Trading Places: Baby Boomers More Aggressive Than Millennials in Retirement Goals

Popular investing wisdom states that the younger you are, the more time you have to ride out market cycles and therefore the more aggressive and growth-oriented you can be in your investment choices. But that is not how individuals surveyed recently are thinking or behaving with regard to their retirement investments.

In fact, the new study sponsored by MFS Investment Management suggests that Baby Boomers take a more aggressive approach to retirement investing than the much younger Millennials — those who are 18 to 33 years old. Further, each group’s selected asset allocation is inconsistent with what financial professionals would consider to be their target asset allocation, given their age and investment time horizon.

For example, Baby Boomers, on average, reported holding retirement portfolio asset allocations of 40% equities, 14% bonds, and 21% cash, while Millennials allocated less than 30% of their retirement assets to equities, and had larger allocations to bonds and cash than their much older counterparts — 17% and 23% respectively.

Further, when asked about their retirement savings priorities, 32% of Baby Boomers cited “maximizing growth” as the most important objective, while two-thirds of Millennials cited conservative objectives for their retirement assets — specifically, 31% said “generating income” was a top concern and 29% cited “protecting capital” as their main retirement savings goal.

Perception Is Reality

The study’s sponsors infer that the seemingly out-of-synch responses from survey participants reflect each group’s reactions — and perhaps overreactions — to the recent financial crisis. For Baby Boomers, the loss of retirement assets brought on by the Great Recession has made them more aggressive in their attempts to earn back what they lost. Fully half of this group reported being concerned about being able to retire when they originally planned. For Millennials, the Great Recession was a wake-up call that investing presents real risks — and their approach is to take steps to avoid falling foul to that risk even though they have decades of investing ahead of them.

Educating Investors: An Opportunity for Advisors

The study’s findings suggest that there is a considerable opportunity for advisors to dispel fears and misperceptions by educating investors of all ages about the importance of creating and maintaining an asset allocation and retirement planning philosophy that is appropriate for their investor profile.

If you have any questions or concerns about asset allocation, retirement and financial planning or investment management, 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.

Towards Better Social Security Income Planning

As you approach your social security retirement age, your thoughts turn to deciding when you should begin receiving social security benefits. With over 2,700 rules in the social security manual, you’d be forgiven (and, for that matter, so would most social security case workers) for being bewildered and confused about all of the options available to claim social security. In this article, I attempt to distill the most frequently asked questions and help reduce confusion about claiming social security benefits (SSB).

The crux of this article is to discuss the advantages of planning the payout of your (or your spouse’s) benefits to maximize your ultimate financial payoff. Coordinating your benefits with your spouse’s benefits introduces complexities that must be understood to maximize your overall benefits. Combined with the ability to file for benefits, then suspend them or filing for benefits using your ex-spouse’s earnings records, planning for social security benefits can be quite complex.

I realize that, as a financial planner, it’s somewhat self-serving to say that each person’s situation is unique and requires a personalized and thorough analysis of the facts and circumstances to determine the optimal timeframe to claim SSB. Nonetheless, no article, however detailed, can take into account all individual situations.

Note that this article doesn’t attempt to discuss the viability of the social security system or whether benefits will be available in the future (I believe that they will be, perhaps on a somewhat reduced basis).

Social Security Basics

In general, if you’ve worked and sufficiently paid into the social security system for at least 40 quarters of work in your lifetime, you probably have some SSB coming to you when you retire. Calculation of the level of your benefit is quite complicated, but mostly affected by your lifetime earnings.

Even if you’ve never worked a day in your life, your spouse’s (or ex-spouse’s) earnings and qualifications may be your “ticket” to qualify for benefits. If you’ve earned little money in your lifetime (as is the case for a stay-at-home spouse), you can often qualify for a much higher benefit if you file based on your spouse’s (or ex-spouse’s) earnings.

There are three dates in which to begin drawing social security: early retirement age (ERA), full retirement age (FRA) and deferred retirement age (DRA), each one being a later date in life than the previous. Your ERA and FRA vary depending on your birthday, and are generally higher for younger retirees (for anyone born after 1959, their FRA is 67).  For general discussion purposes, let’s assume that age 62, 67, and 70 are the ERA, FRA, and DRA respectively.

Deferring the date that you begin receiving benefits obviously means that you (and your spouse) may receive higher benefits per month until your date of death. Currently, less than 50% of filers wait until their FRA to claim benefits, and less than 6% wait until their DRA to claim benefits, despite the much higher DRA benefit (about 75% higher). The DRA benefit is generally about 30% higher than the FRA benefit. Reasons people cite for not deferring benefits include financial need, bad health, fear of social security insolvency, dying early, or plain ignorance about the overall benefits of waiting.

