What’s Going on in the Markets March 25, 2018

March 25, 2018 — Sam H. Fawaz

With the threat of a trade war, the appointment of a new National Security Advisor, and potential war drums being pounded, the markets took a pounding of their own last week. After a robust recovery, the stock markets now seem intent on re-testing the February 8th lows.

As stocks went on sale again, there didn’t seem to be a lot of bargain hunters stepping in to take advantage of the lower prices. The S&P 500 lost 5.9% over five days, its worst week since January 2016.

S&P 500 weekly change

This action follows a by-now-familiar pattern: the Trump Administration announces tariffs—this time on Chinese imports with an estimated value of $60 billion a year—but is not specific on the details. Traders fear that there will be retaliation against American products sold abroad, and put a lower value on the large multinational companies that account for most exports and make up most of the major indexes.

The last time this happened, the tariffs involved steel and aluminum, and the panicked sellers later discovered that the impact on global trade was actually quite small, due to negotiated exemptions for major steel producing nations like Canada and South Korea—plus the Euro-zone and Mexico. This time around, the U.S. trade representative has 15 days to develop a list of specific Chinese products to slap the additional taxes onto, and there will be a public comment period before the threatened tariffs go into effect. China has announced that it is developing its own list, and as companies (and farmers) become aware of what is included in its reported $3 billion tariff package, they will lobby for exemptions which may turn this announcement into another tempest in a teapot.

Meanwhile, in the wake of the Cambridge Analytica scandal, admissions that private information on 50 million people had been pilfered, and up to 126 million Americans had seen posts by a Russian troll farm on its site, Facebook shares fell almost 10%, from $176.83 down to $159.39. This took the social media giant down from the 5th largest-capitalization company in the S&P 500 index to the 6th (behind Berkshire Hathaway)—dragging the index down even further.

What’s remarkable about the selloff over things that might or might not happen, is that it came amid some very good news about the U.S. economy. Durable-goods orders jumped 3.1% in February, sales of newly-constructed homes were solid, and Atlanta Fed president Raphael Bostic announced that there were “upside risks” in GDP and employment. Translated, that means that the economy is looking too good to keep interest rates as low as they have been—which means this is a curious time to be selling out and heading for the investment sidelines.

Of course, that doesn’t mean that the market can’t “correct” further. As the market tests the February 8 lows, an overshoot to a new low cannot be ruled out, but all the selling last week is at least arguing for a robust bounce, which I expect to materialize this week. The quality and durability of that bounce will tell us a lot about the strength of the market going forward.

The week before the Easter holiday tends to be seasonally bullish, as long as cooler heads prevail.  If you haven’t lightened up your portfolio risk in a very long time, and feel the need to reduce your stock fund exposure, that may be a better time to lighten up your risk. Heck, if you’re under-exposed to stocks, this may be a good place to pick up some of your favorite names at a discount.  Disclaimer: this is not a recommendation to buy or sell any securities.

For our clients, we have reduced exposure to some overvalued stocks and funds over the past several weeks, increased exposure to some undervalued ones, and have increased our hedges to reduce our overall risk. For the most part, however, the benefit of the doubt goes to this bull market until economic and market conditions change drastically.

Whatever you do, don’t panic as a result of the headlines. There’s always a better time to sell, and that’s not into the teeth of a headline driven sell-off. As I’ve said before, market volatility is the price we pay for the superior returns of stocks, and now that’s what we’re paying for. Stocks can only give you superior returns if you don’t panic out of them at the first sight of turbulence.

If you would like to review your current investment portfolio, your level of risk. or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Sources:

http://theirrelevantinvestor.com/2018/03/23/8750/

https://www.marketwatch.com/story/heres-why-the-stock-market-took-the-china-tariffs-so-hard-2018-03-22

https://www.usatoday.com/story/money/2018/03/22/stock-market-falls/448665002/

http://www.symbolsurfing.com/largest-companies-by-market-capitalization

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

Posted in Financial Planning, General, retirement planning. Leave a Comment »

It’s My Turn to Retire-How do I Pay Myself?

March 11, 2018 — Sam H. Fawaz

It’s no surprise that more and more of my clients (and prospects) are coming to me as they approach retirement and are increasingly anxious about how to make the transition from accumulation of their retirement funds to distribution of those funds. Questions like “when should I claim social security, how much is safe to withdraw each year, what account should I take it from first, how will taxes affect my retirement, how should I safely invest during retirement, what should I budget for healthcare costs, what medicare plans are best for me?” are among the many questions on pre-retirees’ minds.

With an estimated 10,000 people retiring every day, this unprecedented surge of new retirees is expected to last for the next 17 years. Many, perhaps most, will roll their retirement plan assets into an IRA account, and that money–plus Social Security, possibly a small pension and any taxable retirement accounts they may have–will provide their living expenses for the rest of their lives.

This is different from retirees in the past, who often received regular sizeable payments from their defined benefit plans–their equivalent of a retirement paycheck. Millions of new retirees are being required to make a new kind of calculation: how do I translate a lump sum retirement account into sustainable income over the rest of my retirement? For those of us who are accustomed to receiving income throughout our lives, this is not an easy calculation to make.

Suppose, for example, a 65-year-old couple retires, and when their pension assets are rolled into the IRA, they have a total of $4 million between the IRA and their retirement accounts. They can start receiving $1,750 a month from Social Security. With so much money in the bank, they feel comfortable joining an expensive country club, traveling around the globe, and before long, a large recreational vehicle is parked in their driveway. They remodel the kitchen. By age 68, they still have $2.5 million in the bank and are back down to spending $170,000 a year (including taxes). Are they all right, or not?

