Bankruptcy Is Sometimes the Best Option (2007-06-25)

Bankruptcy Is Sometimes the Best Option

(2007-06-25) by David John Marotta

Most people want to honor their debt. But many families have allowed their debt to spiral out of control, and they feel helpless, ashamed, and at a loss to know what to do. While bankruptcy isn't anyone's first choice, sometimes it is an important choice to consider.

As strange as it may sound, bankruptcy is one of the benefits of capitalism. In traditional cultures debt was passed from father to son. Without the ability of individuals to escape the slavery of debt, they could become slaves permanently. While bankruptcy is unpleasant, it does beat falling on your sword.

For those who are facing desperate financial circumstances, it is better to get professional advice regarding bankruptcy than to feel trapped into taking desperate measures, either illegal or violent. Bankruptcy, although certainly not pleasant, can provide a way out.

Bankruptcy laws make it possible for people to be forgiven and make a fresh start. I'm not trying to make bankruptcy attractive, just more attractive than the horrible alternatives. Those who have been through bankruptcy will not be trusted with credit for a decade, but this can benefit them as much as it protects those who might be extending them credit.

When consumer debt is insurmountable, here are some rules of thumb for bankruptcy to be the right option:

• Paying off the debt would cause a long-term hardship to the family.
• You have been unemployed or you are currently unemployed.
• You are retired, and living on a fixed income or a permanently reduced salary.
• You have become disabled, and the prospects of a quick recovery of your ability to work are in doubt.
• You have insurmountable medical debts.

Bankruptcy isn't a decision you should make on your own. Unless you are intricately familiar with the credit laws you won't be able to decide if you can seek hardship programs to have your payments reduced to a manageable interest rate, or file bankruptcy.

If you are feeling major financial pressures, a non profit firm that specializes in debt management may be able to help. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 requires you to get credit counseling from a government approved organization before filing for bankruptcy and you must complete a debtor education course.

A credit counseling organization may be able to save you from the headache of bankruptcy if you seek their help early enough. But be cautious. Most provide valuable advice. Some are scam artists engaging in questionable activities that circumvent consumer protection laws. The Federal Trade Commission has a set of guidelines at http://www.ftc.gov/opa/2003/10/ftcirs.shtm to help you pick a reputable credit counseling organization.

A debt management organization can negotiate and reduce your payments and interest rates. Usually your creditors will request 2%-3% of the balance as a monthly payment. A debt management organization can negotiate the terms of your repayment. Since they can negotiate the reduction of future fees, delaying seeking help increases the chance of bankruptcy. Failure to see help is part of the cause of spirally out of control debt.

A debt management organization can help you determine if you should seek hardship programs or client advocacy departments from your creditors. Many times they will have programs for those who qualify that will enable you to reduce your payments to a manageable interest rate such as 6%. And all of your creditor's payments will be combined into one payment to the debt management agency that then pays your creditors.

A debt management organization can also determine if bankruptcy is the best way out of your spiraling debt. If you want a quick way to determine if you are heading for bankruptcy try this computation. Take your total debt and multiple it by 2%. That is the amount you will need to pay each month. Assuming you can get your debt lowered to a 6% rate of return, it will take 5 years to pay your debt off. You will need to live on a cash only basis during this time, and your finances will need to be carefully monitored.

Bankruptcy is designed as a last resort to getting out of debt. But it protects against involuntary servitude for the remainder of your life. If bankruptcy is inevitable, seek legal advice. Ask your friends and family of an attorney they would recommend, and then ask that attorney for a referral to a bankruptcy attorney.

There are two ways to file bankruptcy. Chapter 7 bankruptcy is for the liquidation of unsecured debt. This type of bankruptcy is used for large unsecured credit card debt. The second type of bankruptcy, Chapter 13, is used when payments on a mortgage or vehicle payment are past due. In this case a court order will determine what payments you will need to continue making in order to keep your house or car.

If there is a chance that you are getting into debt trouble, get help sooner than later. You may be heading toward bankruptcy and the point of no return if you cannot pay off your credit card each month, or if you avoid medical or dental visits because you can't afford them.

Financial problems follow and find those who fail to save. We recommend saving 35% of your income: 10% for charity, 10% for retirement, 15% for short term expenses and emergencies. The 65% balance should be your standard of living.

