Nine Top Elder Frauds to Avoid

October 31, 2019 — Sam H. Fawaz

One of the areas that regulators have begun to focus on in the investment industry is elder fraud. After hearing about the vicious scams endured by senior citizens, many by their own families, I’ve become more attuned to the clues that a client or relative of mine might be a victim of.

It happens too often: you’ve saved money all your life. Or, maybe you sold your business after investing years of hard work. You’ve chosen the smart path and have a comfortable nest egg as you set sail into retirement. Still, you always have to be on guard! Criminals seek to trick you into willingly handing over your hard-earned savings.

Elder financial exploitation quadrupled from 2013 to 2017, according to the Consumer Financial Protection Bureau. Specifically, these activities originated from unknown scammers, family members, caregivers, or someone in a nursing home. They involved more than $6 billion, with an average loss of $34,200. But in 7% of these instances, losses exceeded $100,000.

In 2017, elder financial exploitation reports totaled 63,500. Sadly, these reports probably represent just a small fraction of actual incidents. According to the FBI, more than 2 million seniors were victimized in the past year. Even former FBI Director William Webster, 95, was targeted in 2014.

Webster was promised $72 million and a new car…if he paid several thousand dollars to cover shipping. Ultimately, the caller was arrested. But not before his relatives in Jamaica had successfully scammed other U.S. citizens out of hundreds of thousands of dollars.

It won’t happen to me

If you’re thinking, “This can’t happen to me,” think again. The best and brightest can fall victim to a seasoned swindler.

While scams are only limited by the criminal imagination, the U.S. Senate’s Committee on Aging highlighted some of the more common scams in a report entitled “Protecting Older Americans Against Fraud“.

Listed below are the top nine scams. Please familiarize yourself with this list. If you have any questions, we would be happy to talk to you.

  1. IRS impersonation scams

Scammers impersonating IRS officials claim you owe money and pressure you to settle immediately. If victims make an initial payment, they will often be told that new discrepancies have been found in their tax records, which must be satisfied with another payment.

Don’t fall victim! The IRS will never call you to demand immediate payment. If there is a question about your return, you’ll receive a letter in the mail, not an e-mail, and there is a process to appeal any disputed amount. 

  1. Robocalls and unsolicited phone calls

Robo-dialers can be used to distribute prerecorded messages or connect the person who answers the call with a live person. IRS scammers may use this tactic.

Robocalls often originate overseas, and numbers are usually spoofed (fake) to hide their true identity. Have you recently received a call from someone whose phone number has your prefix? If you don’t recognize the number, it’s likely spoofed and not local.

The FTC has warned not to give out personal information in response to an incoming call. Identity thieves are clever. They often pose as bank representatives, credit card companies, creditors, or government agencies. They hope to convince victims to reveal their account numbers, Social Security numbers, mothers’ maiden names, passwords, and other identifying information. Sometimes all they’re looking for is to record and “steal” your voice imprint, so let them do the talking. Don’t answer any questions with “yes” or “no”, or even give out your name (see 4. below).

Unsure who you are talking to? Just hang up the phone.

  1. Sweepstakes scams / Jamaican lottery scam

Sweepstakes scams continue to claim senior victims who believe they have won a lottery and need only take a few actions, i.e., sending cash to the con artists in order to obtain their “winnings.”

Sometimes, it’s best not to answer a call if you don’t recognize the number. If it’s a friend, neighbor, relative or colleague, they’ll leave a voicemail message.

  1. “Can you hear me?” “Are you there?” scams

The goal: get your voice print saying, “Yes.” Then, the scammer charges your credit card using your “Yes.”

If asked, don’t respond. Just hang up. If you get a call, don’t press 1 to speak to a live operator to be removed from the list. If you respond in any way, it will likely lead to more robocalls–and more scams.

  1. Grandparent scams

“Hi Grandma/Grandpa, guess who?” When you respond, “This sounds like ‘Sally’,” the fraudster will say “she’s” in trouble and needs money to help with an emergency, such as getting out of jail or paying a hospital bill.

If you send cash, expect “her” to call you again, asking for more cash. Victims who were duped later said they had wished they had asked some simple questions that only their true grandchild would know how to answer. Have discussions with your loved ones about what safe word or phrase you might share if they’re really in trouble and need help.

  1. Computer tech support scam

Whether a computer pop-up screen or an alleged caller from Microsoft, scammers claim your PC is infected with a virus. Please note, Microsoft will never call you to inform you they have detected a virus.

Do not give control of your computer to a third party that calls you out of the blue. Don’t give them your credit card number.

  1. Romance scams

More and more Americans are taking to the Internet to find a partner. While some find love, others find financial heartache.

Be wary of individuals who claim the romance was destiny or fate. Be cautious if an individual declares his or her love but needs money from you to fund a visit. Or claims cash is unexpectedly needed to cover an emergency. These are huge red flags.

  1. Identity theft

This was the most common type of consumer complaint in 2016, with nearly 400,000 complaints.

Placing a freeze with the major credit bureaus helps prevent credit cards or loans from being taken out in your name. If you believe you are a victim, call the companies where the fraud occurred, place a fraud alert with the credit bureaus, and file a report with your local police department.

  1. Government grant scams

In the most common variation of this scam, consumers receive an unsolicited phone call from a con artist claiming he or she is from the “Federal Grants Administration,” or the “Federal Grants Department”–agencies that do not exist. Always remember, grants are made for specific purposes, not because you are a good taxpayer.

Do not wire funds to cover fees for the so-called grant.  Government grants never require fees of any kind. If you do, you’ll likely get more requests for additional unforeseen “fees.” If getting a sum of money to someone involves using pay services such as Western Union or going to say Walmart to transmit money, be immediately suspicious.

And, don’t give out bank information or personal information to these swindlers. Scammers pressure people to divulge their bank account information so that they can steal the money in their account. You wouldn’t give bank information to a stranger at the supermarket. You don’t know them. So, why give personal information to someone you don’t know who unexpectedly contacted you?

Always remember, you are in control. When in doubt, hang up. That is how you protect yourself.

If you suspect elder financial abuse, the American Bankers Association suggests the following steps:

  • Talk to elderly friends or loved ones. Try to determine what may be happening to their financial situation, such as a new person “helping” them with money management, or a relative using cards or credit without their permission.
  • Report the elder financial abuse to their bank. Enlist their banker’s help to stop it and prevent its recurrence.
  • Contact Adult Protective Services in your town or state for help. Report all instances of elder financial abuse to your local police—if fraud is involved, they should investigate.

Be on alert

At the end of this article, there is a list of useful tips that you can print. Place it near your phone. These cards can be a useful tool to help protect you against swindlers.

Final thoughts

Our mission is to help you reach your financial goals. We are proactive in our recommendations. But sometimes, a good defense is the best offense. It’s heartbreaking to hear stories of theft. We don’t want you to become a victim and another government statistic.

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.

Tips to Avoid Scams 2019-10-31

 

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

Six Social Security Mistakes to Avoid

September 30, 2019 — Sam H. Fawaz

One of the most common worries I hear from clients is that social security won’t be there for them when they retire. Hence, many of them insist on claiming social security at the earliest possible age so they can get back as much money that they paid in as they can. Hint: social security is not going anywhere; a few tweaks in benefit payment and taxation of wages here and there, and it can be viable for decades to come.

