Occupy Wall Street, Boston or Watercolor

November 10th, 2011

Occupy Wall Street, Boston or WaterColor
Originally published November 5, 2011
Buz Livingston, CFP
The Walton Sun

The 99 percent versus 1 percent debate dominates the news.

If I were a betting man, I would wager South Walton has more 1 percenters compared to the rest of the country. Unique for our environs, we likely have more former members of the 1 percent club due to the real estate bubble. While real estate values may be coming back there are two inviolate investing rules: No. 1, your return is directly proportional to risk and No. 2, see No. 1.

The Occupy Wall Street movement gets some negative press, but dismiss their complaints at your own fiscal risk. While at the Garrett Planning Network’s annual retreat, I spent a little time with my good friend and Marine aviator Rick Ferri. On his blog, www.rickferri.com, Ferri challenges Occupy Wall Street for being in the wrong place.

Boston should at least share the focus of their ire, come to think of it, yours, too. One of the greatest fleecing machines, the mutual fund industry, began in Boston, not Wall Street. Actively managed mutual funds, the backbone of the industry and most likely your retirement savings, have two distinct characteristics, high fees and underperformance. Like the French stormed the Bastille, Occupy Boston should march from Boston to Malvern, Penn., home of Vanguard index funds/exchange traded funds —a true consumer-friendly choice.

Don’t get me wrong, a small number of laudable active managers exist — Pimco, T. Rowe Price, Selected Funds and a few others but roll call does not take very long.

Locally, Fairholme Fund owns 27 million shares of Walton County’s largest private landowner, St Joe. Fairholme’s manager, Bruce Berkowitz garnered multiple investing acumen awards but hold the applause. Due to Fairholme’s outsized bet on JOE coupled with a few other doozies like AIG, Fairholme’s recent performance is akin to Florida’s second half offensive production in Jacksonville. Fairholme’s shareholders should occupy WaterColor.

You may be inclined to see the 99 percenters as rabble rousers or troublemakers especially if you are salting away the maximum in your retirement plan. Think again; the financial services/retirement planning complex poses a real threat to your retirement. In the next few months, the Department of Labor is supposed to require full, complete and plain-English retirement plan (401k, 403b, 457) cost disclosure.

Most people will be (should be) shocked to learn they pay between 2 percent and 3 percent annually. If you whine about variable annuity fees and commissions, retirement plan costs are just as bad.

If you have a $500,000 401(k) plan balance, you pay $12,500 annually assuming a 2.5 percent nick. Contrasted with the Thrift Savings Plan (TSP) available to federal employees the levy is a mere $1,200. To paraphrase the late Sen. Everett Dirksen (R-Ill.) “Ten thousand here, ten thousand there, soon you are talking real money.” No taxpayer money subsidizes the TSP either; it just runs more efficiently.

Whether you occupy Wall Street or ride in fancy dining cars, drinking coffee and smoking big cigars, retirement plans with actively managed mutual funds deserve a good protest. On the other hand, it’s your money. If you want to give it away be my guest.

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Don’t Protest….Beat the Banks Instead

October 20th, 2011

Don’t Protest Beat the Banks Instead
Buz Livingston, CFP
Originally published in The Walton Sun, October 15, 2011

Years ago, an Edward Jones stockbroker (actually Edward D. Jones for appropriate historical perspective) told me people go to banks like lambs to slaughter.

Banks exist to make money, deal with it but don’t be a sucker.

Bank of America finds itself labeled as bogeyman de jour for bank chicanery but other large banks plan to nick customers who use debit cards. Without sounding too old-school debit cards never appealed to me. In the case of a vendor dispute, credit cards offer more protection. Contrasted with a credit card, debit card fraud can leave you on the hook for hundreds of dollars unless reported promptly. Plus using a debit card means you have to chronicle every purchase. While electronic banking and sites like Mint.com make tracking easier, who wants to be wired constantly?

If the fee bothers you vote with your feet. “A lot of folks don’t want to be charged to use debit cards,” said Greg Wheeler, vice president of marketing for Tyndall Federal Credit Union. Other local credit unions with no –fee debit cards include Eglin Federal Credit Union and Army Aviation Center Federal Credit Union.
Many online banks offer no-fee debit cards, too. Through November, ING Direct (www.ingdirect.com) even provides a 1% cash rebate on debit card purchases. Online banks often rebate some or all ATM fees. ING Direct offers a network of over 35,000 no-fee ATMs around the country and a $50 bonus for new accounts.