The best way to avoid debt problems is to live well below your means and save and invest the difference. Compounded appreciation is financial heaven. Compounded debt is financial hell. And while bankruptcy isn't financial salvation, it can at least release you from eternal servitude.

from http://www.emarotta.com/article.php?ID=236

Evan Almighty: Financing a Block Buster (2007-06-18)

Evan Almighty: Financing a Block Buster

(2007-06-18) by David John Marotta

This Friday, June 22, 2007, the movie Evan Almighty opens in theaters. Filmed in and around Crozet, I had the opportunity, like many in Charlottesville, to be an extra in the movie. Watching the movie being made from the inside only increased my respect for the business of movie making. Last week I had a chance to see Evan Almighty at the Charlottesville Premier. The wait was worth it.

Directed by Tom Shadyac and staring Steve Carell, Lauren Graham and Morgan Freeman, Evan Almighty is said to be the most expensive comedy ever made. Producer Michael Bostick need not be worried.

The day that Morgan Freeman was on the set was especially memorable. His presence and acting ability reflected his credentials: an Oscar and three Oscar nominations. Oddly enough, having an Oscar winner in a movie has very little effect on the ultimate profitability of the movie nor does it have much effect on subsequent DVD sales. The Oscars are Hollywood's opinion of film's artistic value. The ticket sales are the masses opinion of the movie's entertainment value.

Oscar winners require producers to make a difficult cost/benefit calculation. While an Oscar winner is a drawing card that increases revenue, they can also demand more for their presence thereby reducing the film's profitability. Morgan Freeman's performance certainly enhanced Evan Almighty. He delivers some of the funniest lines of the movie.

For Evan Almighty's success, the first few weeks are critical. In the era of Jaws (1975) and Star Wars (1977) movies were only released on a few screens and ticket sales peaked several weeks later. Since the 1970s movie attendance has trailed off more and more quickly. Today, attendance drops sharply within the first couple of weeks as a majority of people wait for it to be released on DVD.

Most homes have a DVD player. Their owners buy an average of 20 movies a year and watch each of them twice. After adding in the bonus material (e.g. delete scenes, special effects) the average household is watching well over 100 hours each year. The loyalties are shifting away from public movie attendance and cable TV to DVD usage.

DVD sales provide about 60% of a feature film's revenue. In contrast, those actually watching the movie in a movie theater only provide 14% of a film's revenue. The remaining revenue comes from television and other sales (e.g. television, foreign theaters, hotel rental). Studios have found that although there is some competition between movie formats there is much more symbiosis. Rather than decreasing their revenue they have learned to use the buzz generated by a successful movie release to enhance all their other sources of income.

As the DVD source of revenue has become more important, studios have decreased the time it takes for a theater movie to be released on DVD to only a few months. The movie release has become more an advertisement for the DVD release so that consumers can make their decisions before the excitement of the marketing campaign has faded.

Studios are also increasingly feeling the need to release their movies on DVD more quickly in order not to be scooped by the rise of immediately available pirated versions.

As a result of the quick release, consumers now categorize movie releases into those that must be seen in the theater and then purchased on DVD verses those that they can wait until they are released on DVD and could be purchased or rented. I'm sure that those in Charlottesville who were extras will see Evan Almighty several times in the theaters and then buy multiple DVDs for their friends and family.

Another engine driving sales is the constantly changing media format. Those with movie collections in VHS format are re-purchasing higher quality DVD versions of their favorite movies. Now, with the advent of the even higher definition digital formats, movie buffs are being enticed to purchase their favorite movies a third time.

Evan Almighty was produced by Universal Studios, now part of NBC Universal which is mostly owned by GE up 13% over the past year through the end of May. The movie industry has done well over the past year. Walt Disney (DIS) which owns Buena Vista and Miramax is up 17.2%. News Corp (NWS) which owns Fox is up 18.9%. Viacom (VIA/B) which runs Paramount is up 19%. Lionsgate (LGF) is up 24.7%. Time Warner (TWX) which runs Warner Brothers is up 25.6%. And Sony (SNE) which owns Columbia is up 28.3%.

