Favorite Books:

Owning a business and investing involves risk and may not be suitable for all investors. You should consider your ability to handle the byproducts of such activity.

If you’re dissatisfied with your personal financial statement and you have an intense desire to transform yourself into an extraordinary investor, here are some nuggets I’ve learned from my wealthiest clients.  Notice I said intense desire. A regular desire just won’t cut it if you desire to be wealthy.  Regular desire is like regular gas.  It’s not enough fuel for top-performance.

Millionaire Habit #1:  Be Financially Articulate

Millionaire Habit #3:  Get In the Game, Stop Fan-Watching

This commentary should not be considered individual financial advice and cannot guarantee success.

The employer-sponsored 401k Trust and its job transition heir-apparent, the IRA, have become by far Americans’ most popular vehicles for accumulating retirement assets during our working years. According to Investment Company Institute’s March 31, 2008 report, some $17.1 trillion or 40% of American households’ net worth are retirement assets.

Of that $17.1 trillion, IRAs own $4.5 trillion and 401k’s (and equivalents) own $4.3 trillion respectively. The product of choice for half of these IRA and 401k assets is the mutual fund.

It’s a well known fact in the financial industry that when share prices rise (and account balances swell), investors experience emotional exuberance and pour money into more shares. Conversely, when share prices decline (and account balances shrink), investors experience emotional distress and liquidate their shares.

Although this is the very opposite behavior that a mutual fund investor should employ, it is a well documented and well-rutted ritual that is not likely to change.  The following three (3) ideas will enable you to take maximum advantage of an investment’s price volatility, or as I like to call it, The EKG Effect:

• Bet the House’s Money: If seeing your account balance decline or as you refer to it losing money makes you nervous, then put the house’s money at risk instead of your own. Not “rent money,” but house money. You’ve been to Vegas or a casino somewhere so you know what it means to play with the house’s money. In a 401k Plan, house money comes from several sources. One source of house money is Fedtax.  Fedtax is that line item dollar-amount shown on your paystub that was witheld from your pay.  However, if you contribute to your 401k Plan, house money is that amount that you [would have] given to Uncle Sugar if you hadn’t paid it to yourself instead via your 401k Plan.  Just take a look at your paystub if you’re the visual type.  Additionally, house money comes from the matching dollars and the Profit-sharing dollars that your Employer may add to your account because you participate in the Plan.  This house money could easily be as high as $16,000 or more annually at max participation and funding levels.

Here’s a hypothetical example to illustrate this concept. Let’s say you’re married and earn between $65,100 and $131,450. According to the IRS Tax Schedule below, you would reduce your tax liability by $0.25 cents for every $1.00 dollar you contribute to your 401k Plan. That means $0.25 is technically house money and rightfully it should have gone to Uncle Sugar. If you contribute the max $15,500, then roughly $4,000 is house money.

Now, let’s say that your employer matches Plan contributions dollar-for- dollar up to 4.00% of your $50,000 annual compensation. That’s another $2,000 in house money. And, if you Plan has a Profit-sharing provision, that’s even more house money. Makes sense so far?

In this example, if you’re a nervous Nellie and you can’t stomach the decline in your account value and the roller-coaster volatility is making you nervous, here’s a suggestion. Rather than liquidating your accounts at the absolute worst time to do so, segregate your own money from your house money. Commit your own money to the more conservative bond or fixed income fund options in your 401k Plan and leave it that way. Alternatively, commit the house money to the more aggressive stock or growth fund options in your 401k Plan and leave it that way. Deploy your new deferrals and matching contributions in the same manner.

• Hedge Your [401k] Bets: Hedge is a just a fancy word for insurance. Funny…we seem to understand insurance when it comes to material assets, but we don’t quite get the concept when it comes to money. But, don’t you agree that it’s just as important to insure [protect] your money as it is your car? Well, here’s how you can do that.

You’ll remember that in the above-referenced ICI report, about half of that $17.1 trillion in retirement assets was split equally between employer- sponsored retirement plans and IRA accounts. To me, that suggests that most folks who have 401k Plans also have an IRA. If that’s you, then you have the necessary tools to hedge your 401k. To do this, simply invest your IRA assets in investments that have no correlation, low correlation, or negative correlation to the funds inside your 401k Plan. This will require a little research and due diligence, but it’s really not that difficult. By hedging this way, you will feel less anxious about volatility since the bulk or your investments will no longer be closely related to each other; and therefore, they will probably not reflect the same volatility characteristics at the same time. This means that you will not feel the emotional duress that motivates investors to liquidate at precisely the wrong time.

• Save the Maximum Possible [both] Inside and Outside your 401k Plan: Currently, the maximum available contribution level to a 401k Plan is $20,500 annually if you’re age 50. According to separate studies by Hewitt and Fidelity, the average employee defers 6.00% – 7.00% of their compensation. That amount is well short of the 15.00% cap, which means that there is a lot more opportunity for saving.

