Thinking about what’s happening in the market right now. I don’t want to wade into what the Treasury’s plan means for the market. Nor do I want to analyze the consolidation occurring in the Investment Banking industry.

I’d like just to put some thoughts down on how current events may impact investment research going forward and what that means for investors.

1. Investment banks are currently the best we’ve got in terms of researching companies.  I don’t mean to say that they are always (ever?) right, but my point here is that individual investors can never get as close to a company as does a sell-side equity analyst.  As outsiders, we’re left frequently to decipher using shadow-puppetry what’s actually going on inside a company.  Certainly, there are times and certain companies where analysts are equally outside but I’m just describing, not prescribing.
2. Fewer banks mean less research.  As investment banks consolidate into retail banks (as Merrill Lynch has with Bank America, for example), it ultimately means further consolidation in research departments as it doesn’t make sense to keep both brands separate and maintain separate teams.  This means fewer stocks actually covered with research and fewer opinions on those stocks already covered.  This is bad for investors as investors have proven that they, like many professionals, have an aversion to paying for research from independent research outfits.
3. Importance of New Rules of Investing (NROI) grows: In order to compensate for the loss of research, investors are going to continue to flock towards free web resources (see my Top 5 Investment Sites) to make their own decisions.  This is a huge opportunity for those competing in the Online Finance 2.0.  In addition to expert communities and pickybacking sites, look for a flurry of new models in addition to incremental changes online with new charting technologies, blog aggregation, etc.
4. Opportunity for Investor Relations firms who “get it”: As a buy-side analyst at a hedge fund, I always felt that Investor Relations firms were missing an opportunity.  In a the Web 2.0 world, as investment banks continue to consolidate research ops and struggle with their business model, investor relations firms can really innovate here with new distribution models for disseminating information, new models for interfacing with company executives, etc.  The old road show/press release model can be improved upon by those who get it.  Firms who “get it” have an opportunity to compete against the i-banks, albeit coming at the game from a different perspective.  Maybe, as the result of all of this, we’ll see the role of the IR firm change as well.

The investment industry has seen various modes of expansion/contraction throughout its lifecycle.  I believe that this stage is natural in this evolution.  This economic contraction for the industry happens to correspond to an expansionary period in web technologies so that when these firms emerge, they may be left behind in their research.  This is a huge opportunity for other participants.

Very interesting post over on grownchildren.net (what a great title, btw).  The gist of the post is the importance of having “The Chat” with your kids.  I’m squimish when it comes to discussing adolescence but for some reason, I find financial discussions to be easier.  Not so for most people.

So, it got me thinking about 3 important reasons to discuss finances with kids:

1. logistics: it happens that parents pass away without ever telling children where their assets are located.  In my job as a financial planner, I see this occur with more frequency than you’d expect.  Children spend the time post-mortem looking for and tracking down assets.  Bequeath the assets or give them away but don’t lose them.  Keep your kids in the loop.
2. ethical inheritance: use these discussions to impart your values on your children.  Let them know why you worked so hard all your life.  Explain to them how you manage the work/life conundrum.  These discussions, however awkward, mean a lot to your children, while you’re around and after.  AS Penny mentioned in the article linked to above, it’s also a great forum to explain divergence in inheritances between family members.  I remember my grandfather, OBM, showing me his mother’s will which effectively left nothing to him and all to his siblings because he had done well in business.  He understood what he mother meant by her actions and in fact, respected her for such decisions.
3. wealth transfer: how frequently we see new clients coming into money for the first time in their lives while in their late 50s and 60s.  Their parents lived to a ripe age and left money for their middle-aged children.  Frequently, as we see the baby boomers retire, this requires the children receiving inheritance to learn basic asset management skills and/or shop around for an advisor.  The sooner the children are brought into the circle of trust, the sooner and quicker they can start scaling the knowledge curve required to manage money responsibly.

I’ve received a lot of calls over the past couple weeks from fear-stricken investors. They are tangibly shaken by the volatility in the markets and feel they need to “re-look” at their financial plans.

Obviously, when external things threaten the overall plan (like the US stock market giving back its gains for 2007 in 10 trading days), investors can review their financial plans with their advisor. But I have to say, I receive a lot fewer calls when the markets go up. People feel better when they read good things about the stock markets but that doesn’t mean that they are well-positioned in their financial planning.

Just because markets go up doesn’t mean your investments do, nor does it mean you are optimizing your appetite for risk. If you could get more return for assuming the same amount of risk, you’d do it, right?

