Celebrating 25 years of fee-only financial planning       
  • Otto & Associates, Inc.

    Offices in Katonah, New York and Norwich, Vermont

    Comprehensive Financial Planning: Otto & Associates, Inc. is a Fee-Only financial planning firm providing a full range of financial planning services. These include: investment management, retirement and estate planning, saving for college, insurance analysis, tax planning, budget and cash management, and charitable giving.

    Fee-Only: “Fee-Only" means that we do not represent any companies, receive commissions for selling particular products, or accept compensation from anyone other than our clients.

    Fiduciary Responsibility: Otto & Associates, Inc. adheres to the fiduciary standard. This means:
    • Acting in the best interest of the client at all times
    • Avoiding conflicts of interest and disclosing any potential conflicts of interest that cannot be avoided
    • Providing oversight to assure that all aspects of a client’s financial life are in order
    • Acting in good faith and with candor in every encounter
    • Not accepting referral fees or compensation contingent upon the purchase or sale of financial products

  • What We Do

    At Otto & Associates, we believe that making sound financial decisions begins by examining a broad range of issues. Today more than ever, financial questions are interrelated. Thus, we take a comprehensive look at our clients' financial profiles and offer a balanced, integrated strategy to best serve their full range of needs. Otto & Associates works with you to solve basic to complex financial questions and - more importantly - help you achieve your life's financial goals.

    The first step is an initial consultation session. Prior to this meeting, we gather documents and information that will help us to understand your overall financial picture. This first session begins a process of assessing the current financial state and looking at the long-term financial future. This meeting can be useful at all stages of life, and is appropriate for young couples buying a first house as well as for individuals who are ready to retire. At this first meeting we give feedback based on the information we have gathered, and also use it as a time for all of us to ask additional questions. The charge for the initial consultation is $500 and the meeting usually lasts for about an hour and a half. Financial issues often need monitoring on an ongoing basis, particularly with investments. Because of this, many clients desire an on-going financial planning relationship.

    Our fee for ongoing financial planning is an annual charge of 1% of investment assets per year paid quarterly in advance, with a minimum of $250,000 of investable assets. This fee is reduced to 0.5% for assets in excess of $1,250,000.

  • Investment Management

    Otto & Associates manages investment assets almost exclusively through no-load mutual funds, Exchange Traded Funds (ETFs), and private investments, where appropriate. Our goal is to help clients achieve the security of a diversified portfolio that will provide a solid return without undue risk. We buy and sell investments following guidelines established with our clients and, because we do not accept commissions, our clients receive unbiased asset evaluation, selection, and management.

  • Retirement Planning

    Otto & Associates helps to prepare clients for life after paid work ends. We help clients answer such questions as: "Will I be able to maintain my standard of living when I retire?" and "Which retirement option offered by my employer is best for me?"

  • Estate Planning

    Otto & Associates helps to ensure that the transfer of a person’s wealth and assets after his or her death is done in a smooth and systematic manner. We will help to establish and review estate documents including wills, trusts, health care proxies, and powers of attorney.

  • Saving For College

    Otto & Associates has expertise in college planning, including 529 plans. 529 plans are tax advantaged investment vehicles where money is designated to pay for college expenses.

  • Insurance Analysis

    To protect against unforeseen events, Otto & Associates will examine and evaluate existing life, auto, homeowners, umbrella liability and other insurance policies to determine whether clients have adequate coverage. We do not sell any insurance or receive referral fees when recommending new insurance.

  • Tax Planning

    Otto & Associates reviews taxes annually and works closely with accountants to make sure that tax considerations are an integral part of financial decisions.

  • Budgeting And Cash Management

    Otto & Associates provides advice on loans, credit management, mortgages and refinancing, savings, and gifts to family members.

  • Charitable Giving

    Otto & Associates encourages clients to be generous and thoughtful in their giving, and helps them to understand the tax implications of various gifting options.

  • our staff

    David W. Otto

    David Otto founded Otto and Associates in 1991. Prior to his becoming a CERTIFIED FINANCIAL PLANNER™ professional, David had a career as a clergyman, serving for 10 years as the pastor of a community church in North Salem, NY, and then as the director of the Pastoral Counseling Center in Poughkeepsie, NY.

    A graduate of Morningside College in Sioux City, IA, David holds a Master of Divinity from Union Theological Seminary in NY and a Doctor of Ministry from Andover Newton Theological in Boston. He received his financial planning training through Pace University, during which period he also founded a corporation to manage real estate financing.

    In addition to his professional commitments, David has been a volunteer in both the financial planning world, where he has served on committees of the National Association of Personal Financial Advisors (NAPFA), and in the communities in which he lives. In Katonah, he has been president of the Board of the Katonah Village Library and a member of the Zoning Board of Appeals, and in Norwich, he has been president of the Board of High Horses, a therapeutic horseback riding organization, and trustee, treasurer and secretary of the Montshire Museum, a creative science museum. David spends most of his time in the Norwich office and also works in Katonah.

    Deborah Levy Maher

    Deborah Levy Maher joined Otto & Associates in 1997. She is a CERTIFIED FINANCIAL PLANNER™ professional and holds a BA with honors from Vassar College. She is a member of the Financial Planning Association and has served on the Regional Board. Deborah was formerly a Vice President of Chase Bank and its predecessors Chemical and Manufacturers Hanover Trust, where she worked in a variety of lending and relationship management positions. Her volunteer work includes pro bono financial planning and helping local community groups including Temple Israel of New Rochelle. She and her husband have three children.

    Susan Otto Goodell

    Susan Otto Goodell joined Otto & Associates in 2007, after a 15-year career as a teacher at the Newbury, VT Elementary School. She also devotes time to teaching adults and children with disabilities in the High Horses Therapeutic Riding program. Susan is a co-owner of Otto & Associates and brings with her to the Norwich office a familiarity with the Upper Valley and expertise in working with younger families and the varied financial issues that arise for them. She is a graduate of Bates College, has a Master’s Degree from Antioch New England, and is a CERTIFIED FINANCIAL PLANNER™. She and her husband live in Newbury and have two children.

    Kathy Patton

    Kathy joined Otto & Associates in 2007. She is a Registered Paraplanner (RP®). Kathy’s major area of strength involves creating ways to streamline the office processes and procedures. She received a BS from Georgetown University, after which she worked at Goldman, Sachs & Co. for 14 years. When Kathy is not at O&A she spends her time as an active member of the Board at the Bedford Free Library and as a chaperone and Treasurer of the Fox Lane Ski Club. She and her husband live in Bedford and have three children.

    Joan Poulin

    Joan Poulin joined Otto & Associates in an administrative capacity in the spring of 2012. She received a BA (Finance) from Pace University. She was a relationship manager for financial products at the Royal Bank of Canada for 11 years. Joan enjoys contact with O&A clients, organizing and helping to host events, and being a team player. She is an avid reader and an active member of her temple. She and her husband live in Somers and have two children.


    Fritz came to O&A as "office dog" in 2003.
  • November 2014 - INTRODUCTION

    With the holidays only weeks away, we hope the November O&A Newsletter arrives in time for you to read it before your house is full of company or you are about to head out the door to be with family and friends elsewhere. We’ve begun this Newsletter with an article on a topic not usually addressed in financial planning publications, that of how the medical community treats aging and dying and why it should matter to us all. We hope that our offer to send you a copy of Atul Gawande’s Being Mortal might open the door for discussions of this vital topic as you visit with people who are important to you in the upcoming months.

    What follows are articles on annuities, modifications in client portfolios, and some wisdom from famous investors spanning the past 80 years. As usual, we close with Office Matters.
    David W. Otto, Editor

    read more

  • November 2014


    With the holidays only weeks away, we hope the November O&A Newsletter arrives in time for you to read it before your house is full of company or you are about to head out the door to be with family and friends elsewhere. We’ve begun this Newsletter with an article on a topic not usually addressed in financial planning publications, that of how the medical community treats aging and dying and why it should matter to us all. We hope that our offer to send you a copy of Atul Gawande’s Being Mortal might open the door for discussions of this vital topic as you visit with people who are important to you in the upcoming months.

    What follows are articles on annuities, modifications in client portfolios, and some wisdom from famous investors spanning the past 80 years. As usual, we close with Office Matters.
    David W. Otto, Editor


    When was the last time that you were so engaged by a book of non-fiction that you couldn’t put it down? That happened to me recently with the new book Being Mortal by Atul Gawande, a surgeon who practices at Brigham and Women’s Hospital in Boston and teaches at Harvard Medical School. Gawande, who writes regularly for the New Yorker, focuses his book on the issues surrounding the last chapter of life, and he begins with the acknowledgement that, naturally, we all are going to die. The author points out, however, that until the last two or three centuries, we lived an average of fewer than 40 years, and it is only in recent decades that so many people are living into their 70s, 80s, and beyond. He is of the distinct belief that we are not doing a good job of shepherding and supporting people in the final years of life, and he is the most critical of the medical profession itself.

    In Gawande’s view, the medical field has become the fix-it-up profession for oldsters. As we are more proficient in curing illnesses, or at least learning how to live reasonably full lives with less than perfect health, the focus has been on pushing back the boundaries on “incurable” diseases. In the process we have become less adept and less humane in our ability to manage and support people whose health is unlikely to improve.

