Enlightened Financial Planning

What??! The Stock Market is Rigged???      April 15th, 2014

You may have heard about the 60 Minutes interview with author Michael Lewis, a

former Wall Street broker, author of “Liar’s Poker” and “The Big Short,” who has

just come out with a new book entitled “Flash Boys.” Lewis is an eloquent and

astute critic of Wall Street’s creative and predatory practices, and in his new book

(and in the 60 Minutes interview) he offers evidence that the stock market is

“rigged” by a cabal of high-frequency traders, abetted by stock exchanges and Wall

Street firms.

The charge is entirely true. And it is also completely irrelevant to you and anyone

else who practices patient investing.

Lewis is exposing a secret advantage that a surprisingly large number of

professional traders, employed by large brokerage firms, are able to get when they

build high-speed fiber optic cable feeds directly into the computers that match

buyers and sellers of securities. Some of those traders actually have their trading

computers located in the same room as the New York Stock Exchange and Nasdaq

servers. And some pay extra for access to more information on who wants to buy

and sell, more quickly, than would be available to you if you were sitting down at

your home computer looking to buy or sell Apple Computer through a discount

brokerage account.

All of this is perfectly legal, but Lewis points out that it is also shady. Why should

some buyers and sellers have millisecond advantages over others? The companies

that see more of the market, more quickly, are able to jump in ahead of you and me

and buy stocks at lower intraday prices, and then jump ahead 15 seconds later and

sell to the highest bidder before you and I would even see that bid on our screen.

They can buy the stock you put in an order for and sell it to you at a fractionally

higher price through the normal market-matching mechanisms. This way, they can

squeeze out additional pennies and nickels on each transaction, and if they do this

thousands of times a day, it adds up to real money–millions of dollars a year.

Why is this irrelevant to you? Many of those lost dollars are coming out of the

pockets of day traders, ordinary people who are foolish enough to think that they

can outwit the markets by moving into and out of individual stocks several times a

day, or professional traders at hedge funds who may not have access to the fastest

server or a direct feed into the Nasdaq servers. There are tens of thousands of

these investors, and many of them, watching the 60 Minutes report, discovered for

the first time that they are getting routinely fleeced by Wall Street’s money


However, if you’re invested for the long term, it really doesn’t matter how many

times the stocks you own inside of a mutual fund or ETF, or directly in your

retirement account, change hands or at what price every few minutes. It doesn’t

even matter whether your stocks are up or down in any given month or year, so

long as the underlying companies are building their value steadily over time. Your

time frame is eons compared with the quick-twitch traders, who hope to be in and

out of your stock in minutes rather than decades. Your mutual fund that buys

when a stock seems cheap might, if it’s careless or unsophisticated, give up

fractions of a cent on its purchases, but that likely isn’t going to have a measurable

impact on your long-term investment returns.

Somehow, this important fact was lost in the 60 Minutes interview. The interview

also didn’t mention that things can go horribly wrong in the arcane and predatory

world of rapid-fire trading. The Hall of Fame of trading losses includes $9 billion

lost in credit default swaps by a single Morgan Stanley trader from 2004 through

2006, or the $7.2 billion lost by Societe Generale trader Jerome Kerviel over a few

days in 2008, or the $2 billion “London whale” losses in 2012. They–and many

others–used their milliseconds speed advantage to generate staggering losses,

proving that even the smartest operators aren’t always raking in the profits.

In the end, the interview tells us several things. First, it exposes, yet again, the fact

that the Wall Street culture will go to great lengths to grab money out of the hands

of unwary investors. One wishes that the 60 Minutes interviewers had asked a

simple question: what economic purpose is served by fast-twitch traders, trying to

make money for their wirehouse employers by purchasing and selling individual

stocks multiple times a day ahead of other investors? Is this benefiting the

economy in some way?

Second, the interview makes plainly clear the folly of an average investor trying to

outsmart the markets with short-term trading activities.

And finally, for those who can see the big picture that is never explained in the 60

Minutes interview, these revelations confirm the wisdom of having a long-term

investment horizon. When you measure returns over three-to-ten year time

horizons, the milliseconds don’t matter.

What about myRA?      April 8th, 2014

Chances are, you’ve heard about the new myRA retirement savings program that was

proposed by President Obama during his State of the Union speech. But what is it, and

how does it relate to the array of other retirement savings options you already have–

including, of course, traditional and Roth IRAs, 401(k) and/or 403(b) plans? Is this

something you need to be looking at in addition to, or instead of one of these other


The new account, which is scheduled to be introduced later this year, will be offered to

workers who currently don’t have access to any kind of retirement program through their

employers. Remarkably, this underserved population is actually about half of all

workers, mostly those who work for small companies which have trouble affording the

cost of creating and administering a 401(k) plan. The idea is that a myRA would be so

easy to install and implement (employers don’t have to administer the invested assets),

and cost so little (virtually nothing), that all of these smaller companies would

immediately give their employees this savings option.

