exile economy

2011 Winners & Losers

2011-12-29T12:38:00.000-08:00

As a volatilefinancial year comes to a close, I thought it best to reflect on the largeimpacts to the financial landscape for 2011. So I will give you my list ofwinners and losers for the year. However,I want to take a different spin on this type of commentary by focusing onwinners & losers within 4 major topics affecting the financial universethis year.

News Networks – Those that read my blog, orwork with me on their financial planning have more than likely heard mereference the “creation of crisis” that is created by the 24-hour newsnetworks. Well, 2011 provided noshortage of crisis. Financial marketsdown one week had them proclaiming the return of financial armageddon (a la2008); with a subsequent rebound rally 2 weeks later. I often urge people to take headline newswith a grain of salt when it comes to personal finance. Financial reporters are unregulated financialpundits—meaning they can say whatever they want and they are not held to anystandard. This is not the case withthose folks who hold any investment license, but reporters fall into an exemptcategory. No wonder every week is a newcrisis. Compound that with every othercommercial on these networks focused on selling gold to the viewer, and youhave networks getting rich on selling fear.

Winners: Network Corporations Losers:Nervous viewers cashing in their IRAs to buy gold

Europe – Whencontinental Europe entered into the single currency in 1999, it seemed like afantastic idea. The prolonged issues in Europe over the last two years continueto revolve around no central decision making body to set fiscal policy for theUnion, while the European Central Banks sets monetary policy. The debt crisis in Greece was like a virusthat infected the world including Italy, Spain and France, scaring the globaleconomy. On Dec. 5, French President Nicolas Sarkozy and German ChancellorAngela Merkel called for a new European Union treaty to help curb spending inan effort to end Europe's debt crisis and save the continent's euro currency. As Europe turns (pretty much every week), USfinancial markets react with polarity.

Winners: Europe (ifthey can come up with a central policy/treaty) Losers: US Banks

Occupiers – Life isn’t fair…let’s put that outthere straight away. But when someonecomes through a college graduation to spend the next few years of their lifeunemployed, it starts to take a toll. Protracted unemployment has sapped the morale of the workingAmerican—and I believe that is what we are seeing in the Occupy protests. Meanwhile corporate profits have continued torise. One thing is for sure, companies will not invest in hiring until theyhave a clearer picture of their expenses to hire for the foreseeable future—andthat remains difficult with health care legislation still in question and nolong-term agenda for taxes.

Winners: Are thereany? Losers: Everyone (Closing of West Coastports as the ultimate example)

Polarized Washington – The failureof Congress to come to any swift conclusion on raising the debt ceilingresulted in S&P cutting the US credit rating from AAA. But with the refusal of policy makers toaddress a number of issues, it was only a matter of time. Entitlement reform, out of control deficits,tax reform—“compromise” is not in the vocabulary of any of thesepoliticians. The recent failure of the“Super-Committee” is just one more example of a year of politicalbrinksmanship. The leadership vacuum inWashington is quickly becoming a black hole.

Winners: Career politicians Losers: The next generation of Americans

It is difficult to isolate the “most importantissues” of the year when you write one of these kinds of pieces, but I believethese will have the most lasting effects on us all. The bright news for the start of 2012 is thatthe underpinnings of the US economy continue to foreshadow strength. Cheers to a happy and healthy new year toall.

Asset Location is As Important as Asset Allocation

2011-12-14T15:45:00.000-08:00

After a yearin which the Euro vacillated between survival & collapse, democracy reachedthe shores of North Africa, and Wall Street got “occupied”, one thing remainedsure & true: VOLATILITY. As I meetwith people every day, it is the ubiquitous item that is keeping people up atnight as they prepare to transition to & through retirement.

A 1991study conducted by Brinson, Singer & Beebower showed that 91% of aninvestment portfolio's performance is determined by the allocation of itsassets—meaning diversifying (& re-diversifying) your investments betweendifferent types of companies is the best way to assure long term performancegains & reduce risk. More recentlythough, the increasing complexity of economic forces and the interdependence ofglobal markets have contributed to significantly alter the investmentlandscape. The current market environment poses new hurdles: unprecedentedvolatility, economic forces putting pressure on equity markets, the prospect ofa resurgence in inflation, & rising interest rates, all compounded byunfavorable demographic trends for most of the developed world. In short, toparaphrase an old saying, in today’s investment landscape, the only certaintyis that nothing is certain.

Investors canno longer necessarily rely on traditional strategies to reach their financialgoals. As a result, traditional diversification (or Asset Allocation, as it iscalled) may not be as effective as it once was in serving investors’needs. However, the concept of choosinginvestments based on how they correlate with one another—how their priceschange in relation to each other—is still an integral part of investment planning.But asset class diversification alone may not get the job done.

What I call“Asset Location” has become just as (if not more) important as assetallocation. Asset location is aboutdiversifying across different investment vehicles to take advantage of possibletax advantages, income focus, or non-traditional investment classes. While traditional asset allocation remainsimportant for a significant portion of your portfolio, asset location can helpyou to build an infrastructure around your investment plan to help weathertimes of protracted volatility.

This is howfinancial planning benefits the investor—more specifically, it structuresportfolios by combining different asset classes and investment vehicles in anattempt to provide more effective diversification in order to combat volatility,mitigate risk, overcome inflation and provide income in your retirement years.

Please rememberthat diversification, asset location and asset allocation do not guaranteeprofit nor protect against loss in a declining market. They are methods used to help manage risk.

Super-Failure…

2011-11-29T09:06:00.001-08:00

The result of the U.S. debtceiling’s dysfunctional debate this summer was Congress’s passing of the BudgetControl Act of 2011, which created the Joint Committee on Deficit Reduction,more commonly known as the Super Committee. The committee was made up of 12members of Congress, evenly divided between the House and Senate and bothpolitical parties. Their objective by November 23 was to find ways to reducethe deficit by at least $1.2 trillion (to be spread out over 10 years).Unfortunately, they failed to do so.

Failure of thecongressional joint committee on deficit reduction likely means little chanceto make progress on comprehensive tax or entitlement reform before the November2012 election.

Now that theeconomic anchor has dropped, Washington still has to make difficult choicesthat will likely be a drag on already slow – but recently improving – economicgrowth. However, given the resiliency in Washington and Congress’s constantfocus on electability over sustainability, it would not be surprising if theyfound a way around the mandatory cuts. After all, the ratings agencies havesaid that a debt downgrade is not imminent, which could have the politicaleffect of inspiring further inaction.

Failure of thecommittee may present some economic hurdles, as it reduces the chances ofextending recent tax breaks like the payroll tax cuts that are set to expire atthe end of this year. Further, we will see mandatory cuts in entitlements anddefense to the tune of around $600 billion each. These enforcement mechanismsdo not take effect for 14 months, and how those cuts will be enacted iscurrently a bit unclear. Some members of Congress are already talking aboutreconfiguring the cuts. We should havemore clarity on where the cuts come from as we move closer to the time they areenacted in 2013. These automatic cuts were supposed to be painful enough thatthey could force agreement in Washington, but it now appears that ourrepresentatives in Congress would prefer to throw out an anchor on economicgrowth rather than tackle spending. Failure to reach a deal has the potentialto decrease GDP growth next year by nearly 1 percent, attributed primarily tothe ending of some tax breaks and not extending unemployment benefits. Failure also kindled fears about Washington’swillingness to overcome political gridlock and take the necessary steps toimprove the nation’s fiscal health.

Despitethe failure, Standard & Poor’s reaffirmed that it would keep the U.S.credit rating at AA+ after removing its top AAA grade on August 5. Moody’sInvestors Service reaffirmed its AAA rating with a negative outlook. In astatement following the super committee’s announcement that it was unable toreach a compromise, Fitch Ratings noted that it said in August that a supercommittee failure would probably result in a “negative rating action,” (likelya revision of its outlook to negative), and that a review would be concluded bythe end of this month. It is worth noting that bond investors have shrugged offthe August downgrade, as yields on 10-year U.S. treasuries stood at 2.56percent on August 5th, the time of the S&P downgrade of U.S. debt, and arenow around 2 percent.

With an economy still trying to climb out of oneof the worst financial crises in history, I believe more political leadershipwill be needed to right the economic ship.

How Should We Measure Inflation?

2011-11-16T15:09:00.001-08:00

Those readers who have heard me speak at various engagements will note that I devote a significant amount of time focusing on inflation. My argument is always in finding the correct measure. While the Bureau of Labor Statistics publishes their monthly change to Consumer Price Index, it remains to be seen how much “trust” should be put into these numbers.

Earlier in the year, the Wall Street Journal Online published a great piece on why the “official” inflation numbers are probably skewed. All of the adjustments to the calculation of CPI over the last 30 years have made CPI seem “more bearable”.

Two areas that I think are of major concern in the calculation are the principles of substitution and hedonics. Substitution simply states that when the cost of fresh vegetables creeps to high, the government calculation assumes you buy canned veggies—and thus any additional inflation on vegetables is avoided. Hedonics attempts to value a product based on the values of its underlying constituent parts—the best example is a piece of technology. CPI takes into account that if the same technology is the same today as it was three years ago, that the product has experienced negative inflation (deflation) due to the fact that the parts used in today’s model are better or more efficient. I will let you judge whether that argument has merit or not.

The bottom line is that the calculation of CPI is constantly changing, and at the suggestion of one “rogue” economist John Williams, if we still calculated inflation the way we did when Jimmy Carter was president, the official rate wouldn't be current CPI of 3.7%--it would be closer to 10%. These factors tell you how central a concern that inflation should be in the financial planning discussion.

The Impact of the “Boomer-ang” Phenomenon

2011-10-28T11:05:00.000-07:00

As I write about often in my posts, the Baby-boom Generation are right in the midst of making the transition toward retirement. As they do so, they must come to grips with the unique risks associated with this transition. But a recent phenomenon is adding a new complexity to the boomers ability to plan for the retirement financial goal. One of the realities in the era Post-Great Recession is that more adult children are expecting financial help from their parents.—in the form of a down-payment for a home, tuition payments, or in many cases a roof over their head.

There were some interesting statistics in a recent Harper's magazine article. 85% of this year's college graduates were planning to head back to live with parents for at least some time. Columbia University conducted a study in 2010 that showed 52.8% of 18- to 24-year-olds were living at home, up from 47.3% in 1970. That means that it is now more common for this age group to be living with their parents. Some of this can be attributed to the protracted unemployment we are facing on a national level. Others are trying to super-charge their savings to attempt to get ahead in saving for a home. Still others help parents in meeting monthly expenses.

The challenge (and danger) to the Boomers, is in the cases where a child living with them (or using funds ) is a significant drain on funds that were earmarked for use in retirement. While some folks may have a goal to leave a financial legacy, this is not to be focused on at the expense of running out of money in retirement. This creates a difficult psychological position for parents and is another side-effect of stutter-step recovery to the global financial crisis of 2008.

Be Prepared: Getting Ready to Get Ready for Retirement

2011-09-22T11:26:00.000-07:00

If you think about it, youwent to school for probably nearly a quarter of your life to prepare you foryour career--a big investment of time and money. But beyond just making sure we do not run outof money, it does not seem that we spend the same proportionate amount of timegetting ready for the retirement phase of life. With that in mind, I thought I would dedicate this week’s blog entrytoward creating a checklist of items to prepare for transitioning toretirement. Here are a few thoughts ongetting ready to enter pre-retirement transition years:

Debt: The 3 “No’s” ofPreparing

Borrowing fromRetirement Accounts—Accessing funds in an IRA comes with the sting of a 10%excise penalty tax, but many company plans allow you to borrow from them and“pay yourself back” over a specified time period. Sometimes these loans come withrecord-keeping fees, and you could be missing out on potential appreciation oninvestment markets.

Racking upCredit Card Debt—The interest paid to credit card companies is lost leverage incritical pre-retirement years. Savingsrate is quite important as you near pre-retirement years, and carrying balanceson credit cards not only serves as impediment to saving, but also drains moremoney through interest costs.

Accessing Equityin your Home—Home ownership is a critical key issue for the pre-retiree becauseyour home will either serve as your retirement residence, or as a large pieceof re-investable savings if you choose to sell and access built-in equity. For those people carrying large loans intopre-retirement & early retirement, this key cash-flow item could force theneed for more income sooner, or the need to downsize earlier.

Health:

Not only is it no fun being in poor health in retirement, but it can also be costly. While much of this may be out of our control due to genetics, having a healthy diet and engaging in reasonable exercise can boost general health.

Saving (Tax-Advantaged):

Pre-Tax Savings Plans—For most of us, the pre-tax retirement savings plan(401k, IRA, etc.) will provide the best tax advantage; reducing taxable income now. This is the primary place to engage in savings until you hit your limit. Pre-retirees should aim to put as much in this bucket as their budget can bear because once earned income stops, so does their ability to use these plans.
Roth IRA Saving—After you have max-funded your pre-tax savings and funded an emergency fund, funding a Roth IRA would allow those assets to compound tax free. Some people may not be able to save in a Roth due to their income tax situation.
Tax-Sensitive Savings—Saving in taxable accounts can be different to tax-deferred funds because of the requirement to pay capital gains and income tax “as you go”. Being tax-sensitive with individual securities sometimes makes sense, as does funding cash value life insurance or annuities. These choices are highly dependent on the goals set forth for these savings account

Planning (not justfinancially):

Just as having a vague idea about “what you wanted to do with your life” was a decent idea as you entered the working world, having some thoughts on what you want your retirement years to look like is also a good idea. Whether it’s travel, taking up golf, or volunteering, this will give you some idea of lifestyle, which in turn gives you some idea of income needs. Also, giving this some serious planning will help you to time your exit from the everyday workforce with what is right for you.

