Recovery—For How Long?

March 5, 2016 — Sam H. Fawaz

On Tuesday of this week, the U.S. stock markets (S&P 500 index) went up 2.39%, the highest one-day return in a month. Analysts attributed the rise to a variety of economic news that suggested that the American economy is not, after all, plunging into recession. The buoyant mood among investors may not last, but for many, it’s a welcome sign that things may not be as gloomy as they seemed just a month ago.

In fact, the S&P 500 only dropped about 12%, from 2078.36 at the end of December 2015 to the bottom of 1829.08 on February 11—despite widespread predictions of a 20% bear market. Since then, it has risen on shaky legs back to more than 1999, just 79 points from breaking even on the year. One more day like Tuesday would erase nearly all of the damage in 2016.

The good economic news involved construction spending, which reached its highest level since 2007. Oil prices were also gaining ground, although it’s hard to see why the average American would find reason to cheer about that. In addition, new orders and inventories stabilized in the manufacturing sector, after experiencing downturns in the last quarter of 2015.  On Friday, The February jobs report showed that the economy created 242,000 jobs and unemployment remains at a low 4.9%.  Other factors include the possibility that U.S. stock investors may finally have decided that declines in the Chinese markets are not going to directly affect the value of American-based businesses.

None of this means that we know what will happen next. Neither we nor any of the pundits you see on the financial news have any idea whether that long-awaited 20% decline will materialize, or the markets will continue to recover and we’ll all look back on February 11 prices as a great time to buy. But it’s worth reflecting on how unexpected this latest rally has been at a time when it seemed that all the news pointed to more pain and decline. Anybody who believed the pundits and fully retreated to the sidelines after the January selloff is now sitting on losses and wondering whether to jump in now and hope the gains continue, or wait and hope for another downturn, and risk losing even more ground if this turns out to be a long-term rally. This is not to say that hedging or taking some bull market profits off the table is still not a good idea. All-or-nothing investing is almost never a good idea.

We can never see the next turn in the market roller coaster, but long-term, the markets seem to operate under the opposite of the pull of gravity. You and I know with some degree of certainty in which direction the next 100% market move will be, even if we can’t pinpoint when or where.

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.

Sources:

http://www.businessinsider.com/the-stock-market-is-over-china-2016-2

http://www.bloomberg.com/news/articles/2016-02-29/japan-futures-down-on-strong-yen-as-china-stimulus-buoys-aussie

http://finance.yahoo.com/news/wall-st-open-higher-oil-143344528.html

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

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

Focus on the Forest, Not the Trees, of Investing

February 5, 2016 — Sam H. Fawaz

It’s a message worth repeating. Investing is a matter of focus. Despite recent disappointments in stock market performance, investors who are willing to assess the whole universe of investment choices may find that the market continues to offer new possibilities. And those who keep their sights set on long-term investment goals may find that a “forest, not trees” approach to investing offers the greatest potential for success.

Focus is especially important for retirement savers — those who are still in the accumulation stage — as well as for retirees who need to keep the potential for growth alive in their portfolios.

Are You a Micromanager?

As a retirement saver, your employer-sponsored retirement plan gives you the freedom to make your own investment decisions. And because you can easily change plan investments, you may find yourself becoming a micromanager. That’s an investor who changes investments frequently because of daily market movements instead of focusing on the big picture: a long-term investment strategy. But “chasing returns” by moving your money into whatever investment type or stock market sector happens to be doing well at the time rarely pays off in the long run.

The Unknowable Future

The problem with chasing returns is that it’s virtually impossible to predict how long a particular investment or market sector will continue to be a top performer. Eventually, another investment or sector will probably take over the lead, and there will be little or no advance warning. That can leave you in the lurch if you changed the investment mix of your retirement plan account based strictly on recent performance.

The Solution: Keep a Long-term Perspective

You may be much better off by the time you retire if you use a “forest, not trees” perspective when you invest. Concentrate on your goal, and choose an investment mix with the potential to help you reach that goal over time.

