Six Early New Year's Resolutions

In the spirit of the holiday season, here is a list of early New Year's resolutions and fun things to do in 2012!

1. Remember, cash flow (income versus expenses) is the key to long-term financial success. If you are gainfully employed, you should be saving 15% to 25% of your income. If you are retired or not fully employed and are drawing on your investment portfolio, your total annual withdrawals should be 3% to 5% of your portfolio value or less. If your savings rate is low or withdrawal rate high, take steps to increase your employment income or reduce your expenses.
2. Insurance is the foundation of sound financial planning. Home and auto insurance, umbrella liability coverage, health insurance, life insurance, disability and long-term-care insurance all require regular review and updating. Consider funding a Health Savings Account (HSA). If you own or are considering long-term-care insurance, pay particular attention to and understand the inflation protection options.
3. In 2011, we've seen renewed volatility in stock market prices. Investors are still bruised from the 2008 global financial crises and pessimism is pervasive. Remember that the stock market is a leading indicator and will turn up before business, consumer and investor attitudes improve. Bond interest rates remain low and pose a challenge for achieving reasonable long-term returns. Broad diversification will be well rewarded and realistic expectations for long-term returns (mid to high single digits) are a must.
4. Are there any family or personal changes that might prompt a review of your beneficiary designations on life insurance policies (both employer provided and individually owned), IRA accounts and employer retirement plans? Were there any changes in employer plans wherein correct beneficiary designations should be confirmed? How about a power of attorney, will or trust documents? Are there changes of address or telephone numbers for people listed in your healthcare power of attorney document?
5. Do your children or grandchildren have employment income that could be used for a Roth or traditional IRA contribution? If applicable, have you funded 529 college savings plans for the calendar year for your children or grandchildren?
6. Do your family members know where to locate important personal financial papers and how to contact your professional advisors in case of an emergency?

Have a safe and happy holiday season. Take good care of yourself. Best wishes for a healthy and prosperous New Year in 2012!

About Bruce J. Berno, CFP^®

Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.

What Is Your Life Expectancy?

Mortality tables will tell you the average life expectancy is in the low 80s. But for many of us, there is a reasonable probability of living to age 90 or 95. An informal scientific analysis may be informative.

One website that may be helpful is www.livingto100.com. It asks 40 quick multiple choice questions and should take about 10 minutes to complete. (Hint: it will be helpful to have your latest blood pressure and cholesterol test results.)

The website provides personalized feedback on all of your answers and a "to-do" list for you and your physician. For example, it may suggest that if you lose "x" pounds or exercise "x" times more a week, you could add "x" number of years to your life expectancy. We do not endorse this website for medical or financial planning advice, but consider it an interesting tool and kind of fun.

"What Is Your Life Expectancy?" could be the question that will make you the life of the party at your family Christmas gathering!

Let us know if you try it and what you learn! 

About Bruce J. Berno, CFP^®

Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.

Numbers to Know for 2012

Here are some short and sweet numbers to impress your friends with for 2012:

Now you know!

About Bruce J. Berno, CFP^®

Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.

Reality Show for Investors: "Survivor" by Weston Wellington

Note from Bruce:
The best stock performer in 5 or 10 years will probably be a company we haven't heard of today. History is filled with icons that have crumbled. A broadly diversified, passively managed fund is the best way to capture new stocks and tomorrow's best performers.
-Bruce J. Berno, CFP®

Anyone studying the long-run history of American business cannot help but observe how many of the prominent firms of one era fail to make it to the next. Free-market economies are characterized not only by intense competition but also by disruptive change. Sometimes a company's toughest competitor turns out to be a firm it has never heard of selling a product or service that didn't exist until recently. The list of companies that once dominated their industry but have fallen on hard times is lengthy enough to give every thoughtful investor reason for sober reflection.

Among many possible examples, a number of firms come to mind that were once highly regarded but later encountered serious or even fatal problems.

• Bethlehem Steel pioneered the steel I-beam, which launched a skyscraper boom in cities across the country. Its engineering expertise supplied the steel sections for the Golden Gate Bridge. But growing competition and a changing marketplace eventually took their toll, and the firm filed for bankruptcy in 2001.
• In 1973, Eastman Kodak held a seemingly impregnable position in the lucrative market for photo film and chemicals, enjoyed a reputation for innovation and astute marketing, and boasted a market value even greater than oil giant Exxon. Kodak shareholders had been favored with an uninterrupted stream of dividends dating back to 1902. Today the company is struggling to reinvent itself as the film business shrivels, the dividend has been suspended, and the share price is limping along under $3.
• A Fortune article profiling Pfizer in mid-1998 praised it for having "one of the richest product pipelines in the Fortune 500." A Wall Street analyst enthused that "some of my clients refer to Pfizer as the best company in the S&P 500." In early 1999, a Forbes cover story sounded a similar note, crowning Pfizer "Company of the Year" and observing that "the people who brought us Viagra have more blockbusters on the way." Thirteen years later, the Viagra boom has subsided, patents are expiring on highly profitable products, and the gusher investors expected from the research pipeline has slowed to a trickle. The share price has slumped over 50% since year-end 1998 compared to a 3% loss for the S&P 500 Index.

