What would you do?

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etj4588's picture
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Client:  41 year old male.
Investments:  mutual funds and stocks - NQ
 
Client of mine recently lost $40K over the last year and called today stating that he is done losing money.  Wants ideas on principal protected investments.  He is open to ideas.
 
Can do CDs or corporates, but does anyone have any ideas that are more attractive? 

San Houston's picture
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Fixed or Indexed annuity. Lay out some choices and let him choose. 

etj4588's picture
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He's 41.  Wouldn't an annuity keep him locked in till 59 1/2?

San Houston's picture
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etj4588 wrote:He's 41.  Wouldn't an annuity keep him locked in till 59 1/2?No. He won't be "locked in." He can get his money if he's willing to pay a 10% penalty on the profit. Much less than the penalty he's already paid to be in the market.

etj4588's picture
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So the penalty is only on gains for early withdrawal?

San Houston's picture
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etj4588 wrote:So the penalty is only on gains for early withdrawal?Correct. His initial premium dollars had already been taxed when he earned them.

San Houston's picture
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iceco1d wrote:Now that's slick...and I'm not talking about the recco.  What ARE you talking about?

etj4588's picture
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So let me get this straight because I've never sold an annuity to anyone under 60:
He puts $100K into, for examples sake, a 1 year Fixed Annuity paying 3%.
At the end of the year, he withdraws the money.  He would be withdrawing $103K minus $300 penalty, so in total he gets $102,700 (forget ordinary taxes for the moment).  So the effective yield would actually be 2.7%?
Am I correct here?

San Houston's picture
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etj4588 wrote:So let me get this straight because I've never sold an annuity to anyone under 60:
He puts $100K into, for examples sake, a 1 year Fixed Annuity paying 3%.
At the end of the year, he withdraws the money.  He would be withdrawing $103K minus $300 penalty, so in total he gets $102,700 (forget ordinary taxes for the moment).  So the effective yield would actually be 2.7%?
Am I correct here?Yes.

San Houston's picture
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iceco1d wrote:San Houston wrote: iceco1d wrote:Now that's slick...and I'm not talking about the recco.  What ARE you talking about?
 
Gee I dunno!  I get it.

etj4588's picture
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You got a different idea ice?

Spaceman Spiff's picture
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etj4588 wrote:Client:  41 year old male.
Investments:  mutual funds and stocks - NQ
 
Client of mine recently lost $40K over the last year and called today stating that he is done losing money.  Wants ideas on principal protected investments.  He is open to ideas.
 
Can do CDs or corporates, but does anyone have any ideas that are more attractive? 
 
Tell him that he's only trading what he loses money to.  If he moves to something fixed like a CD paying 1.5% right now, sure,  his money is guaranteed, but so are his taxes and his ability to lose purchasing power to inflation, which from all that I've read and learned is right around the corner.  Tell him to grow a pair and give you some more money to add to his investments.  If he doesn't  understand the long term effect of making a stupid decision like this now, fire him.  Send him to the bank.  Two or three years down the road, after he's missed a 40% upswing, he'll be complaining to you because his buddies are on the road to recovery, but he's lagging behind. 
 
Hartford has a great piece called Crisis to Confidence.  Have them overnight you some copies and show him pages 2 and 3.  It'll be a 5 minute discussion.  If you don't end up with him either staying put or adding money, you've done something wrong.
   

liquid's picture
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Fire him and find someone with a reasonable risk tolerance for his time horizon.

Sam Houston's picture
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San Houston wrote: etj4588 wrote:He's 41.  Wouldn't an annuity keep him locked in till 59 1/2?No. He won't be "locked in." He can get his money if he's willing to pay a 10% penalty on the profit. Much less than the penalty he's already paid to be in the market.
 
I have a question for you Hank.  Wouldn't this situation concern you?  Clients don't remember half of what they are told ten minutes later, much less years later.  A broker in my office just had a complaint filed against him over a pre 59 1/2 annuity withdrawal issue.  Wouldn't you be concerned this will come back on you being the client is so far away from a penalty free withdrawal?

San Houston's picture
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Sam Houston wrote:San Houston wrote: etj4588 wrote:He's 41.  Wouldn't an annuity keep him locked in till 59 1/2?No. He won't be "locked in." He can get his money if he's willing to pay a 10% penalty on the profit. Much less than the penalty he's already paid to be in the market.
 