This is the kind of calculation that financial planners who serve retiree couples wrestle with all day long, and there are few definitive answers. Some of the pioneering research into safe spending in retirement, most notably by Bill Bengen of La Quinta, CA, take into account what is called “sequence risk”–meaning that some unlucky retirees will experience a severe market drop in their early years, which will make it more likely that they’ll run out of money before they die. The research assumes that the retired couple wants to raise spending, each year, at exactly the inflation rate, so they maintain spending power and overall lifestyle. Then it looks at the historical market returns, and identifies a spending level that would have survived even the worst sequence risk scenarios. The answer is between 4% and 4.5% of the retirement portfolio in the first year, with that dollar amount rising with the inflation rate each year (that approach requires retirement savings of approximately 20-22 times your annual lifestyle budget expected in retirement) .

In our hypothetical retiree example, Social Security is paying for $21,000 of the couple’s living expenses, meaning the portfolio has to come up with an additional $149,000, indexed to inflation, for the next 30 or so years. That comes to almost exactly 6% of the remaining portfolio. The couple feels financially solvent, but they are really highly at risk if the market turns down in the next few years.

Other research, notably by Jon Guyton of Minneapolis, MN, has factored in the possibility that a retired couple will be willing to forego inflation increases in years when their retirement portfolio has lost money. This so-called “adaptive withdrawal” strategy allows a retiree couple to raise spending to approximately 4.8% of the initial portfolio. Once again, under this other scenario, our hypothetical couple is in the spending danger zone. And this only covers a 30-year period. People who live longer would need to live on somewhat less–but how do you know how long you’ll live?

Others, including Jim Shambo of Colorado Springs, have looked at the Bureau of Labor Statistics research on actual spending in retirement, and found data that questions the assumption that people in retirement only increase their yearly spending by the inflation rate. Shambo found that the government-calculated Consumer Price Index appears to understate actual yearly increases in retirement spending by as much as one and a half percentage points a year–meaning if the CPI goes up by 3%, actual spending may rise by anywhere from 3.25% to 4.5%. Using a more complex calculation, Shambo found that people age 75 and older were spending between 13.2% and 22.07% more than the inflation statistics would indicate.

Of course, all of this research focuses on surviving the worst-case scenario–the times when the markets are least favorable to a comfortable retirement. If the market climate is, instead, sunny during the early years of retirement, if our hypothetical couple happened to retire in the early years of a bull market, then their current spending won’t be a problem, and they may actually be able to increase their lifestyle expenditures.

Self-serving statement alert: The only way to stay in the safety zone is to have a professional run the numbers every year in light of recent market activity and long-term guidelines, and help you chart a course through the income maze. Converting a portfolio into a paycheck is a surprisingly complex exercise. Ten years down the road, when a few million baby boomers are well into retirement, you may be reading about some of the simple, innocent, tragic mistakes they made with their spending decisions when it felt as if they were flush with cash.

If you would like to review your retirement income options, current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Sources:  http://www.fpanet.org/journal/HowtoAchieveaHigherSafeWithdrawalRate/

http://www.advisorperspectives.com/newsletters12/The_Fallacies_in_Todays_Retirement_Plan_Assumptions.php

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

Posted in Financial Planning, General, retirement planning. Leave a Comment »

How Firm is your Investment Character?

February 25, 2018 — Sam H. Fawaz

One time Fidelity Magellan Fund manager and investing legend Peter Lynch once said “The real key to making money in stocks is not to get scared out of them.”

Benjamin Graham said “What investors need, but few have, is a “firmness of character.”” What he was referring to is the ability for investors to keep their emotions in check.

Investing success is more influenced by DQ than IQ. Our Discipline Quotient, or the ability to remain disciplined during emotional times, is what sets investors apart. Exercising investment discipline is a difficult, but not impossible endeavor.

Buy Low, Sell High

Every investor wants to buy low and sell high, yet it is so much easier to sell low and buy high; it just feels right at the time. Very few investors have the discipline to buy low or sell high because it is contrary to how we feel.

The price to earnings ratio (P/E) is a financial statement term that compares the price of a stock to the annual earnings per share (also called the earnings multiple).  Would you rather purchase a basket of stocks with an average P/E ratio of 13 or 34? Well, if you want to buy low, then 13 would be your answer. Yet, in March of 2009 with a market P/E of 13, no one wanted to touch stocks. Why would they? The expectation was that they would be going down a whole lot more.

Fast forward to 2018.  Now that the P/E is above 34 and the future looks positive, investors can’t seem to get enough of stocks.1 We often allow feelings, which are fleeting, to drive our investment decisions.

Keeping it Cognitive

One of the best ways to keep emotions at bay is to ask reflective questions. An honest assessment can often dampen emotions (less giddy during good times, less fearful during bad times), and empower you to make more thoughtful decisions.

Questioning valuation, investor sentiment, debt etc… can engage the thinking brain (which forces emotions out), and give us a chance to analyze the situation. We can then calculate the actual risk, rather than rely on our emotionally skewed perception of risk.

Knowing Yourself

Our perception of risk is highly fluid – it’s based on mood, media headlines and expectations. As humans, we tend to perceive less risk when times are good and overestimate risk when times are bad.

We are all influenced by emotions, especially with respect to our own money. That’s just part of being human. As your advisor, one of my primary roles is to help you remain disciplined and stick to your plan. Together, we can think things through and ensure that decisions are based on sound judgement and fair valuations, not on how we feel.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

(1) P/E calculations based on Shiller method for S&P 500 Index. The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. All indices are unmanaged and may not be invested into directly.

Information provided by The Emotional Investor, a member of The Behavioral Finance Network. Used with permission.

 

Posted in Financial Planning, General, retirement planning. Leave a Comment »

What’s Going on in the Markets February 5, 2018

February 5, 2018 — Sam H. Fawaz

It’s been a long time, more than a year, since I’ve posted an article about what’s going on in the markets. Market volatility, until last week, has been mostly subdued. For what seems like years now, markets seemed immune from any meaningful drop. But this still young month of February has seen volatility return with a vengeance.