“What if I die before I claim social security?” Most of the time, my answer is that the only ones who will care about that are their heirs, since it meant that my clients spent a little more of their nestegg patiently waiting for their benefits to grow. And in that case, there is usually plenty in the nestegg to keep them happy.

Social security rules are so convoluted and confusing that even I have a tough time remembering and reciting them. But hopefully with this article, I can help you avoid some of the most common mistakes people make when claiming social security.

On January 31, 1940, the first monthly Social Security check was issued to Ida May Fuller of Ludlow, Vermont. She received $22.54, according to the Social Security Administration. She was 65 years old at the time. She passed away at 100 years of age.

Ida May Fuller worked for three years under the Social Security program, paid a total of $24.75 in payroll taxes, and collected $22,888.92 in Social Security benefits.

Today, nearly 70 million people receive some form of assistance from Social Security. You and I will never receive the return on our contributions that Ms. Fuller received, but Social Security can and does play a role in supplementing savings accumulated over a lifetime.

Recognizing that Social Security supplements other sources of income, we can take proactive measures that maximize benefits while avoiding the pitfalls that poor choices can create.

With that in mind, let’s review potential financial Social Security potholes that can cost you money.

1. Collecting benefits too soon. You may begin receiving your retirement benefit at age 62…at a reduced rate. You probably know this, but let’s talk turkey.

If you were born in 1960 or later, full retirement age is 67. At age 62, your monthly benefit amount is reduced by about 30% of what you would receive if you waited until you are 67. The reduction for starting benefits at 63 is about 25%; 64 is about 20%; 65 is about 13.3%; and 66 is about 6.7%.

In casual conversation, it’s common for clients to ask us, “When is the right time for me to begin receiving benefits?” We usually respond with a less-than-definitive, “It depends,” because many variables, both objective and subjective, factor in.

If you have questions, let’s talk. We believe it’s important to tailor our thoughts and recommendations to your specific circumstances. Optimizing your spouse’s and your social security claim dates can literally add tens, if not hundreds of thousands to your retirement income stream.

2. You collect prior to your full retirement age while still working. If you are under full retirement age for the entire year, Social Security deducts $1 from your benefit payments for every $2 you earn above the annual limit. For 2019, that limit is $17,640. Ouch!

In the year you reach full retirement, Social Security deducts $1 in benefits for every $3 you earn above a higher limit. The 2019 income limit is $46,920. Only earnings before the month you reach your full retirement age are counted.

In many cases, the price of collecting Social Security while working and under full retirement age can be costly.

3. You are unaware that your Social Security may be taxed. IRA and 401(k) contributions may be deducted from income to reduce your overall tax bill. However, Social Security taxes paid by the employee are not deductible. But that doesn’t necessarily translate into tax-free Social Security income.

If you file a federal tax return as an “individual”  and your combined income (excluding Social Security) runs between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. Earn more than $34,000, and up to 85% of your benefits may be taxable.

If you file a joint return, the threshold rises to $32,000 and $44,000, respectively. Proper tax planning with your other income can help minimize the income taxes that apply to your social security benefits.

4. You decide to defer the spousal benefit. The longer you wait to take Social Security, the greater the monthly benefit, up to age 70. So, why not employ the same strategy for your spouse, if money isn’t the primary issue? Unfortunately, that may not be a wise choice.

The most your spouse may receive is 50% of the monthly benefit of the primary account that you are entitled to at full retirement age.  If your spouse waits past his or her full retirement age, he or she is leaving money with the government. Again, optimization of social security benefits can help figure out what claiming strategy makes the most sense.

5. Remarriage and your benefit. It’s complicated. You may already be aware that  divorced spouses are eligible for benefits tied to their former marriage.

 Eligibility is determined by these criteria: 

  • You were married for at least 10 straight years.
  • You are at least 62 years old.
  • Your ex-spouse is eligible for retirement benefits.
  • You are currently unmarried.

However, if you remarry, you lose the rights to your former spouse’s benefits unless your new marriage ends, whether by death or divorce.

I understand that the monthly Social Security check you receive may pale in comparison with the new journey you are about to begin, but it’s important that you are aware of the financial component.

6. How many years have you worked? Most of us understand one simple concept: the longer we wait to take Social Security (up to age 70) the higher the benefit (spousal benefit may be an exception–see #4). 

We also understand that higher wage earners can expect to receive a higher benefit. But did you realize that your monthly benefit is also based on your highest 35 years of earnings?

What if you haven’t worked 35 years? Social Security averages in zero for those years, which reduces your benefit. If you have at least 35 years, but some of those years are low earning years, they will be averaged in, creating lower benefit versus continued employment at higher wages.

Are you still working in your 50s or 60s? Great! Those after-school jobs in high school or years when your income may have been low, are removed from the benefit calculation if you’ve exceeded 35 years of income.

When we are factoring in pensions and retirement savings, those extra dollars may or may not amount to much, but I believe it is something to be aware of.

For some folks, Social Security may seem simple. For others, it feels as if you’re entering a complicated financial maze. If you have questions about Social Security or are uncertain how to proceed, feel free to give us a call. And of course, be sure to run any tax scenarios by your tax or financial advisor.

If you would like to review your social security options, get an opinion on 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.

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Option Selling to Reduce Portfolio Risk — A Case Study in Ulta Beauty (ULTA)

August 31, 2019 — Sam H. Fawaz

I wouldn’t blame you if you read the title of this article and decided to just skip it. Indeed, when I talk to clients about selling call options against some portfolio positions they own, I can see their eyes glaze over before I even get to explaining the possible outcomes.

In case you need a primer, a comprehensive article I wrote several years ago explains the basics of working with options in “Using Options to Enhance Portfolio Returns” . For this case study, and since ULTA shares lost almost 30% of their value on Friday, I thought I’d walk through a good example of how selling calls against a position can mitigate a bad quarterly earnings report and loss of share value.

One of the positions we’ve held in client portfolios (and mine) since August 2016 is Ulta Beauty (ULTA).  For these past few years, calendar quarter after calendar quarter, Ulta has been reporting and beating earnings estimates, as well as raising forward looking earnings estimates. So when the price dipped in 2016 and 2017, I decided to buy shares for client portfolios, including my own. As a growth stock, Ulta does not pay a dividend.

The rosy quarterly earnings parade came to a tire-screeching halt this past week when, in a big surprise (shock?) to Wall Street and analysts, Ulta missed its quarterly earnings estimate and lowered forward earnings guidance. The stock was hit the hardest I’ve ever seen, losing almost $100 per share (30%) of its value on Friday alone. Just before the earnings announcement, the options markets (which handicap expected moves) were implying a +/-$20 per share move on earnings. What we ultimately got is known as a whopping five standard-deviation move instead. That’s epic as far as daily stock moves are concerned and those are quite rare.

To put that move into perspective, put options (stock options you can buy to protect your downside below a certain price) expiring on Friday August 30th, were not even available below the $260 price. That’s because, even at $260, options were implying that there was less than a 1% chance Ulta would be trading that low, let alone below $240. You usually see moves like this in risky biotech stocks failing an FDA drug approval, not a loved retailer.

So yes, in one trading day, Ulta gave back its entire stock appreciation of the past three years and is now trading back to the level it was at in June 2016. The entire client unrealized profit was wiped out overnight as algorithmic traders and portfolio managers dumped the stock en masse.