Your retirement plan offers several investment options, allowing you to choose a well-diversified investment mix for your account. The idea behind long-term investing is to choose a mix that offers you a realistic opportunity to achieve gains while reducing the overall risk to a level you are comfortable with.

After you’ve chosen your investments, you shouldn’t ignore market and economic developments. But you’ll generally want to stay with your plan unless you decide that changes in your personal situation or risk tolerance make an adjustment necessary.

If you’re a “forest, not trees” investor, you can be much less concerned with what the markets do on a day-to-day basis. You’ll be free to switch your investments, but you won’t feel compelled to make a move every time the markets zig or zag.

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.

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What’s Going on in the Markets January 18 2016

January 18, 2016 — Sam H. Fawaz

Wow! There’s no diplomatic way to say this: the global stock markets are in panic mode right now. In two weeks of trading, the U.S. S&P 500 index is down 8% on the year, which brings us close to correction territory (a 10% decline), and has some predicting a bear market (a 20% decline).

On top of that, we’ve been hearing a widely-publicized, rather alarming prediction from Royal Bank of Scotland analyst Andrew Roberts, saying that the global markets “look similar to 2008.” Mr. Roberts is also predicting that technology and automation are set to wipe out half of all jobs in the developed world. If you listen closely out the window, you can almost hear traders shouting “Sell! Head for the exits! We’re all gonna’ die!!!”

When you’re in the middle of so much panic, when people are stampeding in all directions, it’s hard to realize that there is no actual fire in the theater. Yes, oil prices are down around $30 a barrel, and could go lower, which is not exactly terrific news for oil companies and oil services concerns—particularly those who have invested in fracking production. But cheaper energy IS good news for manufacturers and consumers, which is sometimes forgotten in the gloomy forecasts. Chinese stocks and the Chinese economy are showing more signs of weakness, and there are legitimate concerns about the status of junk bonds—that is, high-yield bonds issued by riskier companies with high debt levels, and many developing nations. These bonds have stabilized in the past few weeks, but another Federal Reserve interest rate hike could destabilize them all over again, leading to forced selling and investors taking losses in the dicier corners of the bond market.

If you can think above the shouting and jostling toward the exists, you might take a moment to wonder about some of these panic triggers. Are oil prices going to continue going down forever, or are they near a logical bottom? Is this a time to be selling stocks, or, with prices this low, a better time to be buying? Are China’s recent struggles relevant to the health of your portfolio and the value of the stocks you own?

And what about the RBS analyst who is yelling “Fire!” in the crowded theater? A closer look at Mr. Roberts’ track record shows that he has been predicting disaster, with some regularity, for the past six years—rather incorrectly, as it turns out. In June 2010, when the markets were about to embark on a remarkable five year boom, he wrote that “We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable,” he added, ominously.   (“The unthinkable,” whatever that meant, never happened.)

Again, in July 2012, his analyst report read, in part: “People talk about recovery, but to me we are in a much worse shape than the Great Depression.” Wow! Wasn’t it scary to have lived through, well, a 3.2% economic growth rate in the U.S. the following year? What Great Depression was he talking about?  Taking his advice in the past would have put you on the sidelines for some of the nicest gains in recent stock market history. And it’s interesting to note that one thing Mr. Roberts did NOT predict was the 2008 market meltdown.

Since 1950, the U.S. markets have experienced a decline of between 5% and 10% (the territory we’re in already) in 35.5% of all calendar years—which is another way of saying that this recent draw down is entirely normal. In fact, our markets spend about 55% of the time in this range (pulling back).  One in five years (22.6%) have experienced draw downs of 10-15%, and 17.7% of our last 56 stock market years have seen downturns, at some point in the year, above 20%.

Stocks periodically go on sale because people panic and sell them at just about any price they can get in their rush to the exits, and we are clearly experiencing one of those periods now. Whether this will be one of those 5-10% years or a 20% year, only time will tell. But it’s worth noting that, in the past, every one of those draw downs eventually ended with an even greater upturn and markets testing new record highs.

Many investors apparently believe this is going to be the first time in market history where that isn’t going to happen. The rest of us can stay in our seats and decline to join the panic.