    It was not primarily Gawande’s work as a surgeon, however, that brought him to this point of understanding, but rather the deaths of three members of his family, each of whom had quite different experiences in the final years of their lives.

    His grandfather had an extraordinarily long and atypically happy old age, dying at age 110 in a small village in India, surrounded by family members who cared for him. His was a death no longer typical in the Western world, but more common in years past when people lived shorter and more local lives. Those few who made it to old age were regarded as wise and held in esteem. They also normally lived with family, often in the family home, inhabited by successive generations. While all was not idyllic in such situations, which was also true of Gawande’s grandfather, (when he was well over age 100 he had a fight with a son, who also lived in the house, and got so mad he moved out for two months to live with another relative), his was the kind of empowered aging to which most of us aspire. But few people today can depend on that scenario at the end of their lives.

    In another death which Gawande describes, his wife’s grandmother went through a much more common, not to say awful, process. She had spent her life as a self-sufficient New Englander but began to lose more and more of her abilities. She was “not safe to live alone, not safe to drive, not safe to manage her own finances – she was [eventually] not safe to live at all, really, yet condemned to live on.” Gawande shows how difficult it can be to find a balance between a sterile, safe, and seemingly meaningless life that no one enjoys on the one hand and, alternatively, living with limitations while continuing to find satisfaction in life. The grandmother eventually moved to her own apartment in a CCRC (Continuing Care Retirement Community), but did not like it from the first day and it was not good for her. After several falls, she was moved to the nursing home part of the facility. By that time she had lost “any meaningful resemblance to what she would call living.” A few months later she died. As medical science develops more treatments for aging conditions, the grandmother’s situation is likely to become increasingly typical unless we radically change our approach. On that matter, Gawande has a lot of ideas, and documents some of the more creative projects that are being tried in the U.S.

    The third person included as a central character in the book is Dr. Gawande’s own father. “In his father’s case, it was disease, not age, which ultimately forced a careful consideration of the meanings of ‘life.’” Dr. Gawande’s father was also a surgeon and continued operating into his 70s when a malignant, inoperable tumor formed on his spine. “His surgeon’s hands were the first to go.” Gawande and his father had always been close and when his father was diagnosed with the tumor, the son was better prepared to deal with his father in a more humane manner. Although medication, which was the option his father chose rather than a recommendation for surgery, radiation treatment, and chemotherapy, allowed him to work for many more months, when his father could no longer practice medicine, he functioned pretty well for another year before he was at risk of losing the use of his limbs as a result of the tumor. The elder Dr. Gawande, with the vital help of the author as well as one other particularly sensitive doctor, was able to negotiate a life that continued to hold meaning until the very end. That was his clear goal; he was not focused on simply keeping his body alive as long as possible. Not surprisingly, as the book demonstrates with many real-life stories of people whom Atul Gawande met as he got to know people who were aged or had debilitating medical conditions, this focus often had the effect of actually keeping them alive longer than would have been likely with aggressive treatments. That was also true for his father.

    A review of this book appeared in the NYTimes on October 6, 2014. It was written by another physician, Abigail Zuger, who has thought clearly about some of these same issues and brings an enlightened perspective to her review. She suggests, only partly in jest, that we should not allow members of the medical profession to provide services to older patients until those doctors reach age 50. The reason? Younger physicians have only one orientation, which is to be specialists in preserving life, whatever the cost, both financial or quality of life. Being Mortal is a book about the necessity for the medical profession, and all of us, to look closely at these issues, according to Zuger.

    Why does this article appears in a financial planning newsletter? We at O&A are regularly involved with financial issues and aging. It is clear that there is a need for strong voices helping people to accept aging and the limitations that come with it in order to find ways to live as fully as possible.

    The O&A staff seek to insure that clients will not run out of money before they die. But we also want our clients to consider what their lives have meant and how they want to be cared for at the end of life. What can you do to make arrangements and make your wishes known about all aspects of growing older? Without some serious thinking and clear instructions, it can easily happen that your care is left to the medical profession. We believe that discussing these issues in advance is good for all involved and we encourage our clients to take the lead in these vital discussions. To read Being Mortal is an excellent first step. If you would like us to send you a copy, please contact the office.

    [As we go to print, the New York Times Sunday Book Review has published another exceptionally good review of Being Mortal. The date is November 9, 2014.]


    I recently attended my wife’s high school reunion in Iowa. One of her class members (I’ll call him Karl), whom I have gotten to know over the years (this class of 30 members has had a lot of reunions), told me that after President Obama was elected, he feared the economy was only going to get worse and had conveyed to his broker that he wanted protection from a declining stock market. The broker recommended putting all of his money in annuities, advice which Karl followed. His decision, based on politics and questionable financial logic, raised some questions for me.

    An annuity is a stream of payments made by the insurance company that sells the annuity, normally for the life of the person. Technically, Social Security benefit payments are annuities, as are company pensions. But generally, when discussing annuities we are referring to an insurance product that is purchased with a lump sum of money that guarantees to pay to the annuitant, in its most simple form, a monthly sum for the rest of his or her life. There are all kinds of variations on this theme: a 100% continuing payment to a spouse if s/he survives the annuitant; something less than a 100% continuing payment to the surviving spouse; a “ten year certain” stream of payments, so that income continues to a beneficiary even if the annuitant dies in the first 10 years. Life insurance also can be built into the policy – the options are endless. However, all of the choices come at a price, usually in the form of a reduced monthly benefit.

    Although we at O&A cannot sell annuities, I periodically get put on the wrong mailing list. Shortly before my conversation with Karl, I had received an email from an annuity company assuring me that I could earn a 7% commission on annuity products from their company. If Karl had walked into my insurance office and had $300,000 to invest, my company and I could have made $21,000 in one day, and a short day at that. Annuity salesmen are not held to the fiduciary standard so are not required to disclose their sources of income. Had Karl been told the amount of the commission on what he was buying, he might have had second thoughts as to the objectivity about the investment advice he was getting. More to the point, a commission effectively reduces the amount of monthly income the annuitant will receive.

    For those readers who want to understand the inner workings of the annuity and how the dollar payments work, we add this paragraph. The way in which “percentage” is used in describing annuities is different from the way we usually use the word. Suppose you are a 62 year old man who invests $100,000 in an annuity for which you will receive 5%, or $5,000 per year for the rest of your life. The 5% seems like a reasonable return, but it is not a normal 5% in that annuity payments include both principal and interest. Usually, if you get 5% on an investment, at some point in the future your original investment will be returned. Not so with annuities. Unless there is some special provision in the annuity, at the end of your life, the annuity quits paying and no money is returned.

    It is important to note that charitable annuities need to be looked at in a different light. First, they are a consideration primarily for people who are charitably inclined and want to give significant money to a not-for-profit organization. They work in much the same way that other annuities work, as described above. However, with a charitable annuity, the client will likely receive less money from the annuity, but in exchange the charity also gets a benefit, and the donor/annuity purchaser will get a tax deduction on a portion of the contributed amount. This can be a useful way to simultaneously give to charity and receive a lifetime stream of payments. And there is another advantage: with charitable annuities there is normally no commission paid, so there is more money available for the charity and/or the annuitant.

    We have some experience with charitable annuities, both because we have assisted clients in obtaining them and because, in my capacity as Treasurer of the Montshire Museum of Science in Norwich, VT, I have been involved in discussions on the not-for-profit side of annuities. While charitable annuities are a real benefit to both the annuitant and the not-for-profit institution, it is important to recognize that most charities will impose a minimum for the size of the annuity they accept because of the time and effort involved in setting it up.

    If you have questions about this matter or think you may be a candidate for this type of investment, the planners at O&A would be happy to discuss annuities with you and, if appropriate, help you find a competitive product or a charitable option that meets your needs.


    Those of you who are clients may have noticed that we made more changes than usual when rebalancing your accounts during the last few months. One modification was that for those funds which we expect to hold for the foreseeable future and which offer institutional shares, we traded in retail shares for the institutional shares of the same fund. We did this in order to reduce mutual fund expenses. Institutional shares are normally available only to very large investors, but we are allowed to aggregate our clients’ accounts for this purpose.

    The other step we took was to sell some actively-managed mutual funds where we are less confident that the managers would outperform their market index, in some cases because of underperformance for an extended period, and in others because the manager we had confidence in left the fund. We then bought some very low cost index mutual funds, in the hope that we will not only reduce expenses, but also improve performance.


    Several years ago the mutual fund firm of Davis Selected Advisors put together a 10 page booklet quoting legendary investors over the past 80 years. That publication has recently been updated with some valuable information. Paying attention to the thoughts conveyed below will go a long way to enhancing your savvy as an investor.

    BENJAMIN GRAHAM, “Father of Value Investing,” began teaching at Columbia Business School in 1928. Warren Buffett is one of his disciples.

    “Individuals who cannot master their emotions are ill-suited to profit from the investment process.”

    Graham pointed out that emotions wreak havoc on an investor’s ability to think clearly in evaluating investment processes and specific investments. It is for that reason that while the average stock mutual fund returned 8.6% between 1993 and 2012, the average stock fund investor earned 4.3%, exactly one-half what the average fund earned. Most investors who manage their own portfolios will do well to read Graham.

