts in their

credit rating. Ideally, this means buying bonds issued by and fully backed by the U.S. government. Municipal bonds and corporate bonds can be downgraded and are therefore riskier. (Interestingly, some will argue that the safest bonds are those that have already been downgraded: Junk bonds are worth buying, this argument goes, because their ratings have nowhere to go but up.)

Third, and more importantly, don’t over-weight your portfolio with bonds. Main-tain a meaningful allocation to stocks, real estate, natural resources, precious metals, and oil and gas — assets that are not (or not directly) affected by interest rates and credit ratings. Diversification helps when facing the challenges of a financial mar-ketplace in turmoil.

Imagine the poor soul who invested his money in stocks in 2008 — and watched the S&P 500 fall 38%. Determined not to let that happen again, and desperate to avoid further losses in the stock market, he moves his money to bonds — and unwit-tingly sets himself up to lose another 40% when interest rates rise.

Don’t let that be you. If the stock market’s recent performance has tempted you to sell stocks low, you might buy bonds high without knowing it — and it’s always what you don’t know that hurts you.

That’s why you should let your portfolio be managed by investment professionals who know what they’re doing. IPF

My goal is to teach you the fundamental principles of personal finance — everything from getting out of debt to managing substantial estates. I am convinced that you can achieve financial success through education, self-initiative and self-reliance — not by speculation or by blindly following someone’s self-proclaimed “hot tips.” That’s what makes Ric Edelman’s Inside Personal Finance® so different from all the others — and why this newsletter will not tout stories offering “great stock tips” or get- rich-quick schemes. Instead, it is filled with practical, realistic and truly helpful information, enabling you to discover the tools and strategies you need to achieve financial success for yourself and your family.

TELL ME WHAT YOU THINK [email protected]


Staff StoriesDirector, Financial Planning Diane Jensen went to Antarctica on her sabbatical in De-cember. (Don’t worry, it was summer there. Pictured below.) Client Services Associate Rachelle Pollard’s 6-year-old daughter Ananda sang a solo in her school’s winter musical. Izzy, son of Document Processing Coordinator Ran Yeatts and wife Amie, celebrated his first birthday in September — a major milestone for a boy born four months early and who spent his first eight months in a hospital. Meetings and Event Planner Maribeth Bluyus and Graphic Designer Christine Janaske coordinated a 35-pound candy donation to a local food bank. Network Engineer Mike Pike ad-opted a beagle-mix puppy named Hamilton. (Pictured above with son Nicholas.) Director, Project Management Mike Attiliis is proud of son Brandon, 14, whose team won the Prince William Jubilee ice hockey tourna-ment in his age bracket. IPF

Diane Jensen

The Best & Worst of TimesDon’t let fear of bad days keep you away from the good

In a perfect world, we’d buy on the day when the market was the lowest and sell on the day it was the highest. The market would be down when we were young and saving for retirement and

skyrocket while we lived off our investment income after we left the world of employment.

I don’t have to tell you that we don’t live in a perfect world — not even close. But I thought it would be interesting to see what kind of returns we might achieve if we did so.

The chart above shows an analysis of the Dow Jones/Wilshire 5000 Composite Index* for the 10-year period of October 1998 to October 2008.

It’s hard to imagine that the profit for an entire decade occurred in just a handful of trading sessions, but the chart above shows that’s clearly the case.

If you didn’t bother to predict which days are the ones that matter and instead remained invested the entire time, you could have earned a 13% return.

But if you tried to capture that 215% return, you would have had to have been incredibly lucky! But if you were both lucky and unlucky — meaning you missed the best days (unlucky) but also missed the worst days (lucky), your return would have been 18% — and you would have had to have made 40 decisions about when to be in or out of the market. By contrast, being in the entire time required only one decision, and you still would have earned a double-digit return.

So, avoid the temptation of guessing when the market will rebound. Missing even a single day of the recovery could have a huge negative impact on your portfolio. IPF

*An index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios, and investors cannot invest directly in an index. Past performance does not guarantee future results.

+13% +18%

-57%

+215%

Oct. 1998 - Oct. 2008

Wilshire 5000 Annual Returns

Why Being Invested ALL THE TIME

Is So Important

Invested theentire time

Missed 20 worst days

Missed 20 best days

Missed both

Nicholas with new best friend, Hamilton


Top 10 Scams of 2008Some Lists Never Go out of Style

You don’t have to lose $50 bil-lion in a Ponzi scheme to get scammed. ConsumerAffairs.com

has announced the top scams of 2008. New ones have joined the classics, but if you’re not careful, they all lead to the same place — a lighter wallet.

1 Foreclosure rescue scam. Record numbers of distressed

homeowners paved the way to the #1 spot for this particular scam, a retread of 2007’s #6 scam, “We’ll Buy Your Home.” In this new version, home-owners make payments to a “rescuer” and sign over the deed to the house. This is supposed to stop foreclosure, but instead it aggravates the problem — the homeowner has signed over his home to the scammer, losing all equity, yet still owes the full mortgage balance to the lender.

