What’s Going On With The Markets?

June 29, 2010 — Sam H. Fawaz

Well that was quick!

I’m referring of course to the short uptrend from the stock market correction that had seen a bottom on June 8. As of today, the S&P 500 index undercut the lows of the last correction and has put us back into another market correction. With all the overhang from worldwide events and mounting evidence of a slowing recovery, investor, consumer and institutional sentiment are at their lows.

In last week’s statement from the Federal Reserve, where it continued to hold interest rates at 0-0.25% for an extended period, the “Fed” acknowledged a softening recovery and lackluster employment growth. Hints of another fiscal stimulus or monetary easing emanated from Washington to help avoid a possible double-dip recession. Now you may have heard about the G-20 Summit meeting this past weekend in Toronto where the United States was the lone voice in encouraging a coordinated effort of more fiscal stimulus to heed off a global recession; instead, most European nations were insistent that austerity measures and tax increases were the way to go to bring their fiscal houses in order. While I’m totally in favor of balanced budgets and fiscal conservatism, simultaneously cutting spending and raising taxes are the surest way to plunge your country into recession or worse, depression (history has demonstrated this time and time again.) At a time when the recovery is so fragile, doing one of the two is risky; doing both is simply economic suicide.

The Conference Board reported a sharp drop in Consumer Confidence today which caught Wall Street completely off guard. However, today’s figures are in sharp contrast to last Friday when the University of Michigan reported its Consumer Sentiment gauge at the highest level in two years. Although the 9.8 point drop in the Conference Board numbers was higher than expected, keep in mind that Consumer Confidence fell over 10 points in February just before the last stock market rally. These numbers really don’t mean a whole lot to the markets, so I’d caution against reading too much into today’s report or market reaction.

As I’ve written before, the stock markets hate uncertainty. With the BP Gulf disaster getting worse, the European Union is still arguing who should pay for whom and how much, financial regulation passage still uncertain, new job creation largely absent, and slowing growth in China, we have the makings of a “bad news salad.” Even though yields on money markets and Treasuries are at their lows, it seems that there is no appetite for risk or conviction in the markets by both the bulls and the bears. With poor May retail sales, jobs, and housing numbers, the bulls haven’t had much to hang their hat on lately. But keep in mind that one month does not make a trend.

So we find ourselves once again at a critical level in the markets today. At a closing level of 1,041 in the S&P 500, the bulls must come in and rescue this uptrend or risk dropping another 6% from here to about 980. I must admit that I believe that our only short-term hope of averting this drop is a very favorable June jobs number on Friday (on the order of 100,000 new jobs created.) Tomorrow (Wednesday), ADP will release their preliminary estimate of the jobs number (of mostly private employment; it does not include government jobs) and it is widely expected to show 60,000 new jobs created. The ADP report is widely anticipated as an indicator of the main jobs report, but it has been known to be way off. However, many institutions and traders treat it as a preview of Friday’s number. Let’s hope that the Labor Department has a nice 4th of July weekend send-off for us.

So much bad news, negative sentiment and consecutive down days are built into the market that a bounce is overdue and may come tomorrow (Wednesday) if the ADP jobs report is favorable. For our portfolios, I will be closely watching the 1,041 level on the S&P 500 index for support. If that support line is definitively broken, I will look to reinstate the portfolio hedges that have served us well in the past. Even at these market levels, we are still considered to be in a correction, not another bear market. By technical definition, a bear market is a 20% decline from a market high, which was 1,220 in the S&P 500 index. That gives us running room to 976 to avoid descending into another bear market.

I personally believe that with an undoubtedly positive 2nd quarter earnings season coming up and a good jobs report, we can avert the drop to bear market levels. I am not in the camp that believes that a double-dip recession or depression is in our near-term future. Short-term, a negative jobs report and poor earnings guidance combined with severe austerity measures around Europe will likely mean bad news for stocks. My broken crystal ball predicts however that we will pull out of this malaise and that the recovery, albeit tepid, will carry the markets upward through the rest of the year. However, if the markets insist on going lower into bear market territory, I will look to liquidate a portion of equity portfolios and increase our hedges. Recall that earlier in the spring I mentioned that the summer months would be both volatile and bumpy…and here we are.

I am working on my 2nd half 2010 market and economic outlook and will send it out to everyone later this week. I wish I had better news for you right now. Nonetheless, I hope this update helps you understand a little more of what’s going on with the markets. Please feel free to forward this message to anyone who might benefit from reading it. If you have any questions or comments, please don’t hesitate to contact me. If you or someone in your family or circle of friends is considering hiring a financial planner, please visit our website or consider a complimentary financial roadmap via the link below. Your first consultation with us is complimentary and there is no pressure to make any decisions.

