Millionaire Lifestyle

by Bruce Fenton

Does the idea of a millionaire’s lifestyle appeal to you? Ocean cruises around the world, vacations abroad, sailing on a yacht, shopping in Paris…all might be your idea of how a millionaire lives, but that is not reality according to Dr. Thomas Stanley who has made a career out of studying millionaires.

Stanley, in his book, The Millionaire Mind, explores the world and minds of millionaires who made it the old fashioned way…no dot.com stock options, lotto tickets, or inherited wealth…rather, hard work, creativity, willingness to take risks, self-discipline and a high dose of personal values.

According to Stanley, all of the above lifestyle activities rank very low on the list of how his millionaires spend their time. Millionaire activities are more likely to include visiting a tax advisor, involvement in community activities, raising funds for charity or watching children/grandchildren’s sporting events.

Stanley’s study group was selected using survey techniques that produced 733 true millionaire respondents from over 1,000 completed questionnaires sent to a random sample of 5,063 households in 2,487 affluent neighborhoods around the country. These neighborhoods were selected for the likelihood that the residents would be Balance Sheet Affluent rather than Income Affluent.

He discovered in his research that while many households have high incomes and live in expensive houses, they have correspondingly low accumulations of real wealth and high mortgages. These are the Income Affluent.

The Balance Sheet Affluent are the real millionaires. They tend to live in older, yet expensive homes, bought years ago for a fraction of today’s market value. They have low mortgages and no debt. They focus on accumulating wealth, not spending it.

His study led him to explore the factors that were the most influential in creating personal success. The top five success factors most often mentioned by the study group included:

• Integrity—being honest with all people
• Discipline—applying self-control
• Social skills—getting along with people
• A supportive spouse
• Hard work—more than most people

Interestingly, most respondents ranked luck at the bottom of the list of success factors. Stanley found an inverse relationship between level of wealth and the purchase of Lotto tickets!
While millionaires are extraordinarily successful at producing wealth, and spend a good deal of time on activities directly related to these goals, Stanley notes that they lead remarkably well balanced lives.

They like to spend time socializing with their children and/or grandchildren. They value time spent with friends higher than time spent on things.

They are likely to be participants in individual sports such as tennis or golf. He found that Decamillionaires are nearly twice as likely to play golf than high-income-producing non-millionaires are. Part of this comes from a strong motivation to be physically fit and engage in competitive activities.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Employee Stock Ownership

Any owner of a successful, privately held, small business will tell you that businesses are fun to build, but that the tax system does not provide many benefits to ownership. Short of selling the stock in their company, outright to a third party, they have few ways to derive tax benefits from ownership while operating the company.

Further, in this age of stock option incentives at public companies, privately held businesses can find themselves at a disadvantage when it comes to attracting qualified employees who are looking for incentives beyond a paycheck.

The answer to both problems may lie in a 1921 law, known as the Industrial Homestead Act, which was designed to broaden the ownership of capital by employees. Then it was called a Stock Bonus Plan, we know it today as an Employee Stock Ownership Plan, or “ESOP.”

The Homestead Act encouraged the development of the nation’s major natural resource—land—by providing that any person could homestead up to 160 acres per person. The law allowed any person who took possession of the land and assumed responsibility for making it productive for a certain period of years would acquire full ownership of this land at the end of that time.

As a result of this legislation, hundreds of thousands of people were able to acquire capital and to become financially independent. The ESOP is an extension of this logic into the industrialized economy we know today.

ESOPs have evolved from 1952 legislation that allowed them to be set up as tax-exempt trusts, designed to enable employees to own part or all of the company for which they work, without investing their own funds.

When a company establishes an ESOP, the company makes a tax-deductible contribution to the trust, which may purchase company stock from shareholders. The employee participants hold beneficial ownership interests in the assets of the trust and are the beneficiaries. Normally the employer, or major shareholders, are the trustee(s) of the trust, and retain all rights to vote the stock for company control purposes.

Each year the value of the stock must be determined by an independent appraisal of the business. If the business does well and appreciates, this appreciation increases the value of the stock held in the trust, and correspondingly increases the value of each participant’s share.

When an employee leaves the company, their ownership interest is distributed from the trust to them as cash. This distribution is treated as any other qualified plan distribution and may be rolled over into an IRA in order to defer further taxation.