DVD rental companies are not doing so well. Blockbuster (BBI) is down 4.9% and Netflix (NFLX) is down 20.9%. Movie theater companies, however, continue to do well. Regal Entertainment (RGC) is up 25.5% and Carmike Cinemas (CKEC) is up 27.4%.

Today, those regularly attending movie theaters currently represent about 9% of the population, down from 60% back in the 1940s. With the multiple shots of our Blue Ridge Mountains and the movie's inclusion of hundreds of locals in the film, I expect the percentages of those who go to see Evan Almighty in Charlottesville will far surpass 60%.

The challenge of remaining a profitable industry is constant for any business. But the demise of the movie theater business has been falsely predicted for several years. Instead, it has turned out to be a 100-year durable business model. While movie rental stores may close in the next decade when in-home digital movie delivery replaces physical rentals, the theater business will survive. Theaters are not primarily selling movie delivery; they are selling a relatively inexpensive way to go some place special with a friend or social group.

from http://www.emarotta.com/article.php?ID=237

Consider Delaying Social Security Benefits (2007-06-11)

Consider Delaying Social Security Benefits

(2007-06-11) by David John Marotta

Over seven out of every ten Americans opt to receive their Social Security checks as soon as possible. This is usually a mistake. By delaying when you start receiving your benefits, you may receive more money and ensure you have a better retirement in the long run.

Part of the confusion about timing Social Security benefits stems from the fact that full retirement age isn't the same for everyone. For Americans born between 1943 and 1954 full retirement age is 66. For everyone born before or after those dates, the full retirement age is set on a sliding scale between age 65 and 67.

You can wait until your full retirement age to begin benefits, or you can opt to receive benefits as early as age 62 or as late as age 70. Most people decide to take the cash early and run. By taking Social Security at age 62, your monthly benefit is locked in at a much lower payout rate, forever.

However, if you wait until age 70, you will receive your full monthly benefit plus additional money for being patient. After age 70, there's no additional benefit increase, so there's no point in delaying benefits any further. The bottom line: the longer you wait, up to age 70, the higher your monthly benefit.

According to the Social Security Administration, it doesn't matter which option you choose. But, the numbers tell a different story.

When it comes to timing your Social Security benefits, delayed gratification does pay off. For retirees born in 1943 or later, benefits increase by 8% for each year you delay receiving your benefit. In addition to the 8% increase in benefits, your actual payment will also be indexed for inflation! In other words, if inflation is running at 3%, your actual benefit amount will increase by an impressive 11% for each year you delay taking the benefit!

This still doesn't answer the big question: Is it better to get a smaller payout for a longer period of time or a bigger payout for a shorter amount of time? As a rule of thumb, the longer you expect to live, the more likely the later payout will pay off.

Let's consider an example. Triplets Peter, Paul, and Mary, born in 1941, are presented with identical benefit options. Each can opt for a monthly benefit of $758 at 62. They can wait until full retirement age of 65 years and 8 months for a benefit of $1,000. Or, they can delay benefits until age 70 and receive $1,312 per month.

Peter couldn't pass up the opportunity to take the earliest possible payout. He locked in his payout at $758 beginning at age 62. Paul decided to wait until his full retirement age (65 and 8 months) to receive his $1,000 monthly check. Mary decided to wait until age 70 to get a monthly benefit of $1,312.

And although Peter was the first to begin collecting his money, he didn't end up with the biggest total payout. By the triplets' 78th birthday, Paul's benefits had surpassed the total payout Peter had received. And although Mary didn't begin receiving her checks until age 70, soon after the triplets' 83rd birthday, the total value of Mary's benefits had outstripped both of her brothers'.

Upon the triplets' death at age 90, Peter had received $254,688 in total benefits. Paul had received $291,000, and Mary had received $316,192.

In other words, the longer you expect to live, the better off you'll be opting for the age 70 payout. But, does that mean you should spend down your savings, waiting for the bigger benefit?

The best plan is to keep working until age 70. That way, you can both delay taking benefits and avoid tapping into your savings. If you are unable to keep working, choosing between early benefits or draining your savings while you wait for the higher payout requires some very careful thought.

