Corporate Benevolence and Investment Strategies?

In the 1970s, a company called Merck discovered a cure for "river blindness," a disease that afflicted thousands (millions?) of people in the developing world. The disease was carried by a certain fly, which bites people, introducing bacteria that create tremendous itching and, in severe cases, blindness.

This wasn't an accidental discovery; Merck had another medication that they thought might work if suitably modified. Long story short, they had to spend millions of dollars to develop and test the medicine and prove it safe and effective on humans. There had been some hope that someone (charities, the World Health Organization, somebody like that) might help defray the costs of manufacture and distribution, but it never happened. Merck has given out some hundreds of millions of doses and impacted millions of lives, and never received a penny for this miracle drug.

It wasn't just this one drug, either—that was an extreme example, but Merck were not in the habit of maximizing income to the detriment of patients. In an interview on American Public Media's Marketplace radio program, a former CEO commented that the purpose of Merck was to relieve suffering and cure disease; if they did that, they'd get some money. This CEO did not think it reasonable to raise the price of any medicine any more than the rate of inflation. In his view, it was okay to "leave money on the table," since Merck could get a reasonable return while fulfilling their mission.

What would happen to such a CEO today? Would activist investors take over the board and replace the CEO with someone that would raise prices and stop the giveaways? How can Merck continue to give away medicines in today's climate of fear and greed?

And what, if anything, can I do as an investor to help companies like Merck continue to do acts of benevolence?

One theory of investing says to forget about benevolence and invest for maximum return. But wouldn't that tend to discourage, even extinguish, corporate benevolence of the "river blindness" variety?

One could imagine creating a stock fund concentrating on socially responsible investments, but if the returns aren't there, there won't be enough investors. The system of capitalism tends to concentrate wealth, as many have pointed out—perhaps most notably Professor Piketty in his Capital in the 21st Century; trying to counteract this tendency is like trying to fight the laws of physics.

Yet we must at least think about trying. Philanthropy on the scale of Merck's giveaway of the "river blindness" drug would be exceedingly difficult to get with individual donations or government subsidies. If Merck were of a mind to make money on the drug, no amount of government subsidies would be enough to supply the drug to all who need it. (Government subsidies can barely keep our 20th-century Caltrain system afloat financially.)

So I'm stumped, at least for the moment. I'm sure others have given a lot more thought to this, and from my understanding, Merck are still giving away the "river blindness" medication. So it appears that there's still hope. But a comprehensive answer? I've no idea.

Citizens?* Or mere taxpayers?[* I don't mean Citizens United]

In a recent Harper’s, Marilynne Robinson remarked that whereas our society used to have citizens (who may have a sense of identity based on their country, maybe even pride in or aspirations for their country), we now speak mainly about taxpayers. Both the citizen and the taxpayer are creations of political rhetoric, she wrote, pointing out the power of words to shape our thinking.

But I want to write about paying taxes. As a taxpayer, I’m pleased that my federal and state income taxes are lower than they might be. As a citizen, however, I think it’s outrageous that marginal tax rate is so low for someone with my income.

Back in the 1970s, the top marginal tax rate was about 70% for single taxpayers and about 55% for married couples filing jointly. But ever since the Reagan administration, the top marginal tax rate has been something like 39.6%. I’ve paid this rate. My income hasn’t decreased since that time, but my marginal tax rate for 2015 was 28%. Which is nuts!

Why is the national debt ballooning? Why don’t we have enough money to repair roads and bridges, and to pay our teachers a decent wage? Yes, I know that teachers are paid with state and local taxes, but the federal government also contributed to education funding; these federal subsidies have decreased dramatically since the 1980s.

I also know that we’ve wasted a lot of money fighting wars that we never should have started, and that we have furthermore wasted billions on “security theatre” at the nation’s airports. But if you say, “I’ll support higher tax rates when the government stops wasting money,” you’ll wait forever.