    CHRISTOPHER DAVIS is the current head of Davis Selected Advisors. The firm was founded by his grandfather in 1947.

    “Despite inevitable periods of uncertainty, stocks have rewarded patient, long-term investors.”

    After suffering through trying times of market losses, investors often reduce or abandon their exposure to stocks. The graph which accompanies the quotation demonstrates how consistently investors benefit from strong and often exceptionally high returns following a painful period, which is the often the time that individual investors have abandoned the stock market.

    PETER LYNCH was the legendary investor and manager of the Fidelity Magellan Fund from 1977 – 1990. The fund returned 29% annually for the period.

    “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves.”

    A chart shows that if investors remained in the market for the 20 years between 1992 – 2012, they made 8.2%. The stock market was open for about 7,100 days in those 20 years. However, if investors missed the 30 best days of the market, their return would be 0% for those 20 years. If they missed 90 of the best days, the return would -9.4%.

    WARREN BUFFETT is Chairman of Berkshire Hathaway.

    “Be fearful when others are greedy. Be greedy when others are fearful.”

    This quotation would seem to present guidance for our current situation. Even though the market has more than doubled since the low point in March, 2009, there is still a good deal of fear today. The Buffett quote quite clearly suggests investors should continue to be aggressive when others are timid. Buffett also recognizes that his advice is counter-intuitive and not easy to follow.

    JOHN KENNETH GALBRAITH is an economist and Harvard professor.

    “The function of economic forecasting is to make astrology look respectable.”

    A chart accompanies the Galbraith page that reports on an every six month survey done by the Wall Street Journal of the predictions of economists for following six months. The chart covers the 30 year period from December of 1982 through December of 2012. Out of those 61 survey periods, the economists got the direction of the market correct 22 times, or 36% of the time. They got it wrong 39 times. If economists cannot predict even the direction of the market, let alone the market’s relative strength or weakness in the following six months, there is reason to disregard what they say when it comes to making investment decisions.

    Readers of this Newsletter, for the most part, do not make major investment decisions themselves, but work with O&A planners in making those judgments. But some of you pay close attention to the market and can get caught up in the uncertainties. We hope that remembering these five quotations will give you perspective.


    Both David & Susan enjoyed the recent NAPFA Fee-Only Conference in Charlotte, NC, from October 21 -24. The outstanding array of speakers addressed such topics as the current state of the economy, spending guidelines for retirees, and “How to Change Things When Change is Hard.” All three of the O&A planners attended several partial day conferences in recent months on estate planning and investments, including conferences presented by mutual fund managers. In addition, Deborah volunteered at Westchester County’s Senior Law Day, answering participants’ financial planning questions.

    We at O&A are presently evaluating possible alternatives to the Newsletter as a useful way to communicate with clients, primarily because the Newsletter gets published less frequently than might be ideal. We are considering publishing a periodic electronic communication somewhat more often, perhaps with only one article. We would welcome your ideas on this subject.

    The O&A Holiday Party will occur on Dec. 12 and we are all looking forward to an evening with staff and spouses which includes our traditional Yankee Swap. Deborah, Susan, Kathy, Joan and David all join in wishing you the happiest of Holidays.

  • December 2013


    It is a pleasure to be sending you this issue of the Newsletter after a long hiatus, and we hope you will find it of interest. People are pleased with what the stock market has done so far this year - in fact for much of the time since the spring of 2009. But the events of 2008 still invite caution and skepticism among investors. We address these concerns in various ways in the first two articles. The third major article reviews an important lesson that comes from the Madoff scandal. That is followed by comments on the retirement dilemma. We conclude, as always, with staff information and events regarding the two O&A offices. David W. Otto, Editor


    In The Life Cycle Completed, the psychologist Eric Erikson states that the first and deepest issue that young children need to resolve, and the issue that all of us face more or less continually through life, is that of trust. Can "life" be trusted?

    Does this seem like a strange way to begin a newsletter for a financial planning firm? Perhaps, but it is relevant because trusting that, among other things in our lives, we have sufficient financial resources is important to all of us and can become an increasing concern among those approaching retirement or actually retired.

    Are you confident that you will have enough money to live out your days more or less as you wish and afford to give money to your children? Could your plans be derailed if there is another big loss in the stock market? In general, will there be sufficient money to do what you want to do and to avoid a severe compromise of your life, happiness or sense of fulfillment?

    Several books in the financial planning arena suggest that "wants" can be an expansive category. More than one book is titled Enough, and each addresses the question of what is "enough." Wanting more is common for all of us, whether it's the fancier car, the larger house, or the luxury vacation.

    Many years ago we had clients, both of whom were working, who, in one of our first meetings said, "We would like to have $1 million in our nest egg by the time we retire." Those clients came to us in 1994, a good period for the stock market. And they were saving quite a bit of money because both of them had good paying jobs and their children were on their own.

    It was quite a surprise when several years later they told us how happy they were with their jobs and their savings and that they would be greatly relieved when they had a retirement nest egg of $2 million. If we had not written down their original statement, they would never have realized that their "wants" had doubled without their even knowing it.

    The question of having sufficient money to avoid a catastrophe is easier to address. Most people who read this newsletter, unless spending gets truly out of hand, will not run out of money. The reason is that if client assets begin to dwindle in later years, we can help reduce spending to insure there will be sufficient money to at least meet basic needs.

    Still, the most personal question remains. Do you trust the universe to meet your physical and emotional needs? Erikson identifies eight stages of development; "Trust vs. Mistrust" is the most basic. He does not suggest that a child or adult must achieve 100% trust, but rather that there must be a satisfactory balance between the two poles.

    We conclude with comments by two authors, the first a warning, and the second a note of encouragement. "You may be deceived if you trust too much, but you will live in torment if you don't trust enough." (Frank Crane) "We must trust our own thinking. Trust where we're going. And get the job done." (Wilma Mankiller)


    In 1949 the legendary financial figure Benjamin Graham wrote a book titled The Intelligent Investor. In it he introduced Mr. Market, whom he called a "manic-depressive investor," based on his habit of one day making exorbitant bids for stocks, and the next day offering to sell them at whatever lower prices another investor was willing to pay. Other writers have talked about the same phenomena by describing an investment process that moves between the emotional poles of greed and fear. Today volatile investment habits may be fueled both by technology and by our access to continually updated news programs.

    But manic-depressive investing is not just an individual, short-term mechanism. It also happens over very long periods, and one way to view the current investment environment is to say that the stock market is coming out of a long-term depression but is still quite a ways away from hyper-mania.

    Bob Veres, a national financial journalist, has been writing about investment matters since some time after graduating from high school in Somers, NY, during the time that David was the pastor of a church within 10 miles of Bob's home. He is also the writer who more consistently than any other journalist, has followed the fee-only financial planners for all of their 30 year history.

    Veres recently reported on a market commentator who discussed a rarely heard theme. "[Today] the world at large gives inordinate attention to downside scenarios, and nobody is calling our attention to the much larger upside of our…investment landscape. The human brain amplifies [these downside scenarios] because it is hardwired to notice threats much more than opportunities." According to the commentator, the stock market is composed of something like 25% risk and 75% opportunity, pretty much the reverse of what one is likely to conclude in reading the popular press, or listening to the many of television programs that comment on the market.

    Continuing with his own observations about current worries, Veres writes, "If we don't see disastrous consequences from the federal debt, [then] the inflation rate arising from dramatic increases in the monetary supply will surely [alarm us]. European sovereign debt crises will eventually contaminate the American banking system; global warming will cause our coastal cities to flood; and there is no way in the world that wind farms will take up the slack when we finally run out of oil. Taxes are still too high; the economy is a mess; Obamacare will wreck our nation's health and finances; Congress is too paralyzed to do anything except squabble and periodically raise its own salaries."

    Veres concurs that the public is over-exposed to the potential risks in the stock market and under-informed about the opportunities. In this period where we are only too aware that between 2000 and 2009 the stock market had two periods of huge losses (a 50% loss each time), it is not surprising that investors are cautious. But historically two such periods of stock market losses are an anomaly. What is actually happening is that "scary stories get eyeballs."

    Important facts that get little attention today bring Veres article to a close. Even with the big downturns after 2000, since 1950 the S&P 500 has gone up 9,650%. Instead of having run out of a supply of fossil fuels, as was predicted in 1970 to have happened around 1990, we have discovered vast quantities of gas which is more environmentally friendly. While the debt crisis needs our attention, in the 1990s (when interest rates were considerably higher), the annual debt payments the U.S. made was 19% of the total U.S. budget. Today it is 10%.

    Veres does not intend to sound like a Pollyanna with the implication that the horizon is free of storm clouds. The message that often gets lost in all of this negativity is that there are also some significant breaks in the clouds.

    This theme was addressed in another way by a presentation that Susan and David heard at the annual East Coast planning conference that NAPFA sponsors each fall, by Carl Richards who titled his speech, "Secret Society of Real Financial Planners."