Employees benefit because they can now participate in the appreciation in value of the company that results from their efforts. As with any other pension plan, an ESOP provides a store of future wealth for retirement.

Ownership benefits because stock they sell is taxed at capital gains rates instead of ordinary income rates. They have a ready market for their ownership interests, without giving up control of the company. Best of all, they have a way to reward the employees who make the business a success, in a tax-efficient fashion.

Catching Stocks Is Like Catching Fish

by Wendell Cayton

Plop! There, got another one! Fishing? No, I was catching stocks. Only instead of the high stress method of thrashing around on the Internet and day trading, I was practicing the low-stress, low-IQ, method of adding to portfolios by using simple limit orders to buy the stock.

I find a bit of similarity between ‘catching’ stocks and ‘catching’ fish. I grew up in Central Washington. The Ahtanum Creek came down from the Cascades not far from our home. On hot summer afternoons my brothers and I could often be found reclining in the shade along its banks, with our fishing poles, a worm swimming on the end of the line, propped up on a forked stick. With little effort we could usually catch enough trout for dinner.

We preferred this laid back approach to catching fish as opposed to flailing our poles back and forth, in a more typical Type A manner. The latter method required more worms, and often caught more snags than fish. It was much more relaxing to put out our bait, enjoy the day, and pull in the fish that picked our worm.
Stock can be ‘caught’ the same way. The procedure is simple . . . just use limit orders. A limit order is an order placed through a broker to buy or sell a stock when it hits a certain price. These instructions are transmitted to the floor specialist at the stock exchange who will hold them as an open order to buy or sell at that price.

Your target price to buy must be below the current trading price, or above if your order is to sell, otherwise your order will be immediately executed as a market order.

When placing the order, you can either leave it in place for that day, or until you chose to cancel, known as “Good Till Cancelled.” You can also instruct the broker that you will—or will not—accept a partial execution of the order.

Buying stocks in this manner works well for stocks that you intend to buy and hold and that are trading within a somewhat definable price range. Setting the price target is like picking a fishing hole. Some places in a stream are not likely fish habitat. If you set the price too low, the price may not come back to that level, leaving your order unfilled

When stock prices are rapidly moving up, as they did last fall after the September/October correction, limit orders to buy do not work well. Reminds me of spring along the Ahtanum when mountain runoff would swell the creek with swift flowing rapids. The water was going much too fast for the fish to find our bait. Neither is the market going to look back for a price set too low.

There are several ways to arrive at your target price. Using fundamentals such as earnings, ratio of price to book value, sales volume, etc. you can calculate your ‘fair value.’ This is the price you would be willing to pay to own a piece of that business. Above that price, you would not be interested.

If you are satisfied that the stock is trading within a range that you consider fairly valued, you can watch daily trading activity, noting the high and low prices occurring during the day. Put your target at the low point within that range.

There are a number of sites on the Internet where you can see charts depicting the trading range for the day or other periods. I find the Yahoo’s financial section works well. There I can find charts for the day, 5 days and 3 months, all of which depict the ranges for the day. This site also provides historical pricing for any date(s) showing the open, high, low, and close.

Value of Stock

by Bruce Fenton

Long-term value investors understand that buying a stock is not unlike buying a business. In order to arrive at a fair price, the buyer needs to understand the fundamentals of the business. Today, we examine why a stock, like a business, is worth what it can earn in the future.

When finished, you should see why stock prices fluctuate, positively and negatively, with earnings expectations and interest rates. The fundamental analysis of the financial affairs of the business is required to gain a better understanding of the nature and operating characteristics of the company. Value investors believe that the value of a stock is influenced by 1) the underlying financial performance of the company that issued the stock, and, 2) the amount of risk inherent to the owner.

This historical perspective on the company’s performance includes examining its competitive market position, composition and growth of sales, profit margins, dynamics of company earnings, its liquidity position, and finally the company’s capital structure.

Most of this information can be found in the financial records of the business. The balance sheet of the business shows us the book value of what we would own if we bought the business and, also important, what we would owe. The balance sheet is a snapshot in time that shows shareholder equity. Viewed over a number of periods, the balance sheet provides a series of progress reports toward growth of equity.

The income statement and statement of cash flows provide us with information on the liquidity and cash flow. As any owner of a business can attest, “cash is king.” Huge sales and profits are meaningless unless the business generates cash to pay operating expenses.

