What’s Going On in the Markets August 23, 2015

August 23, 2015 — Sam H. Fawaz

Some of the most entertaining times to be a long-term investor are those periods when short-term investors are looking over their shoulders for an excuse to sell. They’re convinced that the market is heading down before they can get out, and so they jump on any bad news that comes across their Bloomberg screen.

Last Thursday and Friday was a marvelous time to see this in action. With all the economic drama playing out in the world, there were plenty of opportunities to panic. The Greek Prime Minister has resigned! Sell! … China devalued its currency a few days ago by 2%! Head for the hills! … Chinese stocks are tanking yet again! Get out of American stocks while you can! … The Fed might raise short-term interest rates from zero to very nearly zero! It’s the end of the world!

Of course, a sober analyst might wonder whether a change in governance in a country whose GDP is a little less than half the market capitalization of Apple Corporation, is really going to move the needle on the value of U.S. stocks—especially now that Greece seems to have gotten the bailout it needs to stay in the Eurozone. Chinese speculators are surely feeling pain as the Shanghai Composite Index goes into free-fall, but most U.S. investors are prohibited from investing in most companies in this tanking market. If the market value of PetroChina, China Petroleum & Chemical and China Merchants Bank are less valuable today than they were a week or a month ago, does that mean that one should abandon U.S. stocks? Does it mean that American blue chips are somehow less valuable?

What makes this dynamic entertaining—and sometimes scary—is the enhanced volatility around very little actual movement. You see the market jump higher and faster, lower and faster, but generally returning to the starting point as people realize a day or two later that the panic was an overreaction; and so was the false exuberance of realizing that the world isn’t going to come to an end just because we’re paying less at the gas pump than we were last year. Despite all the jitters investors have experienced over the past nine months, and despite the drop last week, the S&P 500 is only down about 4% for the year, and was in positive territory as recently as August 19.

Let’s summarize a few of the facts about this current sell-off:

  • Friday’s decline was 500 points in the Dow Jones Industrial Average (DJIA), which was 3.1%. During this bull market there have been 11 similar daily declines of that size (or larger), and in every instance the market went on to new highs. So Friday’s decline, by itself, does not mean that we’re in a bear market.
  • Last week’s loss in the S&P 500 Index was 5.77%. Since 1940, there have been 38 weekly declines of this size (or larger). Surprisingly, there were three times as many double-digit gains three months later than there were double-digit losses. So last week’s decline doesn’t necessarily indicate more big losses ahead.
  • Market readings are at the most oversold level since the 2011 correction lows. Historically, readings this low indicate a high probability of a rally or bounce in the week ahead.
  • For perspective… from the market peak earlier this year, the DJIA is off 10.1% through Friday’s close, and the S&P 500 Index is off only 7.5%. So far, this barely qualifies as a correction. And the last 10% correction was in 2011, so this was overdue. Since the year 1900, there have been 35 declines of 10% or more in the S&P 500. Of those 35 corrections the index fully recovered its value after an average of about 10 months. Sure, there’s no guarantee that the length of future recoveries will happen in a similar time frame, but the long term bias of the market is always up.

I’m not telling these facts to downplay the market’s weakness (which I’ve been telling clients to expect), but to convey that this correction may not be a full scale bear market. Bull market tops are long, drawn-out affairs. And while negative technical market signals have been building for the past few months, I cannot say with certainty that we are in a bear market…at least not yet.

Another positive development –not yet considered by today’s panicked sellers– is that this market weakness has likely taken the chance of any September interest rate hike by the Federal Reserve completely off the table. In fact, we’ll be surprised if Fed officials are not cajoling the markets with dovish comments this coming week to calm investor nerves and stabilize Wall Street.

If you want a broader, more rational picture of our current economic situation, read this analysis by a long-term trader who now refers to himself as a “reformed broker” in Fortune magazine: http://fortune.com/2015/08/20/american-economy-worries/. He talks about the “terrible news” that it hasn’t been this cheap to fill your gas tank in over a decade, and businesses that rely on energy to manufacture their goods, are now forced to figure out what to do with the excess capital they’re not spending on fuel. (warning: sarcasm to follow).

Oh, but it gets worse. American corporations are struggling under the burden of enormous piles of cash they don’t have a use for. They may have no choice but to return some of that money back to shareholders in the form of record dividends or stock buybacks. Of course, you read about the risk to corporate profit margins. It seems that unemployment is so low that wages for American workers are going up, and that could raise consumption and demand for products and services.

Meanwhile, contributions to 401(k) and other retirement plans are up dramatically, housing starts and the construction sector are booming, America’s biggest global economic competitor (China) is reeling, and the Federal Reserve might decide that it no longer has to keep short-term interest rates low because the emergency is over and the economy has recovered.

The author apologizes (tongue in cheek) for bringing us all this terrible news, but hey, we can always sell our stocks and get out until conditions improve. Right?

Nobody would be surprised if the U.S. stock market suffered a 10% or even a 20% short-term decline (correction) this year, or perhaps next year. Besides, we haven’t had a 10%+ correction in nearly four years. But what can you do with that information?