    We often hear "buy low and sell high." But according to Richards, getting useful market information to know if the market is "high" or "low" is not easy when most of it comes from the popular press which focuses on stories that people are interested in today. The press does not necessarily focus on thoughtful articles with a big picture perspective. Carl Richards offered his take on this matter:

    Brace yourself: The U.K. is under attack. News reports indicate that the island nation is about to be overrun by the false widow spider. It's even reached the point that a school closed for fumigation out of fear that the building was infested with these dangerous creatures. After all, they can kill children with a single bite.

    By now, I hope you're laughing at least a little bit about this ridiculous story. The U.K. is not under attack. The false widow spider can't kill people with a single bite. But that hasn't stopped some members of the U.K. media from stirring up people with the fiction that the false widow spider is dangerous and deadly.

    When I first read about this nonsense in "Wired," this line made me pause. It's easy to write a story about spiders that will make lots of people share it. Many folks are afraid of spiders. Replace the word "spiders" with the words "investing," "money" or "retirement." It now makes a lot more sense why we see so many stories about these subjects. They're playing on our emotions, and if we aren't careful, it's easy to believe that they're always true.

    For instance, consider the real facts about the false widow spider: " It's been in the U.K. for 100 years. " It's the most common house and garden spider in southern U.K. " Its bite is rarely harmful to people. These facts are easily available, but when compared to a headline like, "Mum's terror as FIFTY venomous False Widow spiders race towards her," which story is more compelling, [the facts or the headline]? The same thing happens in our own media when we see financial stories.

    Because of the emotion involved, it can be incredibly difficult to not get sucked into assuming that everything we're reading is true. Maybe it's about an investment "guaranteed" to beat the market, or "experts" claiming that the world is ending and we need gold in our portfolios. Whatever the story, we need to recognize that our emotions can and will drive our actions if we aren't careful. The results won't be pretty if we've chosen a path that depends on fiction instead of fact. So how do we do that?

    I'd suggest thinking like a journalist. We need to test the accuracy of the information. If we see something in one place, we need to be able to confirm it in a second place. In other words, if that investing newsletter has a hot tip that can't be confirmed anywhere else, we probably shouldn't invest our life savings based solely on the tip.

    We also need to test the accuracy of what we think we know. The emotions we feel about financial topics can sometimes make us resistant to asking questions. It's easier to think that what we already know trumps whatever new information might appear….

    We invite you to view a lively video of the Richards presentation, enhanced by his creating simple sketches as he talked, by copying the website address or clicking on our links page. You can also find him at www.youtube.com.


    There is, however, a note of caution to be added to the Veres and Richards opinions. As we write this Newsletter at the end of November, the stock market has been up for eight weeks in a row, the first time that has happened in over 10 years; it has risen about 25% this year; and it rose 18% in 2012. There will be a time when the market reverses course. It would not surprise us if it lost 10% or more at some point in the next months. Even so, in the intermediate term (i.e. in the next two - five years) we think there is more opportunity than risk.

    In such times as these, the focus of various news media sources can be useful. But when it comes to responsibly managing financial resources, the information they provide may be highly engaging but ultimately a distraction from long-term goals and big picture understandings that are crucial to success. Maintaining perspective is important.

    O&A vs. MADOFF

    We regularly get positive client feedback in the vein of "We appreciate what Otto & Associates has done in helping us to interpret retirement and tax planning and making decisions about Social Security benefits, not to mention good investment returns over a lot of years." But it appears from the continuing news reports that Bernie Madoff's clients felt equally positive about their financial advisor. How does one discern when a financial planner could be a Bernie Madoff?

    Often the answer is simple. Madoff had an investment firm and also owned a brokerage business. While the Madoff brokerage was large by some standards, it was relatively unknown by comparison to Merrill Lynch or TD Ameritrade. With this arrangement, Madoff controlled statements from both the planning and brokerage firms. By contrast, Otto & Associates manages investments but uses a separate, independent custodian, TD Ameritrade. Clients of firms like O&A receive statements from two unrelated firms. The value of client accounts is provided on the various O&A reports as well as on the TD Ameritrade monthly statements. Since O&A has no control over what is reported by TD Ameritrade, clients can compare the independently reported values. The figures may be somewhat more difficult to integrate when there are also alternative investments in non-retirement accounts because those investments will not be listed on the TD Ameritrade statement. Still, there should be a logical explanation for any differences in the totals.

    We learned recently of another Madoff type scandal which, although involving 1/100th of the amount of money Madoff reportedly lost, was much closer to home. In early November a former president of NAPFA (the fee only, national organization for financial planners) was found guilty of a $50 million fraud by a District court.

    The Nov. 7, 2013 Investment News reported that "Mark Spangler, 58,…was convicted of 32 counts, including wire fraud, money laundering and investment advisor fraud," said U.S. Attorney Jenny Durkan. David and Mark Spangler had been acquainted in the mid-'90s, when Spangler was President of NAPFA. To those who knew him, it seems quite incredible that Spangler could have done this, although he dropped out of NAPFA shortly after his tenure as president.

    How did Mark Spangler accomplish this fraud? According to a web article posted by the Financial Advisor Magazine, it was by "hiding where his clients' money was invested, and by providing them with false account statements." Although Spangler had a tiny brokerage firm, his scheme was apparently quite similar to that of Madoff.

    The planners at O&A are particularly dismayed by the news of Mark Spangler's actions. NAPFA prides itself on its members being transparent and highly ethical. And even though Spangler had not been a member of NAPFA for over 10 years, it is still a painful reminder of the lengths people will go to make money. The Investment News article makes it clear that Spangler thought his clients would ultimately see very good returns, but whatever his hopes and intentions, he broke laws that are in place to keep investment managers from speculating with client money without their knowledge.


    David attended a conference in NYC a number of months ago where Mitch Anthony, the founder of The Financial Life Planning Institute, spoke. His topic was working with clients who are anticipating retiring or have already retired. Anthony made the point that there is so much more than money involved in living our lives when we no longer go to our place of employment every day. He has found that many retirees are not as happy as they had anticipated being because prior to retirement, they had not developed a plan for finding fulfillment or considered how they would use their time. While he thinks easing into retirement could help, he acknowledges that some salaried jobs are almost impossible to do on a part-time basis. However, "we are not wired to spend all of our time in a life of leisure."

    Most of us need some kind of work, which he defines as "productive time that is of value to others and meaningful for ourselves." That can easily include charitable efforts, helping out a friend or family member in need, and mentoring or coaching others. We are endlessly impressed with the creative work our "retired" clients find to do, like volunteering to transport those with medical needs many miles to a hospital for special treatment, including day surgery; serving as president of a historical society, a job which also includes being a handyman for the society's historic building; volunteering weekly at the circulation desk of the local library; and serving as the church treasurer.

    George Bernard Shaw says it well. "I want to be thoroughly used up when I die, for the harder I work the more I live. I rejoice in life for its own sake. It is a sort of splendid torch which I have hold of for a moment and I want to make it burn as brightly as possible before handing it on to future generations."


    Personnel As reported in an earlier O&A Newsletter, Judy LaPorta resigned in 2012 after more than 10 years at our Katonah location. Judy was knowledgeable about many aspects of the business and was a welcoming presence to people who came to the office.

    With Judy's departure, Kathy Patton became the Office Manager. Kathy is well known to clients in Katonah, having been at O&A for more than six years in a different job. We are fortunate to have a person of her ability. Having worked for a number of years for Goldman Sachs in their Manhattan offices, Kathy brings both expertise and creativity to her position.

    The second administrative post has been filled by Joan Poulin, whom a number of you have already met. Joan also worked in finance at the Royal Bank of Canada before she took some years off to raise her daughters. She was most recently employed by the Somers Central School District before joining O&A in May, 2012. In the year and a half she has been at O&A she has become a valuable support person to all of us in the two offices.

    Susan Otto Goodell joined the VT office in 2003 doing secretarial work, but over time she decided she wanted to become a financial planner and began to pursue the Certified Financial Planner (CFP) designation, passing her comprehensive CFP exam in March, 2012. She has steadily increased her commitment to O&A and is now full-time. Susan works out of the VT office, although she also travels to the Katonah office every second or third month.

    Conferences Staff members have attended many conferences this year. In January Deborah and David went to a three day TD Ameritrade conference in San Diego. There were a number of valuable workshops and addresses, including a panel discussion with Erskine Bowles and Alan Simpson.. Deborah went to several one-day conferences throughout the year, including the Baron Conference, a huge gathering that takes over all the venues at Lincoln Center. She also volunteered at two different, local financial education days where the general public could get their questions addressed.

    In the fall Deborah and Susan particularly appreciated the Third Avenue Conference in NYC where they heard both Paul Volker, former Chairman of the Federal Reserve, and Marty Whitman, who founded the Third Avenue Company in 1986 and managed the first Third Avenue Mutual fund. In October Susan and David attended the three-day NAPFA Philadelphia Conference referred to in the second article. In addition to Carl Richards, they heard informative addresses by Mark Maurer of Low Load Insurance Services (a company to whom we refer people, particularly for life insurance policies) and Frank Murtha, who spoke about the emotional forces that drive investors - a theme addressed earlier in the Newsletter.