Those are problems I can't solve, but there is an issue I'm considering. I had solar panels installed on my roof last year, and consequently I'm eligible for a tax credit. The question is: Should I ask the federal government (read: "my fellow citizens") to pay for part of my solar panels?

Because tax credits—and, to a lesser degree, tax deductions—are expenditures. A dollar not collected because of tax deductions or tax credits is a dollar not available to fix a road or a bridge; alternately, it's a dollar that can't be used to pay a park ranger, or a dollar we've got to borrow...

Why should I ask my fellow citizens to pay for [part of] my solar panels? I understand the offer is there, and that it's permissible for me to receive it, and as a taxpayer I "should" take it, as I'm entitled to.

But as a citizen, do I really have an obligation to? Following Kant, do I want my fellow citizens to take every legal tax credit and deduction available? As a taxpayer, all I'd care about is myself, but as a citizen...

So there's my quandary.

Atmos Energy? Really? Oh, it's proflowers

The really interesting-looking email appeared in my inbox today. It urges me to click on (some ".nl" link) to find out why natural gas is the best choice for clean and responsible energy use, and urges me to click on (another ".nl" link) to see my latest bill.

At first, I wondered if this might be the natural gas equivalent of telephone slamming, but why would my gas supplier be in Europe? Then I looked at the "To:" address on the email and my doubts were erased.

That's right, I used a uniquified email address when ordering flowers from ProFlowers. The scammers claiming to represent "Atmos Energy" (which may as far as I know could be legit) got my email address from proflowers, who are now on my hate list.

A word to the wise...

Two financial articles from The Atlantic

1. Why Wall Street Always Blows It
   The magnitude of the current bust seems almost unfathomable—and it was unfathomable, to even the most sophisticated financial professionals, until the moment the bubble popped. How could this happen? And what's to stop it from happening again? A former Wall Street insider explains how the financial industry got it so badly wrong, why it always will—and why all of us are to blame.
   by Henry Blodget (December 2008 ATLANTIC MAGAZINE) link
2. The Great Stock Myth
   Why the market’s rate of return—and your nest egg—may never recover
   By Megan McArdle
   Business September 2010 ATLANTIC MAGAZINE link

Yahoo! store merchant sends my security code in email!

So I just placed an order with a Yahoo! store merchant and got an email that looked like this:

This email is to confirm the receipt of your recent order from <merchant name>.


You can always find out the current status of your order by going to
https://order.store.yahoo.net/blahBlahBlah

Date     Sat Jan  2 08:22:10 HST 2010
Ship to  Carol Park
         <our street address>
         <city/state/ZIP>
         US United States
         <ZIP extra 4 digits>
Bill to  Same
SC       <the real 3-digit security code from the back of my credit card!>
E-Mail   <my email address> (emailed)
Via      US Priority Mail
Payment  <CC type (Visa or MC)>


Name             Code               Qty   Each  Options
-----------------------------------------------------------------
blahBlahBlah...

I was rather unhappy to see the real 3-digit security code right in the middle of the email, and sent the merchant a note asking them to please tell Yahoo! to not send the security code. Maybe it was the merchant who set the options up wrong? I'm not sure. Anyway, I'll let you know when they tell me they've got it fixed. Here's what I wrote to them:

Folks, 

Please forward the below to whoever manages your web-order system, 
maybe some yahoo.com person.  Short version: I'm quite concerned 
that my credit card's security code was sent in email in plain text. 

------------------------------------------------------------------------

Dear web/mail/order system design/maintenance staff:

PLEASE do not send the card's security code in email!

The below email had a line with the credit card's security code
in cleartext.  It looked like this:

SC       123

(I changed the digits; that's not my real security code.)

The code is called a SECURITY code because only the card holder
is supposed to know it!  It's one thing to enter the code over
an SSL connection (https:...); it's quite another to send it in
plaintext email.

Please let me know that you've fixed this, so that I can feel
more comfortable ordering stuff from other Yahoo! store merchants.

