Bill Cleveland, MBA, CPA, CFP

The economy also is influenced positively and negatively, at times, by the government's fiscal and monetary policy. Fiscal policy, implemented by our elected leaders, is the use of government spending and taxation to influence the economy. Many individuals with whom I speak have expressed concern about the current budget deficits, rising national debt, and the possibility of higher taxes.  

Monetary policy is run by the Federal Reserve, an independent body not directly accountable to the voters. Recent acts by the "Fed" include lowering the short-term lending rate (Fed funds rate) to 0 percent. More relevant to you is the prime rate, which typically is about 3 percent above the Fed funds rate. This is the rate that is mainly used on your lines of credit and credit cards as well as on short-term lending rates that builders and other businesses use for borrowing. The Fed also has devoted an enormous amount of money to holding down long-term interest rates and mortgage rates by buying mortgage-backed securities and longer-term U.S. treasuries.  

The Fed's position is that it needs to save the economy first and deal with the consequences later. The difficulty is that any policy moves made by the Fed always take six to 12 months to filter into the economy. Given this lag, the Fed is trying to estimate what inflation is going to be in the future, not necessarily what it is today. This approach is the reason that many economists will adjust current measures of inflation such as the Consumer Price Index and Producer Price Index to try to analyze what factors temporarily are affecting inflation versus factors they expect to persist.  

So, what are some things you can do to diversify and "hedge" your risk against inflation? Several areas to consider for a portion of your fixed-income portfolio are U.S. Treasury Inflation Protected Securities (TIPS). Pimco and Vanguard have funds dedicated to TIPS as well as exchange-traded funds from Ishares. Real assets, such as commodities including crude oil, energy, timber, and gold, historically have been a good hedge against inflation. Commodities, however, can be extremely volatile, so make sure you understand what you are buying before investing.  

Given historically low interest rates, there may be no better time than today to get your financial house in order. Consider taking advantage of current rates and locking in low long-term rates on your home or office building. Focus on getting yourself into a low-debt, strong liquid position, which will be important in a world with tighter credit and requirements for higher down payments. 

Although it seems likely that inflation will increase, no one knows what the future holds. That uncertainty is the reason that investing involves risk and that proper diversification is important, even if we may overweight certain asset classes or strategies that we believe are more probable to occur in the future. 

The author is a fee-only certified financial planner with Preston & Cleveland Wealth Management LLC

in Atlanta and Augusta, Georgia, and a member of the National Association of Personal Financial Advisors. The ideas expressed in this column are his alone and do not represent the views of 

If you have a comment or a topic you'd like to see covered here, please e-mail 

Articles

Government's fiscal policy can positively and negatively impact economy.

Viewpoint: Tracking Fed's impact on inflation

Perhaps you're among the many physicians who have recently questioned whether it is worth the cost, frustration, and commitment of time to operate a retirement plan for employees. To the practice owner, it may seem like many employees either don't care or don't participate in these plans, especially in a down market.

On the other hand, as your employees' portfolios shrink, they are probably wondering whether they will ever be able to retire at all.

Now may be the time to review your original goals for having a retirement plan, then evaluate whether your plan is meeting those goals. With the changes in law during the past five years, your plan may no longer have the best design, and there may be ways to adjust the plan to maximize the dollars going to the owners or to better reward long-term employees.

From your point of view, you want the plan to maximize your contribution, defer tax liability, and help your employees achieve their goal of saving for the future. A good retirement plan should give your employees the ability to select from any fund in the marketplace, not just from one fund company. From this universe of options, your adviser then helps you select the funds that are most appropriate for your plan. I typically like to see 15 to 20 funds-enough for diversification, but not too many options to confuse employees.

One of the keys to having a successful retirement plan is offering proper and constant education for your employees. They should get some form of communication on a quarterly basis and should see the adviser at least once a year, and that adviser should be available and responsive to their questions.

Most employees have no idea how to select from among their investment options, especially in volatile markets. Going to cash or stopping contributions in market downturns, picking options based on last year's performance, listening to the most outspoken person in the office, and taking loans from the plan-all of these are common pitfalls and sure ways for employees to have an unsuccessful investing experience. Research shows that investors who make emotional decisions with their money often significantly underperform the market over time.

It is important that employees understand the basics of planning, such as having a six-month reserve fund, saving 10 to 15 percent of their salaries, keeping debt low, and entering into the retirement plan with the idea that they will not touch the money until they actually retire.

That last point is important: Retirement plans are for the future, not the present. While you will never totally eliminate the need for hardship withdrawals or loans (especially during a recession), it's important for employees to know that, while beneficial in the short term, they almost always lose in the long term. Many times, employees will leave a practice and not have the money to pay back the loan, resulting in the balance being taxed, along with a 10 percent early-withdrawal penalty.

As a practice owner, it is not in your best interest to drop a plan, but it may make sense to restructure it. You may have started with a SEP or SIMPLE plan; now, a 401(k) may be more appropriate, or vice versa.

A retirement plan is usually worth the costs and occasional headaches. Make sure your plan still fulfills its original purpose and that you and your employees are receiving the advice you need to make good decisions.

Now may be the time to review your original goals for having a retirement plan, then evaluate whether your plan is meeting those goals.

Revamping your practice's retirement plan

Few of us learned anything about sound financial behavior from classes in high school or college, which leaves us to learn those lessons on our own-and usually the hard (read: expensive) way.

Maybe that’s why so few parents dare to discuss money matters with their children.