    Visitor Pacific West Land, a Seattle firm that offers clients an opportunity to invest in real estate, sponsored dinners in both Norwich and Katonah in October. Martin Steever, one of the principles of the company, updated O&A clients involved with the two Pacific West projects and gave an overview of a fund that they will be offering in the near future. We are pleased with the performance of the offerings by Pacific West and appreciate Martin's sponsoring the dinners so clients could gain more firsthand knowledge.

    Holidays The O&A Holiday Party for the staff and spouses occurs on Dec. 13, where we will again have a Yankee Swap during dinner. If you have never participated in such an event, ask members of the staff about their experience the next time you are in the office. It is always a great time.

    Beginning on Dec. 23, the office will be staffed on a limited basis because of vacation schedules. Please allow sufficient lead time for any transactions that need to be done by the end of the year.

    And to all, we wish you the happiest of Holiday Seasons.

    David W. Otto, Editor

  • November 2011


    One of our clients asked recently if he had been taken off the mailing list for the Newsletter, which brought to mind how long it had been since we last wrote. One reason for the delay is that it has been difficult to comment on this very unpredictable stock market since major forces influencing the markets change so rapidly: unemployment trends, the economy, the possibility of a double dip recession, and most recently first Europe's and then Greece's response to the Greek debt crisis. So volatility in the markets is the topic of the first article. That lead article is followed by articles on considerations for the best age to begin collecting Social Security benefits, a discussion about end of life choices, and a couple of miscellaneous matters. We conclude, as always, with what is happening with employees in the office. -David W. Otto


    What a week/month/quarter/year this has been. This piece is written in early November, but we think it likely that at least two of those four nouns in the first sentence will be fairly apt most anytime during this period. During August the market moved more than 4% in each of four of the five days in a single week. Two days were up by more than 4%; two days were down by more than 4%. Similarly, a blended portfolio was down about 6% in September and up a similar amount in October.

    That market volatility is a likely norm for the foreseeable future is a difficult reality to accept. At the moment, however, the impact of uncertain markets is made worse by the fact that many - if not most - portfolios are, at best, about even with where they began in 2011. The occasional improvements we have seen in the markets have failed to signify that recovery is just around the corner.

    During times of uncertainty, investors are often tempted to pull back in order to protect themselves. Such reactions have problems of their own. Abandoning the market totally can put retirement goals at risk. Often, buying CDs leads not only to small returns, but also to losses due to the subtle erosion created by inflation. Switching to government bonds may have helped in the past, but these too can decline in value, and their yields are likely to underperform the stock market in the long run.

    At times like this, it seems important to again focus on the strategies that Otto & Associates rely on. We have three general principles which we list here and expand on below:

    •  We pay as little attention as possible to headline news and as much attention as we can to constructing big picture understandings of market analysis, consumers, and the economy, so as to look for positive options and avoid pitfalls.
    •  We watch for opportunities in sectors of the markets where there is reason to believe investments are mispriced. This will cause us to overweight certain sectors (today one area that is priced too low, in our opinion, is commercial real estate) and underweight other sectors (it is our opinion that today traditional U.S. government bonds are vulnerable to long term price deterioration).
    •  Most importantly, we keep client goals in mind. Often those goals include a comfortable retirement and may also involve college funding, leaving a legacy, and perhaps some interim goals such as paying for a wedding, funding a trip, or helping a relative who has financial needs.

    First, at Otto and Associates we try to discount the headline news. You can depend on the media to have dramatic stories. You can also depend on the drama having a negative tilt more of the time because it is that news which draws an audience. But as we read the market tea leaves, the reality today may not be as negative as the headlines would lead you to believe. Related to that fact, we keep in mind that because the market is an auction, in the short term it is very responsive to the latest news.

    Second, we firmly believe there are often places where money can be made, even in a declining market. The difficulty comes in identifying those opportunities. Our goal is to find situations where, because of current circumstances, it is likely that stocks, or bonds, or a certain sector or a group of countries will outperform other investments. Some investment managers have said that they make half their money on the day they buy an investment - because they focus a lot of attention on buying what they understand to be undervalued and will most likely increase in value in the future.

    Because we at O&A do not consider ourselves experts in picking individual stocks or bonds, we use mutual funds, some of which focus exclusively on trying to identify sectors and specific companies that are undervalued. Longleaf Partners, a stock mutual fund we have owned for a long time, is one such fund. While the fund goes through periods of underperforming the market, in the long run the managers buy stocks that have worked out for their investors. They have been right enough of the time that in the last ten years, they have outperformed the broad market. While the market has achieved only 2.6% growth per year during this period, Longleaf Partners has done considerably better at 4.6%. In round figures, $10,000 invested in the broad stock market would have made $2,930 during that period. Longleaf Partners made almost twice that at $5,650.

    In addition, over the years O&A has developed some special knowledge in three particular areas: oil and gas, closed-end funds, and real estate. We have bought very little oil and gas properties since 2004 because we believe both the price and the risk are too high. The majority of the oil and gas investments we bought was in the late '90s, when oil was selling at $10 - $17 per barrel. It now sells in the range of $80 - $95, and all of our clients who invested in this sector have been well rewarded.

    Closed-end funds also continue to be an interest that we follow, though we buy them only when the discount is historically wide (call the office for a copy of the Sept., 2004 Newsletter for a full discussion of closed-end funds), which has occurred in only a limited way in the last couple of years. We expect closed end funds will become attractive again.

    In addition, we have expertise in private placement real estate, an area where we can purchase investments only for qualified investors who have larger accounts. In the last two years we have invested significant client money in this area.

    Finally, while there will be variations on several main themes in business news, and opportunities in the investment world will come and go, client goals remain fairly consistent as they evolve over the years. Younger people tend to focus on accumulating assets in order to buy a house, or save money to support themselves and perhaps a family. As people accomplish these goals and age, they normally focus more on having sufficient assets for retirement.

    It is these goals that we always keep in mind - and urge clients to keep in mind. Investing is not aimed at accumulating as much money as possible. Rather, investing is part of a larger financial plan directed toward meeting a person's or a family's financial goals.

    Many years ago, when the market seemed only to go up, two of our clients whose children were out of the house, said that their goal was to accumulate $1,000,000 by the time they retired. We made a note of that because it was a very concrete target and one which seemed reasonable to us. Some years later after the market had experienced significant growth, they expressed their happiness with what they had accumulated and added: we are well on our way to our goal of accumulating $2,000,000. We reminded them that they had just moved the goalposts by doubling their target, something they were completely unaware of. Currently, we keep clear records of client aspirations, review them regularly and revise them advisedly. "Enough" should not be a moving target.

    Older adults can be especially at risk for feeling the need to always have a bit more money or for worrying about running out of money. One way this shows itself is when retirees say, "We do not want to spend our principal," not realizing that they have mentally redefined "principal" to include both initial contributions and accumulated growth. It may be a reasonable goal not to spend "principal" when people are in their 60s - maybe also for those in their early 70s. But at some point spending money that has been accumulated over the years may be required.

    Writing down aspirations and keeping them figuratively in view often helps to keep financial matters in perspective. This is one technique that helps mitigate the effect of the daily headlines which can distract us from the larger goals we want to accomplish in life.


    Everyone hypothesizes about when to start taking Social Security retirement benefits. Should I begin taking payments at age 62, assuming I am retired? Should I wait until "full retirement" at age 66? Or should I hang on until age 70?

    The choice you make has clear ramifications, some of which you may not have thought of. Let's begin with an illustration from a client's Social Security statement:

    Mr. Jones is not yet 62, but his Social Security (Benefits) Statement projects that, assuming he continues to work until at least age 62, he will receive: $1,554/month if he begins taking benefits at age 62 $2,144/month if he begins at age 66 $2,752/month if he begins at age 70 He would receive no additional benefits if he delayed beyond age 70.

    The above statement demonstrates what is true for everyone who can claim Social Security retirement benefits: you receive 33.3% more at age 66 than you would receive at age 62. And if you delay taking benefits until age 70, you receive an additional 32%. The actual benefit goes up monthly by a proportional amount, increasing .67% per month. This means that someone who decided to begin taking payments when she is sixty-eight and a half would receive 20% more money than she would get had she begun at age 66. However, for this article we will limit the discussion to the three ages of 62, 66, and 70.

    What are the issues that go into making the decision as to when to begin taking benefits? Some people think the first question to ask is how long you have to live to make a delay in taking of benefits worthwhile. We think there are other matters to consider ahead of that question.

    Marital status is a very important factor because of some complementary choices a husband and wife have. For a couple where the husband and wife are the same age, but he has more Social Security credits and has had a consistently higher income, there are some natural choices, although each situation needs to be evaluated on its own merits. In this scenario, if the wife outlives her husband (which is likely), she will qualify for the higher survivor benefit, assuming her husband predeceases her. Consequently, if the husband delays receiving his payment, under average circumstances he will receive a much higher benefit for a number of years, and then she will receive that higher benefit after he dies.

    In this illustration, we would normally advise the wife, assuming she is retired, to begin taking her own benefits at age 62, while her husband delays until age 70. If she does not retire at age 62, she should normally begin taking benefits when she does retire, or at age 66, whichever comes first. People can begin taking Social Security payments without penalty at age 66 even when they continue to earn a salary. Taking benefits before age 66 means there will be a penalty if the person earns more than $14,160 in salary income. (It is actually more complicated in that a person can earn more than twice that amount the year prior to turning 66, with less of a penalty.)