Nobody would have been surprised if this had happened at any point in the long bull market that may have doubled your stock investments, and nobody can predict whether Friday was a signal that the market will take a pause, or if Monday will bring us another wave of short-term euphoria measured mostly in sighs of relief. And if you don’t know when to sell in this jittery market, how will you know when to buy back in?

These short-term swings provide entertainment, but very little useful information for a mature investor. If you aren’t entertained by watching people sell in a panic and then panic-buy their way back in when they realize things aren’t as dire as the headlines made them out to be, then you should probably watch a movie instead.

What To Do

It is likely the media will have a heyday with the recent losses, and perhaps showcase predictions of much more dire things to come. The media is all about getting you to tune in, not to help you with investment decisions. When things are good, they highlight how great things are, and when things turn south they jump on the bandwagon and act like there won’t be a tomorrow. It’s best to tune them out.

As mentioned above, we are way overdue for a correction. Over the past six years, there has been much less volatility in the markets than there usually is. We have become a bit desensitized to how stock markets actually move. Losing 10% – 20% over a period of months is not unique. Markets go up and down; that’s why stocks pay us a premium to own them. Every time something different causes it and each time it instills a lot of fear. This time and times in the future will be no different.

If you have at least five to seven years until you plan to fully cash out of your account, then you have nothing to worry about. Even if we were to get a protracted downturn, it wouldn’t matter for long-term investors; in fact it can benefit you.

If the markets go down significantly more, expect to take advantage of the weakness and buy high quality stocks “on sale”. It’s never easy to buy stocks after seeing them go down, but it can really help your returns over time. A 5% correction is not sufficient to do this. I’d be looking for a 10% – 20% correction before putting more money to work.

Diversified portfolios, which you must have, ensure that your investments don’t move in line with the market. Sure, you don’t go up as much as the market, but you also don’t go down as much. And by having assets that do well in tough times such as cash, short-term bonds and inverse funds, we have the ability to actually purchase stocks on sale – to take advantage of temporary losses for your long term gain. The key is to think long term (five years or more) and ignore the short term stuff.

While I have no specific knowledge (or a working crystal ball), my guess is that the market highs are in for this year. That doesn’t mean we go down from here; it just means that it gets harder to make new highs before year end. Of course, I could be wrong!

In our client portfolios, we have been building up cash positions, taking profits on some positions, increasing our allocations to defensive sectors, and adding to our hedges for months now. If you’re wondering what to do, you might consider lightening up on some profitable positions into the next rebound if you haven’t already done so (this is not intended as investment advice-please check with your advisor so that changes made to your investments are consistent with your financial plan, risk tolerance and time horizon).

Because Friday closed on the lows, we could very well see selling pressure spill over into this week. Even so, we do not see last week’s swoon as the start of a waterfall decline or market crash. Taking into account how bull market tops unfold, we believe this top (if it indeed is one) will take more time to develop and offer more convincing evidence of a bear market.

We will be closely watching the coming rebound. If we continue to see deterioration in breadth/leadership (the number of stocks going up are less than those going down), and the technical health of the markets deteriorate, then we will increase our cash reserves, hedges and defensive sector allocations. If this turns out to be a wonderful buying opportunity, then we may not catch the absolute bottom, but there will be plenty of time to take advantage of this latest “dip”.

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:

Bob Veres, Inside Information

Investech Research

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Devaluation Panic: Bear in the China Shop

August 16, 2015 — Sam H. Fawaz

Earlier this summer, China’s stock market appeared to be in free-fall, despite the Chinese government’s efforts to control stock prices and stem the panic. The chief culprit appears to be leverage: investors last year and in the first half of this year borrowed billions in order to buy stocks on margin, offering little or no collateral except the shares themselves. As prices fall and stock values drop below the level of debt, it triggers margin calls from the lenders, which forces investors to sell at any price, further depressing prices, causing more margin calls in a downward spiral whose bottom is not easy to see from here.

A recent report said that the volume of these margin loans dropped by 6%, or $23 billion over five trading days, which implies that there is still $383 billion more that could be called over the next months or years, an alarming 9% of the roughly $4 trillion in total market value on the Shanghai market.

But leverage is only part of the problem. The CSI Information Technology Index, a mix of high-tech names in China similar to the NASDAQ in the U.S., is still trading at a multiple of around 75 times earnings (PE), while NASDAQ’s PE is closer to 30. If the two indices were to normalize, it would imply that Chinese stocks could drop an additional 60% in value before the current bear market has run its course—and that’s assuming the debt situation doesn’t cause the market to overshoot on the downside. Some compare the situation in China to the dot-com bust in the year 2000.

One complication in the situation is the fact that, since late last year, foreign investors have been allowed to invest directly in Shanghai-listed stocks. Savvy market traders with years of experience in these death spiral events have been making program trades which bet on further drops. Chinese regulators recently suspended 34 U.S.-based hedge fund accounts from trading, including the Citadel Fund, and short selling is now totally forbidden.  Arrests for selling stocks short have been reported.

Currency Devaluation

This past week, investors across the globe were sent into a panic when the Chinese Central Bank devalued the nation’s currency, the yuan. The U.S. market temporarily lost more than 1% of its total value, oil prices fell, and global shares plummeted on news that China decided to make its currency two percent cheaper than it was before. Despite the Central Bank’s assertion that it was a one-and-done devaluation, they proceeded to further devalue the yuan two more times within a matter of days.