My point here is that not only in volatile times (read, markets going down) should investors care about their overall financial profile. Eking a percentage point out more per year means a lot of money over investors’ lifetimes and this is true in good times as well as bad.

Summer is quickly approaching. Many people will start planning their summer vacations. Tremendous time and effort will go into the planning to ensure a joyous vacation for all. You will probably speak with a tour company, get recommendations from friends, gather information and research the best attractions.

Fiscal Fitness

Believe it or not there is much in common between weight loss, physical fitness, and financial well-being. Unfortunately people tend to bite off more than they can chew. The key to successfully losing weight is discipline. Cutting back on what you eat and adding exercise to your lifestyle will help you shed those unwanted pounds. It’s when we say, “I want to lose 20 pounds” without a plan how to do it, that we tend to get in trouble. Budgeting is the same. If you create an unrealistic budget, you’ll likely save less than what your budget calls for, become frustrated, and resort to your old ways.

I’m Young; I Don’t Need to Plan Now

Another common excuse used is that, “I have my whole life to save, I don’t need to start now. I’d rather buy a new car and in a few years I’ll start.” Each year that passes with no investment, will affect your retirement. Assuming you have 30-40 years until retirement, every year you forego saving or investing money today will subtract 1-5 years from your retirement. Along the same lines, I often hear people in their 50’s, when speaking about retirement planning say,” I don’t worry about retirement because I’ll just keep working.” Sounds good except what happens if you wont be able to keep working. I recently met a man in his early 50’s who has worked as a house painter his whole life. He told me it’s getting hard for him to paint for a full day because all the hard work has taken a large toll on his body. Thankfully for him, he started saving at a young age.

Rich Aunt Molly

Sadly, many people plan for retirement by dreaming that some long lost wealthy relative will die and put them in their will, and they will turn into millionaires. Such far-fetched fantasies are common. I read recently that a full 25% of Americans polled, actually thought that their plan for retirement was to win the lottery!

Time to Make a Plan

In our day-to-day lives we are always making plans. We plan what to have for dinner; we plan which parent is going to pick up which kid from school; we plan vacations. We are constantly planning. We tend to have a goal, and we initiate a plan in order to reach that goal. The same should hold true with our finances. Making a financial plan is essential to start preparing for your future. Since we are not prophets and we can’t predict the future, a solid financial plan can guide you through the uncertainties that lie ahead, and help you in achieving your retirement goals.

Just Start

The fact is that if you don’t have to be wealthy to start investing. Let’s say you start at 25 years old by investing $15,000 and in addition you manage to scrape together $2,000 a year to add to your account and everything is invested at 5.5%. If you were to continue this disciplined investment approach until retirement (65 years old) you would have over $413,000. If you were too add some risk to your investment profile in the hope of getting a higher return, your nest egg at retirement would grow even more substantially.

If you take control of your own finances and start saving early and stop delaying, you can retire without having to worry about old age unexpectedly catching up with you.

One of the most common questions that I receive has to do with real estate. The question usually goes like this: “I have some money that I am thinking of investing and I want to know if it’s better to invest in an apartment or a well diversified portfolio of stocks and bonds?”

Investment or to Sleep in?

When attempting to answer the question, one needs to distinguish between buying a property to live in versus an investment property. If you are talking about buying an apartment that you plan on living in, then there are more factors influencing your decision, than just economic issues. For most people, a home has traditionally not been seen as a portfolio device or financial instrument, but rather as place to live and raise a family. No price tag can be placed on having your own apartment, and raising your family there, ultimately, even if the value goes down, the primary importance is that you still have a roof over your head.

Investment Property

The real issue arises as to when you have some extra money that you are looking to invest. I was raised in a family where it was inconceivable to invest in the stock market, because my grandfather lived through the stock market crash of 1929, and because something similar could happen again at some point in the future, you had to invest in real estate, because at the end of the day, you are still left with a tangible asset. How many times have you heard people talk about the beauty in property investing because” apartment values always go up”

When one starts to investigate the economic benefits of one asset class over the other, the picture is not nearly as clear-cut as people think, in fact as an investment, statistically, it seems that a diversified portfolio of stocks and bonds may be a better investment. Historically, a well-diversified portfolio of stocks and bonds returns over 8% annually compared to an approximate 6% return for real estate.

Is it worth the headache?