Smaller banks or community banks often have lower fees, too.

Start carrying your checkbook again or go back to carrying cash. Use a credit card and pay the balance every month. Ways exist to beat this thing and it’s not that big of a deal.

We have the opportunity for a quick lesson in how free markets works. Banks made a calculated decision and after careful review increased their fee structure. Banks surely realized some customers would leave but others would opt to stay. Some will stick with debit cards and grudgingly pay because they don’t qualify for a credit card. Still others will find the hassle of changing a dozen or more electronic drafts too much trouble.

I think Ayn Rand would be excited. If enough folks break camp for greener pastures, maybe things change.

Quit whining about Dodd/Frank. Big banks and brokers pretty much got what they wanted from Dodd-Frank. Their penalty was the equivalent of a warning citation for drunk driving while running 80 mph in a school zone…pretty weak tea. Sure fees are annoying, don’t forget Dodd/Frank also banned raising credit card rates at any time for any reason and forced banks to disclose their fee structure.

If you are mad at Bank of America, the $5 fee is small potatoes-look at their executive compensation. These geniuses, including but not limited to JP Morgan, Wells Fargo, Merrill Lynch, Wachovia, Morgan Stanley, Citigroup, and, the king, Goldman Sachs, almost single-handedly wrecked the economy, got bailed out by Republicans and Democrats alike while the middle class gets the shaft. Five bucks, LOL.

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The Demise of the Bond Market Has Been Greatly Exaggerated

February 3rd, 2011

Like generals fighting the last war financial pundits seem determined to predict the next bubble to burst.

Vangaurd does a great job of allaying any fears.

Yes, bond funds will lose value when interest rates increase.  Remember, since rates will be rising, income investors will receive more income.

Their check will be larger, or more likely, their eletronic balance will be higher.   Either way they will have more money to spend.

One way to avoid interest rate risk is to buy individual bonds and hold them to maturity.

You can minimize interest rate risk by owning short term bond funds.

Risk cannot be avoided; it’s part of the human condition.

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There Are No Easy Solutions

December 12th, 2010

Like it or not, there are no easy solutions

Originally published Walton Sun, December 11, 2010

If you catch me in one of my 30A haunts wearing a ball cap with FOOL emblazoned on the crown, don’t judge too harshly. Tom Gardner, one of The Motley Fool’s founders, personally gave me two FOOL ball caps. In “As You Like It,” Shakespeare references “… a motley fool,” or the court jester as the only person who could tell the king the truth without worrying about losing his head.

In 2005, economist Dr. Raghuram Rajan boldly predicted the pending disaster affecting the U.S. economy. What made Rajan’s prediction so unusual was the venue — long serving Federal Reserve Chief Alan Greenspan’s Jackson Hole, Wyo., retirement bash. Rajan alone dared to question Maestro Greenspan’s policies with his presentation “The Greenspan Era: Lessons for the Future.” No one lopped his head off, although Larry Summers, former head of President Obama’s Council of Economic Advisors, directly confronted Rajan after his speech. Summers claimed increased regulation would reduce the productivity of our friends in the financial industry.

Many blame the financial crisis America still struggles with on housing, but Rajan boldly (again) sees the housing bubble as a symptom of a more insidious problem — income inequality. Before you throw the paper down and shout “wild-eyed liberal,” remember Rajan teaches at the University of Chicago, a freemarket bulwark. For those reading online, don’t blow your coffee on the screen either. Both the good doctor and I are pragmatists.

Beginning in the 1980s, income inequality in the United States widened significantly. Since there was little political pressure to expand welfare or other income redistribution ideas, housing became the panacea. For Democrats, home ownership for the poor would benefit their constituency and Republicans thought homeowners would eventually vote Republican. Politicians from both sides of the aisle pushed Freddie Mac and Fannie Mae to subsidize more mortgages.

Unlike equities, housing prices could not drop. Didn’t you hear that pitch? Plus, homeowners could borrow against ever-increasing home values, thus fueling demand for goods and services.