Some companies almost single-handedly create new industries but still find it difficult to turn innovation into a permanent advantage. Pan Am (air travel), Kmart (discount retailing), Polaroid (instant photography), and Wang Laboratories (word processing) all had impressive initial success and provided handsome rewards for their investors. Alas, neither Pan Am nor Polaroid survives today, and Kmart shareholders were wiped out when the firm emerged from bankruptcy in 2003. (Kmart, Polaroid, and Wang Laboratories were all cited as examples of "excellent" companies in the 1982 bestseller In Search of Excellence.)

Evidence of this "creative destruction" appears all around us. For example, the Wall Street Journal reported that shares of Minnesota-based Best Buy Co. slumped Wednesday (9/14) to their lowest level since 2008 after reporting a 30% drop in quarterly profits. For most of its life, Best Buy has been the toughest kid on the block, vanquishing rivals such as Highland Superstores and Circuit City on its way to becoming the nation's leading electronics retailer.

Will Best Buy fall victim to even tougher competitors such as Amazon.com or Walmart? Or is this current downturn just a speed bump on the road to even greater success? No one can say. For every riches-to-rags story, we can find another tale of decline followed by dramatic recovery. According to some accounts, for example, Apple was only a few months from bankruptcy when Steve Jobs returned to the company in 1997. Now it vies with ExxonMobil for the number one spot in a ranking by market cap. And who would have imagined that a floundering New England textile firm with a low-margin business that sells suit-lining fabric would one day become a financial colossus known as Berkshire Hathaway?

The thrill of owning a great growth company during its most lucrative phase is a powerful incentive to search for the Next Big Thing. But almost every company with a highly profitable position is under constant attack from competitors seeking to garner a portion of those hefty profits for themselves.

As a result, the search for firms destined to generate greater-than-expected profits for many years into the future is fraught with peril and likely to end in frustration. Most investors will be far better off harnessing the forces of competitive markets and putting them to work on their behalf by holding a diversified portfolio. As Nobel laureate Merton Miller once observed, "Above-normal profits always carry with them the seeds of their own decay."

Miguel Bustillo and Matt Jarzemsky, "Best Buy Gets Squeezed" Wall Street Journal, September 14, 2011.

David Stipp, "Why Pfizer Is So Hot," Fortune, May 11, 1998.

"Pfizer: Company of the Year," Forbes, January 11, 1999.

Standard & Poor's Stock Guide, 1974.

Thomas Peters and Robert Waterman, In Search of Excellence (HarperCollins, 1982).

Merton Miller, "Is American Corporate Governance Fatally Flawed?" Journal of Applied Corporate Finance, Vol. 6, No. 4, Winter 1994.


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About Bruce J. Berno, CFP^®

Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.

What's the Probablity

The future is always uncertain. I am not a gambling man, but many times decisions are made by asking the question, “What are the chances that this is going to be successful?”

When it comes to investing, the probability is in our favor in the strategic decisions that we have made. It is also important to understand that no strategy works successfully 100% of the time, so what is the probability of:

A. U.S. large-company stocks beating one-month Treasury bills?

We may be in one of the minority periods now, but given that one-month Treasury bills are at 0% now, the chances of stocks doing better in the future are pretty good.

B. U.S. large-value-style stocks beating the S&P 500?

C. U.S. small stocks beating U.S. large stocks?

More importantly, add to these questions how stocks perform coming out of a recession, which is certainly a fair way to describe our current environment:

A. How have U.S. large- and small-company stocks performed after recessions since 1953?

B. How have value-style stocks performed after recessions since 1970?

Value-style stocks significantly outperformed growth-style stocks after recessions for both large- and small-company stocks for all time periods referenced above.

I am also reminded of a friend who rented a motorboat while on vacation, but the motor wouldn’t start properly and he had to leave the motor idling when not in motion. When he made this fact known to the marina owner, he got a nice southern drawl answer of, “Well, nothing’s perfect…” Truly memorable words to live by.