As I have written before, Ibelieve that the retirement transition years are the most important in settingyourself up for the rest of your life. Itis important to be ready to start getting ready to transition.

Within the Volatility: Viewing the Positives?

2011-09-13T10:30:00.000-07:00

Sometimes it’s hard to stay positive about the economy asyou watch investment markets jerk downwards, upwards, and generally dance withvolatility over a protracted period of time. When almost every headline & television news show tells us that weare headed to recession (based largely on a leadership vacuum in worldpolitics), I think it is important to also look at the economic underpinningsbeneath the noise as well.

A recent research report from Bank Credit Analyst Research –one of the world’s leading providers of global investment research since 1949 –listed a number of positive economic points that are worth noting when tryingto determine the direction of the economy:

Oil prices have fallen sharply over thepast four months. Oil isdown nearly 25% from its high in late April of $113.93. This will providerelief to consumers and, combined with a bottoming in the market when we getthere, will be a nice boost to potential economic growth.

Real bond yields have fallen toextraordinarily low levels.Since many homeowners can therefore refinance to take advantage of betterinterest rates, consumers may begin to cash-flow relief.

The Chinese economycontinues to grow, and policymakers there have a lot of ammunition to dealwith any slowing that may appear. Earlier this year, the fear was that theChinese economy was trending dangerously, as policymakers attempted to givethe people what they want in terms of economic growth to support China’s growingmiddle class. Recent policy action in China suggests that policymakersthere are moving away from a “growth at all cost” mentality to a moresustainable growth mentality.

Treasury yields are low, indicatingglobal confidence in the U.S. as a safe haven, despite the recent S&P “downgrade”. Now is a perfecttime to have the political debate on spending and taxes. The difficulty isthat, with the 2012 election cycle upon us, answers will probably not be comingforward from our leaders in Washington.We are on a low budget in the U.S.,but that doesn’t mean that fiscal reform has to be a destroyer of our economy.Sensible spending restraint and some tax adjustments can allow the U.S. economyto expand at a healthy pace going forward.

Stock prices and interest rates arecurrently so low that we do not need economic growth to justify the purchase ofequities. I do not thinkthat the stellar profits many companies reported for the second quarter is asurprise to anyone by now. It is also encouraging to note that earnings pershare can still grow in a low economic growth environment. Firms will likelyuse the earnings that they do not pay out as dividends to repurchase sharessince it is not likely that companies will continue to sit on ever-growing cashbalances if they are not investing for growth. It is likely this type ofearnings growth will add support to the markets.

The index of leading economic indicators (LEI) rose for athird consecutive month in July.Admittedly, an advance in August will be a bit more difficult to achieve giventhe recent market volatility and negative sentiment. However, Fed accommodationstill allows for a steep yield curve despite some recent flattening, whichshould provide some lift to August LEI. Unemployment claims holding in aroundthe 400,000 mark may support LEI, and that level is not indicative of a recession.

· On Wednesday, August 24, durable goodsorders blew away expectations.

o Amonthly surge in new orders for motor vehicles and parts – the best in eightyears – headlined a strong durable goods report for July. Another economicmeasure that implies that the economy may not be what it appears--or at least may not be as bad as reported by the talking heads.

· The Baltic Dry Index – the index measures the price oftransporting raw materials by sea and is often cited by economists as abellwether of global economic activity – mostrecent release revealed that it is now up 21 percent from its recent lows.Maybe those of us who think the global economy, while slowing, has notfundamentally changed are not misfits after all. While the index certainly hasits critics, in an environment where investors are beginning to price in aglobal recession, the increase in the Baltic Dry Index is one piece that callsthat view into question.

· Unemployment claims holding in around the400,000 mark may support LEI, and that

level is not indicative of a recession.

Whilethere are certainly some fundamental issues that need to be addressed in theeconomy (particularly the level of government debt in Developed countries), notall news is bad news either.

Revisiting the Efficiency of your Life Insurance Plan

2011-08-30T11:12:00.000-07:00

A common issue upon which I revisit with clients on aregular basis is the efficiency of their life insurance. Typically people will have either an oldpolicy that was taken out when they first started their career and/or aspecific amount provided by an employer. While updating your coverage to a new policy can sometimes lower yourcosts with greater amounts of coverage because of the changing nature ofinsurance company mortality tables, often the original intention of theinsurance has changed for the person. For me, the question of reviewing their coverage always starts with the“Why?” question. Why did you initiallyset up this coverage?

In my estimation, the main reasons for having life insuranceprotection in place are as follows:

Income Replacement—purchasing enough coverage that would provide your heirs or dependents with enough money to replace the income you would have provided during your working years. From a cost efficiency standpoint, this can often be accomplished through buying a term policy with a term that matches the number of working years remaining before retirement—with the idea that you are using the cost savings to fund retirement plans.

Estate Tax Mitigation—purchasing permanent insurance coverage (sometimes via an irrevocable life insurance trust) to mitigate estate taxes that will be owed by your beneficiaries upon your passing. While this type of plan should be orchestrated with an estate planning attorney, it can be helpful when estates are in excess of the government’s estate tax threshold (currently estates valued at $5MM).
Tax-Favorable Savings Vehicle—For those people who are max funding retirement savings plans, Roth IRAs, personal savings, and emergency funds, a permanent life insurance policy could be a good way to grow cash value in tax-favorable way. This typically is not a cost-viable plan until these other types of savings vehicles are being maximized.

I believe it is important to be careful with the overallcost of your life insurance plan. Do notmake the premium cost an impediment to other savings vehicles (especiallytax-deferred savings potential). Whenlooking particularly at permanent life policies, be careful not to make it toolarge of a cash-flow item in the retirement budget. It is always best to review your lifeinsurance plan to be sure that it fits with the rest of the elements in yourfinancial plan an overall wealth management.

Rollercoaster or Train Track?

2011-08-11T14:57:00.000-07:00

I have sat down intently several times over the last 7 days to write an entry that addresses the volatility in the headlines. First topic was the lack of impact that the debt ceiling deal had on markets. Next was flight to US Treasuries despite the downgrade of US credit rating by S&amp;P. And then was the continued influence of the European banking problem that is potentially pouring over into US financial companies.

In the end I decided to shelve all of that to highlight the difference between simply investing versus investing with a plan backed up by infrastructure. This kind of day to day volatility can definitely churn your stomach like a rollercoaster, as investment managers struggle to sift the data and find a support level in the investment markets. However your exposure to the volatility should differ based upon your time horizon and overall appetite for risk.

The Phases of Investment Exposure

While the traditional savings paradigm is a simple save/accumulate to distribute illustration (seen to the right), I would argue for several phases along the way:

Distribute, Protect, &amp; Grow—Having a plan for efficient and consistent distribution of assets is critical to meeting your expense needs; however more than likely you will still need some tilt for future growth because of the extended timeframe of retirement

Save &amp; Grow--early in saving for a long term goal like retirement, where you may have the ultimate stomach for short-term volatility on a significant portion of your savings.
Save, Grow, &amp; Protect—As you start to amass a significant savings for your goal, beginning to build a protection infrastructure around your savings becomes important. This may involve using different investment vehicles and alternative asset classes that are not correlated with traditional liquid investments.
Protect &amp; Grow—At some point in the cycle, protection trumps growth as you get closer to needing to tap funds for retirement.
Distribute, Protect, & Grow—Having a plan for efficient and consistent distribution of assets is critical to meeting your expense needs; however more than likely you will still need some tilt for future growth because of the extended timeframe of retirement.
Distribute, Protect, &amp; Transfer—While not the primary concern for retirement planning, efficient wealth transfer should be addressed once you have come through the danger zone of pre-retirement and early retirement years. This may involve re-checking beneficiaries on retirement accounts, and tending to trust matters for after-tax assets.

Using All of the Asset Classes

When volatility spikes your exposure to alternative asset classes could prove to be a nice anchor for your savings. While these investments require a suitable income and net worth because of their liquidity &amp; risk profile, vehicles such as non-traded real estate investment trusts, equipment leasing partnerships, and business development companies could provide consistent income that is not correlated to the day to day volatility of investment markets. For those that this type of planning is suitable for, I recommend that the alternative asset class sit right along with equities, bonds, and cash, and be between 5-20% of your allocation (dependent on which phase of retirement transition you are in).

Consistent Income

Lastly, the biggest worry about the fluctuations in your retirement account ultimately goes back to the accounts ability to produce income for you on a consistent basis in retirement—either through income generating investments or through liquidation of assets. It is for this reason that you should revisit your income plan on a regular basis during pre-retirement and early retirement years. This includes looking at Social Security projections, pension plan provisions (and the adjustment to your spouse’s income if something were to happen to you), and then looking at the efficient distribution of your savings so that it lasts through your entire retirement.

Just like a good business plan is written down, your retirement &amp; financial plan should be codified somehow so that you can review it as necessary, but also so that when volatility re-enters investment markets (which it inevitably does) you can feel confident that you have an infrastructure in place to weather the dips.

Alternative investments are subject to significant risks and therefore, are not suitable for all investors. When considering alternative investments, you should consider various risks, including the fact that some products use leverage and other speculative investment practices that may increase the risk of investment loss, can be illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees and in many cases, the underlying investments are not transparent and are known only to the investment manager. With respect to alternative investments in general, you should be aware that returns from some alternative investments can be volatile and you may lose all or a portion of your investment.

Between the Lines of the Debt Ceiling Agreement

2011-08-04T14:45:00.000-07:00

The deal to cut more than $2 trillion in government spending over the next decade and extend the government's ability to borrow until at least 2013 has been signed, sealed, and delivered. So what was all the fuss about? And what was really gained by this polarized government brinksmanship?

The debt ceiling debt debate over the last few months achieved one unintended goal. It surfaced a sleeper issue with the American public to raise the importance of our country’s out of control debt and unsustainable entitlement programs. Politicians on both sides of the aisle have talked about addressing the problem for a long time, but this has forced the country to face this problem head-on.

The agreed upon bill will cut spending slightly in the early going; which is certainly better for the fragile state of the recovery. The spending cuts will begin with just $25 billion in 2012 and $46 billion in 2013. This is the tightrope that legislators walked while attempting to form this bill, as economists weighed in that cutting any spending could reduce US GDP (a measure that is already quite low signaling potential sluggish economic growth).

While everyone seems to agree that government debt and spending are out of control, agreement on where to make significant enough cuts to actually impact debt remains unseen. Major expenditures of Medicare and Social Security, as well as national security seem to be areas that the average American does not want disturbed, but these also remain major weights to the ballooning debt. It may be clear that we need and want smaller government, but achieving that may be more painful than we want.

The next step in the debt debate will be the appointments made to the bi-partisan super-committee in Congress, and what potential plans can be agreed upon heading into a presidential election year.

The Context for the Debt Debate

2011-07-20T17:39:00.000-07:00

History of the U.S. Debt Limit1

The last time Congress raised the debt ceiling was in February of 2010. At the time, it was increased by almost $2 trillion.
The fight in Congress over the debt ceiling and fears of a government shutdown are all over the airwaves, so I thought I would touch on a few aspects of the debate, and frame the context for the battle currently being waged in Washington.

History of the Debt Ceiling

The debt ceiling first came into existence in September of 1917. At the time, Congress authorized the issuance of $7.5 billion of bonds and another $4 billion of certificates of indebtedness under the Second Liberty Bond Act.

If we take that $11.5 billion dollars, adjust it for inflation from 1917 through 2011, outstanding debt would have increased to just over $193 billion dollars. The current debt limit exceeds $14 trillion. Washington’s “love affair” with debt has not only grown, it has grown exponentially since 1982.

Looking at the statistics of how US government debt has grown historically, I think it is important to look at two key points:

1. The debt ceiling did not hit the “magic” $1 trillion mark until 1982… less than 30 years ago.

2. Increases in the debt ceiling are quite common. Over this 94 year period since 1917, the debt ceiling was revised 102 times!

Also of interest, Congress has NEVER refused a President’s request to increase the debt ceiling, which is part of the current problem.

A second way to look at the debt ceiling is to look at it in relation to the nation’s Gross Domestic Product (“GDP”); or the market value of all final goods and services produced within a country in a given period. Looking at all available data on this comparison dating back to 1929, we can see that the all-time high for the debt limit to GDP occurred right after WW II when it exceeded 120 % of GDP. If Congress votes to increase the debt ceiling again this year, the debt limit could once again reach 100 percent of GDP. While the U.S. may not be fighting a world war this time around, it is borrowing money like it is.

Options for policy makers to bring debt levels down and cure its addiction to debt-related expenditures are to cut spending, raise taxes, or both.

Why Does the Debt Ceiling Exist?

In a nutshell, the debt ceiling is Congress’s way of setting a limit on how much the U.S. Treasury can borrow. Our Constitution presents Congress with the task of managing both spending and borrowing. When Congress’s appetite for spending exceeds available funds, the government borrows money via U.S. Treasury securities.

While the debt ceiling was proposed with good intentions, it has done little to stop our nation’s exponential rise in debt. More recently, it has become a source of political grandstanding, as policy makers attempt to “stand tall” against a debt problem of their own making.

How Could the U.S. Lose its Aaa/AAA Credit Rating?