2 Unauthorized charges. Ever sign up for a “free trial”? Often

free trial offers are extended after making a credit card transaction with another merchant. If you don’t cancel the trial, you’ll be charged monthly for the product or service. In more devious cases, scammers place a small charge on your credit card or phone bill and hope it goes unnoticed. A nickel can add up to big profits for the perpetrators, and that’s why this fraud is up from the #8 spot last year.

3 Work-at-home scams. These scams came in at #2

last year, and they remain common. This year “secret shopping” is the most prevalent scam, promising income and free merchandise but resulting in small losses when upfront fees are paid or big damages when victims wire large sums of money to “test” money-wiring services.

4 Phony “government official” scam. Fraudsters masquerading as

government officials captured the #7 spot last year, with IRS scams the most common. Now the Food and Drug Administration says consumers have been offered discounted prescription drugs from scammers pretending to be with the agency. Victims are asked to wire funds to the Dominican Republic, but after sending the money, the fake FDA warns the consumer that they’ve violated the law and must wire money to pay the fine or face legal action. Other common frauds imper-sonate the Federal Trade Commission and tell consumers they’ve won a lot-tery or sweepstakes.

5 Financial meltdown scams. The financial crisis has led to an

increase in credit counseling scams, payday loans, phony job offers and investment scams. Phishers have also milked the crisis by promising to offer advice but instead merely collect per-

sonal information about you that they sell to other crooks, or they promise to provide you with quicker access to economic stimulus checks.

6 Campaign 2008 scams. Last year’s election generated a

lot of excitement — which scammers were quick to exploit. Spammers sent emails with links to President Barack Obama’s acceptance speech. To watch, consumers had to download a program. But instead of playing the video, the “keylogger” recorded user IDs and passwords. Other fraudsters claiming to be from the voter regis-tration board called people advising them of a “problem” with their registra-tion and tried to collect their Social Security numbers.

7 Fake lottery scam. Deposed King Abdul Abacha

(and his urgent request to help transfer funds out of Nigeria) is said to be the ruler of email scams. But when it comes to snail mail, nothing beats fake lotteries. How it works: Victims receive a letter and a check saying they won the lottery. They are told to cash the check and send part of it back to cover taxes and fees. Naturally, the check is

continued on page 11


Despite Fraud, Markets GrowYou need another excuse to avoid investing

It’s not every day that somebody defrauds investors of $50 billion in the fashion of Bernie Madoff.

But he’s not the only person to rip- off investors. From small-scale con artists to billionaire scoundrels, history is replete with hucksters. Alchemists tried to turn metal into gold; “ship scut-tlers” deliberately sank ships in ancient Greece for the insurance money; some have tried to sell famous landmarks and even land in a country that did not exist.

Stories of fraud are in turn scandalous and heartbreaking. But the truth is that despite reports of these scams, the world goes on. Investors keep investing. Businesses keep growing. The U.S. economy continues to expand.

Don’t believe me? Consider that one of the earliest examples of investment fraud in the U.S. occurred in 1792 and involved a founding father. To finance the Revolutionary War, states sold war bonds to citizens. Afterward, the first U.S. Treasury Secretary, Alexander Hamilton, crafted a plan to have the federal government take over the states’ debts and repay bondholders. But before the plan became common knowledge, word spread to New York,

enabling speculators to buy the bonds from farmers and veterans for pennies on the dollar.

As a result, the country’s first public in-vestment enriched speculators instead of those who financed the revolution. Still, rather than destroy the country, Hamilton’s plan established the U.S. government’s credit.

The Ponzi scheme Madoff pulled off got its name from Charles Ponzi (although he was certainly not the first to try this type of scam — it was once known as “Robbing Peter to pay Paul”). In 1919 and 1920 Ponzi promised investors a 100% profit in just 90 days by buying postal coupons in foreign countries and selling them in the U.S. for a profit. Ponzi collected about $8 million (nearly $100 million today) and instead repaid old investors with new investors’ money. The scheme unrav-eled when a journalist discovered there weren’t enough postal coupons in existence to justify the volume of investments.

“Match King” Ivar Kreugar controlled nearly 75% of the world’s match production in the 1920s and used his empire to buy other international companies, including banks, and lend large amounts of cash to foreign coun-tries. With nearly 200 companies under his control, Kreugar cooked the books to report profits that didn’t exist, pay increasing dividends and loot acquired companies. The deception was revealed when Kreugar died in 1932, creating a “Kreugar Crash” that caused many investors to go broke.

Congress reacted by passing security reform legislation in 1933 and 1934.

Like Bernie Madoff, Richard Whitney used his clout as former president of the New York Stock Exchange to cover misdeeds in the 1930s. He was busted for embezzling from charities, the yacht club where he was treasurer and his father-in-law’s estate and served three years in prison.

Meanwhile, Oscar Hartzell convinced investors in Iowa with the last name Drake (and eventually others) that they were entitled to a portion of Sir Francis Drake’s fortune, which supposedly had been collecting interest for 300 years and was worth billions. The catch: The investors needed to give Hartzell cash to sue the British government to release the fortune. Hartzell raised millions, and donations continued to come in even after he went to prison for the fraud in 1933.