You actually read that right. Headlines raised the prospect of a global currency war, and there were hints in the press that nations might resort to trade barriers, which would slow down global trade in all directions. If you’re following the story, you probably didn’t read that the Chinese yuan, even after the devaluation, was actually more valuable against global currencies than it was a year ago in trade-weighted terms. Nor did you read that China actually intervened in the global markets to make sure the devaluation didn’t go any further in open market trading.

The background for the devaluation is China’s slowing economic growth and its recent stock market volatility. The Caixin China Manufacturing Purchasing Manager’s Index recently fell to levels which indicate economic contraction, and industrial output is at the weakest level since November of 2011. If you can believe the numbers, the country is on track for a 7% growth rate this year—three times the U.S. rate, but sluggish by recent Chinese standards, and quite possibly unacceptable to the country’s leaders.

You probably already know that the Chinese stock market climbed to impossibly high levels earlier this year and then fell just as far in a matter of weeks. As you can see from the below chart (and as mentioned above), the Chinese government marched into the chaos with a heavy hand, outlawing short sales, banishing hedge funds to the sidelines, suspending margin calls and even buying stocks directly in an effort to put a floor on prices. The theory was that the devaluation was part of this intervention, since it would make exports cheaper and boost sales, raising profit margins of those companies whose stocks were recently free-falling. Some believe that the Chinese won’t quit until they devalue the yuan by at least 10%.

CA - 2015-8-14 - China Devaluation1

A more nuanced view of the situation is that the recent depreciation is a small step to keep the yuan’s value in line with those of its peers, not a dramatic shift in exchange-rate policy or a part of the Great Shanghai Market Panic. Indeed, if you look at the below chart, you can see that China’s percentage of world exports has been steadily growing for this entire century, without any need to add the stimulus of a weaker currency.

CA - 2015-8-14 - China Devaluation2

A scarier scenario, which nobody seems to be talking about, is that China’s endgame goal is to make the yuan the reserve currency for global trade—replacing the U.S. dollar. China is already lobbying to join the list of reserve currencies recognized by the International Monetary Fund. The new exchange rate is more in line with basic economic fundamentals, strengthening the argument that the yuan is not under the total control of an interventionist central government. But so long as China imposes strict limits on the amount of its currency that can flow into and out of the country, and attempting to manipulate its own stock market, this will be a difficult argument to make.

You don’t often see a market rally when an economy is sliding into recession, so at these valuations, you aren’t likely to find many bulls left in the Shanghai China shop either.

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://fortune.com/2015/08/03/china-looks-for-scapegoats-in-continued-stock-market-decline/

http://fortune.com/2015/06/29/china-stocks-crash-into-bear-territory-as-margin-calls-bite/

http://www.ft.com/intl/fastft/242222/china-overtake-japan-stock-market-cap

http://www.economist.com/news/finance-and-economics/21661018-cheaper-yuan-and-americas-looming-rate-rise-rattle-world-economy-yuan-thing?fsrc=scn/tw/te/pe/ed/yuanthingafteranother

http://www.bloombergview.com/quicktake/chinas-managed-markets

http://finance.yahoo.com/news/global-markets-china-devaluation-hits-165238168.html

http://www.bloomberg.com/news/articles/2015-08-13/china-citigroup-agree-there-s-no-need-for-big-yuan-devaluation

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

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Surprise! Doom and Gloom Sells

August 1, 2015 — Sam H. Fawaz

Maybe you saw the alarming headline in the middle of the other stories on Yahoo! News, which told you that the U.S. dollar was about to collapse, as a result of H.R. 2847—or, sometimes, simply “the new currency law.” Write down this date, the frightening article said: July 1, 2014.

More recently, you might have seen/heard TV and radio advertisements or ubiquitous Internet warnings where Dr. Ron Paul urgently reveals “a real currency crisis” that will usher in the greatest economic meltdown this country has seen in 50 years—including civil unrest, pension fund collapses, the erosion of personal liberties, bank and brokerage closings, and mass rejection of the U.S. dollar in favor of “non-paper alternatives.”

In case you were wondering, the U.S. dollar did not collapse in July of last year, nor did it collapse in 2009, which is when Ron Paul began predicting doomsday. But if you watch the 54-minute Ron Paul infomercial, you will eventually be offered a “survival blueprint” published by Stansberry & Associates Investment Research—interestingly, the same company that told us that the U.S. currency would melt down last year. To avoid financial armageddon, you simply need to pay $49.50.

Who is Stansberry & Associates? The owner and publisher is Frank Porter Stansberry, who, among his credentials, has been prosecuted by the Securities & Exchange Commission for investment fraud, and fined $1.5 million for selling $1,000 reports with information that a panel of judges determined that he knew not to be true. Using the pseudonym “Jay McDaniel,” Stansberry offered a “Super Insider Tip” telling gullible investors that on May 14, 2002, there would be a major announcement which would instantly double their money. As it turned out, the uranium processing company that was being touted in the $1,000 report made no significant announcement on the date in question, and in fact investors testified that they lost 20-25% of their investment portfolio after purchasing the stock and options.