This means that the U.S. stock market will finally get something that happens, on average, about once a year: a 10+ percent drop—the definition of a market correction.  The last time this happened, better known as a bear market, was a whopper: the Great Recession drop that caused U.S. stocks to drop more than 50%–so most people today probably think that corrections are catastrophic.  They aren’t.  More typically, they last anywhere from 20 trading days (the 1997 correction, down 10.8%) to 104 days (the 2002-2003 correction, down 14.7%).  Corrections are unnerving, but they’re a healthy part of the economy and the markets—for a couple of reasons.

Reason #1: Because corrections happen so frequently, and are so unnerving to the average investor, they “force” the stock market to be more generous than alternative investments.  People buy stocks at corporate earnings multiples which are designed to generate average future returns considerably higher than, say, cash or municipal bonds—and investors require that “risk premium” (which is what economists call it) to get on that ride.  If you’re going to take on more risk, you should expect at least the opportunity to get considerably more reward.

Reason #2: The stock market roller coaster is too unsettling for some investors, who sell when they experience a market lurch.  This gives long-term investors a valuable—and frequent—opportunity to buy stocks “on sale.”  That, in turn, lowers the average cost of the stocks in your portfolio, which can be a boost to your long-term returns.

The current market downturn relates directly to the first reason, where you can see that bonds and stocks are always competing with each other.  Monday’s 4.1% decline in the S&P 500 coincided with an equally-remarkable rise in the yields on U.S. Treasury bonds last Friday.  Treasuries with a 10-year maturity are now providing yields of 2.85%–hardly generous, but well above the record lows that investors were getting just 18 months ago.  People who believe that they can get a decent, relatively risk-free return from bond investments are tempted to abandon the bumpy ride provided by stocks for a smoother course that involves clipping coupons.  Bond rates go up and the very delicate supply/demand balance shifts, at least temporarily, in their direction, and you have the recipe for a stock market correction.

This provides us all with the opportunity to do an interesting exercise.  It’s possible that the markets will drop further—perhaps even, as we saw during the Great Recession, much further.  Or, as is more often the case, they may rebound after giving us a correction that stops short of the technical definition of a bear market, which is a 20% downturn.  The rebound could happen as early as tomorrow, or some weeks or months from now as the correction plays out.

Most bear markets coincide with the onset or expectation of a recession. Some even debate whether a recession causes the bear market or vice versa. The good news is that all indications are such that a recession is not on the horizon. Jobs, housing and many other manufacturing and services data are quite strong, retail sales are healthy, and most importantly, consumer confidence is near all-time highs. While this could all change, it would take at least 9-12 month for conditions to deteriorate enough and make the probabilities of a recession more likely than not. That’s why I believe that a bear market is not imminent.

A correction or even a bear market, once they’re over (no matter how long or hard the fall) you’ll hear people say that they predicted the extent of the drop.  So now is a good time to ask yourself: do I know what’s going to happen tomorrow?  Or next week?  Or next month?  Is this a good time to buy or sell?  Does anybody seem to have a handle on what’s going to happen in the future?

Record your prediction, and any predictions you happen to run across, and pull them out a month or two from now.

Chances are, you’re like the rest of us.  Whatever happens will come as a surprise, and then look blindingly obvious in hindsight.  All we know is what has happened in the past.  Today’s market drop is nothing more than a data point on a chart that doesn’t, alas, extend into the future.

Markets have become very oversold, a market technical term that indicates that we’ve sold off too far too fast. That means a bounce is near, and it may be a big one. If you’re worried about what the markets are doing, and overexposed on your risk, you should use these bounces to hedge your portfolio or sell some portions thereof to the “sleeping point”; that is, the point where you can sleep or get through your day without worrying about your portfolio declining. Think about putting some spare cash in the markets after you see some signs of the markets stabilizing, feeling good about picking them up on sale (Disclaimer: this is not a recommendation to buy or sell any security).

For our clients, over the past several weeks, we have reduced market exposure through sales of certain positions, and have increased our hedges. But we are not preparing for an all-out bear market. In fact, we have been looking to pick up some positions that are much more attractive after this latest selloff. After all, the stock markets are still in an uptrend, the economy is hitting on all cylinders, and there are no signs of an impending recession.

If you are worried or would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Sources:

https://www.fool.com/knowledge-center/6-things-you-should-know-about-a-stock-market-corr.aspx

https://www.yardeni.com/pub/sp500corrbear.pdf

https://finance.yahoo.com/news/stocks-getting-smashed-143950261.html

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

Posted in Financial Planning, General, retirement planning, US Stock Market. Leave a Comment »

A Strawberry Alarmist?

February 4, 2018 — Sam H. Fawaz

“Good sense, innocence, cripplin’ mankind
Dead kings, many things I can’t define
Occasions, persuasions clutter your mind
Incense and peppermints, the color of time

Who cares what games we choose?
Little to win, but nothin’ to lose”

— Song Lyrics from the 1967 hit single “Incense & Peppermints” written by Tim Gilbert & John S. Carter and performed by the group known as The Strawberry Alarm Clock

Suppose somebody came up to you and shouted: “I have terrible news about the economy. I think you should sell your stocks!”
Alarmed, you say: “Oh, my God. Tell me more!”
And this mysterious stranger shouts: “Run for the hills! The American economy just added 200,000 more jobs—more than expectations—and the U.S. jobless rate now stands at 4.1%, the lowest since 2000!”
You blink your eyes. So?
“There’s more,” you’re told. “The average hourly earnings of American workers have risen a more-than-expected 2.9% over a year earlier, the most since June of 2009! You should sell your stocks while you can!”

