Jeremy's Financial Planning Blog

Most people are fully aware that investing usually involves fees or commissions, and mutual funds are no different. We are always told to invest in funds with low fees so that we can maximize our returns. That makes perfect sense, but what are all the different types of fees you hear about?

• Sales Charges - These are also called loads, but it is the fee based on a percentage that is applied to your purchase of a mutual fund. Funds can have front-end loads that are applied once upon the initial purchase,or back-end (also known as deferred loads) that may be applied over time or upon sale of the fund. Generally, front-end load funds are called Class A, and back-end loads will be Class B shares. There are also many mutual fund companies and special share classes that offer no-load funds. The total cost of the sales charge can vary and range anywhere from under 1% to over 5% of your investment.
• Management Fees - Even if your fund has no sales charge, it still costs money to run and manage the fund. These fees are paid by investors in the form of an ongoing expense that is subtracted from the fund's performance. Management fees pay the fund managers and employees of the fund company. Management fees can range from just a fraction of a percent to over 1% per year.
• Administrative Fees - In addition to the management fees, administrative fees pay for other operating expenses of running the mutual fund. These expenses include statement mailing, record keeping, customer service, and so on. You can expect to pay anywhere from 0.1% to 0.4% each year on average.
• Marketing and Distribution Fees - Some funds also charge fees to cover the cost of marketing and promotion for the fund. These fees are commonly referred to 12b-1 fees.

While it may seem like there are a lot of fees to be concerned with, it isn't as complicated as you might think. The management, administrative, and 12b-1 fees are all added together and typically reported as the fund's expense ratio. The expense ratio is what is most commonly reported on financial websites. For example, if a fund has no load or sales charge, and an annual expense ratio of 0.5%, that means every $1,000 invested in the fund will basically cost you $5 in fees each year. Of course, you don't pay these fees out of pocket, but they are automatically factored in and deducted from the fund's performance.

With the many layers of fees, you can see that it can be costly if you wind up paying a sales charge and an additional high expense ratio from the other fees. Your best bet is to stick to no-load funds with low expense ratios if you do your investing on your own. It is also a good idea to check on your 401k fund offerings if you participate in one so that you can take advantage of the low-fee funds if they are available.

Stock market got you down? Looking to put more money away in case of an emergency? If so, you've probably been thinking about stashing more money away in the bank. One of the benefits of the bank is that it provides you safety with FDIC insured funds, and your money is easily accessible. Unfortunately, most banks offer dismal interest rates on basic savings accounts. If you're looking for relatively high interest, you're faced with the likelihood of buying CD which locks your money up for a period of time, or depositing a large sum of money to take advantage of the higher rates they offer. But if you're just getting started or don't want to tie your money up, there's no reason to let your money sit and not even keep up with inflation.

That's where online banks come in. There are plenty of online banks that have sprung up in the past few years, and their big attraction is the ability to deposit small amounts of money into a savings account and still take advantage of interest rates that compete with, or even exceed CDs at your local bank. Of course, these online banks aren't for everyone, but they can be a great way to put your savings account to work so that you're at least keeping pace with inflation.

A few days ago I pointed out some investment considerations you should take in a bear market, but since the market and economy is on everyone's mind lately, it doesn't hurt to take a look at a few more tips as well. As you're probably aware, the stock market has had a pretty rough year. In some cases, investors are finding themselves down 25% or more in under 12 months.

Nobody likes to see losses, but most people overlook the benefits of a down market. For those who are investing in taxable accounts, you can use this opportunity to take some losses by selling a bad investment. These losses can offset your gains, and possibly even reduce your overall taxable income. In addition, investors who have a number of years before needing the money, markets like these present a number of wonderful buying opportunities. Remember, you make money by buying low and selling high, not the other way around.

So, if you're looking for tips on how to get through these tough times, check out a few more tips on how you can make it through a bear market.

The stock market has now experienced four consecutive negative quarters, and most markets are down somewhere around 20% on the year. If you've looked at any of your investment statements recently, it probably isn't pretty. But, even though things look bad, it isn't out of the ordinary, and there are some things you can do to help make sure you're making the most of this volatile market. You may be tempted to bail out of the market completely, but doing so could hamper your long term goals. So, before making a rash decision, you should consider these measures first:

• Examine Your Investment Objective
• Consider Your Risk Tolerance
• Don’t Chase the Market
• Rebalance Your Portfolio
• Shore Up Your Short-Term Investments

This week has been a classic example of the uncertainty that's filling the markets right now. On Monday, we see record market declines, and the following day, we also see record gains. Nobody has a crystal ball that can tell us exactly what's going to happen in the coming weeks and months, but you can make sure that you're positioned so that you can minimize your risk and weather any financial storm.