I have a question for you Hank.  Wouldn't this situation concern you?  Clients don't remember half of what they are told ten minutes later, much less years later.  A broker in my office just had a complaint filed against him over a pre 59 1/2 annuity withdrawal issue.  Wouldn't you be concerned this will come back on you being the client is so far away from a penalty free withdrawal?Well, Primo, no. It wouldn't concern me.

Fud Box's picture
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Spaceman Spiff wrote:etj4588 wrote:Client:  41 year old male.
Investments:  mutual funds and stocks - NQ
 
Client of mine recently lost $40K over the last year and called today stating that he is done losing money.  Wants ideas on principal protected investments.  He is open to ideas.
 
Can do CDs or corporates, but does anyone have any ideas that are more attractive? 
 
Tell him that he's only trading what he loses money to.  If he moves to something fixed like a CD paying 1.5% right now, sure,  his money is guaranteed, but so are his taxes and his ability to lose purchasing power to inflation, which from all that I've read and learned is right around the corner.  Tell him to grow a pair and give you some more money to add to his investments.  If he doesn't  understand the long term effect of making a stupid decision like this now, fire him.  Send him to the bank.  Two or three years down the road, after he's missed a 40% upswing, he'll be complaining to you because his buddies are on the road to recovery, but he's lagging behind. 
 
Hartford has a great piece called Crisis to Confidence.  Have them overnight you some copies and show him pages 2 and 3.  It'll be a 5 minute discussion.  If you don't end up with him either staying put or adding money, you've done something wrong.
   
I just had the chance to listen to Dr. Quincy Krosby of the Hartford speak yesterday, and they handed out that "Crisis to Confidence" pamphlet. It's short, sweet, and simple to understand. It really makes a good case for the values of controlling your emotions during the inevitable financial crises that occur as well as a solid explanation of "buying pessimism and selling optimism".
 
They made it almost completely product/company neutral, so you can use it even if you don't like the Hartford. I say "almost" b/c the last two pages are dedicated to advertising the Hartford.

SometimesNowhere's picture
Joined: 2008-12-22

I've got this strategy I've been using with my clients, approved by some of the brightest minds on Wall St.
- Fill half of your portfolio with MBS. Make sure you get some good, high yield ones out of CA and FL.
 
- Buy CDO's on margin
 
-Take the rest of the money in your portfolio and remodel your house. Make sure you include a four-legged comode.
 
The only downside of this plan is, if it fails, you have to go before congress so they can pontificate, and you get to answer questions about your compensation and what stock purchases you made in the past year.
 
Trust me, it will work.

buyandhold's picture
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Give him 3 options.
1. Stay in equity. It's your best long term choice and here's why.
2. You're freaked out by your losses. Let's move this into a money market until you're comfortable. Then we can jump back in.
3. Show him a fixed annuity or an EIE if you can do those.
 
His choice. You're not responsible for his choices. I suspect that what he really wants is a one-year, insured note paying 10 percent. He won't go for the fixed annuity 'because it won't pay me enough' and he won't go for the money market 'because I'll miss the rally.'
 
 
 

Borker Boy's picture
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Spaceman Spiff wrote:etj4588 wrote:Client:  41 year old male.
Investments:  mutual funds and stocks - NQ
 
Client of mine recently lost $40K over the last year and called today stating that he is done losing money.  Wants ideas on principal protected investments.  He is open to ideas.
 
Can do CDs or corporates, but does anyone have any ideas that are more attractive? 
 
Tell him that he's only trading what he loses money to.  If he moves to something fixed like a CD paying 1.5% right now, sure,  his money is guaranteed, but so are his taxes and his ability to lose purchasing power to inflation, which from all that I've read and learned is right around the corner.  Tell him to grow a pair and give you some more money to add to his investments.  If he doesn't  understand the long term effect of making a stupid decision like this now, fire him.  Send him to the bank.  Two or three years down the road, after he's missed a 40% upswing, he'll be complaining to you because his buddies are on the road to recovery, but he's lagging behind. 
 
Hartford has a great piece called Crisis to Confidence.  Have them overnight you some copies and show him pages 2 and 3.  It'll be a 5 minute discussion.  If you don't end up with him either staying put or adding money, you've done something wrong.
   
 
I live in a very rural area, and I used to believe that I had the absolute dumbest clients in the United States.
 
