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Why Dave Ramsey Is Wrong

There is no denying that Dave Ramsey has done a commendable job of bringing back our grandparents’ financial values into popular culture. Many Americans have been poor stewards of their finances and have been saddled with avoidable debt. Ramsey’s advice has helped thousands get back on the right financial track. Even at my own company, we use the debt snowball of Financial Peace University to help right the finances of our pro-bono planning clients. Ramsey has become a multimillionaire by simply telling people to live within their means by creating and maintaining their household budget. Certainly, in today’s society of zero interest and only three easy payments of $19.99, this is no simple task. However, once a person overcomes modern-day financial temptation and begins investing in his or her future, Ramsey drops the ball and becomes a spokesperson for one of the most confusing industries in America, financial product sales. Ramsey recommends his followers work with brokers who are paid high commissions for investing in mutual funds. Ramsey, as popular as he is – and no one disputes that – has missed the boat on one thing – dismissing the credibility and sensibility of a fiduciary and fee-only financial advisor. That may not sound like a big deal, until you understand that picking the right financial advisor can lead to an overall stronger financial foundation for your family, your future and your state of mind. Let’s look at this a bit closer. The Fee-Only Advantage Fiduciary (your best interest) fee-only advisors take a different approach to investing. There are no selling products; fee-only advisors are not paid a commission from a product. This removes the conflict of interest that brokers carry in their relationships with their clients. This also causes the advisor to look differently at the product that he or she recommends to the client, which is why we see a much higher usage of index funds from the fee-only community. These highly diversified funds carry very low fees, because they don’t pay any advisor any commission, and historically have beat actively managed, commission mutual funds over long periods of time. A well-diversified index fund portfolio should cost no more that 0.25% a year, with most of the funds trading at no charge. Fee-only advisors are compensated as a percentage of assets they manage, by a flat monthly retainer, or bill hourly for financial planning. Each of these options are free from any conflict that the advisor gives to the client. Most fee-only firms also include financial planning in their asset management fees. A financial plan sets how the portfolio should be allocated. Proper asset allocation is a large ingredient to successful long-term investing. A mutual mess Ramsey, on the other hand, encourages his followers to contact a broker within his referral network when they are ready to start investing. In the interest of full disclosure, his network rejected my firm telling me that being a fiduciary fee-only financial services firm we did not qualify because his network is made up of only commission brokers. Ramsey recommends that his flock work with a broker and invest in a mutual fund that has a long track record of good results vs. the S&P 500. He then adds that the investor should purchase and stay put, meaning don’t sell when the market falls, be a buy and hold investor. The broker will collect a 5% +- commission from the sale and will receive a smaller percentage on a quarterly basis, assuming the investor does not sell the fund. Additional investments into the fund, whether it is annually or monthly, will also be charged the large upfront fee. Ramsey supports this model because he believes this to be the cheapest form of investing compared to fee-based firms that would be charging 1.2% a year to give advice and provide planning services. In the 80’s and early 90’s this may have been the correct advice, but unfortunately the US brokerage business has taken a turn for the worst, in that products are not built to benefit the client, they are built to make money for the firm and the broker. A retired executive from a large brokerage company recently told me he got out because his firm no longer focused on the client, they focused on what they could get away with selling to the client. Even if Ramey’s referral network has the best intentions, history is against them. There have been very few mutual funds that actually beat the S&P 500 net of fees over long periods of time. Some get lucky over a 10 year stretch, but after 15 years the list is very short. Historically we see less than 1% of funds beat the S&P 500 (after fees) over 30 years. This might be a long time, but how long are you going to be invested? If you live to age 95 and are in your 40’s or 50’s, 30 years is not that long. Another issue is Ramsey’s buy and hold philosophy. The idea is great on the surface, but when a year like 2008 strikes many individual investors, without a good financial support system, are going to sell. If you get burnt, you first want to stop the pain (sell low) and when you go back, if at all, it will be when you feel ready (buy high). Buy and hold is the correct advice, but when you call the broker for reassurance there is always the potential of him or her selling you another fund at 5% commission to help “make you feel better,” while padding his or her pockets with more of your money. This is where a fee-only advisor earns their fee. By keeping the client focused long term, buy high and sell low tendencies can be eliminated, increasing the client’s rate of return. Ramsey also recommends that you not own bonds. He states “bonds are mistakenly believed to be safe.” While it is true – not all bonds are safe – there is a good case to be made for adding the right bonds to a portfolio to lower volatility. Bonds in a portfolio help keep you from hitting the panic button when it feels like the stock market is falling into oblivion. A fee-only advisor can help choose the right bonds for the portfolio. Ramsey also wants his followers to stay away from Exchange Traded Funds (ETFs). ETFs, if used properly are more tax efficient than any mutual fund, held outside retirement accounts, are more liquid and offer cheaper fees. There are good ETFs and bad ETFs, and I think Ramsey has thrown the baby out with the bath water with this advice. Perhaps it is because his network of advisors would not receive a commission or trailing fee if ETFs were used. What should Ramsey do? If Ramsey and his network of brokers wanted to truly work in the best interest of his radio and print flock, I propose that he endorse a network of fee-only advisors, simply being paid by the hour. These advisors would help create portfolios for the Ramsey following at a fraction of the cost of his commission advisors, all while giving unbiased investment advice. In the end, Ramsey’s math does not add up and the investor loses. Ramsey, who tweeted that he was the “big dog on the porch” in a recent tweet with fee-only advisor Carl Richards, could use his status to help make all advisors work in the best interest of their clients, as is being discussed at the SEC in 2015. Instead, he sits in the pockets or every big insurance company on Wall Street who wants to maintain the current system of taking from Main Street to pad the profits of Wall Street.