In the 1960s and 1970s, Equity Fund-ing Corporation made a name for itself marketing packages of mutual funds and life insurance, which were sold to reinsurers for cash. The problem: The insurance policies were fake. Hundreds of employees knew about the fraud and helped it along by creating fake computer printouts and other docu-mentation. As with Madoff, several people reported suspicions to the Securities and Exchange Commis-sion, but the story was written off as preposterous. When a whistleblower finally convinced the SEC in 1973 that the fraud was real, the firm’s stock was wiped out, costing investors $300 million.



Lessons Learned in 2008

A lot of mistakes were made in 2008. But mistakes can be valuable — if we learn from them. With that in mind, here are eight lessons offered by the financial markets of 2008.

1 When investing, assume the worst. Too often, people engage in wishful thinking,

not financial planning. They buy a house they can’t afford and hope its value will rise, or they invest in a product they don’t understand and get swindled à la Bernie Madoff. Some people buy only their company’s stock or accept shares as compensation instead of cash, losing both their savings and their jobs when the company tanks (think Enron, Fannie Mae, Lehman Brothers, etc.). These problems can be avoided by investing as though things won’t go well: Simply consider the worst-case scenario (the house’s value drops or the company goes bankrupt) and invest only if you can stomach it.

2 Maintain diversification. Don’t make big bets. That means you

shouldn’t buy individual securities, put your entire life savings in a bank account or tie up all your money in the equity of a paid-off house. Rather, build a diversified portfolio based on your situation and reassess what you’re doing from time to time to make sure it’s still appropriate for your situation.

3 Build ample cash reserves. In an ideal world, you need 12 months’

worth of spending in a safe place — either U.S. Treasuries or FDIC-insured bank accounts. Never chase yield by buying investments that offer unusually high dividends or interest rates. Higher rates always mean higher risks. Money market accounts may be extremely popular, but if you use one that isn’t invested solely in U.S. Treasuries, you

could run the risk of breaking the buck like the Reserve Fund did last year, leaving investors with 97 cents per $1 invested.

4 Be realistic. The economy and stock market will take

time to recover. Just because 2008 is over doesn’t mean the problems with our nation’s economy are. Patience is necessary.

5 It’s okay to be scared. It’s natural to feel unsettled in times of

economic doubt. The key is to prevent fear from causing you to do the wrong thing at the wrong time for the wrong reasons. Investment behavior is dominated by fear and greed; when the econo-my is strong, we get excited by profits, and greed makes us want to buy. Falling prices fill us with fear and encourage us to sell. Instead, we need to focus on the long term and know that wealth is created in periods of uncertainty.

6 Be skeptical about what you read, see and hear.

Pundits love to scare you because that’s what sells newspapers and grabs radio and television audi-ences. If you see a headline stating “Why Home Values May Take Decades to Recover,” don’t accept it at face value — evaluate the claim and decide for yourself. Remember that the media are not smarter than you.

7 If you’re properly diversified with an investment horizon of at least three

years, buy more. The key to building wealth is to sell high and buy low. With today’s low prices, the current market is offering the investment opportunity of a lifetime.

8 If you’re glued to the news, go watch basketball. IPF

8


Edelman Financial Boosts Client PrivacyWhy does privacy protection have to be inconvenient?

Continuing our tradition of utmost client care, Edelman Financial has introduced ad-ditional steps to increase client privacy and

the security of information clients entrust to us.

Now, client paperwork will reveal only the last four digits of your Social Security number, and the first two digits of your account number will be redacted.

Also, when you call the office and speak with a staff member who doesn’t know you, we’ll authenticate your identity by asking questions about you and your account.

Finally, we won’t always complete paperwork for you like we’ve done in the past. When we send forms for you to sign, there’s a concern that someone other than you might open or intercept the mail. Therefore, we’ll avoid pre-populating the paperwork with private information. Either you’ll complete the forms, or we will do so for you after you sign and return the documents to us. Although this may be a little inconvenient, it’s worthwhile to improve privacy protection.

These steps — along with our ability to send sensitive data to you via DataMotion’s secure email protocol — will help us continue to protect your information from those who steal mail or try to impersonate you.

If you have any questions, call us anytime. IPF

Bad Impersonation Reveals$113 Million FraudA prominent New York at-torney has been charged by the Securities and Exchange Commission with conduct-ing an elaborate $113 million scheme involving the sale of bogus promissory notes. Marc S. Dreier, the founder and managing partner of a 250-attorney firm, used phony documents and impersonated other people to market fake promissory notes to hedge funds and other private invest-ment funds, the SEC alleges.

The SEC says Dreier created an elaborate charade designed

to convince purchasers that the notes were genuine. He allegedly distributed phony financial statements and audit opinion letters from a reputable accounting firm and recruited others to play the parts of representatives of legitimate companies involved in transactions, even creating dummy email addresses and telephone numbers.