Without a doubt the market picture looks dour, and it’s hard to see red on our screens and declines on our monthly statements. A disciplined approach that takes into account your goals, risk tolerance and time horizon remains the best way to approach when and how you’ll sell. There’s always a better day to sell since strength always returns to markets after a panic. Your patience is always rewarded in the markets, though I acknowledge that it’s easier said than done. If investing in the stock markets was easy, then returns would not be anywhere near as rewarding as they are.

In our client portfolios, we continue to look for opportunities to add to positions in good funds and companies at the appropriate time. We continue to maintain a healthy cash position, and have increased our hedges. While we may see additional selling to start the week (which starts on Tuesday due to the Martin Luther King, Jr. holiday), I suspect that the selling is somewhat exhausted in the short term, so I’m expecting a robust bounce as early as this week (I saw signs of selling exhaustion on Friday January 15). The quality and duration of that bounce will tell us more about what’s to come, and whether more defensive measures are warranted.

Nothing in this note should be construed as investment advice or a recommendation to buy or sell any security. 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.

Sources:

http://finance.yahoo.com/news/why-the-heck-are-the-markets-tanking-165146322.html

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7857595/RBS-tells-clients-to-prepare-for-monster-money-printing-by-the-Federal-Reserve.html

http://www.publicfinanceinternational.org/news/2012/07/economic-crisis-%E2%80%98worse-great-depression%E2%80%99

http://blogs.spectator.co.uk/2016/01/the-author-of-the-rbs-sell-everything-note-has-been-predicting-disaster-for-the-last-five-years/

http://www.marquetteassociates.com/Research/Chart-of-the-Week-Posts/Chart-of-the-Week/ArticleID/140/Frequency-and-Magnitude-of-Stock-Market-Corrections

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

Posted in American Economy, Financial Planning, General, retirement planning, Stock Market. Tags: , , . Leave a Comment »

New Benefits for 529 Plans

January 13, 2016 — Sam H. Fawaz

On December 18, 2015, Congress approved the “Protecting Americans from Tax Hikes (PATH) Act of 2015”, which includes provisions that impact 529 plans. President Barack Obama signed the bill into law the same day.

Computers

Previously, 529 rules treated computers as a Qualified Higher Education Expense only if the beneficiary’s college required them as a condition of enrollment or attendance. Under the new law, computer equipment and related hardware qualify even if they are not specifically required by the university, college, or technical school the beneficiary attends, although they must be used primarily by the beneficiary while enrolled in school. The new law defines desktop computers, laptops, and other related technology as a Qualified Higher Education Expense. The costs for Internet access and computer software related to a beneficiary’s studies also qualify.

The new law is retroactive to expenses incurred since January 1, 2015. So if your beneficiary purchased a computer or related technology any time in 2015 to use while in college, funds from a 529 account can be used to cover the cost if the withdrawal was made by Thursday, December 31.

Refund Re-contribution

The PATH Act also gives 529 account owners a 60-day window to re-contribute refunds from Eligible Educational Institutions into their accounts. The law is retroactive for withdrawals made during 2015.

Under the new law, account owners have 60 days from the date of the refund to redeposit a refund of Qualified Higher Education Expenses into the same 529 account from which the money was withdrawn. For example, if a beneficiary receives a refund from an Eligible Educational Institution because he or she withdrew from school due to an illness or other unforeseen circumstance, the refund may be returned to the beneficiary’s 529 account and would not be deemed a non-qualified withdrawal or be subject to any taxes or tax penalties.

The re-contribution cannot exceed the amount of the refund.

The law is retroactive to January 1, 2015.

  • Account owners who received a refund of Qualified Higher Education Expenses between January 1, 2015, and December 18, 2015, the date the law was enacted, have until February 16, 2016 — 60 days from the enactment date for the PATH Act of 2015 — to redeposit the money.
  • Account owners who receive a refund of Qualified Higher Education Expenses on any date after December 18, 2015, have 60 days from the date of the refund to redeposit the money.

It is recommended that account owners keep a receipt of refunds in order to have documentation of the amount of the refund and the date it was issued.

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.