Sam H. Fawaz CFP®, CPA is president of YDream Financial Services, Inc., a registered investment advisor. Sam is a Certified Financial Planner (CFP®), Certified Public Accountant and registered member of the National Association of Personal Financial Advisors (NAPFA) fee-only financial planner group.  Sam has expertise in many areas of personal finance and wealth management and has always been fascinated with the role of money in society.  Helping others prosper and succeed has been Sam’s mission since he decided to dedicate his life to financial planning.  He specializes in entrepreneurs, professionals, company executives and their families.
All material presented herein is believed to be reliable, but we cannot attest to its accuracy.  Investment recommendations may change and readers are urged to check with their investment advisors before making any investment decisions.  Opinions expressed in this writing by Sam H. Fawaz are his own, may change without prior notice and should not be relied upon as a basis for making investment or planning decisions.  No person can accurately forecast or call a market top or bottom, so forward looking statements should be discounted and not relied upon as a basis for investing or trading decisions. This message was authored by Sam H. Fawaz CPA, CFP and is provided by YDream Financial Services, Inc.
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Feel Like Un-Retiring? Here’s How to Prepare

June 8, 2010 — Sam H. Fawaz

Last October, the MetLife Mature Market Institute released a study that said the over-55 workforce will account for almost 93 percent of the net increase in the U.S. civilian labor force between 2006 and 2016.  At the same time, MetLife reported that many American workers plan to stay on the job at least until age 69.

The Pew Research Center’s Social & Demographic Trends Project echoed those findings in May 2009, saying that just over half of all working adults aged 50-65 plan to delay their retirement, with 16 percent saying they never plan to stop working.   The issue, says the Pew study, is not about what these Americans earn, but how much they lost during the investment meltdown and the worst economic downturn in more than 70 years.

Add all these factors together and you have one of the most interesting labor situations for older Americans ever.  That’s why that for every retiree or potential retiree who feels they need to return or stay on the job, it’s particularly important to review investment, insurance and tax issues.  It therefore makes sense to meet to discuss these areas with a financial advisor such as a fee-only Certified Financial Planner™ professional.

Here are some critical points to address:

How are your skills? This is a valid point for current and potential retirees. The best job candidates are those with current skills in technology and procedures specific to an industry, so staying in the workforce may mean retraining.  If there’s a way to get an employer to pay, then you should take advantage of it.  But if you have to pay for your own education, then you really need to weigh whether your earnings will justify it unless you enjoy the area of education or going back to school.

Be realistic about your demographic in the workplace: While age discrimination is illegal, there are some workplace cultures where older workers frankly seem out of place.  You have to ask whether you are going to be happy staying in a field that’s populated by younger workers with different interests or whether you might try another line of work.

Consider how a return to the workplace will affect you personally and socially: If you’re 40, 50 or 60, working right now probably feels like breathing – when have you not worked?  But it may not be the best option after a year or two out of the workplace.

Consider health insurance issues: If a retiree returning to the workforce is already receiving Medicare or is covered by a “Medigap” policy, they may be able to lower their costs or improve their coverage by accepting group coverage as primary underwriter of their medical expenses.  Since people over age 55 are generally the greatest users of the health care system, coverage issues are particularly important to run by a financial planner.

Know your tax picture: Tax issues shouldn’t determine your ambitions and goals, but it’s important to consider the impact full or part-time income will have on your finances.  Most retirees realize that it doesn’t take much income to knock them into a higher bracket.  Look for ways to control the taxes you’ll ultimately pay, including continued participation in qualified plans, IRAs, and other tax-favored accumulation vehicles and using annuity income to fill the gap between the beginning of the “post-retirement” period and the age when full Social Security benefits can be drawn without an offset for employment income.  Additional work income may affect the amount of taxable social security income you’re receiving, so be sure to take that into account.

Consider what earnings will do to all your retirement payments: If you are planning to continue working or returning to work, consider not only the tax impact, but also how that might change the way you plan to draw on your retirement savings and investments as well as Social Security.  If you are planning to work, it’s important you consider suspending or delaying receipt of those benefits for as long as you can.

Look for work-related incentives: Particularly for public sector workers, there are opportunities to return to state employment and actually augment existing pensions.  Keep an eye out for these programs and see if they work for you.

Keep saving: If you return to the workplace, see what you can do to take advantage of your new employer’s 401(k) plan or any other tax-advantaged retirement savings benefit, particularly if an employer matches your contribution.  Don’t miss a chance to enhance your retirement savings.

Returning to the workforce after retiring can be immensely rewarding both professionally and personally.  If you’ve un-retired yourself, please feel free to post your comments or additional insights about your experience.

This article was produced by the Financial Planning Association (FPA), the membership organization for the financial planning community, and is provided by Sam H. Fawaz and YDream Financial Services, a local member of FPA and a fee-only member of the National Association of Personal Financial Advisors.
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Beware of Gotchas in Growth & Guaranteed Annuities

June 7, 2010 — Sam H. Fawaz

I’ve had several prospects ask about growth and guaranteed annuities being promoted by many in the brokerage and insurance industry.  If there’s one thing you can count on in the financial industry, it’s that the industry will always come up with products that capitalize on fear amongst investors or the frenzy in a particular market segment.  Today, many investors and pre-retirees are discouraged by increased market volatility and low or negative rates of return of late.  The financial and insurance companies respond with products to try and address these concerns and they certainly do sound attractive.

I’ve analyzed and read more annuity prospectuses in my career than I care to admit, and I have yet to find one that delivers on its promise without numerous “gotchas.”  As with any financial product, there is never a free lunch. From hidden and high fees, low guaranteed returns, vague and complicated guarantees and draconian penalty and surrender provisions, the majority of annuities, variable and otherwise, simply don’t make much financial sense.  Annuity and life insurance salesmen, brokers and “financial advisors” always tout the great benefits their products have, but rarely delve into the details of the contract or the downsides.