Once you begin receiving benefits, you may have options to suspend them within 12 months of starting them to qualify for a higher later benefit. This mostly involves repaying all of the benefits received. As more fully described below, there may be circumstances where you might want to file for SSB and immediately suspend them at FRA (without receiving payments) to allow your spouse to receive a higher (spousal) benefit or to receive a higher benefit at DRA.

Deferring Benefits

In general, deferring SSB as long as possible makes a lot of sense if you can afford to do so. The significant increase in benefits is primarily due to the additional years of compounding that occurs when you defer benefits.

At its very core, social security is exactly like taking the sums that you contributed into the system over your working years and continuing to invest it. Just like any investment, the primary factors that affect the payout are the length of time for compounding and the rate of return applied. The longer you wait for benefits, the larger the invested sum grows.

Making a decision to begin or defer benefits is an exercise in making a best guess on how long you (and your spouse if you’re married) will live. “Gaming” social security is about maximizing the benefits you collect over your lifetime. Deciding to defer social security until age 70 is a losing proposition if you’re in bad health and don’t have much of a chance to make it to or much past that age. Conversely, if you’re healthy and your family has a past history of living well into their nineties, deferring benefits may or may not lead to a higher overall lifetime payout. Obviously, the “game” ends when you die, since your benefits cease then. So just like investing, the outcome of the decision to defer isn’t known until the investing and disbursement period is over.

Essential Rules/Facts

Given the forgoing background, here are some of the essential rules/facts to know about filing for SSB and some potential tax planning points:

1.    At full retirement age (FRA), one may receive the higher of their own retirement benefit or a spousal benefit equal to 50% of their spouse’s retirement benefit.  Many do not realize that in order to claim that spousal benefit, the spouse on whose record the 50% payment is based must be receiving or have filed for (and perhaps suspended) retirement benefits.

2.    If a worker starts benefits prior to his/her FRA, and his/her spouse is receiving retirement benefits, the worker does not get to choose between their retirement benefit and a spousal benefit. They are automatically deemed to have begun their retirement benefit, and if their spouse is receiving retirement benefits, a supplement is added to reach the spousal benefit amount.  All this is reduced for starting early. The total will be less than half the normal retirement benefit.If you start your retirement early and your spouse has not claimed or suspended his/her retirement benefit, you cannot get a spousal supplement until they do file.

3.    A person needs to have been married to an ex-spouse for at least ten years immediately before a divorce is final, in order to be eligible to receive a spousal benefit based on a former spouse’s record. The ex-spouse need not approve this and may never know this is the benefit being claimed.If you marry again, you are no longer eligible for a spousal benefit on your ex’s record and a new 10-year clock starts on the marriage to your new spouse. If you are over 60 when you get married again, you will still be able to claim survivor benefits on your ex.

4.    If you take your retirement early, it not only reduces your retirement benefits, benefits for your survivor (if any) are also based on that permanently reduced amount.

5.    If you have claimed your retirement benefit early, when you reach your FRA, if your spouse then files for his/her retirement and you want to switch to a spousal benefit, you will not get 50 percent. The formula is (A-B) + C where A= ½ the worker’s Primary Insurance Amount (PIA, their benefit at their FRA), B= 100 percent of the spouse’s PIA, and C= the spouse’s EARLY retirement benefit. Since starting early means C is less than B, the total is less than 50%.  One only gets half their spouse’s benefit if the spousal benefit is claimed at FRA.

6.    Spousal benefits do not receive delayed credits. In other words, if taking the spousal benefit is good for a couple, delaying the claim for spousal benefits past the recipient’s FRA has no additional benefit.  The same applies for widow/widower benefits. They can be started early but there is no benefit to delaying past FRA as no delayed credits apply. Before a worker dies, delaying does increase the potential survivor’s benefit.

7.    Taxpayers whose income is low can find that some forms of tax planning can result in higher than expected taxation. Many retirees will make distributions from IRAs or qualified retirement plans prior to age 70½ to have a low tax rate applied. Roth conversions are often done for the same reason. A relatively small amount of taxable income can cause up to 85% of Social Security payments to become taxable.

8.    Because the income thresholds that determine how much of one’s Social Security is taxable are not indexed for inflation, over time, more and more of the benefits can become taxable.

9.    New this year, an increase in taxable income as just described can also cause a reduction or elimination of subsidies available to lower income households under the new health insurance law. Social Security payments, even the tax-exempt portions, are included in this evaluation. Supplemental Security Income (SSI) is excluded.