He got caught when repre-sentatives from a firm he was trying to con didn’t believe his impersonation of a Canadian firm’s executive. IPF

100% Return in 90 Days Proves Too Good to Be TrueAn alleged investment of-fering a 100% return in 90 days turned out to be a Ponzi scheme and affinity fraud that collected more than $23 million from thousands of investors in the Haitian-Amer-ican community nationwide

through a network of purport-ed investment clubs, the SEC reports. George L. Theodule, through his company Creative Capital Consortium LLC, lost at least $18 million trading stocks and misappropriated at least $3.8 million for himself. IPF

As many as 80 investors lost $50 million in a Ponzi scheme run by Joseph S. Forte of Broomall, Pa., the Securities and Exchange Commission alleges. According to the SEC, Forte told investors that he would invest their money in

securities futures contracts, but traded very little of it. Instead, he withdrew millions in so-called fees for his per-sonal use and lied to investors about the fund’s performance. Forte was never registered with the SEC. IPF

$50 Million Lost in Ponzi Scheme

CAVEAT EMPTOR


Your Personal Finance RescueRic’s new book offers an antidote to bad investing

Battered banks and ailing automakers are enjoying gov-ernment bailouts, and you can’t help but wonder: Who is going to step in to save your own financial security?

The answer is you, and I’ll show you how with my new book, Rescue Your Money from bad investments as well as big losses, excessive fees, high taxes, and avoidable risks, caused by painful mistakes, major missteps, immense blunders, giant slip-ups, large gaffes, enormous oversights, whopping errors, second thoughts,

cumbersome rationalizations, and wild guesses, all because you got bad advice, poor counsel, silly suggestions, errant recommendations, idiotic opinions, incorrect instructions, and useless information from know-nothing pundits, arrogant journalists, self-proclaimed experts, idea-of-the day columnists, commission-seeking brokers, and inexpe-rienced advisors, all of whom you thought were smart but who you now realize

are actually ill-informed, uneducated, inexperienced, unskillful, untrained, flat-out wrong, or just plain stupid.

Yup, the title says it all.

The Panic of 2008 has caused consumers across the country to impulsively make bad investment decisions that are only worsening their predicament. Rescue Your Money reveals the myths, mistakes and major obstacles that are preventing people from achieving financial security and offers solid, effective advice in a practical how-to guide that you can read in a single sitting. There’s even a special section for people who are already retired.

So if you know someone whose finances need rescuing, be sure to tell them about Rescue Your Money, available in book-stores this month. IPF

Another reason that converting to a Roth is a dumb idea

Congress has granted some tax relief for retirees: No IRA withdrawals are required for 2009.

Ordinarily, people age 70½ or older must make a man-datory withdrawal from IRAs and retirement accounts; the amount is based on your age and the previous year’s ending value.

Withdrawals for 2008 were especially painful for retirees because account values had declined dramatically — yet withdrawal amounts were based on December 31, 2007, when account values were much higher. This forced many retirees to sell invest-ments that had fallen in value.

To help, Congress has waived the withdrawal require-ment for 2009. (However, some retirees will still have to make a withdrawal: If you turned 70½ in 2008 and didn’t make your 2008 withdrawal by December 31, 2008, you must do so by April 1, 2009.)

If you don’t need the money, don’t take a distribution in 2009. If you receive monthly checks from your ac-count, call your advisor to stop those distributions.

Congress’s action demonstrates yet again the superi-ority of Deductible IRAs over Roth IRAs. Roth propo-nents have argued that Roths are superior because they aren’t subject to mandatory withdrawals. But now, for 2009 at least, neither is the Deductible IRA!

Imagine the hapless investor who converted his IRA to the Roth in order to avoid mandatory withdrawals. He could have avoided those withdrawals anyway! IPF

IRA Withdrawals Not Required This Year


“If you want your children to turn out well, spend twice as much time with them, and half as much money.” – Abigail Van Buren

Is the Stork Headed Your Way?

The birth of a child is one of the greatest joys a family can experi-ence. It also changes everything —

including a family’s finances.

I can now speak from personal experience. My wife Alicia and I welcomed twins last spring! Sasha and Mason are the light of our lives. We would do anything for them. And one of the best things we’ve done for them so far is to ensure our family’s financial security and prosperity by taking to heart the advice I give my own clients. Here are some items (and lessons I’ve learned along the way) to keep in mind if you or a loved one is expecting:

Cash Reserves The first order of business is to start saving even before the baby arrives. It sounds trite, but babies are expensive (the De-partment of Agriculture says the average family spends $20,200 in the baby’s first year) and you will spend your cash reserves more quickly than you think, especially if either parent (or both) takes an extended absence from work. So before the child is born, build your cash reserves to 6 to 12 months’ worth of current expenses and cut (better yet, eliminate) your credit card balances.

Insurance Like many parents-to-be, I was worried about navigating the maze of insurance. Here are the policies you’ll need to deal with as you await your new arrival(s):

Health insurance. Most adults of child-bearing age are not used to visiting the doctor’s office regularly, so get ready for a

new habit. Check with your HR department or call your insurer to get details about costs and coverage for your new bundle(s) of joy. Find out which hospital delivery expenses you’ll be responsible for.