    Another less tangible consideration in the decision of when to begin taking benefits is that many people tend to spend more when they have added income. It can be tempting to take Social Security as soon as possible because things are tight financially. By deferring Social Security benefits, people might learn to live just as happily on a bit less, allowing for more of a cushion against inflation or unexpected expenses in older age.

    Delaying Social Security benefits can also act as a kind of insurance policy in case a person or a survivor lives far beyond normal life expectancy, when he might run short of money. At 96 years of age, Mr. Jones (see the benefits listed at the beginning of this article), might well appreciate receiving $2,752, (the scheduled amount he would receive beginning at age 70) plus many years of a COLA rather than $2,144 he would receive if he began drawing at age 62, plus the COLA.

    Even so, there are some good reasons to start Social Security benefits sooner. If someone needs money and can't work, there may be little choice but to take benefits. If a person is in bad health and expected to live only a limited time, there is good reason to sign up for benefits earlier. And sometimes clients' emotions dictate that they start early, even knowing that there will be a price to pay down the road for satisfying the emotional desire at an earlier age.

    There may be no "right" answer for when to begin taking Social Security payments, but some personal situations are clearer than others. While we are available to consult with any of our readers on this matter, the Social Security website is also quite helpful. The address is www.ssa.gov .


    People are talking more these days about end-of-life choices. We at O&A very much encourage these discussions. While it is important to pay attention to how to minimize taxes in passing money onto heirs, and to where assets should go, there are additional considerations that people need to discuss and make decisions about. In fact, when end-of-life choices are addressed, some of the answers to the financial questions may fall into place more easily.

    In October Susan and I (David) presented a seminar at the Montshire Museum of Science in Norwich, VT, on these very issues. While the basic theme was estate planning, we did not begin with the traditional discussion of vehicles available to efficiently pass money on at death. In fact, beyond a few questions and passing references, those matters never came up.

    Rather, we focused on the idea of "legacy," what a person's life has stood for, what values the person has tried to convey and live, and how those values can be passed on. How do you want to be remembered? What contributions have you made throughout your life? And how might money be used to further accomplish those values?

    One area that we did not have sufficient time for was that of health care issues at the end of life. In 2009 Jane Brody wrote Jane Brody's Guide to the Great Beyond: A Practical Primer to Help You and Your Loved Ones Prepare Medically, Legally, and Emotionally for the End of Life. What she didn't know was that within months of publishing the book, she would come face-to-face with the subject of the book when her husband was diagnosed with lung cancer.

    We have included below an edited version of an article, written by Ms. Brody and printed in the New York Times, on Jan. 17, 2011, ten months after her husband's death. While the article has a bit of a political bent, we include it here because it raises important questions and offers an example of one family's experience. We hope it will stimulate your thinking.

    "The specter of 'death panels' was raised yet again..., prompting the Obama administration to give in to political pressure a second time [and curtail] its effort to encourage end-of-life planning.

    "Of course, the goal of this effort was not to make it easier to 'pull the plug on grandma' in order to save the government's money, as some opponents would have it. The regulation in question…, simply listed 'advance care planning' as one of the services that could be offered in the 'annual wellness visit' for Medicare beneficiaries.

    "The widespread misconceptions about the regulation were exemplified in a letter to the editor published in the New York Times. 'Death panels,' the writer said, would have denied her 93-year-old mother colon cancer surgery that has given her the chance to live several more years.

    "But that is not at all what the regulation would have done. Instead, 'by providing Medicare coverage for end-of-life planning with a physician, it would have encouraged doctors to talk to their patients about their wishes and make it far easier and more likely for these important conversations to take place,' said Barbara Coombs Lee, president of Compassion & Choices, an organization that helps people negotiate end-of-life problems….

    "Encouraging such conversations might indeed save money in the long run. Doctors and hospitals are paid only for treating living patients, so there is always a possibility that financial incentives, conscious or unconscious, would prompt many expensive, if futile life-extending measures - efforts that many patients would veto if they could….

    "At least as important, the quality of life in their final days was much worse than among those who did have such discussions. Countless studies have shown that extensive medical interventions can make the last weeks of life an excruciating experience for patients and those who care about them.

    "Although talk about end-of-life options has often emphasized avoiding unwanted, intrusive and futile care, that does not mean everyone would or should make that choice. Many patients, especially younger ones, might be inclined to ask that every conceivable measure be taken….

    "For [some] patients, hospice care is the right decision. Studies have found that terminally ill patients are likely to live longer, with a better quality of life, when they choose hospice over aggressive treatment to the bitter end.

    "The point is that end-of-life care is an individual decision that should be thoroughly discussed with one's family and physicians. Studies have shown that when doctors don't know a patient's wishes, they are inclined to use every possible procedure and medication to try to postpone the inevitable.

    "In an interview on the syndicated news program "Democracy Now!" on Jan. 5, the writer and surgeon Dr. Aatul Gawande said that patients with terminal cancer who discuss end-of-life choices with their doctors "are less likely to die in the intensive care unit, more likely to have a better quality of life [with] less suffering at the end…, and six months later their family members are markedly less likely to be depressed."

    "….A year ago, my husband was given a diagnosis of Stage 4 cancer. As his designated health care proxy, I had agreed long before he became ill to abide by the instructions in his living will. If he was terminally ill and could not speak for himself, he wanted no extraordinary measures taken to try to keep him alive longer than nature intended.

    "Knowing this helped me and my family avoid agonizing decisions and discord. We were able to say meaningful goodbyes and spare him unnecessary physical and emotional distress in his final weeks of life.

    "Preparing these advance directives should not wait until someone develops a potentially fatal disease. Patients in the throes of terminal illness may resist discussions suggesting that death may be imminent, and close family members may be reluctant to imply as much.

    "Compassion & Choices has an excellent free guide and "tool kit" to help people prepare advanced directives. They can be downloaded from the organization's Web site, www.compassionandchoices.org (select the "care" tab, then "planning for the future") or call (800) 247-7421 for a free hard copy of the documents."

    Compassion and Choices is a very useful organization in helping to think through such matters. O&A also has available for clients "Five Wishes", a multi-page pamphlet that provides a variety of issues for people to think about. However, Compassion and Choices has something similar, along with a lot of additional resources. As always, we at O&A are available to be part of the discussion.


    Otto & Associates, Inc. is required to make our ADV (a form that we complete annually for the Securities and Exchange Commission) and brochure available. Many of you have seen the three-panel brochure which explains our work, backgrounds, etc. For the most recent version of the brochure or for an updated version of the ADV, please call the office. The information in the brochure is also available on our website www.ottoandassociates.com. ADVs can also be found through the SEC's website www.sec.gov.


    The end of the year is within sight, so please think about whether some financial planning year-end deadlines apply to you. Contact us soon if you'd like our help with:

    •  Contributions to or rebalancing of College Savings 529 accounts for children or grandchildren
    •  Contributions of appreciated stock or mutual funds to charities
    •  Conversions of IRAs to Roth IRAs

    We keep track of IRA Required Minimum Distributions and will make certain that those who must take a distribution will do so. Also, we will consider tax loss selling, when appropriate. There is no need to call about these matters unless you have questions or concerns.


    One of the biggest recent events in the office occurred in January when Susan Otto Goodell learned that she had passed her comprehensive CFP (Certified Financial Planner) exam. It was a grueling process, including six courses plus six exams over a couple of years, ending with the comprehensive exam. Congratulations, Susan!

    However, a very close second to that event happened on Nov. 6 when Kathy Patton completed her first NYC Marathon. We're proud of you, Kathy!

    David's 100 mile bike ride in July to raise money for cancer research pales in comparison. (Riding at the same time as David were his wife, Mary, all of Susan's family, and some other family and friends. Jeff (Susan's husband) and Carter (her 14 year old son) also rode 100 miles, and the rest of the team, including Mary, Susan, and 11-year old Eliza rode 50 miles.

    Judy, who had some trouble recovering from a knee replacement, is again able to do most things. We're very happy to have her back.

    And Deborah has launched her third and final child. She visited her son Harry during Parents' Weekend at Grinnell College in Iowa (also Mary's alma mater) in October. (While there she traveled to Rock Island, IL, to see Harry run a cross country race where he performed very well - which is impressive given that he is a freshman.)

    Deborah, Susan, and David attended a three day NAPFA conference in Brooklyn in October. There were a number of outstanding speakers and seminars available to the attendees, as well as two opportunities to walk across the Brooklyn Bridge early in the morning. And during recent months Deborah has been keeping up to date by attending a number of conferences sponsored by mutual funds where many clients have money invested: Artio Julius Baer, Third Avenue, and Baron (two separate conferences for each of the last two.) Judy also attended a Baron conference.

  • September 2010


    The lead article of the fall Otto & Associates Newsletter centers on our view of the future prospects for both the stock and bond markets. This may be a different perspective from ones you are likely to read in your newspaper. The second article makes an important distinction between the economy and the markets, a difference not often highlighted which we think is important for investors to keep in mind. The final two articles include a reminder that now may be a good time to refinance your home, and some of the important considerations to keep in mind before purchasing long term care insurance. We conclude with several office matters.


