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Investing in Fixed-Income Securities

As a money management firm, our client’s are looking for income and cash flow from their investments. There are many ways to accomplish that and one way is investing in bonds. Some investors may believe that bonds are not exciting investments  and do not believe bonds are appropriate for their portfolios. These investors may be wrong on both counts. The variety of debt instruments with a wide range of features can earn current income and large returns. Some bonds including junk bonds can be exciting however they may not be appropriate for conservative investors seeking income and preservation of capital.

As part of our asset management service, we encourage investors to reduce risk and create income through fixed income securities. Bonds do play an important role in diversifying a portfolio. We usually allocate bonds in the tax deferred accounts in order to minimize the tax. As a CPA who specializes in tax reduction and money management, we use many tax saving strategies along with maximizing returns for our clients..

As an asset management firm we analyze our clients income needs and risk tolerance. We are well versed in fixed income securities and we would like to share some basics when it comes to investing in fixed income securities.

What is a bond or fixed-income security?

All bonds have similar characteristics. They represent the indebtedness (liability) of their issuers in return for a specific sum, which is called principal.  All debt has a maturity date, which is the date by which your principal must be paid back. When debt is issued, the length of time to maturity is set, and it may range from one day to thirty years or more. Long-term debt matures more than a year after it has been issued. Debt that matures between one to ten years is sometimes referred to as intermediate debt. The interest rate or sometimes called the coupon rate is paid to the borrower. The interest rate on most securities are fixed rates however there are fluctuating rates such as TIPS. You can buy bonds at par, a discount or at a premium.  This will determine the effective rate which may be different then the stated rate. The potential return offered by a bond is referred as the yield.  There is a relationship between yield and the length of time to maturity for debt securities.  The longer the length of time to maturity, the more risk an investor take on with regards to getting paid back or fluctuations in the interest rate. That is why long-term debt typically has a higher rate to compensate the investor for the additional risk over short term.

What is the yield curve?

The difference in long-term and short-term yields is demonstrated by what is referred to as the yield curve in economics. Although such relationship between time and yield does usually exist, there have been periods when the opposite has occurred (ie., when short-term interest rates exceed long-term interest rates). This happened from 1978 to 1979, and again in 1981. This can be explained by the high rate of inflation, which exceeded 10 percent at that time. In order to contain inflation and slow down the economy the Federal Reserve will raise short term rates. In recessions, like the one we are having now in 2009 and 2010 the Federal Reserve is keeping short term interest rates at 50 year lows to create inflation and spur the economy.

As part of our asset management services, we make sure our clients are well diversified and protected from inflation as well as all the other inherent risks to the best of our abilities.  With asset management, we analyze our client’s portfolio to match income and risk.

What type of Bonds should I invest in?

There are a variety of fixed-income securities available with a variety of terms and risks. As part of our asset management we will allocate your income portfolio according to your short-term and long-term goals and risk tolerance. Here is a summary:

Corporate Bonds- Corporations issue many types of bonds: mortgage bonds, equipment trust certificates, debenture bonds, income bonds, convertible bonds, variable interest rate bonds, and zero coupon bonds. These corporate debt instruments are either secured or unsecured. A secured debt means that the debtor is entitled to some type of security or asset of the company as collateral.

Money market instruments- Short-term, highly marketable loans tied to financial and non-financial corporations. These securities are usually less than 12 months in duration and are generally considered safe investments. They consist of commercial paper, repurchase agreements, bankers acceptances, negotiable CDs, Treasury bills, and tax anticipation notes. Money Market Mutual Funds are what most investors use and it is important to note these instruments are not protected under FDIC insurance.

U.S Government Securities- US Securities are considered direct obligations of the U.S. government. These marketable securities include Treasury Bills, Treasury Notes, and Treasury Bonds. U.S. Treasuries are considered to be the safest fixed-income securities, they are highly sought after in the U.S. and throughout the world. T-Bills, notes and bonds are broken up by the maturity duration of the securities.