Because of its tax-advantages and expense structure, there is no better primer to accumulate retirement assets that the 401k or employer- sponsored retirement plan. Every American should maximize his or her contributions. After all, a huge part of those contributions are HOUSE MONEY.

We have spent countless hours in strategy with clients in order to determine the best course of action for each client.  We would be glad to put our intellectual capital to work for you so you gain greater clarity about the financial future that awaits you.

by Larry DeRamus, President
DeRamus Wealth Management, LLC

Surely by now you’ve heard someone refer to the US as a “debtor” nation. Well, the events unfolding before your eyes are proof-positive of just how accurate a description of the U.S. that really is. With a bloated national debt weighing in at over $10 trillion and a deficit this year projected to hit $1 trillion, the red ink continues to grow at a roadrunner pace.

It’s my belief that no American generation before ours has had a more up-close and personal view of “debt” than ours. And, it’s not just the US government. It’s US households and US businesses. Each is addicted to debt.

And if you’re just a little confused and scared by how the experts seem to have complicated this current debt [credit] crisis, join the crowd. After hearing some of the many interviews on television, I’ve even walked away on several occasions wondering what that guy just said.

The Circulatory System

At the risk of over-simplifying the situation, here’s a context that may help clarify your understanding of this crisis: In high school, you learned about the circulatory system. This system we learned was where the blood distributes all those vitally important nutrients, such as oxygen, water, and waste throughout the body to their various destinations.

This circulation of blood is what keeps the body alive and functioning at peak levels. If the flow of blood is to ever stop circulating suddenly, or if it gets disrupted somehow, then something bad has happened.

At the center of this amazing network is the heart. Its function is to pump and regulate this never-ending flow of blood to the organs of the body by way of a vast highway of blood vessels.

The Banking System

In my example, if you replace circulatory system with banking system and the flow of blood with the flow of credit, then you’ve got a pretty good picture of the relationship between the economy and the banking system. In other words, credit is to the economy as blood is to the body. Thus, credit has become the very lifeblood of a modern global economy. And banks are the heart of the infrastructure that keeps credit flowing.

A Hemorrhage:  Credit-Risk Overload

So, exactly what happened to cause all this mess to get out of kilter and resulted in what Treasury Secretary Hank Paulson described as the “credit markets freezing up”? Like you, I’ve heard a dozen different arguments. Here’s where my investigation led me. Again, back to my circulatory system analogy for clues.

What would cause the circulatory system to run out of blood? Answer: a hemorrhage. What’s the equivalent of a hemorrhage in banking? Answer: Credit-risk overload. In a nutshell, it’s the combination of too much money lent to borrowers who don’t pay it back and too much money lent against assets with too little value. Let’s explore how the credit game is played.

As stated earlier, the banks exist to pump credit into the system. Their single highest priority is lending money. The more money they lend, the more profit they make. If you thought the primary job of banks was to help you “save” money, I’m sorry to disappoint you. That is simply not true. The banks’ only motivation for taking your savings is so they can lend many dollars out against every one you have on deposit.

It’s called leverage, which is a term we’ll get back to later. For now, it is extremely important that you understand that a bank’s financial statement motivates them. It is the very opposite of your financial statement. Whereas on your household balance sheet, you list your savings as an asset and your loan as a liability; your bank’s balance sheet reflects your savings or deposits as a liability and books your loan an asset. And like every profit-driven entity, banks want a lot more assets than they want liabilities. For this to happen they have to lend, and lend they do.

So, understand that the bank’s motivation and your motivation are not necessarily aligned. Because businesses and households have a never-ending appetite for credit, and banks have an unceasing appetite to lend, there is every incentive to make the system more and more efficient.

Need a “Capital Transfusion”

In recent years, the intersection of product innovation, technology, regulations, and everywhere banking has brought together lenders and borrowers at a meteoric pace and volume never seen before. The result, both parties have now hemorrhaged on credit and the Feds have come to the banks’ rescue.  Interestingly enough, how do you treat a patient whose hemorrhaged?  Answer:  A transfusion.  In this case, it’s a capital transfusion.

The cause of the hemorrhaging at the banks is this; what was once a huge asset to them (mortgage loans) has become an even more colossal liability. In other words, what once was a very dependable asset generating uninterrupted cash flows for the bank stopped flowing or slowed to a trickle. It became a “toxic asset.” Unfortunately, it gets worse.

Remember that word leverage? You probably thought that when you borrowed money from a lender you got the lender’s “cash.” Well, not quite. In the lion’s share of cases, the bank used its access to credit [or borrowed money] to make the loan you received. So, in a credit crisis scenario this double-triple-even quintuple leverage further exacerbates the problem.