The sudden loss of profits is, needless to say, disappointing to put it mildly. For our case study, I want to point out where selling call options helped to hedge the position (i.e., reduce the risk) and actually allowed locking in profits along the period of time since ownership.

Shortly after we bought the shares in August of 2016, we began selling upside October 2016 call options against the positions. You must own 100 shares of a stock to sell one call option against it. Selling a call option means that for a small deposit to your account (known as option premium income), you sell someone the right (but not the obligation) to buy your shares from you at a certain price (i.e., the strike price) by a certain date (expiration date). So when the stock was trading at $255, we sold (upside) call options at the $270 strike level (collecting $340 for that first sale).

This meant, if Ulta was trading above $270 per share on or before expiration, the buyer of the option we sold could buy 100 of our shares for $270 each. If that occurred, our per share profit would be $1,500 ($270-$255=$15 x 100 shares) plus the $340 we collected for selling the call option. Therefore, our initial total profit, if the shares would have been “called” away, would have been $1,840 or 7.2%. Since this would have been a 45-day hold, the annualized return would have been a whopping 58.5%. All quoted figures don’t account for the small commissions incurred when buying or selling an option, which is about $4.95-$8.95 per transaction.

As it turned out, the shares never got called away (Ulta was trading below $270 on options expiration), and the October 2016 call option we sold essentially expired worthless, meaning that we got to keep the $340 we originally collected. This meant that we could do this again. And we did so by selling the November and then the December 2016 options at appropriate strike prices. The income generated through this process is called “option premium”.

Between 2016 and 2019, over a three year period, we collected and pocketed about $5,510 in option premium that we never have to give back, nor do we have any further obligation since the options expired. That’s a 21.6% return over three years, or a 7.2% annualized return on the cost of the 100 shares of Ulta owned. That certainly reduces (but doesn’t eliminate) the sting from the share price decline this past week.

Having those call options sold as a hedge against the position prior to the earnings announcement, clients did not suffer the 30% loss on the shares Friday.  Instead they gave up only 12.7%. That’s the power of option hedging.

To be fair, I should mention that the last call option we sold prior to earnings, was a $305 call expiring in January.  Had the shares gained 30% on Friday instead, our “upside” would have already been capped at $305 per share, and clients would have only participated to a much smaller extent to the upside. On the other hand, that cap would not have kicked in until January. Is it possible that the stock could recover by then? Options markets give that about a 15% chance today, so not likely. But then again, nobody would have ever expected Ulta to close under $238 on Thursday.

With the decline in the shares under $238, we closed the January 2020 call options on Friday for a 70% profit. To keep the shares hedged (while we decide what we ultimately want to do with Ulta Shares), we sold June $270 calls for $2,000 each. Unless the stock trades above $270 by June, we’ll get to keep the $2,000 and ….. here we go again!

In hindsight, buying put options (options that act as insurance against large declines like this one) to further protect our profits would have been prudent. But with the price of protection highly elevated, and taking into account the fact that we had call options sold against the position, I weighed the pro’s and con’s and decided against doing so.

Although my case study is about reducing risk through selling options, the lesson here is that taking some gains/profits in a stock during its march upwards, is a prudent move, whether you’re selling calls against your position or by just trimming the position. One never knows what happens, but you’ll be happy that you did when your stock gets hit like Ulta did. Ultimately, it’s not a gain until you take the profit off the table.

Disclaimer: None of the forgoing discussion is a recommendation to buy or sell any securities. It’s provided strictly for educational purposes.

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.

 

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Broken Records or Records Broken?

July 29, 2019 — Sam H. Fawaz

Rearrange the two words “broken” and “record” and combined they have two totally different meanings. A broken record is akin to your financial planner repeating over and over again about saving more and spending less. A record broken conjures up images of olympic athletes taking their craft to higher, never before achieved heights.  We also hear it often when referring to never-seen before stock market levels.

We’ve all heard it said: “Records are made to be broken.” We celebrate record-breaking winning streaks from our favorite teams and athletes. Conversely, we hope to avoid a long string of losses.

The bull (up-trending) market that began in 2009 is not the best performing since World War II (WWII). That title still resides with the long-running bull market of the 1990s. But it is the longest running since WWII (St. Louis Federal Reserve, Yahoo Finance, LPL Research–as measured by the S&P 500 Index).

In the same vein, the current economic expansion is poised to become the longest running expansion since WWII. For that matter, it’s about to become the longest on record. According to the National Bureau of Economic Research, which is considered the official arbiter of recessions and economic expansions, the current expansion began in July 2009. It has run exactly 10 years, or 120 months, matching the 1990s expansion (see below table).

Economic Scorecard

Expansions Length in Months
July 2009 -? 120
Mar 1991 – Mar 2001 120
Feb 1961 – Dec 1969 106
Nov 1982 – Jul 1990 92
Nov 2001 – Dec 2007 73
  Average 64
Mar 1975 – Jan 1980 58
Oct 1949  – Jul 1953 45
May 1954 – Aug 1957 39
Oct 1945 –  Nov 1948 37
Nov 1970 – Nov 1973 36
Apr 1958  – Apr 1960 24
Jul 1980  –  Jul 1981 12

Source: NBER thru June 2019

Barring an unforeseen event, the current period is headed for the record books.

While the economic recovery is about to enter a record-setting phase, it has been the slowest since at least WWII, according to data from the St. Louis Federal Reserve. For example, starting in the second quarter of 1996, U.S. gross domestic product (GDP), the broadest measure of economic growth, exceeded an annualized pace of 3% for 14 of 15 quarters. It exceeded 4% in nine of those quarters (St. Louis Federal Reserve). Growth was much more robust in the 1960s, and we experienced a strong recovery from the deep 1981-82 recession.

Economic booms and long-running expansions can encourage risky behavior. People forget the lessons learned in prior recessions and overextend themselves. Consumers can take on too much debt. Businesses may over-invest and build out too much capacity. We saw euphoria take hold in the stock market in the late 1990s and speculation run wild in housing not too long ago.

That brings us to the silver lining of the lazy pace of today’s economic environment.

Slow and steady has prevented speculative excesses from building up in much of the economy. In other words, a mistaken realization that the good times will last forever has not taken hold in today’s economic environment.

Causes of recessions

In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). The long-running expansions of the 1960s, 1980s, and 1990s led to a mistaken belief that various policy tools could prevent a recession.

Yet, expansions don’t die of old age. A downturn can be triggered by various events. So, let’s look at the most common causes and see where we stand today.

  1. Rising inflation leads to rising interest rates. In the early 1980s, the Federal Reserve pushed interest rates to historically high levels in order to snuff out inflation. The Fed’s policy prescription succeeded, but led to a deep and painful recession.
  2. The Federal Reserve (The Fed) screws up. A policy mistake can be the trigger, for instance if the Fed raises interest rates too quickly and restricts business and consumer spending. This is a derivative of point number one. There were fears the Fed was headed down this road late last year. Credit markets tightened, and investors revolted until the Fed reversed course after the markets swooned nearly 20% in the 4th quarter of 2018.
  3. A credit squeeze can snuff out growth. In 1980, the Fed temporarily implemented credit controls that briefly tipped the economy into a recession.
  4. Asset bubbles burst. The 2001 and 2008 recessions were preceded by speculative excesses in stocks and housing.
  5. Unexpected financial and economic shocks jar economic activity. The OPEC oil embargo in the 1970s exacerbated inflation and the 1974-75 recession. The tragedy of 9/11 jolted economic activity in 2001. Iraq’s invasion of Kuwait pushed oil up sharply, contributing to the 1990-91 recession. Such events don’t occur often, but their possibility should be acknowledged.