In the judge’s opinion, “The gravity of the harm in this case is not limited to the amount of money each purchaser spent for the Special Report. Approximately 1,217 investors bought the Special Report with the expectations, as promised, by the Super Insider Solicitation.” Stansberry and his publisher were enjoined from conducting any additional “deliberate fraud.” An investigative website also notes that he predicted the demise of AT&T, General Motors, the FNMA quasi-governmental guarantor of mortgages, Continental Airlines and… General Electric. One thing these predictions have in common with the prediction of the collapse of the dollar: they never happened. In 2011, Stansberry’s online infomercial predicted “The End of America,” and also that Germany would leave the European Union. To our knowledge, those things haven’t happened yet either.

In case you were wondering, H.R. 2847 is a provision that requires Americans living abroad to comply with tighter reporting requirements on their offshore income—and has very little to do with anything related to the dollar.

Predicting disaster is a reliable way to make money, because the human mind is wired to pay more attention to threats than to the more benign elements in our environment. In the future, you’ll probably see Stansberry predicting all sorts of other scary things, and probably a few more “can’t miss” investment opportunities. What you won’t see is any clear accounting of his track record.

Write down this date about the collapse of America, the extinction of the dollar, the demise of senior members of the Fortune 500, the total breakup of the European Union and a great chance to double your money in a day: Not on Porter Stansberry’s timetable.

Another outlet of bearishness, Casey Research, was recently acquired by Stansberry and Associates. Casey is also a flamboyant (and spammy) research firm, so I don’t expect the doom and gloom headlines to die down any time soon. These folks have been calling for the demise of the United States and the dollar for years, and people love to read fearful headlines. Most of these outfits have caused their readers to miss out on the last six years of stock market gains. Instead, they have led folks to invest in gold, gold mining stocks, commodities and other precious metals that have lost half or more of their value since 2011. You can save your time and safely ignore this trash designed to get you scared witless.

Just like in the media, fear sells, but if the dollar is doomed, we all have bigger problems to deal with. Instead of cash or gold, I’d rather have my home stocked with drinking water, flour, cans of tuna fish and the finest shot gun I can find if the dollar or market collapses. Oh and some fine beer or wine too, if that’s what you fancy.

While I personally believe that the market is way overdue for a 10% or more correction, the market doesn’t care what I believe.  Still, I don’t consider the situation as dire and desperate as these doom and gloomers describe it. The country’s economy is doing great, unemployment is the lowest it’s been and there are currently no signs of an impending recession. Nonetheless, while a crisis could develop anytime without notice somewhere around the world, our client portfolios are hedged and positioned defensively for whatever the market throws at us.

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://briandeer.com/vaxgen/stansberry-fraud.htm

http://thecrux.com/porter-stansberry-predicts-the-next-major-company-to-go-bust/

http://wealthymatters.com/2011/09/20/porter-stansberry/

http://thecrux.com/dyncontent/ron-paul-one-step-prepare/?cid=MKT033949&eid=MKT057529

http://www.snopes.com/politics/conspiracy/hr2847.asp

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

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Are There Any Disadvantages Associated With Paying off a Mortgage Early?

July 19, 2015 — Sam H. Fawaz

I’m often asked if it makes sense to pay off a mortgage early or invest the cash in the markets. As is often the case in personal finance, the answer is, wait for it…..it depends.

The disadvantages, if any, may stem from the financial trade-offs that a mortgage holder needs to make when paying off the mortgage. Paying it off typically requires a cash outlay equal to the amount of the principal. If the principal is sizeable, this payment could potentially jeopardize a middle-income family’s ability to save for retirement, invest for college, maintain an emergency fund, and take care of other financial needs.

If you have the financial means to pay off a mortgage, consider the following:

  • Your feelings about debt — Some homeowners like the feeling of security that comes with owning a home free and clear. Knowing this may help you sleep better at night.  If this describes you, it may be to your benefit to pay off or reduce the size of your mortgage. Should conditions in your local real estate market decline, there’s less of a chance of owing more than you own.
  • Your current interest rate — If you currently have a low fixed interest mortgage rate, and having mortgage debt doesn’t bother you much, then investing the sum may yield better after-tax returns. Just keep in mind that markets may move down, so there is a risk here. You should discuss this option with your financial planner so you understand it well.
  • Your timeline until retirement — If your mortgage is relatively small and you pay it off, you may be able to invest the money formerly used for mortgage payments for retirement or other long-term goals. Your timeline until retirement may be a factor when making this decision. With 10 years or more remaining until you expect to retire, you could have time to build a nest egg if you invest the money formerly used to pay a mortgage. If you plan to retire sooner, entering retirement without a mortgage could provide you with more flexibility during your later years.
  • Your tax savings — Mortgage interest typically is tax deductible. During the early years of a mortgage, when the interest payments are highest, many homeowners benefit from a sizeable deduction. This could be important if you are in a higher tax bracket. If your interest payments are relatively low, the tax savings could be less of a factor. The amount of your other itemized deductions may be a factor if their total is close to your standard deduction.
  • Your future plans — Owning a home outright could be an advantage if you plan to sell it during the next few years. You could potentially leave your existing residence with more home equity.
  • Your overall debt load — If you are carrying other forms of debt, such as credit card balances or a college loan, consider whether you could benefit from paying off other debt first before reducing or eliminating your mortgage.