10.    With today’s mobile workforce, it is not unusual to find some taxpayers that worked at a job and earned a pension benefit but were not subject to withholding for Social Security taxes and another job that was subject to Social Security taxes. Many such folks are unpleasantly surprised that their Social Security benefits may be reduced due to the Windfall Elimination Provision.

11.    If you “file and suspend” for SSB, Medicare premiums cannot be paid automatically from Social Security income and must be paid directly to the Center for Medicare & Medicaid Services (CMS). Affected taxpayers should be sure to get billed properly by CMS. If it is not paid timely, you can lose your Medicare Part B coverage.

12.    When collecting retirement benefits, increases in Medicare Part B premiums are capped to the same rate of increase of the retirement benefits under a “hold harmless” provision.  This is tied to actual receipts so while delaying past your FRA earns delayed credits, there is no cap on the Medicare increases. Worse yet, the uncapped increase is locked into every future premium. This hold harmless quirk is not relevant to high income taxpayers. Hold harmless does not apply to high income taxpayers paying income-related Medicare B premiums.

13.    Because it used to be allowable to pay back all of your retirement benefits and start over, many people think that they can change their minds about starting SSB early. Withdrawing your claim this way basically erased the claim as though it never happened and future benefits would therefore be higher. Today, if you regret your choice, you can only withdraw your claim and pay back benefits within 12 months of your early start. After 12 months, you are stuck with your choice until your FRA, at which point you can suspend and earn delayed credits up to age 70. The credits are applied to your reduced benefit.

Some Strategies and Conclusion

Here are some final considerations to make when deciding to file a claim for SSB (by necessity, these are generalities that must take into account each individual’s/couple’s facts and circumstances):

•    Assess your own life expectancy, and, if married, your joint life expectancy.
•    If married, and either spouse is healthy, delay the higher earner’s benefits as long as possible.
•    If married and one spouse is unhealthy, get the lower payout as soon as possible.
•    Supplement benefits with spousal amounts, if within FRA.

As mentioned above, the decision of when to file for social security benefits can become very complex and requires assessment of many factors. Since the determination can involve differences of thousands of dollars per person, per year, it’s worthwhile to carefully assess and model all of the facts and circumstances before starting benefits.  Even though a total SSB re-do is no longer available, there are some options still available to modify benefit payouts.

It may be tempting or convenient to utilize a simplified web-based social security calculator to help you make an estimate, but be wary of any program that doesn’t model multiple scenarios or doesn’t require entry of many variables that may ultimately affect your optimum benefit. In the end, there’s no perfect answer, but perhaps a “best fit” for your situation is good enough.

If you have any questions about social security planning or any other financial planning matter, please don’t hesitate to contact me or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.

Bequest or Beneficiary: In Estate Planning, the Difference Is Crucial

When planning your estate, be sure you understand the differences between bequests spelled out in a will and beneficiary designations incorporated in retirement accounts.

The scenario plays out over and over again in attorneys’ offices: A family brings a parent’s will to be probated. The will is complete, well-thought-out, and takes into consideration current tax law. But under closer examination, the attorney discovers that the deceased’s estate plan doesn’t work. Why? Because a substantial portion of the parent’s assets pass by beneficiary designation and are not controlled by a will.

Increasingly, investors have the opportunity to name beneficiaries directly on a wide range of financial accounts, including employer-sponsored retirement savings plans, IRAs, brokerage and bank accounts, insurance policies, U.S. savings bonds, mutual funds, and individual stocks and bonds.

The upside of these arrangements is that when the account holder dies, the monies go directly to the beneficiary named on the account, bypassing the sometimes lengthy and costly probate process. The “fatal flaw” of beneficiary-designated assets is that because they are not considered probate assets, they pass “under the radar screen” and trump the directions spelled out in a will. This all too often leads to unintended consequences — individuals who you no longer wish to inherit property do, some individuals receive more than you intended, some receive less, and ultimately, there may not be enough money available to fund the bequests you laid out in your will.

Unnamed or Lapsed Beneficiaries

Not naming beneficiaries or failing to update forms if a beneficiary dies can have its own unintended repercussions, which can be particularly damaging in the case of retirement accounts. For instance, if the beneficiary of an IRA is a spouse and he or she predeceases the account holder and no contingent (second in line) beneficiary(ies) are named, when the account holder dies, the IRA typically would pass to the estate instead of the children directly as the account holder likely would have preferred. This not only would generate a tax bill for the children, it would also prevent them from stretching IRA distributions out over their lifetime.

Planning Priorities

Given these very real consequences, it is important to work with an estate planning professional to ensure coordination between your beneficiary-designated assets and the disposition of property as it is spelled out in your will.