We know how this story is playing out. Despite the recession ending, we will be facing tough economic headwinds for quite awhile. Rajan projects we are looking at five years from the trough of the recession (mid-2008) before job numbers return.

To prove his free-market moxie, Rajan disdains the argument we should stimulate demand because “it is not about demand… we have a structural problem,” — specifically income inequality. Without addressing income inequality, pumping up demand only creates the illusion of growth.

Trying to redistribute income does not work either, Rajan argues. Rather, the best way for American income inequality to drop is by improving education and/or developing skills that translate into 21st century jobs. Few Americans can afford a good education anymore; costs are enormous.

One reason the United States has enjoyed its success for so long is because when problems get big enough, we have historically come together and worked toward a common goal. Income inequality makes compromise fruitless and creates treacherous political dynamics. We need to get away from bumper sticker solutions and begin to accept the fact there are no easy answers.

Anything else is foolish (with a small f).
Buz Livingston is a certified financial planner. He operates Livingston Financial Planning Inc. focusing on hourly financial planning and investment management. Contact him directly at 850-267-1068 or at buz@LivingstonFinancial.net  .

BUZ LIVINGSTON

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Santa Comes Early

December 6th, 2010

Here Comes Santa Claus … Here Comes Santa Claus

December 05, 2010 4:50 PM

www.waltonsun.com
On the ride home from Tallahassee Memorial Hospital, we needed some holiday cheer. Since Santa shows up at malls before Thanksgiving, what the heck, I decided to beat the Fat Guy to the punch. For the first time in our 30 plus years of marriage, we sang Bruce Springsteen’s “Santa is Coming to Town” before Thanksgiving. When your dad’s chest has been split open, why not sing?

Even if you have not been good this year, fret not, you still have something under the tree from me. Every six months, the S&P Indices publishes a review of mutual fund performance specifically tracking the performance by the hot hand of prior years. They examine the persistence top half and top quartile (for Auburn folks the latter translates to top 25 percent) funds exhibit.

For actively managed mutual funds, the results are the proverbial lump of coal. Of the funds in the top half in September 2005, only 4.16 percent of large-company funds and 4.55 percent of small company funds maintained a top-half ranking over five consecutive years. Statistically, random outcomes suggest a 6.25 percent rate.

With other timeframes, the results are overwhelming (or underwhelming if it’s your money). In September of 2008, data shows 595 U.S. equity stock funds in the top quartile. One year later, 21.51 percent of the funds remained while two years later only 5.21 percent could stay in the top quartile for consecutive years.

The longer you look at the numbers, the worse the results are. In September of 2006, there were 542 U.S. equity stock funds in the top quartile. A year later, less than 13 percent were still standing. Of that amount, only 1.85 percent could remain in the top 25 in consecutive years. By 2010, not a single solitary fund in the Class of 2006 Top 25 could stay for five consecutive years. A Georgia Bulldog fan can relate.

The mainstream investment community must perpetuate the myth of performance or else the industry’s substantial investment fees could not be justified. In an in-house study, Morningstar found their own vaunted stars were less of a predictor than the annual fees charged. Jack Bogle, founder of Vanguard Group, eloquently pointed out, “In the investment fund business, you get what you don’t pay for.”

On Nov. 18, The Wall Street Journal published an excerpt from the latest edition of Burton Malkiel’s “A Random Walk down Wall Street” where he recommends using index funds as the core (at the very least) of your investment strategy. His logic is simple: Low-cost index funds outperform the majority of actively managed mutual funds. Very few professionals can consistently “beat the market” over the years. For some odd reason, Internet bulletin boards seem to house a high proportion of these shrewd investors.

I own and endorse “A Random Walk down Wall Street.” Laney and Jenny keep a copy on the shelf at Sundog Books and the gift-wrapping comes free.

MEDICARE OPEN ENROLLMENT ALERT — From Nov. 15 to Dec. 31, U.S. residents 65 or older can make changes to their government-subsidized health and drug plans. Fewer Medicare Advantage and standalone drug policies likely means less confusion but the process remains byzantine. Don’t delay.

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Thanksgiving

December 1st, 2010

Buz Livingston, CFP

Originally published November 27, 2010

www.WaltonSun.com

My “things to be thankful” list had a much-needed entry. With the Georgia Bulldogs still chasing bowl eligibility, family infirmities and a dear friend’s much too-early death, my thankful cupboard was barren.