With this information, plus our opinions of how the economy and the industry structure (competition) will influence future performance, we can estimate future earnings.

The final component in the valuation process is to build in reward for the risk we take as investors. The most basic stock valuation models compare the historical performance of stocks to a risk-free investment such as the 90-Day U.S. Treasury Note over an extended period of time. The average difference represents the risk premium that an investor must receive, over and above risk-free returns, in order to be adequately compensated for the investment. (Note: this is a simplified model. More complex models will include changes in future earnings as well as a future stock-selling price.)

When interest rates have fallen and earnings are up, mathematically this increases the fair value of stock share prices. That is why those who say the market is too high by simply looking at historical price earnings (P/E) and other standards that do not factor in falling interest rates and increasing corporate earnings may be making a mistake!

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Asset Allocation

by Bruce Fenton

Asset Allocation, long thought of as a basic tenet of a good investment strategy, is not always every investor’s friend. Controlling risk is important to most when markets are going down, not when they are going up. A good asset allocation model relies on the premise that a portfolio balanced between various asset classes will help control or mitigate investment risk.

In theory, this might be true. But in practice, many investors lack the discipline to make this a truism. The basic problem stems from the emotional disorder afflicting many investors…they buy and hold when the markets are good and sell when markets are bad. In other words they buy high and sell low.

To make asset allocation work, they would have to be willing to buy assets that no one wants, that are down in price, that look as if they will never recover. They would have to sell assets going up in price that everyone wants and that look like they are going to the moon. Not an easy bridge to cross!

The broadest and easiest form of asset allocation to understand is a model based upon equal parts stocks, bonds, and cash. Periodically the holder of this portfolio would sell a portion of the assets gaining value and buy that class going down in value. This requires faith that the asset classes will periodically cycle from low to high.

In strong up markets, this implies selling favorite stocks, for example, and buying low performing bonds. In 1999 or 2000 this concept would have resulted in most financial advisors losing their jobs, since getting a client to sell a prized asset that had just doubled or tripled in value in order to buy a bond earning 5% would have generated a rancorous argument.

An investor building a portfolio around sector analysis would buy sectors that have bottomed and sell those that have topped out. Obviously the trick is to know which is which, and then have the discipline to buy low and sell high.

A second asset allocation model focuses on investment style. Style refers to value versus growth, large cap vs. small cap, and domestic vs. international equities. Style analysis works well when reviewing performance of mutual fund managers where funds have a wide variety of holdings.

Stanford Professor and Nobel Prize winning economist William F. Sharpe pioneered returns-based style analysis. This allows investors the opportunity to evaluate portfolio managers by estimating a portfolio manager’s style by determining the mix of passive benchmarks that best matched the actual returns of the fund. This technique enables an analyst to develop a perspective about how the fund might behave in the future based upon historical performances.

Always keep in mind that historical performance does not guarantee future performance. We are still subject to event risks that can disrupt the ordinary course of events in an economy and the investment markets.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Second Marriage Planning

by Bruce Fenton

Handling the money in a second marriage takes planning and thought to avoid potential potholes on the road to marital bliss. The financial planning issues in second marriages can be broken into two parts: those required to conduct the everyday affairs of the marriage; and those relating to property ownership and estate planning.

In the case of the former, two separate and independent economic entities have to be merged to operate as one. Usually two incomes have to be combined to pay the bills—his, hers and theirs. Savings have to be allocated for two separate retirement plans. It is not uncommon for both to own their separate residences.

An easy way to deal with the bills and money is to set up one joint checking account, with each of the spouses keeping their separate checking account. Common expenses and common savings can be paid from this account. Each is responsible for contributing a set amount into this account. What remains in each separate account is theirs to spend as they wish.

This arrangement is simple, easy to manage and facilitates record keeping for tax preparation. More important, it leaves each with an element of financial freedom to spend the leftover money in their separate account without having to account to the other spouse.

When both bring personal residences into a marriage, property ownership and management are an issue. Suppose they decide to live in one and rent the other. Suppose both contribute to the mortgage payments of the residence through the common checking account. The rental income goes into the joint account to help cover the costs of the household. Such an arrangement will quickly create a joint ownership situation for both properties where none existed before. Because of the co-mingling of income and expenses, before long both properties could be considered community property.

If the parties wish to continue owning their respective properties as their separate property, they will need a pre- or post-nuptial agreement to do so. Separate property will not be subject to division in a divorce and it allows them to appoint the full value of their property as either gifts or inheritances to heirs.