You should also review your beneficiary designations on a regular basis — at least every few years — and/or when certain life events occur, such as the birth of a child, the death of a loved one, a divorce or a marriage, and update them, as necessary, in accordance with your wishes.

Are Daughters a Better “Investment?”

As Father’s Day has now passed for this year, a new survey from the online account aggregation firm Yodlee.com and Harris Interactive tells us that the financial relationship between fathers (and parents) can be very different for their sons vs. their daughters.  The survey found that an astonishing 75% of young adult men (age 18-34) are receiving financial aid from their parents, compared with 59% for comparable age daughters.  The financial dependency extends deep into adulthood; among sons aged 35-44, fully 32% are still living at home, while only 9% of women in that age bracket sleep in their former bedroom.  Even those numbers understate the disparity, because more than a third of the women who are living with their parents are doing so to support them in old age, something that sons are, according to the report, far less likely to do.
 
Overall, daughters are 32% less likely to need their parents’ money, and twice as likely to move back home because they’re unemployed.  By age 45, the survey found, most of these stark differences in financial independence have faded; sons lag only a few percentage points behind daughters in these two areas.  But then a new discrepancy emerges.  The survey found that older sons are half as likely as daughters to support their parents in old age. 

If you have any questions about any financial planning or money management services, please don’t hesitate to contact us or visit our web site athttp://www.ydfs.com. As a fee-only fiduciary financial planning firm, we always put your interests first, and there’s never a charge for an initial consultation or any sales pitches.
 
Sources:  

http://www.businessinsider.com/daughters-require-less-financial-support-2014-6
 
http://time.com/money/2861530/daughter-better-investment-than-son/

Market Correction?

Last Monday, the U.S. markets dropped roughly 1% of their value (as measured by the S&P 500 index), and Europe and Asia were down by similar amounts the following day. The market then fell 2.1% on Friday in a sickening lurch. Today the S&P 500 fell another 0.5%. This combination was enough to cause pundits and investors to ask whether we are now in the early stages of a bear market or, indeed, if the past almost-five years should be considered an interim market rally inside of a longer-term bear market.

The answer, of course, is that nobody knows–not the brainiac Fed economists, not the fund managers and certainly not the pundits. A Wall Street Journal article noted that most of the sellers on Friday were short-term investors who were involved in program trading, selling baskets of stocks to protect themselves from short-term losses. Roughly translated, that means that a bunch of professional traders panicked when they learned that Chinese economic growth is slowing down on top of worries that the Fed is buying bonds at a somewhat less furious rate ($75 billion a month vs. $85 billion) than it was last year.

What we DO know is that it is often a mistake to panic sell into market downturns, which happen more frequently than most of us realize. A lot of people might be surprised to know that in the Summer of 2011, the markets had pulled back by almost 20%–twice the traditional definition of a market correction–only to come roaring back and reward patient investors. There were corrections in the Spring of 2010 (16%) and the Spring of 2012 (10%), but almost nobody remembers these sizable bumps on the way to new market highs. Indeed, most of us look back fondly at the time since March of 2009 as one long largely-uninterrupted bull market.

Bigger picture, since 1945, the market has experienced 27 corrections of 10% or more, and 12 bear markets where U.S. equities lost at least 20% of their value. The average decline was 13.3% over the course of 71 trading days. Perhaps the only statistic that really matters is that after every one of these pullbacks, the markets returned to record new highs. The turnarounds were always an unexpected surprise to most investors.

We may get a full 10% correction or even a full bearish period out of these negative trading days, and then again we may not. But history suggests an important lesson: if we DO get a correction or a bear market, we may not remember it a few years later if the markets recover as they always have in the past. The people who lose money in the long term are not those who endure a painful market downturn, but those who panic and sell when the market turns down. The facts are that the market is overdue for a reasonable correction after the torrid and virtually uninterrupted run up we’ve had since late 2012.

Instead of panic selling into the market downturn, you may choose to lighten up your equity weighting or re-balance some of your equity weight into other asset classes. After a long winning run, it never hurts to take some profits off the table, trim back your winners and leave the proceeds in cash to invest when the downturn ends. There are various inverse funds and other options available to partially hedge your portfolio if the uncertainty keeps you up at night. After a few days of selling, there’s usually a rally around the corner to counterbalance the weight of the selling and that’s a more opportune time to lighten up. None of this is a recommendation–they’re just some ideas to consider.

For our clients, we have raised and maintained a healthy level of cash and have used hedging to reduce our overall portfolio risk. If the correction becomes prolonged, we’ll do more of the same and await the next opportunities to re-invest. No one says that you have to stay 100% invested at all times.