But kids depend on their parents to teach them the basics of just about everything in life, and that includes the subject of personal finance. Otherwise, they will be left to learn their lessons from the financial world itself-and the interests of that world don’t always align with their own best interests.

A problem for many of us is the inability to delay gratification, which causes us to buy more cars, larger homes, and more stuff than we can afford, leaving no room for error if there is a health problem, job loss, rising interest rates, or other financial or economic changes.

Many students head off to college without a basic understanding of finances or the importance of delayed gratification. Their first lesson in compounding interest comes from the credit card they signed up for outside the bookstore in order to get that free T-shirt. Because of this, many graduates start their post-college lives at a financial disadvantage, finding out that at 15 or 20 percent interest, several thousand dollars of debt can take a long time to recover from (not to mention the average student now has loan debt of $20,000, and the average debt from medical school is $175,000, according to the American Academy of Family Physicians).

As your children embark on a life of their own, make sure that you discuss a budget with them. Let them come up with the categories and amounts.

Once they do, have a conversation about what is reasonable. Most of the time this is the first experience they will have living within a budget, and it is important to learn that there are consequences for not staying within that budget. In order to teach them the importance of hard work, establish that they will have to earn their “fun” money.

Don’t be afraid to explain some of the financial mistakes you’ve made and talk with them about how they can avoid making those same mistakes. 

Remember that there is an important distinction between helping our children grow into independent adults and enabling them to become dependent on you. Sometimes, the earlier they learn these hard lessons, the better. 

Several organizations are taking the lead in providing financial literacy with objective and unbiased information. One of those is the American Institute of Certified Public Accountants. 

One site that we can all learn something from is the AICPA’s 360 Degrees of Financial Literacy (www.360financialliteracy.org). A related initiative by the AICPA is the Feed the Pig campaign (www.feedthepig.org). Its goal is to educate young people about preparing for long-term financial security.

Another recent initiative is a partnership between the National Association of Personal Financial Advisors, TD Ameritrade, and Kiplinger’s. The NAPFA Consumer Education Foundation and its partners are bringing financial education and awareness to individuals through their “Your Money” bus tour, which will travel across the country this year. 

It is important to take the initiative to teach yourself and to learn from some of the impartial resources available. The more you know, the better you will be at helping your children start off on the correct financial path.

Few of us learned anything about sound financial behavior from classes in high school or college, which leaves us to learn those lessons on our own -- and usually the hard way.

How to talk to your kids about money

What we are witnessing these days is the difficult and emotionally draining part of investing. As we come home each night it seems the news can't get any worse. And then it does. Companies that we have relied on and trusted for decades evaporate in a matter of weeks.  

Because of this, our confidence in the government and financial institutions is shaken, causing many of us to naturally want to "do something" to protect ourselves. From an investment standpoint, it is fair to ask, "Is it really worth it to invest in equities and the markets?" Over time, the answer is yes, but the key to this answer is to understand and become aware of our own emotional tendencies as investors. 

Over the years, we have come to the conclusion that the key to achieving goals and being a successful investor revolves around two main factors: diversification and your attitude as an investor. Let's take a closer look at both of them. 

First, are you proactive in setting your investment strategy, or are you reactive to daily market events? If you are proactive, you have a better chance of building a diversified portfolio for your age, time horizon, and risk tolerance. 

I have observed that most people are not proactive in setting their investment strategy, have not tied how their capital is invested to their short- or long-term goals, and are not properly diversified. As many have learned the hard way, appropriate diversification is not defined as 15 tech companies or loading up on investment real estate, nor is it moving all of your assets into bonds and cash.  

Assuming your portfolio is appropriately diversified, the second-and many times more important-question to ask is "Am I giving my plan the opportunity to succeed?" One of the most informative studies on investor behavior is Dalbar's Quantitative Analysis of Investor Behavior. The Boston-based financial research firm has measured the effects of investor decisions to buy, sell, and switch into and out of mutual funds since 1984.  

Dalbar released its latest study in July, concluding that "investment return is far more dependent on investor behavior than on fund performance. Mutual fund investors who hold their investments typically earn higher returns over time than those who time the market." 

The study recommends that investors develop a systematic (monthly) plan of investing, a diversified portfolio, and a disciplined buy-and-hold approach. (You can view the latest study at 

The bottom line is that your decision-making in times of extreme up-or-down markets is a major factor in growing and maintaining your wealth, and whether you'll achieve your goals in life. 

In an ideal world, we would get out just before the market crashes and then get in the day before it rebounds. This is next to impossible. With the amazing volatility in these markets, missing just two or three up days could mean the difference between being down 10 percent or 20 percent. As a long-term investor, it helps to set proper expectations. The reality of investing is that there will be down years as the market goes through periodic self-corrective cycles, and all of these cycles are unique and different.  

The greatest value an adviser can provide is devising a realistic plan that factors in, manages, and contemplates risk right from the start. That gives you a better chance of having success and ultimately achieving your goals. As the Dalbar study demonstrates, following a planned strategy will maximize the return you receive in the years ahead. 

The author is a fee-only certified financial planner with Preston & Cleveland Wealth Management LLC (

) in Atlanta and Augusta, Georgia, and a member of the National Association of Personal Financial Advisors. The ideas expressed in this column are his alone and do not represent the views of Medical Economics. If you have a comment or a topic you'd like to see covered here, please e-mail 

Following a planned strategy will maximize the return you receive in the years ahead.

Author | Bill Cleveland, MBA, CPA, CFP

Articles

Viewpoint: Tracking Fed's impact on inflation

Revamping your practice's retirement plan

How to talk to your kids about money

Diversification and attitude are the keys to successful investing