    Does it seem like the markets are changing direction every other day? Are you often confused about whether the trend is up or down? Did you notice that pundits who said discouraging things about the market in early 2009 changed their tune later last year, only to return to being cautions again three or four months ago? And today (Sept. 18) there is another decrease in pessimism, if not actual optimism, in the air. What is going on?

    A useful way to see this extended period is to view it as an inflection point. While an inflection point sometimes refers to a very specific event (the fall of the Berlin wall has been described as an inflection point in global politics), it can as well refer to a longer period. The Great Depression may be seen as an "inflection point," even though it was a nearly ten-year period. An "inflection point" can be viewed as a positive, negative, or a mixed juncture, but one that invites us to pause as we go forward. We will argue that the current situation in the markets is largely positive for investors if they recognize that ongoing investment adjustments may be required.

    During the past 10 years, investments in the stock market have performed in a quite unusual way. Two significant downturns occurred - from March of 2000 through March of 2003, and from November of 2007 through February of 2009 - in which the stock market lost more than 45% each time. Even with a gain in 2009 of 27% - something that no one projected - the return for the decade was 0%. And in 2010, we have had additional excessive choppiness, which included a 13% loss in eleven weeks ending in early July. Such an extended period of positive and negative returns may indeed signal a turning point. We will explain why we believe this will be positive for stocks, after examining bond market history, specifically long-term U.S. government bonds.

    If we take a broad look at long-term government bonds from end of World War II until the present, we will see two distinct trends. From 1945 to 1981, interest rates for bonds went steadily upward, and the price of bonds went steadily downward. During this period bonds had mostly positive returns. However, after accounting for inflation, the returns were largely negative. For the entire 36 year period, bonds returned an annual rate of 2.2%, while inflation was 4.6%, resulting in an annual inflation-adjusted return of -2.4%. The direction of both interest rates and the value of bonds changed in the early 1980s, starting the second distinct trend. And while there is always unevenness year to year, for the last 28 years (1981 -2009), bonds have largely had positive returns in excess of inflation, often by significant amounts. For this 28 year period, long-term government bonds have returned 10.2% while inflation has been 3.2%. That means bonds have returned a real, inflation-adjusted return of 7.0% per year!

    Even though bonds have been relatively stable and rewarding in recent years, the high returns are unlikely to continue. The reason bonds made money for 28 years is straightforward: when interest rates fall, bonds make excessive returns. The interest rate on long-term government bonds in 1981 was 11.6%. The interest rate in 2009 was 3.5%. The result was that during that extended period, the price of bonds and bond funds continually went up.

    But interest rates on bonds will not go down indefinitely, and when they begin to rise from these very low rates, bond holders will not do well. An illustration may help. Were bond rates to go from 3% to 4%, a buyer of bonds would have a choice: to buy a new bond at 4% or an older bond at 3%. The only way the buyer would consider the 3% bond would be to buy it at a reduced rate, thereby in effect getting a higher interest rate. Specifically, if he could buy a $1,000 bond paying 3% for $750, it would yield 4%. The combination of low interest payments on the bonds that are held, along with a declining value in the bonds because of rising rates, can easily result in losses.

    If this idea that the realities of today's markets have led to an "inflection point," with the stock market set to increase in value over time, and long-term government bonds likely to decrease in value, we need to look carefully at the implications for investors. With this scenario, the holders of long-term U.S. government bonds will likely lose money, at least on an inflation-adjusted return, for reasons spelled out above. Likewise, the "inflection point" we envision has implications for stock investors. While the various media have carried a lot of bad news recently, many companies are making a good deal of money. In addition, if investors sour on the bond market, some of them are going to begin to put some money back into the stock market. When that happens, it could drive up the market quickly. We have written in the past about the way stocks can tumble on nothing more than negative investor sentiment. The reverse can also happen. The last ten month period of 2009 is an example.

    We anticipate that today's trend might be most difficult for retirees who have most of their investments in bonds. They had gotten used to bonds that paid a quite favorable interest rate and at the same time increased in value. Retirees invested primarily in bonds, and who have already experienced difficulty in this low interest rate environment, are likely in for additional difficulty when they also see their bonds and bond funds losing value.

    While we are just beginning discussions with our clients, very few of whom have a high bond allocation, we anticipate that we will start reducing some of their bond investments. We will also consider increasing exposure to foreign and/or emerging market bonds, since those markets have quite different histories and characteristics from the bonds discussed in this article.

    Additionally, we will look for investment opportunities that are unique to the current situation. To that end, we at O&A have kept our eyes open for non-traditional investments that don't move with stocks and bonds, including private placements, investments not traded on the stock exchange because they are too small for that marketplace. We believe there are particularly good values in some real estate assets where cash is needed to refinance debt, to upgrade foreclosed properties that banks have let slide, or to finish building properties that have gone through bankruptcy and can be purchased for a small fraction of the original price. In this environment, the traditional sources for lending (often banks, but also insurance companies and others) may be completely out of the lending business. This is part of the ongoing credit crisis. We have a relationship with two particular real estate investment companies which have found potentially good values in the past and we expect to do more investing with them in the future. These investments are generally offered to clients who meet a certain minimum net worth. More information is available by contacting O&A.

    Investing at inflection points is never easy. It always involves exploring a variety of options, being open to new opportunities, and being able to sit tight through volatility. But we are optimistic that stocks and stock mutual funds, as well as private placements of both equity and debt, are likely to appreciate in value in the next few years.

    Thoughtful investing requires much more than reading the headlines. In fact, it often means re-contextualizing investment strategies.


    Many people today do not distinguish clearly between the concepts of the economy and of the stock market. The two are very different and they can "perform" very differently. The economy can be in difficulty, as it is now to some extent, and the market can, at the same time, be robust.

    An understanding of the economy emerges from observations about important statistics, such as the Gross Domestic Product (GDP), inflation, per capita income, the unemployment rate, and a host of less well known statistics, such as what a country produces per capita. Definitions of the economy include phrases like "the careful and thrifty management of resources, such as money, materials, and labor." All of the statistics for the U.S. economy are designed to reveal how efficiently various resources are used.

    The stock market is quite different. Technically, the stock market is the exchange where shares of stock of publicly traded companies are bought and sold. More colloquially, we make reference to the stock market as the aggregate price of a representative group of stocks (e.g. Dow Jones Industrial Average, the S&P 500 Index, or the Wilshire 5000 Total Stock Market Index). With the stock market, attention is paid to whether the numbers associated with one of the indices or averages goes up or down. The economy will have an indirect effect on the increase or decrease in the market indices or averages, but investors need to be clear not only how the economy can affect the market, but also why and how the market can move independently from the economy.

    With regard to the economy today, there is an ongoing focus on the discouraging unemployment numbers. What does not get as much attention is some of the numbers that are more encouraging. Without getting into a long explanation, the U.S. GDP is actually doing reasonably well, even while unemployment seems locked in at something close to 10%, with predictions that it will not decrease appreciably for some time. Americans are also concerned about global trade, per capita income, and the balance of income between the rich and everyone else. Still the primary economic concern that is oozing over to affect the market seems to be the depressing information on the unemployment rate.

    Now, having acknowledged the effect that perceptions of economic realities can have on market performances, it is important to notice as well that markets can act more or less independently of economic trends.

    Benjamin Graham once said that "In the short run, the market is a voting machine but in the long run it is a weighing machine." We might translate that to say that while the stock market in the short-term may be unduly influenced by the mood of investors, in the long run it goes up or down to the extent that companies make money. The short term can sometimes be many months, but ultimately whether companies make money determines the direction of the stock market.

    Unfortunately, there is little ability to forecast with certainty when profits will become the factor that moves the market. Thus it is important for investors to stay in the market. because investor sentiment, as witnessed particularly this calendar year, can change quickly.

    Companies themselves can also play a role in turning the market around. Do you remember when the term "lean and mean" was first introduced to describe companies in the U.S.? While the phrase may have come into vogue more than twenty years ago, it sought to highlight a shift that corporations made from being paternalistic by taking care of their employees and not laying off more people than absolutely necessary during downturns in the economy. The "new" lean and mean paradigm includes closely monitoring customer needs and desires and when there is less demand, making changes quickly. Overtime pay is cut back, the number of shifts is reduced, people are laid off, and inventory is not allowed to build. Our companies today, as a whole, are very much in the "lean and mean" mindset. The result today is high unemployment, limited wage increases, and very low inventories, to mention three of the most obvious realities. That way of doing business can mean that companies will respond quickly to challenging times and show increasing profits. While profits are increasing, this year's stock market prices have yet to reflect the fact.

    The Depression provides a useful illustration of companies making money when the economy is in difficulty. While investment returns during the first few years (1929 - 1932) were abysmal, long term returns beginning in 1933 and through the balance of the Depression were generally positive. If you invested money at the beginning of 1933, you would have made annual returns in excess of 11% in the next 8 years.

    Investors need to recognize that markets can make money even when the economy is not doing well. The confusion between the market and the economy that is promulgated in the media and in discussions around the water cooler at work is unhelpful. We are staying invested in the stock market so that when prices increase, we will be ready.