Where are we today?

Inflation is low, the Fed is signaling its first possible rate cut this week, and credit conditions are easy as measured by various gauges of credit. For the most part, speculative excesses aren’t building to dangerous levels.

While stock prices are near records, valuations remain well below levels seen in the late 1990s (I’m using the forward price-to-earnings ratio for the S&P 500 index as a guide). Besides, interest rates are much lower today, which lends support to richer valuations. That doesn’t mean that swaths of stocks or sectors are not over-valued. That’s also not to say we can’t see market volatility. Stocks have a long-term upward (bullish) bias, but the upward march has never been and never will be a straight line higher.

As I’ve repeatedly stressed, your financial plan is designed, in part, to keep you grounded during the short periods when volatility may tempt you to make a decision based on emotions. Such reactions are rarely profitable.

A sneak peek at the rest of the year

The Conference Board’s Leading Economic Index, which has a good record of predicting (if not timing) a recession, isn’t signaling a contraction through year end. But one potential worry: a protracted trade war and its impact on the global/U.S. economy, business confidence, and business spending.

Exports account for almost 14% of U.S. GDP per the U.S. Bureau of Economic Analysis (BEA). It’s risen over the last 20 years, but we’ve never experienced a U.S. recession caused by global weakness.

By itself, trade barriers with China are unlikely to tip the economy into a recession. Per U.S. BEA and U.S. Census data, total exports to China account for just under 1% of U.S. GDP. Even with higher tariffs, exports to China won’t grind to a halt and erase 1% of GDP.

What’s difficult to model is the impact on business confidence and business spending, which in turn could slow hiring, pressuring consumer confidence and consumer spending. Simply put, there isn’t a modern historical precedent to construct a credible model. Hence, the heightened uncertainty we’ve seen among investors.

Is a recession inevitable?

It has been in the U.S., but other countries have more enviable records.

Earlier in June, the Wall Street Journal highlighted, “Australia is enjoying its 28th straight year of growth. Canada, the U.K., Spain and Sweden had expansions that reached 15 years and beyond between the early 1990s and 2008. Without the Sept. 11, 2001 terrorist attacks, the U.S. might have, too.”

If trade tensions begin to subside (a big “if”) and if the fruits of deregulation and corporate tax reform kick in, we could see economic growth well into 2020 (and with some luck, into 2021 and beyond). But, I’ll caution, few have accurately and consistently called economic turning points.

The Fed to the rescue?

Rising major market indexes for much of the year can be traced to positive U.S.-China trade headlines (at least through early May), a pivot by the Fed from tightening monetary policy to loosening, and general economic growth at home.

We witnessed a modest pullback in May after trade negotiations with China hit a snag. The threat of tariffs against Mexico added to the uncertain mood until June 4th, when Federal Reserve Chief Jerome Powell signaled the Fed would consider cutting interest rates to counter any negative economic headwinds.

While Powell is not exactly promising to deliver any rate cuts, one key gauge from the CME Group that measures fed funds probabilities puts odds of a rate cut at the July 31st meeting at around 100% (as of July 28 – probabilities subject to change).

I’ll keep it simple and spare you the academic theory explaining why lower interest rates are a tailwind for equities. In a nutshell, stocks face less competition from interest-bearing assets.

But let’s add one more wrinkle–economic growth.

Falling rates in 2001 and 2008 failed to stem the outflow out of stocks as economic growth faltered. And, rising rates between late 2015 and September 2018 didn’t squash the bull market.

During the mid-1980s, mid-1990s, and late 1990s, rate cuts by the Fed, coupled with economic growth, fueled market gains.

It’s not a coincidence that bear markets coincide with recessions and the bulls are inspired by economic expansions. Ultimately, steady economic growth has historically been an important ingredient for stock market gains.

Final thoughts

Control what you can control. You can’t control the stock market, you can’t control headlines, and exactly timing the market turns isn’t a realistic tool. But, you can control your portfolio.

While I would expect the market to continue higher over the intermediate term, it would not surprise me to have a mid-summer pullback as August-September tend to be weaker months of the year. Don’t let volatility shake you out of your positions, but if you haven’t done anything to take some money off the table up to this point, it would be prudent to consider taking some profits on certain positions and add some defensiveness to your portfolio. This is not a recommendation to buy or sell any stocks or other securities.

Your plan should consider your time horizon, risk tolerance, and financial goals. There is always risk when investing, but we tailor our recommendations with your financial goals in mind. If you’re unsure or have questions, let’s have a conversation. That’s what we’re here for.

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

Tips to Teach Kids About Money

June 30, 2019 — Sam H. Fawaz

We may not even realize it, but most of our attitudes, fears and habits around money are formed when we are kids. How much our families made, how much they spent and even how much of an allowance we got, greatly influence how we feel and react to the lack of or the abundance of the greenback.

Kids learn the basics in school — reading, writing and arithmetic. But schools avoid almost any instruction about money. If they do offer a class, it may be an elective in high school, long after money habits have been formed.

I believe it’s important to start talking about finances early, when kids are young. You can begin to share your values and help kids shape their views on money in a culture that places a premium on “things,” not savings.

While we can’t shelter our children, we can teach them. It’s why I am sharing a guide of practical tips that I believe will help put your kids on the right path.

1. Teaching delayed gratification. This is the hard part. Some of us are better than others, but few have truly mastered the art of patience. After all, we are human!

Look at it another way for kids. Anticipation can be half the fun! It’s the journey. Think about it:  your kids awaiting the arrival of Santa, or the excitement that precedes going to an amusement park or on an upcoming family trip.

If they want to buy a pricey item, help them save for it. You can lend support by setting up various methods for savings. I remember the piggy bank. Money goes in, but never really comes out. Instead, consider setting up three jars: One for savings, one for giving, and one for spending.

2. Incorporate giving it away. I believe the giving jar is as important, if not more important, than the savings jar.

Do your children have a cause that resonates in their heart? Do they want to give to their church? Is there a local food bank or animal shelter your daughter or son can assist with donations?

Learning to let go and help those who are in need will create a stronger sense of altruism and selflessness that, if taught early, will blossom in them as adults.

When it comes to charity, let their treasure follow their heart.

3. Kids need money. Theory without practice won’t work. Kids need a hands-on lesson. You may start with an allowance (some refer to it as a commission)—you may pay kids for various chores, or both. That’s a parenting preference, and there are advantages to both.

What is an appropriate allowance? According to a study by RoosterMoney published by The Balance, the weekly allowance earned by a 4-year-old averages $3.76. At 8 years of age, an allowance averages $7.27 per week. At 12, the allowance is $9.85 and $12.26 at 14.

The study offers reasonable guidelines, but you may adjust at your discretion.

What about birthday gifts, Christmas gifts, etc.? Set goals with your children, but I lean heavily toward the savings bucket. Those annual gifts will add up over the years. Your kids could graduate high school with a tidy sum of cash if they have the discipline to save.