There is no “right” answer for everyone when it comes to potentially paying off a mortgage. Consider your feelings about debt, current interest rate, your timeline with respect to long-term goals, your tax savings, and other factors before making a decision that is in your best interest.

After-Tax Value of Home Mortgage Deduction

One of the big benefits of home ownership is the mortgage interest deduction. The federal government lets you deduct mortgage interest on a first or second home, up to $1 million per year.

30-year conventional mortgage pix

Source:

Wealth Management Systems Inc. Monthly payments assume a conventional 30-year fixed-rate mortgage at 5% APR, excluding escrows for taxes, insurance, or other fees. Mortgage deductions are based on first month’s interest. Assumes that other deductions exceed the standard deduction. (CS0000218)

If you would like to review your current mortgage payoff options, your 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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The Value of Objective Financial Planning

June 23, 2015 — Sam H. Fawaz

What is the value that people get when they work with an objective, client-focused financial planner?

Most planning firms are reluctant to toot their own horns—partly out of modesty, and partly out of a conviction that you probably have better things to do than read about how they help you with your financial life. But every once in a while, it’s a good idea to stop and think about what you get, for what you pay.

This list is organized in rough order of value, and if you feel you aren’t getting all of these benefits from your financial planner, you should let her or him know.

1) An independent financial planner helps protect you from financial predators.

It’s a touchy issue in the profession whether advisors who put their clients’ interests first should be “bashing the competition,” but in fact the Wall Street firms that pretend to offer financial planning guidance are seldom (if ever) looking out for the best interests of their customers. When you work with a broker (possibly also known, on their business card, as  “vice president of investments,”) you will be presented with separately-managed accounts that look like mutual funds, except they share their fees with the brokerage firm, plus a lot of investments that have to pay people to recommend them—never a good sign for the end investor.

And since the investment markets are extremely complicated, it’s usually hard for a layperson to know when there are much better alternatives than the “opportunities” being presented.

2) An independent financial planner helps you keep track of and make your financial affairs more efficient.

It is not uncommon for financial planners to talk with clients who once had a will drawn up, but they’re not sure exactly when. Now that you mention it, they’re curious about what, exactly, it says. There’s a life insurance policy in a drawer somewhere, and it may be a term policy or it may be a cash value contract; all the client knows for sure is that she writes a check to the insurance company every year. Upon inspection, it turns out the auto insurance policy she happens to own is way more expensive than the lowest rate available in the market, and the homeowner’s policy hasn’t been updated since the Clinton Administration.

And the investments are not uncommonly a hodgepodge of what a broker sold the client based on what he was told by his bosses to recommend at different times during the relationship.

Hopefully, this was never you. But it does offer a certain peace of mind to know that everything is organized, in one place, and that somebody is paying attention to the details. Because in your financial life, the details matter.

3) An independent financial planner will stand between his/her clients and the dysfunctional emotional decisions that everybody makes with their own investments.

Do you remember how it felt when Lehman Brothers went down, and the U.S. government was bailing out General Motors? Many people sold everything at the bottom, and then waited, and waited, and waited to get back into the markets until it was “safe.” To this day, I still get calls from people who left the markets near the bottom and never got back in. They never dreamed that the markets would go on six year bull run that would take us to new record highs, and want to know if it’s too late to get back in.

The Morningstar (research) organization has calculated the difference between investment returns and investor returns—that is, between the returns people actually get vs. what the markets (or individual mutual funds) have delivered. Results? It is not unusual, during various time periods, for individual investors to get about half the returns of the market. How is that possible? They may be moving the portfolio around, or buying an attractive-looking hot fund or selling a great fund that’s going through a rough patch. They may sell out at the bottom of a scary period, or go all-in when the markets are about to take a nasty tumble.

For many of us, the best approach is to find good, solid investments and stay the course through thick and thin, ups and downs. But it’s very hard to do those things on your own. An independent advisor provides a dose of objectivity right when you need it.

4) An independent financial planner is a strong advocate for your future.

You know the statistics about the savings rate in America (the 2000-2008 numbers hovered around 0% of income, spiked briefly after the Great Recession, and are now back in the 1% range again). But the keepers of these statistics don’t tell you that they probably overstated the actual rate, because they didn’t include things like increasing credit card balances or home equity loans. When people put money in their savings account, and at the same time run up more debt, they still counted it as an increase in their savings.

The problem for most consumers is that there is no voice in their environment advising them to pay themselves a fair percentage of the income that they earn. Instead, they’re bombarded by messages which make powerful arguments to do the opposite: to buy this, that, or something else. The entire advertising community conspires to take those dollars out of their hands before they ever hit an investment account.

Advisors become that rare voice speaking out in favor of saving. And in some cases, they help identify expenditures that are not in line with your stated future goals. Which leads us to:

5) An independent financial planner helps people identify what is important in their lives and prioritize their goals.

How many people do you know who have taken the time to identify what they really want out of life?

