Investment Odd Couple

Through the third quarter, an odd couple has emerged as big winners in the investment world. The Dow Jones Industrial Average, representing the broad U.S. stock market, is up 14 %, while gold futures are up 19%.

Usually, a rise in the stock market reflects a confidence in an economic recovery, while an increase in gold prices indicates investors fear an unstable economy. Therefore, these two investment markets usually move in opposite directions. However, low interest rates and government stimulus have poured cheap money into financial markets, helping stocks. Yet the creation of all that money, together with the Federal Reserve's maintenance of near-zero interest rates and the prospect of heavy government borrowing to fund deficits, threatens to weaken the dollar and fuel inflation and economic volatility. This, in turn, creates a growing interest in gold.

While many institutional investors have been placing large bets on gold, gold futures can be volatile and probably shouldn't compose more than 5 percent of an individual investor's portfolio. While it's true gold futures have soared from $250 in 1999 to $1,055 for a troy ounce, gold would still have to double to $2,291 to reach its 1980 high adjusting for inflation. This illustrates why gold has not been a solid long-term investment. If you are interested in gold, be sure to buy gold futures on a legitimate exchange, not those pretty gold coins you see on TV late at night.

Of course, these type of investment decisions and building a well-rounded portfolio can be complex, working with a financial advisor can help. It's best to speak with an independent fee-only financial planner to make sure your investment portfolio represents your risk tolerance, investment goals, and time horizon before taking any action.

Joseph Pisani of CNBC News reports that the cost to attend a four-year nonprofit private college increased 4.3% for the 2009-2010 academic year, bringing the average annual price to $35,636. Meanwhile, during the last 12 months, the Consumer Price Index (a measure of inflation) actually fell 1.3%.


Shockingly, the cost to attend a public college grew at an even greater rate. Public in-state college costs climbed 5.9%, with the average cost reaching $15,213. Out-of-state students watched their costs rise 6% to $26,741, according to the College Board, a non-profit association of schools, colleges and universities. (All costs include tuition, fees and room and board.)

Interestingly, poor investment performance may be one reason college costs continue to measurably outpace the rate of inflation. Many schools are suffering significant losses in their endowments as a result of the current financial crisis. Some of the largest endowments in the country including places like Harvard, Princeton and even the University of Michigan have experienced declines of over 20 percent during the fiscal year that ended June 30, 2009.

However, Benjamin Franklin's words still hold true: "an investment in education pays the best interest." As a matter of fact, over a lifetime a high school graduate earns an average of $1.2 million, while a college graduate earns $2.1 million (in current dollars). Therefore, it's more important than ever to adequately plan for college tuition expenses. Work with an independent fee-only financial advisor to ensure you are taking the right steps to ensure your investments are ready when your student is.

Financial Planning Tips

Good advice never goes out of style.

Things to do:

• Have a financial plan showing where you want to be and how you will get there.
• Develop an investment policy statement describing how you will make investment decisions to help prevent you from making emotionally-charged investment decisions.
• Whenever possible, invest often. Consider a systematic investment plan. This forces dollar-cost averaging.
• Work with a financial professional who is compensated to provide objective advice, not an advisor who's paid to sell products.
• Identify your risk tolerance before the next market drop, and have an asset allocation targeting that risk tolerance.
• Be truly diversified including large, mid, small, international, growth, and value stocks in you portfolio. Invest in corporate bonds, government bonds and international bonds.
• Make your asset allocation more conservative as you approach retirement.
• Rebalance your portfolio at least annually.
• Meet with your financial advisor at least every six months.
• Review and update your financial plan and estate documents at least annually.
• Have some liquidity in your portfolio. Having cash available will reduce your need to sell securities when their values are depleted.
• Take full advantage of the employer match on your 401k. Remember the match is part of your compensation.
  
• Understand the risk/return history and expectations for all your investments.
• Monitor how and how much your investment advisor is compensated.
• WORK WITH A FIDUCIARY - since they are obligated to act in your best interest.

Things not to do:

• Let emotion get the best of you.
• Necessarily trust your financial advisor. Make him or her earn that trust.
• Trust "financial advisors" that encourage you to leverage your home, or push annuity products without mentioning the costs of such products.
• Be enticed by new, short-term investment strategies.
• Work with a financial planner who isn't financially motivated to constantly serve you.
• Neglect estate planning.
• Invest in things you don't understand such as gold, commodities, and options.
• Pay high investment fees or commissions.
• Seek advice from "financial professionals" who work with a limited range of products, such as insurance or annuity salesmen.
• Seek advice from friends and family who are not financial professionals.
• Invest for the long-term without an established emergency fund (3-6 months of expenses).
• Use short-term investments for long-term goals, or vice versa.