Federal Agency Bonds- These instruments are issued by federal agencies to provide funds to support activities such as : postal service, housing, insurance, credit guarantees, etc. Agency bonds that are backed 100% by the U.S. government are defense dept, export –import bank, FHA and Tennessee Valley Authority.  Federally sponsored agencies would be FNMA, student loans, farm credits, Federal Home loans banks, etc.

Mortgage-Backed Securities & asset-backed securities- These are securities that are backed by pools of mortgage loans. Because the underlying mortgages can be prepaid, prepayment risk is a major concern. Additional and more current in headline news is the default risk when there isn’t sufficient collateral or home equity upon default.  There are mortgage pass through securities tied to certain pools of Ginnie Mae, Fannie Mae and Freddie Mac loans. Ginnie Mae obligations are the safest of the three due to the fact they are 100% guaranteed by the U.S Government. Collateralized Mortgage Obligations (CMOs) are a means to pool mortgages principal and interest payments among investors in accordance with their preferences for prepayment risk.

Municipal Bonds- State and local governments borrow money to finance their operations. These bonds are like any other government type bonds except they have additional tax break  incentives.

What risks are there when investing in Bonds?

Time to maturity or duration– The length to maturity has a great affect on a bonds exposure to risk as well as the perceived value of the security. The longer the maturity, the greater the amount of time its coupon (interest) payments would be affected by interest rate changes. This is why longer-term fixed-income issues have a higher rate in order to compensate the investor for the additional risk. When interest rates increase your long-term bonds will decrease more in value than your short-term bonds. Additional risks to longer term bonds are inflation risk and reinvestment risk. The added exposure to risks would again be compensated through higher coupon rates. As a security approaches maturity, its risk exposure is less and its sensitivity to interest movements is also less.

Default or credit risk- This is the likelihood the issuer may default on the payment of interest and principal of the loan. Any security backed by the full faith and power of the U.S. government is considered the highest quality (or lowest default risk). For all other fixed-income securities, there are rating systems.

Currency Risk- Foreign bonds pay in their countries currency denomination. When that currency converts into U.S. dollars there is a currency fluctuation risk.

Other Risks- There are many aspects and risks associated with investing in fixed securities. Other risks not discussed above can be extension risk, liquidity risks, political risks, courts, disclosure, exchange, etc  To explain all of these risks would be too cumbersome for the purpose of this article.  Prudent investing to match our clients financial goals is what our asset management or money management firm provides.

Retirement Planning and Simple Retirement Plans

You are probably so busy running your business that it’s difficult to take time out to plan for retirement. As a financial planner, I advise clients that they will need up to 70% of their preretirement income to have a comfortable retirement.  Clients should realize that only a small portion of that retirement money will come from Social Security. Retirement planning is a part of financial planning. Choosing the right retirement plan for a business or individual can be complicated and an experienced financial planner should have the expertise to guide you. We at RJR Financial Firm are experts in the field of retirement planning and asset management.

One of the best retirement plans I recommend for small business is a SIMPLE PLAN. A SIMPLE IRA Plan is a salary reduction retirement plan. That means that participants decide how much they want to save for retirement-and that amount is deducted from their salary on a pretax basis each pay period. It is a cost-effective plan designed specifically for companies with 100 or fewer employees.  One of the biggest advantages of a SIMPLE IRA Plan is that enables all participants to save for retirement while also saving on current taxes. In addition to reducing current taxable income, a SIMPLE IRA Plan

  • Helps retain and attract valuable employees
  • Allows employees to save for their retirement
  • Allows contributions to grow tax free
  • Employer contributions are tax deductable
  • RJR Financial Firm is a money management and asset management firm that will manage the employee’s investment accounts

From the employer’s side, this type of plan is cost effective administratively and requires a much lower employee matching requirements from other plans. Each employee will have their own IRA account in which to contribute in order to shelter income from taxes and build a retirement fund. Instead of employees who are not experts in asset management, determine what to invest their money in, We as expert asset management and money management firm will provide that service.