If you have any questions or would like to speak to us about your portfolio needs or any financial planning matters, we’re here to help. We are a fee-only financial planning firm that always puts your interests first.

Fee-Only Financial Advisers Who Aren’t

Today’s (Saturday September 21, 2013) Wall Street Journal contains an article entitled ” ‘Fee-Only’ Financial Advisers Who Don’t Charge Fees Alone” written by award-winning writer Jason Zweig, better known as “The Intelligent Investor.” Jason acts as beacon to guide investors towards the better practices of saving and investing and warns them of the tricks and traps.

In this article, Jason points out that “You might think a “fee-only” financial adviser will never charge you commissions or other sales charges that could induce him to favor selling you something that is better for him than for you. Think again.”

Through his research, he found that many advisors who hold themselves out as “fee-only” indeed earn commissions, kickbacks, trails or other hidden compensation even though they might not sell you a product that generates one. He found that numerous advisors (661) that were Certified Financial Planners (TM) and worked for large Wall Street brokerage firms such as Morgan Stanley, UBS, RBC, Wells Fargo, J.P. Morgan Chase, Bank of America Merrill Lynch, Raymond James and Ameriprise Financial also listed themselves as fee-only advisors on the CFP (r) website. By definition, based on the nature of the firms that they work for, they cannot designate themselves as fee-only advisors or planners.

Many people also confuse fee-only with fee-based. They are definitely not the same. Fee-based means that the advisor can earn both fees for services as well as other commissions or kickbacks for selling investment, insurance or other financial products.

NAPFA, the National Association of Personal Financial Advisors (the de facto fee-only organization of planners and advisors found at napfa.org), the Financial Planning Association and the Certified Financial Planner board of standards are currently working on more clearly defining the “fee-only” standard and urging members to update their profiles and re-assert that they meet the more clearly-defined standard. I applaud this effort.

I wish to reassure our clients, prospects and friends that our firm, YDream Financial Services, takes a very serious and crystal clear stance on meeting the fee-only definition. Fee-only planners, like us, are compensated solely by fees paid by our clients and we do not accept commissions or compensation of any kind from any source. We also don’t earn any money or consideration from trails, referrals or markups. We have zero incentive to recommend any financial products and don’t accept anything (except perhaps trinkets from wholesalers or fund companies worth $5 or less handed out at conferences) that influences our recommendations. Our custodian, Charles Schwab does not reimburse or compensate us for any trade commissions or for the use of any particular financial products that they offer.

As a fiduciary, we take our responsibility to put your interests first and we endeavor do that in every recommendation or transaction that we initiate on your behalf. Finally, any conflicts of interest that our compensation approach might present are clearly discussed and disclosed with our clients and prospects prior to implementing the recommendation or moving forward with the engagement.

You can find the Wall Street Journal Article here http://goo.gl/23Oy3B. It’s worth the short read. If the link requires a log in or subscription to the Wall Street Journal Online, I suggest typing the title of the article above into your favorite search engine then click on the search hit that it finds.

Your Returns Versus the Market

One of the most misleading statistics in the financial world is the return data we are routinely given by the financial media, telling us how much investors made in the markets and in individual stocks or mutual funds over some time period.  In fact, your returns are almost guaranteed to be different from whatever the markets and the funds you’ve invested in have gotten.

How is this possible?  Start with cash flows.  We are told that the S&P 500 has delivered a compounded return of about 7.8% from 1992 through 2011, which sounds pretty positive until you realize that this return would only be available to somebody who invested all his or her money at the beginning of 1992 and didn’t move that money around at all for the next twenty years.  If you invested systematically, the same amount every month, as most of us do, then you would have earned a 3.2% compounded return.  Why?  A lot of your money would have been exposed to the 2008 downturn, and not much of it would have enjoyed the dramatic run-up in stocks from 1992 to 2000.

In addition, there is the difference–only now getting attention from analysts–between investor returns and investment returns.  Human nature drives investors to sell their stocks and move to the sidelines after their portfolios have been hammered–which is often the worst possible time to sell.  And it drives people to start increasing their equity allocations toward the peak of bull markets when they perceive that everybody else is getting rich.  That means less of their money tends to be exposed to stocks when the market turns from bearish to bullish, and more is exposed when markets switch from bullish to bearish.

Understand also that owning a diversified portfolio means that only a portion of your investments are exposed to stocks. Assets such as cash, bonds, real estate, commodities and other non-stock investments all have returns that are inherently different than stocks, making overall portfolio return comparisons an “apples to oranges” one.

