Q:  Why does the market panic so easily?!

A: There are several factors:

-     The market seldom does anything in moderation.  The two forces at work are fear and greed—there is nothing moderate about either of those motivations. 

-     In addition, large institutional traders use sophisticated electronic trading systems.  These systems are programmed to perform certain trades in milliseconds if particular market circumstances occur.  If those conditions occur even briefly, the massive electronic trading is triggered, exaggerating the fear/greed impact.    

-     Markets panic the most in the face of the unknown.  If traders dont know the full impact of the subprime mortgage credit crisis, then the automatic reaction is to prepare for the worst.

-     Markets also panic when they are surprised.  That relates back to the need to know.  When they are surprised, it dawns on traders that they didnt know everything so they panic until perceived certainty sets in again.  Thats when greed takes off.

Q:  What is a hedge fund?

A:  Its like a mutual fund in that investors pool their money to buy certain financial instruments.  Hedge funds, however, are usually only available as private offerings to accredited investors.  They do not have to register with the SEC, nor are they required to make the types of public disclosures required of mutual funds.  Some hedge funds are highly leveraged and have reacted dramatically during this last market upset.

Q:  I have a Universal Life policy.  I was told that it might not last until I die.  How would I know?

A: If you have a Universal Life policy (sometimes called a  Flexible Premium policy), you need to ask for an In Force Illustration.   An In Force Illustration tells you how long your policy will remain in force based on current interest rates and your current premium amount.  These are estimates, but they give you an idea of where you stand.

Q:   My Universal Life policy matures at age 95.  What if I live to be 96?

A:  You will most likely receive any cash value at age 95 and not receive a death benefit at age 96.  You should ask your agent or financial planner to help you find out what happens with your policy.

Q:  If Im nervous about my Universal Life policy, do I have any alternatives?

A:  Yes.  You may decide to increase the premium or reduce the death benefit.  Or you may decide to exchange your current policy for permanent life insurance.  Again, talk to your agent or financial planner to determine what is best for you. 

Q:  Is Universal Life bad?

A:  No.  You just need to be aware of exactly what you have.  If you have taken a loan out on a Universal Life policy, or if you have reduced your premiums from the original amount, you really need to obtain an In Force Illustration.  What you dont know CAN hurt you, or your heirs.  So be proactive.  Consult your agent or financial advisor.

Q:  Is there more than one way to measure whether a portfolio is successful?

A: Yes.  Lets think of your portfolio as being a goose.  What makes a successful goose?  If you want to fatten it up so you can eat it later, then you would be successful if you made your goose bigger and bigger.  On the other hand you may not want to eat the goose.  You may prefer to have your goose lay eggs that you can eat and/or use to raise more geese.  Or you may want to fatten the goose while it is laying eggs.  If that is the case, then you will be well served to judge the portfolio not solely by whether the stock price is getting fatter, but also by the value of the eggs the portfolio is generating.

Q:   Is there any publicly traded investment that goes up in value continuously?

A:  The values of investments in the publicly traded market go up and down.  Nothing in nature is perfectly linear.  And the market is a reflection not only of business statistics, but human nature.  Fear and greed are the two driving forces in the market.  Even investments that are growing do not grow in a straight line.

Q:  Are mutual funds by their very nature safer than individual stocks?

A:  What makes a mutual fund safe depends on what individual stocks the mutual fund buys.  Some mutual funds invest in blue chip stocks, some in junk bonds, some in real estate, etc.  Just because it is a mutual fund does not mean that it is immune to the ups and downs of the market.  If you have a portfolio of several individual stocks, you in essence have your own mutual fund. 

Q:  When people say the market, what do they mean?

A: Thats a good question because it could mean several different things.  Most often quoted for the market is the Dow Jones Industrial Average (DJIA).  It consists of 30 of the largest domestic companies.  When it was first introduced in 1896, it had only 12 stocks.  Of the 12 original stocks, only GE remains today.  Technically its not just an average of the stock prices.  Other factors are included in the calculation.  However, it is a widely accepted benchmark of the market at large. 

Q:   How did the DJIA gain such widespread acceptance and use?

A:  In 1882, Edward David Jones, Charles Dow and Charles Bergstresser formed Dow, Jones and Company.  The flagship publication of this company is none other than the renowned Wall Street Journal, which began in 1889.  Mr. Dow was the first editor of The Wall Street Journal, writing many articles about investment theory. 

Q:  Is the DJIA the only index?

A:  No.  The 4 most common other indexes are the S&P 500 (based on 500 stocks), the Wilshire 5000 (a broader representation of the market), the Russell 2000 (represents small cap stocks), the EAFE (Europe, Australia and Far East stocks).  There are others as well.  When comparing personal returns to the market, it is important to compare them to the appropriate index.

Q:  What is a Qualified Dividend?

A: It is a dividend that  qualifies for a better tax rate.  For example, if your marginal tax rate is 33%, qualified dividends are taxed at 15%.  For the dividend to be qualified it must be paid from a US company, or qualifying foreign company and you must own the stock for a required holding period.

Q:   Does every company pay dividends?

A:  No.  A company may need all its resources to reinvest in the company itself as it grows and expands, and therefore will not pay dividends.  Established companies with good cashflow, often do pay dividends.