Under a Simple plan, any employee with compensation of at least $5,000 in compensation must be permitted to enter a “qualified salary reduction arrangement.” Under this arrangement, an employee can elect to have a percentage of compensation not in excess of $11,500 (in 2010) set aside in an IRA, instead of receiving it in cash. This maximum is indexed for inflation each year.

Amounts taken out of the employee’s salary and contributed to a Simple IRA are not taxed to the employee until withdrawn from the plan. Early withdrawals may be subject to a 10% penalty (25%, if the withdrawal is made within the first two years).

Under a qualified salary reduction arrangement, the employer must make “matching” contributions to the SIMPLE IRA. That is, the employer must make contributions to an employee’s SIMPLE IRA in the same amount that the employer contributed under the employee’s salary reduction election, up to 3% of the employee’s compensation. For example, if an employee with compensation of $50,000 elects to have 10% of his pay contributed to the plan ($5,000), the employer must contribute an additional $1,500 (3% of $50,000). For these purposes, an employee’s compensation is the amount reported on his Form W-2, plus the amount of elective deferrals (e.g., the amount of the salary reduction contributed to the SIMPLE IRA). But the matching contribution for the year cannot exceed $11,500 in 2010. This amount is indexed for inflation each year.

If an employer wishes to contribute less than 3%, he can give employees proper notice and drop the contribution to as low as 1% of compensation, as long as this isn’t done for more than two years out of the five-year period ending with the year of reduced contributions.

Alternatively, instead of making “matching” employee contributions, the employer can simply contribute a flat 2% of “compensation” (limited to $245,000 for 2010, and as adjusted for inflation in following years), for every employee eligible to participate in the plan, whether the employee elects to reduce his salary or not. Special notice must be given to employees if the employer wishes to take this approach.

Instead of adopting a SIMPLE plan, an employer can set up a SIMPLE 401(k) plan. By making matching contributions (or 2% non-elective contributions) and satisfying rules similar to those for simple plans, SIMPLE 401(k) plans will be considered to satisfy the otherwise complex nondiscrimination test for 401(k) plans. The contribution rules for SIMPLE plan apply to Simple 401(k) plans, except that if an employer adopts the matching contribution approach (instead of the flat 2% option), the maximum contribution percentage cannot be dropped below 3%. Unlike a SIMPLE plan, a Simple 401(k) plan is part of a qualified plan, and is subject to the qualified plan rules. Contributions to Simple 401(k) plan are not subject to the 15 percent limits on contributions to profit-sharing or stock bonus plans.

SIMPLE plan have the advantages of simplified reporting requirements and the absence of the qualification rules prohibiting the plan from discriminating against lower-level employees. These advantages come with some obligations, such as the matching contribution requirement. Additionally, to be eligible to adopt a SIMPLE plan, an employer must not contribute to, or accrue benefits under, any qualified retirement plan for services provided during the year (or in any year after the qualified salary reduction arrangement takes effect).

This maybe a good time to reassess your retirement planning for yourself and your business.  Please call , Robert Richter at RJR Financial Firm if you wish to discuss this topic further.

Emotion’s can wreak havoc for an investor

As an asset management firm, we need to rely on economics and our experience to not let our emotions get in the way of sound investing.

As Benjamin Graham, Father of Value investing once said   “Avoid Self-Destructive Investor Behavior. Individuals who cannot master their emotions are ill-suited to profit from the investment process”

Over the 20 years of being in the asset management business, I have seen how emotions can wreak havoc on an investor’s ability to build long-term wealth. That is why I recommend potential clients and non professional investors to engage a professional asset management firm that they can trust to do their investing.

I would like to bring up an illustration in a study done by quantitative analysis of Investor Behavior by Dalbar, Inc and Lipper. In this study over the period from 1988-2007, the average stock fund returned 11.6% annually, while the average stock fund investor earned only 4.5%.

