Of Interest

The Quiz and Answers

1. How much of your income should you spend on monthly housing expenses?

A. 50 percent

B. 43 percent

C. 31 percent

2. If you want to improve your credit score, which step is the best to take?

A. Close old credit card accounts you no longer use.

B. Pay down your debt to at least 25 percent or less of each credit card limit.

C. Consolidate your debt on one balance-transfer credit card.

3. How many times per year can you access your free credit report at www.annualcreditreport.com?

A. Once per year.

B. Only when you’ve been turned down for a loan or credit card.

C. Three times per year.

4. How big should your emergency fund be?

A. $1,000

B. Two months of rent or mortgage payments

C. Six months of living expenses

5. Which of these individuals needs life insurance the most?

A. A single mother with two young children

B. A two-income married couple without children

C. An elderly widow

6. Which of the following items is not part of your credit report?

A. Your current credit card balance

B. Your payment history

C. Your income

7. Which of the following individuals will pay the most in interest on their credit card over time?

A. Jane, who makes the minimum payment on her credit card bill every month.

B. Joe, who pays the balance on his credit card in full every month.

C. Joyce, who sometimes pays the minimum, sometimes pays less than the minimum, and missed one payment on her credit card bill.

8. If your credit score dropped because you got behind on your bills, what’s the best way to improve your score?

A. Pay your bills on time.

B. Hire a credit repair company.

C. Cancel your credit cards.

9. Which of these accounts allows you to make unlimited withdrawals without a fee?

A. Certificate of deposit.

B. Checking account.

C. Money market account.

10. Which of these retirement savings plans will result in the largest sum by the time the individual is 65?

A. Tom saves $1,000 per year from age 25 to 35 in an account earning 8 percent interest and then stops saving.

B. Tracy saves $1,000 per year from age 35 to 65 in an account earning 8 percent interest.

C. Both the same.

Did the Money Smarts Quiz Challenge You?

1. (C) 31 percent.

Whether you rent or buy, it’s best to keep your housing costs at a maximum of 31 percent.

2. (B) Pay down your debt to at least 25 percent or less of each credit card limit.

Cancelling a credit card account could cause your credit score to decline because it lowers the overall available credit you have been granted.

3. (C) Three times per year.

If you are denied credit based on something in your credit history file, you are eligible for a free credit report from the reporting bureau used. However, regardless of your credit activity, you can get one free credit report each year from EACH of the three credit reporting agencies (Experian, TransUnion and Equifax).  You can request the three reports separately or together all at once.

4. (C) Six months of living expenses.

While the amount varies according to your living costs, your other assets, and whether you are a one- or two-income household, a good starting place for emergency savings is having enough to cover six months of living expenses.

5. (A) A single mother with two young children.

Life insurance is essential for someone who is the sole income provider for a family. The single mother needs the most protection for her children in the case of her death.

6. (C) Your income.

Credit reports do not take into account or report your income.

7. (C) Joyce

Skipping a payment is likely to cause your credit card company to raise your interest rate.  Paying only the minimum payments will result in paying large amounts of interest over time.

8. (A) Pay your bills on time.

Cancelling your credit cards won’t help because the balance owed and your payment history will stay on your credit report.  And it will reduce the amount of credit available to you.  A credit repair service cannot fix accurate negative information and will only cost you more. Only time — and a consistent ongoing payment record — can fade the impact of true negative information.

9. (B)

In general, most Certificates of Deposit (CDs) limit your withdrawals to the end of the CD term or may allow access with a penalty; money market accounts may allow only six withdrawals per month; and you can get money from a checking account as many times as you want. Rules can vary from institution to institution.

10. (A) Tom

Surprise! Even though Tom invested only $10,000 and Tracy saved $30,000, Tom comes out ahead in this savings scenario with $169,000 in his account compared to Tracy’s $125,000. That’s because Tom’s money had a longer time to grow. That’s the miracle of compound interest in action.

How well did you do on the quiz? Please email us at [email protected] if you would like to ask any questions or if you would like an appointment to discuss your personal situation.   The first appointment at White Oak is always free, and we try hard to make it meaningful for you.


Passive Investing

Don’t be tempted by the recent returns of passive funds.  Passive investing is just one methodology that did, in fact, outperform most active managers such as ourselves over the past few years since 2009, but the market environment during that time was not typical.  For example, in 2011 the S&P 500 reversed more than 5% 16 times; the historical average is less than once a year.

Over longer time horizons and normal market cycles, passive equity investing has meant settling for middling performance at best.  While investing in equities is for long-term investors who can tolerate short-term bouts of volatility and potential losses, we believe that active, technically-guided management is the best way to approach the equity asset class most of the time.

Investors have the potential to do better than their passive counterparts if they pick the right active manager.  We think active stock pickers who can separate the good companies from the bad and who are willing to be truly different from the indexes are well-positioned to outperform and provide potentially better returns for our clients over the long term.


The Pitfalls of Automatic Portfolio Rebalancing

If you participate in a 401(k) or other retirement account, you may have been given the option to have your portfolio “automatically rebalanced” for you at set junctures, such as quarterly or yearly.  The idea behind rebalancing is to minimize investing risk by reverting the balance of stocks and bonds to percentages you initially set, based on your time horizon to retirement  (generally heavier on stocks when you are younger, more bonds as you age).

For instance, if your portfolio holds 50 percent stocks and 50 percent bonds, your stock-to-bond ratio may have shifted to 60 percent stocks and 40 percent bonds during years when the stock market is rising and equity values appreciate.

Traditional rebalancing basically forces you to take the profits you made from equities and use them to buy more bonds, thus achieving that initial 50-50 ratio.  The question is: Should you agree to have your portfolio rebalanced automatically?

Absolutely not, says Matthew Tuttle, CFP, MBA, CEO of Tuttle Wealth Management in Stamford, Conn.  “Automatic portfolio rebalancing is [crazy],” Tuttle says.  “The idea that you’d rebalance a portfolio based on a calendar date [makes no sense].”

The correct way to rebalance is to understand the underlying market dynamics and act accordingly.  “The key to safety is staying in harmony with the major market trends,” Tuttle says.  “So, if you see that those trends are favoring small caps over large caps, you overweight small caps; if stocks are doing better than bonds, you overweight stocks.  Age has very little to do with it.”

Nor does Tuttle like the method of portfolio rebalancing that calls for investors to increase the portfolio percentage of bonds as they move closer to retirement.

“Conventional wisdom says that, as investors get close to 65, they should have most of their portfolios in bonds,” Tuttle says.  “That pretty much guarantees that, at age 80, you’re going to be working at Wal-Mart, because life expectancy is increasing.  I’m going to my grandmother’s 96th birthday party next month.”

Shifting almost everything to bonds as you age is risky because rising interest rates will bring capital losses and because bonds don’t keep pace with inflation, Tuttle says.

From the Franklin Prosperity Report September 2011 Issue


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