O Canada, The True North Strong and Free! (2006-06-26)

O Canada, The True North Strong and Free!

(2006-06-26) by David John Marotta

July 1st is Canada Day, the day our northern neighbors celebrate their union as the North American colonies of Great Britain. We should celebrate too. Not only are they good neighbors but a good investment.

Canada ranks sixteenth among the 161 countries in The Heritage Foundation’s 2005 Index of Economic Freedom, just four spots behind the US. It is one of the ten countries that we emphasize because of their economic freedom. While a balanced portfolio includes both foreign and domestic investments, foreign generally outperform US investments, and the countries with economic freedom outperform the foreign stock index. Canadian investments are no exception.

As of the end of May, 2006, MSCI Canadian Index's five year annualized return was 16.67% compared with the MSCI EAFE foreign index's 9.18% or the S&P 500's meager 1.96%. Another reason to emphasize Canada is because it is the one major country that is not included in the EAFE (Europe, Australia, and Far East) foreign index.

Canada, not China is America’s biggest trading partner. Rich in natural resources, Canada’s oil reserves are second only to Saudi Arabia’s. In fact, Canada is the largest foreign supplier of energy to the US.

Despite the oil and trade deals, the income gap between Canadians and Americans is growing steadily wider with one exception: Alberta.

For some Canadians the upcoming national holiday will be anything but uniting. Once again, some Canadians are threatening a vote for independence. But, this time it’s not from Quebec, but from Alberta. The growing economic differences between Alberta’s "have" status and the other "have not" Canadian provinces has the majority of Canadians demanding greater wealth redistributions from Alberta.

Known as the 'Texas' of Canada, Alberta possesses nearly 95 percent of Canada’s oil resources. Alberta’s wealth has skyrocketed since oil production began in earnest in the late '70s. But its new-found riches are as much a result of policy change as they are from oil.

Big government is a way of life in Canada. To our "life, liberty, and the pursuit of happiness" the Canadians stuck to the cautious motto of "peace, order, and good government." And in the same name of equality, the Canadians have lauded their socialized health care system and territory wealth redistribution systems as the key to building wealth. Albertans though, in keeping with their cowboy stereotype, elected a conservative government, making a clear departure from traditional Canadian political views.

The Fraser Institute’s 2005 Economic Freedom of North American report measured economic freedom of the 50 American states and the ten Canadian provinces in terms of government size, taxation, and labor market freedom. It found a direct correlation between economic freedom and economic prosperity. As government red tape increased, efficiency and wealth decreased among the states and provinces. As economic freedom increased, so too did the level of economic prosperity.

The economic freedom rankings in the Fraser report tell a remarkable story. Of the 60 states and provinces, Alberta took fourth place behind the America’s Delaware, Colorado and North Carolina. The other nine Canadian provinces landed at the bottom of the list.

Oil alone can not explain Alberta’s success. While the rest of Canada was pressing for wealth redistribution programs, Alberta was working to lighten the government regulations that were choking out free enterprise.

By the mid-‘90s, Alberta was outperforming its neighbors by leaps and bounds. Alberta now boasts the highest productivity rates, the lowest individual and corporate tax rates, and the highest per capita investment rates compared to the other provinces. In 2004, the Global Insight reported Albertan’s enjoyed a standard of living which outstripped the Canadian average by 45 percent. And despite the added infrastructure expenses, Alberta remains Canada’s only debt-free province.

This July 1 millions of Canadians will unite in the singing of their national anthem "O Canada." The forth stanza reads "The True North Strong and Free!" We salute our northern neighbors, thankful especially for provinces like Alberta that mentor the match of economic strength with economic freedom.

from http://www.emarotta.com/article.php?ID=184

Health Savings Accounts (2006-06-19)

Health Savings Accounts

(2006-06-19) by David John Marotta

Employers and employees alike are feeling the squeeze of swelling health care costs. According to the Kaiser Family Foundation, health insurance premiums have risen at an average rate of 12 percent per year since 2000. Unable to keep up with rising premiums, employers are forced to pass on costs to employees, to trim benefits, or worse, yet, to dump the coverage all together.