Why did investors sacrifice nearly two-thirds of their potential return? Driven by emotions like fear and greed, they engaged in such negative behaviors as chasing the hot manager or asset class, avoiding areas of the market that were out of favor, attempting to time the market, or otherwise abandoning their investment plan. In our asset management service we understand that successful investing and building long-term wealth requires the ability to control one’s emotions and avoid self-destructive investor behavior.

With our asset management service, we do not try to time the market by going in and out of cash. We look at our client’s long-term and short term objectives and risk tolerance to allocate their assets accordingly. Down markets are inevitable and it is not a time to panic or sell everything which will lock in a loss. As painful as this may seem in the short term, remember all bear markets come to an end. A large part in asset management is to manage risk.  In the very short term, risk cannot be entirely eliminated; however for a one hundred percent bond portfolio, three years is a good time frame for positive returns.

How General Liability Insurance Protects You

As a financial planner and CPA it is important to make sure our clients are protected from lawsuits. When in business, it is critical to protect against the liability you have, based on the products and services you sell, and the vehicles you use. Liability insurance is the easiest way to ensure that you have the needed protection for your business. It can be designed to provide specific coverage for specific exposures a company might face. This coverage can be provided at reasonable rates and at a fraction of what it might cost should you be sued. Traditionally, business firms insure their liability exposures using Commercial General Liability policies or business owner’s policies.

As a CPA and Financial planner, I have recommended forming an LLC or incorporation in addition to liability insurance for asset protection.

No matter how careful you think you are, you could be sued successfully for accidents resulting from something as simple as the carelessness of an employee or customer. General liability insurance is your last line of defense against devastating claims for events or actions over which you may not have control of. General liability insurance insures a business against accidents and injury that might happen on its premises, as well as exposures related to its products.

Exposure to liability claims may result from either the actions you choose to take, or those you choose not to take that is considered prudent under the circumstances.

General liability insurance provides liability insurance for the cost of defending lawsuits stemming from accidents that cause bodily injury, property damage, and claims such as libel, slander and false advertising.

There are three areas of exposures:

  1. Direct liability– This arises out of the firm’s own actions
  2. Vicarious Liability– This is considered an indirect liability which most often arises from hiring independent contractors. The plaintiff would claim that you were negligent in hiring, informing or supervising the contractor.
  3. Contractual Liability-This arises if a firm accepts by contract a liability it otherwise would not have had but for the fact it agreed to take on that responsibility.

Additional Liability insurance and provisions

Long-tail claims– Insurers call claims filed many years after the alleged injury took place. This is usually used in product liability cases or construction contractors.

Umbrella policies– Commercial umbrella policies can be purchased which provides coverage for excessive claims above your current policy and a more comprehensive coverage then your current policy. The umbrella policy becomes the underlying coverage after your general liability policy is exhausted. There is no standard form of commercial umbrella liability insurance and many policies have substantial differences.

Environmental Impairment liability– to provide protection for claims against individuals and organizations whose actions damage the environment.

Professional Liability Insurance– This is sometimes called malpractice insurance or errors and omissions coverage. Such insurance typically commits an insurer to pay all sums subject to policy limitations, that the insured becomes legally obligated to pay as damages resulting from providing or failing to provide professional services  or negligence. Errors and omissions insurance protects your firm from claims if your client holds you responsible for errors, or the failure of your work to perform as promised in your contract.

Director and officer’s  liability- covers Directors of corporations and other organizations.

Employment practices liability– This arises from hiring, terminating and supervising personnel.

If you need any help in this area of incorporating or finding general liability insurance please call RJR Financial Firm for a quote or service in forming a corporation.

Asset Management in Today’s Investment World

The investment environment of today is even more  dynamic, complicated and fast paced than ever before. World events can rapidly alter the values of specific assets and as an investor,  you need to be ready and informed.  The amount of information available to investors is staggering and grows continually.