Disability insurance. You need to maintain your income even if you’re not healthy enough to earn it, and that’s why this form of insurance is crucial. Remember that pregnancy is considered a disability, so moms-to-be need to obtain this coverage before becoming pregnant. Learn about coverage provided to you at work, and consider getting a supplemental policy that can provide additional coverage.

Life insurance. Both parents need life insurance, whether or not both earn a paycheck, so the survivor has funds for child care and other costs (as well as college savings) should the other die be-fore the kids are supporting themselves. For most young parents, 20- or 30-year term policies are sufficient. Don’t buy policies for the babies; instead, add an inexpensive rider to your policy to cover the cost of a (God forbid) funeral.

Property and casualty insurance. Make sure you have at least as much in liability coverage as you do in assets. Ask your homeowner’s agent about an umbrella liability policy. It’s cheap and beneficial.

Check your policies and their deductibles. A benefit of having plenty of cash in reserve is that you can raise your deduct-ibles, which lowers the cost of your insur-ance polices.


by Al Burgos, Sr. Financial Planner

PLANon It


The 1980s brought about the movie Wall Street, which told America that “greed is good.” Based on the stories of junk bond king Michael Milken and infamous insider trader Ivan Boesky, it depicted the excesses and hostile takeovers of the 1980s. The movie made millions and so did Milken and Boesky — until they went to jail.

Barry Minkow also took greed to unprecedented levels. In 1986, at the remarkable age of 21, he raised $100 million from some of the biggest firms on Wall Street when he took his carpet-cleaning company, ZZZZ Best, public. But his company dealt with more than dirty rugs. Tricking dozens of lawyers, accountants and bankers, Minkow used forgery, credit card fraud, check kiting and mobster loans to maintain his phony business and hide money laundering activities. Minkow went to prison for more than seven years; his investors lost $50 million.

More recently, the implosion of energy firm Enron sent shockwaves through Wall Street. At the time, En-ron was one of the country’s leading and most innovative firms. The firm collapsed when massive accounting irregularities were revealed, caus-ing thousands of Enron employees and investors to lose their entire life savings. It was a tragic loss for those individuals, and the country was outraged — especially as word spread that those responsible for cooking the books, including CEO Jeffrey Skilling, sold their shares ahead of time.

The demise of Enron kicked off a series of other accounting scandals that included telecommunications firm WorldCom, cable company Adelphia and manufacturer Tyco International. Investors lost billions of dollars, people went to prison and Congress passed the Sarbanes-Oxley Act of 2002 to reform public companies.

Around the same time, a 20-year, $311 million Ponzi scheme operated by James Paul Lewis Jr. of Lake Forest, Calif., unraveled. Preying on elderly church members, he stopped paying investors dividends in 2003, claiming the Department of Homeland Secu-rity had frozen the fund. In reality, he spent most of the money on himself and was sentenced to 30 years in prison for his long-running scheme.

These are just a handful of examples. Thousands of others exist. But the lesson is that despite the action of ne’er-do-wells and other unsavory people, investing is still the best way to build wealth and increase your financial security.

Frauds will be revealed from time to time, but the market will still grow. The important thing is to ensure that you are making smart investments with people you trust. IPF

Social Security Myths

M illions of Americans are or will be relying on Social Security benefits during retirement. But a recent

survey of 61-year-olds by Fidelity Investments shows that most know little about how Social Security works:

56% don’t know when they will be eligible for full Social Security benefits (age 66 for those

born 1943-54).

54% are unaware that they need to apply for benefits three months before they wish to

start receiving payments. Many incorrectly believe that the Social Security Administration will contact them when it is time to receive benefits.

51% are not aware that when a spouse passes away, the surviving spouse may be eligible to

receive the larger of their two Social Security payments.

31% believe that Social Security payments are not taxable.

12% are not aware that working in retirement could affect their benefits, including the tax

liability of that income.

72% don’t know that a nonworking or lesser- earning spouse could be eligible for Social

Security based on a higher-earning spouse’s work history alone.

If you or your parents are nearing retirement, take the time to understand Social Security. If you have questions, contact the Social Security Administration at www.ssa.gov or (800) 772-1213 or ask your financial planner. IPF

Despite Fraud, Markets Grow ...continued from page 5


Flexible Spending Account Take advantage of your employer’s flexible spending account (also known as a cafeteria plan). This allows you to avoid income taxes on money you spend for items not covered by insur-ance, including deductibles, co-pays and, in some cases, child-care expens-es. Remember that you must spend all the money you place into the plan by the end of each year.

Tax Deductions It’s important to talk to a tax advisor. New parents are typically eligible for new deductions and credits, most of which are available whether you item-ize or take the standard deduction. Make sure you review your tax with-holding, and if one parent stays home, verify that you can deduct money placed into his or her IRA.

College Savings vs. Retirement While college planning is near and dear to my heart, nearer still is retire-ment. As Ric likes to say, you can take out loans to pay for college, but you must pre-fund retirement. Staying on track with your retirement goals is key. New parents need to contribute the maximum to their retirement plans at work, as well as to IRAs. Spouses who don’t earn an income must still save for retirement too.