Remember, when you sign up for any insurance or annuity product that has a penalty or surrender charge, after the right of rescission period has passed (usually three days after signing), the penalty or surrender charge you sign up for is 100% payable whether you keep the product for the requisite term (via higher expenses over 7-17 years) or pay it outright and get out of the contract early.  So waiting until the penalty or surrender period ends does not save you from paying the penalty or surrender charges.  In fact, you’ll lose more by waiting since most contracts have sub-par investment choices with higher annual expenses.

If you’re considering an annuity, keep the following points in mind:

  1. Ask yourself what you intend to use the annuity payout for and when you think you’ll need it.  It is rare that you can’t find an investment that more effectively meets your needs. If you want secure or risk-free retirement income, look at the annuity distribution options and income stream.  In most cases, you would be better off putting your money in bank certificates of deposit and simply liquidate principal as needed.  This way, your heirs get the remaining principal at death rather than the insurance company.
  2. Many people are swayed by the guaranteed current rates on deferred annuities until they realize that the guaranteed rate changes annually, is usually lower than market rates and that the annuity has a 7-17 year unavoidable surrender charge or penalties.
  3. If the guarantee is really important to you, keep in mind that the guarantor is an insurance company much like AIG. How thoroughly have you researched the financial health of the underwriter?
  4. If you are intent on buying an annuity, focus on a fixed and immediate annuity.  Find the best one with the lowest internal expenses, shortest surrender term, and best guarantees.  A fee-only planner can help you choose the best one that has no commissions or hidden compensation to sway his recommendation.
  5. Focus on how relevant the annuity is to your financial goals and whether it is the best solution to the issue you are trying to address.  This helps you move the focus from the product and toward a focus on your personal financial goals, which is what it’s all about.
  6. Remember that an annuity is not an all or nothing decision. You can commit just a portion (10-50%) of your portfolio to an annuity to hedge and diversify your holdings.

I hope this update helps you understand a little more of what goes on with growth and guaranteed income annuities.   My thanks to fellow NAPFA member Bedda D’Angelo for her tips on keeping annuities in perspective.  If you have any questions or comments, please don’t hesitate to post them here.  If you or someone in your family or circle of friends is considering hiring a financial planner, please visit our website or consider a complimentary financial roadmap.

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Market Update for May 20 2010

May 20, 2010 — Sam H. Fawaz

Today marked the 9th day out of the last twelve where the market sold off in a clear message that world governments need to get their acts together and control their fiscal, spending and regulatory policies.  With the Euro currency at historic lows, demonstrations in Greece, an environmental offshore oil catastrophe, German bans on naked short selling, higher than expected weekly job claims, and financial regulatory reform debates going on, we’ve had the perfect storm to extend this market correction.  Stock markets don’t like uncertainty and wishy-washy policy making, so they express their dismay by selling off risky assets.  As of today, the major indices have given back all their 2010 year-to-date gains and then some.  Nonetheless, the long term stock market uptrend remains intact, though as I’ve indicated before (May 6), we’re in for some bumpy times in the market for the summer.

I wish I could say that my crystal ball knew when this short-term pain to the downside would be over.  However, all technical indications is that this move downward is a bit overdone, though admittedly the move to the upside was also overdone in the short-term.  I believe that we’ll see a short or intermediate-term bounce in the next couple of days as value investors and bargain hunters swarm the markets.   We will do the same as the waters calm down.

Indications from Washington are that we may get a vote on the financial reform bill (being debated) tonight and perhaps remove some of the uncertainty in the markets.  I’m not sure what the Obama Administration will tackle next (immigration reform, tax reform, ban on sovereign bailouts, take your pick), but you can bet that it will also rattle the markets when it gets underway.  The European Union appears to be working on a few measures to further restore confidence to the markets and those measures may come to light over the weekend or early next week.  Longer term, we will have to contend with overseas currency and economic weakness, further sovereign debt issues, huge budget deficits, and a stubbornly high unemployment rate.  For the time being though, we have an improving fundamental economic picture, ultra low interest rates, excellent corporate earnings, and plenty of unspent stimulus to keep the market uptrend going for awhile.

Because I felt that it was more likely than not that the majority of the short-term move downward was over today, I decided to lift about 50% of the contra-position hedge that I held on client accounts.  This will allow portfolios to more fully benefit when the uptrend resumes. Leaving 50% of the position “on” allows me to be at least half-right in case there is more downside to come.  This is just prudent hedging.  Should the markets show signs of continuing their downward trend, then it’s just as easy to put the position back on and perhaps add to it.  As of this moment, I see no negative longer term indicators in the markets that tell me that I should be liquidating equity positions and moving to a higher cash position.

Please check out my January-February 2010 Money Magazine Portfolio Makeover-Can I retire Early? http://bit.ly/5aGwIO

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Sam H. Fawaz CFP®, CPA is president of YDream Financial Services, Inc., a registered investment advisor. Sam is a Certified Financial Planner ( CFP ), Certified Public Accountant and registered member of the National Association of Personal Financial Advisors (NAPFA) fee-only financial planner group.  Sam has expertise in many areas of personal finance and wealth management and has always been fascinated with the role of money in society.  Helping others prosper and succeed has been Sam’s mission since he decided to dedicate his life to financial planning.  He specializes in entrepreneurs, professionals, company executives and their families.