However, after this debacle began and I started trying to calm their fears using slick sales pieces, I realized that many of them aren't as dumb as they previously seemed to be. I was shocked at how many paid close attention to the cutoff dates on all of the "here's what you would've had" examples.
 
The Hartford piece is a good one, but the first thing I noticed is that the market is down almost 31% since 9/30/08--the date they use in their piece.
 
I don't know what the answer is, because I know it's difficult to update that stuff regularly, and I realize we're trying to get them to focus on investing principles, but come on, we're down substantially lower than the good ol' days of September 2008 (10850) and the forecasts continue to deteriorate.
 
The "steadfast" folks--those who decided to just hang in there--are down from $425K to $293K, and I don't know what CD rate they used, but the folks who bailed and bought CDs have been earning interest on their $277K since 9/30, so the gap's closing quickly.
 
My clients ain't buyin' the dog-and-pony show anymore. 
 
 

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Nice how they control the dates to make it look better. It used to be a convenient way for me to convince unsuspecting prospects that the investments I was offering up had done a whole lot better than the ones they had...I manipulated the start dates to my satisfaction(Loved the hypo system from Jones, another slick trick from my mentor). 
If you sit back and look at the industry as a whole, IT IS IN THE BEST INTEREST OF THE ESTABLISHMENT to keep the clients in a buy and hold mindset.  Now I hear radio adds for lawyers toting.."your broker told you to hold on...and your investments rode the market all the way down.." if you feel this is you, call us.  If your licensed in this industry, you had the same training as virtually everyone else...buy and hold is the way...slick advertisment toting the gains after the down years, etc. However, all the returns are based on your clients putting money in on January 1st of each year, and we all know we don't due all our business on that exact date.  So the advertised returns for most investments are very misleading, and how they can do differently is beyond me.
I guess when you get a letter from a clients lawyer, just whip out the slick add from Hartford...see if that will get you off. This industry is all smoke and mirrors...all of it. 

buyandhold's picture
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No load, no-expense, no wrap index funds are down 50 percent from their peaks, too; and this market has exposed the concept of non-correlated assets as academic fiction that only works when you jigger the assets after the fact.

Borker Boy's picture
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I don't believe he was asserting that no-loads and ETFs are immune from a downturn.
His issue is with fees and expenses that provide no value.

buyandhold's picture
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I ran some numbers comparing Vanguard/annual fee vs. American Funds A shares using those guidelines and got this:
Vanguard Total Return Bond 70 pct, 500 Index 30 pct, 100k, since 12/01/1986. Auto rebalance. 1 percent annual fee. Grows to 395,644. .42 10-year beta. Total fees to broker dealer: 59,451.
Bond Fund of American 70 pct, Washington Mutual 30 pct, same. 3.5 pct initial charge, no annual fee. Grows to 452,010. .33 10-year beta. Total fees to broker, 3500 initially, plus trails (probably a quarter of 59451.)
Lessons: 1. We put too much stock in our portfolios. 2. I gotta get to a fee based platform!
 
 

Chuck's picture
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this one is kinda boring but pretty darn solid... pimco total return fund, 4.33 POSITIVE return in 2008. positive so far for 2009

Sam Houston's picture
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iceco1d wrote:Buy & hold isn't the problem.  Buying the wrong shit, paying the wrong people for non-value added services...and then holding the crap you bought forever, is the problem. 
 
I'm not going into another b&h or passive vs active debate...but here's another way to look at it.  If you waste 100 bps a year paying a management fee to some a-hole @ putnam to manage mutual funds (yes, I'm being nice to them here), then waste another 50 bps in turnover costs within the fund, then pay your "broker" another 150 bps to wrap you into some shit allocation of funds, guess what you have to do to reach your goals?  Take a shit load more risk because you are paying a shit load of people to provide largely non-value added services.
 
Shit, in the above example, your expenses are 3% before you even get started!  Well no shit you have to take a bunch of extra risk (read: more equity exposure) to achieve your 7 or 8% return to reach your goals.
 
What if you largely bought index funds or ETFs (total expenses maybe 40 bps?), and then only paid your "broker" a 1% wrap fee...aww hell, give'm 1.1%.  Cut out 1.5% worth of non-value added "our industry bullshit" and all of a sudden you can trim down your equity exposure 15 or 20% to reach the same return over the long haul. 
 