Southern Company Will Be Teaming Up With The U.S. Navy And Air Force

Summary Southern Co. and HelioSage are teaming up with the U.S. Military to develop three solar facilities on military sites across the gulf coast. Southern Co. has taken added interest since the end of QE3 in October 2014, hitting new all-time highs in a fighting market. Southern Co. is a stable long-term stock with a respectable 4.02% dividend. Southern Co. is reporting earnings on February 4, 2015. Here we are, three weeks into the year, and we are working our way through earnings. If this is the first time you have read my articles, I am building a portfolio for 2015 that contains all original research. I am digging through SEC filings and considering the state of the economy. So far, I have written articles about seven stocks and my eighth pick is Southern Co. (NYSE: SO ). I am focusing on long-term growth, diversification, and I love dividend stocks. With the uncertainty of the market right now, I have begun each search with a few primary characteristics of each stock. Aside from the economic state, which is driving me towards oil and retail, I am also looking for stocks that popped around mid-October of last year, and that have weathered the January storm. The reason for this is because October was the end of QE and people reallocated their money, and stocks that gained interest in these time frames are a good indicator of where a lot of it went. I believe that some of the stocks that have done well since that time are likely to continue to rise for the time being. This article will take an objective approach to the company, and raise any potential issues. However, upon evaluation, I believe that the market risks are not of immediate concern, but should be considered when deciding whether to invest or not. A Brief Overview Southern Co. is seen as a secure investment because of its customer base. According to its website : Southern Co. is a leading U.S. producer of clean, safe, reliable and affordable electricity, Southern Company owns electric utilities in four states – Alabama Power , Georgia Power , Gulf Power , and Mississippi Power – and a growing competitive generation company – Southern Power – as well as a licensed operator of three nuclear generating plants – Southern Nuclear – and fiber optics and wireless communications – Southern Telecom and SouthernLINC Wireless , respectively. Their clientele is around 4.4 million and they have nearly 46,000 megawatts of generating capacity. Below is some info about the power subsidiaries. Gulf Power Company (Gulf Power) Gulf power has a variety of power generation sources, and has a focus on Carbon Conscious Energy. Specifically, gas-to-energy, wind and geothermal, and solar are highlighted focuses of the company. Any time a company pairs with the government, many opportunities of expansion are created because the military is seen as a reliable customer once commitments are made. Gulf Power just announced that it is partnering with the U.S. Navy and U.S. Air Force to build solar energy farms within its region. The planned implementation date is December 2016; however, in my experience with the military, it is highly likely that this date may be pushed back. If approved, it will still be a large revenue boost, and there will likely be a reduction in operating costs since solar requires less regulation than other options such as nuclear. It will not replace other forms of energy at the moment, but will supplement them. Georgia Power Company (Georgia Power) Georgia power services 2.3 million customers as of December 31, 2013. The majority of the customers are serviced in metro regions, with the fewest customers in Southern Georgia. Total Georgia Power kW Capacity Hydro 1,087,536 Fossil 8,791,427 Nuclear 1,959,852 Solar 705 Other (Diesel, Combined Cycle and Combustion Turbine) 5,746,409 Total 17,585,929 Although solar is the smallest of the generating capacity, Southern Co. has made it clear that solar is one of the focuses of the company as the country moves towards cleaner, safer forms of energy. Georgia power has an initiative called the “Georgia Power Advanced Solar Initiative (GPASI).” 2015 will begin the first year that four Power Purchase Agreements (PPA) will take effect totaling 50 MWs of utility scale solar generation to be purchased by the company. Southern Power Company (Southern Power) Southern Power recently announced plans to develop a 131MW PV solar project in Georgia. The electricity will power 21,000 homes and will be sold to three Georgia electric membership corporations. First Solar will be the engineer and contractor. Plans to begin this project are set for September, 2015. There will be approximately 1.6 million thin-film PV solar modules mounted on single-axis tracking tables. Alabama Power Company (Alabama Power) Alabama Power is the second largest subsidiary of Southern Company and its customer base is approximately 1.4 million homes, businesses and industries in the southern two-thirds of Alabama. There are 24 generating plants that range from Hydro, Coal/Gas, Gas, and Nuclear. The single nuclear plant has a total nameplate generating capacity of 1,720,000 KW. One concern is that with the major earthquake and tsunami that struck Japan, operating expenses may rise once reviews are complete of nuclear facilities in the US. This may result in higher capital requirements and increased costs associated with ensuring