All material presented herein is believed to be reliable, but we cannot attest to its accuracy.  Investment recommendations may change and readers are urged to check with their investment advisors before making any investment decisions.  Opinions expressed in this writing by Sam H. Fawaz are his own, may change without prior notice and should not be relied upon as a basis for making investment or planning decisions.  No person can accurately forecast or call a market top or bottom, so forward looking statements should be discounted and not relied upon as a basis for investing or trading decisions. This message was authored by Sam H. Fawaz CPA, CFP and is provided by YDream Financial Services, Inc.

My no-nonsense no-spam policy: If you’d prefer not to receive future updates, just reply and let me know by typing “unsubscribe” in the subject (please don’t hit the spam button-it just puts me on a universal spammer’s list which is tough to get off of.)I’ll take you off my list immediately and permanently.  I will never sell, share, rent or give away your e-mail address to anyone.  Period.

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Learning from mistakes: Buying a New Car

April 30, 2010 — Sam H. Fawaz

The red flags in this story point to a few lessons to heed when buying a new car. (©iStockphoto.com) The red flags in this story point to a few lessons to heed when buying a new car. (©iStockphoto.com)

By Sam H. Fawaz

Anyone who has bought a new car is familiar with the hassles of going to the dealer, finding the right car with the right options, negotiating the deal, and pushing back on all the extras the dealer tries to sell. The last thing you would expect to find out, months after you bought the new car, is that the new car you bought was really a used car.

A family member told me a tale of woe that can serve as a warning for others buying a new car from a dealer. This story began when he stopped at a local Cadillac dealer with a specific request for a 2009 Cadillac CTS with certain options. Though the dealer did not have the car he wanted on-site, they told him that they had located one at a dealer in a neighboring state. While negotiating the deal, he told the salesman that he is a savvy buyer and would not pay the dealer’s document preparation charges or marketing surcharge, which were customary for this dealer to charge. The dealer agreed and the deal was signed. The car would be at the dealer’s lot in a day or two.

When the car arrived, the car buyer went to the dealer to inspect and pick up the car. While inspecting the car and test driving it, he noted that it already had 425 miles logged on the odometer. This seemed odd to the buyer, so he asked the salesperson about this. The salesperson told him that these miles were incurred to transport the car to the dealership and that this was pretty normal.

This was the first red flag for the buyer, though the car was almost exactly as he wanted it and was consistent with the deal he signed. Normally, new cars have less than ten miles registered on the odometer, but driving it from an out-of-state dealer seemed to be a reasonable basis for the number of miles (though elevated) logged on this vehicle.

Back at the dealer, and ready to sign the prepared paperwork, the buyer noted that both the document preparation and marketing charges were added to the purchase price. In addition, a dealer added undercoating treatment had been added to the invoice that was not previously disclosed.

This was red flag number two in the transaction. The salesman explained that all buyers pay these amounts and that they were customary charges. In addition, the dealer option was unknown at the time of negotiation and that they could not delete it. The buyer explained that he told the salesman that he would not pay such charges when he negotiated the deal, and if the dealer didn’t remove them and honor the original deal, he would walk out without the car. The salesman pled with the buyer and told him that they brought the car from out-of state for him and that it wouldn’t be fair if he walked away. The buyer stuck to his guns and walked out. Of course the salesman followed him out the door and told him that those charges would be removed. They were indeed removed.

Signing the final paperwork while the car was being prepped for delivery, the buyer was happy to be getting the car he wanted at the price he had negotiated. As is customary with new car purchases (when you don’t transfer a license plate), he received a temporary license plate for the car and was told that he could pick up the permanent one within a month. The dealer would call him when it was ready.

A month or so went by and the dealer hadn’t called him to pick up his permanent license plate, so the buyer called the dealer. He was told that there were some issues with the paperwork and to come by and pick up a 30-day temporary plate. The buyer did so.

Another month went by and still there was no call from the dealer to pick up the permanent plate. Concerned, the buyer called the dealer and was told that they were still having issues with the registration and to pick up another temporary plate. The dealer could not give him any further information. This process repeated for a few more months, and the buyer continued to make payments on the car even though he still had not received a valid title for the vehicle.

This was red flag number three.

Suspicious that something was amiss here, the buyer made a phone call to the Secretary of State to find out why registration had been delayed. He was told that the vehicle identification number (VIN) of his car was not registered to him and that they therefore could not give him any information about the vehicle. Of the few facts he was able to garner from the representative was that the vehicle was still registered in the name of an out-of-state dealer and that the buyer would not, when a new title was issued, receive a new original vehicle title. In other words, the car had been previously registered to another buyer and he would therefore receive a used car title.

Apparently what had happened is that the out-of-state dealer had itself purchased the vehicle for another potential buyer from yet another out-of-state dealer, and, to bring the car across state lines, had to register the vehicle in the dealer’s name (normally, dealers are not required to title vehicles purchased for resale in their name). However, that deal had fallen through, so the dealer was stuck with this car and kept it in its new car inventory system. This explained why so many miles were already registered on this vehicle even though it was transported from an adjacent state less than 200 miles away. In any case, the buyer had essentially purchased a used car under the guise of a new car purchase.