When considering investing your hard earned money it is important to hire an asset management firm that has the experience, knowledge and positive results.  There are so many assets from which to choose from and there are many factors to consider when constructing a portfolio.  In asset management, it is important to consider the goals of the client, the risks involved, the taxes that will be imposed on any gain, and a knowledge of the available opportunities and alternative investments.

The investor’s goals should largely determine the construction and management of the portfolio. Investing must have a purpose, for without a goal, asset management does not have a purpose for the client. Some objective must guide the composition of the portfolio.

There are many reasons for saving and accumulating assets through asset management. Individuals may accumulate funds for a down payment on a house, finance a child’s education, start a business using small business loans for this, meet financial emergencies, finance retirement, leave a sizable estate or even accumulate for the sake of accumulating.  For whatever the reasons or motives, saving money with a purpose in mind should dictate the asset management process and effect the composition of the portfolio.  Not all assets are appropriate to meet the investor’s financial goals. For example, savings that are held to meet emergencies, such as unemployment or illness, should not be invested in assets whose return and safety of principal are uncertain. Instead, emphasis should be placed on safety of principal and assets that may be readily converted into cash, such as in money market mutual funds. In the asset management process the funds should not sit idle, but should be invested in relatively safe assets that offer a modest return.

Depending on the short term and long term financial goals, the willingness to bear risk and tax consequences a prudent asset management firm will construct a prudent portfolio to meet their client’s goals.

529 College Savings Plan (Qualified Tuition Program)

College is getting more expensive every year. Four years in a public school costs roughly $ 70,000 and in a private school $139,000. The best way to prepare is to start saving now. The earlier you start making regular contributions, the better prepared you’ll be when those college expenses start rolling in. A great way to start this process is by opening a 529 College Savings Plan. You can design an individualized savings plan that meets your needs. Factors that need to be considered are:   1) Estimated college cost  2) time frame  3) contributions needed  4) how many children  5) inflation and other  economic factors.

Here are the general rules


  1. You can open a 529 plan for anyone-your child, grandchild, spouse or even yourself
  2. The contributor is usually the owner and the beneficiary is the future student
  3. Earnings in the account can grow tax free
  4. There are no income limits. You can contribute no matter how much you earn
  5. Contributions are not deductable on your tax return. It is considered a gift
  6. You can contribute up to $65,000 per year without gift tax issues. There is a $350,000 maximum value in which  no more contributions are allowed
  7. You maintain control of the assets. There’s no predetermined investment mix. As your investment advisor I will allocate your funds that best reflects your needs. We are allowed to move assets only once a year or when you change beneficiaries.
  8. You can use a 529 plan to pay higher education expenses at any eligible educational institution in US
  9. You  can change the beneficiary from one family member to another once a year
  10. Anyone can contribute to the account. However, only the account owner can make decisions regarding the account, including taking withdrawals from the Account, changing the Account’s investments and changing the Beneficiary.
  11. You are permitted to roll over funds without federal income tax consequences from one 529 plan to another 529 plan for the same Beneficiary once every 12 months.


  1. You decide when to make withdrawals
  2. If you withdraw money for something other than qualified higher education expenses, you will owe federal income tax and in addition may face a 10% federal tax penalty on earnings.  If distributions are more than the beneficiary’s qualified expenses, the earnings portion of the excess is included in the beneficiary’s income

Qualified higher education expenses include:

  1. Tuition, fees, books ,supplies and equipment required for attending an eligible school
  2. Reasonable costs of room and board for those who are at least half-time students in a degree program
  3. Certain expenses of a special-needs beneficiary needed to complete their education