safety. Many of the capital expenditures include investments to comply with environmental regulations. Mississippi Power Company (Mississippi Power) Mississippi Power is another subsidiary of Southern Co. that operates utilizing multiple fuel sources. You will notice that the diversification of fuel sources is intentional, so that the distribution of each source can be modified to adjust to current price trends. Lignite, natural gas, and traditional coal are the primary sources of energy with 70% of the customers being fueled by natural gas. Mississippi Power is currently working on a $6.1 billion, 582-megawatt power plant in Kemper, Miss. This has contributed to increases in debt load and the costs have surpassed expectations. It has a coal gasification design called Transport Integrated Gasification. It will tap into lignite reserves, which will reduce shipping costs and stabilize prices in the long term. The progress of this project is important because of the sheer scope and cost. Another important factor will be the recapturing of CO2. The company will need to ensure that this new plant is able to capture the targeted amount (65%) because if there is any excess or does not comply with regulations, it could become a target, upping the cost even more. The projected completion date is mid-2016. The Commonality One common theme throughout all of these companies is the level of debt currently held by the company. The debt level has grown steadily over the past several years. The 2013 annual report reflects a total debt of $23.395 billion. In a low interest climate, this is OK, but this is something they will need to keep under control in a rising interest climate. An important point on their debt though is some of the forms of debt they hold. For example, Alabama Power established a wholly-owned trust to issue preferred securities. The investment in the trust is reflected as other investments, and the related loan from the trust is reflected as long-term debt. This total was $206 million as of December 31, 2013. A tactic used to maintain the control of debt in Alabama Power is through the conversion of long-term debt to short-term debt. While this is not generally a good practice, there are strategic reasons why this could be a good decision. From 2014-2016, the debt maturities are expected to exceed operating cash flows. The solution to this is for the company to take out short-term debts to cover longer-term debts. With the seasonality of the business, this is necessary and while interest rates are low, this tactic will benefit the business. Short-term cash needs are met through the paper program and through a SO subsidiary organized to issue and sell commercial paper at the request of the company. There are very specific actions being taken to ensure debts are taken care of and after their current projects are completed and implemented, the expectation is that some of the debts should decline. In the meantime, it is important to keep an eye on the allocation of their cash flows and how they control their debts. More items to consider are investments that are made to comply with imposed regulations. As mentioned previously, as CO2 emissions gain the attention of politicians, it will affect the operations of companies like SO. Swings in weather are generally good for power companies since colder days or hotter days require the use of either a heater or air conditioning. However, major disasters can have a drastic effect on SO (note the location of the nuclear power plant on the coast). Finally, I mentioned interest rates assisting or hurting their ability to pay off debts, this trickles down to the bottom line and expect EPS to be effected by the rise in interest rates that may come within the next year. Should I Buy It? (click to enlarge) The stock currently has an attractive dividend yield of 4.03% and a PE ratio of 21.4. Currently there are 2 analysts that rate Southern Co. as a buy, 4 analysts rate it a sell, and 8 rate it a hold. A look at the charts from 2014 makes it seem a bit rich for the typical growth of a utility company; however, expanding back to 2010 and before yields more information. A long, drawn out correction from 2012-2014 has given the stock room to grow in the near-term. Southern Co. has been reaching new all-time highs on a regular basis and is trading above both 50 and 200-day SMAs. The future growth will most likely not happen as quickly as the last year. In fact, the stock is due for a correction. While it is currently a bit pricey, the revenue growth has shown superior growth to the industry average of 5.8%. SO is sitting at 6.4%, and as a long-term growth strategy, this could be a promising company to hold for years. The future earnings potential are dependent upon a number of factors mentioned previously and since prices are regulated by the FERC, retail rates may be adjusted as necessary to accommodate the current economic climate. Earnings are due to be reported on February 4, 2015 and this should give a good indicator of where the company will go from here. Regardless of the earnings results, this stock is a wait and see in the short term, but I will buy it for the long term. In the event of negative earnings press, I will wait until after the stock has declined and shown support multiple times before purchasing it. In the event of an earnings beat, I may wait a bit longer until a reasonable correction has occurred.