Chances are, you don’t find this alarmist stranger’s argument very persuasive, but then again, you don’t work on Wall Street. After hearing these benign government statistics, traders rushed for the exits from the opening bell to the closing on Friday, and at the end of the day the S&P 500 stocks are, in aggregate, worth 2.13% less than they were last Thursday. The NASDAQ Composite index fell 1.96% and the Dow Jones Industrial Average, a somewhat meaningless but well-known index, was down 2.54%.

To understand why, you need to follow some tortuous logic. According to the alarmist view, those extra 200,000 jobs might have pushed America one step closer to “maximum employment”—the very hard-to-define point where companies have trouble filling job openings, and therefore have to start offering higher wages. No, that’s not a terrible thing for most of us, but the idea is that if companies have to start paying more, then they’ll be able to put less in their pockets—and the rise in the hourly earnings of American workers totally confirmed the theory.

If you’re an alarmist, it gets worse. If American workers are getting paid more, then companies will start charging more for whatever they produce or do, which might raise the inflation rate. “Might” is the operative word here. There hasn’t been any sustained sign of higher inflation, which is still not as high as the Federal Reserve Board wants it to be. But if you’re a Wall Street trader who thinks the market is in a bubble phase, you aren’t necessarily looking at facts to confirm your beliefs.

Suppose you’re not an alarmist. Then you might notice that 18 states began the new year with higher minimum wages, which might have nudged up that hourly earnings figure that looked so alarming a second ago. And some companies have recently announced bonuses following the huge reduction in U.S. corporate tax rates, whose amortized amounts are also finding their way into wage statistics.

Meanwhile, those same government statistics are showing a resurgence in factory activity and a rebound in housing, which together, account for more than 50,000 of those new jobs.

So the question we all have to ask ourselves is: are we alarmists? Selling everything in anticipation of a bear market has never been a great strategy, even though stocks are admittedly still priced higher than they have been historically. Trimming some positions and perhaps putting on some hedges into one of the greatest bull runs of our time makes a lot of sense. But panicking never paid worthwhile benefits to anyone.

If you are not an alarmist, then you have something to celebrate. The S&P 500 has now officially ended its longest streak without a 3% drop in its history—as you can see from the below chart. It’s an historic run not likely to be seen by any of us again. The truth about the markets is that short, sharp pullbacks are inevitable and routine—unless you were living in the past year and a half, when we seemed to be immune from normal market behavior.

Strawberry Alarmist

Although the drop on Friday was a bit “jarring”, and technical indicators point to some internal deterioration, I don’t believe that this is the start of a bear market. Employment, housing and the overall economic environment are way too strong to give way to a recession, at least not in the next six to nine months.

I’ve been saying for months now that the market is way past due for a normal correction, as evidenced by the above chart. A pullback of 10-15% in the markets would be normal and healthy, to allow this market to “rest up” for the next move higher. If you think you’re nimble enough to get out of the markets now, and know when to get back in to catch the next wave higher, then I and 90% of the masses out there can probably learn from you. But as the great fund legend Peter Lynch once said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” 

If you’re concerned about the markets and you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Sources:
https://www.bloomberg.com/news/articles/2018-02-02/u-s-added-200-000-jobs-in-january-wages-rise-most-since-2009

https://www.bloomberg.com/news/articles/2018-02-01/asia-stocks-to-slide-as-tech-stumbles-bonds-drop-markets-wrap?

https://www.theatlantic.com/business/archive/2018/02/market-dow-drop/552254/?utm_source=atltw

TheMoneyGeek thanks guest writer Bob Veres for his contribution to this post

Posted in Financial Planning, General, retirement planning, US Stock Market. Leave a Comment »

Running for the Hills

January 31, 2018 — Sam H. Fawaz

I’ve never seen anything like it. The mere mention of Amazon eyeing another kind of business can send chills down traders’ backs who might own stocks in that line of business. It seems no one wants to be caught owning the next business Amazon might want to conquer.

As a result, on Tuesday morning, Wall Street traders woke up to something they haven’t experienced much of lately: actual market volatility.  One trader posted an image of his Bloomberg terminal at the market opening, which showed an immediate scary-looking plunge in U.S. equities as the opening bell rung.  By the end of the day, American stocks were down more than one percent, the worst one-day loss since last August, and capping the largest two-day loss since last May. One percent! Oh the horror of a selloff.

What’s going on?  Are U.S. stocks really a full percentage point less valuable today than they were yesterday morning?

By the end of the day, it was clear that much of the drop came from a handful of U.S.-based healthcare companies, whose stocks had been unloaded by spooked traders.  Why?  There had been an announcement by Jeff Bezos of Amazon, Warren Buffett of Berkshire Hathaway and Jamie Dimon of JPMorgan Chase, Inc. that they were thinking about forming a new independent healthcare provider.  The market prices of these companies fell anywhere from 1.8% to 8.6% as a result of this new, still-hypothetical competition. Collectively, these healthcare companies saw their total worth—measured by the value of shares outstanding—drop $30 billion in roughly two hours of trading.

Did this make sense?  Surely not.  Experienced stock pickers were basing their decision to sell, sell, sell on how Amazon totally disrupted retail investing. JPMorgan Chase has enormous financial clout and Warren Buffett is a legend in the investing world.  But the “plan” they announced was really more of an intention to create a plan, and it was uncertain whether the new disruptive high-tech healthcare provider would be available to mainstream Americans or just the employees of three very large companies that desperately want to reduce their health insurance costs.

It will be at least a year before we know what Bezos, Dimon and Buffett plan to create, if anything, and more years before any current healthcare provider is disrupted by their new model.  Healthcare companies have time to prepare for the competition, and meanwhile they should not be significantly less valuable one day over another, due to a vague announcement of a plan to do something.