This would be bad enough, but people also switch their mutual fund and stock holdings.  When a great fund hits a rough patch, there’s a tendency to sell that dog and buy a fund that whose recent returns have been scorching hot.  Many times the underperforming fund will reverse course, while the hot fund will cool off.  The Morningstar organization now calculates, for every fund it follows, the difference between the returns of the mutual fund and the average returns of the investors in fund, and the differences can be astonishing.  Overall, according to Morningstar statistics and an annual report compiled by the Dalbar organization, investor returns have historically been about half of what the markets and funds are reporting.

And then there’s the tax bite.  Some mutual funds invest more tax-efficiently than others, and generate less ordinary income.  Beyond that, if a fund is sitting on significant losses when you invest, you get to ride out its gains without having the tax impact distributed to your 1040.  If the fund is sitting on large gains when you buy in, you could find yourself paying taxes on gains even if the fund loses money.

Sources:

http://www.forbes.com/sites/financialfinesse/2012/06/20/why-your-investment-returns-could-be-lower-than-you-think/

http://www.thesunsfinancialdiary.com/investing/understanding-ms-total-return-and-investor-return/

http://corporate.morningstar.com/cf/documents/MethodologyDocuments/FactSheets/InvestorReturns.pdf

My thanks to Inside Information publisher Bob Veres for his contribution to this post.

The Rollercoaster Effect

There are two kinds of investor in this world.  One type pays close attention to the daily (and sometimes hourly) flood of information, looking for a reason (any reason) to jump in or out of the markets.  The other kind of investor is in for the long haul, and recognizes that the markets are going to experience dips and turns.  If these people are particularly wise, they know that the dips and turns are the best friend of the steady, long-term investor, because as you put money into the markets, as you re-balance your portfolio, you gain a little extra return from the occasional opportunities to buy at bargain prices.

Last week, the investment markets made an unusually sharp turn on the roller coaster, and showed us once again the sometimes-comical fallacy of quick trading.  See if you can follow the logic of the events that led to last week’s selloff.  Federal Reserve Board Chairman Ben Bernanke and the Federal Open Market Committee issued a statement saying that the U.S. economy is improving faster than the Fed’s economists expected.  Therefore (the statement went on to say) if there was continued improvement, the Fed would scale back its QE3 (quantitative easing) program of buying Treasury and mortgage-backed securities on the open market, and ease back on stimulating the economy and keeping interest rates low.

Everybody knows that the Fed will eventually have to phase out its QE3 market interventions, and that this would be based on the strength of the economy, so this announcement should not have stunned the investing public.  Nothing in the statement suggested that the Fed had any immediate plans to stop buying altogether; only ease it back as it became less necessary.  The statement said that this hypothetical easing might possibly take place as early as this Fall, and only if the unemployment rate falls faster than expected.  At the same time, the Fed’s economists issued an economic forecast that was more optimistic than the previous one.

The result?  There was panic in the streets–or, at least, on Wall Street, where this bullish economic report seems to have caused the S&P 500 to lose 1.4% of its valueon Wednesday and another 2.5% on Thursday.

In addition–and here’s where it gets a little weird–stocks also fell sharply in Shanghai and across Europe, and oil futures fell dramatically.  How, exactly, are these investments impacted by QE3?

The only explanation for last week’s panic selloff is that thousands of media junkie investors must have listened to “we plan to ease back on QE3 when we believe the economy is back on its feet again,” and heard: “the Fed is about to end its QE3 stimulus!”

It’s possible that the investors who sold everything they owned on Wednesday  throughFriday will pile back in this week, but it’s just as likely that the panic will feed on itself for a while until sanity is restored.  If stocks were valued daily based on pure logic, on the real underlying value of the enterprises they represent, then the trajectory of the markets would be a long smooth upward slope for decades, as businesses, in aggregate, expanded, moved into new markets, and slowly, over time, boosted sales and profits.  The roller-coaster effect that we actually experience is created by the emotions of the market participants, who value their stocks at one price on Wednesday, and very different prices on Thursday and Friday.

The long-term investor has to ask: did any individual company in my investment portfolio become suddenly less valuable in two days?  Did ALL of their enterprise values in aggregate become less valuable within 48 hours–and at the same time, did Chinese and European stocks and oil also suddenly become less valuable?  Phrased this way, the only possible answer is: no.  And if that’s your answer, then you have to assume that eventually, people will eventually be willing to pay the real underlying value of the stocks in the market, and the last couple of days will be just one more exciting example of meaningless white noise.

With all that said, it’s prudent to be cautious about going “all in” on this pullback in the market and to perhaps take some hard-earned partial profits on positions you’ve been holding. In our clients’ portfolios, we’ve upped our hedges and taken partial profits on short-term positions, but are still holding the majority of our equities and bonds.