Q:  What is the dividend ex-date?

A:  A company will announce that shareholders who own shares of their stock on a certain date (the record date) will receive a dividend.  The ex-date is 2 trading days before the record date.  It takes 3 trading days for a trade to settle, or change ownership.  So if you buy a stock on the ex-date, you will not be the owner as of the record date.  If you buy the stock on the ex-date you will not receive the dividend. 

Q:  What if I sell my stock AFTER the record date, but before the dividend is paid?

A:  You will still get the dividend.  You just must own the stock on the record date.

Q: What is an Exchange Traded Fund (ETF)?

A: An ETF is similar to a mutual fund in that the fund is comprised of individual stock holdings.  The stocks in an ETF usually mirror, or closely resemble those in certain indexes.  However, as its name implies, ETF shares trade on the stock exchange throughout the day, whereas mutual funds shares do not.   ETF fees are usually lower than mutual fund fees, and turnover is often lower.  There is not an initial minimum investment amount for an ETF as there usually is for a mutual fund, nor are there any back-end surrender charges for selling ETF shares as there are for selling certain mutual fund shares.  However, if you are making small investments along, mutual funds allow you to buy partial shares, whereas EFTs do not.    

Q:   What is a Preferred Stock?

A:  A Preferred Stock is preferred is because (1) dividends have to be paid to preferred stock shareholders before common stock shareholders can receive theirs and (2) in the event a company liquidates, preferred stock shareholders are paid ahead of common stock shareholders.  A preferred stock has a par value (usually $25).  The issuing company has the right to call (buy back) the preferred stock at par.  So its best to pay less than $25 a share.  Most preferred stocks also have a credit rating that indicates a companys ability to pay its stated dividends. Dividends from many preferred stocks qualify for the 15% maximum tax rate.

Q: What do the initials NASD stand for?

A: NASD stands for National Association of Securities Dealers.  The NASD is the primary regulatory and licensing body in the securities industry.  See www.nasd.com. 

Q:  What do the initials SIPC mean?

A: SIPC stands for Securities Investor Protection Corporation.  It is the safety net for investors if the brokerage house declares bankruptcy.  It does NOT protect investors from the normal ups and downs of the market.  See www.sipc.org. 

Q:   What do the initials SEC stand for?

A:  SEC stands for Securities and Exchange Commission.  The SEC is a small federal agency with huge responsibilities over the securities markets.  It oversees the NASD and the SIPC among many other functions.  See www.sec.gov.

Q:  What does it mean when a stock is held in street name?

A:  It means the stock is registered with the issuer in the name of the brokerage firm—not your name.  Your name is recorded as the owner on the books of the brokerage firm.  That is often referred to as being in book-entry form.  So instead of issuing a stock certificate, the brokerage firm issues regular statements documenting your holdings.

Q:   What if I want to have the actual paper certificate?

A:  If you purchase securities through a brokerage firm, you can request that the actual paper certificate be sent to you.  You might have to pay a small fee for that service.  Dont keep your certificates in such a safe place that you cant find them again though.  It will cost you to replace the certificates, and you will need them when you decide to sell.

Q: How are my securities held that I purchase directly from the issuing company?

A:  Usually your ownership is recorded at the company in book-entry form—meaning the record of ownership is on the company books rather than on a paper certificate.  Having your securities in book-entry form is a convenient way to buy, sell and transfer your securities.  You should receive a Confirmation notice whenever you buy, sell or transfer.  

Q:  I have heard that you can now have a ROTH 401(k).  Is that true?

A:  Yes, it is legally permissible.  But not every 401K plan is making the option available.

Q:   How does a ROTH 401(k) work?

A:  As the employee, you can choose to make after-tax contributions to the ROTH portion of the 401(k).  Any employer contributions, however, will go to the traditional portion of the 401(k).  So youll have, in essence, two 401(k)s combined.  This complicated bookkeeping is why some 401(k) plans have not adopted the ROTH portion yet.

Q:   As a sole proprietor, am I able to have a 401(k)??

A:  Yes.  They are generally referred to as Individual or Solo 401(k)s.  They have many advantages to small business owners.  If you have any employees, you cannot take advantage of the Individual 401(k), however.

Q:  Can my Individual 401(k) be self-directed?

A:  Yes.  That alternative is available.  We have set up several.

Q:  I have placed my family living trust as the primary beneficiary to my 401(k).  Does it make a difference that my beneficiary isnt a human being?

A:  Yes, it makes a difference.  The IRS says that when the beneficiary isnt a human being, then the distribution must be completed over a 5-year period. 

Q:   What would happen if my spouse were the sole beneficiary instead of the trust?

A:  Your spouse could roll the money from your 401K into his/her own IRA.  It would remain tax deferred.  Then the spouse has choices as to how to take distributions, including taking it out over his/her lifespan.  That option is not available if the 401(k) money goes to the family trust.

Q:   So making a family trust a beneficiary is wrong, right?

A:  Not necessarily.  As long as something is legal and moral, the only thing that makes it right or wrong is whether it is the appropriate method to get you the results you want.  This is an extremely complicated issue.  It is best to review your situation with your attorney and CPA.