The bigger lesson of the downturn is how easy it is to spook Wall Street traders these days.  With market valuations persistently higher than historical averages, traders seem to be jumping at shadows in hope of avoiding the next downturn.  The challenge they face is that nobody has a reliable way to predict the real thing before it happens.  Jumping at shadows just means, in many cases, running up trading costs and booking losses.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Sources:

https://qz.com/1192731/amazons-push-into-healthcare-just-cost-the-industry-30-billion-in-market-cap/

https://www.ft.com/content/3353179a-05d3-11e8-9650-9c0ad2d7c5b5

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

Posted in Financial Planning, General, retirement planning, US Stock Market. Leave a Comment »

A 2018 Forecast to Bank On

January 5, 2018 — Sam H. Fawaz

Will the markets go up, go down, go sideways, and by how much? If you’re like me, you’re reading many of the forecasts that pundits publish this time of the year. So I decided to publish my own.

Before I get into my market forecast for 2018, I want you to consider why forecasts are so alluring to investors like ourselves. What is the force that influences us to make decisions based on forecasts? There is ample evidence that expert forecasts are correct only half of the time, yet we are still attracted to them. Why?

You may not be able to put your finger on it because our attraction to forecasts is largely subconscious. It boils down to how the brain likes to operate. Our brain is a planning machine; it finds much contentment and peace in being able to plan. When we don’t know what the future holds, we can’t plan with certainty. This bothers the brain. So it, subconsciously, seeks for some sort of certainty. And forecasts, especially confident ones, provide an illusion of certainty.

We are subconsciously attracted to forecasts even though we consciously recognize that forecasts historically have not been very accurate. We fix this problem by giving greater weight to forecasts that 1) confirm what we want to happen and 2) are more confident than others. But these don’t improve the accuracy, just our perception of accuracy.

My Forecast

I am quite confident in my forecast for 2018. To be fair, it was the same forecast I’ve had in prior years (though this is the first time I’ve actually published it), and will likely be the same forecast in future years. Why wouldn’t I keep it the same? It has an overall accuracy very close to 100%:

  • The economy/market will do something that surprises us
  • Investors who watch or look at the markets or their portfolio quite often will experience more stress and greater unhappiness than those that don’t
  • No one will be able to predict what will happen perfectly, but it will all seem obvious in hindsight
  • You will wish you owned more stocks if the markets are going up, and wish you were holding more cash if the markets are going down
  • Your diversified portfolio’s return will not match the market’s return, will lag it in a rising market environment, and probably outperform it in a falling market environment (but you’ll find cold comfort in an outperforming portfolio if it’s still going down)
  • The pain of missing out on bigger gains will outweigh the pain of bigger losses
  • You will be tempted to abandon your plan at some point based on expert forecasts and/or short-term market performance
  • Investors that focus on those things they can control (i.e. your reaction) will have a better investment experience than those that focus on what they can’t control nor predict (i.e. What’s XYZ going to do?)
  • Investors who abandon their plan to chase a “winning investment” or “sure thing” will have lower long-term returns than investors who stick with their plan

You may be frustrated that my forecast doesn’t say anything about where the market will go or what sector to invest in. If so, then I’m sorry to disappoint you. But understand that in my 30+ years advising clients, I have learned that the best results are obtained by those who have the discipline to ignore the distractions and stick with the plan we have developed.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

I wish you all a prosperous, fulfilling, happy and healthy 2018.  Thank you for allowing me to be your trusted partner along the journey.

Source: Information provided by The Emotional Investor, a Member of The Behavioral Finance Network. Used with permission.

Posted in Financial Planning, General, retirement planning. Leave a Comment »

Tax Bill Provisions to Consider Before You Jingle All the Way

December 19, 2017 — Sam H. Fawaz

And the award for the busiest profession during the 2017 year-end holiday season goes to…..tax preparers and planners…..the crowd goes wild and applauds loudly. “I’d like to take this opportunity to thank our President, our senate and our House of Representatives for this “gift”. Without their last minute help and effort, no one could have made this Christmas to New Year’s period any busier for us.”

Laughing all the way…

The new tax law hasn’t been fully ratified by the U.S. House and Senate yet, but all indications are that the Tax Cuts and Jobs Act of 2017 will be sent to the President’s desk in the next two days. As you probably know, the House and Senate versions were somewhat different. What does the new bill look like?

Tax simplification? “Fuggetaboutit!” (think Italian mobster)

Despite the promise of tax “reform” or “simplification,” the bill actually adds hundreds of pages to our tax laws. And the initial idea of reducing the number of tax brackets was apparently tossed aside in the final version; the new bill maintains seven different tax rates: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Most people will see their bracket go down by one to four percentage points, with the higher reductions going to people with higher income. And the tax brackets, going forward, will be indexed to inflation, meaning that the “real” income brackets will remain approximately the same from year to year.

The new brackets break down like this:

Individual Taxpayers

Income $0-$9,525 – 10% of taxable income
$9,526-$38,700 – $952.50 + 12% of the amount over $9,526
$38,701-$82,500 – $4,453 + 22% of the amount over $38,700
$82,501-$157,500 – $14,089.50 + 24% of the amount over $82,500
$157, 501-$200,000 – $32,089.50 + 32% of the amount over $157,500
$200,001-$500,000 – 45,689.50 + 35% of the amount over $200,000
$500,001+ – $150,689.50 + 37% of the amount over $500,000

Joint Return Taxpayers

Income $0-$19,050 – 10% of taxable income
$19,051-$77,400 – $1,905 + 12% of the amount over $19,050
$77,401-$165,000 – $8,907 + 22% of the amount over $77,400
$165,001-$315,000 – $28,179 + 24% of the amount over $165,000
$315,001-$400,000 – $64,179 + 32% of the amount over $315,000
$400,001-$600,000 – $91,379 + 35% of the amount over $400,000
$600,000+ – $161,379 + 37% of the amount over $600,000