There are no guarantees when buying real estate for rental purpose. Let’s take an example. Say you own a debt-free apartment worth $250,000. You are lucky enough to find a renter who pays $800 per month. You net $9,600 a year, which is a return of 3.84% annually. This is before any unexpected expenses that may arise. It’s not a lot of fun being a landlord and getting a call at midnight that a pipe burst, and that the tenet needs it fixed immediately. And what if your apartment has a vacancy for a month or two? Your 3.84% return very quickly gets lower and lower.

Currently you can get a FDIC insured bank deposit, which pays 3.5% annually, headache and hassle free. Of course, and of equal importance, if you feel the property value will increase substantially, then you might decide to continue your ownership.

Liquidity

Perhaps the biggest drawback to property as an investment, is its’ illiquid nature. If for whatever reason one needs to sell an apartment suddenly, it’s not at all certain that the seller will get a price even close to what the property may be worth, and that is assuming you can even sell it. Conversely, a stock and bond portfolio has daily liquidity, and you get the market price when you need to sell.

Stability

One of the advantages of property investing is the stability of returns. “Historically, the largest real home price decrease is on the order of 5% in any given year,” says Jonathan McCarthy, senior economist at the Federal Reserve Bank of New York. “Whereas you talk about a real stock-price decline, you could probably see 20% or even more.”

Is there an answer?

Jewish scholars debated this same issue 2000 years ago. The Talmud says that you should keep 1/3 of assets in property a 1/3 in business and a 1/3 in cash. Meaning not only is there room for both property and a stock and bond portfolio, rather it’s the recommended way to invest.

Many of us want to start investing, or improve our current investment strategy, but don’t know where to start. Here are four steps that I think will help you get started on your path to becoming a more savvy investor:

How should you choose a financial professional?

First and foremost it’s very important to use a licensed financial advisor. This will help ensure that you receive the appropriate advice that you should be given, as well it gives the client a legal outlet for any complaints a client may have.

Plan Ahead

Before you meet with an investment advisor, broker, or other investment professional, it’s a good idea to map out your financial goals. Using an expert will help you decide how to invest your savings, but you should first have a firm handle of your short and long-term goals and needs. How much income you will need to supplement your existing Social Security or other pension fund to meet fixed expenses? Do you have children or grandchildren to marry off? Are your elderly parents in need of care? You need to determine your own budget needs and your ability to tolerate risk first, and then ask your advisor what kinds of investments would best fulfill these goals. Use your advisor as a sounding board. The advisor can tell you if your goals are realistic, and if not, you can work together to come up with goals that can be achieved. Then you should take the time to understand the various investment products you may be considering. If you receive a lump sum pension payment or an early retirement payout, you may feel pressure to invest it quickly in order to avoid adverse tax consequences. Intelligent investing requires careful consideration. If you need time to fully explore your options, put the funds in a short-term deposit and then invest once you feel ready to do so. Otherwise, you may be susceptible to high-pressure sales tactics of those who will “take care of your problems for you.” A quick fix is not the answer in this situation. Your money is too important to lose!

Understand your investment

Focus on the whole range of the investment’s characteristics in your decision-making, not simply on promises of a high return. Before you purchase an investment, you should understand the cost, degree and nature of the risks, investment goals, performance history, and any special fees associated with the investment. Never assume that your investment is federally insured, low risk, or guaranteed to deliver a certain return. Make sure you understand the information you are given. Once you have that information, check it against your own goals and risk profile to see if the recommended type of investment is a good fit.

Check Account Statements

Be sure you understand your account statements. Your account statement should reflect only the pattern of investing that you have authorized. If there is a discrepancy, raise the problem immediately with your broker and, if necessary, the branch manger who supervises the broker. If there is something that you don’t understand (for example: an unfamiliar term or abbreviation) that appears on your statement, don’t hesitate to ask your advisor. If an investment professional is unwilling to take the time to answer your questions he may not be someone with whom you want to handle your life savings. The account statement is your primary tool as an investor for policing your investments, so make sure to take full advantage of it. Continued cooperation with your financial advisor will ensure that your investments remain consistent with your goals. It is important to review your portfolio with him periodically, and make sure that it is still consistent with your needs. On the same note, make sure that your investment strategy remains current. If there is a change to your financial situation, consider whether your strategy needs to be reevaluated. With smart planning and continued monitoring of your investments’ progress, you and your financial advisor should have a valuable, long-lasting relationship.