Then Robert Reynolds of Putnam Investments spoke at the National Press Club.

When Wall Street types show up in Washington, D.C., you can count on them asking for money, railing against regulations or paying a politician. The Wall Street gang rarely has an idea good for America. Perhaps being headquartered in Boston rather than The Big Apple gives Putnam immunity.

As a disclosure, we never recommend Putnam mutual funds. Their lineup consists of actively managed funds and active management doesn’t work, at least not for clients. When I was a child, I used Putnam; when I became a man, I put away childish things. Nonetheless, their CEO speaks with unusual clarity.

Reynolds touched the third rail of American politics — Social Security. Instead of lobbying for privatization as most financial leaders, he lauded the program calling it a “cornerstone element of most Americans’ retirement.” He lambasted an item high on the Republican agenda — private accounts — as being unnecessary for the solvency of Social Security. Most people cannot or will not save enough to equal the present value of their Social Security benefit. Sure, small business owners and the self-employed bear more of the burden since folks like us pay both sides of Social Security but those were the rules when we got in the game.

He realizes society benefits handsomely from a system where retirees can live with dignity and wellbeing. Reynolds laid down a marker unveiling a “new solvency” initiative where he spelled out changes in tax-and-spending policy along with measures to strengthen individual savings. Included is support for mandatory IRAs allowing workers at companies without a companysponsored plan to save via payroll deduction.

Pay yourself first works, and if you never see it, you don’t spend it.

Employee participation in 401K plans has increased at companies with voluntary automatic enrollment (opt-out), Reynolds said. He recommends making enrollment mandatory. We should evaluate if tax incentives for employers/employees would be beneficial.

Reynolds also supports many initiatives leaked earlier this month from the deficit commission-gradually raising the retirement age, adjusting how benefits are calculated for higher earning workers and broadening the tax base. Liberals unfairly label the first two as gutting Social Security while Republicans complain about taxes and both sides are wrong. All three will require something seldom seen — “unusual political courage.”

Social Security is no Ponzi scheme, ask a Madoff investor. The Social Security Administration projects a 22 percent benefit reduction in 2037 when reserves are exhausted. Madoff investors face a 100 percent reduction, so drop the hyperbole. Goofy allusions to Social Security being little more than government IOUs further muddies the water. The “IOUs” Social Security detractors denigrate are U.S. treasury bonds and allow Social Security to match beneficiaries’ projected needs.

We need solutions, not sound bites.

I am so thankful for common sense recommendations instead of bumper sticker rhetoric, and I hope Pop comes home for Thanksgiving. If Georgia gets bowl-eligible, I hit the trifecta.

 Unfortunately, our Thanksgiving table will have one empty glass

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The Canary in the Mineshaft

October 14th, 2009

The Canary in the Mineshaft-Oh! Atlanta

Buz Livingston, CFP®

www.LivingstonFinancial.net

Originally published October 17, 2009 

“You’ve never seen Little Feat live? It will be fun,” I was promised.  For our anniversary our son, Jim, took us to see them play in the Variety Playhouse.  There are a few things in life better than hearing Little Feat play Oh! Atlanta in Atlanta… but not many.  

Growing up in the other Georgia, it took some time but Atlanta finally earned my respect.  For all of its warts, being too busy to hate turned out to be a lot better strategy than fire hoses.  One of the unintended consequences of civil rights was the unfettered right for black officials to be just as short-sighted as white ones. 

During the 2001 and 2005 Atlanta city elections grandiose pension benefits were promised to current city employees.  There was only one small problem-no one planned how to pay for their generosity. In 2001 pension benefits cost the city $43 million, this year the tab is $136 million and if changes aren’t made expenditures will rise.    Just like the path to hell being paved with good intentions the city’s financial woes had noble goals. City employees don’t pay into Social Security plus their wages are often lower than surrounding counties.  In order to staunch the tide of employees leaving for higher paying jobs, increasing pensions was hailed as the solution.  But the plan didn’t work, employees are still high-tailing it to other jobs.   