Taxes for trusts and estates were also changed to:

$0-$2,550 – 10% of taxable income
$2,551-$9,150 – $255 + 24% of the amount over $2,550
$9,151-$12,500 – $1,839 + 35% of the amount over $9,150
$12,501+ – $3,011.50 + 37% of the amount over $12,500

Tax geeks like me note that the current 10% tax bracket is little changed, and the 15% bracket is now 12%, while the 25% and 28% tax bracket are replaced with 22% and 24% and a new 32% rate. Notice that in the lower brackets, the joint return (mostly for married couples) are double the individual bracket thresholds, eliminating the so-called “marriage penalty.” However in the higher brackets, the 35% rate extends to individuals up to $500,000, but married couples with $600,000 in income fall into that bracket. In the top bracket, the marriage penalty is more significant; individuals fall into it at $500,000, while couples are paying a 37% rate at $600,000 of adjusted gross income. That means more two-income couples will be calculating their taxes filed jointly and separately to arrive at the lowest resulting tax.

Making spirits bright…

Other provisions: the standard deduction is basically doubled, to $12,000 (single) or $24,000 (joint), $18,000 (head of household), and persons who are over 65, blind or disabled can add $1,300 to their standard deduction (currently $1,250).

The bill calls for no personal exemptions for 2018 and beyond (currently $4,050). For married couples with more than two children, this means that the new standard deduction ($24,000 in 2018) will be less than their current total standard deduction plus personal exemptions ($24,850 with three children in 2017). And the Pease limitation, a gradual phaseout of itemized deductions as taxpayers reached higher income brackets, has been eliminated. The Pease limitation added up to 3% to a high income taxpayer’s rates.

Despite the hopes of many taxpayers, the dreaded alternative minimum tax (AMT), remains in the bill. The individual exemption amount is $70,300; for joint filers it’s $109,400. But for the first time, the AMT exemption amounts will be indexed to inflation, so fewer taxpayers will be ensnared by the AMT. Even without this change, fewer taxpayers would be subject to the AMT because, as described below, the maximum deduction for (state and local income, sales, property) taxes is reduced beginning in 2018, and for most taxpayers, it was the deduction of those taxes that made them subject to the AMT.

Interestingly, the new tax bill retains the old capital gains and qualified dividend tax brackets—based on the prior brackets. The 0% capital gains rate will be in place for individuals with $38,600 or less in income ($77,200 for joint filers), and the 15% rate will apply to individuals earning between $38,600 and $452,400 (between $77,400 and $479,000 for joint filers). Above those amounts, capital gains and qualified dividends will be taxed at a 20% rate.

Misfortune seemed his lot…

In addition, the rules governing Roth conversion recharacterizations will be repealed. Under the old law, if a person converted from a traditional IRA to a Roth IRA, and the account lost value over the next year and a half, they could simply undo (recharacterize) the transaction, no harm no foul. Under the new rules, recharactization would no longer be allowed. This makes more accurate tax projections essential going forward, along with a good working crystal ball.

Before the tax act, fewer than 30% of taxpayers itemized their deductions. With the higher standard deductions, many more people will no longer file Schedule A, Itemized Deductions. Their deductions will simply not be enough to exceed the standard deduction, especially given the other changes in the tax bill. This makes year-end planning and projecting even more essential.

For many taxpayers who can itemize deductions, their taxable income number will likely be higher under the new tax plan, because many itemized deductions have been reduced or eliminated. Among them: there will be a $10,000 limit on how much any individual can deduct for state and local income, sales, and property tax payments. Before you rush to write a check to the state or your local government, know that a provision in the bill states that any 2018 state income taxes paid by the end of 2017 are not deductible in 2017, and instead will be treated as having been paid at the end of calendar year 2018. It’s not clear yet what happens if your 2017 state withholding exceeds your state liability. Normally, you would deduct the full amount on your current return and report the excess (refund) as income in the following year. But prior year state income tax refunds are no longer includible in income starting in 2018. Nothing is mentioned about paying and deducting already issued property tax bills due early in 2018, so it makes sense to figure out whether paying them in 2017 or 2018 yields a higher tax benefit. If you are in the AMT for 2017, prepaying any taxes will not yield a benefit.

The mortgage interest deduction will be limited to $750,000 of principal for new mortgages (down from a current $1 million limit); any mortgage interest payments on principal amounts above that limit will not be deductible. However, the charitable contribution deduction limit will rise from 50% of a person’s adjusted gross income to 60% under the new bill. If you think you’ll be ineligible to itemize starting in 2018, it makes sense to evaluate accelerating some planned 2018 charitable contributions to 2017, including any non-cash contributions.

Miscellaneous itemized deductions such as safe deposit box fees, unreimbursed employee business expenses, tax preparation fees, investment expenses and other deductions (currently subject to a reduction by 2% of adjusted gross income) are no longer deductible in any amount beginning in 2018. Here again, it make sense to see if prepaying some of those expenses makes sense (it does not if you’re in the AMT for 2017). Any prepayment amount and timing must be reasonable in the eyes of the IRS.

What about estate taxes? The bill doubles the estate tax exemption from, currently, $5.6 million (projected for 2018) to $11.2 million; $22.4 million for couples. Meanwhile, Congress maintained the step-up in basis, which means that people who inherit low-basis stock or real estate will see the embedded capital gains go away upon receipt, because the assets will have a cost basis equal to their fair market value on the date of death.

Public “C” Corporations saw their highest marginal tax rate drop from 35% to 21%, the largest one-time rate cut in U.S. history for the nation’s largest companies.