4. Teach by example. I remember a time I paid for my purchase at the gasoline pump, got back into my car, and drove away.

 My young daughter accused me of stealing!

She understood the idea that “what’s not ours isn’t ours,” but she didn’t grasp the concept of “plastic money.”

 I explained how I paid without going into the store, discussed the concept of a credit card, and emphasized these purchases are always paid in full at the end of each month. Today, I still impart the benefits and dangers of credit cards.

Was this a lifetime lesson for her? I certainly remember helping my parents pay their credit card balances off in full each month.

In addition, consider using lists when shopping. Your children will see that it helps avoid impulse buys. And, as kids grow older and the discussions are age appropriate, explain why you try to avoid impulse purchases. Oh and it goes without saying: never shop for groceries/food when you’re hungry.

Use various examples from your own life when you teach your kids about the importance of money and savings.

5. Encourage summer and after-school jobs. Trading time for cash via a job helps kids learn the invaluable lesson of hard work. It also supplements savings and provides spending money.

Cutting your own or the neighbor’s grass, shoveling your own snow or the neighbor’s snow, yard work, a lemonade stand, babysitting, helping in the family business, working retail, household chores, or working as a lifeguard are options.

Besides the extra cash, they will learn a strong sense of pride and responsibility that will carry over into adulthood.

6. Open a savings account. Not that long ago, a savings account earned a respectable interest rate. That’s not the case today. Still, a savings account helps kids learn.

A 5-year-old may not need a savings account, but adulthood isn’t far away for a teen or pre-teen. As young adults they will have a checking account, debit card, and eventually a credit card. Baby steps in the right direction will ease the transition.

As they grow older, discuss the benefits of investing with your kids. Outside of a college savings account, you may open an investment account or Roth IRA in their name and teach them about investing. You could start it with seed money and have them contribute on a regular basis (they need earned income to contribute to a Roth IRA). More importantly, help them buy into a savings goal. That way, they will take ownership.

If you’re unsure about how to start the process, we’d be happy to point you in the right direction.

7. There’s an app for that. Today, there are mobile apps that can help kids. Bankaroo, iAllowance, and PiggyBot are just a few. Feel free to look online for one you feel is most appropriate for your child.

8. Guide them with goal setting. Are they trying to save for something? Help them come up with a plan and incentivize with matching funds. Companies do this with 401(k)’s, why can’t parents?

Discuss the importance of needs versus wants. A teenager may need a bicycle. But do they need one with all the bells and whistles? Or, are there reasonably priced bikes that won’t bust the savings account?

9. Money isn’t everything. Yes, it’s important. It gives us choices. But by itself, money can’t buy happiness.

10. Let them make mistakes. Ashley LeBaron, a graduate student at the University of Arizona, said, “Let them make mistakes so you can help them learn from them, and help them develop habits before they’re on their own, when the consequences are a lot bigger and they’re dealing with larger amounts of money.”

Not surprisingly, her research showed those who had practical experience with money during childhood learned how to work hard, how to better manage money, and how to spend it wisely.

That may be the most important desired outcome.

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.

 

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Big Changes Coming to Retirement Plans

May 25, 2019 — Sam H. Fawaz

There are multiple bills before Congress now that are intended to help IRA owners and  participants invested  in workplace retirement plans such as 401(k)s. The proposals have some overlapping provisions, along with a number of important differences.

The House of Representatives passed a retirement bill (known as the SECURE Act) on Thursday which includes an assortment of changes for participants in 401(k) plans and owners of IRA’s. The Senate may be poised to pass the bill, or a similar one, quickly and send it to the president, who is expected to sign it. Here’s a look ahead:

Convert your IRA Into an Annuity

It’ll become easier to convert your retirement savings into a steady lifetime income—a feature common to old-fashioned pensions—by buying an annuity in a 401(k)-style retirement plan. Currently, only 9% of employers offer this option, according to Vanguard Group Inc.  Employers would be able to choose whether to offer an annuity and, if so, which type to offer.

Keep Contributing after Age 70½

The bill repeals the age cap for contributing to a traditional IRA, currently 70½, making it easier for people with taxable compensation to continue saving if they continue to work.

Defer Required Minimum Distributions Until Age 72

Under current rules, you must start taking minimum (taxable) withdrawals from your IRA or 401(k) when you turn age 70½. Under the new bill, the age to start taking required taxable withdrawals from 401(k)s and IRAs would increase to 72.

See How much Income Your 401(k) Supports

The legislation would also make it easier for employees to understand how much monthly income their 401(k) balance supports by requiring employers to disclose an estimate on 401(k) statements. So participants would see not only their account balance on their statements, but also a lifetime stream of monthly payments based on expected-mortality tables.

Part-time Employees Can now Participate in 401(k)s

The bill requires 401(k)-style retirement plans to allow long-tenured part-time employees working more than 500 hours a year (employed for at least three years) to participate.

Penalty-free Withdrawals for Expenses of Adoptions or Child-birth

The bill would allow you to take penalty-free distributions from 401(k)s and IRAs of up to $5,000 within a year of the birth or adoption of a child to cover associated expenses (normally, a 10% penalty tax applies for pre-age-59½ withdrawals). You will still owe taxes on the withdrawal.

Inherited IRA’s “Stretch” Limited to 10 Years

Currently, with a few exceptions, those who inherit an IRA can elect to take required minimum distributions over their lifetimes, which could stretch out for decades. Under the bill, heirs would no longer be able to liquidate the balance over their lifetime and stretch out tax payments. Instead, if you inherit a tax-advantaged retirement account after Dec. 31, 2019, you must withdraw the money within a decade of the IRA owner’s death and pay any taxes due.

Exceptions are provided for surviving spouses and minor children (under 18), folks who are less than 10 years younger than the account owner, and the chronically disabled. Planning distributions during this 10 year period will be crucial to heirs to avoid the highest tax rates from large distributions.

Utilize 529 Education Savings Plan Money To Pay off Student Loans

You’d be able to withdraw as much as $10,000 from a 529 education-savings plan for repayments of some student loans (including siblings), registered apprenticeships and homeschooling costs.

Group 401(k) Plans

An estimated 42% of private-sector workers don’t have access to a workplace retirement-savings plan. Under the bill, employers without retirement plans would have the option to band together to offer a 401(k)-type plan if they choose.

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: Wall Street Journal

 

 

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What’s Going on in the Markets: April 28, 2019

April 28, 2019 — Sam H. Fawaz

It’s no surprise to anyone paying attention to financial news that the stock market, as measured by the S&P 500 index, closed at an all-time high last Friday. It was one measly point away from the all-time intra-day high set on September 21, 2018 (2940.91). The technology heavy NASDAQ indexes have already surpassed their all-time 2018 highs.

You’d think at new all-time highs, the masses would be euphoric and pouring money into the stock market hand-over-fist. But alas, that’s not the case at all. The rise from what I like to call the “Christmas Eve Stock Market Massacre of 2018” has been one of the most distrusted and hated rallies I’ve ever seen in my over forty years of following the stock markets. Ironically, that’s what might keep the market from falling over and moving higher, at least temporarily.