Yes, this does require you to pull your head out of your ass and realize American Funds isn't providing you any real value with their "we go wherever we need to go to achieve our goal of Growth & Income" - and this may require you to actually realize you need to control the duration, maturities, credit quality, etc. of your fixed income (since, it IS fixed income to provide stability to your portfolio, why would you want large pieces of it in highly sensitive fixed income securities...omg to squeeze a few extra bps in yield?  gimme a break). 
 
And of course, if you have access to some negatively correlated assets, you could take 12 minutes and learn about them too.
 
But wait...if you STILL think all of this bullshit, you could take the extra $$$ you saved by NOT paying douchebag companies like Putnam or American, and buy yourself some puts as a hedge. 
 
No no no Ice.  You are a moron.  I leave the money management to the CFAs.  I bring on WORLD CLASS money managers for my clients that are well worth their fee.  Oops.  Nevermind.  They are down 35%+ too. 
 
Buy & hold isn't broken.  The people selling it are. 
 
If you aren't going to take the time to figure out wtf you are doing wrong, and are in love with pre-printed nonsense sales literature...do yourself, and your clients a favor, throw away your American Funds, Frankling Templeton, and Putnam literature, and only sell them annuities (my god I didn't just say that, did I?). 
 
Ice, I can put the active v. passive debate to rest.  PM me and I wll give you info that will change your life.

jkl1v1n6's picture
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Sam,
Don't ask for a PM, put it out there so the rest of us can see this debate unfold. 

jkl1v1n6's picture
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It must have been very enlightening indeed!

Ron 14's picture
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Borker Boy wrote:Spaceman Spiff wrote:etj4588 wrote:Client:  41 year old male.
Investments:  mutual funds and stocks - NQ
 
Client of mine recently lost $40K over the last year and called today stating that he is done losing money.  Wants ideas on principal protected investments.  He is open to ideas.
 
Can do CDs or corporates, but does anyone have any ideas that are more attractive? 
 
 Sell this guy out and fill out his ACAT to Mattress Federated, he is an idiot and at age 42 should be doubling down

NORM's picture
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Originally posted by Borker BoySpaceman Spiff wrote:etj4588 wrote:Client:  41 year old male.
Investments:  mutual funds and stocks - NQ
 
Client of mine recently lost $40K over the last year and called today stating that he is done losing money.  Wants ideas on principal protected investments.  He is open to ideas.
 
Can do CDs or corporates, but does anyone have any ideas that are more attractive? 
 
 Sell this guy out and fill out his ACAT to Mattress Federated, he is an idiot and at age 42 should be doubling down
__________________________________________________________________________
 
Other than his age 42, what do you base this recomendation on?\
 
Why is he an idiot?
 
Norm
 
 
 

Indyone's picture
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I'll ask the other question...tell us why moving to full principal protection now is a smart idea for a 41-year-old.
I recognize that there are holes in the profile information...let's assume typical profile for a 41-year-old male...working full-time, average risk tolerance, 10 years investment experience, sufficient current income, sufficient emergency fund, no extraordinary anticipated expenditures on the near-term horizon.  Anything else you want to make the call?

etj4588's picture
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Indyone wrote:
I'll ask the other question...tell us why moving to full principal protection now is a smart idea for a 41-year-old.
I recognize that there are holes in the profile information...let's assume typical profile for a 41-year-old male...working full-time, average risk tolerance, 10 years investment experience, sufficient current income, sufficient emergency fund, no extraordinary anticipated expenditures on the near-term horizon.  Anything else you want to make the call?
 
Yeah, I've tried explaining that he shouldn't be principal protected, but he doesn't wan't to hear it.  The question is now becomming, how long do I want to argue with this guy?  Or should I just do what he wants and call it a day?

fritz's picture
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etj4588 wrote:Indyone wrote:
I'll ask the other question...tell us why moving to full principal protection now is a smart idea for a 41-year-old.
I recognize that there are holes in the profile information...let's assume typical profile for a 41-year-old male...working full-time, average risk tolerance, 10 years investment experience, sufficient current income, sufficient emergency fund, no extraordinary anticipated expenditures on the near-term horizon.  Anything else you want to make the call?
 
Yeah, I've tried explaining that he shouldn't be principal protected, but he doesn't wan't to hear it.  The question is now becomming, how long do I want to argue with this guy?  Or should I just do what he wants and call it a day?
 