According to the credit analysts at Standard and Poor’s, the rating agency would downgrade the quality of U.S. debt for the following reasons:

1. If Congress and the administration fail to come up with a “credible solution” to the U.S. debt and show no signs of agreeing on one in the foreseeable future.

2. If the United States misses any scheduled debt service payments, in which case S&P would issue a “selective default,” meaning a default has occurred on some bonds but not others.

3. If S&P concludes that the debt debate calls into question policy makers willingness and ability to timely honor the U.S. scheduled debt obligations.

How Does the Stalemate Get Addressed?

I think investors and Americans in general, would very much like to see a bold resolution to the current debt debate. In the end, though, a mini deal that satisfies neither side will probably get through and the debt ceiling will be increased. For the optimists, a grand bargain on spending, taxes, and debt will have to wait until after the next election.

From an investment standpoint, for the markets to retain their composure, they do not so much need a solution to the “crisis” as they need more certainty about the direction policy makers will take over the next few years. Stay tuned as the debt debate rages on.

Source 1: U.S. Treasury

Source 2: U.S. Treasury, Bureau of Economic Analysis

Source 3: Jason Geopfert - Sundial Capital Research, Inc.

Slowdown, Meltdown, or Short-term Correction?

2011-06-20T12:17:00.000-07:00

Even in times of minor correction, we as individual investors feel the jitters of volatility. I always compare the emotion tied to investment for the individual to the feeling of being on a rollercoaster—markets go up and we have that feeling of anticipation and exhilaration, and as they fall it quickly turns to terror. It can be very hard to divorce one’s self entirely from the emotional side of investing.

While the individual views investment markets like a rollercoaster, institutions look at it like a railroad—with opportunities on one side of the tracks and risks on the other—and they aim to ride right down the middle of the track leaning toward opportunity when they can, and away from risk as needed.

The disciplined approach of the institution can be a tough one for the individual to mimic because of the emotions that play into buying and selling. Typically the euphoric feelings at the height of the market make the individual clamor for more, while the lows trigger emotions towards the exit. This leads to the “buy high, sell low” trap of emotional investing. Institutions take the opposite view; tuning out the noise, and looking for opportunities at the low, and exit strategies at the high.

So, how do we attempt to read through the lines of this current pull-back on the markets? Let’s look at the economic data in May that potentially foreshadowed a slowdown

“Only 54,000 payroll jobs were added, auto sales declined significantly, retail sales were sluggish even excluding autos, growth in manufacturing slowed sharply, house prices continued to decline to new post-bubble lows (as of March), and home sales slowed.” (according to Calculated Risks Finance & Economics blog). Some of these issues could be attributed to interruptions in supply-chain in Japan following the earthquake (influencing auto sales), & rise in oil prices tied to geopolitics in the Middle East (influencing the price at the pump).

Monetary supply worldwide is on a tightening trend; which isn’t necessarily a bad thing. Responding to high inflation, both the Chinese and Indian banks tightened policy, which may slow growth, but it does not look as though they have gone too far to cut off potential growth completely.

Two political showdowns could play significantly on the continued upward trend of investment markets:

The first being the European Union’s move on Greek debt. If some form of restructuring is not rolled out, Greece could default and exit the Euro—a move that would not be good for any country participating in the single currency. Domestically, the argument over the debt ceiling continues to be dicey; with one side refusing to cut spending, while the other refuses to raise taxes. Without action, the US government could find itself in technical default—though I do not believe politicians would make that type of dogmatic mistake.

Despite these risks, it bears to keep in mind that we are coming out of a steep recession fueled by a credit crisis, and after almost 2 years of positive growth, a correction at some point is inevitable. The economic data in the next couple of months will be telling as to whether we have a sustained pullback or if some of the shorter-term issues have been resolved—namely the slowdown in manufacturing fueled by supply chain issues. Taking an institutional approach to investment decision-making is not easy, but the ability to stomach normal corrections can prove to be the difference in meeting financial goals.

From an Investor’s Prospective: Understanding the disconnect between Wall St. & Main St.

2011-06-01T09:28:00.000-07:00

Many people continue to ask how the stock market can have recovered significantly from the maelstrom of 2008, while the economy and employment still have the feel of “recession” to them.
The short answer is that the stock market is primarily focused on corporate profits. Hence, the stock market has done quite well over the past two years, a period of time when corporate profits have “surged” but the U.S. economy as a whole has merely “firmed up.”

The somewhat longer answer is that there is a very large difference between what drives “Main Street,” (the U.S. economy) and what drives “Wall Street” (the stock market). The table below highlights some of those key differences:

Source: BofA Merrill Lynch U.S. Equity Strategy

While your investment accounts may be enjoying the recovery in corporate profits, at the same time you may personally be feeling the effects of recession recovery (sluggish employment, higher than normal inflation, etc.). Hopefully, the above chart will help shed some light on the gap between recession/recovery “feelings” and what Wall Street may be “seeing.”

Separation Boom

2011-05-26T11:07:00.000-07:00

While divorce rates over the past 2 decades has decreased, for couples over age 50 (particularly baby-boomers) it has just about doubled according to the National Center for Family & Marriage Research at Bowling Green State University.

The implications for couples divorcing later in life are much deeper for several reasons. Couples typically have accumulated more wealth by age 50, 60 or even 70, and this presents a greater degree of complication in dividing that wealth. Details such as long work history, real estate ownership, retirement account disparity, and life insurance can create a complicated mine-field for equitable division of assets.

Valuing Retirement Accounts at Divorce

One common mistake that is made with retirement accounts is that they are typically over-valued because the taxation is not considered. When looking at an equitable split of assets, the retirement accounts should be factored into the couple’s balance sheet with an after-tax value—sometimes as low as 65% of the current market value of the account.

Protecting Cash-Flow

If a divorcing spouse is awarded an alimony payment to aid in monthly income, the spouse who is set to be receiving alimony should take out a life insurance policy on the paying ex. Trying to plan for payments from an ex-spouse gets more and more risky every year after age 50, as the chance of them becoming ill or passing away prematurely increases with each passing year.

Because couples who are married longer than 10 years are entitled to Social Security benefits from the ex-spouse, divorcing couples will want to pay attention to the Social Security entitlement of their ex-spouse. Someone who earns less than their ex-spouse would want to claim the higher-earning spouse’s Social Security retirement benefit because it will be a higher amount. This is only the case so long as the claiming ex remains unmarried. If a divorcing spouse has a claim to your benefits, you should factor that in to negotiations on the dissolution of the marriage.

Protecting Assets for Heirs

To ensure that assets pass to heirs as originally intended, it sometimes makes sense to set up asset protection trusts upon the division of community property. This type of planning could protect divorcing couple’s children from the complications of remarriage, or from community property claims of their own divorces.

Divorce is a major life transition event, and needs careful consideration. For divorcing boomers, it can have significant impact on retirement feasibility and wealth transfer. Be sure that you understand the future repercussions of any settlement that you are structuring.

Watching the “known unknowns”

2011-05-10T13:49:00.000-07:00

Equity markets seem to be struggling with “known unknowns”—that is to say we know there are some things we do not know—ending a volatile stretch of almost daily ups and downs for the market, creating a “risk on-risk off” tennis match for investors.

Here are a few of the questions that the market seems to be grappling with:

Known: Chinese import growth is slowing versus export growth
Unknown: Is this slowdown a sign of greater issues in Chinese growth leading to softer demand for outside goods and commodities? Or, is it indicative of high inventory levels in the country and demand will return?

Known: Commodity prices are softening
Unknown: Is price softening a result of slowing demand in China and other emerging markets, or a slow leak in a commodity price bubble?

Known: U.S. Dollar is rebounding
Unknown: Is it better for U.S. manufacturers to enjoy the benefits of exporting goods with a weaker dollar or for U.S. consumers to experience greater purchasing power with a stronger dollar?

Known: Consumers are feeling the pinch of higher energy and food prices with the April Consumer Price Index (CPI) rising 3.2 percent, the most since October 2008.
Unknown: Does this increase translate into broad long-term inflation across sectors or will consumers adjust to the new environment with little relative pain?

Time will sort out these unknowns and determine market leadership going forward. These unknowns must be factored in to the risk analysis for investors.

6 Items Keeping Boomers up at Night

2011-04-25T10:04:00.000-07:00

While you can make the argument that investment markets have returned to normalcy over the last 12 months, there are still major concerns for those who are currently going through or about to go through the transition to retirement. Here are six issues of primary concern for the pre and early retiree

Inflation

According to a labor Department report in December, the cost of living only rose 0.1 percent last year. Looking at the price of various commodities, paints a very different picture. The Federal Reserves current round of quantitative easing has sparked a debate amongst politicians about its longterm affects on inflation. Sustained annual inflation about 3% could have a significant affect on a retiree’s purchasing power.

Parent-Child Sandwich

A prolonged recession has put some established boomers in the position of needing to support aging parents and unemployed children. Reports show many twenty-somethings have moved back in with parents in an effort to curb cost of living. According to 2010 Census Bureau data, 5.5 million Americans aged 25 to 34 live with their parents, up 38 percent from 2000. Last Novembers unemployment rate for people aged 20 to 24 was 14.8 percent.

Statistics show the same at the other side of the generational divide. A 2009 survey by the National Alliance for Caregiving showed 21 percent of caregivers for older adults said the economy had forced them to live together in the previous 12 months. An earlier study by the group found, on average, that families caring for older adults spend 10 percent of their income to do so.

Gold Bubble Bursts

Are Boomers going from bubble to bubble to bubble? Boomer investors irrational exuberance began in the tech sector in the late 1990’s; moved to a more tangible asset class in real estate in the early 2000s; and has poured into commodities (a traditionally volatile asset class) in the last few years. The price of gold is up more than 170 percent since the beginning of 2006 and hit a record of $1,431.25 an ounce last Dec. 7. Billionaire George Soros has predicted that the gold rush can't last, calling the precious metal "the ultimate asset bubble" at the World Economic Forum last January.

Bond Bubble Bursts

Speaking of bubbles, the other asset class that has seen a flood since the financial crisis in 2008 is bonds. Traditionally seen as a more conservative instrument than equities, bonds may be at the center of a perfect storm considering that interest rates are at historic lows. The relationship between interest rates and bonds is such that as rates rise, bond principal values fall.

Not Saving Enough

A 2010 Employee Benefit Research Institute survey shows 13 percent of workers aged 55 or older are "very confident" that they have enough money to live a comfortable retirement--down from 27 percent in 2000. Only 53 percent of older workers have actually tried to calculate how much money they will need in retirement, the survey said. The options for slow-savers are few: They can save more, work longer, or cut back on their spending. The EBRI survey found that 42 percent of older workers don't plan to retire until age 66 or later, up from 20 percent in a 2000 survey. Sticking one’s head in the sand will surely compound the situation. Figure out your capital need and hash out a savings plan sooner rather than later.

Too Much Company Stock

Still a problem I see with prospective clients working for well-established large corporations is the over-weight in company stock in their retirement plans. According to the Profit Sharing/401k Council of America, 18.1 percent of retirement plan assets last year were invested in employer stock. No matter what you think you know about the company you work for, there is still a prudent amount of exposure to have of your employer’s stock.

While this all seems like doom and gloom for the transitioning retiree, these are risks that can all be reduced or eliminated. While the risks and planning principals change during this part of your financial life, you can put an infrastructure in place to get through it.

Thoughts on measuring risk in an investment portfolio

2011-04-08T14:07:00.000-07:00

Often when I meet with prospective clients to review their retirement holdings, their portfolio’s risk is measured in a ratio of equities-to-fixed income investments. This has been the traditional way to measure the overall risk of a portfolio, with the weight moving from the equity side to the fixed side as a client ages.

While this may be a simplified way of expressing risk, it may also be just that—too simple. I would make this argument for 2 reasons:

• Some bonds may be more risky that some stocks. It stands to reason that a debt instrument from an emerging market company could conceivably have more risk than an established dividend paying equity investement in the US domestic market

• Risk Changes over time. Volatility in the Emerging Markets asset class certainly is different today than it was 10 years ago, just as the risk of Real Estate or commodities has been an evolving factor over the last couple of years

To account for the changing risk levels regular and consistent analysis should be conducted. This process results in portfolios designed to take advantage of more attractive opportunities for investment while maintaining risk levels established by the analysis. It also allows for a portfolio to adapt as risk changes—of particular value when volatility spikes in the market for the pre-retiree investor.

A portfolio’s stock-to-bond ratio is greatly affected by whether the risk in a portfolio comes from a small allocation to emerging markets, a sizable allocation to high-yield bonds, or a moderate overweight of the equity allocation. However, an adaptive risk analysis can measure these options and determine to what degree a client’s risk tolerance can handle each.

The Dangers of Trading Headlines

2011-03-21T10:01:00.000-07:00

In 2007, author Nassim Taleb wrote his very interesting book, "The Black Swan," the theme of which is that the impact of rare events is huge and highly underrated. The idea behind the entire premise of the book is that these events are rare, In previous entries I have opined about the dangers of 24 hours on investment markets. The media have a profound affect on behavioral finance, and it is our individual ability to filter the media which potentially makes us successful investors.
With the recent events in the Middle East, and the earthquake & tsunami in Japan, combined with the financial events/turmoil of the past few years, the term “black swan” is being kicked around more and more, and the label is being placed on many things. I even read an article noting that “black swans were becoming a more common occurance.” This is just irresponsible journalism.