It is important that all retirement plans and life insurance contracts be reviewed to ensure that beneficiary designations are correct. It is not uncommon among second marriages to find old IRA or life insurance policies with the first spouse named as the beneficiary. Retirement plans, IRAs and life insurance policies, which name anyone other than the current spouse as a beneficiary, create a potential estate tax liability upon the death of the owner. This can be avoided by either removing the life insurance policy from the estate by gifting or change of ownership, or changing the beneficiary to the new spouse.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Large Stock Position Strategies

by Bruce Fenton

Large singular stock positions in a portfolio can cause management challenges for the investor. As many found out during the tech bubble a few years ago, holding a large position in one stock can help you learn about lack of diversification the hard way.

I expect large stock positions to begin reappearing in portfolios as the markets and the economy improve, so let’s take a look at several ways one might manage these positions. This article is only relevant to stock positions held outside qualified retirement plans and IRAs, as those accounts/plans have different investing rules and are not constrained by taxes when making decisions to buy and sell.

Setting a “sell stop” at some point below the stock’s current value is a simple strategy for protecting gains. This implies that the investor is willing to sell at some lower price in order to protect gains to this point or cut potential future losses.

A sell stop is an automatic order to the brokerage firm to sell the stock as a market order when the price hits the stop. As the stock moves up in value, an investor can slide the stop up, thus protecting future gains. This strategy works well for stocks with low price volatility. With a highly volatile stock, the investor runs the risk that the price will drop sharply, hit the sell point, trigger a sell and then rebound higher. Thus, the stop must be kept farther away from the current price on volatile stocks.

The investor can also protect against a price drop by purchasing insurance in the form of a “put option” that gives him/her the right to sell stock during the term of the option at a stated price. This works just like conventional insurance, in that the position remains covered as long as the option expiration date has not been reached. At the end of the option expiration, if the investor still holds the stock and requires additional protection, he/she must purchase a new option and pay a new premium.

In both of the above strategies, the investor’s ultimate protection is to sell the stock and pay the taxes. In cases where selling is not an option, for either emotional or financial reasons, the investor may choose to increase income from the position by selling a covered call.

A covered call gives the purchaser the right, but not the obligation, to buy the stock at a stated price from the option writer (owner of the stock). The writer collects a premium and gets to keep it if the option to purchase is not exercised.

A covered call writer typically sells an “out-of-the-money” option with an exercise price higher than the current price plus the premium. If the price stays above that target, there is little risk the stocks will be “called away” or sold at the strike price, and the investor gets to keep the premium. If the price of the stock goes up sharply, risking the sale of the position, the writer of the call may buy back the call and close out his position (generally resulting in a loss) or negotiate the difference between the premium collected and the premium spent to buy back the position.

A word of caution—all option strategies carry risk. It is a good idea to become familiar with option trading by reading books on the subject or consulting a website.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Market Terms

by Bruce Fenton

Get out your rally monkey! Just in case you missed it, the markets have moved off the bottom after executing a neat, reverse head-and-shoulders technical formation.

Oops—pardon my lapse into technical jargon.

In case that really was too technical for you, I want to prepare you for the coming bull market on CNBC. Let’s join two young buy side analysts discussing their day at the local coffeehouse . . .

“It’s been tough out there these last few years—no more Goldilocks economy; too many leprechaun leaders,” says one analyst.

“I agree,” says his friend. “I have spent too many days trading QUIPS when I should be looking for a Bo Derek. But my boss keeps telling me to forget that and concentrate on Jennifer Lopez.”

“Ha!” snorts the first analyst. “We’d probably both be better off chasing cats and dogs, although with our luck, we could catch a dead cat bounce instead! Think I’ll stick to scripophily.”

In the language of Wall Street and CNBC, our buy side friends work for a larger institution where they are tasked with buying larger amounts of stocks.

Their lament over the lack of a Goldilocks economy refers to the latter half of the 1990s, when the economy was “not too hot—not too cold—but just right.” Everything was fine, of course, until the three bears (or bear market) came home for breakfast.

A 'leprechaun leader' is a corporate manager or executive who, like the fabled Irish elf, is a mischievous and elusive creature said to possess buried treasures of money and gold. According to Irish folklore, the location of hidden treasure is only revealed when the leprechaun is caught. In the case of a market leprechaun leader, the 'buried treasure' is often not buried, but rather in a protected offshore account!