 

 

Posted in College Planning, Financial Planning, General, retirement planning, tax planning. Tags: , , . Leave a Comment »

What’s Going on in the Markets January 7 2016

January 7, 2016 — Sam H. Fawaz

Have your long-term financial goals changed in the last four days?

Are American companies becoming less valuable because investors in China are panicking?

Is there any reason to think that because Chinese investors are panicking, that Chinese companies are less valuable today than they were a few days ago?

These are the kinds of questions to ponder as you watch the U.S. stock market catch a cold after China sneezed.  In each of the first four trading days of the year, China closed its markets due to a rapid fall in share prices—a move which may have made the panic worse, since it made investors fear being trapped in stocks that are seen as dropping in value.  It’s unclear exactly how or why, but the panic spread to global markets, with U.S. stocks falling 4.9% to mark the worst first-of-the-year drop in history.

For long-term investors, the result is much the same as if you went to the grocery store and discovered that the prices had fallen roughly 5% across the board.  At first, you might think this is a great bargain. But then you might wonder whether the prices will be even lower tomorrow or next week.  One thing you probably WOULDN’T worry about is whether prices will eventually go back up; you know they always have in the past after these sale events expire.

Will they?  The truth is, nobody knows—and if you see pundits on TV say with certainty that they know where the markets are going, your first impulse should be to laugh, and your second should be to check their track record for predicting the future.  Without a working crystal ball, it’s hard to know whether the markets are entering a correction phase which will make stocks even cheaper to buy, or whether people will wake up and realize that they don’t have to share the panic of Chinese investors on this side of the ocean.  The good news is there appears to be no major economic disruption like the Wall Street derivatives mess that triggered the 2008 downturn.  The best, sanest investors will once again watch the markets for entertainment purposes—or just turn the channel.

I overwhelmingly hear pundits predicting a bear market in 2016 (a bear market is defined as a 20% or more decline from the last market peak). “The bull market has gone on way too long, economic data is deteriorating, the Federal Reserve is raising interest rates, geopolitical events spell doom, we’re heading for a recession, oil is going to $1 per barrel” are all reasons our markets are headed for a tumble. Remind yourself that no one knows for sure what might happen, and while a bear market might assert itself in 2016, no one can reliably predict when it will come. All we know for certain is that it sets up opportunities

So what should you do? If you’ve enjoyed nice gains in your portfolio from this bull market, then you should consider cashing in some of those gains. It never hurts to take some money “off the table” and have some cash reserves to take advantage of better prices. Don’t panic sell–wait for the inevitable bounce that always comes after a multi-day selloff. You’ll be glad you did.

If you’d rather not tax the tax hit on your gains, there are ways to hedge your portfolio so you can at least sleep better at night. Speaking of that, if you’re up at night worrying about your portfolio, then you need to figure out whether you’ve taken on too much risk for your temperament and investing time horizon. You should first discuss all of this with your financial advisor/planner. Don’t have one? We’re glad to help.

As for our clients, we’ve been raising cash and doing some hedging ourselves over the past year. While there are some concerning recent economic trends and technical market anomalies, we don’t see signs of an impending recession on the horizon. We look for indications of a recession, because recessions usually lead to bear markets.

Nothing in this note should be construed as investment advice or a recommendation to buy or sell any security. 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.

Sources:

http://www.ft.com/intl/cms/s/0/f248931e-b4e5-11e5-8358-9a82b43f6b2f.html#axzz3wc533ghn

http://www.ft.com/cms/s/0/bc8c0d60-b54d-11e5-b147-e5e5bba42e51.html?ftcamp=published_links%2Frss%2Fhome_us%2Ffeed%2F%2Fproduct#axzz3wc533ghn

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

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

The Association Factor

December 27, 2015 — Sam H. Fawaz

What’s the best way to be happy and successful? What do most happy and successful people have in common?

If you answered “money,” or anything to do with meditation or networking skills, you’re off the mark, according to Jason Butler, a former financial planner who is currently working as a motivational speaker. He says that after reading biographies of political, business, scientific and charity leaders, and hearing the personal stories of several hundred financial planning clients, one factor tends to be present in the happiest, most successful individuals, and it’s entirely in your control: who you surround yourself with. Call it your “association factor.”