There are geopolitical, natural, social, & financial “events” that happen every year, and it is in the ability to manage those risks that we see financial successes or failures. To name a few of these events over the past several decades:

2000s

Oil Shocks (2005)
Corporate Accounting Scandals (2002)
9/11 (2001)

1990s

Tech Bubble Bursts (1999)
Bosnia-Balkan Crisis (1995)
War in the Persian Gulf (1990)

1980s

Savings & Loan Crisis (1989)
Chernobyl (1986)

1970s

3 Mile Island (1979)
Watergate (1974)
Vietnam War spreads to Cambodia (1970)

If pressed to, I bet that I could use this loose description of a black swan to name an event every year going all the way back to the 1920s. The point of Mr. Taleb’s book (and it is a great read), is that we cannot mentally grasp or predict the type of event that a black swan is; and therefore cannot plan for it.

As individual investors, it is sometimes difficult to divorce or emotions from our investment decisions. “Media Events” can contribute to these poor decisions. Consequently, we often give in to the emotion of selling low and buying high.

Bull still feels like a Bear—2 years on from the bottom…

2011-03-11T11:14:00.000-08:00

On the 2-year anniversary of the current bull market, it may not be a bad time to take a step back and look at where we were not too long ago. What may have felt like financial Armageddon, turned to a sustained market rally, and financial markets are back above the mark they were prior to the crisis.
In probably the most tumultuous time in the market since the start of the Great Depression, it was very difficult to tame emotions for some as a number of investors dumped equities at or near the bottom and shifted to fixed-oriented securities. The reality is that many probably should have never had that much risk exposure anyway.

Over the last 2 years, pundits & money managers have tried to define the “new normal.” Others have declared death to the “buy and hold” investment strategy. The truth is that those who did not panic have recovered much of what they lost—and done so with less volatility. While “buy and hold” may be an okay investment strategy during the accumulation phase of your life, a unique set of risks has always existed during pre-retirement and early post-retirement. This is what necessitates a different investment strategy—not the undefined “new normal.”

Perhaps the reason why this bull market still feels like a bear to many of us is the fact that the 2008 financial crisis was such a trauma, and that some are waiting for another Lehman Brothers to rear its head. Volatility still feels high, though the VIX (the index which measures volatility) has been much lower. The market saw many swings in 2010, which were influenced by headline trading (Euro issues, Gulf oil spill), but they were mildly one way, and then mildly the other…miss one of the mild swings upward and you may have significantly affected your overall success for returns for the year.

While the world gets more complex and economies grow more inter-dependent, the difficulty in staying committed to an investment strategy through emotional ups and downs becomes the biggest challenge to those that need investments growth, but cannot stomach swings.

2011 Oil Shocks on the Way?

2011-03-08T14:32:00.000-08:00

The price of oil is up 25% in two weeks, while production is down only 1% due to the Libyan instability issue. So far it seems to be an issue of “the price of oil mirroring headline.” But what will higher oil prices mean for the global economy?

The simplest notion is that higher oil=higher petroleum at the pump= less money for the consumer. Right now, consumer spending is an important part of the domestic economy.

A big questions is what the reaction from government bankers will be. Those at the European Central Bank have hinted that they will raise interest rates in the short term. Bernanke and the Fed have indicated they will keep the status quo for now. This is a real balancing act as inflation worries hang in the balance.

If production does decline due to a protracted unrest in Libya or “contagion” across the Middle East, some have suggested dipping into the country’s oil reserves to ease prices at the tank. It is unclear what real affect this would have on price, because of the emotional affect of using up reserves. If price is already up on a 1% drop in production, what would lowering reserves do to the attitudes toward oil?

Reforming Property Ownership

2011-03-01T12:10:00.000-08:00

With 25% of all mortgage holders in the US owing more on their notes than their homes are worth, and distressed transactions account for 66% of sales in CA, it is important to step back and ponder the significant role that emotion plays in the largest segment of most people’s net worth. Do we have a healthy relationship with property ownership in this country?

If you look at the property boom that spawned from the “dotcom bust,” we see the collective heard shunning fantasy business plans and instead opting for “hard assets.” But there are a few inherent issues with investment in real estate that make it a potentially dangerous asset class:

As mentioned before, Americans have more of their wealth in Real Estate than any other asset
Property and debt go hand in hand—and the banks that secure that debt set aside less money for those loans because of the property as a hard asset as collateral for the loans.
As property values increase, homeowners have the opportunity to re-leverage debt by accessing equity (There was a doubling of mortgage debt in the US from 2001 to 2007).
Property is not only an inefficient market, but also an inefficient asset class—meaning that you cannot offload pieces of it like you could with an equity portfolio (e.g., you cannot sell off your kitchen, but you could dump an underperforming large cap stock); illiquidity can strand owners in their properties even when it is not a negative equity situation; and the market for the same four walls will be different in different locations (arbitrage?)

Given all of the danger, let’s not get the idea that owning a home is a bad idea, however creating government subsidies and programs to promote “irresponsible” home ownership may not be a good one. The systemic issue seems to be the amount of debt that home buyers are allowed to take on. The Swedish government set a maximum loan to value of 85% last year for mortgage ratio; and that is a step in the right direction.

Whether ending the 30-year mortgage device, or phasing out income tax deductions for mortgage interest, or setting more stringent standards for first-time buyers & family businesses (where all household income is reliant on one business) makes the most sense is hard to say.

Baby Boom soon to be Retirement Tsunami

2011-02-25T15:15:00.000-08:00

The first of the 78 million Americans of the baby boom generation (individuals born between 1846 & 1964) start turning age 65 in 2011…an age which has been considered “normal” retirement age. As this increases over the coming years, so will the retirement finance burden.

A couple of interesting statistics about entitlement programs:

1. The number people enrolled in Medicare will grow from 47M to 80M in a mere 2 decades.

2. Enrollment in SS will grow from 44M to 73M during same time frame.

At the same time the American workforce will grow more slowly, therefore the taxes to finance these benefits will significantly decrease.

Compounding the baby boomer retirement issue is the findings published in a recent article in the Wall Street Journal. The savings amassed in the 401k plans of boomers falls well-short of their retirement funding needs.

“The median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement, according to data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston College for The Wall Street Journal.” –WSJ

This fact could be easily explained away by saying that boomers simply did not save enough for their retirement years, but I would argue that part of the issue can be found in the design of the typical 401k plan which is a great accumulation tool in early savings years, but may not have protection features as participants near retirement age.

The other retirement threat for boomers that has not been bantered about in the media is the risk of incurring a major medical event in retirement—the cost of which could significantly erode retirement savings. What happens once savings is entirely depleted and you still need long term care/skilled nursing? Medicaid may kick in to cover these costs…another entitlement program which is probably under-funded.

So how should boomers prepare for the coming retirement tsunami? The years immediately preceding retirement need a careful strategic approach that differs from previous accumulation years. Managing investments for protection becomes important. Price out the cost of a long term care insurance policy early, as the cost continues to grow as you get older Find an advisor who can help you manage these issues in concert.

Municipal Securities next?, Maybe Not…

2011-01-31T10:00:00.000-08:00

With headlines blazing “Arma¬geddon,” the normally sleepy municipal bond market is finding itself center stage in the current “name that crisis” championship.

In seeing the sovereign debt crisis spread across Europe last summer, many of the talking heads in the media have begun to pick on struggling states and municipalities as the potential next proverbial shoe to drop. But how likely is it that they would default on their debt obligations.

In my recent conversations with a portfolio manager, an interesting tidbit came forward which I found interesting with regard to municipal securities:
“It is important to focus on higher-quality issuers that provide services that are essential to their communities. This “recession-proof” revenue stream from projects that are critical to the state’s progress, such as hospitals, education, transportation, and utilities, is where investors need to concentrate in this environment. This means carefully-selected essential service revenue bonds should currently be the foundation of a municipal portfolio and likely provide the most stability. Government obligations (“GO”) bonds still face significant challenges with budget constraints and public employee benefits producing high price volatility and the potential for downgrades. Finding issuers with little to no underfunded pension obligations and strong reserves will be challenging, but this is where stability will lie in the GO space.”
The take-away here is that not all Munis are created equal and the pros who are good at managing these types of portfolios should still be able to separate the wheat from the chaff.

The 5 Biggest Surprises from 2010

2011-01-14T14:54:00.000-08:00

#1 No Rise in Interest Rates

With interest rates at record lows to start the year, most investors probably believed we were in for at least a minor increase. It looked like rates would tick up, but with sovereign debt worries in Europe peaking at mid-year in Greece, the Fed probably kept rates low to avoid a potential double-dip recession. Couple that with another round of Treasury purchases, and rates hit a low at 2.4 %. But overall, it was a decent year for bond investors, with modest gains across most high-quality bond categories, and even larger returns to riskier areas, such as corporate high yield and emerging-market debt.iii

#2 European debt crisis could bring us down

The spring of 2010 brought the potential for a sovereign debt crisis across the Euro zone. Issues kicked off in Greece as government bonds spiked above 13%, causing the currency to lose significant value, and thus raising fear and volatility throughout global financial markets. A $1 trillion rescue fund was created by the European Central Bank to address future similar problems, and the volatility was quelled temporarily. Ireland became the next problem a few months later, and even later in the year further discussion about Portugal and Spain began. Despite the fact the euro is the world’s second most-important currency and the Euro-zone’s economy accounts for 15% of global output, the region’s sovereign debt turmoil did not derail the global economic recovery. European sovereign debt uncertainty may well continue in the year ahead, but the good news in 2010 was the showing of the world economy’s ability to shrug off these types of events.

#3 U.S. stocks remained unloved by mutual-fund investors

With the S&P 500 up nearly 90% from the March 2009 lowiv, history suggests that investors would be flocking to jump into the next potential bull market. The statistics show that through October, mutual fund investors pulled a net $64 billion out of U.S. stock funds during 2010, and continued to feed bond funds instead. Are we also seeing the feeding of another bubble…this time in bonds? Perhaps it is the more conservative mindset of investors, or the aging population seeking income-oriented investments, but I expect interest in the bond market to continue into 2011. With stocks having made a serious comeback from crisis lows, I also expect equity funds to garner some more attention than in 2010.

#4 Ironies abound in “2-speed”, imbalanced world

It is widely acknowledged that developing economies, such as India and China, have grown much faster than developed nations and are expected to do so for some time into the future. In a world full of contrasts and imbalances, that was just the beginning. The Euro-zone dichotomy included a periphery where Spain’s unemployment rose above 20%, and Ireland and Greece slumped back into recession, while Germany’s economy

rode blockbuster export growth to a near-two-decade low in unemployment.vi Commodity markets flourished, with agricultural commodities and copper returning to mid-2008 record levels, while core inflation rates in the U.S. hit 50-year lows. Within the U.S. economy, the residential housing market languished as sales slumped and foreclosures bulged, but corporate capital spending was brisk. Unemployment remained stubbornly high near 10%, but consumer spending picked up steam throughout the year.vii Corporations borrowed at record low rates, but more than 150 banks failed in 2010, and getting a residential mortgage without a high credit score was a futile effort.viii

#5 Gloves come off in currency debate

The Fed’s latest round of Treasury buying called quantitative easing or QE2, had set off some worldwide currency tensions. Some countries finance ministers have argued this as an effort by the US to devalue the dollar. Right now, no major country wants their currency to strengthen in an effort to keep exports of their goods attractive. I expect currency to play an ongoing role, and China’s ongoing valuation of the yuan will be central

Boring…but, a solidly average year

After a calamitous 2008, and a huge rebound in 2009, I picked 2010 to be important for getting us back to a “normal” market. A modest double-digit return on financial markets is a nice average year, and it could not come at a better time after the violent volatility of the previous market cycle. 2010 reaffirmed that you can’t predict market behavior by looking at the daily headlines.

