Calm Investors, Raging Markets

Fear and loathing took over the financial marketplace in October. The Dow Jones Industrial Average suffered its worst week ever, closely followed the next Monday by a gain of 936 points, its highest point increase ever. While the numbers varied, it was truly a global phenomenon as investors from Shanghai to London to São Paulo to New York dumped equities one day only to light a rocket under them the next.

It was very entertaining for market bystanders. It was a test of faith for investors.

Such tests occur regularly, but seldom with as much incessant and ruthless brutality. Portfolios everywhere were trashed as panicky investors sold equities as though they were toxic, though most of the activity seemed more related to the statements and policies of the moment rather than basics, such as actual underlying values.

Confidence Rules

Even for investors with nerves of steel, the roiling markets of 2008 shed light on just how important confidence is in the economic scheme of things – confidence your bank will have your money when you need it, confidence that firms apply sound business principles in their financial dealings, confidence that mortgage holders will not, in large numbers, default on their loans – because, in the end, the value of something is what we and everyone else agree that it is.

The investors who most successfully emerge from turbulent times are, historically, those who don’t try to time the markets, who keep emotions in check and refuse to let them overrule their long-term perspectives, who resist the lure of trying to “play it safe” by switching entirely to certificates of deposit, and who realize that, over time, investors who have appropriately well-diversified portfolios of stocks, bonds and cash – and are willing to accept reasonable risk – are most likely to succeed.

There are good reasons for this. It is generally a losing strategy to try to time markets. No one knows when highs and lows are reached, except after the fact, so you are constantly in danger of buying high and selling low.

To be sure, it is instinctive to let emotions take over – it is perfectly sensible to move back if you are about to step on a poisonous reptile – but selling after the market has plunged is the equivalent of capturing your losses. There are perfectly good reasons to change your asset allocation or redirect your portfolio. Raw emotion isn't one of them.

Finally, while you can eliminate almost all risk by investing only in insured bank accounts, accepting risk is far more likely to give you a higher return and allow your portfolio to gain on the goal you have set for it. Over the long term, the safest investments may not even keep up with inflation – and that’s a risk, too.

If you have questions about the market or your portfolio, please give me a call.

Diversification does not ensure a profit or protect against a loss.

Long-term Care Partnership Policies Have Financial Appeal

It’s not pleasant to contemplate, but the fact is, some of us will require the kind of extensive – and expensive – personal healthcare provided under long-term care (LTC) insurance. If you have substantial assets, you probably have private long-term health insurance or may be self-insured.

If not, you may be worried that purchasing an LTC policy will drain your finances to the point where you may have to spend down your assets to the $2,000 level in order to qualify for your state–s Medicaid program.

While weighing the alternatives, don’t forget to check into your state’s long-term care insurance partnership program (36 states have partnership programs in place or have submitted plans to provide them). Such policies have “asset disregard” provisions that can provide a pathway to long-term care insurance without your having to give up virtually all your assets.

These partnership programs are collaborations among state governments, private insurance companies authorized to sell LTC and state residents who buy LTC partnership policies.

Most states stipulate that these policies must offer comprehensive benefits (institutional and home service, for example), be tax qualified and adhere to state-mandated inflation protection.

As the purchaser, you gain the right to apply for Medicaid for additional long-term care services under "asset disregard" provisions that essentially allow you to retain assets equal to the amount of benefits you receive under the policy.

Partnership at Work

Let’s say Jason buys a partnership policy valued at $100,000 and years later receives benefits under that policy valued at $150,000 (it is inflation protected, you may recall). Jason can then apply for Medicaid and, if eligible in every other way, may keep $152,000 in assets (the value of his benefits plus the $2,000 allowed by that state's Medicaid provision).

These programs help individuals obtain and pay for services without having to spend down all their assets - which can be passed along to beneficiaries. They’re not for everyone, but if you have questions about such partnership plans, please call me.

Financial Planning: New FDIC Bank Account Insurance Limits Are Temporary

The Federal Deposit Insurance Corporation (FDIC), an independent agency of the U.S. government, has been making headlines. Last month, its role in closing and reopening troubled banks was the focus in this space. In the meantime, FDIC insurance provisions changed with the economic stabilization legislation passed by Congress as a countermeasure to the current credit crunch.

Effective October 3, 2008, FDIC coverage limits were raised to $250,000 on the total of all deposits an account holder (or account holders) has at each FDIC-insured bank.

The coverage limit for IRA and certain other retirement accounts remains at $250,000. Trust accounts are covered to $250,000 per owner per beneficiary (specific requirements apply).

Otherwise, the rules haven’t been changed; if you have more than the limit, ensure your accounts are held at different banks.

FDIC insurance limits have been raised sporadically since the agency was established in 1935. The original $5,000 limit was raised to $10,000 in 1950, $15,000 in 1966, $20,000 in 1969 and $40,000 in 1974. In 1980, it reached $100,000, and there it stood for the past 28 years. It could return to $100,000. Barring further legislative changes, the new ceilings are scheduled to end on December 31, 2009. Visit fdic.gov for more information.