Only some of the employees would be eligible, however. Married couples earning more

than $191,000, or singles earning more than $129,000, would be excluded from making

myRA contributions. And there is currently no law which says that employers would be

required to offer these plans.

So the first thing to understand is that people who already have a retirement plan at

work, or who earn more than the thresholds, shouldn’t give the myRA option a second


Nor, frankly, would those people want to shift over to this option. Why? myRA

functions like a Roth IRA, which means that contributions are taxed before they go into

the account just like the rest of a person’s salary, but the money will come out tax-free.

Anybody can make annual contributions to a Roth IRA; the 2014 maximum is $5,500 for

persons under age 50; $6,500 if you’re 50 or older–and these are the same limits that

will be imposed on the myRA. BUT–and this is a big issue–the myRA is not really an

investment account. Any funds that are contributed to a myRA account earns interest

from the federal government at the same rate that federal employees earn through the

Thrift Savings Plan Government Securities Investment Fund–which is another way of

saying that the money will be invested in government bonds.

Why does that matter? Retirement accounts that invested in the stock market earned

close to 30% from their stock investments last year. The government bond investments

that would have gone into a myRA earned 1.89% last year–which is below the inflation

rate. In real dollars, that was a losing investment.

Another big issue is the employer match. Many workers who have a traditional 401(k)

account get some of their contributions matched by their company, which effectively

boosts their earnings. myRA accounts will get no such match.

The Obama Administration clearly understands the difference between saving in a

government bond account and actual investing; there is a provision that whenever a

myRA account reaches $15,000, it has to be rolled into a Roth IRA, where the money

can be deployed in stocks, bonds or anywhere else the account holder chooses. The

program seems to be designed to encourage younger workers to start saving much

earlier than they currently do. Statistics show that the median retirement account for

American workers age 25-32 is just $12,000, and 37% have less than $5,000.

Will they be motivated to save when myRAs roll out at the end of the year? Some

commentators have noted that the money can be taken out of the account, for any

reason, at any time, with no tax consequences. That is not a great formula for longterm

savings. But it does make the myRA account a convenient way for a worker just

starting out to build up a cash reserve which could serve as a cushion against job loss

or unexpected expenses like car repairs. If it is not needed, the account could

eventually grow into a retirement nest egg.

By Bob Veres, publisher of Inside Information – the premier publication of financial industry trends and

information for leading practitioners in the financial planning profession.


Things you probably don’t know about the Russian incursion into the Ukraine      March 25th, 2014

Our hearts and prayers go out to the people of Ukraine, as they undergo both an internal political crisis and what appears to be military intervention from Russia. For people of a certain age, the current events, with tanks rolling across the Russian border into a neighboring nation that wants to exercise its freedom, it feels a bit like the Cold War days all over again.

Whenever we see troop movements and fires raging in the streets of a capitol city the size of Chicago, our instinct is to assume the worst and move our money to the sidelines. But is this really the best strategy? Some commentators see any market downturn as a buying opportunity, since stocks are going on sale simply because of unfounded fear of economic aftershocks.

Here are some facts that you might not know about what has, hitherto, been a relatively quiet new member of the world economic community.

1) The word “Ukraine” means “borderland” in proto-Slavic. It appears to have acquired this name simultaneously from Poland, Austria and Russia, referring to the territory that sits across the border of so many European nations and Russia. In fact, the Polish referred to their troops stationed in this area as Ukranians–that is, borderlanders. Since the country became independent from the Soviet Union, it is no longer referred to internationally as “The Ukraine.”

2) Ukraine’s currency is the hryvnia, adopted in 1996 after the country suffered the greatest one-year bout of hyperinflation in global economic history. (Zimbabwe has since broken the record.) Today, one dollar will buy 9.6 hryvnias. A euro will buy 13.3 of them.

3) After Russia, Ukraine has the largest military presence in Europe. Ukrainian troops have been deployed as part of international peacekeeping missions in Somalia, Kosovo, Lebanon and Sierra Leone, and has engaged in multinational military exercises with U.S. military forces. NATO has accepted Ukraine as a member pending a national referendum on the matter–which will obviously be delayed until the conflict with Russia has played itself out.

4) Ukraine has one of the world’s most active space programs. The National Space Agency of Ukraine has launched six self-made satellites and a total of 101 launch vehicles. The country also manufactures the An-225 aircraft, the largest aircraft ever built.

5) Due to low birth rates, Ukraine’s population is declining at the sixth fastest rate in the world, behind the Cook Islands, the Federated States of Micronesia, the Northern Mariana Islands, Niue (an island nation in the South Pacific) and the Eastern European nation of Moldavia, which borders Ukraine.

6) Nevertheless, Ukraine’s largest city, Kiev, has a higher population (2.8 million) than Chicago, America’s third-largest city. The population of Kharkiv, Ukraine’s second- largest city (1.4 million), is greater than San Antonio, San Diego and Dallas, America’s seventh, eighth and ninth most populous cities.