[i] Greece’s 10-year bond yield hit 13.17% on 5/7/10. Source: Financial Times,

Haver Analytics, FMRCo. (MARE) as of 12/13/10.
[ii] On April 5, 2010, the 10-year Treasury yield hit 4.01%, then fell to 2.41% on
10/6/10. On Dec 2, 2010, the 10-year Treasury backed up to 3.01%. Source: Federal
Reserve Board, Haver Analytics, FMRCo. (MARE) as of 12/13/10.
[iii] All references to asset classes in the article and their respective U.S. dollar
returns (%) for 2010 are as follows (unless otherwise noted): Large Caps – S&P
500 Index (13.4%); Small Caps – Russell 2000 Index (24.9%); Developed Country
Stocks – MSCI EAFE Index (7.4%); Emerging Markets – MSCI Emerging Markets
Index (16.2%); High Yield – Bank of America Merrill Lynch U.S. High Yield Master
II Index (14.3%); Investment-Grade Bonds – Barclays Capital U.S. Aggregate Bond
Index (6.2%); Real Estate – NAREIT Equity-Only Index (22.7%); Commodities – S&P
GSCI Commodity Index (5.7%); Gold – London Gold Bullion, PM Fix US$/Troy Oz.
(28.6%). Source: FactSet, Wall Street Journal, FMRCo. (MARE) as of 12/13/10.
[iv] U.S. Stocks represented by the S&P 500 Index, which appreciated 90.3% from
3/9/09 to 12/13/10. Source: FactSet, FMRCo. (MARE) as of 12/13/10.
[v] Year-to-date net fl ows for U.S. equity and bond funds were -$64 billion and
$223 billion, respectively, through October 2010. Weekly net bond fund fl ows
turned negative the last two weeks of November 2010. Source: Investment Company
Institute, Haver Analytics, FMRCo. (MARE) as of 12/13/10.
[vi] Spain’s unemployment rate was 20.7% in Oct. 2010, while Germany’s was
7.5% in Nov. 2010. Source: Statistical Offi ce of the European Communities, Haver
Analytics, FMRCo. (MARE) as of 11/30/10.
[vii] The High-Grade Copper COMEX spot price ($/lb) reached an all-time high
of $4.20 on 12/13/10. The S&P 500 GSCI Agricultural Commodities Index stood
at 486.22 on 12/13/10, very near its high of 499.25 set on 3/12/08. The U.S. core
infl ation rate was 0.59% year-over-year, an all-time low. The S&P/Case-Shiller
Home Price Index of 20 metro areas is down 0.05% from Jan. 2010 to Sep. 2010.
The number of new consumers with new foreclosures was 457,000 in Q3 2010.
Gross private domestic investment grew 22.4% year-over-year in Q3 2010. The
unemployment rate in Nov. 2010 was 9.8%. Personal consumption expenditures
rose from $10.1 trillion in Q4 2009 to $10.4 trillion in Q3 2010. Source: Standard
and Poor’s, Bureau of Labor Statistics, Bureau of Economic Analysis, Haver Analytics,
FMRCo. (MARE) as of 12/13/10.
[viii] As of 12/10/10, the Federal Deposit Insurance Corporation stated that 151
institutions had failed or been assisted. Source: Federal Deposit Insurance Corporation,
Haver Analytics, FMRCo. (MARE) as of 12/10/10.
[ix] The S&P 500 fell 15.6% from 4/23/10 to 7/2/10, while gold appreciated by 6%.
Source: Standard and Poor’s, Wall Street Journal, Haver Analytics, FMRCo. (MARE)
as of 12/13/10.
[x] Corporate profi ts after taxes with inventory valuation and capital consumption
adjustments stood at an all-time high of $1.2 trillion in Q3 2010. Corporate liquid
assets of non-fi nancial corporations stood at $1.93 trillion as of Q3 2010, which
represented 7.4% of total assets. Source: Bureau of Economic Analysis, Federal
Reserve Board, FMRCo. (MARE) as of 9/30/10.
[xi] The S&P 500’s calendar year average from 1926 through Oct. 2010 is 11.8%.
Investment grade bond’s calendar year average from 1926 through Oct. 2010 is
5.7%. Investment-grade bonds represented by Barclay’s Capital Aggregate Bond
Index from 1976-2010; from 1926-1975 bonds are represented by a weighted composite
of the IA Long-term Corporate Bond Index (34%) and the IA Intermediateterm
Government Bond Index (66%). Source: Ibbotson Associates, FMRCo.
(MARE) as of 10/31/10.
[xii] The range of returns for the major asset classes listed in footnote #3 above
(excl. gold) was 19.2 on a year-to-date basis through Dec.13, 2010, compared to a
historical average range of 51.5 dating back to 1988. Source: Ibbotson Associates,
FMRCo. (MARE) as of 12/13/10.
[xiii]The S&P 500’s standard deviation from 1926 through Nov. 2010 is 21.4%, while
year-to-date through Nov. 2010 it stood at 21.3%. Investment-grade bonds historical
standard deviation is 4.7%, while year-to-date through Nov. 2010 it was 2.6%.
Investment-grade bonds represented by Barclay’s Capital Aggregate Bond Index
from 1976-2010; from 1926-1975 bonds are represented by a weighted composite
of the IA Long-term Corporate Bond Index (34%) and the IA Intermediate-term
Government Bond Index (66%). Source: Ibbotson Associates, FMRCo. (MARE) as
of 10/31/10.

Inflation?, What Inflation?

2010-12-14T11:06:00.000-08:00

I do not intend this post to be a statement that inflation is here. But I think that challenging our traditional notions of how we measure inflation may be in order. Whether it is Core Inflation or Consumer Price Index (CPI had an increase of 1.2% over the last 12 months through November 17), it is clear that these measures are not reflective what has been going on on the commodities markets over the last several months.

Commodity Price appreciation for the recent 5 months:

Commodities                                        Return*
Aluminum                                               19.20%
Barley                                                     75.10%
Coffee                                                    22.73%
Copper                                                   29.83%
Corn                                                       55.27%
Cotton                                                    58.86%
Gold                                                       11.85%
Lead                                                       28.29%
Lumber                                                   15.42%
Lean hogs                                                1.69%
Live cattle                                                4.30%
Nickel                                                     16.87%
Orange juice                                             1.38%
Palladium                                                 66.25%
Platinum                                                  10.03%
Rice                                                        52.44%
Silver                                                      52.86%
Soybeans                                                18.70%
Sugar                                                      47.49%
Tin                                                          40.95%
Wheat                                                     50.08%
Zinc                                                        19.62%
Rare earths                                             60.53%

With interest rates at historic lows, it remains to be seen how investors could keep up with a significant loss of purchasing power.

Investment Discipline

2010-12-06T15:02:00.000-08:00

I am sure many of us have heard that trying to “time the market” is not a good idea. Statistics have shown that missing the five best trading days of the year can significantly affect investment returns.

Well, a different statistic this year shows again why timing is not a good idea. According to a study last week by the analysts at Bespoke1 , year-to-date returns for the S&P 500 Index would have dropped from 8.3 percent to -3.8 percent if you were out of the market the first trading day of each month!

The concept of buying near the low end and selling near the high end of a trading range in an attempt to extract incre¬mental return out of a relatively flat market may be appealing. However, when large returns are spread among a few widely dispersed days, asset allocation suddenly looks more attractive than attempting to aggressively trade a range-bound market.

The message? Traditional investment markets continue to be a great place for a longer-term strategy, but jumping in and out of the market for incremental returns is playing with fire.

Source (1): “If Only There Were 20 Months a Year”, December 1, 2010, Bespoke Investment Group, www.bespokeinvest.com

Elections, Taxes, & QE2

2010-11-29T12:57:00.000-08:00

With the loss of Democratic control of the House of Representatives, the pendulum of American politics continued its back and forth swing. Divided government has shown much promise in the last 30 years; with the administrations under President’s Reagan and Clinton serving “the middle” very well.

The biggest challenge ahead will be how to tackle the coming tax hike on January 1. With President Obama reaching out to the Republicans, it seems clear that some compromise will pass before the new year ticks over. This, in effect, creates a new round of stimulus for the economy. My biggest concern is that there continues to be no long term plan to tackle the deficit from either side of the aisle. At some point, those in Washington DC will need to make some difficult decisions for the long term financial well-being of the country. The proposed tax deal merely pushes that date out another two years.

What the current tax rate extension will do is take some pressure off at the Federal Reserve. Their second round of Quantitative Easing (or, their current action of buying $600 billion in Treasury bonds—a way of increasing the money supply) has been under-way and is expected to continue through next June, but the tax deal probably puts an end to any more than that.

The hope is that lower tax rates for all will translate into boosted spending and encourage hiring, to battle an unemployment rate at 9.8%. Perhaps it is not a bad short-term plan, but with the deficit growing by the second, and government entitlement programs bursting at the seems, at some point, someone will need to tackle the long term.

Reviewing Where We’ve Been/Where We’re Going

2010-10-08T11:33:00.000-07:00

Every so often, as the investment market indicies bounce around, I find it important to reflect on the response to the financial crisis of 2008, and how the economy has responded to the measures.

First, let’s look at 3 major factors of government response:

• An almost $1 trillion stimulus program.
• A TARP program that bailed out banks and some auto makers that after it is all said and done, is projected to cost us roughly $100´s of billions.
• The Federal Reserve has virtually lowered interest rates to zero and spent over $1 Trillion in Asset Backed Securities to pump money into the economy and keep interest rates artificially low.
Next, let’s look at the economic response (or lack of) in the current fiscal/financial condition of the US economy:
• Massive Federal Deficits (not even including unfunded entitlement programs).
• Unemployment at 9.6%.
• Foreclosures still at record highs accompanied by lower home prices.
• A stock market roughly 30% lower from its peak.
• GDP growing in the latest quarter by 1.6%.
• Historically low mortgage and interest rates.
• Huge inflows to bonds and out of equities.

Now, it’s not all bad news. Recent growth in equity markets gives me reason for some optimism in 3 timed outlooks:

• Short-term: 3rd quarter earnings might actually be better than expected.
• Intermediate-term: The mid-term elections could provide investors and business with some clarity on taxes.
• Long-term: Equities are very cheap relative to bonds.

Where I see some significant risk for the domestic economy is in the value of the US dollar as compared to other currencies. With interest rates at very low levels, central banks have turned to currencies as the next lever to pull to stimulate their economies. We are in “beggar thy neighbor” world, where each country wants a cheap currency to make their country’s goods competitive in the global market place. In our current super-low interest rate environment, cur¬rency movements can overwhelm valuation and have a significant impact on asset class returns.

The bottom line is that the Fed will need to continue use all of the tools available to it to keep the economy fixed on the road to recovery.

10 Potential Changes to the Tax Code – Plan NOW

2010-09-15T14:07:00.000-07:00

If Congress does not act soon, January 1st, 2011 will see one of the largest increases in taxation ever. There are no fewer than 10 adjustments to the tax code that affect 3 different areas of financial planning, and probably require all of us to revisit some of the assumptions in our longer term wealth management. Here is a quick review of things to come:

Income Tax Rate Increases
1. Top Federal Rate rises from 35% to 39.6%
2. 33% Federal Rate rises to 36%
3. 28% Federal Rate rises to 31%
4. 25% Federal Rate rises to 28%
5. 10% expires and reverts to 15%
6. Standard deduction for married couples no longer double that of unmarried filers
True, over half of these 10 changes come from Federal Income Tax increases, but the significance of rising income tax for all of us is huge given the fragile state of the economic recovery. There is an obvious affect on expendable income, as well as small business’ ability to grow. At the same time, there is a need to balance that want for economic growth with growing government debt.

Taxes on Investment
7. Maximum Long-Term Capital Gains tax rises from 15% to 20%
8. Tax rate for qualified dividends rises from 15% to Ordinary Income rates (as high as 39.6%)
It is important to note that an increase in long-term capital gains from 15 to 20% is not a 5% increase… it is a 33% increase! These two potential changes will be very significant to our thoughts on after-tax investments. What I call Asset Location (meaning the choice of investment vehicle & use of registration) will become even more important, as tax efficiency and transparency of holdings becomes paramount. It may become tempting for investors to run to federally tax-free muni bonds, but more than likely these will not be the best option. Tax-free investments tend to benefit investors in the highest tax brackets the most.

Estate Taxes
9. Estate tax redemption will decrease from $3.5 million (2009) to $1 million
10. Top Estate and Gift tax rates rise from 45% (2009) to 55%
Estate planning has been a moving target since the “sun-set” provision was written into legislation earlier in the decade. 2010 saw most wealth transfers pass untaxed. With these two changes poised to set estate planning assumptions back 10 years, now is a good time to review your documents to make sure they still accomplish the goals for which they were originally designed.

Because of these significant changes, the team at our office is hosting a workshop and open house on this topic in October to kick off our tax planning season. Please be sure to attend!

Thoughts on Fixing Social Security

2010-08-09T12:21:00.000-07:00

"We need to look at the American people and explain to them that we're broke," Boehner (US Senator, John Boehner) was quoted as saying recently in The Pittsburgh Tribune-Review. "If you have substantial non-Social Security income while you're retired, why are we paying you at a time when we're broke? We just need to be honest with people."

I think that quote is about as clear an indication as we will get from a politician about Social Security. The system is quickly charging toward insolvency unless significant changes are made. A stark fact that has almost gone unnoticed by the general public is that social security (tax) revenues fell below benefit costs this year with the economic crisis, as more people retired early and fewer workers were paying in benefits. Something needs to be done quickly.

Here are some of the thoughts that have been proposed, and my two cents on each:

Increase the normal retirement Age to 70--This one is sort of a no-brainer. It has been the typical response so far out of Washington. Clearly, as life expectancy increases and the ratio of workers to SS beneficiaries decreases, the age to claim retirement benefits will need to increase.

Increase Early Retirement Age--People can and do claim a reduced retirement benefit at age 62. If there is a need to raise the normal retirement age, then clearly there is a need to raise the age to claim early retirement benefits. Given that current projections are for SSA to exhaust payouts by 2041, this seems a likely change in tandem to the increase in the normal retirement age.

Tie Cost-of-Living Increases to Wages--Consumer price index is a traditional measure of inflation (tracking the price fluctuations of a basket of non-durable consumer goods). Actual wages have grown at a much slower rate over time, and this could effectively slow down the amount of benefits paid out of the trust.

Working Longer-–Currently, full Social Security benefits are attained through working 40 quarters; with a quarter being defined as $1,120 of earnings. I could conceivably see two potential ways to change this: one in increasing the number of quarters, or two in changing the dollar amount that qualifies for a quarter.

Raising the taxable wage base--$106,800; that’s where current taxes for social security revenue purposes stop. Meaning anyone who earns a dollar over that amount, that dollar is not taxed for social security purposes. This seems like another no-brainer, given the dire state that the Social Security trust is in.

I am unsure what it will take to make a significant step toward fixing the system. More than likely it will take a bold move by Congress, and mix and match of these and other suggested changes. With an impending insolvency and an economy that is not forecasted to grow at break-neck speed, clearly something must be done.

