Front Street Wealth Management

Fee Only, Proactive Wealth Managment

Minding Your Financial CyberSecurity

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According to Charles Dickens, “It was the best of times, it was the worst of times…” While he certainly didn’t know about the many benefits and pitfalls the internet would bring with regard to the security of personal information, Dickens aptly describes a modern day plight for today’s investors. If managed correctly, you can get the best of both worlds; easy access to your information with the peace-of-mind you deserve.

As an investment advisor who tends to work with near-retired or currently-retired clients, the concerns expressed to me regarding the online security of financial information is ever present. And it’s a growing problem that’s rightfully caught the attention of my industry’s regulators.

However, developing and maintaining the security of clients’ personal information requires a true partnership between both the client and the professional. In the absence of clients following sound online habits, like most things in life, there’s a weak link in the chain.

In addition to communicating with your professional advisors about their internal cybersecurity policies designed to reasonably protect your information and your money, here are a few things that you can do to help.

First, develop safe password policies. At its most basic level, avoid using overly simplistic passwords. Naturally, the simpler it is for you to remember, the simpler it is for criminals to exploit.

In an era where all of us are juggling dozens of passwords for dozens of websites, it is also intelligent to avoid using the same password across the board, even if it’s sufficiently complex.

Instead, consider creating a single “core” password dedicated just for your financial websites. And, then simply append to your core password a unique identifier to make it one-of-a-kind. Additionally, make it a habit to change your financial passwords frequently. This will help mitigate your financial risk with the types of widespread data breaches we’ve witnessed in recent years.

Second, watch out for what’s known as email phishing scams. It’s not uncommon for unsuspecting victims to fall for fake emails linking to imposter financial institutions’ login pages. By the time they realize it, victims enter their login information online and inadvertently share it with criminals. A best practice is to never click on links to financial websites within emails. Instead, just enter their website address directly in your browser.

Finally, consider calling the various credit report companies – Equifax, Experian and TransUnion – and ask them to install a “lock” on your credit report. This feature can effectively stop identity fraudsters from opening up new credit cards in your name.

So, in the face of Dickens’ double-edged commentary, I’d argue the internet offers far too much to let worry stand in your way. Take a few precautions and enjoy the world of information literally at your fingertips.

Social Security, The Pogo Stick Plan

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Not too long ago, retirement planning was built on the concept of a three-legged stool. One, a pension, negotiated by you and promised by your employer. Two, your own investments, saved by you and supported by an ever-growing economy. Three, Social Security, provided by you and your employer and mandated by your government.

With this secure and sturdy stool in place, a solid retirement plan was once likely, if not probable. For many today, retirement security is based not on a concept of a stool, but rather a pogo stick, where Social Security plays a huge role for those who struggle to save and invest.

Given its importance, the next Money Series event will delve into Social Security; how the program works and the rules you should understand to get the most out of it.

To highlight Social Security’s impact on our lives, a few facts speak volumes.

Approximately 60 million people receive almost $1 trillion in benefits every year. On average, the program provides about one third of household income for the elderly. Yet, even those statistics don’t properly paint the full picture.

Digging deeper, about half of all retired married couples and three out of four retired single people receive more than half of their income from Social Security. Shockingly, almost half of retired singles rely on Social Security for over 90% of their income.

Social Security is a big deal. Even so, its various rules and options remain a mystery to most. It literally pays to know them better.

Far too many fail to realize the advantages of simply waiting to file for benefits. As a result, millions leave billions of dollars on the table by choosing to file at their earliest possible age of eligibility. In fact, just less than half file for benefits at age 62. Astonishingly, waiting until age 70 to file for benefits results in nearly 80% more per month.

In an age of constant medical advancements, longevity can be both a friend and foe. Earning Social Security’s delayed-retirement credits, earned by waiting to file for as long as possible, is just one tool tilting things in your favor.

For married couples, it’s important to understand that lower-earning spouses may be entitled to receive additional benefits – called, spousal benefits – in exchange for supporting the careers of their higher-earning spouse and/or choosing to raise the children.

Many people also fail to understand that even after a divorce or the death of a spouse they are entitled to benefits connected to their former married status. Spousal benefits for divorced retirees and survivor benefits are yet another wrinkle that deserves a deeper education.

Finally, since April is just around the corner, it’s also important to understand how your Social Security benefits are taxed. From the limits on what you are allowed to earn when you are under age 66 to the amount of income allowed before Social Security starts to tax away your benefits, various strategies do exist to help you minimize the taxman’s bite.

To hear more on Social Security’s rules and options, join me on Wednesday, Feb 15th at 6:30pm for the Front Street Foundation’s Money Series held in the McGuire Room at the Traverse Area District Library. Visit MoneySeries.org

Planning Starts with a Conversation

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A client of mine, but more importantly a family friend of four decades, recently passed away. As I sat down with her loved ones, I immediately recognized the gift she provided them. Her gift was the overall simplicity of her estate plan. It’s something everyone should strive to leave behind. It all starts with a purposeful conversation.

While it’s true the duties assumed by an estate’s personal representative or a trustee still require time – often spent in the midst of grieving – your thoughtful planning can ease their workload considerably.