If you are fully funding retire-ment, you’re ready to open a 529 college sav-ings plan. With the help of your financial advisor, you can create the right asset allocation for the child. And if you contribute to a plan offered by your home state, you may be eligible for a reduction in state income taxes.

Even better, you can actually start now to help your child enjoy a more

secure retirement by establishing a RIC-E Trust®. Invented by Ric more than 10 years ago and awarded two U.S. patents, the Retirement Income for Everyone Trust lets you (or any adult) contribute $5,000 or more to an account that will grow uninterrupted until the child reaches retirement age. At 8% a year, such an account for newborns like ours would grow to $750,000 by the time they reach age 65. That’s why Alicia and I are in the process of opening a RIC-E Trust® account for each of the twins.

Estate Planning This is the part no one likes to discuss. Alicia and I had a will, but we knew we needed to review it. With kids on the way, we needed to choose guardians (and secure their cooperation). And working with our attorney, we needed to create instructions for handling our assets should something happen to us. Like all Americans, we also need a durable power of attorney and a healthcare power of attorney so we can make decisions for each other in case one of us becomes incapacitated. Estate planning is a sober (but not somber) activity, and completing the process gave us comfort in knowing that our kids will be well cared for

and raised by someone who wasn’t selected

by a judge.

Indeed, the list of financial planning for babies is exten-sive. I’m confident

Alicia and I are do-ing right by the twins.

And I’m certain you want to provide your family with

the same peace of mind. So if you’re an expecting parent, best wishes to you. Call your financial planner to share the good news and start plan-ning now for that bright future. IPF

Is the Stork Headed Your Way? ...continued from page 9

Top 10 Scams of 2008 ...continued from page 4

bad, and the victim is out the cash sent to the scammers.

8 Charity telemarketing scam. Telephone fraud has been

around nearly as long as the tele-phone, and you’d think that the Do Not Call List would help to prevent fraud. But charities are exempt from the list, clearing the way for fake charities to continue calling you. They collect money, but little, if any, goes to support those they purport to help.

9 EPPICard scam. As many states have moved to

debit-like EPPICards to administer payments and benefits, a new scam has made the list. To take advantage of the people using them, scammers have been sending fraudulent text, voice and email messages warning of a problem with the victim’s EPPICard and threatening to close the account. When the victims contact the fraud-sters, their personal information is stolen and their account is drained.

10 Kevin Trudeau’s “Weight- Loss Cures ‘They’ Don’t Want

You To Know About.” This book promises an “easy” recipe for slimming down, but when consum-ers purchase the book, the FTC has charged, they find that it describes a complex, grueling plan that requires severe dieting, daily injections of prescription drugs that consumers cannot easily obtain and lifelong dietary restrictions. Trudeau was ordered to pay back more than $5 million in profits and he is banned from promoting the book in infomercials. Other too-good-to-be-true weight loss scams abound. Trudeau’s latest book and infomercial purportedly reveals how to get rid of debt/credit problems. IPF

Mason and Sasha Burgos


Q&AQ I’ve lost $800,000 of my

formerly $2.6 million port-folio, and it’s killing me. I’m really uncomfortable having my money, everything I have ever earned, in a place where I really don’t know what is happening or why it’s hap-pening. My husband and I want to retire in about 10 years and we recently bought some new prop-erty and it all feels like it’s slipping away. How do I stay the course?

First, let’s turn those dollars into per-

centages. As a percentage, you’ve lost

30%, and while that feels frightening to

you, losing 30% in 2008 suggests that

your portfolio could be well diversified.

If so, you probably don’t have as much

to worry about as you fear.

Without knowing where your money

is invested and relying solely on the

2008 performance you’ve described,

you should consider staying the course.

But let me elaborate on what that re-

ally means. People sometimes accuse

me of being someone who argues for

the “buy and hold” approach, and that

is not what I’m saying. My argument is

that you should “buy and rebalance.”

In other words, if you have a properly

diversified portfolio, the key now is

not to simply hold on to it, but to

rebalance it. Compare your portfolio’s

allocation of one year ago to your

portfolio today — and rebalance it

so that today’s portfolio looks like last

year’s portfolio.

That would be a positive step because

it enables you to sell assets that are

relatively high in value (selling high

is always good) and buy assets that

are lower in value (and buying low is

always good). If your financial planner

hasn’t been doing that for you, you

need to ask why.

Q I have a 30-year fixed mort-gage at an interest rate of

5.75% and I was wondering when would it make sense for me to refinance. How low would interest rates have to go?

Twenty years ago, I would have told

you that interest rates had to drop 2%

in order for refinancing to make sense.

That rule is no longer true, because the

cost of refinancing is much lower these

days, as are interest rates.

I suggest you call your mortgage com-

pany and ask, “If I were to refinance,

what would be the new interest rate

and what would be my new monthly

payment?” Then ask how much it will

cost to get that new loan.

If it costs $1,000 to refinance and doing

so saves you $50/month, it will take

you 20 months to break even. If you’re

going to move during or soon after

that time, it’s not worth it. But if you

plan to stay in the house 10 years, it’s

a good deal.