And at the very time when banks have grossly insufficient revenues flowing in from those toxic assets, their expenses and reserve requirements increased exponentially. That, in turn, pressured them to sell would-be assets at fireside prices to raise capital and shore up balance sheets.  Forced-liquidation selling (sorry – now it’s called deleveraging) is a tried and true indicator of a financial calamity. It’s the old double whammy! And some analysts estimate that there is $1 trillion US in these toxic assets out there …that you just bought.

Regardless of pedigree, virtually none of the domestic or global banks have been unscathed. Global brands like Bear Stearns, Lehman Brothers, Merrill Lynch, AIG, Countrywide, Wachovia, WAMU, and many other lesser known brands.  They’ve all been affected to some degree. Why? Because in one way or another, directly or indirectly, they are each couriers and participants within the banking system’s lifeblood — credit.

So, in the end what happened to those hallmark bank attributes – caution and steadfast aversion to risk – that all bank financiers are naturally endowed with? Once the smoke clears, I believe that consensus will find that the white blood cells of the banking system – underwriting – is where the system capitulated.

Underwriting is itself the process invented by banks, insurers, and regulators to evaluate and rid the system of potentially toxic risks. However, all parties to the case apparently found it impossible to say no to credit. Both sides of the transaction (banker and borrower) became intoxicated with what it wanted. After all, from the bankers’ profit-motive viewpoint – the default rate of mortgage-related issues has historically been in the very low single percentages. Easily an acceptable level of risk.

Furthermore, “credit insurance” derivatives, better known as credit default swaps, could be bought to mitigate the banks against expected default levels. Turns out however, that AIG, both a counterparty and speculator in CDS’, was one of the first casualties of the crisis in need of a “capital transfusion.”

According to International and Derivatives Swap Association, the CDS maket is currently estimated at some $54.6 trillion.  That’s bigger than the stock market, treausuries market, and mortgage markets combined.  Finally, from the borrowers’ “buy now pay later” viewpoint — historically low interest rates, relaxed underwriting scrutiny, and strong real estate valuations further fueled an unbridled, runaway demand for credit.  Easy money. Everybody won.  But, now as they say, “the chickens have come home to roost.”

Learning is a action verb.  Understanding how and when to apply what you have learned is what epitomizes the seasoned from the unseasoned professional.  The expertise gained in any field takes many thousands of hours of critical thinking, research, study, and yes – failure and successess.  As the saying goes, If the grass on your neighbor’s side of the fence is greener than yours, then you can bet their water bill is higher too.

This is a very different and challenging time.  We have already paid the water bill and demonstrated our ability to skillfully navigate and counsel our clients through financial storm seasons of all types.  If we meet your qualifications and you meet ours, we would be glad to assist you with your investment decision-making and implementation.

by Larry DeRamus, President
DeRamus Wealth Management, LLC

Beginning right now, if you were to read every great investment book ever written, none would give you greater and more eloquently simple and practical advice as that single statement from the hockey player who has come to be known as The Great One.

Americans spend an enormous amount of time and money trying to figure out exactly which investments to buy and precisely when to buy them. Here are the results: when investment or business circumstances and news are bad and investments lose value, investors sell their investments. Upon selling, they sit on the sidelines and watch and wait until prices rise (become high). When circumstances and news improve and investments go up in value, they buy and watch and wait until their investment values fall (become low). This is the classic “buy high, sell low” mantra shared by the miseducated masses. And, it is the polar opposite and complete misapplication of the Gretzsky philosphy ”skate to where the puck is going to be.”

If you continue to buy emotionally based on where the puck is or has been, how will you ever accumulate enough income and assets to live the life you’ve dreamed of when the time comes? This is a very serious question. The problem is that it’s tough to catch yourself buying emotionally. Why? Because it has become a habit. Habits, good ones and bad ones, are called habits because they are effortless and often invisible to us. And, of course successful investors, the beneficiaries of your misguided behavior, are more than happy to cash in on your blind spots and keep taking your money.

So, how do you know when you’re caught up in the emotional investment rat-race aka the loser’s game? You know when you go to your playbook and there is no playbook…no written Gameplan. The gameplan or playbook removes your need to to think about things and replaces the wiring that causes you to second-guess yourself. A gameplan makes decision-making automatic…that’s right, like a habit. There is no doubt about it. Far more investors lose far more money from indecision than from bad decisions. Again, The Great One put it best, You miss 100 percent of the shots you never take. In the absence of a gameplan you will sit out too many games and take far to few shots; and when you do play, you will make buying decisions on the impulse of greed and selling decisions on the impulse of fear.