24 Hour News Television & the Creation of Crisis

2010-06-21T10:29:00.000-07:00

Mini-corrections are normal for investment markets. It can be difficult to remember that coming out of this recent financial crisis and recession, but after prolonged bull-market periods it is quite normal to see a bit of a pull-back. Since 1927, the average correction within a bull market has been a decline of 13.3%, which we are still short of. It is normal for our relationship with risk and fear to be skewed after the systemic collapse in 2008, but the “creation of crisis” found on the television airwaves does not help our behavioral relationship with our finances.

Fox Business continues to ask on a daily basis “Is the World Broke?” “BREAKING NEWS” flashes across the screen on CNBC the moment an executive takes a labored breath at a domestic large-cap firm. Isn’t every news piece they are running “breaking news”? The question is whether the delivery needs to be in such a way as to disturb an internal crisis in the viewer.

Additionally, nearly every other commercial on business news stations is for investments in gold bars—a traditional crisis inflationary hedge instrument. While a tilt to commodity holdings for some investors may be appropriate as a good hedge against inflation, it is unconscionable to solicit the viewer to move all of their money to gold bars or coins because we are in a prolonged recession. At this point, that could be the equivalent of buying Yahoo stock at the height of the NASDAQ in 2000.

The point of my anecdote is not imply that we are some how out of the woods from a prolonged global recession, but merely to reflect that the next crisis is not occurring every minute. Behavioral finance, or balancing fear and greed with a long-term investment strategy, is something each of us struggle with, and 24-hour news television sometimes only adds one more irrational voice in our heads.

The Return of Volatility

2010-05-11T10:10:00.000-07:00

A confluence of events in Europe last week sent the broad market stock indicies crashing 1000 points intra-day. The Dow Jones Industrial Average fell below the 11,000 mark, and the bears decided to make a little run into this 12-month bull market.

Setting aside any potential human error on the trading side, we know that the markers generally hate uncertainty; and things had been fairly uncertain with regard to how the European Central Bank would respond to the debt crisis in Greece. Things came to a head last week, during the same time the UK elections left a hung parliament (no political party with a clear majority) for the first time since the 1970’s. Uncertainty times two for a very important political and economic region.

As the European Central Bank’s rescue package became clear by Monday morning, markets began to recover. When a coalition UK government (the conservative Tories and Liberal Democrats formed a cooperative majority in parliament) was announced, UK markets reacted dramtically; and all of a sudden the Dow is flirting with the upper 10,000’s again.

With more European debt issues likely in the future and a mid-term election later in the year in the US, you can imagine more market volatility is in the offing. Right now the economic domestic data still looks good:
• April was the 4th month in a row of positive employment growth, adding 300,000 new jobs, which was well above estimates.1

• Strong factory orders for March announced this week affirm the strength in the manufacturing sector. Excluding the volatile transportation component, orders recorded the strongest month in 5 years.2

• Becoming the standard of recent quarters, companies are beating Wall Street earnings estimates. Earnings improvements are beyond the benefits of cost cutting as 75% of companies within the S&P 500 have reported higher top-line sales from a year ago.3

• In response to the good earning reports and economic indicators, future earning estimates continue to enjoy upward revisions for all of 2010 and 2011. 4

Last week’s events continue to remind us of the interdependencies of world economies.

1 Bloomberg, May 7, 2010

2 Bloomberg, May 4, 2010

3 Zacks Investment Research, May 4, 2010

4 Standard & Poors, operating earnings estimates, May 4, 2010

Diagnosing Fiscal Fitness

2010-05-03T11:39:00.000-07:00

Trying to be your own financial advisor can sometimes feel like trying to perform surgery on yourself. But, you can certainly try to diagnose your own fiscal fitness. Here are a few items to keep in mind when looking at the health of your finances:

• Emergency Fund – Usually recommended to have 3 to 6 months of nondiscretionary expenses available in very liquid holdings.
• Debt Coverage – A good measure of mortgage debt is 28% of gross income
• Savings Rates – The largest part of retirement planning is the actual savings element. Typical healthy savings rates are in the neighborhood of 10-12%.
• Net-Worth Growth – Calculated by subtracting your liabilities from your overall assets, it also helps to look at how your net worth trends over a period of time. Is there growth in your net worth?
• Asset Location – While much is often spoken of asset allocation in controlling risk tolerance, asset location is more telling of controlling exposure to the opportunity of difference financial vehicles (e.g., cash-value life insurance vs. term, liquidity of one investment vs. another, or tax-efficiency of one investment vs. another, etc.)
While these are some great elements to examine with regard to your current financial condition, making the right adjustments is key. Because of the plethora of decisions to be made in your financial life, self-diagnosis will probably only take you so far.

Tax Planning vs. Tax Preparation: Start your 2010 strategy now.

2010-04-19T09:31:00.000-07:00

While I took a short hiatus from blogging during the height of tax season in our office, the Dow Jones Industrial average blasted through the 11,000 mark—a significant level given the enormous drop witnessed in the fall of 2008. Time will tell if this will be a trading support level throughout 2010.

Having just come through tax preparation season in our office, though, I thought it prudent to take a moment to discuss tax planning versus preparation. Generally, the tax preparers in our office begin a meeting by asking some basic questions about financial decisions made over the past year…Did you buy a house? Did you collect unemployment? Was there an addition to your family this year? Did you purchase a car this past year? These are all reactive questions—answers provided after the fact, with little opportunity to change the tax impact.

There is a difference between tax preparation and tax planning. Tax preparation is simply completing your return: committing certain events to history and recognizing their tax consequences. Tax planning, on the other hand, is proactive in nature: you identify tax savings opportunities and create a roadmap to maximize them.

There is little doubt that with government spending and budget deficits exceeding previous records, the tax rates are going to increase. For that reason, now is the time to break the cycle of taking a reactive approach to addressing your tax exposure. This often looks at ways of reducing your taxable income, claiming potential tax credits, or, in the case of small business owners, optimizing your tax status (i.e, creation of an entity for your business to be able to use more tax deductions).

To get the true benefit of tax planning, have a strategy session with your preparer and your financial advisor. Get both on the same strategy page.

The 11 Pitfalls, Concerns, & Opportunites for Roth Conversion in 2010

2010-03-01T11:00:00.000-08:00

When TIPRA (Tax Increase Prevention & Reconciliation Act) passed in 2005, it seemed like the opportunity for Roth IRA conversion would be a good one for some people. No one could have predicted the “perfect storm” of opportunity for Roth Conversion in 2010 that has ensued. Given record lows for the top income brackets, the sizeable government deficit that has mounted, and the Financial Crisis’ effects on account values of deferred retirement savings accounts, Roth Conversion in 2010 may be the largest tax planning opportunity some of us will ever see. Careful analysis should be taken by everyone to weigh whether or not a conversion strategy is right for you.

Given all that, I have found 11 pitfalls and considerations Californians should know about before they begin any analysis. They are:

1. Waiting Period – There is a 5 year waiting period before growth can be accessed on any Roth Conversion. Full income tax is applied if growth is touched prior to the 5 year wait. There is an additional 10% penalty if you are under 59 ½ .

2. The “Do-Over” Rule – Recharacterization can be done if you convert an account to Roth and the value is worth less around the time you are filing your taxes. If the Roth has lost value since conversion, you can recharacterize back to traditional IRA, and then reconvert at the lower value…lowering the tax burden.

3. Paying the Tax on Conversion – Generally, people should have after-tax savings in a separate account to pay for the tax on conversion. Withdrawing from a traditional IRA to pay the tax will cause a penalty for individuals under 59 ½ , and is probably not the best option for those over 59 ½ .

4. Treatment of Non-deductible IRAs – If you have been contributing after-tax dollars to a traditional IRA, the after-tax portion of the account that is converted to Roth will not be taxed (because you have already paid tax on this money). Additionally, you cannot pick and choose which portions or Ira accounts you wish to convert. You have one IRA in the eyes of the government, no matter how many accounts you have, and therefore any after-tax contributions must be converted pro-rata to the sum total of all traditional IRAs.

5. Converting Company Plans 1 – If you have an old 401k (403b or 457) from a previous employer and want to convert it to Roth, be sure to roll it over to IRA first. If you convert directly from 401k to Roth, you will not have the opportunity to recharacterize if the stock market moves against you.

6. Converting Company Plans 2 – If you want to make better use of mixed/non-deductible IRAs, convert before rolling an old 401k (403b or 457) to a traditional IRA. This will allow you to convert a larger portion of the after-tax IRA contribution.

7. Utilizing Tax Losses – This could be a great time to use net operating loss carry-forwards, charitable contribution carry-forwards, non-refundable tax credits, and pass-through losses to mitigate the taxes of conversion. Work with your tax advisor to coordinate this.

8. Financial Aid Loss – When applying for college financial aid, retirement accounts are generally discounted, but income is not. Roth IRA conversion is considered income and is classified this way on all IRS tax forms.

9. Converting SIMPLE IRAs – There is a 2-year holding period requirement on initial contributions to SIMPLE IRAs. Conversion to Roth prior to the 2-year hold could trigger a 10% penalty. Be sure you time this correctly.

10. Split the State Tax not the Federal – If you have the after-tax dollars to pay the tax on conversion, and there is not a need to manage tax brackets for your conversion strategy, you may consider paying the Federal taxes now (which are scheduled to increase) and use the 2-year deferral split option for State taxes.

11. Trying to Coordinate your Tax Advisor & your Financial Advisor – In all seriousness, this is an opportunity which requires the coordination of your financial advisor and your tax advisor. Be sure to include both in a strategy session to work out whether a full, partial, or multi-year conversion plan may be right. They will be able to help you wade through these and other pitfalls.

This is not meant as a do-it-yourself guide. Roth Conversion is potentially a great opportunity, but should be evaluated on an individual basis, given all of the considerations involved.

The preceding should not be construed as tax advice. Be sure to consult your tax advisor before making any decisions.

How will your Social Security be Taxed in Retirement?

2010-02-19T09:28:00.000-08:00

In light of a recent Wealth Management Workshop about Social Security that we hosted for our clients, I have found it helpful to review with people the potential taxation of their Social Security benefits in retirement. Many people do not realize how taxation will affect them in retirement, and consequently fail to plan for it properly.

The IRS looks at your “combined income” to determine the taxability of your Social Security benefit. Combined income is calculated by adding your Adjusted Gross Income with any non-taxable interest (such as Muni Bond interest), plus half of your Social Security Benefits. The equation looks like this:

AGI + Non-taxable Interest + ½ Social Security Benefits = Combined Income

If your “combined income” is between $25K and $34K for a single person, or $32K and $44K for a couple, 50% of your Social Security benefit will be taxable.

If your “combined income” is over 34K for a single person, or $44k for a couple, 85% of your Social Security Benefit will be taxable.

As you can see this can become quite significant and should be weighed when planning for retirement income.

Europe’s PIiGS vs.Emerging BRICs

2010-02-08T09:29:00.000-08:00

As we have watched the globally economy grapple with Greece’s debt load in the last couple of weeks, it has become clear that international investing in 2010 will be characterized by a tug of war between the struggling Euro-zone and the potentially overbought Emerging Markets.

The investment world loves to use acronyms whenever possible, so let’s be clear. Dubbed the PIiGS, the struggling economies of Portugal, Ireland, Greece, Spain, and to a lesser extent Italy (the small “i”). The basic challenge for Greece is that the decline in world eco¬nomic growth has exposed the declining relative productivity of Greek business. Historically in this situation, the currency of the country would decline and interest rates would be cut. The decline in currency would improve the trade deficit because cheaper goods become more attractive to foreign markets, thus reducing any trade deficit.

Because these countries use the Euro for their currency, they have little to no control on monetary policy—specifically interest rates. The Europe¬an Central Bank remains reluc¬tant to cut rates as low as the Federal Reserve, which would help Greece. The other PIiGS are not in as bad a shape as Greece, but the entire continent has been terribly hit by this recession.

On the other side are the Emerging market BRIC countries of Brazil, Russia, India, and China—with China being the biggest of the capital letters here. To get an understanding of just how large the Chinese market is, consider that it has three of the four largest banks, the two largest insurance companies, and the second-largest stockmarket. Currency issues have been a global concern toward China, with the yuan having been “allowed” to devalue with the US dollar. Both economists and politicians have argued that the value of China’s currency should be much higher given the country’s improving economic performance.

The challenges with Greece will result in a challenge to the rest of Europe and to global liquidity. If this challenge becomes more likely, emerging markets, corpo¬rate bonds, and domestic equities may suffer. China will have the biggest questions to answer of all of the BRICs, with an exploding economy. With regard to the international sector in 2010 the balance will be between the old world and the new.

2010 in the Crystal Ball--Part 3

2010-01-20T15:00:00.000-08:00

Thoughts on ...
Tax & Financial Planning

What to Expect from Retirement Benefits
• Social Security will be staying as is. While there is usually some cost of living adjustment associated with payments, 2010 will not show an increase.
• 401k contributions limits are staying as is. While the government has been building in slight increases each year, there will not be any for 2010. Limits will stay a $16,500 maximum, with a $5500 catchup provision for participants over age 50.
• 401(k) matches are returning. Statistics are showing that ofthose company plans that cut employer contributions, 27% have already become matching again. Look for this trend to continue as the economy continues to stabilize.

Roth Conversion
• Be sure to consider whether a Roth Conversion is right for you. 2010 marks the first time that the conversion opportunity is open to EVERYONE. Be sure to avoid potential tax pitfalls of conversion.