I’ll be the first to admit that I personally haven’t fully embraced the 24% rally from the Christmas Eve bottom. It’s been a torrent advance that has given latecomers (as well as early sellers) very few low-risk opportunities to jump in. That’s to say, pullbacks since Santa Claus came calling have been shallow and fleeting. Bull markets tend to be that way. Virtually every portfolio manager and investor I talked to was over-invested going into the 4th quarter 2018 swoon, and under-invested during the 1st quarter 2019 relentless advance.

Such is life investing in the stock markets.

Pundits would say that it was the Federal Reserve Chairman’s walking back talk of planned interest rate hikes in 2019 as the proximate cause for the rally. Markets love low interest rates (cheap money) as companies borrow even more money to buy back their own stock. Lower interest rates for longer have always meant corporate earnings can grow a bit faster with less drag from servicing (paying down) debt and financing expansion plans.

If the promise of lower interest rates for longer is the proximate cause for the rally, then recent positive economic news might cause the “data dependent” federal reserve to rethink the interest rate pause. A federal reserve board meeting is scheduled for this week, though the chance of an interest rate hike announcement at this meeting is virtually nil.

Just this past Friday, what was widely forecast as a coming dismal 1st quarter 2019 gross domestic product figure (under 1%), turned out to be more than thrice as good, coming instead at 3.2%.

Also this past week, while existing home sales came in 4.9% below expectations, new home sales came in almost 4.5% above expectations. In addition, durable goods orders also came in much better than expected. Finally, weekly jobless claims continue to be low. The March monthly jobs report will be announced on Friday May 3.

Expected to be dismal as well, first quarter 2019 corporate earnings reports have also continued to surprise to the upside. So far, 230 of the S&P 500 have now reported Q1 2019 earnings, and the reported Earnings Per Share (EPS) growth rate for the index is up about 2%. Granted, when companies lower expectation ahead of time, beating them becomes the norm (games companies play!)

So should we throw caution to the wind, set aside all hedges and invest all idle cash since so little seems to derail this charging bull market (e.g., the still unsettled trade wars, the Mueller Report, rising debt levels, the never-ending Brexit debacle, slower global growth, higher gas prices, etc.)?

In a word, no.

While it appears that the markets will continue to move higher in the near term, the risk-reward ratio at these levels does not favor heavy deployments of capital. Getting to a previous market high doesn’t necessarily mean we’re going to smash through those old highs and rally another 5-10% immediately. After all, there are many regretful buyers from the 2018 highs who can’t wait to get out at even-money if given that opportunity (exclaiming the famous phrase anyone unexpectedly caught in a nearly 20% stock market drop “never again!”).

That incoming supply of shares from regretful buyers will likely cause a long battle around last year’s highs, making for a pause in the upward momentum. Besides, after a nearly 25% run, the market is way overdue for a break.

A Wall of Worry?

In addition to the still unresolved trade wars and ongoing Brexit discussions, we have the following worries on the table (acknowledging that the market likes to climb a wall of worry):

  1. Recession Fears: an inverted interest rate curve, where short term rates are higher than longer term rates, has historically been a warning flag for the economy, though the lead time to a recession has been 11 months on average. In fact, there has been only one instance where the yield curve inverted without a U.S. recession, in January 1966. It is worth noting, however, that there was still a bear market during that period, which began just one month after inversion.
  2. Inflation Fears: as inflation indicators have eased since the middle of 2018, investors and economists alike have pushed this all-important economic barometer to the back of their minds. However, inflationary pressures, in the form of wage hikes, could reemerge in the near future, forcing the Federal Reserve to again take action when they least want to do so.
  3. Corporate Debt: over the course of this economic cycle, business debt has skyrocketed as U.S. corporations have issued record amounts of debt.  Non-Financial Business Debt as a percentage of GDP is close to an all-time high, and well in excess of the levels reached at the beginning of the last three recessions. If the economy slips into recession, marginally profitable companies will be unable to pay back interest on their debt, let alone the principal.
  4. Small Business Optimism: both small business owners and CEOs are not as enthusiastic as consumers or investors. Small business confidence fell sharply in the closing months of 2018 and has shown little propensity to recover. Corporate CEO confidence experienced an even bigger hit, with the same inability to rebound from these depressed levels. Business owners are most likely feeling the pressures of a tight labor market, rising wages, and squeezed profit margins. That could spell trouble for earnings and business spending ahead.

So What To Do Now?

The economy is stable and employment is strong. At this point, blue chip indexes have surpassed or are very close to surpassing their previous highs, tempting investors to climb aboard for another potential leg upward. But should you?

The financial planning answer to that question is that it depends on your goals, time-frame and risk tolerance. But the more realistic answer is that it really depends on your current investment level and your confidence that we’re just going to sail higher. While in the long run the market trends higher, no one I know of is a fan of investing at a potential top.

I suggest that you think back to how you were feeling in December of 2018, and if you felt that you were over-invested, or were surprised or uncomfortable reading the balances on your year-end account statements, take this gift the market has given you and reduce exposure to the markets. Even if you weren’t, ask yourself this: should I be taking some profits off the table? This is not a recommendation to buy or sell anything; only you and your financial planner can make that decision (we can help!)

I’m personally not so confident we’re going to just continue to rally without a near term pullback, and therefore I continue to position client and my personal portfolios with a defensive tilt. Mind you, I see nothing in the price action to tell me that a pause is imminent, but severe downside action can change that and repossess weeks’ worth of gains in a matter of a day or two. This, however, should be meaningless to investors with a long-term investing horizon.

While we have participated robustly in this rally since 2018, I believe that the market’s ability to achieve notably stronger gains from here is somewhat questionable. And from a safety-first strategy viewpoint, the longer-term outlook is more ominous.

The recent inversion of the yield curve is a classic warning flag, regardless of whether it remains inverted over the intermediate term. And the simmering wage inflation pressures are not going to subside anytime soon, especially when initial claims for unemployment are hitting 50 year lows. That means the Federal Reserve might have to renege on their “no rate hike” promise before this year is over. Few on Wall Street are anticipating that the Fed might take away the low interest rate punch bowl again.

As Jim Stack of InvesTech Research warns, “One of the most difficult aspects of negotiating the twists and turns of a late stage bull market is keeping one’s feet objectively planted on firm ground. It’s hard to argue against positive economic reports, except with the historical knowledge that bull markets peak when economic news is rosiest. And with consumer confidence near the highest levels of the past 50 years, one would have to think that we are approaching a peak. That inherently leaves a lot of room for potential disappointment.”

Even if it means leaving a few dollars of market profits on the table, my safety-first approach leaves me cautious/defensive with an abundant level of cash and hedges for the time being. Now is a good time to take stock of your investment level, and decide for yourself whether you’re prepared for the next downturn.

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.

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Is “Smart Money” Really that Smart?

March 24, 2019 — Sam H. Fawaz

Ask ten people if they think they’re a good driver, and I’m willing to bet that most, if not all of them, will claim to belong to that camp. The other guy or gal is the bad driver, not me. But someone is causing all of those car accidents and traffic snarl-ups, so we can’t all be considered good drivers.

The same can be said about investors. We often hear financial pundits on TV talking about what the “Smart Money” is doing. Who are these smart people? What makes them so smart? And if they are smart, what are we? I won’t keep you in suspense: yes, you might be considered “dumb money”.