Go Long SPY Now – Market Turn At Hand

The market has accounted for its fear of the ECB and Greece year-to-date, and I believe stocks have mostly sold off in 2015 because of rumors around these events. But as rumor fades into news, stocks are poised to enjoy a relief rally, and SPY is already off its lows marked on January 15. While the Greek election results are likely to revive some fear next week, I am already taking long stakes in stocks and view SPY okay to buy in increments. It’s time to start going long the SPDR S&P 500 Trust ETF (NYSE: SPY ), aka the U.S. market, as I see a turn sometime between last week’s low and the end of the month. If I am correct that the European Central Bank (ECB) action and the Greek election and its potential repercussions have greatly swayed currencies, commodities and stocks year-to-date, then a turn may be in store in the very near-term. My reasoning is based on my belief that stocks have mostly priced in worst case scenario fueled fear, and that reality will be much less scary than expectations. Stocks seem to have already found stability, with a recent bottom marked on January 15 for SPY; and many names are rising into their earnings events now, some of which I have taken long stakes in over the past week. I’ll talk about those in dedicated articles. The market has priced in a ton of fear year-to-date, I believe around the Greek election and its potential election to drop out of (or be dropped out of) the euro-zone thereafter if the big demands of its expected new leadership are not met. But, I expect the end result of events in Greece will prove much less threatening than the market has priced in, offering opportunity for relief rally as events unfold this weekend and next month. Thus, we appear to have set up for a sell the rumor, buy the news turn of events, and it’s about time to start buying in increments here. Volatility has dropped off significantly over the last two trading days, and I’m pulling my hair out for not taking that short position in the iPath S&P 500 VIX Short Term Futures ETN (NYSE: VXX ) I had been contemplating through put options. We may get another spike in the VXX Monday after the Greek election results come in, so there could be another opportunity yet. But as for the market generally, I think it’s okay to start taking stakes in stocks again and the SPDR S&P 500 is a great way to do that. I surveyed some of my Greek contacts and have contemplated the situation; there seems to be the possibility that risk may have been overly priced into stocks around the Greek election due on Sunday. The new disruptive political party Wall Street and Brussels are concerned about, Syriza, is not the threat to European and global stability our press indicates it is. Yes, Syriza will push for renegotiation of the terms of the money Greece owes its European partners and other parties, but it will not default on that debt in my view. In other words, a Grexit is not going to happen as far as I see it. SPY’s page at Seeking Alpha shows it is only down 1.2% year-to-date after gaining back roughly 2.9% since the January 15 close. Many pundits I’ve seen talk about the market seem to conclude the valuation of the S&P 500 Index is not so cheap, with an index P/E multiple of roughly 18.8X, versus historical mean closer to 15.5X. However, the index multiple on forward estimates is 16.65X according to the WSJ page linked to above. Let’s not forget that our economy is growing at an accelerating pace and that the unemployment rate has been decreasing at a better than expected rate. Europe has its stimulus now, but the region’s decline and even China’s slowing growth are not a huge a threat to our economy anyway; that is especially true now that gasoline prices have come down so much (I’m looking for oil prices to stabilize and rise soon). My friends, I say face fear and start buying stocks now in increments and more so as we get passed this Greek election event. It will drive fear again into stocks next week, but I expect that would only open further opportunity for U.S. investors to buy SPY and stocks generally for benefit later this year. This thing has been overblown. My mouth is watering over some of the valuations I see considering this economy’s strength, so I’m gritting my teeth and buying stocks.