The incredibly sad truth is that the vast majority of people in our advanced, prosperous society have not taken the time to figure out what they really want out of the all-too-brief time they will spend on this planet. And because they don’t know their destination, they will never reach it. They are, in a very real sense, at the mercy of whatever agenda others have for them.

An independent financial planner will ask questions in your initial interview which help you recognize what you don’t know about what you want, and help you identify your most personal goals and desires. That, alone, can be a priceless service.

6) An independent financial planner can help people turn seemingly impossible goals into a routine that can achieve them.

After years of running retirement planning spreadsheets, and working with successful individuals in the community, advisors eventually master one of the truly magical lessons of life: that any enormous goal can be broken down into manageable, monthly increments, and achieved by routine and persistence. You save X amount of dollars every month in a portfolio that gets something close to what the market offers, and you will retire with a sum of money that seems impossible to you now.

Clients who have goals that they don’t believe they can achieve are put on a schedule that will get them there as a matter of routine.

Of course, this list doesn’t include specialized services like making retirement planning projections, charitable planning, creating special needs trusts for a disabled child, reducing overall taxes, social security planning, evaluating disability and long-term care insurance—and it doesn’t mention the comfortable knowledge that you can call an expert for advice on virtually any financial subject, and you’ll get an answer that is not tainted by a sales agenda.

The point is that the services offered by an independent financial planner can have enormous value to people who are motivated to enjoy successful, prosperous lives. An independent planner’s only goal is your success and prosperity, which should not be—but is—unusual in our financial world.

If you would like to review your current investment portfolio or discuss possibly hiring us as your financial planner, 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.

TheMoneyGeek thanks guest writer Bob Veres for contributing to this post

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It’s 2015: Do You Know Who Your Beneficiaries Are?

June 7, 2015 — Sam H. Fawaz

Many IRA owners may not be aware that after their death, the primary beneficiary — usually the surviving spouse — may have the right to transfer part or all of the IRA assets into another account.

Many investors have taken advantage of pretax contributions to their company’s employer-sponsored retirement plan and/or make annual contributions to an IRA. If you participate in a qualified plan program you may be overlooking an important housekeeping issue: beneficiary designations.

An improper designation could make life difficult for your family in the event of your untimely death by putting assets out of reach of those you had hoped to provide for and possibly increasing their tax burdens. Further, if you have switched jobs, become a new parent, been divorced, or survived a spouse or even a child, your current beneficiary designations may need to be updated.

Consider the “What Ifs”

In the heat of divorce proceedings, for example, the task of revising one’s beneficiary designations has been known to fall through the cracks. While a court decree that ends a marriage does terminate the provisions of a will that would otherwise leave estate proceeds to a now-former spouse, it does not automatically revise that former spouse’s beneficiary status on separate documents such as employer-sponsored retirement accounts and IRAs.

Many IRA owners may not be aware that after their death, the primary beneficiary — usually the surviving spouse — may have the right to transfer part or all of the IRA assets into another account. Take the case of the IRA owner who has children from a previous marriage. If, after the owner’s death, the surviving spouse moved those assets into his or her own IRA and named his or her biological children as beneficiaries, the original IRA owner’s children could legally be shut out of any benefits.

Also keep in mind that the law requires that a spouse be the primary beneficiary of a 401(k) or a profit-sharing account unless he/she waives that right in writing. A waiver may make sense in a second marriage — if a new spouse is already financially set or if children from a first marriage are more likely to need the money. Single people can name whomever they choose. And non-spouse beneficiaries are now eligible for a tax-free transfer to an IRA.

The IRS has also issued regulations that dramatically simplify the way certain distributions affect IRA owners and their beneficiaries. Consult your tax advisor on how these rule changes may affect your situation.

To Simplify, Consolidate

Elsewhere, in today’s workplace, it is not uncommon to switch employers every few years. If you have changed jobs and left your assets in your former employers’ plans, you may want to consider moving these assets into a rollover IRA. Consolidating multiple retirement plans into a single tax-advantaged account can make it easier to track your investment performance and streamline your records, including beneficiary designations.

Review Your Current Situation

If you are currently contributing to an employer-sponsored retirement plan and/or an IRA, contact your benefits administrator — or, in the case of the IRA, the financial institution — and request to review your current beneficiary designations. You may want to do this with the help of your tax advisor or estate planning professional to ensure that these documents are in synch with other aspects of your estate plan. Ask your estate planner/attorney about the proper use of such terms as “per stirpes” and “per capita” as well as about the proper use of trusts to achieve certain estate planning goals. Your planning professional can help you focus on many important issues, including percentage breakdowns, especially when minor children and those with special needs are involved.

Finally, be sure to keep copies of all your designation forms in a safe place and let family members know where they can be found.

This communication is not intended to be tax or legal advice and should not be treated as such. Each individual’s situation is different. If you would like to review your current beneficiary designations or discuss any other estate or 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 estate planning, Financial Planning, retirement planning. Tags: , , , . Leave a Comment »

Planning for Known — and Unknown — Health Care Costs in Retirement

June 1, 2015 — Sam H. Fawaz

The issue of health care costs in retirement — and planning for them well in advance of retirement — is becoming a centerpiece of any retirement planning discussion.