Needless to say, the buyer was not happy about this. Since he wanted to know his rights, he consulted with an attorney who advised him, that even though he had driven the car for several months, he could essentially drive the car to the dealer, demand a refund of all monies paid (including the payments made to the dealer’s financier) and “walk away” from this purchase. Alternatively, he could demand restitution from the dealer for selling him a used car at a new car price.

The buyer called up the dealer and told them that he pretty much knew what was up with this car and let them know that unless they negotiated a settlement with him, he would turn in the keys and they would once again “own” this car. The dealer inquired about the number of miles on it (about 8,000) and asked the buyer to come down to the dealership to talk. In any case, they had finally procured the plate and he could pick that up as well.

The dealer, needless to say, did not want to have to take this car back into inventory and take a large loss on it. The buyer held most of the cards here, so he asked for a settlement of $8,000 cash to keep the car. The dealer of course, low-balled him an offer which the buyer flatly rejected and let the dealer know in no uncertain terms that they would not want the media to hear about his experience with this purchase if they didn’t deal with him in good faith. In the end, the buyer ended up negotiating a $6,000 cash payment plus a $1,800 bumper repair the car had needed. He walked out with a repaired car and a check that day.

This story obviously ended well for such a savvy buyer, but most people would either not know their rights in these circumstances or would not be aggressive enough to push the dealer to settle on their terms. The red flags in this story point to a few lessons to heed when buying a new car:

1) If the dealer adds new charges to an already negotiated deal at signing, walk away and find a more scrupulous dealer.

2) Always inspect, test drive the car and check the odometer before signing the final paperwork. If the mileage on the odometer is more than 10-20 miles, find out why and ask yourself whether this is indeed a new car. Always match up the VIN on the paperwork to the one on the vehicle itself.

3) If it takes more than six weeks to receive a title or license plate, start digging deeper to find out why. When you receive the title, inspect it closely to ensure that you are getting a new car title (original owner) rather than a used car title.

4) If you find out that a new car you have purchased was actually used, consult with an attorney with experience in this area to find out your rights in your circumstances.

I can’t say how many times this kind of story happens to buyers, but I imagine that many more people would not even be aware that this type of thing goes on. Even a savvy buyer as I have described didn’t quite catch on at the time of purchase, so I imagine less experienced buyers would never suspect anything either.

Hopefully, this tale will help you avoid being a victim of this kind of transaction and you’ll be able to assert your rights. While the majority of new car dealers are honest and straightforward, this demonstrates that some clearly can be somewhat shady, even those we think have a pristine reputation.

Sam H. Fawaz CPA, CFP® (a.k.a. TheMoneyGeek) is a fee-only personal financial planner and a registered member of the National Association of Personal Financial Advisors. He has been working in personal finance since 1980 and has been writing about it since 1999. Sam’s website is http://ydfs.com.

Posted in Consumer Alert, General, Smart Buying. Tags: , , , , . 1 Comment »

15 Small-Business Tax Deductions

March 28, 2010 — Sam H. Fawaz

I recently contributed to an Entrepreneur Magazine online article written by Karen Mueller Prince about small-business Tax Deductions.  Here’s an excerpt with a link to the full article:

Opportunities abound for small businesses to cut their tax bills.  The key is understanding what’s deductible for your business. A good tax preparer can guide you, but it is your responsibility to save receipts throughout the year.

Organization and good record keeping are the keys to lower tax preparation fees and painless IRS audits,” says Sam Fawaz, a certified financial planner and certified public accountant with Y.D. Financial Services
in Franklin, Tennessee and Canton, Michigan. “Bringing a shoe box to your CPA or accountant and saying, ‘Here are my tax records; please prepare my return’ will undoubtedly cost you more in compilation and accounting fees to arrive at tax return numbers.”

Here’s a rundown of expenses to track in preparation for tax day.

To continue reading, please click here http://bit.ly/a49I1K

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Market Update-Week Ended March 27, 2010

March 28, 2010 — Sam H. Fawaz

The stock markets have been enjoying several weeks of continued gains after a market correction that ended around mid-February.  Corporate earnings have been stellar, mostly on a net income basis, but many have also enjoyed sales growth as well, albeit from a low (2009) base.

We’ve had stock market indices that have run up to 18 month highs and we came within 100 points of 11,000 on the Dow Jones Industrial Average this week.  Down days in the market have been only very mildly down as investors enjoy more confidence that the economy is slowly improving and that the possibility of a double-dip recession this year is nil.  This has all happened despite bad news from Europe relating to Greece’s possible default on their sovereign debt, Fitch’s downgrade of Portugal’s sovereign debt, passage of “Obama Care”, poor sales of U.S. Treasury bills, record federal deficits, and still dismal (though improving) unemployment figures.  The news that a South Korean Navy ship experienced an explosion yesterday barely made the markets blink.  High inflation is currently nowhere in sight, though it’s a certainty that it will be here before we know it.