Sick of facing the same dilemma each year, more Americans are turning to consumer-driven high-deductible health care plans like those which offer Health Savings Accounts. Since their 2004 debut, enrollment has increased exponentially and is expected to gain momentum. By 2010, the Department of the Treasury estimates as many as 45 million Americans may be covered by an HSA-eligible plan.

Thus far, the results of HSAs are surprising. In fact, they may be nothing less than a miracle cure for America’s health care crisis. So, you say, isn’t a health insurance plan with a high deductible the exact opposite of a great benefits package? Nope. And here’s why.

The cause of healthcare’s malignant growth has been diagnosed as a lack of "negative feedback." All systems must have a regulator in order to dampen runaway reactions. Healthcare coverage is no exception.

One way to provide just the right amount of negative feedback is to make sure that the person who pays for a service is also both the person who benefits from the service and the person empowered to decide if the service should be given in the first place.

Traditional health care plans, on the other hand, are built on cost sharing. And, chances are high that you consume far fewer health care dollars than you pay in. Most of a plan’s health care expenses are generated by a small number of participants with chronic problems. In fact, the top 10 percent of the most ill patients account for 69 percent of total health care payouts in America. Additional expenses are generated by a small number of participants who abuse the system and consume services simply because they are not paying for them.

Instead of handing over thousands of dollars each year to a big insurance agency, why not keep most of those dollars in a savings account and use them on the services you actually need? There is no person better suited to determining the value of a medical procedure than the patient paying for the benefit.

Insurance is best used to limit catastrophic risk, not to pool everyday expenses. Therefore affordable medical insurance should have a high deductible. Out of pocket expenses below the deductible provide sufficient negative feedback to prevent skyrocketing insurance costs.

To help Americans cover the out of pocket costs of high deductible plans, the federal government passed legislation providing tax incentives in the form of Health Savings Accounts.

HSAs are just that, savings accounts. As long as funds are saved and spent on qualified medical expenses all contributions, capital gains and withdrawals remain untaxed. And like any other bank account, HSAs come complete with debit cards and checks.

To protect you against catastrophic medical expenses, Health Savings Accounts are coupled with a High Deductible Health Plan (HDHP).

You may think your insurance has a high deductible already. However, to qualify as a HDHP, insurance deductibles must be a minimum of $1,050 for individuals and $2,100 for families. Once the deductible is met, most HSA-eligible HDHP plans cover 100 percent of most medical expenses like emergency room visits, hospitalization, lab tests and prescriptions. Still, these deductibles are nothing to joke about. Paying a couple grand out of pocket before your insurance chips in may seem like financial suicide.

The good news is HSA-eligible HDHP premiums are only a fraction of the cost of a traditional medical insurance plan. A study by the Galen Institute found that the majority of HSA-eligible plan participants pay premiums of less than $100 per month. Try comparing that to the premiums for most insurance plans which average $335 for individuals and $906 for families - per month.

As an HSA owner you’ll likely do better than break even each year. With the savings on your insurance premiums, you should be able to accumulate a sizeable nest egg. And, unlike your traditional health care plan, your HSA funds are not subject to a "use it or lose it" policy. Anything you don’t spend one year carries over to the next year. After all, it’s your money. While you’re on a roll, why not check out the invest options offered by your bank?

So, you ask, what counts as a qualified medical expense? The IRS has approved a long list of qualifying expenses. In addition to doctor’s visits, hospitalizations, lab tests and the like, the list also includes prescriptions and some over the counter drugs like aspirin.

Qualified expenses may also include items which may or may not count toward your deductible. For some, that may include vision and dental costs like contact solution and teeth cleanings. HSA funds may also be spent on medical expenses for a family member not covered under the HDHP. However, nonqualified withdrawals will be considered as income and slapped with an additional 10% penalty tax.

So, what happens to your HSA when you leave your employer? The money is yours. No matter how many times you change employers, your account is fully portable. Accounts owners are immediately fully vested. All contributions made by an employer belong to the account holder.

And, there’s even more good news. Consumer-driven health care plans are positively shaping the behavior of the insured while pushing health care costs down. The Galen study found that HSA owners were more likely to engage in healthy behaviors and to get annual check-ups. It also reported they were more likely to inquire about costs and less likely to consume health care they didn’t need. And don’t think that the health care industry isn’t taking note.