A recent study by Employee Benefit Research Institute (EBRI) projected that in 2014, men and women who wanted a 90% chance of having enough money to cover out-of-pocket health care expenses in retirement would need to have saved $116,000 and $131,000 respectively by age 65.1 This is a sobering goal when you consider that just 42% of workers in their 50s and 60s report total savings and investments in excess of $100,000.2

Part of the problem with putting a price tag on retiree health care expenses is that every situation will vary depending on an individual’s health, the type of health care coverage they carry, and when they hope to retire. That said, EBRI has identified some “recurring expenses,” or standard elements of cost that can be estimated and planned for in advance as well as “non-recurring” expenses that are less predictable but tend to increase with age.

Recurring vs. Non-Recurring Expenses

Using data gleaned from the Health and Retirement Study (HRS) — a longstanding, highly respected study of representative U.S. households with individuals over age 50 — EBRI was able to categorize utilization patterns and expenses for two separate types of health care services:

  • Recurring services — include doctor visits, prescription drug usage, and dentist services. Since these services tend to remain stable throughout retirement, it is possible to calculate an average out-of-pocket expense among individuals age 65 and older of $1,885 annually.3 Projecting forward, and factoring in the following assumptions: a 2% inflation rate, a 3% rate of return on investments, and a life expectancy of 90 years, EBRI estimates that one would need $40,798 at age 65 to cover the average out-of-pocket expenses for recurring health care needs throughout retirement. It should be noted that this calculation does not include expenses for any insurance premiums or over-the-counter medications.
  • Non-recurring expenses — include overnight hospital stays, overnight nursing home stays, home health care, outpatient surgery, and special facilities. Unlike recurring expenses, the cost of most non-recurring services increases with age. For example, average annual out-of-pocket expenses for nursing home stays are estimated at $8,902 for those in the 65 to 74 age group, $16,948 for those aged 75 to 84, and $24,185 for individuals aged 85 and up.3

Yet because the likelihood of utilizing these services and the degree to which they will be needed is largely unknown, projecting the savings needed to cover these costs throughout retirement is an elusive exercise. However, by thinking about the total out-of-pocket savings goals of $116,000 for men and $131,000 for women cited earlier in terms of recurring and non-recurring costs may help retirees and those nearing retirement in their planning efforts.

Bigger Picture Planning

As financial planners, we often recommend taking a holistic approach to calculating income needs in retirement, factoring in such costs as taxes and debt payments along with other typical expenses including health care. In addition to the out-of-pocket health care calculations discussed above, consider what you think you might have to pay in annual premiums if you were to apply for health insurance today. Lastly, and perhaps most important, add in an allowance for inflation — both general and health care inflation.

Your financial planner can help get the retirement income planning discussion started and — as part of that exercise — can work with you to put some numbers around your health care planning needs.

This article offers only an outline; it is not a definitive guide to all possible consequences and implications of any specific saving or investment strategy. If you would like to review your retirement plan, investment strategy 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:

1Employee Benefit Research Institute, news release, “Needed Savings for Health Care in Retirement Continue to Fall,” October 28, 2014.

2Employee Benefit Research Institute, 2014 Retirement Confidence Survey, March 2014. (Not including the value of a primary residence or defined benefit plans.)

3Employee Benefit Research Institute, “Utilization Patterns and Out-of-Pocket Expenses for Different Health Care Services Among American Retirees,” February 2015.

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The Next Bailout ?

May 26, 2015 — Sam H. Fawaz

It’s been five years since the newspapers exploded with stories of the Greek debt crisis, which, we were told, threatened the very existence of the Eurozone. Eventually, a variety of bailout packages were negotiated, and things seemed to return to normal.

As it turns out, the current rescue package will run out at the end of June. The European Union finance ministers and leaders of the newly-elected Greek government appear to be far apart in their negotiations on extending the bailout. The European Central Bank, International Monetary Fund and the European Commission have demanded that Greece institute another round of economic reforms, meaning austerity in government spending and services, higher value-added taxes, pension cuts, and a continuing decline in the Greek GDP and standard of living for ordinary citizens. The citizens, naturally, have been reluctant to endure any more pain, and elected leaders from the Syriza Party who ran in opposition to any more austerity, promising instead to cut a better deal, spend more, and generally use Keynesian economic theory to restart the economy. The Greek government recently rehired 4,000 public sector workers in a clear display of independence from the creditor demands.

Greece’s finance minister has agreed to make the next 750 million euro loan repayment to the International Monetary Fund, which staves off immediate default. But there is no question that the country will have to refinance 172 billion euros of debt. No deal means default and, possibly, what people are calling a “Grexit” from the Eurozone. You can expect to suddenly see headlines about the looming “crisis” and once again hear intimate details about the financial situation in Greece. If the negotiations succeed, and Syriza officials win concessions, it could bolster the strong anti-austerity populist movements in Spain, Portugal and Ireland.

Should you be concerned? If you’re holding a private stash of Greek bonds, or are receiving a government pension from the nation, then you should be following these developments closely. If not, then there is nothing about the negotiations which will change the underlying value of European stocks and bonds in most American portfolios. The headlines could cause a temporary stock market sell-off, particularly in the event of a Grexit, but corporate earnings and valuations will ultimately prevail, whether Greece is given a grace period, whether it remains part of the Eurozone—or not.

