Strategic Money Management’s
Financial Savvy Newsletter,July 2006
By: Scott Saunders; email@example.com, tel. 321-773-6480
About the President: Scott Saunders is the President of Strategic Money Management, a sole proprietorship registered in the state of Florida in February 2004. He served as a
fighter pilot in the Air Force and retired at the rank of Colonel after 25 years of service to
his country. Since then, he has been an employee for three companies; one small
company engaged in engineering services and products near Washington, D.C., one
producing small and large military and commercial engines in Indiana, and one company
that is a defense contractor providing large scale integration products and services here in
Florida. He has held managerial and director positions in business development, program
development, and program management. He currently captures and manages business in
Command and Control, Manned and Unmanned Aircraft Development and Upgrade, and
Aircraft and Ship Logistics programs. He has a wife and three children. His wife, Patty,
is Chief of Marketing for Strategic Money Management and ministers to those in need of
natural alternative medicine. His daughter, Jennifer, and son-in-law, Sean live in
Virginia and are raising their two-year old daughter. His oldest son, Scott is an
entrepreneur, private investor and small business partner in California, as well as a
successful accredited investor. He and his wife, Suzanne are raising their son and
daughter. His youngest son, Matt, is graduating from George Mason University in June,
currently works as a carpenter, and a flight instructor. He and Cheri are expecting a
daughter in July. All three children got Rich Dad, Poor Dad for Christmas last year.
Scott and Patty are adding clients on a regular basis and are accepting new clients at this
Mission Statement: Our goal remains to help you improve your financial situation, moving to:
? Financial Freedom this month through:
o Dealing with the Bear Market predicted by this publication in May
o Taking action in other areas to increase/preserve net worth
This is my seventh newsletter, which I plan to continue to publish monthly. As I have
previously stated, you are welcome to contact me to pursue any of the topics in greater
detail and to arrange a one-on-one strategy session.
Dealing with the Bear Market predicted in May:
There should not be any doubt in anyone’s mind that we have entered into a
Bear Market: When the markets do not follow through after an occasional rally day (Bernanke’s last announcement about an end in sight to interest rate hikes) and the
markets continue to move downward, even on positive financial news, you can be sure
we are in a bear market. There will still be occasional days of strength, but the trend
remains downward. In this market, two out of three stocks will go lower. The one out of
three stocks that will rise include the category called “defensive stocks.” Even these,
over time, may go lower. If you are interested in defensive stocks, here are a few choices,
some of which were pushed by Jim Cramer on “Mad Money”, last week:
PPR: Consists of senior loans and has been holding up nicely-pays 5%
NOC: Number 2 defense company in US
UTX: Air Conditioning and Defense and is buying back stock
STJ: Medical, which is a “must do” industry, even in declining markets
ICF: Commercial real estate and apartments, has been appreciating slightly
Immediate Action Required: If you cannot wait out the Bear Market (could be two-
three years), sell your stocks and buy CDs and money market instruments until the
market turns north. The cash instruments are listed below. If you must own stocks,
select from the list above.
Cash Instruments: Six or seven month CDs or money market funds will pay
between 4 and 5% and give the flexibility to move back into the market in November,
should the market downturn in May and rebound by the end of October. If the prime rate
continues to rise above 8.5%, you can increase your money market position until the
prime rate begins to be reduced, purchasing bond funds previously identified until below
8.5%, at which point you return to equities. A few examples of money market funds, all
with similar performance are: DMMXX, DMIX, DPOXX, DPIXX, VMFXX, and
VMMXX. For Schwab account holders, buy either SWVXX (large accounts) or
SWZXX (smaller accounts).
There may be minimum investments required, depending upon your brokerage house.
These money market funds will only net a percent or so after taxes and inflation, but
consider the drops in the major indexes of 100-150% in the last Bear Market. In a Bear
Market, two out of every three stocks drop. That includes those, which are in mutual
Summary: Did your current financial advisor or 401K/403B, IRA, SEP, 507 or 527 Plan manager advise you in May that we were entering a Bear Market? If not, you
may want to ask yourself why not?
Taking action in other areas to increase/preserve net worth:
This is an excellent time, while you are letting your regular investment allocations feed
your money market account, to take other actions to increase/preserve your net worth.
I will briefly recap my services in this area with an update from my January Financial
Savvy Newsletter, so you can choose what is most appropriate for you.
Increased Net Worth: Start by listing all of your assets and liabilities and
review your budget or cash flow plan. Assets generate income or increase in value. Liabilities must be subtracted from assets to compute net worth. Your assets include cash, savings accounts, equity in stocks, bonds, rental property, CDs, T-Bills, fine artwork, fine jewelry, and your residence, if the appreciation is greater than the maintenance cost. Stock equity includes IRAs, 401Ks; Joint Stock Accounts, and other deferred income accounts. Liabilities cost you money; i.e. your house if it is not appreciating, loans, credit-card balances, automobiles, association dues, taxes, and monthly bills.