There are several dimensions to this. If you’re an athlete who wants to improve your fitness or skill level, hanging out with (competing with) superior athletes will do more to help you ‘up your game’ than if you were associating with people you can beat without breaking a sweat. If you employ or work alongside people who have a diligent and service-oriented attitude, you can delegate work, avoid micromanaging, and feel confident that the workload will be shared fairly. If your social circle is full of people who are pessimistic, negative, defeatist or cynical, then it will pull you into pessimism or defeatism. We all know people who suck the life out of anybody they’re around. Why let it happen to you?

Butler says that cultivating meaningful personal relationships with the right types of people should be an essential priority for anyone who wants to live a meaningful, fulfilling, successful and happy life—which basically means all of us. You should consciously try to surround yourself with people who are optimistic, positive, capable and excited about the future.

The interesting thing about this advice is how few people seem to be intentional about their friendships. Most of us make friends by happenstance, because we shared an experience together or have something in common. Consciously creating a circle of friends, and constantly looking for business relationships that will be productive and supportive, is not often a priority.

But it can be, and the results could be dramatic.

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.

I wish everyone a happy 2016 with many successful associations!

Sam

Source:

https://www.linkedin.com/pulse/one-thing-all-happy-successful-people-do-jason-butler?trk=prof-post&utm_content=bufferf8382&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

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

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

Three Year-end Tax Reduction Tips

December 19, 2015 — Sam H. Fawaz

Even though April 15 now seems a distant deadline for filing your 2015 tax returns, in order to take advantage of some of the biggest tax reduction strategies, you have to act before the end of this year. Without further ado, here are three “go-to” maneuvers that you may want to execute by December 31.

1. Maximize Contributions to Tax-Advantaged Accounts

Contributing to your employer’s retirement plan is one of the smartest tax moves you can make. For 2015 (and 2016) you can save up to $18,000, or $24,000 if you are age 50 or older. Because contributions are typically made on a pretax basis, qualified plans such as 401(k)s and 403(b)s help to lower your current taxable income. Plus, the money in the account is allowed to grow tax deferred until you begin taking withdrawals, usually in retirement.1

If you are interested in supplementing your contributions to your employer’s plan, you may be eligible to fund a traditional IRA with a deductible or non-deductible contribution. You can contribute up to $5,500 in 2015 and 2016, adding $1,000 to that total if you are 50 or older and catching up on your retirement savings. Like 401(k)s, IRAs offer a “one-two punch” in tax savings: tax deferral on your investment until you start withdrawing money, along with a potential tax deduction on all or part of your annual contribution if you meet the IRS’s eligibility rules.

You could also direct your savings to a Roth IRA or a Roth 401(k), if offered by your employer. Although contributions to Roth retirement vehicles are made with after-tax dollars, withdrawals are tax free provided certain conditions are met. Keep in mind that the annual contributions limits for 2015 — $18,000 per individual or $24,000 for those age 50 or older — apply cumulatively to all employer-sponsored plans, Roth or traditional.

Even though you have until tax day — April 15, 2016 — to fund an IRA for 2015, why wait? Funding it by year-end potentially gives it all the more time to grow in a tax-deferred shelter.

If you’re self-employed or own a small business, you may have just enough time to set up a small business retirement plan before year-end. In some cases, you can wait until next year to fund it, but the plan must be established in 2015 to get the deduction this year.

2. Consider Tax-Loss Harvesting

Simply stated, tax-loss harvesting is the process of balancing portfolio losses against gains to help minimize your exposure to capital gains tax. In a year like 2015, in which the stock market experienced a significant late-summer swoon, such a strategy may be particularly attractive.

Generally, the IRS allows you to offset capital gains with capital losses to the extent of your total gains — and above that, you may be allowed to deduct up to $3,000 against ordinary income each year, thus potentially lowering your tax liability. Losses in excess of that limit can be carried over to the next year.