With any long string of stock market gains (with only minor down days) comes the inevitable correction in the market. During the latter part of this week, days that were up for the most part suffered downside reversals and profit-taking towards the end of the day.  This could be a sign of another correction coming (perhaps in the range of 5-10%), portfolio managers adjusting their quarter-end books, or just traders preparing for a week or so off for the Easter holiday.  Dwindling stock market volume certainly would indicate that many are planning some time off.  A correction would be healthy for the market, and would give those still sitting on the sidelines or mostly invested in bonds an opportunity to jump back into the stock market at a lower price.  Stories are abound about $3 trillion still on the sidelines in money market accounts earning less than 1-2% interest or invested in low-risk short-term bond funds.  I personally still believe that we will enjoy returns this year in the low to mid-teens while gross domestic product (GDP) growth will be in the 3-4% range, which is historically low.

Next Friday April 2nd, while the stock markets are closed (the bond markets are open), unemployment figures for March 2010 will be reported and they’re expected to show actual job growth for the first time since early to mid-2008.  The boost will be partially attributable to the hiring of census workers, though employers, who are enjoying record productivity levels, have been increasingly hiring temporary workers and will have no choice but to make permanent hires soon, as the existing workforce grows exhausted from one person doing the work previously done by two people.  Even General Motors announced this week that it is recalling 700 workers to its plant in Ontario Canada and plans to hire 60-70 new workers.  The employment trend is definitely in the up direction, but the speed is still at a snail’s pace.  For the unemployed, the pace is understandably far too slow.

For those taking some time off for spring break and the Easter holiday week (post or pre), I hope you enjoy your time off and have good weather wherever you go.   To all who have to work, enjoy a great holiday nonetheless.

I welcome your comments and feedback. If you have any questions, please feel free to get in touch with me and be sure to share this post with your friends and colleagues.  And please be sure to let them know about me if you think that they might benefit from my services.  As a CFP® and NAPFA registered investment advisor, we have a fiduciary responsibility to always put your interest ahead of ours and avoid conflicts of interest.  Most brokers and advisors cannot say this nor do they adhere to this very high standard of care.

A summary of the week’s market results :

Market Update For Week Ending 3/26/2010

Index Close Net Change % Change YTD YTD %
DJIA 10,850.36 +108.38 1.01 +422.31 4.05
NASDAQ 2,395.13 +20.72 0.87 +125.98 5.55
S&P500 1,166.59 +6.69 0.58 +51.49 4.62
Russell 2000 678.97 +5.08 0.75 +53.58 8.57
International 1,572.26 +0.17 0.01 -8.53 -0.54
10-year bond 3.86% +0.17% +0.05%
30-year T-bond 4.75% +0.17% +0.06%

International index is MSCI EAFE index. Bond data reflect net change in yield, not price. Indices are unmanaged and you cannot directly invest in an index.

Sam H. Fawaz CFP®, CPA is president of YDream Financial Services, Inc., a registered investment advisor. Sam is a Certified Financial Planner ( CFP ), Certified Public Accountant and registered member of the National Association of Personal Financial Advisors (NAPFA) fee-only financial planner group.  Sam has expertise in many areas of personal finance and wealth management and has always been fascinated with the role of money in society.  Helping others prosper and succeed has been Sam’s mission since he decided to dedicate his life to financial planning.  He specializes in entrepreneurs, professionals, company executives and their families.

All material presented herein is believed to be reliable, but we cannot attest to its accuracy.  Investment recommendations may change and readers are urged to check with their investment advisors before making any investment decisions.  Opinions expressed in this writing by Sam H. Fawaz are his own, may change without prior notice and should not be relied upon as a basis for making investment or planning decisions.  No person can accurately forecast or call a market top or bottom, so forward looking statements should be discounted and not relied upon as a basis for investing or trading decisions. This message was authored by Sam H. Fawaz CPA, CFP and is provided by YDream Financial Services, Inc.

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Portfolio Makeover: Can I Retire Early?

January 17, 2010 — Sam H. Fawaz

Money Magazine recently approached me to perform an investment portfolio makeover for a couple in the Metro Detroit area, Kevin and Janice Ford.  The article, written by Money Magazine Senior Writer Donna Rosato, was published in the January-February 2010 double-issue.  The Roasato’s met with me recently and we put together a financial plan and asset allocation.  Here’s an intro to the article and a link to the full one:

(Money Magazine) — Kevin Ford has worked as an engineer in the Detroit auto industry for more than three decades – currently for the car company that best suits his name. His wife, Janice, is also a veteran of the field, a fellow engineer who even ran her own dealership for a few years before leaving the industry in 2005 to do part-time business development consulting.

Kevin hoped to follow her into retirement at age 55, and two years ago that seemed doable. The family had nearly $1 million saved, plus a hefty pension; they had no debt besides a $300,000 mortgage; their son, Darrell, was out of college and daughter, Kimberly, would be done in 2011.

To continue reading, please click here http://bit.ly/5aGwIO.

Posted in General, investing, markets, retirement, Taxes. Tags: , , , , . 3 Comments »

Retirement or College Savings-What Comes First?

December 4, 2009 — Sam H. Fawaz

Even as the economy begins its slow crawl back, college costs are continuing to rise.  That means parents are continuing to fight a tough battle between funding college and funding their own retirement.