After a long weekend session, both parties were confident that the House would be able to pass the measure today, but it fell short by just a handful of votes. This sent the stock markets into a tailspin, leaving most major indicies down between 7 and 10 percent for the day. Clearly, investors were hoping for passage of this bill, and they have sent a strong message to Washington now that it hasn't.

A Necessary Evil

Not many people are thrilled about the so-called bailout, both regular folks and politicians alike. The idea of helping large companies on Wall Street survive with taxpayer dollars is a bitter pill to swallow, but we're left with few options. While greed fueled many of these institutions to lend money they shouldn't have, and consumers flocked to buy things they couldn't afford, we still need to maintain a healthy financial network to keep the economy running. If large banks are allowed to fail, it will cause even greater strain on the already weak economy.

It isn't just about mortgages and real estate either. Granted, real estate may be at the root cause of this, but banks also lend money to individuals and businesses as well. When a bank is holding a bunch of toxic mortgage securities, they are simply unable to extend credit to anyone, and this includes regular people and businesses. So, if a business can't get the money they need to expand, that means fewer jobs, slower growth, and a weaker economy.

When a Bailout Isn't a Bailout

Everyone is calling this $700 rescue package a bailout, but that isn't entirely correct. Yes, some companies will be bailed out in a sense that this measure could prevent them from going bankrupt, but the government isn't writing a blank check from the treasury just to keep companies afloat. This rescue plan is buying assets that have an underlying value. These packaged mortgage securities have plenty of toxic loans bundled inside them, but they aren't entirely worthless, and there are plenty of good loans in these securities as well. So, while the government may be buying the assets at a steep discount, they do still carry a value, and could increase in value over time resulting in a profit.

As the government purchases these troubled securities from banking firms, it then frees up money that they can use to begin lending to businesses and individuals again, which in theory would help keep the economy from faltering even further. Is it a perfect solution? Of course not, but the option of doing nothing at all would probably hurt far greater than what it might cost to implement this plan. Clearly, we shouldn't be in this situation to begin with, but we are, and now we have to deal with the best we can.

What it Means for You

If you're invested in the market, clearly you're going to notice a drop after today's performance. Nobody likes to see a loss, but it's important to keep your investment objective in mind when looking at what's happening. If this is money in your retirement plan and you still have a number of years until retirement, then this is just a drop in the bucket. As quickly as the market goes down, it can rebound. If you're trying to time your buying and selling with a long-term investment horizon, you're probably doing more harm than good. If you're still investing on a regular basis, either through contributions with each paycheck in your 401(k) or regular investments into an IRA, it's important to remember that you will be buying some of these investments that just took a hit. That means you'll be buying shares that are five, ten, or twenty percent cheaper than they were a few months ago, and when the market does rebound, you'll experience even bigger gains. This is called dollar cost averaging, and it can help you reduce some of the volatility in your portfolio.

The first step in personal financial planning is controlling your day-to-day financial affairs to enable you to do the things that bring you satisfaction and help you reach your goals. This is achieved by planning and following a budget. Controlling spending, saving money, and investing for the future are all important aspects of financial planning, but those things mean nothing if you don't have specific goals that you're trying to reach. In order to gauge your financial success, you need to have goals so that you can measure your success. The second step in personal financial planning is choosing and following a course toward long-term financial goals.

The four steps to setting financial goals:

• Identify and write down your goals.
• Break goals down into short-term and long-term goals.
• Educate yourself.
• Evaluate your progress.

More information on setting financial goals.

With financial markets in turmoil, the government has put together initial plans to bring some stability back to the market. This includes buying some of the toxic mortgage securities from banks so they aren't faced with such dire consequences and continue lending to consumers and individuals. But, nobody can seem to agree on every aspect of the plan. An initial agreement was reached on Thursday, only to fall apart after it made it to the White House.

Will taxpayers be on the hook for this bailout? Will there be caps place on executive compensation for the bailed out companies? What will the government oversight be so that this money will be spent wisely, and how will we make sure this won't happen again in the future? These are the questions we're waiting for. Details are sketchy, and until lawmakers can come together and compromise on a plan, we're left with speculation.

Until the plan is finalized, we won't know exactly what impact this will have on people, so there isn't much of a reason to make any drastic changes to your financial plan at this time. I would recommend at least making sure your emergency fund is built up as it should be, and if in a bank, that it's FDIC insured. Aside from that, we'll have to wait and see what the markets do in response to the finalized bailout plan.