The second analyst is not a comedian; he is trading Quarterly Income Preferred Securities (QUIPS). QUIPS are an example of hybrid securities, combining features of preferred stock and corporate bonds. These hybrids generally pay a higher rate of return than preferred stock.

And no, these men are not fantasizing over beautiful women. A Bo Derek is a perfect stock, as in Bo, the perfect woman. An alternative to a Bo is a Jennifer Lopez, or a stock that is charting a nice rounded bottom. (I’ll let you draw the analogy.)

Cats and dogs, in this conversation, is slang for speculative stocks that have short or suspicious histories for sales, earnings, dividends, etc. In a bull market, analysts will often mention that everything is going up, even the dogs and cats. When they do fall, the result can be a dead cat bounce, referring to a temporary recovery by a market or stock after a prolonged decline or bear market. In most cases, the recovery is momentary and the market will continue to fall. Think: “Even a dead cat will bounce if dropped from high enough!”

And scripophily is not a game—it’s the avocation of collecting old, worthless stock certificates.

Finally, going back to my original terminology, head-and-shoulders is a technical analysis term used to describe a chart formation in which a stock, or the market, rises to a peak and subsequently declines, followed by a third rise that does not exceed the second. This signals that a major reversal has occurred. What’s relevant is that when this formation occurs in the reverse, it generally signals the turning point from a stock or market going down to one that is heading back up.

That’s where we are today, and that’s why you need your rally monkey. (If you have no idea what a rally monkey is, ask a fan of the Angels baseball team.)

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Asset Allocation for Retirement

by Bruce Fenton

The common rule of thumb for asset allocation between stocks and bonds in retirement accounts—that your age represents the percentage of bonds you should have in your retirement investment portfolio—overlooks an important bond component. Social Security, guaranteed annuity payments and fixed pensions can be equated to bonds in a portfolio.

A bond pays a periodic fixed sum of money according to the terms of the issuer. This sum represents interest to the holder of the bond—payment in return for lending the capital to the issuer.

In cases where a retiree is drawing a fixed pension from an employer of a state system such as the State Teachers Retirement System or Public Employees Retirement System, the bond equivalent portion of his/her overall retirement portfolio will be even greater, implying that greater exposure to equities might be warranted.

This type of retirement income planning should be modified to meet individual investment and retirement considerations.

If the retiree had been planning to derive retirement income annually from the investment portfolio, the investment horizon for a portion of the account would be shorter and less able to be invested in risky assets, resulting in fewer equity and more bond or Treasury components in the portfolio.

Even with a longer investment horizon, a personal intolerance for risk dictates fewer equities and more bonds in a portfolio. There’s no sense in being retired and worrying about the stock market, no matter how far in the future you plan to spend the money!

Additionally, a retiree who anticipates needing large sums of money for future major purchases, anticipated medical expenses, paying for a grandchild’s education, etc., may wish to reduce equity exposure in his/her portfolio.

Last but not least, a retiree carrying larger amounts of consumer debt should weigh carefully the wisdom of being invested heavily in equities. Once the paychecks stop, earning one’s way out of debt is no longer an option. If the fixed, or bond, portion of the portfolio can generate enough income to pay the debt, then it should be carefully invested to maintain that future earning power with as little risk to the principal as possible.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Case for Dividends

by Bruce Fenton

Dividends do matter—not exactly a concept we embraced during the boom of the late 1990s!

Dividends provide several benefits often overlooked by investors. An investor emeritus who remembers buying stocks in the 1930s will tell you stocks were once valued by the dividends they paid. They used a price-to-dividend instead of a price-to-earnings valuation method.

Since dividends have to be paid from hard cash, dividends represent real earnings. For a number of years, dividends were out of favor with growth companies, whose strategy was to reinvest corporate earnings back into the enterprise. This led to the abuses now being played out in the nation’s courtrooms where former corporate executives are being held accountable for manipulation of earnings and other accounting scandals.

Corporations paying dividends are being forced to exercise better capital discipline, which, in the long run, should result in better-run businesses. Balance sheets should improve as management will be forced to make better decisions regarding the use of shareholder assets.