Defining “Smart Money”

Terms that Wall Street throw around such as “smart money” and “expert” can sound very alluring to us. Before we jump and listen to what they have to say, we should first find out more about what makes them so smart or deemed an expert. The truth is there is no standard definition.

In all my years in the industry, I still don’t know what makes someone a media proclaimed “expert” or “smart”. Based on my experience, an expert is someone who makes confident predictions and is right only about half the time. “Smart money” generally refers to a person/institution with a lot of money, but it can also be used to describe people who run complex investment schemes (so complex that we common folk can’t understand it).

Forget Smart Money; Be a Smart Investor

Historically, “Smart Money” has not translated into outsized returns. Their returns are often in line with straightforward (not complex) investment strategies. In fact, the Barron’s Roundtable of Smart Money in 2018 handily underperformed the markets (and that was not an anomaly).

Wall Street Journal personal finance writer Jason Zweig recently opined, “the only smart money is the money that knows its own limitations.”

Legendary investor Warren Buffett said, “What counts for most people in investing is not how much they know, but rather how realistically they define what they don’t know.”

As Zweig writes, it’s surprisingly easy to find instances where smart money managers can sometimes behave just as irrationally as individual investors who chase prices up to parabolic levels, and join in the panic at the lows. They are, after all, humans just like us, subject to the laws of fear and greed innate in all of us.

Let’s not forget that professional hedge-fund analysts, fund-of-fund managers and other such purportedly expert advisers, put thousands of investors into Bernard Madoff’s Ponzi scheme. They ultimately lost millions of dollars of clients’ money.

Another example: among the eager clients of the Foundation for New Era Philanthropy, one of the most notorious fraudulent investment schemes of the 1990s, were such billionaires and philanthropist as Laurance Rockefeller, former Goldman Sachs co-chairman John C. Whitehead and ex-U.S. Treasury Secretary William E. Simon.

Smart investors recognize that it’s OK they don’t know everything. And neither do the “smart money” nor the so called “experts”. Once we define the limits of our knowledge and understanding, we can focus our time and energy on what matters most – those things we can control.

As investors, we can control our decisions and reactions to uncontrollable market events. Following a disciplined and deliberate decision-making process is one of the smartest things investors can do. Working with a fee-only advisor can not only help you sort through all of the investment options and risks, but can also keep you from panicking at the lows, and feeling overly euphoric at the top.

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: (c) 2019 The Behavioral Finance Network, used with Permission

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Believe it Or Not

January 27, 2019 — Sam H. Fawaz

A longtime favorite line that I like to use when people ask me what the market or economy are going to do in the near future, is to say “Sorry, my crystal ball is in the shop.”  Or I’ll repeat what famed baseball manager Yogi Berra once said: “It’s tough to make predictions, especially about the future.”

That doesn’t stop others from trying to be a broken clock by predicting early and often. And so we’re into that exciting time of year when all sorts of market predictions are made by people who are mostly claiming that they knew the future and have accurately predicted it over a great track record.  But if you’re smart, you’ll turn off the TV/radio or move on to the next article.

The truth is that none of us can accurately predict the movements of the markets.  If we could, then we would always make trades ahead of market moves, and it wouldn’t take long before that amazing prognosticator with the working crystal ball would have amassed billions off of his or her stock market trades.  Have you read about anybody doing that lately?

Most of these people are employed at think tanks or sell their predictions to credulous investors.  Would they need that paycheck or your hard-earned subscription dollars if they had the ability to make billions just by checking the ‘ole crystal ball a couple of times a day?

A recent article by frequent blogger and wealth manager Barry Ritholtz offers some rather amazing data on people in the prediction business.  You may know that the cryptocurrency known as “bitcoin” is now worth about $3,500—way WAY down from the start of 2018.  So how well did the people in the prediction business foresee that downturn?

Not well.  In his article, Ritholtz noted that Pantera Capital predicted that Bitcoin would be selling for $20,000 by the end of 2018.  Tom Lee of Fundstrat was more bullish, forecasting that bitcoin would breach $25,000 by then.  Prognostications by Anthony Pompliano, of Morgan Creek Digital Partners, were still more bullish, predicting bitcoins would be worth $50,000 by the end of last year.  John Pfeffer, who describes himself online as “an entrepreneur and investor,” anticipated $75,000 bitcoins by now, and Kay Van-Petersen, Global Macro-Strategist at Saxo Bank, one-upped everybody with his prediction that bitcoins would be worth $100,000 by December 31st of last year.

Ritholtz offers other examples, like radio personality Peter Schiff telling listeners since 2010 that the price of gold has been heading toward $5,000 an ounce.  (It’s riding around $1,300 currently.). Jim Rickards, former general counsel at Long-Term Capital Management, is more ambitious, telling his followers that he has a $10,000 price target for an ounce of gold.

If you happen to follow former Reagan White House Budget Director David Stockman, you have been told that stocks are going to crash in 2012, 2013, 2014, 2015, 2016, 2017, 2018 and 2019.  Someday he’s going to be right, and will no doubt be touting his amazing prediction abilities (that broken clock is right twice a day).

When you read about a prediction, instead of reaching for the phone to call your financial advisor, try writing the prediction down on a calendar or reminder program like the app followupthen.com, and come back to it a year later.  Chances are you’ll be less impressed then than you might be now.

The three things that work best for investors: time in the market, portfolio diversification, and risk management. Soothsayers need not apply.

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:

https://ritholtz.com/2018/12/fun-with-forecasting-2018-edition/

TheMoneyGeek thanks guest writer Bob Veres for his contribution to this post
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What’s Going on in the Markets: December 22, 2018

December 23, 2018 — Sam H. Fawaz

Paraphrasing a popular novelty Christmas song by Elmo and Patsy … “Santa got run over by a rein-bear, walking out to Wall Street on Christmas Eve…”

Unless you’ve been on an island somewhere and blissfully disconnected, you probably already know that the stock market had one of its worst weeks since 2011. The S&P 500 index lost about 7% in one week, while the NASDAQ and Russell 2000 indexes lost over 8%. With the exception of bear market funds, government treasury bonds and cash, there was virtually nowhere to hide. It’s the worst December to date since 1931.

The proximate “cause” of the market angina this week was the federal reserve’s (the “fed”) 1/4 point rate hike amid signs of growth slowing around the world. While odds heavily favored the well telegraphed December rate hike, it’s puzzling why Wall Street traders often act surprised when it actually happens. Perhaps it was the fed chairman’s steadfast insistence on two more possible rate hikes next year, and continued monetary tightening via $50B of bond sales per month.

Before the actual announcement at 2 PM ET on Wednesday, we could almost see glimmers of Santa’s sleigh in the distance, as the market was starting to finally bounce after several days of selling pressure. Alas, that sleigh did a prompt U-turn as Federal Reserve Chairman Jerome Powell struck a hawkish tone during his press conference following the rate hike announcement. Powell may turn out to be the Grinch who stole the 2018 Santa Claus rally.

Raising interest rates is the fed’s way of preventing an economy from overheating and leading to high inflation. Higher interest rates tend to slow the rate of corporate/company hiring and purchasing of capital goods and equipment. But many corporate executives were already complaining about trade wars, the political rancor in Washington, and of course, the end of lower interest rates.

In reality, the economy is showing some signs of growth slowing, but not contracting (i.e., negative growth). It’s contraction in the economy that translates to a recession, something that the weight of evidence still points to no recession on the horizon. Of course, that could change at any time.