Yet as simple as this strategy may sound, it is fraught with caveats. For starters, before selling, consider the length of time you have held a security. Securities sold within a year of their purchase can generate short-term capital gains, which are taxed at the investor’s ordinary income tax rate — up to a maximum rate of 39.6% for the highest earning individuals.

Gains from the sale of securities held for more than one year are considered long-term gains and are taxed at a maximum rate of 15% for most Americans, but that rises to 20% for those with taxable incomes of over $400,000 ($450,000 for joint filers). In addition, the Medicare surtax on net investment income, which includes capital gains, results in an overall top long-term capital gains tax rate of 23.8% for high-income taxpayers.

Also keep in mind that the IRS prohibits you from claiming a loss on the sale of a security in a “wash sale.” The rule defines a wash sale as one in which an individual sells or trades securities at a loss and then goes on to buy additional shares in the same or substantially identical security within the 30 days before or after the date of sale.

The bottom line on tax-loss harvesting? If you are considering employing this strategy, evaluate carefully the investments you may select for sale, then discuss your plan with a trusted financial advisor. You certainly don’t want to wag the investment “dog” with the tax “tail”.

3. Timing Is Everything

Another popular year-end tax management strategy — particularly if you expect your taxable income to be higher than normal for the 2015 tax year — is to accelerate tax deductions and, where possible, to defer income. For instance, you could increase your charitable deductions or make advance payments for state and local taxes, insurance premiums, interest payments, medical procedures, or other deductible expenses for which you may be able to control the timing. Similarly, you may be able to delay some forms of discretionary income or hold on to stocks that have performed exceptionally well at least until early 2016, being mindful of what you expect your tax/income situation to be next year. Before prepaying any state income or local property taxes, be sure that the alternative minimum tax does not apply to you.

These are just some of the many steps you can take to help keep your taxes in check. Work with your financial and tax advisor(s) to make tax planning an integral part of your overall financial plan.

This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax situation is different. If you would like to review your current tax situation 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.

Disclaimer:

1Withdrawals from traditional IRAs are taxed at then-current income tax rates. Withdrawals prior to age 59½ may be subject to an additional federal tax.

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

Rate Hike Hype

December 15, 2015 — Sam H. Fawaz

While I’m still a tad skeptical, we will almost surely see the U.S. Federal Reserve Board (Fed) start the long process of ending its intrusion into the interest rate markets, by allowing short-term rates to rise starting on Wednesday. It will be the first time the Fed has raised rates since 2006, and for some it will mark the beginning of the final chapter of the Great Recession.

Since 2008, as most of us know, returns on short-term bonds have been at or near zero percent, which is a consequence of the Fed keeping the Federal Funds rate—the rate at which it will lend banks virtually unlimited amounts of money, short-term—at 0.125%. The average Fed Funds rate has historically been 3.5% to 4.0%, so this is a considerable amount of stimulus.

At the same time, the Fed has purchased more than $3.5 trillion worth of Treasury securities and home mortgage pools as part of its quantitative easing (QE) programs, bidding aggressively against much smaller buyers, which is another way of saying: forcing the rates on these bonds down closer to zero.

Pulling back out of these interventions is going to be tricky, in part because shifts in interest rates have a direct impact on a still-fragile U.S. economy (higher rates mean higher borrowing costs, potentially less corporate investment and lower profits), and even trickier because we don’t know how investors will react. In the past, the markets have panicked at the mere mention of a cutback in Fed involvement, and (more recently) have also risen on the same news, presumably because people drew encouragement from the confidence the Fed was showing in the strength and resilience of the U.S. economy.

There are also some tricky mechanical problems. The central bank will try to control the extent that short-term rates rise and fall by raising the interest it pays to banks for the reserves held at the Fed, and also cautiously raising the amount it pays money market funds for short-term trades known as “reverse repurchase agreements.” The mechanics are highly technical and complicated—and still unproven, although there are reports that the Fed has been conducting tests for the past two years.

As the markets react, either upwards or downwards, there are a few things to keep in mind. First, despite the headlines soon to be blaring from every financial section of every newspaper in the country, the rate is expected to move very modestly from .125% to .375%—clearly a small first step in a long journey toward the long-term average. After each step—prominently including this one—the Fed will evaluate the consequences before deciding to make future changes. If the economy slows, or if there are signs that inflation is falling below the Fed’s 2% annual target, it could delay the next move by months or even years. That caution greatly reduces the danger of any kind of serious economic pullback.