In October, the College Board reported that the average published price of tuition and fees for in-state students at four-year U.S. public colleges was $7,020 for the 2009-10 school year, up $429 or 6.5 percent from a year ago. After adjusting for inflation, the average net price paid for tuition and fees by public four-year college students is lower overall in 2009-10 than it was five years ago, but higher than it was last year.  Private four-year colleges saw a smaller increase of $1,096 or 4.4 percent, but for a much higher average annual tuition of $26,273 for the school year.

Also in October, the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) also reported in October that American workers who held 401(k) accounts consistently from 2003 through 2008 suffered a 24.3 percent average drop in their account balance during 2008’s bear market.

Despite these huge challenges, it’s particularly important for parents to make retirement their first priority. Kids can always take on loans and search for scholarship and grant funding to tide them over.  Parents can offer help in a better economy, but the momentum lost in saving for retirement is much tougher to replace.

And there are serious financial consequences to breaking into 401(k) and other tax- advantaged retirement savings to pay for college.  Parents tempted to do so should look for other alternatives.

A July 2007 Country Insurance and Financial Services survey found that not only did 25 percent of respondents think it would cost less than $50,000 to send a child to a four-year college, but that nearly half believe that saving for college is more important than their retirement. Most qualified experts  (including me) advise against. On average, public colleges have surpassed $50,000 in total costs when you add in books, room and board.

Before you choose between yourself and your child by raiding your retirement accounts, here’s what you should know:

You’ll escape an early distribution penalty, but…

Any withdrawals from an IRA you might take for your child or grandchild’s education (as well as your own or your spouse’s) can be withdrawn without the usual 10 percent penalty on early distributions before age 59 ½, but you’ll owe regular tax at your incremental tax rate on the withdrawal.  Ultimately, you really need to talk with a tax advisor or Certified Financial Planner™ (CFP®) professional (like me) to determine how your IRA withdrawals affect your tax liability and how they have to be reported on your Form 1040.

You might hurt your kid’s chances for financial aid:

The entire withdrawal from an IRA — whether taxable or not — must be included as income on the following year’s application for the Free Application for Federal Student Aid, or FAFSA. Family income does more to influence financial aid than the size of the family’s assets, and dipping into your IRA can potentially damage your child’s potential financial aid. Check with a trained financial planner who is well versed in financial aid strategy before you make such a move.

Most middle and upper income folks assume that they make too much money to qualify for financial aid.  I urge all students to apply for aid whether they think they qualify or not.  Many students whose parents report a six-figure income may qualify for grants, loans work-study or other financial assistance.

A ‘hardship withdrawal’ or loan from a 401 (k) plan should be a last resort:

Earlier this year, the Transamerica Center for Retirement Studies reported an increase in workers taking loans from their 401(k) and other work-based retirement savings. Eighteen percent of those surveyed reported that they took loans from their retirement plans in 2007 compared to 11 percent in 2006.

Keep in mind that while most retirement plans provide an option for hardship withdrawal for emergency medical or funeral expenses, the IRS restricts use of those funds for home purchases or tuition expenses. In any case, you’ll pay the tax on the withdrawal plus a 10% penalty on most financial hardship withdrawals.

So what do you do?  Besides talking to a tax professional, it makes sense to find time to speak with a CFP® professional to take a look at your overall financial situation so you can possibly find alternatives to raiding your retirement.  A trained planner can help you look over all the spending, saving and investment decisions you’ve made so far and seal up the leaks.  Then you can discover whether you have smarter options to pay your child’s tuition. They include:

Starting a search for scholarships and grants with your kid:

See if there are grants and scholarships not only in your community (think community foundations, high schools, local chambers of commerce), or within your industry or trade associations.  Understand what a prospective student’s college choices might offer in terms of aid from its endowment funds.  Also, some employers offer scholarships for their employees’ kids. Start searching online, at the office and by phone for such aid.

The website http://savingforcollege.com provides lots of information about strategies for saving for college, finding scholarships and applying for financial aid.

Negotiate a college work schedule for your child:

No one says that you have to pay 100 percent of your child’s education costs.  In fact, most students work harder when they have “skin in the game.”  A college sponsored work-study arrangement or just a regular full or part-time job while going to school is a great way for students to learn responsibility and how to manage money.

Whatever portion of college costs you decide to pay for your child, I generally suggest that parents let the children first pay for tuition and books and the parents pay for room, board and spending money.  This way, children will think twice about dropping or performing poorly in a class they know they’ll have to pay for again. Also, parents can incentivize kids by agreeing to pay for a larger percentage of college costs based on grades achieved.

Consider attending a commuter college:

Many local colleges and universities offer the same if not a better educational opportunity for students as going away for college.  If money is tight and the student qualifies for little in the way of grants or scholarships, living at home while attending college can be an excellent way to get an education while saving 40 to 50 percent of the total cost.

Fine-tuning your negotiating skills:

Parents need to become more aggressive about negotiating tuition, room, and board at colleges where either their children or they have been accepted. A financial planner with expertise in college planning can train parents to understand where those savings might be and how to ask for them.

Please feel free to get in touch with me or leave your comments or feedback here if you have any questions.  You can find more information about our services and how we can help at http://ydfs.com.

