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Advisor Diversification: The Scenario Where Diversification is Not Beneficial

We are told time and time again that one should never put all their eggs in one basket. In most instances, this statement would be valid. However, this is not true in every case; especially with regards to Advisor persification.

There are many detrimental effects that can result from having multiple Financial Advisors. You would think that by having more than one advisor that you are actually increasing your likelihood for financial success. Unfortunately, you are most likely hindering your chances for success. Having multiple advisors may create adverse inconsistencies between your investment strategies. The disparities can ultimately yield you with varying results; some of which may not be not ideal to both your short and long term financial goals, investment constraints and capital needs.

The communicative inconsistencies that may result from the use of more than one advisor can create financial issues for an investor. Advisor persification can also create high concentrations of investments that are not parallel to an investor’s risk tolerance or investment objectives. Neutralization of one’s investment strategies is another likely byproduct of persification amongst multiple Financial Advisors. With multiple advisors, you may actually be doubling up on or be creating competing investments for yourself. This adverse reality can most certainly create far more risk than the investing inpidual had originally anticipated. With regards to market cyclicality, there is never a guarantee that even the most qualified of all Financial Advisors won’t lose investment value at some point in their career. Having multiple advisors will not eliminate that risk of loss, but instead it could magnify it in times of bad financial markets.

The truth of the matter is, there is never a good reason to have multiple advisors. By having a concrete investment plan, a single advisor is more than sufficient in implementing this strategy that is specifically tailored to your risk tolerance, financial goals and capital needs. It doesn’t take more than one Financial Advisor to successfully employ that plan. Trust is by far, the single most important element rooted within the relationship between a client and their Financial Advisor. By persifying amongst multiple advisors, one has communicated a lack of trust from the get-go; defeating the entire purpose of the client-advisor relationship. If you work with more than one advisor, who is going to oversee the communication between them to insure that their inpidual plans and strategies mesh and work well together with your short and long-term goals? Chances are the answer to that question is, no one.

persification is a very important strategy when it comes to investing, however, it should be the advisor persifying for you; not you persifying amongst advisors. Call us today at Mitlin Financial and see why having one trusted Financial Advisor could be a more optimal strategy for securing your financial future.


Disclaimer: This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.

Mitlin Minute: 529 Plans

This edition of the Mitlin Minute features 529 plans.

Please feel free to contact us with any questions at (631) 952-4466 x12.  

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Feel free to contact us with any topics you would like covered in an upcoming Mitlin Minute.

 

Disclaimer: This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.

Will you be able to afford tuition costs for your children’s future higher education?

In this fast-paced environment of rising college tuition, overwhelmed Americans continue struggling to make ends meet with regard to affording higher education. Inflationary pressure has caused tuition costs to reach unprecedented levels. The net cost (the cost after scholarships, grants and federal tax benefits) that in-state residents will pay for public colleges this year, rose 4.6% to an average of $16,510. That's more than twice the rate of inflation, which rose just 2% over the last 12 months. As time passes, this trend only seems to be worsening.

Taking financial initiative can be the differentiating factor between affording and not affording these higher education costs. One of the strategies used to offset these rising costs are 529 college savings plans. These tax-advantaged investment vehicles were designed in the United States in effort to encourage Americans to save for future higher education costs.

529 Plans are useful education savings plans that can provide tax benefits and tax-deferred growth. These vehicles can be a very powerful tool for any family disciplined enough to save decades in advance. Investors can make contributions up to $300,000 throughout the plan’s lifetime. Some states offer residents an income tax deduction for a portion of their contribution. Additionally, there are no income limitations on donors making contributions. Parents do not need to be concerned about a student using these funds for purposes other than school. Assets in the 529 account will remain under the donor’s control; even after the student is of legal age.

It is important to note that for 529 Plans, there is one major restriction when it comes to distributions. Funds withdrawn from a 529 Plan for purposes other than education, will be subject to a 10% penalty, as well as federal income tax on the growth of the account.