Other Considerations

  1. You should receive Form 1099-Q, payments from Qualified Education Programs from the plan sponsor showing information related to QTP distributions
  2. The account owner is strongly encouraged to designate a successor account owner. If the original account owner dies or is declared legally incompetent, the designated successor becomes the account owner. If   there is no successor owner, the estate of the deceased account owner becomes the new account owner.
  3. Your 529 plan holdings could impact your beneficiary’s ability to qualify for grants and student loans.  The 529 plans may also affect a Beneficiary’s ability to qualify for federal need-based financial aid. Effective July 1, 2009, a 529 account, will be regarded as an asset of the student if the student is an independent student and an asset of the parent if the student is a dependent student. An independent student generally includes an individual who:
    • is age 24 by December 31 of the award year
    • is an orphan, in foster care or a ward of the court (other rules may apply)
    • is an emancipated minor
    • is a war veteran
    • is a graduate or professional student
    • is married
    • has legal dependents other than a spouse
    • is homeless (other rules may apply), or
    • has special and unusual circumstances which can be documented to his or her financial aid administrator

The Smart Financial Planning Process

The most common question a new client will ask when we begin the financial planning process is, “What kind of returns can I expect from your portfolio management?” The answer depends on your risk tolerance, age, financial planning needs and investment objectives.

In general, those that are under the age of fifty with medium risk tolerance will achieve between 9% to 11% per year.  For those over fifty-five or in retirement this can range from 7% to 9% depending on your specific financial planning needs and risk tolerance. The recommended minimum investment planning time frame is 8 years.
Financial Planning Process Diagram

Step 1: Determine your risk profile and financial planning objectives.

The amount of risk or variability of return you are willing to accept is a major determinant of your portfolio composition.  Every investor is an individual with different needs and different financial planning objectives. Whether your objective is wealth preservation, asset growth or current income, it is critical to discuss them in detail with a knowledgeable financial planner. I will help you determine whether you need investments that produce income, growth or a combination of both.  It is also important to understand your attitude towards financial planning and investment planning.

Another critical aspect of your risk profile is your investment planning time horizon—which focuses on retirement financial planning. This is determined by when you will need to access your investments. It will seriously affect your financial planning portfolio strategy. An investor with a longer time horizon can afford to assume greater short-term financial planning risk in exchange for potentially greater long-term returns.

Stocks historically have experienced greater short-term volatility, but over the longer term, they have outperformed bonds and other fixed income financial planning investments. If you have a longer time horizon, you may want to take advantage of the opportunities provided by investing in stocks, In addition, regardless of the type of assets held in your portfolio, time is on your side. The longer you hold any particular asset class, the less the variation in your financial planning return.

Step 2: Set your asset allocation policy.

Research has shown that the asset allocation decision – how your investments are spread among asset classes such as Stocks, Bonds, Reits, Commodities and Cash – has by far the most significant impact on overall performance.  This is why determining the right asset allocation is critical to your investment planning and success. The world economy is ever changing, so your investment allocation cannot be stagnate.  This is one of the common downfalls I see with other investment managers and individuals who manage their own investments.
Step 3: Diversify across asset classes and financial planning investment styles.

As a knowledgeable portfolio manager, I diversify your investments across several asset classes by using multiple mutual funds, etf’s, stocks and bonds. I use the best performing mutual funds out of the 5,000 funds available to you. I chose the best managed funds in their asset class. The funds are evaluated among their respective peers in their asset class based on a variety of qualitative and quantitative factors including: management, experience, adherence to their stated class, long term performance, low management fees, tax efficiency and other relevant factors.

Step 4: Rebalance your portfolio.

As your investment manager, I monitor your portfolio as well as the underlying securities and the financial markets on a continuous basis to assure your desired financial planning goals are being met. I rebalance your portfolio periodically instead of being static with the same funds or stocks over the years. Keeping in mind your asset allocation and risk tolerance, your portfolio will be flexible in order to take advantage of which asset class might outperform over the next six to twelve months.

Step 5: Report the results.

As your financial planner I will provide you with a brokerage statement on a monthly basis detailing the market value of securities and transactions affecting your portfolio. You will receive an annual summary report on the performance and investment outlook for the following year. Your performance and asset allocation will be summarized. Tracking your financial planning results allows you to measure the progress against your stated investment planning objectives.