And pass-through entities like partnerships, S corporations, limited liability companies and sole proprietorships will receive a 20% deduction on taxes for “qualified business income,” which explicitly does NOT include wages or investment income. This is one of the more complicated areas of the tax bill, and will require working closely with your accountant or CPA to assess whether your pass-through entity will save money converting to a C Corporation.

As things stand today, all of these provisions are due to “sunset” after the year 2025, at which point the entire tax regime will revert to what we have now.

Assuming the tax bill is signed into law this week, and it likely will, you’ll have just over a week to project your 2017 and 2018 taxes, and decide which deductions (or income) you may want to defer to 2018 or accelerate into 2017. Only by projecting both years and finding the least combined liability will you know what planning tactics makes sense for you. We can help.

Oh what fun it is…

If you would like to review your current taxes, investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Sources:

https://www.washingtonpost.com/news/wonk/wp/2017/12/15/the-final-gop-tax-bill-is-complete-heres-what-is-in-it/?utm_term=.4b0efca718e8

https://www.forbes.com/sites/kellyphillipserb/2017/12/17/what-the-2018-tax-brackets-standard-deduction-amounts-and-more-look-like-under-tax-reform/#42b575bf1401

https://www.kitces.com/blog/final-gop-tax-plan-summary-tcja-2017-individual-tax-brackets-pass-through-strategies/

https://www.bna.com/2017-Individual-Tax/

https://www.nytimes.com/interactive/2017/12/15/us/politics/final-republican-tax-bill-cuts/

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

Posted in estate planning, Financial Planning, General, retirement planning, tax planning. Leave a Comment »

To Skimp or Not to Skimp

December 17, 2017 — Sam H. Fawaz

The majority of my clients, to no one’s surprise, are baby boomers. You may think that their main concern is overspending their retirement dollars, but you’d be wrong. In fact, for many of my retired clients, convincing them that it is OK to spend and enjoy their hard earned nest egg, is one of the hardest things to do. Even among my non-retired clients, getting them to enjoy their “saving years” while being prudent spenders can be a challenge.

I consider myself to be a frugal spender, while allowing myself to indulge in the durable goods (read: electronic toys and gadgets) that simplify my life, last a long time and bring me comfort or pleasure. I personally would never spend $9.50 on a latte (I’m not a coffee drinker, but I doubt I could bring myself to spend that kind of money on a cup of anything.) Some people won’t skimp on a good meal; I won’t skimp on a good hotel room. We each have our own compromises and “do not compromises.”

But save and invest. Save and invest. Isn’t that all you hear when it comes to planning your financial life?

An online article by an individual who refers to himself as “the Financial Samurai” makes a more balanced case regarding how you deploy your money. Yes, you should be capable of deferring gratification and have a healthy savings rate during your accumulation years. But there are a few items that are well worth investing in: your comfort, well-being and certain aspects of your lifestyle. Some of these items might be considered luxuries by people who are perhaps overly frugal.

For instance? The Samurai says you should splurge on a really good mattress—recognizing, of course, that you can avoid markups and still buy quality. His argument: you spend almost a third of your life sleeping. Your waking hours will be more comfortable and productive if you are spending your nights on the most comfortable, supportive mattress you can afford.

Another example? Your glasses or contact lenses. Vision may be your most important sense, so it is worth buying glasses with the thinnest lenses with anti-reflection and a scratch-proof coating. If you wear contacts, splurge on daily wear that contain the latest breathable technology.

If you’re serious about athletic performance, then the Samurai thinks that buying top-of-the-line sports equipment makes sense. If you have a baby, the best baby care products are worth the extra expenditure. If you’re in the habit of watching movies at the theater, then you might consider buying a high definition TV and surround sound system, which makes watching movies (and listening to music) at home more enjoyable—and economical. He also recommends that you take care of yourself with massages, physical therapy and coaching—arguing that physical and mental health are priceless.

Finally, since most Americans receive very little vacation time from work, the Samurai recommends that you make the most of those days or weeks, by selecting the best adventure and the best amenities possible. The point: live a great life while you’re saving and investing.

To his list, I would add comfortable clothing and footwear. A comfortable desk chair and good sized desk can make all the difference in the world for the time you spend in your office. And if your computer is more than five years old, treat yourself to the latest hardware, including at least a 24 inch monitor to save yourself time and strain on your eyes.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Source: http://snip.ly/8ohpy#https://www.financialsamurai.com/things-worth-spending-more-money-on-better-life/

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

Posted in Financial Planning, General, retirement planning. Leave a Comment »

Common Estate Planning Mistakes People Make

October 29, 2017 — Sam H. Fawaz

“Mortality never prevented the majority of human beings from behaving as though death were no more than an unfounded rumor” – Aldous Huxley

A Rocket Lawyer survey in 2014 indicated that 64% of Americans did not have a will. If you’re one of them, then this is a must-read.

The most common way to transfer assets to your heirs is also the messiest: to have a will that is so out-of-date that it doesn’t even relate to your property or estate anymore, to have your records scattered all over the place, to have social media, banking and email accounts whose passwords only you can find—and basically to leave a big mess for others to clean up. I’ve reviewed over a hundred wills and estate plans in my lifetime, and it never ceases to amaze me how out-of-date or incomplete some of them are.

Is there a better way?

Recently, a group of estate planning experts were asked for their advice on a better process to handle the transfer of assets at your death, and to articulate common mistakes. A list of mistakes, including a few that I identified during my reviews, are covered below:

Not regularly reviewing documents. What might have been a solid plan 5 to 15 years ago may not relate to your estate today. The experts recommended a full review every three to five years, to ensure that trustees, executors, guardians, beneficiaries and healthcare agents are all up-to-date. You might also consider creating a master document which lists all your social media and online accounts and passwords, so that your heirs can access them and close them down. Be sure your documents specifically authorize and instruct your executor to access and shut them down after your death.