During the last decade, the emphasis for stock valuation has been on the price/earnings multiple. Since the real value of any investment is the stream of future cash that will come to an investor (discounted for time, opportunity cost of funds and risk), our unusually low interest rate environment makes stock P/Es unusually high. If interest rates increase, P/Es are likely to come down, bringing stock prices with them. This all adds up to making a case for dividends.

Owning the stocks of companies that have consistently shown their ability to grow earnings and increase their dividend payouts is not unlike owning pieces of investment real estate—rents are collected periodically, and when the property is sold, the price is a function of the earning potential of the enterprise. The best part of this analogy is that stocks like these that are held for a long period in which the investor collects “rent” in the form of dividends do not have to be watched minute by minute on CNN.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Planning for Non-Traditional Households

by Bruce Fenton

The Massachusetts court decision allowing gay and lesbian marriages to be recognized has captured a great deal of media attention. From a financial planning perspective, this issue raises the question of planning for non-traditional couples and families.

Our culture is a diverse mixture of traditional “Father Knows Best” households and households made up of unmarried heterosexuals, gay and lesbian partners, and single parents.

Non-traditional households are not accorded the same rights under law as traditional households. Most, but not all, of these rights can be replicated with proper planning.

The most basic planning for non-traditional families should be an estate plan. Estate plans should consist of a minimum of three documents for each partner: a will, durable power of attorney for health matters and a durable power of attorney for financial affairs.

A will is necessary to ensure that all property of the decedent goes to the proper recipient. Without a will, the state determines where a decedent’s property goes, generally excluding a partner, unlike a traditional marriage where property would automatically go to the surviving spouse.

If privacy and property control are issues, partners may want to consider setting up revocable trusts to own their respective shares of property. This allows property to pass inside the trust and avoids a potentially nasty probate contest.

Durable power of attorney for health care enables your designated agent to look after your health care needs if you are incapacitated, including the simple right to visit you in the hospital or the more complex right to make life-ending decisions. With durable power of attorney for financial matters, your designated agent is also authorized to manage your financial affairs under the same circumstances. Without predetermining these powers, the courts can choose an agent or custodian you might not have selected and often at a higher cost.

Traditional retirement planning easily allows retirement assets to pass from one spouse to the other, tax-free for tax-deferred retirement accounts. That is not the case with non-traditional couples. The surviving partner, even if properly named as the beneficiary on the decedent’s retirement account, does not have the option of a tax-free rollover to his/her own IRA. He/she must plan to begin distributions from inherited retirement plans no later than the end of the year following the year of the death.

Surviving partners have two choices: take the money out within five years or set up a lifetime minimum distribution plan. In either case, no early withdrawal penalties will apply, but state and federal taxes will apply on all tax-deferred accounts.

This raises another issue for non-traditional planning. If one partner works and contributes the majority of the household’s savings into his/her retirement account, and the partners decide to terminate their relationship, there is no easy way nor legal requirement to divide these assets. The same is true for other assets acquired by the couple but bearing the legal title of only one partner.

Therefore, next to the will and durable powers documents, it is important that the couple have a written partnership agreement in place that will provide clarity to the relationship and specifically spell out how property will be handled in the event of a dissolution of the relationship.

Single-parent households face many of these same problems. Proper wills with guardianship language for minor children and durable powers of attorney are a must. Careful thought should be given to retirement planning and distribution of retirement accounts at death. Single parents should also have a life insurance plan in place where the beneficiary of the plan is a trust within the will. This will help ensure that minor children are properly looked after in the event of the parent’s death.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Financial Planning for New Couples

by Bruce Fenton

Financial planning too often focuses on the end game—estate planning, retirement planning, life insurance, legacy building, etc. The need to help young people just starting a life together plan their financial world is sometimes lost in the scuffle.

New couples must focus on how to meld two individual financial entities into one, how to talk about money, and how to make decisions for “we and us” rather than “I and me.”

If I were asked for advice by a young couple (not that the young often seek such advice, as any parent would attest), here is what I might tell them.

First and foremost, your financial world together is now a team game. It should be something you are willing to openly discuss in a non-judgmental environment. In this game, there are few right or wrong answers . . . just differences of opinion that should be respected by both.

Second, work out a plan to handle money. An easy first step, particularly where both spouses have careers, is to set up a joint checking account for paying common expenses incident to running the household and contributing to joint savings accounts. Pay your personal expenses from your own checking account, but be accountable for contributing your share into the joint account.