What makes the decision even more galling is the fact that The Atlanta City Council, under pressure from unions, caved in and granted increases in pension benefits.  Blissfully ignoring that Atlanta pension funds had been underfunded for years.   Elected officials of all stripes and political persuasions have been kicking the retirement benefit can down the road but there will be a day of reckoning.  It comes a bit sooner in some places than others.   

Atlanta’s dilemma is a microcosm of what Social Security is facing.  Pension benefits are a way to placate voters but there is no free lunch.  Ronald Reagan increased Social Security tax rates (Oh! Yes he did) to stave off financial pressure on the system. Atlanta officials will have to do the same thing.  Plus city services will be cut. Guess what, boys and girls, that’s what must happen with Social Security.  Taxes will have to be increased and/or benefits will have to be cut.  By one estimate, in 2083 Social Security and Medicare will take all of our nation’s Gross Domestic Product.   

Some folks claim the best job in America is an actuary-folks that run complex financial models involving risk and uncertainty.  Personally I consider actuaries the smartest people in the world and they deserve to have the best job.   Actuaries claim that full Social Security benefits can only be paid until 2040. The American Academy of Actuaries website has an interactive tool at http://www.actuary.org/socialsecurity/game.html where you can “solve” Social Security’s problems.  Come up with your solutions. The web site does a good job of presenting alternatives and explains the consequences.   

“Fiddle, Dee, Dee, I won’t be around in 2040 so I don’t care” some say.  Ignorance is not just bliss, sometimes it’s just ignorance. Social Security is currently running a reserve but this reserve has been used for other federal programs and has helped to fund tax cuts. The reserve will go away in less than ten years.  So unless you are planning on leaving this earth in the interim, rethink your strategy.   

Social Security’s ills can be solved but it will take shared sacrifice-the current system is unsustainable.  The longer we delay the more painful the solution will be.    For the Little Feat aficionados who read this far we heard the Waiting for Columbus version of Willin’.

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Increased Lending Standards to Impact Housing Prices

October 7th, 2009

Increased lending standards could impact real estate values

Buz Livingston, CFP®

www.LivingstonFinancial.net

Originally published in The Walton Sun, July 27, 2009

Ronald “Stormy” Smith was a plain-spoken, shoulder to the grindstone kind of guy.  He lived most of his life in the hamlet of Eldorendo (last syllable correctly pronounced “dah”) in northern Decatur County (GA). For comparison purposes Paxton would be a metropolis aside Eldorendo.  With an acetylene torch or electric welder Stormy was an artisan. He left this world a bit too soon and I regret not saying good-bye.  Once during harvest I was facing a dilemma; an unforeseen collision with a “lightered knot” caused the bars on my peanut shaker/inverter to be twisted like a pretzel and the parts house was closed.  “Can you fix it, Storm?  “Why hell, yeah” was the answer. “When I get it hot, hit it with that sledgehammer, right where I tell ‘ya”.  After a couple of ineffectual blows, “Get out the damn way and gimme that sledge.” 

In the early 80s while trying to arrange financing for his home, Stormy observed, “A bank won’t loan a fellow no money, les he can show ‘em he don’t need it”.  Rural banks were reluctant to provide financing unless there was sufficient collateral and/or adequate income.  Fast-forward two decades and banks were quite the opposite.  You didn’t just have to fog a mirror to get a loan, you could have fogged a mirror previously and someone would loan you money.  Those days are gone and they are not returning.  More stringent lending requirements will be the norm. 

Tightened lending standards will dampen the recovery of local land prices.  . Let’s be clear, even though there are hundreds of residential lots within easy strolling distance of my abode that will never surpass the boom time prices I like real estate – a lot. And still think real estate is a good place to invest.  A rental piece of property with a paid off mortgage or steady cash flow is hard to top.  Gulf front and bay front property; those are unique places.  Exclusive Walton County locations -some of the prettiest places in the world will be OK.  Just like after the dot.com boom Apple Corp has kept on clicking, along with Hewlett Packard.  Those two outfits are analogous to Watersound Beach or The Retreat.  Real estate investing means a long term commitment.   