Not leaving personal property disposition instructions, keys and passwords for your executor. Untold numbers of safes and safety deposit boxes have to either be drilled open or forced open by court order because no one else held the key or numeric combination. If you have a home or office safe, or a safety deposit box at a bank, make sure that your executor and/or trustee knows where the key(s) are, or what the combination is (and what bank location the safe deposit box is in). Even better, and to facilitate distribution, leave a signed inventory of the valuables left in there and who is to inherit them. Having a schedule of valuable property or heirlooms and who is designated to inherit them is invaluable to your executor after you’re gone. Don’t wait until after the will is executed to do this. Do it before you sign the will and make yourself a to-do to update the list at least once a year. Will your executor know where to find and be able to access all of your original estate planning documents?

Using a will instead of a revocable trust. This relates mostly to people who want to protect their privacy or pass their wealth to under-age children. When assets pass to heirs via a will, the transfer creates a public record that anybody can access and read. A revocable trust can be titled in your name, and you can control the assets as you would with outright ownership, but the assets simply pass to your designated successor upon death.

Establishing a longer term trust for a small amount of assets. If the trust distributes assets over multiple years, be sure the value of the trust assets justify the cost and burden of fiduciary administration. Creating a trust holding $50,000 worth of assets to distribute $10,000 to each of five beneficiaries over five years makes little financial sense.

Failure to require mandatory and timely annual income distributions. Not distributing income annually to the beneficiaries can subject the trust to a 35% maximum tax rate on all income over $12,500 (currently), a much steeper income tax schedule than that of any individual beneficiary. With an inexperienced trustee, he/she may not know that not distributing the income from the trust annually will likely result in much higher taxation. By specifically REQUIRING annual income distributions in the trust, an ignorant trustee has no choice, and can thereby avoid high trust tax rates, and the beneficiaries pay their own (likely lower) tax rates on their distributions.

Not carefully vetting the trustee. The role of the trustee is both a powerful and time consuming one: make sure the person is qualified, willing and able to devote the time to properly understand and execute the trust instructions. Be sure to ask your candidate if they’re willing to serve before naming them in your trust. Family members who may also be beneficiaries frequently become a source of conflict or present a conflict of interest, so you may want to try and appoint a trusted non-relative instead if at all possible, or designate a corporate trustee. Also, provide in the trust document for reasonable compensation, expense reimbursement and indemnification of the trustee.

Failing to fund the revocable trust. You’ve set up the trust, but now you and your team of professionals have to transfer title to your properties out of your name and into the trust, with you as the initial trustee. If you forget to do this, then the entire purpose of the trust is wasted. Be sure to specify at least two successor trustees.

Having assets titled in a way that conflicts with the will or trust. You should always pay close attention to account beneficiary designations, because they—not your will or trust—determine who will receive your life insurance proceeds, IRA distributions and employer retirement plan assets. Meanwhile, assets (like a home) owned in joint tenancy with rights of survivorship will pass directly to the surviving joint tenant, no matter what the will or trust happens to say. Review beneficiary designations at least once a year. Does that old employer 401(k) beneficiary still list your former spouse as the beneficiary?

Not using the annual gift exemption. Each person can gift $14,000 a year tax-free to heirs without affecting the value of their $5.49 million lifetime estate/gift tax exemption. That means a husband and wife with four children could theoretically gift the kids $112,000 a year tax-free. Over time, that can reduce the size of a large estate potentially below the gift/estate exemption threshold, and in states where there is an estate or inheritance tax, it can help as well.

Not understanding the generation-skipping transfer tax. A husband and wife can each leave estate values of $5.49 million to any combination of individuals. But if there’s anything left over, there’s a 40% federal estate tax on those additional assets left to heirs in the next generation (the children), and an additional 40% on assets left to the generation after that (the grandchildren). Better to transfer $5.49 million out of the estate before death (tax-free, since this fills up the lifetime gift exemption) into a dynastic trust for the benefit of the grandchildren. You can also transfer that annual $14,000 to grandchildren. If your estate is that large, it is imperative that you seek the assistance of an estate planning attorney unless you favor leaving half or more of your assets to your federal and state governments.

Not taking action because of the possibility of estate tax repeal. Yes, the Republican leadership in Congress includes, on its wish list, the total repeal of those estate taxes (the estate tax is based on the value of the estate on the date of death). But what if there’s no action, or a compromise scuttles the estate tax provisions at the last minute? Federal wealth transfer taxes have been enacted and repealed three times in U.S. history, so there’s no reason to imagine that even if there is a repeal, the repeal will last forever. Meanwhile, dynastic trusts and other estate planning tactics provide tangible benefits even without the tax savings, including protecting assets from lawsuits and claims. And while the estate tax may be going away, the tax on estate and trust income is not, and may become a focus of the IRS as replacements for lost revenue are sought out.

Thinking that having just a will is enough. A health care directive (to allow your designee to speak on your behalf regarding health care decisions when you can’t) and a durable power of attorney (to perform duties on your behalf when you’re possibly incapacitated) are essential for every adult to have, in addition to a will.

Leaving too much, too soon, to younger heirs. Nothing can harm emerging adult values quite like realizing, as they start their productive careers, that they actually never need to work a day in their lives. The alternative? Create a trust controlled by a trusted individual (again, preferably not a family member or beneficiary) or a corporate trust company until the beneficiaries reach a more mature stage of their lives, perhaps 30-35 years old.

There are so many other estate planning provisions that may be unique to you, your family and your business. A fee paid to a legal professional who specializes in estate planning is a final act of love to your loved ones to help them understand your dying intentions, and minimize the hassles inherent in estate administration and disposition.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Posted in estate planning, Financial Planning, General, retirement planning. Leave a Comment »
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