Thanks and

Happy new year,

Collin Park (the below order is a gift for my wife)

*** Your original message follows ***

<merchant name> (through Yahoo! Store Order System) wrote:
> This email is to confirm the receipt of your recent order from <merchant name>.
> 
> 
> You can always find out the current status of your order by going to
> https://order.store.yahoo.net/OS/[[this part elided]]
> 
> Date     Sat Jan  2 08:22:10 HST 2010

[[...elided...]]

I'm also going to let them know that I put this up on my blog.

Did Christianity Cause the Collapse?

I read the title of Hanna Rosin's piece in the Atlantic, and was immediately annoyed. "That's like asking of Islam caused 9/11!" I said to myself.

But wait, we asked that question a lot, didn't we? And many thought "yes" even if they didn't articulate that explicitly. Which brings up the question, "What is 'Christianity'? What is 'Islam'?" Or, put differently, "Who is a 'Christian'? Who is a 'Muslim'?" How you answer that question (either one) determines what you'll think about whether those religions caused recent events.

One possible answer to "Who is a ______": "Whoever I think is one!" This had disastrous consequences for an Coptic Christian, from Egypt, who was shot by some idiot here in the US, because said idiot thought the guy was a Muslim and therefore affiliated with whatever group flew airplanes into the World Trade Center.

Of course, there are people who think everyone from North America is a Christian. Britney Spears, Hugh Hefner (if anyone remembers him anymore), those pro wrestlers on WWF, and Carrie Prejean -- all Christians, right? Oh, and Adolf Hitler was a Christian too, right?

Is a "real" Christian one who does what Jesus taught, and a "real" Muslim one who does what Muhammad taught? What documents are used to determine what these prophets said, and who gets to decide? For Jesus, is it the four gospels? For Muhammad, is it the Qur'an only, or is some Hadith (which?) included?

Let me short-circuit the next thing: there is nobody that follows all Jesus said: Love your enemies, turn the other cheek, sell your possessions and give to the poor. Some do some of that more than others, but nobody does it all.

Here's another alternative: we could say "A Christian is anyone who says they're one." and the same for Muslims, Jews, etc. But that brings some disagreement into the mix. There are some Christians who would claim that <some_unfavored_person> isn't one, because of this or that. Again, same for Muslims, Jews, etc. OK, so here's one answer to Ms. Rosin:

If by "Christianity" you mean "what Jesus taught" then the answer is "Absolutely not!" Jesus said his kingdom isn't of this world. There's no record that he ever owned any property. When people asked him about paying taxes, he even borrowed a coin to make his point. He had, by his own account "no place to lay his head."

But if "Christianity" means "whatever was taught in any building labeled 'church' by someone with the title 'pastor'," then sure it caused the crash. It also caused the Jonestown massacre, the Branch Davidian disaster, and all kinds of other awful stuff. That definition of Christianity isn't too different from what some people in the Muslim world call Christianity -- viz., anything coming out of North America.

But let's see if I can clarify that a bit.

To answer “Did Christianity cause...” we need to know...

... what's uniquely Christian. In other words, if the crash resulted from some teaching X, then it only makes sense to blame the crash on Christianity if:

• X is taught by Christians and not by others; and further if
• X is a significant contributor or a deciding factor in the crash's occurrence.

So it seems to me that to answer Ms. Rosin's question we have to decide what's uniquely Christian -- i.e., stuff typically taught by pastors in churches but not taught much outside of churches by people who aren't pastors. I just made this definition up, but in a pluralistic society I think it may be a helpful way to talk about what's unique to Christianity as practiced in the US, but without getting into theology, hermeneutics, the authorship of Mark 16, or other rather esoteric issues. Here are a few things with my shot as to whether they're unique to Christianity:

• You can and should be rich: NO
  • It's taught a lot outside churches
  • Though it's taught in some churches, it's not something that a majority of churches would agree with
• You can have your sins forgiven through the sacrifice of Jesus Christ: YES
  • Taught in most churches, not taught much outside churches
• You should handle poisonous snakes and drink poison: NO
  • Though not taught much (if at all) outside churches...
  • it's not taught much in churches outside a very small subset in a certain geographical area (see Salvation on Sand Mountain)
• You should give money to the poor: NO by this definition
  • Taught both inside and outside the church: it's taught in Mosques/Masjids and synagogues as well as by some non-religious non-profits.
    (Side note: according to this article by Jonathan Haidt, religious people tend give more money -- and blood -- than secular folks do.)
• It's OK to lie, kill, steal from people outside your group: NO
  • Taught by a minority of churches but not by most.
  • Taught by organizations outside the church.
• God is holy, and man is not: NO by this definition
  • Taught by churches, but...
  • ALSO taught in other religious traditions, notably Islam and Judaism
  In other words we could say this is part of Christianity but it's not uniquely Christian.

So here's my final answer: No, nothing caused the crash that's uniquely taught by Christianity. Greed is taught in many places outside the church, and is not universally or generally taught inside the church.

I'd say that rather the crash was brought about by greed. Subprime loans, the excesses of the credit default swap market, the stock bubble -- all those things were only symptoms; the real cause was greed. My opinion.

You got $10 on paypal! What's it good for? Not bloody much!

So some days ago, I took a survey for somebody, JetBlue I think.

The other day I got email from paypal... "You have $10.00!"

"Great," I thought. "I've been wanting to order a book... Your God Is Too Safe -- I wonder if I can get it on Amazon for less than $10?"

Yes I can! But they don't take paypal.

Ebay does, though -- so I found one on offer. 99 cents, $5 shipping (yeah right). So I win the auction, I've got $10 in my paypal account, so I say, "Pay for the item."

No joy! I have to send those guys a BANK ACCOUNT number in order to send even one penny anywhere!

However, I have received dire warnings never to give a bank account number to PayPal -- not an account with any money in it, anyway.

So I'm not doing that. Poking around the paypal site, I see I can request a check. But wait, they want my credit card information -- number, expiration date, and security code??!?

Why do I feel like I've got to take a shower after visiting this website?

---

Update... a few days later

Figured it out. Got a "virtual account number" from citibank -- this is an account that will expire at the end of, hmm, next month. So I still have a window of vulnerability, but it's not as long as my sort of "real" CC#. After giving them that information, Paypal let me pay for my eBay purchase using the funds in there.

I had them send me a check for the rest (less $1.50 handling fee -- bah!). After telling them that, though, I had the idea I should have sent the whole amount elsewhere -- to some cause (like Neoffice, FSF, world vision, or that guy who posted instructions on making boot floppies).

Oh well. Anyway I now have a book on its way to me, so that's what the $10 was good for. Now I just have to watch the credit card account to make sure no untoward activity comes by way of the virtual account. (Hey, I wonder if I can deactivate it now...)

Withdrawing money from a Fidelty 529 plan

I just got off the phone with a Fidelity rep, and I am not too happy with them. Here's the deal.

Suppose you put $2900 (e.g.) into a 529 account with Fidelity in 2004. Over time it grows to $3500, and in 2007 you pull out $3500, emptying the account.

Early in 2008, you get a 1099Q form with this exciting information:

• Box#1 says you took out $3500.
• Box#2 (earnings) says you earned $3500.
• Box#3 (basis) says $0.00

In other words, the 1099-Q says that $3500 came out of thin air. It might be S/T capital gain, L/T capital gain, dividend payout, or gambling winnings -- the 1099Q doesn't say.

Well, fortunately it was only back in 2004 so I still have records showing how much I put into the account, so the cost basis is actually knowable. Especially since this account only had one deposit (the opening one).

Now if these had been mutual funds in a non-529 account, they would have (at least I assume they would have) tracked the cost basis, but for 529s they don't do it.