What we experienced nationwide (more dramatically, here) was a real estate balloon popping.  Just like when a real balloon explodes, it’s a waste of time to keep blowing in it; you only get hot air. Even after the technology bubble blew up there are Dell Computer shareholders who still have profit even if the price is 15% of its peak.  Dell won’t see $50 bucks again and there are vacant lots from Pensacola to Port St Joe in the same predicament.  Some folks still have a profit (or maybe that’s their perception) because they bought land a years ago.  Depending on the location (think old town of Santa Rosa) those places won’t ever see the boom time values.  On my daily constitutional there are scores of lots in the same sad shape.    

In the feeding frenzy boom time days, properties appreciated rapidly.  Banks now have their “Come to Jesus” alter call.  If something sold for “X” dollars, lenders won’t be inclined to magically value it as “X+Y”.  Going forward banks will be more conservative.  Maybe we won’t have pony up for bailouts again.  Not such a bad idea.   My point is ignoring the impact that lax lending standards played in the nationwide real estate bubble could be a dangerous strategy.  

Today’s column is in memory of my old friend Stormy and Paul Hemphill whose New York Times obit appeared with a small error.  Growing up I cut my teeth on Mr. Hemphill’s Atlanta Journal columns.  He abandoned journalism in the 1970s but continue penning Southern genre novels and non-fiction.  Northwest Florida was the locale of his first novel, Long Gone-a story about a baseball team named the Graceville Oilers, sex and racial tensions in the Deep South. His memoir, Leaving Birmingham, was nominated for a Pulitzer Prize.  I wager Mr. Hemphill would be proud to share a memorial with a top-notch welding professional and to know a small southern weekly corrected the mighty New York Times.

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Condo Prices Still on the Decline

October 7th, 2009

South Florida Condo Prices Could Sink Further

Buz Livingston, CFP® All Rights Reserved

www.LivingstonFinancial.net 

Published in The Walton Sun, October 10, 2009 

 “Dad, don’t you read anything other than financial stuff?”   Jason Zweig’s book, Your Money and Your Brain is scientific/financial so you can kill the proverbial two birds. Plus it is nice to re-read a chapter late in the afternoon as the sun sinks low. Most of my reading is online now: the local news, Atlanta and Athens papers along with The Wall Street Journal and NY Times.  Barrons,  Dow Jones business weekly, is the lone newsprint redoubt for me.  Reading Alan Ableson is like being in a master craftsman’s workshop.

Barrons’ September 21st issue featured Steve Bergsman’s Florida Condos: No Bottom in Sight.  Bergsman is no neophyte. His new book, After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade wins high praise. Jack Cohen of real investing icon Cohen Financial calls After the Fall “a fresh look at opportunities and strategies for real estate investing”.   Bergsman focuses on the South Florida market and the numbers are still scary. Yes, there are folks scooping up properties but according to Bal Harbour real-estate consultant, Peter Zalewski, while happy to see the business, “The reality is they will be riding out these units for quite some time.”  

 In June, July and August 2009, an average of 45 condos sold per month in Miami.  Contrast that with over 2400 condos remaining on the market. The glut leads Jack McCabe, a Deerfield Beach consultant to forecast a 10%-15% decline next year.  McCabe notes that bulk deals (multiple sales to one buyer) below construction cost or replacement value still may not be good investments. Brickell Station units in Miami are selling for $200/sq foot, a drop from $400 – $800 the units fetched in the heady glory days.  Since flipping is gone with the wind, renting is unavoidable and even at those prices you “might not cover your operational expenses”.     

The epicenter of the Florida real estate collapse is Lee County. In February 2006, there were 12 homes listed for less than $100K.  By February 2009, there were over 4000 homes listed under 100K.  To paraphrase the incomparable Larry Munson, there was some property value destroyed.    But this is Walton County and we are different, location, location, you know the rest.   People crave our beaches but the truth is both areas will be fighting some of the same demographic headwinds.  An NPR report recently noted that Florida school enrollment had dropped for four consecutive years. Historically, Florida has led the Southeast in population growth. But Harry Fishkin, an Orlando economist, claims that over the last two years North Carolina and Georgia have supplanted the Sunshine State in new residents. 

 

This year, University of Florida researchers report the first decline in population since 1946.  McCabe thinks the researchers may be low-balling the estimated drop.  I am not surprised that no one in Gainesville can do advanced math.  Florida’s lure as a retirement mecca is definitely on the wane. In 1980, over 25% of people over 60 who moved across state lines settled in Florida.  By 2007, the number slid to 12.5%.  William Haas, a professor at University of North Carolina-Asheville, speculates it will drop to 8% in the next decade.  However the total number of newcomers could remain the same since there will be an expansion of the 60-plus demographic.    