Regardless of the cause, the market has been on a great run (bull market) since March 2009, more than quadrupling since the 2009 bottom. With the average bull market usually lasting about 4-5 years, this one certainly deserves some rest in the form of a healthy pullback. Unfortunately, it always feels bad when it happens, no matter how prepared we are.

There are negatives and positives in our economy to push/pull on the markets:

Negatives:

  1. The S&P 500 Price to Earnings ratio (P/E), a measure of stock valuation, was at a historically overvalued extreme earlier this year, which warranted caution. While overvaluation alone does not end a bull market, it does dramatically increase the downside risk in stocks. The recent market pullback has caused P/E valuations to come down, but at 19.9 they remain above the long-term average. At this juncture, it’s too early to say if valuations will continue to subside as prices move lower, or if a drop off in earnings will keep them at high levels.
  2.  Housing prices had/have risen too high, and these elevated prices were/are going to be incredibly hard to maintain if interest rates continue to increase. It’s too early to officially declare that U.S. housing is, or was, in a bubble. However, real estate is starting to unwind both in terms of prices and activity – with some of the highest-growth areas feeling the most pain. Housing is incredibly important to the health of the U.S. economy. If housing metrics continue to decline, this will have negative implications for the economy and the markets.
  3. In the past, the combination of a declining growth outlook and a rising rate environment (called tightening) has generally had dire consequences. Out of the past 11 tightening cycles, nine have resulted in a recession, while only two led to an economic soft landing. Based on history, the current investment landscape is tilted towards a negative risk/return relationship as stock prices remain susceptible to future downward pressure.

Positives:

  1. Consumer Confidence has rarely been more ebullient, with recent Conference Board survey results at the most positive level in 18 years. Although this indicator is
    considered to be leading, and usually rolls over before a recession, it’s interesting to note that past stock market peaks have frequently coincided with excessive levels of consumer optimism. Consumer confidence is essential to economic health, because a confident consumer isn’t afraid to spend or invest in new ventures to keep the economy growing.
  2. The Institute for Supply Management (ISM), which conducts surveys of business activity,  has also been persistently strong this year, and remains near the highest levels of this 9-year expansion. The Business Activity Index for the Service Sector, which accounts for about two-thirds of the U.S. economy, is back at the highest level since 2004. In manufacturing, the ISM Purchasing Managers Index is also hovering near its post-recession highs. Neither of these indexes are currently showing any signs of distress or hints of an impending recession. Whether the current steady outlook will continue to support this economy in the coming months is a critical question for 2019.
  3. Jobless claims and the unemployment rate are both low by historical standards. Monthly job creation is strong, limited only by the number of available qualified candidates for many jobs. If there’s one item that pressures the fed to raise interest rates the most, it’s wage inflation, which we are starting to see as the demand for workers outstrips supply.
  4.  The fed’s steadfast insistence on raising interest rates, in the face of clear evidence that growth is slowing, is perhaps a sign that they see this as a temporary economic condition that can withstand further rate hikes. Why would the Federal Reserve still be tightening (with the 9th rate hike of this economic cycle made this week) if there could be major trouble on the horizon?
  5. Signs of cooperation are emerging between the U.S. and China to end the trade wars and end the tit-for-tat tariff jabs. Both countries’ markets would celebrate at least some resolution to this tiff.

Now What?

So what’s one to do now that the market has taken a big tumble from new highs reached just this past September? The decline has been swift, brutal and almost immune to bounce attempts. In an algorithmic driven and high-speed trading market, risk happens faster than any time before. If you haven’t lightened up on your holdings yet, it’s probably too late to sell, but consider taking some chips off the table if Santa does come to call on Wall Street and rally after all. After more than a 9 year bull run, it’s prudent to not give all your profits back and wait for the next bull market to get back to even. This is not investment advice, as I don’t know your financial goals, your time-frame or your risk tolerance. But please feel free contact us to see if we can help you.

For our clients, we came into the market sell-off with lots of cash and hedges in the form of inverse funds and options. We have continued to add to our hedges as this market attempts to find a bottom, while also nibbling on some new positions that we expect to hold for the long term. So far, we have not been profitable on those nibbles, but we aren’t buying them for the next week or next month. Buying a little at a time on the way down is the way it should be done for long term investors. Remember the old stock market saying: buy low, sell high.

What’s Next?

My crystal ball continues to be in the shop, so it’s tough to say what comes next. We are severely oversold, so a wicked and lasting bounce/rally could arrive at any moment. But while investor sentiment is awful, which is usually a contrary indicator to support the start of a market rally, so far there has been no price action evidence to support one.

Many hedge funds have had abysmal performance this year, and are forced to return billions of dollars to clients this quarter.  They are either closing and/or answering to client redemption requests that have to be met by year-end, so that could continue to pressure the market if their activities aren’t done yet.

A lot of technical damage has been done to the markets, so I don’t expect the next rally to be the one to ramp to new highs. Far from it.  Don’t be the proverbial mouse to rush into the first market rally trap. Patience is essential–be the second mouse to actually grab the cheese. Any durable rally will last for weeks, if not months, you won’t miss out.

Unless the next rally shows signs of a longer term durable bottom, I may be using any strength during the coming weeks to further lighten up positions and add more hedges in anticipation of a sub-par 1st quarter earnings season, and as all the people who didn’t want to sell for tax reasons in 2018, decide to dump their shares in January.

That said, I’m starting to see some small signs of the potential emergence of a new bull market, sometime after the 1st or 2nd quarter of 2019. Any one spark could ignite this market to the upside (e.g., China trade agreement, signs of an interest rate pause, government shutdown resolved). So I wouldn’t be cashing out of this market given that you could miss the big rebound that could start at any time. This is all speculation on my part, one that you shouldn’t rely on for your own investment decisions. My outlook could be wrong, changes often, and could be different, even before the Christmas tree comes down.

Markets Got you Down?

If you’re scared or stressed about the markets, here’s some advice from Jim O’Shaughnessy, author of several books on investing, including the best seller, What Works on Wall Street:

“Take a deep breath, sit down, and write down how you feel about what is happening in the market. Be free-form, and be honest. If you feel a pit in your stomach, write about it. If you feel jittery, write about it. If you think this is the next financial crisis, write about it. If you feel like selling out and going to cash, note that too. Write about every worry, frustration and uncertainty you are currently experiencing. Then date it, and put it away.

Chances are very good that when you read it again 12-18 months from now, you’ll be shocked you felt this way. Your brain will do somersaults to try to convince you that you *really* didn’t feel everything you wrote, because things will have calmed down.

Corrections and bear markets are a feature, not a bug of the stock market. Without them, there would be no equity risk premium. Look back at EVERY OTHER market decline and remember, people were feeling like that was the end too. It wasn’t then, it isn’t now. This is actually a healthy, if painful in the short-term, action. Most important, remember, this too shall pass.”

I couldn’t have said it better myself. And as I often quote, Peter Lynch, legendary manager of the Fidelity Magellan fund said that “The stock market is a great place to make money, as long as you don’t get scared out of them.”

I’d like to take this opportunity to wish you very happy holidays and a grand New Year. I appreciate my readers very much.

“You can say there’s no such thing as Santa, but as for me and the bulls, we believe.”

Merry Christmas!

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.

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