Bottom line: If you use Fidelity for your 529 accounts, and if you spend anything at all on non-qualified expenses (living expenses, for example), wherein you will want to know the cost basis for your account (so you can calculate earnings), then you are SOL (simply out of luck). So keep track of those contributions yourself!

Sell my stock? Exercise my options?

The following is not professional advice and is intended just to tell you things I've learned from our financial advisor. Consult your financial advisor before making any big decisions. Your mileage may vary. No warranty, expressed or implied. Blah blah blah.

OK, so lots of people want to know what's going to happen to stock prices -- especially if they own shares in a single company, as distinct from mutual funds and the like. Nobody knows, of course; just remember the time "When Genius Failed" (on Amazon, or Google "LTCM").

My financial advisor recommends against that -- the risk inherent in owning single stocks is not, for investors like me, sufficiently offset by the expected gain. But if you hold options -- for example if you've been granted options as an employee -- then you have a chance to reap some gain if the stock rises.

So when should you sell? Two answers:

1. if you need the money from the options right away; and
2. as part of a plan to diversify your portfolio.

The first one is obvious. But what does "need" mean? If you need a few thousand bucks, and you could afford to borrow that amount, should you borrow, or should you exercise and sell? I'll tell you: I don't know. But if for example you want a pile of cash for a down payment on your home (so you don't want to borrow it), that might be a case for exercising and selling. But see your financial advisor.

About diversifying the portfolio: Here's a strategy and some tactics that I use. My financial advisor suggests that I look at the amount of money available in vested options. That is, pick a day and say, "If I were to exercise everything I could and sell immediately, how much would I make?"

Exercise enough options (using whatever strategy) to make 25% of that amount, and sell the stock immediately. DO NOT HOLD the stock, especially if you have qualified options (or "ISO"s). Take your profits and put them into a diversified portfolio.

If you do that once a year, you'll reduce exposure to both upside and downside potential of that single stock. When should you do it? Well, if your stock has traditionally had 12-month highs in October in every one of the past dozen years, and it's never had a low in October, then do it in October by all means! But here is what I do.

In one year, I exercised my 25%-of-vested-dollars near the beginning of January. And near the end of December. The next year, exercise nothing. Here's the method to my madness. Suppose I exercise twice in 2005, and not at all in 2004 and 2006. For my 2005 tax return, I get a big bump in income. But there's no penalty, because the 2005 withheld is higher than my 2004 actual tax liability.

Normally when you owe a pile of tax like I did for the 2005 return, you want to make quarterly tax payments. But in 2006, there's not going to be any stock option exercise (especially there won't be any ISOs exercised) so there is no need for estimated tax payments -- in fact I'll get a refund on my 2006 return.

Then in 2007, I'll exercise in January and December, owe a pile of tax on my 2007 return, but again no penalty because my 2006 actual liability is lower than my 2007 withholding.

Now is January/December a good time of year as regards my company's stock? I'm not sure. But my company moves with the market, so if it's cheap, the market is also likely to be cheap, and since I'm basically buying mutual funds from those profits, it doesn't really matter.

Really, this strategy is all about managing risk; it's not about timing the market. Timing the market can lead to spectacular gains -- or spectacular losses. My performance as a market timer is atrocious so I fundamentally don't believe in it.

Is Citibank evil?

The lovely Carol is opening the mail and she says, "Here's a new Master Card®. It has your name on it, so I guess you should be the one to activate it." We both thought this was just a renewal of our existing card, so I walked over to the phone. As I looked at the mailer, I realized that this was for a completely new account.