What about the Estate Tax?
• The current law on estate tax is that there isn't one. The tax expired at the end of2009, but Congress has until September to make a retroactive law, and you can probably bet that something will shake out of Washington between now and then.

RMDs Return
• After the financial crisis in the fall of 2008, Congress decided to suspend required minimum distributions from retirement plans. Well, they are back in 2010, so be sure that you are set to continue withdrawing, otherwise you could be penalized.

Tax Rates--Capital Gains Rates are Still Low ... For Now
• Capital gains rates are set to increase in 2011, as the government grapples with deficit, but for now, the highest rate is 15 percent for individuals in the 25 percent to 35% brackets. There is no capital gains for individuals in the 10 percent and 15 percent tax brackets pay no capital gains.

Tax Rates--One of the Lowest Income Tax Rate Eras ... For Now
• The fact that we are probably in a rising income tax environment (given the fact that we are at near historic low levels for the top income tax bracket), traditional ideas for retirement planning are being rethought. Roth Conversion, Section 79 Plans, and other tax advantaged tools for retirement are becoming more important for business owners.

2010 in the Crystal Ball--Part 2

2010-01-14T11:03:00.000-08:00

Thoughts on ...
Your Retirement Savings

Manage your Retirement Savings
• Earmark Other Savings While not selling off in last year's panic was the right move for investors, not adjusting holdings-or ignoring them-is not a good move either. Adjusting investment strategy is a good idea not only when markets adjust, but also as your life does. Retirement strategy adjustment becomes even more important as you enter what I call the redzone-about 10 years before through to 10 years into retirement. It's here the risk tolerance becomes a moving target and the sequence of returns can really weigh on your goals. Poor investment performance in the redzone can severely impact the longevity of your savings.
• Many investors had a disproportionate amount of their money in equities-nearly four in 10 employees ages 56 to 65 had more than 80 percent of their 401(k)s in stock, according to the Employee Benefits Research Institute.
Increase your savings
• Earmark Other Savings Performance alone will not get you to your goals. Increase your savings rate, especially in 2010, as the market continues to recover from the recent bear market. Recent studies show that in fact the opposite is happening, and many investors have set aside less in their retirement savings accounts.
Fees
• Many people do not realize the extra fees they are paying by keeping money in former employer sponsored plans. Rolling over old company plans will probably decrease the amount of administrative fees you are paying. It will also open up freedom of choice for types of investments, allowing you to choose low cost options.
• Earmark Other Savings
• There are other investments out there specifically geared for retirement savings which help guard against longevity risk. Earmark other funds for retirement as you enter the redzone. Seek out the best investments from a tax-advantaged standpoint.

2010 in the Crystal Ball--Part 1

2010-01-08T14:06:00.000-08:00

I wanted to share my thoughts for the year ahead. This series of blog entries focuses on the economy, retirement savings, and financial planning for 2010 and beyond.

Thoughts on ...
The Economy

Emerging Markets will still be a major focus for 2010
• China continues to play the "will-they-or-won't-they" game when it comes to re-valuing its currency. But the figures for 2009 publish by the Economist are astonishing: "real GDP grew by 10.7% year on year in the fourth quarter. Industrial production jumped by 18.5% in the year to December, while retail sales increased by 17.5%, boosted by government subsidies and tax cuts on purchases of cars and appliances. In real terms, the rise in retail sales last year was the biggest for over two decades." You cannot ignore this sector of the global economy
Small business breaks out
• When you look at past recessions, often it has been small business that has led the way out. I do not think that this recession will be any different, however, I do think that Washington has another mine field to navigate in enticing small business back to job creation and growth. Regulation has been a hot topic recently, and the potential for new national and state regulations and taxes may have companies putting their growth plans on hold. That means no new jobs and continued jobless recovery. This is particularly true for small to medium sized businesses, which have generated about two-thirds jobs on a national scale. Uncertainty about 2010 and beyond simply has business planning in the holding pattern. New workplace rules and higher income tax are just two of the worries.
California Constitutional Convention
• A push for referendum is gaining a lot of support for calling a constitutional convention here in California. This has the potential to effect positive change in the broken political system in our state. It also has the potential to wreak havoc with the 8th largest economy in world. Just exactly who would be the delegates for such a convention has been a much argued element. This leads us to my next point ...
Will CA continue to foster areas of "economic success" (e.g. Silicon Valley; Hollywood; Agriculture)?
• With state spending increased from $56 billion in 1998 to $131 billion in 2008, and the state facing a budget deficit of $40 billion (in 2008), the temptation is for the government to tax successful businesses. The danger as that business will relocate to friendlier confines. The state cannot afford to lose those current tax revenues, and the jobs that come with having those companies in-state.

Decade in Review--From a Financial Perspective

2010-01-02T10:38:00.000-08:00

Looking back on the last ten years, it seems there may have been a geo-political or economic event to mark each year. From an economist’s standpoint, the decade from 2000 to 2009 is painted with a string of investment bubbles. From an advisory standpoint, I can recall with much clarity the impact that these events had on client relationships. Let’s take a quick look at each year’s main event.

2000--Dotcom bust…Get-rich-quick stock bubble bursts. This had a profound effect on California’s economy (particularly the Bay Area), as a large part of the workforce were sent away from jobs that would not return in the same industry sector.
2001--9/11…When stock markets reopened on Wall Street after the 9/11 hiatus, the Dow (DJIA) dropped 685 points. A very scary time in America, resulted in a short-term over-reaction on equity markets. Over the long-term, the 9/11 sell-off had close to zero effect on the economy.
2002--Accounting Scandals…As detrimental as the Enron & Arthur Anderson (& others) scandal were to the US economy, the legislative response of Sarbanes Oxley certainly has had unintended consequences. While holding executives to a higher standard is a fine idea, this piece of legislation has allowed places like London and Hong Kong to creep closer to NY as the preeminent location for global finance.
2003--Iraq War begins…No matter how any of us feel politically about war, the fact remains that it has been costly.
2004--President Bush Re-elected…Again, no matter how any of us feel politically, re-election meant staying the course for the US both internationally and domestically.
2005--Significant Oil Price Increases…Not sure if oil shocks in 2005 can be described as a bubble, but certainly provided a mixed year for equity markets, with the S&P 500 index creeping up only 3%. Certainly those industries dependent on oil continued to be hurt by prices.
2006--Dow Reaches 12,000…Big movement for equity markets in 2006 with the Dow Jones Industrial Average reaching new highs. Additionally, the Democratic Party seized control of Congress in the 2006 mid-term elections.
2007--Sub-prime mortgage crisis…First thought to be the only “problem area” for the mortgage business we soon quickly and painfully learned that securitization of those loans meant that no investor knew who was holding the proverbial bag (of bad debt). 2007 also marked the official start of recession.
2008--Global Financial Crisis…Markets bounced around quite a bit throughout 2008, but it was not until Lehman Brothers bankruptcy on September 14th that the systemic financial problems were truly revealed. AIG’s would soon follow, and before we knew it, we all became majority shareholders in the insurance giant.
2009--The Great Recession…It bears noting just how bad 2008 was: 8of 500 companies on the S&P 500 index posted positive returns and it was only the 5th time in history stocks and bonds had losing years simultaneously. Policymakers have walked a pretty impressive tightrope in 2009. I believe the S&P 500’s “roar-back” in 2009 came from a negative overreaction in late 2008. Real planning and strategy will begin to play a larger part in the process as we move in to 2010 and beyond.

How much money do I need in Retirement?

2009-12-01T10:40:00.000-08:00

By far this is the most ambiguous question when working with clients on retirement planning. Everyone is different. Some people plan to be more active in retirement, while others will spend less. The old rules for retirement planning of “70% of current income” simply will not hold true for the baby-boom generation. Studies show that healthcare and housing tend to be the most under-budgeted areas.

When looking at retirement planning needs, budgeting for the cost of healthcare is always one of the first considerations. If retiring before 65, retirees need to budget for covering the cost of insurance until Medicare kicks in. After Medicare takes effect, you may face higher out of pocket costs than when you were covered by private insurance (dependent on the coverage. Long-term care is the other major consideration. The need to cover the cost of nursing home care could be a major threat to retirement savings.

Many people automatically assume that housing cost should be significantly reduced by the time retirement rolls around. Often forgotten in the budget is the cost for maintenance, which usually increases as houses age. As retirees age, the ability to handle the upkeep of your house by yourself can also diminish, requiring you to hire outside help.

On the lower-cost side of the coin, is the fact that transportation expenses generally decrease (no more commuting), and entertainment costs typically are equal to working folks.
While the cost of saving for retirement is gone, typically some continued savings will be necessary for ongoing retirement well-being.

The Value of your Real Estate in Retirement Planning--Still the largest part of your Net Worth

2009-11-20T12:53:00.000-08:00

The Value of your Real Estate in Retirement Planning--Still the largest part of your Net Worth

Working with clients in the Bay Area, it is not unusual to see the value of a client's primary residence as the largest part of their net worth. Sometimes, the analysis of retirement planning results in the question of what to do with all that equity in your house. Should it be a source for retirement planning?

The issues/questions to consider when it comes to the use of housing wealth are:

• Paying off the mortgage to reduce overall expenses
• Sell and downsize to a smaller home, freeing up funds for investment
• Sell your home, invest the proceeds and then rent
• Secure a home equity loan or secondary mortgage on the house
• Get a reverse mortgage
• Rent out extra rooms
• Rent out your primary residence and live elsewhere at a lower cost
• Keep the house mortgage-free, and let its value serve as an emergency fund if needed

Because of the emotion that is usually wrapped up in the primary residence, the ultimate question of what to do with housing wealth often becomes difficult. The best recipe for success with investment and retirement planning is to plan with unemotional assets.

Really?, Retire the 401k?

2009-11-09T13:35:00.000-08:00

Time Magazine Feature: Why It's Time to Retire the 401(k)

An interesting read...

Much of the focus of the article is about the fact that there aren’t any protection features in the 401k. The message from government over the past 15 years has been that the onus is on us to find the way to fund our own retirement.

The biggest lacking feature in company 401k s is the fact that the vast majority do not have a plan advisor attached to them. They are “unserviced” investment accounts without a professional minding the overall asset allocation. Under this regime, not only is the funding of your retirement on you, so is the professional investment management. If plan participants had the option to work with an advisor, the asset allocation should be adjusted as the participant moves closer to retirement. Over 90% of investment success is determined by asset allocation.

The other major focus of the article is retirement insurance—the idea that we should pay premiums for a “just-in-case” income policy. Retirement insurance already exists in the form of living benefit annuities.

In my opinion, the problem with retirement funding is not the investment vehicles, but the lack of planning.

Defining the "New Normal"

2009-10-12T10:34:00.001-07:00

It seems that every news medium I turn to for information on the economy and the financial system is discussing whether we have returned to "normal," and/or whether we are at the precipice of defining a "new normal."
With the Financial Crisis officially one-year behind us, what can be expected for the Global Economy?

Regulation
• Expect more government regulation in the financial sector.
• Will some of the Federal Reserves regulatory duties be shifted to other/new agencies?
Taxes
• The top Federal Tax rate is near the lowest in history. Politics aside, funding bailouts, healthcare, and war costs money. Expect taxes to increase.
• Many states (perhaps none more than California) are experiencing fiscal crises of their own. It remains to be seen how these states will generate the revenue they need to remain solvent.

Rates of Return
• Tried taking out a CD or depositing cash into a money market lately? With interests at rock bottom, banks are certainly encouraging investment elsewhere.
• The “stock market”(S&P 500) has generated a huge bounceback so far this year. How much of it is in reaction to last falls severe contraction (only 8 of the S&P’s 500 companies showed a positive return on stock prices in 2008)?

The US Dollar
• The fluctuation in value of the US dollar has continued to influence the value of stocks that are priced in dollars. Watch for dollar valuation to continue to fluctuate

Unemployment
• Generally a lagging indicator, unemployment still looms large for the global economy. Companies are posting profits in spite of a smaller workforce, or because of added efficiencies? Time will tell.

With 2009 largely a “recovery year” for the market, I think that 2010 will go a long way to defining normalcy going forward. These and other considerations will remain important going forward.

A year on...what bubbles loom?

2009-09-14T10:40:00.000-07:00

This week marks the one year anniversary of the collapse of Lehman Brothers...the event that truly kicked off last year's financial crisis. Some experts have called the crisis the result of a bubble in the housing market (which fueled the creation of highly complex and opaque financial derivitives). Earlier in the year I wrote a piece comparing this bubble to the tech bubble at the start of this decade, but what are some other potential areas of "irrational exuberance" to watch for the future?

Commodities--The tangibles market has been seen as a safe haven over the past few years. As a result gold prices have kept increasing. This year marks 7 straight where we have seen an increase in price per ounce. There is some question as to whether a bubble is being fueled. Demand remains high. But predictions of a doubling of its current price are probably way off. Many thought real estate would continue its 10+% annual growth...No asset class rises forever without a pull back.

Emerging Markets--China and other Asian economies have been leading the global economy out of recession quicker than the developed world. This has sparked the decoupling debate and it has been suggested by some that emerging markets are uncorrelated to the developed world's economies. Others fear of a "smoke-and-mirrors" economy fueled by emerging countries' governments. Ultimately, the business in emerging markets need to be measured by the same fundamentals as the developed world's.