Increasing your net worth requires reducing the liabilities and/or increasing the assets. You can double your net worth every four years if you can increase your assets by 20% per year or every 5 years if the increase is 15% per year, if the liabilities are held constant. Of course, an average inflation of 3% per year correspondingly decreases the purchasing power, making investing with inflation protection a critical consideration, as well as for sheltering income.
Obvious net worth increase considerations include getting rid of bad debt; i.e., debt that does not provide income generation. Good debt includes real estate investments, higher education, and your personal residence, provided the maintenance and operating costs do not exceed the rate of appreciation. Paying yourself first is also important, before it goes into checking.
Setting realistic goals, after having calculated present net worth is the first step to achieving increased net worth.
Asset Protection: It does little good to increase your net worth without
protecting your assets. Asset protection takes the form of inflation-proofing your investments. Inflation has been as low as 2.2% in the late 1990s or as high as 13.3% in 1979. Benjamin Graham, in “The Intelligent Investor,” recommends either Real Estate Investment Trusts (REITS), or Treasury Inflation-Protected Securities (TIPS) as a hedge against inflation. I can advise you on some specific REITS to consider as a measure against inflation. Currently increased oil prices have not affected core inflation, which remains low, but the issue bears close watching. Balancing between bonds and stocks, based on the market movement and keeping a split of 50/50 or 60/40 or some other ratio, depending on risk tolerance and time remaining until retirement can also protect the net worth of the portfolio.
Protection of assets also includes protection against identify theft, using security lock boxes for important papers, fireproof safes, stops on stock investments, and close market watch for a change in direction.
Asset protection for your estate continues after death and can be optimized through a revocable living trust, avoiding both probate cost and time delays.
Liability Management: The management of liabilities goes beyond paying
down debt, both good and bad. You need to guard against accidents, hurricanes, flood, sinkholes, injuries, lawsuits, and for the sake of your final estate, a plan to pass on as much of it as possible.
Protection from accidents can be covered by insurance with adequate ceilings. Consider dropping collision for an older car. Keep liability and medical at sufficiently high levels, as well as uninsured motorist coverage. There are a lot of uninsured motorists in Florida. Be aware of deductibles for your hurricane coverage, and get enough for rebuilding cost for the period that prices will be escalated after a storm. Flood insurance is recommended in areas that are near the water, even if not in a flood zone. In the Gulf, many learned the hard way. Sinkhole insurance is separate also and does happen in Florida.
Life insurance should be reviewed if older than five years old. The annuity tables have been updated, and you can get better rates. Term coverage for 20 years can be purchased economically until reaching approximately 58 years of age. Return of Premium (ROP) policies can return your payments to you if you do not die by the end of the term. Disability insurance is more likely to be needed than life insurance, if you are still working. Additional liability insurance for yourself and your family should be purchased to cover up to your net worth and is not terribly expensive. Placing your real estate investments in an LLC with your investing partners may keep any potential lawsuits out of your personal estate (Consult a lawyer for details).
Finally, a will/Codicil and durable powers of attorney are is essential. Designating guardians, if applicable, will assist in conveying your wishes as well. A revocable living trust should be considered in higher net worth situations. This also avoids expensive and lengthy probate situations. I can assist you with setting a trust at a much lower cost than you would normally pay.
Investing Tools and Goals Commensurate with Risk Tolerance: Your
investing tools are directly related to your personal financial understanding, risk situation, and time remaining until you are wholly dependent on your investments. The tools include mutual funds, brokerage houses, T-Bills, CDs, U.S. savings bonds, TIPS, Commercial bonds, municipal bonds, stocks, options (puts and calls), and real estate (commercial and /or residential). Real Estate options include fixer-uppers, pre-construction purchases, apartments, lots, personal residence, condos, hotels, and REITS.
Tax strategies include owning rental property, IRAs, 401Ks and similar products, 1031 exchanges for properties sold, making your son or daughter your property manager in rental property you purchase adjacent to his or her college campus, and starting a business.
If you are interested in enhancing your financial situation, I would be pleased to review
your current financial plans and assist you in setting goals and working toward achieving
them. Here is a summary of how I can help you during this Bear Market, when you are
probably not interested in buying stocks:
CD and Money Market evaluation
Living Trusts, wills, codicils, and powers of attorney
Estate Planning (stepped up basis considerations)
Strategy and goal setting
Insurance evaluation and savings (property, life, disability, auto)
Real Estate strategies including business case evaluation and Regional Outlook
Please call me at 321-773-6480 or e-mail me at firstname.lastname@example.org and we
can set up an appointment for a one-on-one strategy session to get started. Referrals for
new clients will be rewarded with a $25 check. Remember the average hourly fee for
financial adviser services is normally $100-150/hr. I will help you achieve your
objectives at an affordable rate of $45/hr.