Where is the best place to stash your savings in today's shaky financial market? Under your mattress? In a cookie jar? Your checking account? Savings account? Certificate of Deposit? With so many choices, it's easy to throw up your hands and take the path of least resistance, which can end up costing you money in lost interest.

It also doesn't help that interest rate cuts over the past year or so are making it more difficult to find good rates of return on your money. Nevertheless, this isn't a time to abandon your emergency fund just because the rates are relatively low. Your goal should be to maximize returns while maintaining the liquidity and security you need.

There are five common places that people use to manage their short-term savings:

• Checking Accounts
• Savings Accounts
• Money Markets
• Certificates of Deposit
• Savings Bonds

Learn more about where you should keep your savings, and check out the primer on U.S. savings bonds to help you make the most of your cash.

When it comes to finding safe places to put your money, money market funds typically rank right up there as one of the safest investments available. After all, they are designed to maintain a $1 per share price and pay interest. While almost all money market funds do live up to their expectations, we saw last week that there are still risks that can be associated with money market funds.

Earlier last week the Reserve Primary Fund “broke the buck,” which means the share price dipped below the $1 standard. This is only the second time in the nearly 40 year history of money market funds that this has happened. This occurred because the fund suffered losses in the Lehman debt it owned, which forced the share price to dip slightly.

The Government Steps In

When word spread that the Reserve Primary Fund was in trouble, investors flocked to pull their money out of money market funds. This run on funds is not good for the fund companies or investors, so the Treasury stepped an announced a temporary program that would protect some money market funds and their investors from losing money. This applies primarily to funds investing in the safest assets, such as Treasury securities.

In the past, money market funds were not insured like bank accounts. Bank deposits are insured by FDIC, so if your bank fails, your money is protected. Money market funds are more like investments, and were not covered by FDIC, so your money would be at risk. For a limited time, some funds will not be protected by this measure taken by the Treasury.

Reconsider the Role of Money Market Funds in Your Financial Plan

Money markets always have, and always will have a place in most portfolios. They are still the cash-equivalents that reside in many brokerage and retirement accounts that are used to temporarily hold money until it is needed to make another investment purchase. The key with any investment is to gauge how much risk you’re willing to take for the desired return. Money market fund yields are based on risk, and the higher the yield, the greater the likelihood that the fund is invested in riskier debt.

So, make sure you understand what role your money market accounts play, and only take on as much risk as you’re willing to take. This was a very unique and rare situation, so your money will likely remain perfectly safe in any money market fund, but just be sure you know what your fund is invested in, and make changes if appropriate.

With the volatility and uncertainty in the financial markets lately, it has had a lot of people asking what they should to with their investments. Some people are abandoning the stock market completely and sticking with cash or bonds, while others seem to be salivating at the drop in stock prices. So, what should you be doing?

For most people, the answer is simple. Nothing. If you're like most working Americans, you are probably still quite a few years from retirement, and you're plugging away by investing in your company's 401(k) every paycheck or regularly investing in an IRA. If that's the case, the recent stock market news shouldn't be of much concern because since you're still buying stocks every week, or every other week, you're buying shares at these discounted prices, which will just produce greater gains when the market recovers.

The Market Can Go Up as Fast as It Went Down

When news hit earlier this week that the broad markets dropped anywhere from 3-5% in one day, panic set in as people saw significant drops in their portfolios. Many of these people quickly called their brokers or went online to sell everything and move their money into a safe money market or bond fund that would be lucky to earn 4% over the next full year. Those people probably didn't expect the good news from the government to follow in the next few days that would spark a rally that sent the same stocks up nearly 8% in just two days, wiping out an entire week of losses.

Sure, this may only be a short-term and the markets may sustain further losses in the future, but for those who had a knee-jerk reaction to a bad day on Wall St. could have recovered their losses and even gained a little more back just by holding. The markets will always be moving, and if you think you can predict what will happen and shuffle your investments accordingly, you're playing with fire.

Invest Like Warren Buffett

Warren Buffett is one of the wealthiest people in the world, and one of the most successful investors ever. What would Warren Buffett do in today's market? He has been quoted a number of times on what to do when times get tough:

We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

That's right. If you see people selling, that means you should be greedy and buy more. Use this turmoil in the financial markets to get more for your money. In most cases, your money will buy you 20% more than it did just a year ago. You like buying groceries on sale for 20% off, so why should your investments be any different?