Here's what I got:

1. A tri-fold mailer with the card in the middle. "Please sign your new card immediately," it says.
   
   In the bottom third of the sheet, it says: "Just follow the steps below and begin saving with your new Citi® MasterCard®" and there's a great big "0% APR" sign. But if you read the fine print, you discover that it's for a limited period and for certain purchases. If you charge a $95 dinner, you pay their usual rate unless you pay the bill off in full. But if you charge a $105 dinner, you get 0% APR for 3 months. I don't know what happens after that.
2. Privacy Notice.
3. Card Agreement
4. Supplemental Pricing Information. This last was the most interesting.
   • Standard Purchases get a 12.24% APR.
   • Standard Cash Advances get a 23.24% APR.
   • Default gets 32.24% APR.
   That "Default" is astonishing. Have you ever missed a credit card payment? We have. It's not because we didn't have the money; it was because we weren't keeping track closely enough. We pay the thing off, but if you're a day late...

So I thought, this looks to me like an unsolicited credit card offer, because I sure as heck didn't ask for a card with 32% APR.

Underneath the card is this lovely notice:

If you do not want the Citi® MasterCard®, call 800-432-0282 and we will close your account.

Now why should I have to call these clowns at all? Is it actually legal to offer unsolicited credit like this?

OK, so I humored them. I dialed the number, and keyed in my 16-digit number: 5256 xxxx yyyy zzzz. Then they ask me for the last 4 digits of my social security number! "You gotta be kidding!" I say.

"We did not get your response. Please enter the last 4 digits of the primary account holder's social security number."

I'm thinking maybe a human will come on at some point. "There is no way I'm giving you any part of my social security number," I say.

The machine asks again, and I just hang up.

So, I really don't like this. There are several things I find extremely offensive about this:

1. UNSOLICITED and UNWANTED (sorry for SHOUTING but this is REALLY OFFENSIVE) "offer" of credit, with an...
2. astonishing, ruinous APR.
3. Training people to give out the last 4 digits of their SSN over the phone. What % of the phones in this country are cordless these days? Especially in homes where you're sending this sort of UNSOLICITED offer of credit? So you're training people to BROADCAST their SSN!

I did not "activate" the card, but I wonder what information is needed to activate it? If it's just the last 4 digits of the SSN, that ought to be criminal, because as the recent HP scandal showed, it's easy enough to find someone's SSN, even if they've been quite careful with it.

Well, I feel a little better after venting. I'm gonna share this information with Consumer Reports and with Knightsbridge Castle.

Financial Planners, Stock Pickers, and Coin Flippers

Started January 21 and left in abeyance for a couple weeks...
There has been a discussion about financial planners on the "hp alumni" mailing list lately, triggered by someone wanting a fee-based financial planner. There's a lot of discussion about how to pick an advisor, how to pick investments, how to think about investments, etc. Someone talked about how financial planning isn't only about investments.

Here's a bit of our journey.

First, like many couples, we have somewhat disparate views about money. One of us would like to spend more, the other is never quite sure we're saving enough. Words like "deprived" and "paupers" have been used, blood pressure has risen. We love each other a lot, but that doesn't mean we don't have conflicts. How much is enough? What is our vision for what we're going to do when I really don't want to do any more of the high-tech thing, the commuting, the political stuff in the office, and all that? (Not to imply I'm unhappy with my job, for any of my colleagues reading this -- but there are some days I would rather catch up with things around the house, or at least away from the office.) We have no disagreement that we are saving proportionally more than our friends are and living more simply. That said, we have been to Europe three times since 1999 (twice including the kids), etc

Anyway, one thing we needed was some clarity about how much saving is enough. Another thing we wanted was some advice about how to invest the "retirement" funds. I wasn't sure if we needed ongoing help (I figured we could just consult the guy once a year for rebalancing, etc.), but we ended up opting for it.

So, although our planner does a bunch of financial stuff, a significant part of what he did for us was... getting us to talk about our visions for the future. What are the top 3 things we want to see happen before we die? If you were to die tomorrow, what would be your regrets? If you knew you were going to die some time between 5-10 years from now, if you had some oracular way to actually know that (but also that you'd feel fine up until the day you dropped dead), what would you change? He got us to talk about all this, to get closer to what a shared goal might look like for us.