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/cms/s/2/7f31597a-f4cd-11e4-abb5-00144feab7de.html?ftcamp=published_links%2Frss%2Fhome_us%2Ffeed%2F%2Fproduct#axzz3ZV6PABAZ

 http://www.huffingtonpost.com/rj-eskow/13-questions-about-greece_b_6621708.html

 TheMoneyGeek thanks guest writer Bob Veres for writing this post. 

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How Do I Know If My IRA Contributions Are Tax Deductible?

May 18, 2015 — Sam H. Fawaz

Contributions to a traditional IRA are tax deductible if you don’t already participate in an employer-sponsored retirement plan. For 2015, the maximum you can contribute to an IRA is $5,500. If you are age 50 or over, you can make an additional “catch-up contribution” of $1,000.

If you do participate in an employer-sponsored plan, your contributions still can be fully or partially deductible, up to certain income thresholds. For 2015, those limits are between $61,000 and $71,000 for single filers and $98,000 and $118,000 for married couples filing joint returns.

If you are ineligible to make deductible contributions to a traditional IRA, you may want to investigate a Roth IRA. Contributions to a Roth IRA are made with after-tax dollars and are not tax deductible, but distributions are tax free. Be aware that there are income thresholds to contribute to a Roth. For 2015, those limits are between $116,000 and $131,000 for single filers and $183,000 and $193,000 for married couples filing joint returns.

You can find more information on the IRS website.

If you have questions about your current IRA’s or if you would like to 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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The Harm in Financial Journalism

May 10, 2015 — Sam H. Fawaz

In most areas of our lives, the more information you get, and the more up-to-the-minute it is, the better we can conduct business and make astute decisions. It is interesting that investing is one area where the opposite is true.

We’re not talking here about the second-by-second blips on a Bloomberg terminal that traders and computer algorithms use to make quick-twitch buys and sells. We’re talking about the normal news reports, cable TV investment reports, and investing articles that we’re bombarded with on a daily basis. In general, the news and data supplied by consumer journalists is almost always harmful to your financial health.

How? Consider profiles of mutual funds and mutual fund managers. The quarterly profiles in Barron’s and the articles in Money, Kiplinger’s and the Wall Street Journal tend to focus a bright spotlight of attention on the hot funds—that is, funds that outperformed their peers (and the market) in the previous quarter. Three months’ worth of track record is statistical nonsense, but the hot fund manager is interviewed with breathless deference normally given to a certified genius. It is interesting that seldom if ever is the next quarter’s genius the same as the last one. Anyone who invests with the fund of the hour (or quarter) is in grave danger of suffering a regression to the mean—which means losses when compared with the indices.

Even one-year and five-year rankings have no predictive value, particularly when the focus is on outliers who were well ahead of their peers. Meanwhile, when we aren’t reading about hot managers, we’re hearing about what the stock market did (or is doing) today. Today’s price movements are, to a statistician, meaningless white noise, indicative of nothing remotely significant about the future. The markets go up today, down tomorrow, up for a week, down for a week, and during each of these time periods, analysts try to tell us the causes of these random bounces. They would be more productively employed trying to explain the “causes” behind each of the waves in the ocean, yet we can’t help listening to their plausible explanations as to why this earnings report, that jobs report, or some other speculation on what the Federal Reserve Board will or will not do, has affected our investment outlook.

And, of course, at market tops, when new money is chasing returns at the most dangerous possible time, the news reports are telling us how the markets have been going up, up, up. When markets are depressed, and it is the best possible time to put new money to work, the news reports are telling us all the bad news about months of market losses. Swimming against that tide is nearly impossible, even for professionals.

There may be meaningful information among this chatter, but it’s unlikely that most of us will see it amid the noisy background. Back in the late 1990s, one analyst who couldn’t believe how much people were paying for tech stocks, finally broke through the background noise by pointing out that Amazon’s share price had reached approximately the same level as the entire yearly economic output of the nation of Iceland, plus a few 747 cargo jets to carry it all back to the U.S. Of course, few listened, and the bursting tech bubble cost a lot of investors a fortune.

Today, we’re being told that the current market rally is long in the tooth, that the Fed is going to raise rates soon, that market valuations are kind of high, and of course that certain fund managers did really well last quarter and yesterday’s market was up or down. The problem is that we were hearing exactly the same things last year and the year before (remember?), and still the market churns ahead, cranking out new record highs.

Unlike just about any other activity you might pursue, the best, most astute way to invest is to turn off the noise and let the markets carry you where they must. The short-term drops tend to become buying opportunities in the long run, and over time, the U.S. and global economies reflect the underlying growth in value generated by millions of workers who go to work each day and build that value. Investor sentiment will swing around with the unhelpful prodding of journalists and pundits, but people who stay the course have always seen new market highs eventually, while people who react to every positive or negative report tend to fare much less well. When it comes to the markets, wisdom trumps up-to-the-minute knowledge every time.

Maybe somebody should tell that to the journalists.

If you would like to cut through the noise, 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.

TheMoneyGeek thanks guest writer Bob Veres for writing this post

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