By learning the costs and savings of re-

financing, you can decide if it’s worth it.

Q I have a question on an exchange-traded fund. I’m

basically a buy and hold investor in retail mutual funds. But as you know, panicky selling hurts exist-ing shareholders. Are ETFs less likely to see portfolio disruption by shareholder redemption and why?

Yes, they are less likely to suffer, for three reasons. One, they tend not to attract market timers to the same extent that retail mutual funds do, so there is less likelihood of trad-ing in that regard. Second, they have very low turnover themselves, which means they are not as likely to be subject to style drift or bracket creep because some fund manager is trading heavily. Finally, due to the way many ETFs handle their tax reporting, they are able to offset one investor’s selling with another’s buy-ing — enabling the fund to avoid reporting the transactions as capital gains or losses.

This explains why the typical exchange-traded fund often issues capital gains distributions that are dramatically lower than those of-fered by typical retail mutual funds.

Q I have only Maryland AAA or AA bonds, and whether they

are transportation bonds or other bonds, there has been a substan-tial paper loss in both. Someone told me it’s because the hedge

These are Ric’s answers to questions sent to him by readers and questions from callers to his popular radio show. Call 888-PLAN RIC or email [email protected] with your questions!


These are Ric’s answers to questions sent to him by readers and questions from callers to his popular radio show. Call 888-PLAN RIC or email [email protected] with your questions! Q&A

funds sold them in the market very rapidly to raise cash. I’m curi-ous as to what your opinion is.

Hedge funds have had a minor impact

on bonds. There are other reasons for

their decline in value.

One big factor is that muni bonds suf-

fer from credit risk. Most muni bonds

are insured, and the companies that

insure them (MBIA, Ambac, Fitch, etc.)

have been experiencing their own fi-

nancial problems. So if the bond’s value

is based on the insurance that supports

it and the insurance is in question, the

bond’s safety is in question.

Second, Maryland is one of a very small

number of states that are AAA-rated.

In the current credit crunch, there are

worries (I’m not suggesting that the

worries are real) that Maryland might

lose its AAA rating. If it falls to AA or A,

the bonds will decline in value.

Thus, you are in a position where

things can’t get any better: Your bonds

are already AAA (the highest rating), so

if things change, they can only change

for the worse.

In other words, there is a difference

between reality and perception of real-

ity. Maryland’s bonds might be in great

financial shape, but if the marketplace

fears change, perception will alter the

bonds’ values.

So, you have a choice: You can sell the

bonds and avoid further losses, or you

can ignore all this, sit tight and be con-

fident that the state of Maryland will

return all your money upon maturity.

Of course, the latter could force you to

wait decades, and you might not want

to wait. Also, the reduced returns you

might earn between now and then

could prove more expensive than sell-

ing and investing elsewhere. To figure

out which course of action is best, talk

with a financial planner.

Q These five events relate to my family. I’ve chosen to in-

vest in a Roth IRA in each instance instead of a Deductible IRA. What are your thoughts on this?

1) When grandparents/parents fund an IRA for a low-income student.

2) For a low-income young adult.

3) For those not eligible to con-tribute to a deductible IRA.

4) For those who prefer not to begin distributions at 70½.

5) For those who were organized enough to invest in an IRA even though it was not tax deductible, but are not organized enough (or

currently sharp enough) to keep records as to what portion of each distribution should be tax free.

1. Okay

2. Okay

3. Okay

4. Not Okay

5. Not Okay

Q Do you think the federal government will keep FDIC

insurance at the new max of $250,000 or go back to $100,000? I have CDs and do not know if I should keep the money there.

No one knows, but I’d bet they will

leave the limits in place. If they don’t,

there will be plenty of notice and

probably grandfathering to protect

those who already invested based on

current rules.

But if you’re really worried, then spread

the money among several banks,

placing less than $100,000 with each.

This way, you don’t have to worry

about it. Instead, you can worry about

why you have so much money in low-

return accounts in the first place.

“People sometimes accuse me of being someone who argues for the ‘buy and hold’ approach, and that is not what I’m saying.”


Q About 80% of my retirement right now is in the company

stock that I got pre-tax, and I am no longer with the company. My cost basis is $8.60 a share, and the value right now is $28 a share. A broker suggested that I do a net unrealized appreciation (NUA) to lift the money out of my retire-ment account so that I can diversi-fy it at an after-tax format and take all the benefits of the NUA. What do you think?

I’m scared to death that 80% of your

retirement is in a single stock. Action

needs to be taken: You need to sell

that stock and diversify your portfolio.

As you know, when you pull that mon-

ey out, you’re going to incur taxes on

the profit, and it’s going to be treated

as ordinary income.

NUA lets the appreciation be taxed as

a long-term capital gain, as opposed to

ordinary income. We’re not a big fan of

NUA, in most cases, because it doesn’t

provide future tax deferral for you.

What we would prefer you do is take

the money and liquidate the security,

diversify the asset, keep it tax deferred

if you don’t need the money and move

on from there.