Sam H. Fawaz CFP®, CPA is president of YDream Financial Services, Inc., a registered investment advisor. Sam is a Certified Financial Planner ( CFP ), Certified Public Accountant and registered member of the Financial Planning Association and the National Association of Personal Financial Advisors (NAPFA) fee-only financial planner group.  Sam has expertise in many areas of personal finance and wealth management and has always been fascinated with the role of money in society.  Helping others prosper and succeed has been Sam’s mission since he decided to dedicate his life to financial planning.  He specializes in entrepreneurs, professionals, company executives and their families. This column was produced by YDream Financial Services and the Financial Planning Association, the membership organization for the financial planning community. All material presented herein is believed to be reliable, but we cannot attest to its accuracy.  Investment recommendations may change and readers are urged to check with their investment advisors before making any planning or investment decisions.  Opinions expressed in this writing by Sam H. Fawaz are his own, may change without prior notice and should not be relied upon as a sole basis for making investment or planning decisions.

All material presented herein is believed to be reliable, but we cannot attest to its accuracy.  Investment recommendations may change and readers are urged to check with their investment advisors before making any investment decisions.  Opinions expressed in this writing by Sam H. Fawaz are his own, may change without prior notice and should not be relied upon as a basis for making investment or planning decisions.
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What’s Going on with Gold?

November 18, 2009 — Sam H. Fawaz

It’s hard to ignore all the buzz about gold lately and how it’s going up to $1,000,000 or more an ounce from here.  If you look back at the history of gold over the years, you’ll quickly see that gold as a long term investment has not even kept up with inflation, much less the risk-free treasury bill rate.  In fact, despite all the talk about gold, I personally hesitate to call it an investment and I’ve never invested $1 in gold (other than the obligatory jewelry for my significant others over the years, but those were not investments).  Gold as a commodity has few industrial uses and, for most of the developed world, provides little beyond intrinsic value.  Central banks around the world hold a percentage of their currency in gold as a hedge, and you may have heard that a few countries have recently increased their holdings in light of the weakening dollar and global economic uncertainty.

The fact remains that gold investments have gone up significantly in recent months, and I’m loathe to shun an asset class that may continue to go up (though I’m not endorsing investing in gold.)  Uncertainty about the value of the dollar, the global regulatory environment, a slow economic recovery, future inflation worries and the growing deficit have all contributed to the worldwide craze over gold.  Near term estimates have put an ounce of gold at $1,300, with some longer term estimates up to $3,000-$5,000 an ounce.  As of today, gold is at its highest levels in years, around $1,148 an ounce.  I hesitate to invest in gold at its current highs, but it looks like it may be going higher.  By the same token, investor appetites for gold can wane quickly, and so the price can drop quickly as well.

If you have more than $250,000 in your already well-diversified retirement account, and you have an appropriate investment choice for gold, you may consider adding  a small portion to your portfolio.  The investment should be in the form of a highly liquid mutual or exchange traded fund (for example, the SPDR Gold Trust or GLD which  buys and houses the physical gold for all of its investors.)  I view an investment in gold as more of a “hedge”, but would look to liquidate it once the prices started dropping.  If you are serious about investing some of your money in gold, then I would wait for a short-term pullback of 3-6% in the price before buying (assuming that a pullback occurs), and would invest no more than 3-5% of your total portfolio value in gold.  The investment in gold should be made in your retirement accounts due to the less favorable ordinary tax treatment gold gets as a collectible, rather than as a capital gain asset.  If you invest in the GLD or other exchange traded funds, be sure to put appropriate stop loss provisions in place to protect your investment.

Another somewhat less risky way to “play” gold is to invest in the stocks or funds of gold mining companies, many of which may already be in your existing mutual and exchange traded funds.  Looking up the funds you own on http://morningstar.com will reveal many of your mutual funds’ holdings.

For the first time in my life, I am personally considering an investment in the GLD fund, but I have not done so yet.  So far, none of my clients’ assets are invested in gold directly either.  I should emphasize that I consider a bet on gold to be a speculation, so it should only represent a small portion of your portfolio, and only if you have a large enough portfolio.  While you could buy gold coins or any number of gold trinkets hawked on late night TV, I recommend that you weigh your decision carefully and consider other investment options if you have a small portfolio.  Well diversified growth mutual funds are always a good bet.

Sam H. Fawaz CFP®, CPA is president of YDream Financial Services, Inc., a registered investment advisor. Sam is a Certified Financial Planner ( CFP ), Certified Public Accountant and registered member of the National Association of Personal Financial Advisors (NAPFA) fee-only financial planner group.  Sam has expertise in many areas of personal finance and wealth management and has always been fascinated with the role of money in society.  Helping others prosper and succeed has been Sam’s mission since he decided to dedicate his life to financial planning.  He specializes in entrepreneurs, professionals, company executives and their families.

All material presented herein is believed to be reliable, but we cannot attest to its accuracy.  Investment recommendations may change and readers are urged to check with their investment advisors before making any investment decisions.  Opinions expressed in this writing by Sam H. Fawaz are his own, may change without prior notice and should not be relied upon as a basis for making investment or planning decisions.  No person can accurately forecast or call a market top or bottom, so forward looking statements should be discounted and not relied upon as a basis for investing or trading decisions.
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