Most Americans don’t have sufficient resources for retirement. Whether it is South Beach or South Walton, high property taxes and insurance rates will affect where people choose to live.   According to Bergsman, our property tax structure is “inhospitable” since permanent residents are favored and not investors or second-home buyers.    

The economic engine that spurred Florida from an agricultural to metropolitan state has been emigration  and the gas is running out.  Going forward, Florida must develop industry with decent wages.  A good definition of insanity is doing the same thing repeatedly and expecting a different result.

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An Investing Lesson From Mother Nature

September 25th, 2009

An Investing Lesson from Mother Nature

Buz Livingston, CFP®   All Rights Reserved

www.LivingstonFinancial.net

Published in Walton Sun-September 26, 2009 

The snake did not hesitate and slipped into the cold water of Morrison Springs.  Fear is the default emotion when I see a snake but this was different. It was serene and beautiful watching the green snake glide across the stream. I steered the bow of my kayak around and showed the critter to Joe Wyatt, a naturalist for Hammock Bay.  Leslie Kolovich, 30A Radio, and Lori Ceier, Walton Outdoors had enlisted Joe to explain some of the local fauna and flora as part of their “Day at Morrison Springs”. 

Before you could say scat, Joe had the green tree snake wrapped around his arm.  “Skinny short snakes aren’t venomous; they have to constrict their prey. The exception being a coral snake.  Short fat snakes may be venomous since their venom can kill larger prey.” Snakes are a part of our ecosystem. You need to know the ones that will hurt you. The venomous snake of Eastern Diamondback heritage spotted crossing the Joe Baker Walkover in Blue Mountain Beach is one to avoid. 

On the way home through Red Bay, it dawned on me that annuities are like snakes; some will hurt you, others won’t.  The prior week I recommended a retiree use a portion of his deferred compensation to buy a single premium immediate annuity to bolster his retirement income but gave the opposite advice to someone else.  Why the difference? In the latter case the annuity in question was a variable annuity with annual costs coiled menacingly like a snake around 3%. 

The Journal of Financial Planning, August 2009 examined several different withdrawal strategies-mutual funds, immediate annuities, combinations of the two along with variable annuities with and without guaranteed withdrawal benefits.  There was no clear-cut winner.  

Guaranteed benefit riders are prevalent on variable annuity contracts.  This product appeals to investors who are wary of market losses.  However ignoring the fees is as dangerous as playing with snakes. “Wealth balance in the low fee scenario is roughly $184,000 higher” based on a $1M initial investment. 

Contrasted with variable annuities containing guaranteed benefit riders, a mix of mutual funds and immediate annuities “can generally provide investors with greater purchasing power”.   Also, a mix of mutual funds and immediate annuities yields “similar or even higher income flows than variable annuities with guaranteed minimum withdrawal benefits”.   It is pretty elementary. Variable annuities with guaranteed minimum withdrawal benefits assess mortality and expense charges along with fees for the withdrawal benefit rider on the entire portfolio.  These costs are absent from mutual funds.   

Even with this headwind under some circumstances a variable annuity with guaranteed withdrawal benefit may outperform.  Under some circumstances it makes sense to pick up a rattlesnake…most people would wisely defer though.  From the article’s executive summary: Mutual funds combined with immediate annuities “deliver solutions broadly similar to and even more flexible than a variable annuity with a guaranteed minimum withdrawal benefit”. 

Annuities are easy to understand-they provide a lifetime income stream.  If your annuity does anything else, you pay for it, each and every year.  Freedom from stock market fluctuation or guaranteed account balances are benefits you buy, sometimes dearly, and are often unnecessary. 

In certain circumstances an annuity with low annual costs may be appropriate for you.  But buying an annuity without understanding the product is not dissimilar from picking up a snake without knowing what kind it is.  In nature or investing what appears to be a good idea can turn out to be the opposite.  Joe told us that the chilly spring water could have killed the snake or shocked it so much a predator would have nailed it for Sunday dinner.

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