---

OK, it's now 2/5. So here's a comment about stock pickers. I have not done the research myself, but to me it seems credible. Supposedly if you look at how well stock pickers do over time, most of them (not all) do no better than chance. (This kind of story comes out from time to time in the press.) There are exceptions! Peter Lynch and Warren Buffett come to mind. But it's too late to ride Peter Lynch's wave - he quit managing Magellan years ago. The other thing about people like Peter Lynch is that in order to have made a bunch of money with him, you would've had to have picked him out from the crowd before he began his 18-year (or however long it was) streak.

An illustration that made a lot of sense to us was the coin-flipper analogy. Imagine if you had hundreds of guys flipping coins daily for some years, and you reward them for flipping "heads". The vast majority of coin-flippers get results that statistics says are within a range attributable to chance, although for short periods some of these guys look like geniuses and others like idiots. A few, like Peter Lynch, consistently flip more "heads" over a long period of time than statistics would predict -- that is, they get results that are so good that it's not reasonable to say they just got lucky.

I just remembered a guy who retired from my former employer. He decided to go to the racetrack, and claimed he could beat the house. I found it astonishing that someone could actually believe something like that, but he said that by looking at the horses, etc., he could get better results than chance would forecast. Maybe he was right; I don't know. I suppose I'm less willing than some (most?) to believe this scheme could work, and maybe that's why we chose a planner over a stock picker. More on this below.

The proposed alternative, which made sense to us, was to diversify, picking a basket of stocks slightly overweighted in small-caps. The other thing is to watch the asset allocation. Which brings me to the Fisher Investments thing. We got the mailings, responded to one, and ended up talking with one of their sales guys in our home. He was very convincing. The essence of his pitch was that they have very smart people who correctly guessed when the bubble was going to burst. Oops -- I mean "correctly forecasted" when the bubble was going to pop, and got their clients out of the market before the big slide. The conclusion (although everyone says past results are no guarantee of future performance) that we were supposed to reach is that the very smart people at Fisher will predict future trends as well as they did in the past.

I think this is one of those personality-related or maybe temperament-related things. Do you want to base your investments on a group of very smart people who correctly forecast big movements in the past, or do you want to instead follow a system that doesn't rely as much on "very smart" people being right (or lucky, to take the opposite view) in their forecasting the markets?

Basically, there are two ways to do well when the stock market has big fluctuations. One is to guess or forecast when things are about to head downhill, and move a lot of money out of equities into cash for example. Then you have to forecast when stocks are going to move up again, and start buying.

The other way I'm aware of is to rebalance often enough to take care of things. So if we were hypothetically 70% in equities, 15% in bonds, 10% in real estate, 5% in cash, and stocks suddenly doubled, we'd rebalance the account to 70-15-10-5. When the market crashed, we'd rebalance it again and take advantage of rising stock prices that way.

This system requires insight and intelligence up front (and discipline in execution), but it does not require a bunch of very smart people to be right about when the market is going to soar or crash. You might make a little less money this way than by betting on very smart people, but you might lose a little (or a lot?) less money this way if the very smart people (think LTCM) turn out to be wrong.

That's essentially how we chose a financial planner over an investment company. No, it wasn't completely rational or logical. But what decisions do you make that are completely logical or rational? Only trivial ones! The really important ones -- who you will marry, whether to make a career move, how to handle the kids -- those are all made with the heart and the stomach. The head, too, but not only the head.

So we believe more in systems than in the ability of individuals to forecast the market.

Now, how do the accounts work? They're held in our name at Schwab. All the statements come to us. (they go to the investment advisor, too.) The investment advisor has the power to make certain trades, to withdraw their management fee, and to sell stuff and send the proceeds to us. Schwab doesn't let 'em sell stuff and keep the proceeds. This is all written on forms from Schwab. I don't know much about this industry, but it sure seems like a smart move on their part to provide this kind of account structure.