In general, the lower the returns on your portfolio, the better off you'll be spending down your savings while you wait for benefits to kick in at age 70. If your savings are just keeping pace with inflation, you'll be better off waiting for the age 70 payout, if you live past the age of 83.4 years. If your portfolio is earning a real return of 2.5% annually, your "breakeven" age is 87.25 years. In other words, you will be better off with the age 70 benefit if you live longer than 87 years and 3 months --assuming an average bond yield on your nest egg.

If you think living into your 80s or 90s in improbable, you may want to think again. Americans are living longer. The American Society of Actuaries reports that a 65 year-old male has a 50% chance of surviving until age 85. Women fair even better. At age 65, the average woman has a 50% chance of surviving until age 88. Taken as a couple, there is a 50% chance that one spouse will survive to age 92. With the improvements in medical technology, these numbers are likely to climb even higher.

Waiting for the higher payout is like buying longevity insurance. By delaying benefits until age 70, you can better protect yourself from outliving your money. And remember, for each year you delay taking the benefit, your 'insurance policy' will give you an 8% benefit increase plus cost of living adjustment. Even an aggressive stock portfolio would struggle to match those returns!

One further reason to wait for the higher payout is to protect your surviving spouse from running out of money. Social Security pays spouses a survivor's benefit ranging from 75% to 100% of the original benefit amount. By taking the later payout at a higher rate, you will ensure a higher survivor's benefit for your spouse and any dependents after your death.

The best way to stay both physically and financially healthy is to keep working at least part time until age 70. By working, you stand to make a paycheck and to grow your social network. Plus, you won't need to dip into your investment portfolio. In the mean time, the interest you earn on your investments between the ages of 65 and 70 will do more to boost your bottom line, more than any Social Security payout strategy ever could.

There are other reasons to be wary of the early payout. Retirees who both work and receive benefits before they reach full retirement age may see their benefits dramatically reduced. Until you reach full retirement age, your benefits will be docked $1 for every $2 you earn above an annual limit. In 2007, the limit is $12,960. But, once you reach full retirement age, you will no longer be penalized for working.

Furthermore, don't be tempted by the myth that you can beat the system by taking the early benefit and investing it. To break even with this strategy, you will need to earn an 8% real return above inflation. If inflation is running at 4%, you will need to earn a 12% annual return just to keep up. Trying to earn a 12% return year after year in your own portfolio is a very risky proposition. Chasing after double-digit returns when you could simply delay your guaranteed benefit and watch your future pay increase by 8% over inflation is a fool's bet.

There is one main exception to this rule. For some, poor health leaves them with little option but to begin receiving the benefit as early as possible. Seniors struggling with poor health may be wiser to take the earlier benefit, assuming they may not live long enough to make the higher payout worth the wait.

Likewise, if you are much younger than your spouse and your spouse's income was larger than yours, you may want to start taking Social Security early. If they predecease you, your benefit will be increased. For everyone else, the early payout may just be a bad choice.

You should consider carefully when you take Social Security benefits and seek professional advice for your specific retirement path. A fee-only financial planner will sit on your side of the table and help you make the decision that's right for you. To find a fee-only financial planner in your area visit www.napfa.org.

from http://www.emarotta.com/article.php?ID=235

Hedge Inflation Risk with Hard Assets (2007-06-04)

Hedge Inflation Risk with Hard Assets

(2007-06-04) by David John Marotta

Diversifying your portfolio will help to lower your risk and increase your returns. One of the asset classes that we use to build diversified portfolios consists of hard asset stocks. These hard asset investments include companies that own and produce an underlying natural resource. Examples of these natural resources include oil, natural gas, precious metals (particularly gold and silver), base metals such as copper and nickel, and other resources such as diamonds, coal, lumber, and even water. We recommend broadly diversifying your hard asset stocks by resource type, by geographic location of a company's reserves, and by company size.

Keep in mind that investing in hard asset stocks is not the same thing as investing directly in commodities. Buying gold bullion or a gold futures contract is an investment directly in raw commodities or their volatility. Whereas, buying a gold mining company is a hard asset stock investment.

Over time, dollars lose their buying power and the goods and services we buy cost more. Commodities, as an asset class, generally maintain their buying power in dollar terms. Stocks, as an asset class, generally appreciate over inflation after dividends are factored in. And, recently, hard asset stocks have been appreciating nicely.