It’s also worth noting that the Fed has announced no plans to sell the nearly $4.2 trillion worth of various bonds—including the aforementioned Treasuries and mortgages—that it owns. At the moment, the bank is simply rolling over the portfolio, meaning it reinvests $21 billion a month as bonds mature. Eventually, most observers expect the reinvestment to stop and the Fed to allow the huge bond holdings to mature and fall off of its balance sheet. The fact that this is not being done currently reflects the exquisite degree of caution among Fed policymakers, who don’t want to rock the boat too fast or too hard.

Finally, some have wondered about the future of mortgage interest rates as the Fed begins a cautious exit from the bond markets. Interestingly, recent history shows that mortgages haven’t been especially influenced by changes in the benchmark rate. The last time we saw extremely low interest rates, after the tech bubble burst in the early 2000’s, the Fed brought its Fed funds rate down to 1%. It began raising rates by 0.25% a quarter starting in the summer of 2004, but over the next four months, the 30-year fixed-rate mortgage actually fell from 6.3% to 5.58%. By the time of the last increase in the summer of 2006, mortgage rates were running at 6.68%, just a half-percent higher than they had been at the previous Fed funds rate low.

Nobody knows exactly what to expect when the announcement comes on Wednesday, but you can look for the investment markets to bounce around a bit more than usual, and economists—including the teams employed by the Fed—to examine every scrap of data about the impact on the economy over the next quarter. At that time, Fed policymakers will face another decision, and there is no reason to expect them to be less cautious than they have been recently. For many of us, the rate rise should be reason for celebration, a sign that the long recession and period of economic uncertainty is finally starting—carefully—to be put in our rear view mirror.

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.

Sources:

https://www.washingtonpost.com/news/where-we-live/wp/2015/12/14/what-a-fed-rate-hike-could-mean-to-mortgage-borrowers/

https://www.washingtonpost.com/news/wonk/wp/2015/12/14/the-federal-reserve-will-likely-raise-interest-rates-this-week-this-is-what-happens-next/

http://www.usatoday.com/story/money/2015/12/14/this-week-december-13/77155714/

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

Posted in American Economy, Financial Planning, General, investing, retirement planning, Stock Market. Tags: , , , . Leave a Comment »

A Better Stock-ing Stuffer

November 30, 2015 — Sam H. Fawaz

What’s a better gift for a young person than a savings bond or a gift card?

When you talk with people who have made a lifelong habit of saving and investing, often you’ll hear them say that somebody—often a grandparent—gave them a few shares of stock at a young age. Following the stock, learning about the company and seeing the dividends reinvested got them interested in a whole new mysterious economic realm that many people never learn about.

The problem, of course, is that it’s not always easy, in this day and age, to give a few shares of stock. Instead of printed shares, we have electronic ownership, which is why websites like giveashare.com and uniquestockgift.com can charge twice as much for a stock and a printed certificate as you would pay for the same share if you went online through a discount brokerage firm. Buying a share directly means creating a new custodial account for the young child, and then executing a brokerage transfer or creating an UGMA account.

Recently, the idea of giving a share or two of stock has gotten a lot easier, with a website called SparkGift. You click on the site, and over the next two minutes, you select a recipient, provide an email address and Social Security number, select an investment—it could be Disney, Tesla, a Vanguard index fund or any ETF, anything that is publicly traded—and a dollar amount. The person on the other end of the email opens the message and creates the account. At that point, your payment executes the trade, and the securities end up in an account in the child’s name. You can use a credit card to make the purchase.

According to the site, the average gift size is $75 to $100, and the giver will be charged $2.95 plus 3% of the gift size, equivalent to the transaction costs at a discount brokerage firm. Some children have gone so far as to establish their own gift registry, specifying the stocks they’re interested in—like Disney, Mattel, Apple or Electronic Arts—which encourages them to research the companies behind the brands they like.

