What to Look for When Selecting a Trustee for Your Estate Plan

Posted on October 23, 2012 | Financial Planning

Selecting the people to carry out the provisions of an estate plan is one of the most important and difficult tasks involved in the estate planning process. It is impossible to make a proper selection of any member of the estate planning team without understanding, in general terms, what it is the individual should be doing and how that person interacts with others who have important roles to fulfill.

A trustee is the person or institution named in a trust agreement to carry out the objectives and follow the terms of the trust. A trustee can be a non-professional individual, a professional individual (such as an attorney, an accountant or an investment adviser), or a corporate fiduciary (such as a bank or corporate advisory firm). They need not be related, and in some circumstances it is inadvisable to select a close relative.

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Dogs of the Dow

Posted on October 19, 2012 | Financial Planning

Every January, Dogs of the Dow draws attention. The strategy is simple. At the start of every calendar year, sort through the 30 stocks in the Dow Jones Industrial Average and buy the 10 with the highest yields. An equal dollar amount is allocated to every stock and the portfolio is held for the entire year. On the first trading day of the next calendar year, repeat the process.

The idea behind the strategy is that every year a new portfolio will be created. This portfolio is designed to be held for 12 months. Investors should profit by purchasing supposedly out-of-favor stocks whose relative yields suggest their valuations are attractive.

The idea of buying the 10 highest-yielding Dow components was popularized by Michael O’Higgins and John Downes in “Beating the Dow” (Harper), first published in 1990. In the 2000 edition, the authors also discussed implementing the strategy at different times, such as in October or mid-December.

In actuality, there may be no benefit to buying stocks on the first day trading day of the New Year as opposed to, say, the day after Thanksgiving. While studies have shown that the markets tend to perform better between November and April than between May and October, last year “selling in May and going away” would have caused you to miss out on a rally that sent the Dow higher by more than 18%.

Yield is the amount of dividends paid relative to a stock’s price. The calculation is simple: total dividends expected to be paid over the next 12 months divided by current share price. For example, let’s say a company has historically paid a quarterly dividend of 25 cents per share and is expected to continue to do in the future. If the company’s stock trades at $40 per share, the yield would be 2.5%. (Total expected dividends of $1 per share divided by a $40 share price equals 2.5%.)

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Personal Finance Library

Posted on October 15, 2012 | Financial Planning

The AAII Personal Finance library was developed by the editors at the American Association of Individual Investors. It is designed to serve as a starting point for anyone interested in learning to become a better and more profitable investor. This library is open to the public and covers the following investing topics: portfolio management, personal finance, stocks, bonds and mutual funds.

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Optimizing Your Retirement Income: What Works Best and Why

Posted on August 17, 2012 | Financial Planning

With the oldest baby boomers hitting 62 this year, and more than 70 million of them likely to enter retirement over the next 20 years, the hard truth is that only a small minority are accumulating enough savings to provide for their income needs during decades in retirement.

This uncomfortable reality is particularly true given the overall rise in life expectancy, sharply rising medical costs, the trend toward more active and costly retirement lifestyles, and, not least, the relentless toll of inflation.

For the financially fortunate with sufficient personal savings, Social Security benefits, and corporate pensions to meet all their retirement income needs, the main financial challenges of retirement are how to invest and spend wisely and perhaps provide for their heirs as well.

However, more than 75% of all workers age 55 or older report having less than $250,000 in investments apart from their homes and pensions, according to a recent survey by the Employee Benefit Research Institute (EBRI). At a recommended initial withdrawal amount of 4%, that provides an income from their investments of just $10,000 in the first year of retirement. Nevertheless, those approaching retirement can improve their income and financial security in retirement depending on their flexibility and their approach to four big decisions that are usually under their control:

Generally, no single decision will improve pre-retirees’ potential retirement security as much as continuing to work even a few more years beyond the anticipated retirement date.

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New Rules for Converting to a Roth IRA

Posted on August 2, 2012 | Financial Planning

Prior to January 1, 2010, only taxpayers who met certain income requirements were allowed to convert funds in a tax-deferred account (e.g., traditional IRA, 401(k), 403(b), 457, SEP-IRA) into a Roth IRA. Now this restriction has been removed. Since you will still have to report the converted funds as income and pay the associated taxes, you need to consider whether converting funds to a Roth IRA is beneficial for your particular financial situation.

There are several factors that could influence your decision to convert funds.

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Due Diligence: 10 Steps to Avoiding Ponzi Schemes and Financial Fraud

Posted on July 27, 2012 | Financial Planning

Bernie Madoff is now behind bars. But the uncovering of his enormous and long-running Ponzi scheme, and the fraud committed by several other financial hucksters, highlight the importance of asking the right questions and doing your own due diligence before selecting an advisor or participating in an investment.

What areas should you focus on when performing a due diligence review?

Here are 10 basic steps all investors can take—as well as certain indicators that should serve as red flag warning signs of the potential for trouble down the road.

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The 10 Myths of Retirement Planning

Posted on July 18, 2012 | Financial Planning

Retirement planning requires a clear-eyed analysis of future needs and income. Yet many individuals view retirement through rose-colored glasses.

Here are some of the most common myths and how you can bring reality into focus.

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529 College Savings Plan

Posted on June 26, 2012 | Financial Planning

With tuition costs rising every year, saving for college is a top priority for most families with children. A 529 savings plan, also called a qualified tuition program, allows you to build up savings to pay for qualified higher education at eligible institutions using tax-free dollars. 529 plans were named after a section of the tax code and are offered through states.

There are three types of 529 plans: traditional savings plans, prepaid tuition plans, and independent plans.

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Does Social Investing Generate Higher Returns?

Posted on June 1, 2012 | Financial Planning

Socially responsible investments have attracted much money, many investors, and many studies. We have studies of socially responsible mutual funds, socially responsible indexes, “sin” stocks, stocks with good and bad environmental records, and stocks with good and bad employee relations. But some parts of our knowledge are inconsistent with other parts and some gaps in our knowledge remain.

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The Role of Risk-Free Assets

Posted on March 30, 2012 | Financial Planning

Treasury bills and other cash investments have the advantage of liquidity and little downside risk, but they offer no real long-term growth, and typically the income is the lowest among fixed-income alternatives.

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