With the action in the markets last week, we officially have the beginnings of a downtrend, but that can be very short-lived in this QE environment, so we remain on our toes. Be sure to consult with your advisor if you’re uncomfortable with your holdings or have trouble sleeping at night because of your positions. Nothing in this message should be construed as investment advice or suggestions to buy or sell any security.

If you have any questions or comments, please don’t hesitate to contact us or post them here. We are a fee-only fiduciary financial planning and investment advisory firm that always puts your interests first.

Have a great week!

Sam

Sam H. Fawaz CFP™, CPA
Registered Investment Adivsor Representative
NAPFA Registered Fee-only Advisor
Financial Planning Asssociation Member
(734) 447-5305
(615) 395-2010
http://www.ydfs.com

TheMoneyGeek thanks Bob Veres, publisher of Inside Information for his help with writing this guest post.

Investing by Population

The map you see below has been widely circulated among professional investors, and it tells an astonishing story.  The circle encloses less than an eighth of the world’s total land mass, but it includes more than half of the world’s population.  Within that circle are the world’s two most populous nations: China, with 1.35 billion people and India with 1.22 billion, plus countries that rank 4th in population (Indonesia, with 251 million), 8th (Bangladesh, with 164 million), 10th (Japan, with 127 million), 12th (Philippines, with 106 million), 13th (Vietnam, with 92 million), 20th (Thailand, with 67 million), 25th and 26th (Burma and South Korea, both with around 50 million).  Also in the circle: Nepal, Malaysia, North Korea, Taiwan, Sri Lanka, Cambodia, Laos, Mongolia and Bhutan.

Add them up and you have 3.64 billion total citizens, or roughly 51.4% of the world’s people.

CA - 2013-5-12 - World Map

So the immediate question is: why isn’t my investment portfolio 50% invested in this region of the world?  Why isn’t my portfolio weighted by population?

The answer is simple.  While this circle represents the world’s center of gravity as measured by people, it also surrounds some of the least efficient places to deploy your investment resources.  Take China, for example, where the same company’s shares trading on the Hong Kong stock exchange routinely cost two or three times more than shares trading in Shanghai, where Chinese residents buy and sell their stocks.  Both shares carry identical claims on assets and profits.

Why the difference?  Chinese residents invest through so-called A-shares, which most foreign buyers are forbidden to trade in.  The rest of us buy B shares trading in Shanghai or Shenzhen, or H shares traded in Hong Kong, or red chips if the companies are state-owned, or P chips if the Chinese company is incorporated outside of the mainland, or N shares for certain Chinese companies listed on the U.S. trading floors.  These other share classes share one thing in common: they trade at higher multiples than the relative bargains offered to Chinese citizens.  China has granted several foreign firms and investment groups permission to own limited amounts of A shares, but it’s not easy to know, from the outside, which firms have an inside track.

Another problem with investing in China is transparency–or, more precisely, the lack of it.  U.S.-based public companies are required to disclose their financials in great detail, and large accounting firms are required to audit and sign off on the accuracy of those statements.  In China, accounting standards run from lax to nonexistent, and the Chinese government can forbid foreign access to the books and records of any company on the theory that this might reveal “state secrets.”

Okay, so what about India?  Here again, the government forbids non-Indian investors to buy shares of publicly-traded companies. Only six of the 30 companies listed in the BSE SENSEX index–the Indian equivalent of the S&P 500–allow shares to trade on the U.S. exchanges.  A few Indian-focused exchange traded funds are allowed to buy shares.

Indonesia’s stock exchange, meanwhile, could be charitably described as “undeveloped.”  Currently, it facilitates trading in just 462 listed companies, which have a combined market value of $462.78 billion–almost exactly the current market capitalization of Apple Computer.  Trading activity on the Jakarta stock exchange makes up less than one tenth of one percent of the global investment flow.

Of course, the Japanese stock market is large and robust, but investors in Japanese stocks have been less-than-thrilled by their performance since 1991.  The Nikkei 225 Stock Market Index peaked at just under 40,000 22 years ago, and now is worth about 12,500.

There is no question that eventually the people living inside of this interesting circle will start punching their weight in the global economy and provide thriving investment opportunities that will conform to more stringent world standards.  For now, a prudent investor will avoid investing by population.  You should have some money in the emerging economies and watch closely the new developments in Japan, where the prime minister may be shaking the economy out of a decades-long slump.  There may come a time when it will be wise to put more than half of your investments into eastern Asia, but that time hasn’t quite arrived yet.