Why would you argue with any client?  Let them do what they want.  In this market I would never think about talking anyone out of selling anything.  25% of my clients, who were about 35% in cash, wanted out of the market in October and I said OK, dont think its going anywhere for awhile anyway.  DOW was about 9500 at the time.  Some were fee based, so going to 50-75% cash cost me some production..but watching others in the office telling people "you are selling at the bottom," I feel better about letting people do what they want/wanted.  I dont know how the brokers can sleep that kept people in for the last 5000 points?  Think about 1/3 of the S&P 500 is shot, even after we stop going down sometime next year maybe, we are going to trade sideways for years.  Maybe between 5500 to 8000??  Probably going to be boring, especially for the people who rode the stuff down from 14,000.

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fritz wrote:etj4588 wrote:Indyone wrote:
I'll ask the other question...tell us why moving to full principal protection now is a smart idea for a 41-year-old.
I recognize that there are holes in the profile information...let's assume typical profile for a 41-year-old male...working full-time, average risk tolerance, 10 years investment experience, sufficient current income, sufficient emergency fund, no extraordinary anticipated expenditures on the near-term horizon.  Anything else you want to make the call?
 
Yeah, I've tried explaining that he shouldn't be principal protected, but he doesn't wan't to hear it.  The question is now becomming, how long do I want to argue with this guy?  Or should I just do what he wants and call it a day?
 
Why would you argue with any client?  Let them do what they want.  In this market I would never think about talking anyone out of selling anything.  25% of my clients, who were about 35% in cash, wanted out of the market in October and I said OK, dont think its going anywhere for awhile anyway.  DOW was about 9500 at the time.  Some were fee based, so going to 50-75% cash cost me some production..but watching others in the office telling people "you are selling at the bottom," I feel better about letting people do what they want/wanted.  I dont know how the brokers can sleep that kept people in for the last 5000 points?  Think about 1/3 of the S&P 500 is shot, even after we stop going down sometime next year maybe, we are going to trade sideways for years.  Maybe between 5500 to 8000??  Probably going to be boring, especially for the people who rode the stuff down from 14,000.
 
I hear what you are saying Doctor, but I like smoking and wish to continue.  Also, why don't you prescribe me some codiene.

MinimumVariance's picture
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Joined: 2008-08-20

You say You have a problem booby?
 
All you need is an annuity.
 
Seriously if he's tired of losing $$$ you need to overlay some portfrolio puts on him. Use real put contracts, not these manufactured things like the SDS. Decide if you're gonna be delta neutral, calculate his portfolio beta, and ipso facto you're done. BTW: have your BM check your math.

squid66's picture
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Why are you an advisor if your approach is to let clients do what they want?

deekay's picture
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squid66 wrote:Why are you an advisor if your approach is to let clients do what they want?
 
Uhh...it's their money.  Give them their options, make your case for the one you think the client should go with, and let them make the decision.  If they choose the one you didn't recommend, make a note in their file and move on.
 
No doctor has a 100% close rate on their recommendations, it's naive to think we as financial professionals would either.

squid66's picture
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Joined: 2009-03-30

It isnt the close rate, it is the lack of conviction about a solution.  As they say on sports radio: Have a take and dont suck

deekay's picture
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Joined: 2007-05-15

Reading between the lines, I can see a moral - bring your best every time you deal with a client or prospect.  That much I can agree with.
On the surface though, you sound like a OLTG (On-Line Tough Guy).  Every one of your posts so far have been abrasive, with very little value to add.
 
I could be wrong though - you may be a wealth of information but haven't decided to share yet. 

squid66's picture
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Joined: 2009-03-30

I have nothing of value. After lurking this board for a while I couldnt take anymore.  Too many ppl who are clueless giving the few true professional a bad name.

deekay's picture
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Joined: 2007-05-15

You have nothing to add, yet you're frustrated about the lack of good advice on the boards?  Wha?

dshibb's picture
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Joined: 2009-03-30

Amen Squid. I have been checking this board for several months now, and it astonishes me that many of you guys are considered "professionals". Some have brains, but not most. The good news is that I am starting to think there isn't much competition out there.

Ron 14's picture
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Joined: 2008-07-10

I have a 3 strikes you're out policy. If some dude is 40 and wants out of equities until things "improve" I will explain to him why he needs to stick with the plan we have in place twice. If he comes to me a third time with the latest "the sky is falling" commentary from CNBC, I put him in a Fixed Annuity if IRA money or a CD or a US Gov fund and call it a day.

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