    The amount that banks charge for interest on home mortgages is at historic lows. Recent rates for a 15 year mortgage have been at 4.125% with no points. Thirty year rates are about .5% higher at 4.625%. A 15 year, fixed-rate mortgage has monthly payments of $746 per $100,000 borrowed. We recently helped a client get such a mortgage. The total borrowed was $417,000, and the new monthly payment is $3,111. While calculating the total savings over the life of the loan is difficult, the client will save $1,050 per month on a cash flow basis.

    For those who have adjustable rate mortgages of home equity loans that will not be paid off in the next 1 - 3 years, this is a particularly good time to refinance. Although the interest rate on such mortgages may be low now, there is considerable risk that it will go higher - perhaps much higher - in the future. Today it is possible to lock in historically low costs for the duration of the loan.

    While there are always considerations beyond the interest rate, if you or someone you know has a rate of 5% or higher, you should think about refinancing. We are happy to discuss the options available and their pros and cons.


    Nearly all of us are intimidated at the potential expense involved in getting old. People observe that it could cost $100,000 or more a year for a nursing home. Such an observation may be followed by a thought that buying long term care insurance is essential. With those kinds of costs, what is there to lose?

    We at O&A recognize that there are genuine concerns about the whole issue of paying for care if one is unable to care for one's self or one's spouse. We also know that people often think of long term care (LTC) insurance as a ready solution to this worry. However, in order to evaluate the need, we begin at a different point. On average, we all lose money on insurance policies. Insurance companies cannot pay out more than they take in and still stay in business. They not only have claims to pay, they have broker fees and other expenses required to run the company. We begin with the assumption that it is likely that we will lose money on nearly all insurance purchases.

    As an example, many of us have paid a lot of money to insure our home over the years. Even so, nearly everyone seems to agree that paying one or two percent of the value of the home and its contents to guard against the risk of a total loss is well worth the money. Term life insurance, for families where the death of the breadwinner(s) would be catastrophic financially, is also generally considered a wise way to spend some of the family money.

    However, the circumstances may be very different for a family thinking of buying a LTC policy. Such a policy is not bought to protect an asset, nor is it bought for income replacement for the family, as with life insurance. It also should not be purchased as a way to turn small premiums into large cash payments at a later date. While that can happen for some people, it does not happen for the average person.

    There is also the issue with LTC insurance of looking very far into the future, which is always a problem. You buy a homeowners' policy for one year at a time and have the ability to change the terms of the policy as needs change. In buying a LTC policy, it is assumed by both the insurance company and the purchaser that it is very unlikely that you will collect any money in the first year - or even the first five or ten years. There is a many year commitment implied in purchasing a LTC policy, with little or no ability to change the terms, and both add to the dynamic in evaluating whether or not it is right.

    The basic questions in considering LTC have to do with running out of money.

    •  1. Is the person married and would long term care expenses risk the financial well- being of the healthy spouse?
    •  2. Does the person consider it very important that certain assets are protected to leave as a legacy to heirs or charity?
    •  3. If either of the above questions is answered yes, then the next question is: Is the person willing to pay the price in modestly diminished resources to avoid the risks inherent in the previous two questions?

    There is also a related question of money that may be available to support LTC with reduced insurance coverage, or no policy. Resources are likely to be freed up to support a person in a care facility because a number of expenses disappear when a person moves out of his house. The new care facility resident would normally spend very little money beyond the monthly fee at the facility. Such a person does not normally go out to dinner, buy expensive clothes, spend money on automobiles, or take expensive trips. While medical expenses will go up, much of that could be covered with health insurance. In calculating whether a person may run out of money, or not have enough money for the healthy spouse to live comfortably, diminished spending needs should be included in the mix.

    There need to be clear answers to all of these questions and they may well involve other people: a spouse, children, a charity which might suggest other ways to leave a legacy, a financial planner to make calculations, etc.

    In addition to considering LTC insurance as a way to pay the expenses involved in aging, you should also think about these options:

    •  1. To self-insure. While LTC is expensive, a number of normal expenses will likely go away, particularly for a single person who would no longer need a house if she enters a care facility. Couples can also self-insure, but the cost of maintaining a home will not be significantly reduced if one person enters such a facility.
    •  2. To consider a Continuing Care Retirement Community (CCRC). There are more and more of these facilities around and if you can afford to go into one and think that would fit your lifestyle, you do not need a LTC policy.
    •  3. To use Medicaid as a back-up. For a variety of reasons, this is not a likely option for most of our clients. There are a number of requirements to qualify and they vary from state to state. But if you have money available (whether you self-insure or have a LTC policy), can pay for up to five years of care, and then run out of money, Medicaid will generally step in. While the majority of people who enter a care facility do not live more than three years, Medicaid may be an option for those who live a longer time in such a facility.

    If this article has focused more on the reasons why not to buy a LTC policy, that is so because most of what we read seems to be focused on why to buy such a policy. There are definitely those for whom buying a policy is the right decision.

    If you ultimately decide that you want a LTC policy, it is useful to shop around. Get more than one proposal and consider carefully the many options. Consulting with O&A, financial planners who have no vested interest, is often useful.

    While we have sketched out the considerations above, a client's unique circumstances will provide the most relevant factors in charting a course toward proving adequate financial resources for the future.


    CONVERT NOW? For the first time, there are no income restrictions on those wishing to convert an IRA to a Roth IRA. We are in the process of reviewing each client's situation to assess whether it is advisable for an individual or a couple to convert some or all of an IRA. We will be in touch with you if we think it is at least a topic worth discussing with you, and we would welcome your questions.

    CLASS ACTION SUITS: Many of our clients have received notice of class action suits brought against Janus, Columbia, and a number of other companies. We have been investigating whether there is any likelihood of actually collecting on the claim and will contact you if completing the paperwork would be advantageous. For most of our clients, there will be no award from this recent group of mailings, because money awards below a certain threshold (often $50) are not processed.

    TAX RETURNS: If we don't have a copy of your 2009 tax return, please send it to Kathy Patton in our New York office. If your accountant can email us a pdf file, this is preferable.

    PERSONNEL: Deborah Maher and Judy LaPorta plan to attend the Baron Funds investment conference in October, as they have for years. Most of our clients own a Baron mutual fund and, if you do and would like to spend an informative and fun (with big name entertainment) day in NYC, go to their website www.baronfunds.com for information or to register. Also in October, Deborah plans to volunteer again for the Financial Helpline. David will attend the Regional NAPFA conference in Boston the first week of November.

    Susan Otto Goodell is in the final stage of the process to qualify for her Certified Financial Planner designation. She will take a preparatory class in Denver from Oct. 18 - 22 and then sit for the exam three weeks later. We are keeping our fingers crossed.

  • New York Address

    Otto & Associates, Inc.

    200 Katonah Ave.
    Katonah, NY 10536

    Tel: 914-232-5379
    Fax: 914-232-5378

    Printable Directions

    Vermont Address

    Otto & Associates, Inc.

    P.O. Box 1203
    261 Main Street
    Norwich, VT 05055

    Tel: 802-649-1946
    Fax: 802-649-7048

    Printable Directions

    Directions to Otto & Associates, Inc.
    200 Katonah Ave., Katonah, NY 10536


    Take Interstate 684 south to Exit 6 - Katonah.
    Turn right at light onto Route 35. Proceed to next light.
    Turn left onto Woods Bridge Road and continue through town for .6 miles.
    Turn left onto Allen Place. Proceed to end of block.
    200 Katonah Ave. is the brick building directly in front of you.
    Turn right and then turn left into the parking lot.
    A two hour parking section is in the first row directly behind the building.(Do NOT park in the Permit Only parking areas before noon.) Additional parking is located across the street, behind Tazza, and one hour parking is available on the street.

    FROM THE SOUTH - Interstate 684

    Take Interstate 684 north to Exit 6 - Katonah.
    Turn left at light onto Route 35. Count two additional traffic lights and at the second light.
    Turn left onto Woods Bridge Road and follow directions above.

    FROM THE SOUTH - Saw Mill River Parkway

    Take the Saw Mill River north to the second Katonah exit.
    Turn left at the light onto Route 35.
    Follow above directions FROM THE SOUTH - Interstate 684.


    Take the Whitestone or the Throgs Neck Bridge to the Hutchison Parkway.
    Just beyond White Plains, bear left and take Interstate 684 North.
    Follow above directions FROM THE SOUTH - Interstate 684.


    Take Metro North (Harlem Line for Brewster) to the Katonah station.
    Walk up the stairs, left over the tracks, and down to Katonah Avenue.
    Cross the street, turn left, walk 2½ blocks to 200 Katonah Avenue (on your left.)

    Directions to Otto & Associates, Inc.
    261 Main Street, Norwich, VT 05055

    Take I-91 to Exit 13, the Hanover/Norwich exit.
    At the end of the exit, turn toward Norwich and away from Hanover. (From the north that is a right turn; from the south it is a left turn.)
    After passing a new, 5 unit condominium complex, we are the third driveway on the left. The house is known locally as the "Middle Brick", for obvious reasons.
    The entrance to the office is on the side of the house.