Third, remember that saving first and spending what’s left will help you build wealth and live within your means. Setting up a simple budget to cover fixed, predictable expenses such as housing, food and utilities will help you define what you need to live on and what you have available to save.

You should have three savings accounts:

1. An emergency fund for unexpected larger expenses should hold 3-6 months’ simple living expenses
2. Each should contribute to his or her respective retirement account, even if only a small amount each month
3. Set up a savings plan/investment account for larger, longer-term goals, such as a first home, new car or furniture.

Set small targets for accumulation targets in this account. When you hit these targets, reward yourself with a treat—dinner out, a show, etc. The little treats make the bigger sacrifice worthwhile.

As a new husband and wife, you should also check the beneficiary statements on your IRAs, employee pension plans and life insurance. Your new spouse should be the primary beneficiary of all.

Property insurance, car insurance, health insurance and life insurance should all be reviewed to ensure that each of you is covered appropriately.

The titles of property each of you owned before marriage, such as cars, stock accounts and real estate, should be reviewed. You may want to make it community property if you reside in a community property state. If not, at least title it in joint tenancy so that if one spouse passes, the surviving spouse is not disinherited.

Finally, start your new life together with a simple will and durable powers of attorney for health and financial affairs. This will ensure that if one spouse becomes disabled, the other spouse could make necessary financial or health decisions for both.

Building a life together is more like running a marathon than the 100-meter sprint. It takes time, understanding and good communication to make it work. It’s all about teamwork.

Bruce Fenton is a financial consultant, a writer, and the president and founder of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Bull vs. Bear

by Wendell Cayton

In a tradition that dates back 150 years to the California gold rush, a bull and a bear were thrown into a ring to do battle as entertainment for the miners. The modern “miners” in this spectacle were a group of stockbrokers and financial service professionals from the United States and Canada. The furry critters providing the entertainment were two widely followed stock market prognosticators—one an unapologetic bull and the other an unabashed bear.

These two opposites shared a stage in a debate at an Atlanta conference I recently attended. Bearing fangs and sharpened claws was “Bear” Robert Prechter, Jr., an avowed advocate of the Elliott Wave system of technical stock market analysis. Dueling with pointed horns and slashing hoofs was “Bull” Harry Dent, famous for his optimistic views of the stock market.

Prechter is widely recognized as an advocate of a form of technical analysis known as the Elliott Wave Theory. Users of this theory predict future market movements based on charting prior patterns of market performance. Elliott Wave theorists generally believe the stock market will move in a five-wave pattern. A correcting down wave follows each upward wave. By the fifth wave, the correcting event is generally thought to be a downward market fall to below the levels of the start of the first wave.

According to Prechter, the market is approaching the top of a fifth wave in a pattern that began with the market crash of 1929. Therefore, he is predicting a major correction, with the Dow pulling back to a 60 year low. Prechter has made similar claims in the past, one as recent as May 1997 when he inaccurately forecasted such a drop. Despite that missed call, he remains convinced the markets are poised for a serious correction.

For those more interested in fact than fantasy graph models, Dent provided hard evidence and research based on consumer spending pattern. His models project a Dow roaring ahead to the range of 40,000 before he sees a major correction, which he predicts will hit sometime between 2007 and 2010.

Dent, best selling author of The Roaring 2000s, makes no apologies for his optimistic future for the next seven to 10 years. Using models based upon demographic trends, Dent sees a stock market continuing to climb into the later part of the first decade of the new millennium. He first unveiled his analysis in 1993 in his book The Great Boom Ahead. He based his predictions for stock market movements on the spending and savings habits of the population. He theorizes that the economy is driven by spending and savings patterns that are a function of the age of the population.

According to Dent, a younger population is likely to spend heavily for establishing a household formulation, using a considerable amount of credit in the process. This will drive up interest rates and inflation, similar to what the country experienced in the late 1970s when the BabyBoomers were young and establishing households.

Spending patterns change later in life. As children grow and leave home, parents enter their peak earning years and begin to concentrate on the accumulation of financial assets. Buying patterns change and saving increases. Interest rates and inflation fall as the mature work force becomes more productive.

In my opinion, Dent provided readily understandable facts and fundamental arguments to back his argument while Prechter relied on theories based upon fitting lines to charts of past market movements. I would have to say the “Bull” in this case won over the crowd…but one could also say that is a little like preaching to the choir!