It should come as no surprise that average costs for consumer-driven health care plans increased at roughly one-third of the rate of traditional insurance plans, according to Deloitte Consulting LLP. Among them, HSA plan premiums actually decreased on average by 17 percent for individuals and by 6 percent for families, according to a 2005 report by the nation’s largest online insurance broker, eHealthInsurance. Now that’s something everyone should feel good about.

from http://www.emarotta.com/article.php?ID=183

Seven Financial Rules for Marital Bliss (2006-06-12)

Seven Financial Rules for Marital Bliss

(2006-06-12) by David John Marotta

An overwhelming number of failed marriages cite financial troubles as a major factor in their breakup. This is no surprise because the way we use our time and money reflects our values. Without a strong set of shared values, marriages drift apart. But, dealing with finances together can bring a couple closer. Here are seven principles of how you can build wealth and your marriage.

Start young. June is the most common month for weddings, and there’s no better time to establish the rules of a relationship than at the beginning. And every seven years you delay starting a savings plan cuts in half your ultimate net worth in retirement. Chances are you know someone who’s getting married this month, so send them a copy of this article. It may be more valuable than the check you write.

Work as a team on the budget. Shared activities help you build and integrate your values and keep your finances in sync with the rest of your life. Couples that share church activities or philanthropic causes do better financially because their common vision allow them to work together instead of pulling in different directions. They do well while doing good.

The more opportunities to forge shared values the better the marriage team. Even the simple process of creating and adjusting a family budget provides a forum for discussion of what is really important to the family.

A budget gives you more freedom, not less. Couples without a budget can, and often do, fight about every dollar spent. Every purchase is an opportunity for values and priorities to clash. But couples who have worked together on a budget are already in agreement on the big picture. Once the difficult decisions are made about what will help further the family’s values, the specific purchases in each category are much less critical.

Couples with a budget do not get concerned about spending until a category goes over the budgeted amount. Having decided how much money the family can afford to spend on clothes for him and for her, it doesn’t matter as much if he prefers lots of inexpensive clothes and she prefers a few nice pieces, or visa versa. A budget allows discretion and freedom prevail within cooperation and teamwork.

Always pay yourself first. The best way to achieve your financial goals is by moderating your spending and staying on track with your savings needs. Only after you have saved several times your annual salary does the rate of appreciation become more important than the rate of savings.

To pay yourself first, set up an automatic monthly transfer from your checking account to an investment account where your contribution is automatically invested in a diversified portfolio. Even a small amount makes a big difference. Just five hundred dollars a month (just $6,000 a year) at 11.5% each year will compound to a million dollars by the middle of the 26th year. Money makes money. And the money that money makes, makes even more money.

Limit the amount you spend unless you both agree. One big mistake can undo months of frugality and sacrifice. Therefore, big purchases require both members of the team to agree. Honoring each other in this way helps avoid resentment and disgust.

When a couple is just starting out, this dollar limit may be very small, perhaps only fifty dollars. As the couple matures, they will grow to anticipate each other’s wisdom and values; plus, they will likely be able to increase their discretionary spending limits.

Separate needs from wants. In the United States, nearly all of our purchases are wants, not needs. We really need little more than food, shelter and clothing to survive. It is easy to fall into the misconception that we deserve nice things because we work hard. But wealth is what you save, not what you spend. The textbook definition of capital is deferred consumption, and wealthy people learn to value financial security over immediate gratification.

We have worked with families with very modest incomes who through saving and investing have grown to be millionaires. On the other hand, we have worked with couples who spent every dollar of dual six-figure incomes. The difference is separating needs from wants.

Enjoy a frivolous slice. Both members of a marriage should have a slice of the budget which is completely at their discretion. So long as their spending stays within this thin slice of the budget pie, they can be completely frivolous. Perhaps it is only 0.5% of your total budget, but it will provide a place to put purchases that otherwise might cause marital strife.

If one member collects ceramic pink pigs and the other signed collectable hockey cards they can both enjoy their frivolous expenditures without jeopardizing budget items that are more important to the family.