Clearly, we want you to understand that no investment strategy works 100% of the time. U.S. value-style stocks, both large and small, and U.S. small-company stocks have underperformed in July and August 2011, after having generally outperformed in the first half of the year. Using our “let’s look forward, not back” theme, the probability of stocks beating bonds and value-style and small company stocks providing superior performance coming out of recession is pretty good. In today’s age, having reasons to be hopeful should provide much appreciated financial peace of mind.


About Bruce J. Berno, CFP®
Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.

All That Twitters Is Not Gold

The most common question we have heard from our clients lately is, "Should we buy gold?" There is a long list of reasons why the answer is "No!"

1. Gold investors made absolutely no money for 25 years from 1980 to 2005, according to Ibbotson Associates.
2. The price of gold actually declined about 50% from 1980 to 2000. Even the most disciplined of investors would have given up during that time, since traditional stocks and bonds were performing well above average during that same period.
3. Gold, like all commodities, does not pay any interest or dividends.
4. Only about 11% of gold has an industrial use. It is not sold and consumed like oil or natural gas.
5. The actual replacement cost of gold is about half of the current value. According to Dan Denbow, co-manager of the USAA Precious Metals and Minerals Fund, it costs about $600 to produce an ounce of gold, but that rises to about $1,000 per ounce when all of the costs of mining are factored in.
6. As of this writing, gold recently spiked above $1,900 an ounce.
7. Gold was up about 16% for the month through August 22, 2011, therefore heading for its best monthly performance since September 1999.
8. Gold has increased in value in value for 11 years, the longest winning streak since at least 1920.
9. Exchange Traded Funds (ETFs) have made it very easy for individual investors to buy gold. But if selling is triggered, heaven-forbid panic selling, then the price swing could be swift and sharp.

In our opinion, buying gold today is like buying tech stocks in the late 1990s. It may continue to go higher in the short-term, but the long-term trend is screaming "buy high," to be followed, of course, by "sell low!" Let's not do that!

About Bruce J. Berno, CFP®
Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.

What Does Your “Next Five” Hold?

Financial planners are well known for counseling their clients to think long-term. While it is important to think 10, 20 and 30 years down the road, that can be hard to do. We frequently counsel clients to manage what we can control and not worry about what we can’t control. Just like tackling a big project is sometimes best handled by starting with baby steps, try looking at your future in smaller steps.

What do your next five years look like? A few issues may immediately come to mind. Better yet, let’s break that into smaller pieces. What does your next year look like? Next three years? Next five years? Of course, being financial planners, we focus on events that will have financial implications or need financial planning. That’s not to say that personal goals, like strengthening friendships or improving your golf handicap, aren’t important, but they are beyond the scope of this article.

Allow me to use the Berno family as an example. In the next year we will be making a college decision for my second oldest child. Obviously, this has huge financial implications. He is very smart, so he may get a generous scholarship or he may go to a top-tier school that is very expensive. Did I forget to mention he just announced he is interested in the Air Force Academy? We’ll definitely have to take a wait and see on this one as it is very hard to plan for. Let’s take the fact that my wife wants to remodel the kitchen as an additional swing factor here.

In May 2012, my daughter will be graduating from college. She has chosen teaching as a profession so a job may not be firmed up until August. The across-the-board layoffs in the teaching profession are certainly on my radar screen. She may consider a volunteer position in social service for one year. The only thing I am reasonably sure of is that her tuition payments will be over!

Within three years I have one term life insurance policy that expires. I am comfortable that I can stick with my original plan of letting it lapse. I plan on keeping my other life insurance in force and do not see the need for more disability insurance. My youngest son turns 16 in October 2012 so that will affect our car “fleet,” as I call it, which currently has four vehicles. Should we shift my second son’s car down to my youngest and buy the then 19-year-old son a different car? Assuming that the 2002 Toyota hasn’t died from mechanical failure or an accident, this sounds like a plan.

Within five years my second child will hopefully be out of undergraduate school. (Did I mention he just told us he may be interested in medical school? This makes the Air Force Academy sound even better!) My third child will be off to college and we will be empty nesters. We are frankly not looking forward to that as my wife and I really enjoy having the kids around. Based on the fact that my one and only daughter will be 26 in five years, should we plan on a wedding? God only knows. But it is important to sketch this list out. 

Over the next five years we should be able to get by with only one, or maybe two, car replacements. We have no major home improvements planned other than the aforementioned kitchen remodel. My wife and I will have our 25-year wedding anniversary, so does that call for a special trip? 

Having started this “next five” exercise myself, I know that it can be exhausting, but a lot of it is due to our stage of life and it is certainly easier than thinking 25 or 30 years out. At the end of the day, a little thinking and planning is better than none. What’s in your next five?