Jeremy Siegel, author of the book "Stocks for the Long Run" did an analysis of investments over the past 200 years. Gold, on average, maintains its value over time. If you bought a dollar's worth of gold 200 years ago, after adjusting for inflation, it would be worth $1.07 today. Because of inflation, a dollar today has only the buying power of about seven cents back then! However, the stock market, on average, has been appreciating about 6.5% over the long-term rate of inflation. Hard asset stocks give you the best of both worlds: the stability of a real asset plus higher market returns.

One index that tracks hard assets is the Goldman Sachs Natural Resources Index. This index is comprised of 70% energy and 11% materials. As of the end of April 2007, this index is up 9.36% year-to-date. Its three-year annualized return is 28.96% and its five-year annualized return is 19.17%

We segment hard asset stocks into their own asset class because they have a unique set of characteristics. First, the movement of hard asset stocks is generally less correlated with the movement of other asset classes such as bonds. Second, hard assets have a unique (and positive) reaction to inflationary pressures. And third, there are periods in the longer term economic cycle when including hard assets helps boost returns.

The beauty of hard asset stock is the fact that they are not highly correlated to US large cap stocks as a whole. The correlation between the Goldman Sachs Natural Resources Index and the S&P500 Index is only 0.38. Importantly, the correlation between the Goldman Sachs Natural Resources Index and the Lehman Aggregate Bond Index is even lower at -0.21. A negative correlation means that bonds and natural resources, as separate asset classes, are often moving in opposite directions. Balancing a bond portfolio with hard asset stocks can help hedge the risk inflation poses to a bond portfolio.

Short and intermediate-term bond investments are usually stable investments – their value doesn't fluctuate much from day-to-day and they pay recurring interest. The danger of having a large bond portfolio is that you will be exposed to greater inflation risk. Inflation causes the buying power of your fixed-income payments to decrease. If we have a period of high inflation like the 1970's or a rapid devaluation of the dollar, a bond portfolio will lose a significant amount of its buying power to inflation even though its value may not have changed much in nominal dollar terms. In order to balance inflation risk, it's important to include investments that provide a true inflation hedge.

Hard asset stocks provide an inflation hedge. Due to the underlying value of the tangible commodity that natural resource companies produce, their earnings are tied to inflation as their resources are worth more as the dollar declines in value. This can occur in times when the supply of money and credit is increased to fund government spending and budget deficits.

Consider a gold mining company whose expenses and overhead allow it to pull gold out of the ground for $290 per ounce and sell that gold for $300 per ounce making the company a $10 per ounce profit. As gold jumped 33% from $300 per ounce to $400 per ounce, the company's profit jumped from $10 an ounce to $110 an ounce - a 1,000% jump in profit - which then caused the company's earnings and stock price to soar. Now that gold is over $650 per ounce the current price level of gold stocks is much higher than it was in 2001.

During 2002, when the S&P 500 dropped over 20%, mutual funds that specialized in precious metal stocks (gold and silver miners) appreciated over 50%. Having an asset class that appreciates while other asset classes are falling helps both smooth and boost your investment returns over time.

Investing in commodity-rich foreign countries is also an investment in hard assets. The MSCI Canada Index has approximately 28.43% energy and 15.92% materials. This index has 0.80 correlation to the Goldman Sachs Natural Resources Index. Latin America (particularly Brazil), the emerging markets such as South Africa, and other developed countries like Austria and Australia are significant producers of natural resources and are strongly correlated to the global demand for commodities.

Because hard asset stocks are negatively correlated to bonds and other inflation-sensitive economic sectors, they provide a unique opportunity for diversification. Adding hard assets to your investments is not as simple as just increasing or decreasing their portfolio allocation to create a more aggressive or conservative mix. When a portfolio has very few bonds and mostly stocks, it needs less hard asset stocks to balance the inflation risk. When you are increasing bonds and decreasing stocks to make a portfolio more conservative, it helps to add more hard asset stocks to counter the bond risks.

Getting your hard asset allocation correct is made even more complicated by the recent changes in the volatility and historical correlation of all asset classes and sectors worldwide. The S&P 500 Index is currently comprised of 10.50% energy and 3.04% materials. If your portfolio contains any bonds, over-weighting this allocation to hard assets could boost your returns and decrease your volatility.

from http://www.emarotta.com/article.php?ID=234