Get yourself a Gameplan. Harvard, Yale, Notre Dame…all have investment gameplans that lay out the foundation for how they will invest their endowment capital to secure the viability of their respective institutions. Yet, the overwhelming majority of mis-educated investors continue to operate like wildebeast migrating across the great Serengeti. Having gotten so enamored with the frenzied crowd they are competing with, it matters more what everybody else is doing and where everybody else is going than whether the crocodile swimming nearby has had his fill of wildebeast this year. Separate yourself from the herd.

Our clients choose us because they sense instinctively that having a Gameplan gives them a greater possibility to win. No longer do they have to agonize over what to buy or sell, when to buy or sell, or if they should buy or sell. It’s already in the playbook. As the chief executive of a financial advisory firm, I know that the primary ingredient for a successful advisory firm is the same primary ingredient for any successful enterprise. And, this same ingredient is critical for you to have a financially successful household. That ingredient: the speed and quality of your decision-making. To ensure our clients’ success, we have a Playbook and we construct a Gameplan for each and every one. That gameplan keeps us clear about their direction and keeps them on purpose and on course. More importantly, it adds speed and removes road bumps to decision-making.

The media often celebrates Wayne Gretzsky as the greatest hockey player to have ever laced on a pair of skates. I agree with them. But in my office and from my viewpoint, The Great One is just as celebrated for the sage and eloquently simple insight he left – ”Skate to where the puck is going to be, and keep taking shots at the goal”.

How many times have you heard it? ”To reach your objectives, you should have a plan”? Study after study after study reconfirms how much more successful are those who have a written plan versus those who don’t. Yet, chances are, you’re one of the 95% of people who don’t have one. Are you satisfied with the results you’ve achieved to date? Or are you like most Americans who feel that everything is relative and so long as you are keeping up with your neighbors, the “Joneses,” then you must be doing well? I sometimes refer to the Joneses as ”The Wildebeasts,” and you know what lions and crocodiles do to wildebeast.

The one big problem with not having your own plan is that it victimizes you by making you vulnerable to everyone else’s ideas, especially the ideas of those individuals who are good at selling their ideas. Of course, these are people who have no clue about who you are at your root or where you may be going in your life. Here’s a personal example. Often when I’m out socializing, when people find out I’m a financial advisor, they hit me with a couple of questions. The questions go something like this: ”What investments are you recommending these days with the market tanking like it is?” or ”My account is losing money, what should I be investing in?” or ”What kind of performance are you getting for your clients?” Does this sound familiar to you?

Before I had a clear view for my life and a plan for how my money fit into and served my life’s purpose, I suppose I asked many of these exact same questions. But once clear on my direction and committed to my written plan, the need for arbitrary, chaotic input was eliminated. I invite you to do the same.

Let me give you a bit of context to frame my perspective. Imagine yourself for a minute walking up to a Wal-mart greeter and asking ”What should I buy while I’m here today to save some money?” Or next time you’re in an airport, scamper up to the Visitors Kiosk and ask the concierge, ”What’s the best airline for me to fly”?

Don’t these questions sound a little ridiculous? Of course they do. Why? Because you know you do your best shopping when you write a shopping list in advance. Would you dare leave for the airport on an important trip without knowing your destination and having pre-purchased your ticket? No way. So, is it any wonder then why the majority of Americans have such poor financial report cards? They have not determined their destination; therefore, there is no travel plan or ticket to outline their route to travel.

Here are three ways to make sure that you do better than your neighbors, the Wildebeasts.

1. Decide on a direction for your life and write it down. At it’s core, what is your life’s purpose? In other words, if you were in Dallas at the airport, would you be flying east to Savannah or west to San Diego? In the absence of a sense of direction, everything is by accident and nothing is on purpose. Winners live life on purpose. Have a plan.
2. Jettison the notion that you can get rich quick. Acknowledge to yourself that there are no free lunches and one reaps in general proportion to what one sows. Any and all attempts to bypass or circumvent these principles have proven futile again and again throughout mankind. Nature has consistently found a way to reward those who have made the appropriate investment of time, effort, and resources. Regardless of the level of wealth you seek – financial security, financial independence, or financial abundance; you must make the appropriate deposits to be in position to someday make the reciprocal withdrawals. Execute Your Plan…not your neighbors.
3. READ. It’s true…”Readers are leaders”. According to an Associated Press survey last year, nearly thirty percent of Americans read not a single book in 2007. On the other hand, Nielsen Media Research points out that the average household has more TV sets than people. As a result, Americans watch an average of 4 hours and 35 minutes of television each day. Remember the oft-quoted advice about computers that went something like ”Garbage in… Garbage out.” Keep that quote in mind the next time you’re watching Cramer scream at you to buy or sell some stock through your TV set. Never stop learning and developing yourself and your financial IQ.