Rather than a gift card that will be spent immediately, the stocks will demonstrate investment appreciation over time—and might even help your kids or grandkids with retirement planning someday.

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 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.

Sources:

http://time.com/money/4067454/giving-shares-stock-sparkgift/?xid=tcoshare

https://www.sparkgift.com/#

http://thereformedbroker.com/2015/10/12/the-greatest-gift-you-can-give-a-young-person/

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

 

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

The Paris Attacks

November 16, 2015 — Sam H. Fawaz

Most of us watched news coverage of the multiple terrorist acts against the city of Paris, France, with a mixture of horror and dread. The horror was our usual response to terrorism, the feeling that arises when we ask ourselves: how can people think this way? And when we realize that, somehow, there ARE people who think that way, which is so far from our own reality, that the realization triggers deep emotions somewhere far on the opposite end of the spectrum from inspirational.

The dread, of course, comes from the realization that these attacks could have, and might still, happen here—that is, wherever we happen to be sitting, whatever concert venue or restaurant we might be planning to visit.

Hard on these emotions comes outrage, and that helps illustrate something that is seldom realized about terrorism. In a recently published book entitled The Better Angels of Our Nature, author Steven Pinker points out that terrorism is far from a new phenomenon. After the Roman conquest, resistance fighters in Judea—who called themselves zealots—would stab unguarded Roman officials whenever the opportunity arose. In the 11th century, Shia muslims launched furtive assassinations on officials who practiced a different version of their belief system. For 200 years, a cult in India strangled tens of thousands of people traveling through their country. The assassination of President William McKinley was executed by a particularly ugly breed of terrorist known at the time as anarchists. Most of us remember days when London and Belfast were routinely rocked by Irish Republican Army terror strikes, and in the U.S., the Weather Underground of the 1960s had a terrible habit of setting off explosives in public places.

The book lists many other instances of terrorist organizations, but all of them prove a point: eventually, each of these groups will go too far, provoke the consciousness of the general public in the wrong way, and turn sympathy to their cause into outrage. Pinker cites statistics that show that virtually zero terrorist organizations ever accomplish their aims, and they tend to die out after their most visible credibility-destroying “success.” One has only to think of the fate of Al Qaeda after 9/11 as an example of a terrorist organization whose relevance declined to near zero in the messy aftermath.

No doubt, the ISIS leaders who planned the attacks on Paris believed that this bloodletting would cause all Western nations to recoil in fear, and back off of their military efforts to contain the new caliphate so it wouldn’t strike again. You and I know that this is pure nonsense. The inevitable outcome will be a new resolve, a hardening, a coming-together of the Western nations in a display of solidarity with France. Countries that were inclined not to get involved in the Middle Eastern messiness are now motivated to sign on for an international military campaign that will contain and perhaps completely destroy ISIS. Leaders who feared that their citizens would revolt at the thought of military intervention can now count on the support of their outraged voters. The next year or two will almost certainly reveal the ISIS attacks on Paris to have been a fatal mistake for those who dream of an Islamic, Sharia-governed caliphate in Syria and Iraq.

Today, you will see the world’s investment markets open lower, and probably close lower, as the horror of the events in Paris are translated into uncertainty about the world we live in—and, therefore, the safety of our assets, reflected in our stocks. The markets always respond reflexively and negatively to threats to our safety.

But as the year proceeds through its last few weeks, the smart money always tells us that these downturns are temporary. Fears that global enterprises are somehow worth less because blood was spilled overseas will prove to be overblown. More importantly, after the events in Paris, the object of our horror and fear—the terrorist organization known as ISIS—is about to confront an opponent more powerful than its leaders have the ability to imagine: the resolve of the Western nations. At the same time, it will have to endure the disgust and repudiation of moderate members of the muslim faith, in the Middle East and elsewhere.

The world changed over the weekend, but not in a way that affects the value of your investments. The change will be felt most powerfully in the failed dreams of a caliphate whose leaders have made a grave and awful miscalculation, who are destined to pay dearly for their malicious stupidity.

TheMoneyGeek thanks guest writer Bob Veres for writing this post

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