7) According to the World Bank, Ukraine’s economy is the 51st largest in the world, ranking just behind Peru and the Czech Republic,a nd just ahead of Romania and New Zealand. But its $7,295 (US) per-capita income (a rough measure of a nation’s wealth) ranks 106th in the world, behind Namibia and El Salvador and ahead of Algeria, Micronesia and Iraq.

8) Ukraine co-hosted the Euro 2012 football (soccer) tournament (with Poland), which is one of the major sporting events in Europe.

9) Even though the Chernobyl nuclear disaster occurred in Kiev, Ukraine operates the largest nuclear power plant in Europe.

10) Despite comments that Ukraine is divided between ethnic Ukrainians and Russia, 77.8% of the population is ethnic Ukraine, and only 17.3% is Russian.

11) Ukraine is known as the “breadbasket of Europe” for good reason. The country is the world’s fourth largest producer of barley, 5th largest producer of rye, 11th largest producer of wheat, the 6th largest producer of oats and the 9th largest producer of soybeans.

12) Russia sells approximately 80% of its oil and gas exports to the European Union through pipelines that pass directly through Ukraine. The European Union receives 25% of its oil and gas from Russian sources through these conduits.

13) Ukraine also happens to be Russia’s second-largest customer of petro-fuels.

14) Russia is drilling for oil in the shallow waters of the Black Sea near the Crimean Peninsula, which shows promise of having significant reserves.

15) Among others drilling in the same area: Chevron and Shell Oil. If they begin production under the Ukrainian flag, it would significantly undercut Russia’s oil and gas market share and prices, simultaneously boosting Ukraine’s economy.

16) When the Russians (as the Soviet Union) invaded Afghanistan in 1979, the U.S. and many Western nations boycotted the 1980 Olympic games, which were hosted in Russia. Is it interesting that Russia decided to move forces into Ukraine immediately AFTER the Sochi Olympics were finished?

17) Among the most likely responses to the Russian/Ukrainian crisis is the cancellation of the upcoming G8 summit in Sochi. Another possible response might remove Russia from the G8 club. This would embarrass Russian strongman Vladimir Putin at home and isolate him (and Russia’s economy) abroad.

19) Russia’s economy could be the big loser in the aftermath of the Ukrainian crisis. Share prices for companies based in Russia declined by 10 percent the day after mysterious soldiers took over the Crimean peninsula, also triggering an outflow of domestic currency that Russia desperately needs to invest in modernizing an economy largely (today) based on selling abroad what is pumped or mined out of the ground.

20) The threat of disruption of trade between Western nations and Russia (either due to sanctions or reluctance to deal with a country that doesn’t seem to be focused on following international law) cost the Russian economy $60 billion in a matter of days– more than the total cost to stage the Sochi Olympics.

21 (bonus) Let’s assume that we are not headed toward a world war. Several commentators have unhelpfully pointed out that the Crimea became the flashpoint for World War I, but the world is somewhat different today. There could be some impact from higher energy prices in Europe if the Ukraine pipelines are disrupted temporarily, but Russia needs to sell its oil and gas as much as Europe needs to buy it. Unless someone is heavily invested in Russian stocks, the crisis will likely be seen as a portfolio non-event.


By Bob Veres, publisher of Inside Information – the premier publication of financial industry trends and information for leading practitioners in the financial planning profession.


Tom Shares Financial Planning Tips with Grief Group      December 10th, 2013

Tom Alf recently spoke to a group of individuals who lost their spouses 18 months to two years ago and are in the next phase of moving forward. Tom was asked to speak about finances by a friend who had lost her husband. He provided the group with an overview of the following areas:

• How different types of financial services firms work with individuals.

• Fee-only advisors versus commissioned advisors.

• The comprehensive financial planning process (including retirement planning, cash flow, investments, taxes, insurance and estate planning).

• Pros and cons of annuities and reverse mortgages.

• Tax filing status of a surviving spouse.

While we tailor our planning approach for every new client, we consciously slow down the process for those who have recently suffered a significant loss.  We first work on the areas of greatest concern, taking one area at a time and making sure that area is completed before moving on.  Slowing down the process and taking one area at a time helps those grieving clients begin to move forward and feel more confident about their finances.

If you would like Tom to speak at a grief group in your area, or if you’re interested in learning more about Clerestory Advisors, give him a call at 651.209.2610.

Tom and Lauri Quoted in the Wall Street Journal      October 9th, 2013

Clerestory Advisors principals Tom Alf and Lauri Salverda were both recently quoted in the Wall Street Journal by journalist Veronica Dagher in an article about How You Can Improve Your Company’s 401(k) Plan. Tom and Lauri offer advice surrounding Roth IRA accounts and 401(k) plans. For more information, you can read the article or contact us to learn more about how Clerestory Advisors can help walk you through retirement planning.