Sources:

http://www.washingtonpost.com/blogs/worldviews/wp/2013/05/07/map-more-than-half-of-humanity-lives-within-this-circle/

http://www.forecast-chart.com/historical-nikkei-225.html

http://www.indexuniverse.com/sections/white-papers/15113-the-complete-guide-to-chinese-share-classes.html?fullart=1&start=5

http://seekingalpha.com/article/829631-how-can-americans-invest-in-indian-stocks

http://en.wikipedia.org/wiki/Jakarta_Stock_Exchange

http://en.wikipedia.org/wiki/List_of_stock_exchanges

http://www.advfn.com/nyse/newyorkstockexchange.asp

http://en.wikipedia.org/wiki/Indonesia_Stock_Exchange

http://www.usnews.com/opinion/blogs/economic-intelligence/2013/01/11/the-us-must-challenge-chinas-accounting-standards

TheMoneyGeek thanks Bob Veres, publisher of Inside Information for this guest post.

Understanding the Fees Associated With Your Retirement Plan

I hope you’re enjoying a safe and fun Memorial Day weekend as we remember those who sacrificed with their lives. We sincerely appreciate the service and sacrifices the women and men of the armed forces make every day to help keep us safe.

There’s a little secret associated with your workplace-sponsored retirement plan. Most participants think their plan is free — that it doesn’t cost them anything to join, contribute, and invest. Unfortunately, that’s not entirely true.

While employees typically aren’t charged any out-of-pocket costs to participate in their plans, participants do pay expenses, many of which are difficult to find and even more difficult to calculate. New regulations from the Department of Labor (DOL), which oversees qualified workplace retirement plans, should make it easier for participants to locate and comprehend how much they are paying for the services and benefits they receive.

Here’s a summary of the information you should receive.

1.     Investment-related information, including information on each investment’s performance, expense ratios, and fees charged directly to participant accounts. These fees and expenses are typically deducted from your investment returns before the returns (loss or gain) are posted to your account. Previously, they were not itemized on your statement.

2.     Plan administrative expenses, including an explanation of fees or expenses not included in the investment fees charged to the participant. These charges can include legal, recordkeeping, or consulting expenses.

3.     Individual participant expenses, which details fees charged for services such as loans and investment advice. The new disclosure would also alert participants to charges for any redemption or transfer fees.

4.     General plan information, including information regarding the investments in the plan and the participant’s ability to manage their investments. Most of this information is already included in a document called the Summary Plan Description (SPD). Your plan was required to send you an SPD once every five years, now they must send one annually.

These regulations have been hailed by many industry experts as a much-needed step toward helping participants better understand investing in their company-sponsored retirement plans. Why should you take the time to learn more about fees? One very important reason: Understanding expenses could save you thousands of dollars over the long term.

Calculating Fees and Their Impact on Your Account

While fees shouldn’t be your only determinant when selecting investments, costs should be a key consideration of any potential investment opportunity. For example, consider two similar mutual funds. Fund A has an expense ratio of 0.99%, while Fund B has an expense ratio of 1.34%. At first look, a difference of 0.35% doesn’t seem like a big deal. Over time, however, that small sum can add up, as the table below demonstrates.

Expense ratio Initial investment Annual return Balance after 20 years Expenses paid to the fund
Fund A 0.99% $100,000 7% $317,462 $37,244
Fund B 1.34% $100,000 7% $296,001 $48,405

Over this 20-year time period, Fund B was $11,161 more expensive than Fund A.1 You can perform actual fund-to-fund comparisons for your investments using the FINRA Fund Analyzer.

If you have questions about the fees charged by the investments available through your workplace retirement plan, speak to your plan administrator or human resources department.

When considering whether to roll over your former employer’s 401(k) or other qualified retirement plan to an IRA, keep all these plan fees in mind, in addition to the limited choice of investments in most employer plans. In most cases, the large selection of funds and lower fees at most discount brokerages should tilt the decision towards rolling over your plan when you leave an employer. A fee-only fiduciary advisor can help you evaluate your options and decide whether a rollover is the best choice for you.

If you have any questions about this or any other financial matter, please don’t hesitate to contact us. We are fee-only fiduciary advisers who put your interests first. Not all advisors adhere to this highest standard.

Source/Disclaimer:
1Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so you may lose money. Past performance is no guarantee of future results. For more complete information about any mutual fund, including risk, charges, and expenses, please obtain a prospectus. Please read the prospectus carefully before you invest. Call the appropriate mutual fund company for the most recent month-end performance results. Current performance may be lower or higher than the hypothetical performance data quoted. The hypothetical data quoted is for illustrative purposes only and is not indicative of the performance of any actual investments. Investment return and principal value will fluctuate; and shares, when redeemed, may be worth more or less than their original cost.

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