Couples that learn to live proportionately maintain their balance whether they are rich or poor. No matter the circumstances, they include some fun, some gifting, and some investing as a reflection of their shared family values.

from http://www.emarotta.com/article.php?ID=182

Foundation Series - 5 Mistakes (2006-06-05)

Foundation Series - 5 Mistakes

(2006-06-05) by David John Marotta

When endowment funds fall victim to poor management, the results are as bad as they are far reaching. Whether an endowment serves to prop up operating budgets or grow company retirement investments, falling market values trigger a host of undesirable outcomes. In the face of dwindling endowment assets, non-profit organizations are left with little alternative but to cut grants and programs. However, the most egregious failures are those involving retirement funds, bankrupted by poor management.

Investment committees must keep in mind the dramatic effects of even the smallest investment decisions. Each investment decision has the potential to land investments hundreds of miles off course, given enough time.

John Griswold of the Commonfund Institute groups management mistakes into six main categories. Avoiding these common pitfalls can help any investment committee fulfill their fiduciary duty, and hopefully bring added investment returns over the long-run.

Tactical Mistakes. Perhaps the most common mistake is the temptation to follow last month’s or last year’s winners. Chasing winners usually means buying overpriced securities just in time for a correction. You have already missed the ride up but are perfectly poised for the ride down. Last year’s winners say nothing about the likelihood of future gains.

When it comes to picking investments, avoid the “everyone else is doing it” syndrome. Let reason drive your decisions instead of your peers’ investment philosophy or the media’s daily buy recommendations. In addition to that, no investment should be considered inherently “too risky.” Instead, the suitability of buying or selling an investment should be measured by its overall fit—or lack thereof—with the portfolio.

Asset Allocation Mistakes. A 2004 study conducted by The Vanguard Group found the most successful investment committees all held a clear understanding of their portfolio’s objectives and investment strategy. Failing to create a rigorous investment policy statement will almost certainly leave your investment efforts lacking.

Included in the IPS should be a clear statement of the endowment’s time horizon. Funds established to exist in perpetuity can and should be exposed to increased levels of risk. Doing otherwise will needlessly limit investment returns over the long-term.

David Swenson, CIO of Yale’s $15 billion endowment warns managers against the temptation to invest heavily in fixed income securities. Keeping and equity bias will increase long-term returns. However, an equity bias isn’t enough, according to Swenson. Managers must also diversify equity funds among sub-asset classes or risk loosing their investments to a big bang following a big boom.

Rebalancing Mistakes. Sticking to a disciplined rebalancing policy is essential to maintaining steady, long-term investment returns. Managers and investment committees should avoid trying to time the markets before rebalancing. Instead, rebalancing should be based on a percentage of a class’ deviation from a target asset allocation, not on market timing or on a pre-determined timetable.

Failing to utilize endowment withdrawals and contributions as part of the rebalancing process is another common rebalancing mistake. Managers who fail to take advantage of account income and expenditures needlessly increase tax liability and trading costs.

Manager Selection Mistakes. Investment committees should avoid picking managers based on their recent successes. Short-term gains (and losses) are often nothing more than the luck of the draw. Instead, choose managers with steady, long-term investment returns who have proven their returns are the result of skill, not beginner’s luck.

Spending Mistakes. Failing to create all-weather spending policy will quickly leave an endowment depleted and anemic. A sound spending formula must be able to provide stability to the organization while limiting spending in up markets and sustaining endowment purchasing power in down markets.

Governance Mistakes. Poor investment returns are often due to a lack of accountability. Committees must set appropriate benchmarks to measure manager and investment performance. Without a benchmark, there is no means for evaluation and correction.

Beware of the inefficiencies created by committees with long member rosters. Big committees result in slow decision making. Further, beware of committee members offering advice about their personal investment experience. No decision should be based on any one member’s personal investment experience.

Finally, avoid conflicts of interest.

Prudent investment practice is as much about knowing what not to do as it is about knowing what to do. By implementing a sound investment policy and avoiding common pitfalls, investment committees should be ready to achieve today’s goals and tomorrow’s dreams. More information about sound investment practice can be fount at www.emarotta.com.

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See also:

1. Foundation Series – 1 Fulfilling Your Fiduciary Duty
2. Foundation Series – 2 Best Practices
3. Foundation Series – 3 Endowment Spending
4. Foundation Series – 4 Asset Allocation
5. Foundation Series – 5 Mistakes

from http://www.emarotta.com/article.php?ID=181