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The Advisory Firm Newsletter:  August 2012

THIS MONTH IN PERSONAL FINANCE: a little math quiz followed by some serious planning.


For the August Newsletter, I thought I would start off with something on the lighter side with a little math quiz and then get into the serious stuff with a discussion about the only sure thing other than taxes.....

Math Quiz: Rate of Return

Here is a quick math quiz for you to get that brain working this morning:

Year 1 investment return: 100%

Year 2 investment return: (-50%)

What is your average rate of return over the period?

Answer: This is in fact a trick question. When we are asked to take the average of something we typically revert to high school math and take the Arithmetic average (or mean) which is adding the numbers together and dividing by the quantity of numbers in the numerator:

(Year 1 + Year 2) / 2 = 100% + (-50%) / 2 = 50% / 2 = 25%

Do you see anything wrong with that answer? If someone asked what was your average return over the period would it be 25% or would your return actually be 0%? If you started with $100 and had a 100% return you would have $200, then if you lost 50% the next year you would be back at $100. When calculating multi-year investment returns you need to use a Geometric average:

(sqrt of (1+year 1%)(1+year2%)) - 1 =

(sqrt of (2.00)(.5)) - 1 =

(sqrt of 1) - 1 = 1-1 = 0%

So when do you use Arithmetic average vs. Geometric average? If someone asked what the probable return of the portfolio next year would be then 25% would be the answer. However if they were asking for multi-year probable returns or actual returns, then geometric average would be used.



A Serious Question:

If something happened to you tomorrow, would your spouse, family or significant other know what to do? In a very difficult and emotional time could they easily find and access your various financial accounts? Would they be able to find your passwords to login? Would they know where you keep your important documents or even what you have out there? What about company benefits, would they know who to call to make sure health insurance wasn't cutoff?

None of us know when our time will be up. So the best we can do is try and make sure that if it happened suddenly we have documented everything to try and make the process as easy as possible for loved ones.


Pull it all together:

I have listed some things for you to think about to make sure that your passing would not be more difficult than it should be for your loved ones. This is by no means legal advice but simply ideas:

- Location of your Will

- a listing of assets and liabilities (and business info if self employed)

- passwords for your online accounts, computer, cellphone voicemail

- listing of company benefits and human resource contact person

- location of life insurance and agent contact information

- name of your estate attorney and financial advisor

- a listing of monthly bills (especially if you are the primary financial person)

- Make sure your spouse is jointly named on the main checking account or has a TOD (transfer on death) assignment on your taxable investment accounts. You don't want to leave them in a bind without access to any cash while the estate is being settled. (yes, social security will go back and retroactively pull your last monthly payment back out of your checking account if you die early in the month)

What steps to take when your spouse or parent dies?

Aside from funeral preparation, the first step is generally filing of the Will in Probate Court. However, before you do this I would recommend one major step: Consult with an Estate Attorney. It is well worth your time and money to have an attorney guide you through the process and to catch any pitfalls before the Will is filed. As you settle the estate you will then have to retitle Real property, change financial account titles along with closing some accounts or transferring to beneficial type accounts. It is a lengthy process that requires many copies of a death certificate and often times many forms to be notarized.

Lastly, the process for spouses can be difficult. There are resources and support groups available especially to help them get through this time. Religious and Community calenders normally have information regarding the various support groups. There are also professional businesses that help widows/widowers with everything we have listed above. Bereavement Navigators is one such organization in Atlanta that offers organization tools, resources and mentoring.


If you have any questions on today's topic just send me an email:

James Daniel, CFP


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The Advisory Firm, LLC provides fee-only financial planning services for clients throughout metro Atlanta and North Georgia including the communities
of Alpharetta, Canton, Cumming, Dawsonville, Duluth, Dunwoody, Marietta, Midtown, Roswell, and Woodstock.

This newsletter if for informational purposes only. The information contained within should not be considered as financial advice nor soliciation
for financial services. Consult with your financial professional if you have any questions. The Advisory Firm, LLC is a fee-only financial planning company and registered investment advisor.