The Fed--Simply because the Fed is buying bad debt (or martgage-backed securities), does not mean those securities should no longer be worrisome to the rest of us. By trying to control the damage inflicted by the financial crisis, the Fed could be silently passing along the problem to taxpayers. $1 1/4 trillion dollars of bad assets may create a debt bubble that wil be difficult to crawl out of. If taxes are raised to cover bad assets, it could mean less total return on investments. If the dollar is devalued as a result of the Fed taking on so much bad debt, assets will simply be worth less.

Keeping an eye on these macro trends and others is important in developing your investment strategies going forward.

Sunshine Tax Increasing?

2009-09-09T12:50:00.000-07:00

Why is it that each year (especially so in recent years), the legilators in Sacramento are called to fit a square peg into a round hole? How are tax estimates so far off when it comes to putting a state budget together. This year could be rationalized by the depth of the recession we are in/coming out of, but it could also be a sign that tax revenues have become more volatile.

Housing prices have severely fluctuated in California over the past few years

The psychological effect of "big housing wealth" in the earlier part of this decade encouraged homeowners to borrow and spend, thus increasing sales tax revenues. Quite the opposite now.

How will high a high unemployment rate affect tax revenues for next year budget process?

To combat tax volatility and to continue to pay for government services, expect both state and federal governments to look for new "things" to tax. With greater corporate & workforce mobility, state competition could lure business away from the state. A fine line for the California tax man to walk...

Warren Speaks Out

2009-08-19T10:30:00.000-07:00

Finance guru Warren Buffett was recently quoted as saying: "we were justified in using any means necessary (last year) to stave off another Great Depression. Now that the economy is beginning to recover, however, we need to curtail our out-of-control spending, or we'll destroy the value of the dollar and many Americans' life savings."

Pretty sobering words from a key player in the world finance sector. He also noted these key points in an editorial in the New York Times:

Congress is now spending 185% of what it takes in

Our deficit is a post WWII record of 13% of GDP

Our debt is growing by 1% a month

We are borrowing $1.8 trillion a year

To illustrate these figures, Buffett elaborates on the last one:

$1.8 trillion is a lot of money. Even if the Chinese lend us $400 billion a year
and Americans save a remarkable $500 billion and lend it to the government,
we'll still need another $900 billion. So, where's it going to come from? Most
likely the printing press. And, ultimately, Buffett says, that will destroy the
value of the dollar.

I thought this editorial was very illustrative and painted a clear problem the citizens of the US will face if government spending is not reigned in in light of last year's crisis.

#2 on the "Most Abandoned" list

2009-08-03T09:58:00.000-07:00

This is never how you want to be distinguished by Forbes, but certainly provides a lagging indication of how the Bay Area has fared through the recession. Some figures of note from the article:

Rental vacancy rates swelled from 4.7% to 7.1%
Homeowner vacancies more than tripled from 1.1% to 3.4%. Why the dramatic change?
According to the Bureau of Labor Statistics' latest reports, Bay Area unemployment has more than doubled since last year, up from 4.6% to 9.4% as of April. Many laid-off workers aren't sticking around.

The article is basically noting the two factors that have defined the economy of our area for some time--1)High cost of living (housing in particular here); and 2)The transient nature of a workforce fueld by innovation. There are pockets of Bay Area real estate that have taken their lumps in the bursting of the housing bubble. The fact that the Bay Area is a center for entrepreneurship and innovation influences the transient nature of the workforce as much as anything else does. An surge in innovation will help lead our area out of recession.

The Future of California

2009-07-13T12:09:00.000-07:00

Spent the weekend showing some friends from London around San Francisco in some of the most glorious weather we have had all summer. It is quite easy to show off the beauty of the Bay Area as the sun basks on some of the iconic landmarks of the Golden State. It is pretty hard to imagine the financial and political gridlock ongoing in Sacramento while taking in the sites.

Word of the political wrangling and mismanagement of the state had reached our visitors. But perhaps what was most striking to them was what was printed on the lunch menu when we sat down at a popular eatery in San Francisco. The 4% health care surcharge in SF restaurants quickly became a topic of conversation over our meal. On one hand the city is trying to address a very serious social need. On the other, it strikes as a bit of a renegade political policy--especially given the state of the state as a whole. If nothing else it is a microcosm of the multiple disconnects between state & city government, and ultimately with the citizens. California needs a comprehensive gameplan.

The Risk Pendulum of Globalization

2009-06-23T16:05:00.000-07:00

Here are a few facts I thought worth sharing with regard to globalization's continued march through all corners of the world despite the crisis:

2008 marked the first time that the "developing" world consumed more energy than the developed world.
The United States, Canada, & Europe will combine for less than half of global economic output in 2009 [according to the Centre for Economics and Business Research].
One wealth manager notes that the "developing" world has larger foreign reserves & less indebtedness. (1)
Additionally, he notes that many of the emerging countries have better GDP per capita growth & superior savings rates. (1)
Does this change the perception of risk usually associated with the emerging world?
(e.g., "Have Asian banks been more or less risky than American & European ones?", "Are countries with greater debt more or less risky?" (2)

These trends may continue to redefine asset class risk in the near term, and therefore skew people's general association of risk with asset allocation. As globalization continues to redefine the world economy, changing our ideas of risk association also becomes important.

(1): "Of Inhuman Bondage" by Tim Price, June 15, 2009, PFP Wealth Management, http://www.pfpg.co.uk/site/newsroom/publications

(2): "Comment of the Day" by David Fuller, June 16, 2009, Fullermoney, http://www.fullermoney.com/x/default.html

At the movies

2009-06-15T15:28:00.000-07:00

My wife and I recently arrived at the cinema early to catch one of the summer's box office hits, and as we waited for the film to start I was not surprised that the theater was not very corwded. But, as the time crept closer to start time, I was pleasantly surprised by how the theater started to fill in. By the time the lights dimmed, it was almost a full house.

Despite the recession, one of California's industry sectors was humming along at full speed through the first quarter of 2009. According to the New York Times, ticket sales were up 17.5 percent and attendance was up nearly 16 percent. If that pace continues through the year, it would amount to the biggest box office surge in at least two decades. Hooray for Hollywood!

3 Macro Trends Redux Revisited

2009-06-08T18:59:00.000-07:00

A few years ago, I was asked to research and revisit the macro-economic trends that were influencing the world of personal finance when I first entered this business over 10 years ago. The result of the research was a white paper titled 3 Macro Trends Redux. I thought it may be interesting to reflect on the original trends, mention the findings of the research, and comment on the development since the crisis of '08. The trends in discussion are:

Aging of the Baby-boomers

Back When--The trend originated 10 years ago as the boomers edged over the age-50 threshold--that magic age when people give keen focus to retirement planning.
Then--Age 60 was now in the sights of the boomers. Pensions first slowly, and then quickly disappeared or became a much smaller portion of people's retirement plans in the last several years.
Now--Chances are the retirement plans of the boomers are in need of major adjustment after the freefall in the stock market last fall. The boomer generation has openly embraced investment in equity-type investments, though I am not sure that planning and monitoring have played a large enough role.

Largest Transference of Wealth in History

Back When--The aging of the "greatest generation" and their general inclination toward saving has set up the potential largest transference of wealth from one generation to the next as the older generation begins to pass on.
Then--The pervasiveness of estate planning has solved many of the issues of this wealth transference, though under current estate law, planning for wealth transference continues to be a moving target. The thresholds for estate exemption have continued to grow and are set to expire next year. This constant expansion makes it difficult to plan for wealth transference.
Now--Because estate law is a legislative hot topic, expect the laws to change once again. There has recently been lively debate in Congress about this issue. The most recent proposal raises the estate tax exemption, lowers the actual tax, and unifies the credits allowed between husband and wife. Whatever is decided upon, it looks as though simple wills and living trust estate planning will solve many of the estate considerations for the mass affluent.

Democratization of the World/Expansion of Capital Markets

Back When--Hopes were high as former eastern bloc nations were thawed to democracy and opened up as new potential capital markets. Eastern Europe was flooded with venture capital and these economies were set for a boom.
Then--Questions arose based upon how the developed world would respond to global terrorism. Would the wars in Iraq and Afghanistan encourage democracy across the Middle East? The rise of the Chinese and Indian economies have led the emerging markets of Asia
Now--China and India (as well as Brasil) have made emerging market a viable alternative to hedge risk brought on by the developed world. These economies have not been hit as hard as the US and Europe in the crisis, and have bounced back quicker as well. Russia (the last of the BRIC nations to be mentioned) has turned politically beligerent in the past few years. This has thrown economic questions up in the air for that region, as the price of oil continues to be the main economic driver for Moscow.

I believe that these macro-economic trends will continue to influence the response of investors from a financial planning perspective. Monitoring the development of these and other factors in relation to your unique plan is important.

Build Your Own Stool

2009-06-02T10:07:00.000-07:00

The three-legged stool analogy for retirement planning is in need of termite-reinforcement now more than ever. This theory of retirement planning has long held that people should think of retirement funding as the balance provided by a three-legged stool: Leg one being Social Security; leg two as employer-sponsored pensions; and leg three consisting of personal savings. Over the last 10 to 20 years the message from government and business could not be clearer. Most responsibility for retirement funding has been shifted to us. Social Security is a broken system, and higher income people are increasingly penalized. Most companies have phased-out the more traditional defined contribution/pension plans. So we are left with trying to balance on one leg...

The good news is that there are better and better methods being introduced to help. The option of partnering with an insurance company can allow individuals to leverage their savings by helping to guarantee future streams of income. People should be careful in building these "personal pensions," as annuities can be highly complex and varied. If not planned properly, you could be subject to higher insurance fees, or lose complete control of your asset.

Annuities can replace that disappearing leg of the stool and reinforce some guaranteed income for retirement. Balancing guaranteed income with personal retirement savings from managed retirement accounts is the constant challenge for people as they approach & cross into retirement. These income plans can provide a great hedge against variable investment returns, but need careful implementation and monitoring.

The 5 Step 401k Makeover

2009-05-21T12:00:00.000-07:00

Perhaps the title of my post is misleading, because I am really referring to all retirement plans from 401k through IRA. After the massive declines in investment holdings last fall and early on into this year, I am offering five review steps for all retirement plans right now...

Asset Allocation
Saving has been the best feature of self-funded retirement plans. Most plan participants have been socking away money with regularity. It is this discipline that has served participants well in the past. Choosing the underlying investments, and revisiting that asset allocation has been the biggest problem for these plans. IRAs aside, most company plans do not allow a financial advisor to directly manage your plan for you. Enlist an advisor to regularly help in reallocated your investment choices. Your advisor can be your advocate in investments they are managing, as well as those they cannot.

Do you have a plan?
Adjusting financial plans has dominated my time with clients throughout the first and second quarter. Plan assumptions have changed in the last 12-18 months. Revisiting financial plans and making the numerical and mathematical adjustments is important for clients, in that they understand where they are in terms of reaching their retirement and other financial goals.

Have you budgeted your risk?
Investor's risk comfort has been redefined in this crisis. When people lose upwards of 30% of their retirement assets, it is back to the drawing board with understanding the risk/reward gamble. Balancing an investment risk where there may be an opportunity is the key. Having a system for budgeting risk in your investment porfolio is important. A methodology for striking the right risk balance can help in retirement planning.

Fees vs. Value
Now more than ever people are examining the fees they are paying for service versus the value received. Sometimes company plans can be laden with administrative fees. Knowing exactly what those fees are is important to the participant. It is also yet another reason to take control of old company plans that you are no longer participating in.

Do you have a guaranteed income stream in retirement?
While the place of the traditional pension in the overall retirement plan is a shrinking one. after the last year, many investors are rushing to guarantees for at least a portion of their retirement savings. Annuities can be highly complex plans, and investors should understand exactly what they are getting for the price they are paying. Newer guaranteed income plans allow investors to turn their asset into a stream of income without necessarily losing control of it completely. Be sure to understand all of the details before comitting to one of these contracts.

Bubble to Bubble: the culture of now

2009-05-12T18:57:00.000-07:00

I believe that the excesses of the financial crisis our economy faced last autumn and earlier this year can be traced back to the returns that investors began to expect during the "dot-com boom." During this time, people could throw a dart at a list of technology companies and get a double-digit return.

I am certainly exaggerating, but the point is that returns were not in line with financial data. Additional, these astronomical returns fed into the frenzy over one sector of the economy. When reality set in in the early part of this decade, investors looked for the "next big thing," fueling a shift in "irrational exuberance" from tech to real estate. The danger in this was/is the leverage involved. Lenders wrote bad loans. Wall Street itched to get involved, thus the securitization of these sub-prime loans, passing along derivitives to investors--instead of reducing risk, this actually exacerbated the risk.

Inordinate performance is simply unsustainable. Investing is not a sexy business, especially if investors stay true to their risk tolerance and general appetite for risk. Our culture of immediate performance does not align with a steady investment return. Patience and discipline are the basis of sound investment decisions.

Exile Economy

2009-04-21T12:00:00.000-07:00

Welcome to my blog!

The regular notations and observances that will be posted here will attempt to blend the ideas behind the phenomenon of globalization with the uniqueness of regional economy. Specifically, I will be touching on California--the 7th largest economy in the world. My posts will attempt to apply macro-economic trends to ideas in personal finance.

Globalization means different things to different people. The best definition I have come across is the "growing economic interdependence among countries through increased flow of goods and services, capital, and know-how." This speaks to the dependence regional economies have on each other. Despite the fact that there are different drivers in various regions, and certain factors insulate economies in different ways, no economy functions on its own. There is no such thing as an economy in exile.