I would recommend you get a second

opinion from another financial advisor

(you kind of did that by asking me, but

you need a more detailed analysis than

I can do for you here), as well as a tax

advisor. Don’t rely solely on a financial

advisor, because you need to examine

the implication of this on your overall

tax return.

QOver years of listening to you I have carefully reviewed the

individual holdings of my mutual funds to ensure I really was diversi-fied. I continue to do so and I no-tice that the funds, including ETFs, are investing heavily into financial services. I am a bit alarmed and confused by this trend. Does it mean the government has thrown a lot of money at these industries and their health is not as bad as we have been led to believe?

You’re putting together two pieces of

information that are unrelated.

The S&P 500 Stock Index ranks stocks

based on their market value. Many

funds invest likewise. Over the past

20 years, stocks in the financial sector

have grown faster than other sectors

(and lately are falling faster, but never

mind) and as a result represent a larger

portion of the S&P than in prior years

(and hence comprise a larger portion

of many mutual funds).

The government rescue plans are unre-

lated (or at least not directly related) to

this phenomenon.

So, in short, yes, many of the firms

in this industry are in as bad shape

as you’ve heard. Thus, government

intervention is appropriate, though

distasteful and hopefully temporary.

It’s reasonable to assume that the S&P

makeup will change along with the

market values of these firms.

QMy wife and I last month signed a contract on a

house that is being built and is scheduled to be completed in May. Right now, our interest rate is floating. We have the option to lock in the interest rate by pay-ing 1.25 points and paying a half- point-higher interest rate. Should we go ahead and lock or should we wait and see what happens? I’d prefer it a little lower, but I’d be happy with the current rate.

If you’re happy with the current rate,

then lock it in.

People who are about to borrow

money always say they want the best

rate. It’s the same kind of game people

play in the stock market: They want to

buy at the very lowest point, and they

want to sell at the very highest point.

Anytime that happens, it’s sheer luck.

So, ask yourself a different question:

Am I happy with terms that are avail-

able? If the answer is yes, take them.

You can always refinance again later if

the rates get even better. Meanwhile,

if the rates get worse, you’ll be glad

you locked in. So you win both ways.

Too often, people try to make this stuff

a lot more complicated than it really is.

They set goals that are impossible to

reach. They will only take a rate that is

Q&A


Q&Athe very lowest rate; they will only sell

their house for the very highest price;

they will only sell a security that has

made a profit. Achieving those goals

requires dumb luck — and that’s

not something I’d want to stake my

future on.

QI have five grandkids be-tween the ages of 4 and 9.

To teach them to invest, I’m look-ing for a place where I can open an account for each of them for, say, $100; add $10 a month; and put maybe 80% of it in a stock mutual fund, 10% into a bond and 10% in money market funds. Then they can see how each of those grows over time. Do you know of such a place?

Yours is a noble idea, and I applaud you

for it. However, I know of no mutual

fund that will enable you to open an

account with only $100 or add only

$10 a month.

Let’s talk about the 9-year-old first.

Instead of investing real money, make

it hypothetical. You can track the funds

as though you really own them using

the newspaper, a Web site or an Excel

spreadsheet. It gives the same message

you are trying to teach.

Second, if you do want to make it real,

set up the portfolio you had in mind

using your own money and share the

results with the kids: Let them see your

statements and watch the prices of

the securities you buy. You can always

transfer the money to them in the

future, and in the meantime, having

them help you make investment deci-

sions will impact the future value of the

money that they are going to receive.

Now let’s talk about the 4-year-old.

I am a firm believer that you should

begin discussing money with children

as young as age 3. For example, as he

learns to count, let him count coins

instead of marbles. For more ideas on

how to teach your grandchildren, visit

www.jumpstartcoalition.org.

If you do all of the above, you’ll be doing

a wonderful thing for your grandkids.

QI recently learned that my wife has racked up $30,000

in credit card debt. Lucky for her the ground is too frozen to dig a shallow grave, so I have to figure other ways to dig out. Card issuers have agreed to lower the interest rates. Any way to use my 401(k)

(about $150k) to pay this off with-out penalty? I’m not planning to retire for another 13 years.

Nope.

Which is good, because you should

never use retirement assets to pay

credit card debt.

I’m concerned, though, about your

wife’s behavior and your mutual lack

of communication (how long has this

been going on, and how did you only

now discover it?).

Counseling is in order — marital for

you both and psychological for her.

There are issues here that must be ad-

dressed, or that debt will continue to

grow and the marriage will continue to

weaken.

QIs it just as safe and secure to open a CD with an online

bank as compared to a brick-and- mortar bank? The yield is higher.

Sure, as long as it’s FDIC-insured. Deal-

ing with an Internet bank is the same

as with any other. The reason the yield

is higher is simply technology: When

you go to your local bank, there are

bricks and mortar, with tellers stand-

ing behind bulletproof windows.

Those expenses affect the rates the

bank can offer. Since Internet banks

don’t have those expenses, their

costs are lower, enabling them to

pass the savings to you in the form

of higher yields.

“I’m scared that 80% of your retirement is in a single stock.”

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