The inevitable cost of college tuition is one that no one can afford easily, nor escape. The general population continues to struggle to pay for such highly inflated tuition fees. This struggle truly creates the need for an alternative savings strategy. The key to affording college is to start saving earlier than when your child reaches high school, middle school, or even elementary school. 529 college savings plans can be helpful in making higher education more affordable. With tax benefits, saving strategies and guidance, it is far easier for overwhelmed Americans to save for and one day alleviate such rising costs. Although savings may only be used for educational expenses, these savings plans force a discipline upon donors that they may have otherwise lacked. Don’t let the opportunity pass you by, for every year, week and day that elapses, you could have just inched that much closer to achieving future higher education affordability for your children.


Disclaimer: This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.

Dividend Discount Model vs. Capital Asset Pricing Model

The vast majority of investment research supports the theory that proper asset allocation is more optimal for a portfolio than market timing. Attempting to value securities may be a fruitless task, however two models that have been used to determine intrinsic stock values are the dividend discount model and capital asset pricing model.

The dividend discount model (DDM) values equities based upon future dividend payments and discounting them to the present value. The DDM is most useful for dividend paying companies, however one glitch in the model is the prediction of future dividend payments. Regardless of skill and resources, it is nearly impossible to determine dividend payments of a firm due to a variety of risk factors, such as macroeconomic risk, industry risk and high inflation. The DDM is obsolete for the vast majority of individual equities. Utilizing the DDM for blue chip firms that have paid consistent dividends for many years may assist in determining the intrinsic value of a security.

The capital asset pricing model (CAPM) is considered more modern than the DDM and factors in market risk.  The value of a security in the CAPM is determined by the risk free rate (most likely a government bond) plus the volatility of a security multiplied by the market risk premium. This model stresses that investors who choose to purchase assets with higher volatility should be compensated with higher returns than investors who purchase less risky assets. This model is consistent with statistics that prove more volatile equities, such as small cap stocks have outperformed less volatile equities, such as large cap stock over many years. Please keep in mind that time horizon, liquidity needs and risk tolerance should be factored in when determining how to invest your assets.

Although the CAPM and DDM may potentially provide an estimate of a security’s price, research proves time and time again that valuing equities based upon future assumptions is not realistic.  A disciplined approach to investing based on asset allocation should prove more beneficial for your portfolio in the long run.

Please contact Mitlin Financial Inc. if you are concerned about your current portfolio allocation.


Disclaimer: This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.

Common Stock & Preferred Stock

Investors that are looking to purchase shares of ownership in a corporation may have the ability to select either common or preferred shares.  Common and preferred stock share some similarities, however preferred shares combine many features of common stock and fixed income.

Common stock is by far the most traded type of equity in the market. The main features of common stock are that shareholders have voting rights on corporate objectives and have the ability to increase the value of their holding through capital appreciation. Shareholders may also receive dividend payments from the corporation. The downside to owning common stock, or ordinary shares, is in the case of bankruptcy. If a corporation were to file for bankruptcy and begin liquidating, owners of common stock receive funds only after debt holders and owners of preferred stock have been compensated. Due to the low level of priority in bankruptcy proceedings, the opportunity for shareholders to receive funds is fairly low.
                
As stated earlier, preferred stock combines features of both fixed income and common stock. Owners of preferred stock have preference over common shareholders in the case of dividend distribution.  In many cases, preferred shareholders receive fixed dividend payments (similar to interest from bonds). In addition to the opportunity for fixed dividend payments, preferred shareholders may also experience capital appreciation in their holding. An added feature for owners of preferred stock occurs in the case of owning shares that are convertible to common stock.  Convertible shares allow owners the flexibility to convert their shares of preferred stock for common stock if the opportunity for significant capital appreciation is more appealing than a fixed income stream. Some disadvantages of holding preferred stock are that owners do not have voting rights for corporate objectives and there may be less opportunity for capital appreciation compared to common shareholders.
                
While most investors prioritize common stock over preferred, owners of preferred stock have the ability to generate a consistent revenue stream with dividend payments as well as the opportunity to convert to common shares if capital appreciation becomes appealing.

Please contact Mitlin Financial in order to discuss advantages and disadvantages of owning preferred stock in your portfolio.

 

Disclaimer: This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.

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