Upon reflection, I view my client’s well-organized affairs as a model to follow. So much so, I now consider it one of my professional New Year’s resolutions to help all of my clients review their plans. I strongly suggest readers do the same.

To help spur your own review, attorney Diane Kuhn Huff of Stephen & Anderson will be speaking this month on estate planning at the Front Street Foundation’s Money Series. Her goal is to help you begin your own meaningful conversation on a topic too many neglect.

Her presentation will help uncover and better define your wishes about the type of health care you really want, where and in what manner you’d like to live your later years and the various resources you’d like to provide your chosen personal representatives to help fulfill your life plan.

In my client’s case, she had expressed a deep desire to remain at home in the final months of her life. The steps she took in her planning – through a combination of her financial set up and open conversations with her family members – allowed her to access the support she needed to achieve that goal.

Your own conversation might begin with a review of the choices you can make now to either remain at home or to gradually transition to other living environments with built-in levels of support. Your conversation might also enhance your understanding of the complex eligibility rules for Medicaid or VA benefits and how you can plan accordingly. In addition, you could discuss the trade-offs created by strategic asset transfers to your spouse or your heirs.

To close, I’d like to add a special note: As is often the case during difficult moments in life, positive things emerge. For my client’s family, a lasting impact was made by the wonderful care provided by the people at Hospice of Michigan. We are very fortunate to have available such high quality resources in our community.

To learn more, join Diane Kuhn Huff on Wednesday, January 18 at 6:30pm for the Front Street Foundation’s Money Series held in the McGuire Room at the Traverse Area District Library.

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Is the Market’s Cheery Mood Justified?

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Sentiment is a peculiar thing. It can turn on a dime. Recently, those dimes have piled up quickly. Since early November, significant new paper wealth has been created from rising stock prices.

The big shift in investor sentiment over the past eight weeks undoubtedly centers around Trump’s victory and the anticipation of Republican control of all three levers of the federal government.

Since the election, the broad stock market has leapt about 7% and stock indexes of smaller, domestic companies have popped about 15%. Is this supportable?

Perhaps it’s true plans for fewer regulations and coming tax cuts may explain some of it. Possibly it’s true that plans for increased infrastructure spending has had some effect. Maybe it’s also true the president-elect’s cabinet appointments foreshadow even more pro-business policies to come.

Yet, these factors alone are difficult for me to explain such a sudden mood shift. Change often happens slowly and, as a result, markets often overshoot expectations.

Here are a few things that concern me with investors’ recent – almost instant – positive reaction to the election.

First, tax cuts aren’t all created the same. Much depends on who receives the tax cuts and what they choose to do with the extra money.

When tax cuts accrue to the wealthiest households, they tend to spend less of their windfall than do the poor. The Bush tax cuts – also heavily weighted to the wealthy – were an example of a lower “multiplier” effect on economic growth. Similarly, if the currently anticipated tax cuts end up sitting in the bank, the effect on the economy may be far smaller than many now anticipate.

While it’s true some will invest back in the economy, that decision will be driven only by a clear-eyed assessment of unmet demand for goods and services. Absent that new demand, many businesses may choose to instead increase dividends, buy back their own stock, or pay down debt. These actions aren’t nearly as impactful on growth as hiring new workers, investing in research and development, building new factories or even raising wages for workers.

Second, given the importance of global trade, it’s troubling to hear the chatter of imposing tariffs, watch the strengthening of the US dollar or read threatening tweets about trade wars. The notion that it’s all just tough talk may be unwise to assume. In response, large multinational corporations will flex their well developed lobbying muscles. But, it may prove quite difficult to put the protectionist genie back in the bottle.

Finally, stocks are trading at all-time highs. Reputable measures of the stock market’s value, such as the Shiller Price-Earnings metric, should not be waived off so readily. An immutable law of finance is the higher price you pay, the lower your future return.

The past two months of 2016 reminds me of something Warren Buffett once said, “Investors pay a very high price in the stock market for a cheery consensus.” If today’s sentiment on Wall Street can be described in a single word, cheery, most certainly fits the bill.

Tips for Year-End Planning

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While the end of the year is admittedly busy, I feel compelled to add to your to-do list!

I was recently reminded of a clever habit of one of my newer clients who hold their very own financial “State of the Union” around their kitchen table each year. For them, this serves as a structured time for them to reflect on the past year and to help them financially plan forward.

In preparing for our upcoming Money Series joint presentation, where we will each share tips regarding year-end financial planning ideas, local attorney Greg Luyt of Bowerman, Bowden, Ford, Clulo & Luyt introduced me to an expanded and robust version of this same disciplined habit.

For those who have been left behind to piece together the puzzle of another person’s life, being handed a cheat sheet is truly welcome. Mr. Luyt’s important idea is to encourage you to create what he calls a Family Guidebook to make things much easier for your loved ones after you are gone.

This essentially entails the creation of a set of communications that may encompass an inventory of – among other important items – your various financial accounts, the location and your intentions for your cherished personal belongings and even a narrative reflecting your final wishes with regard to your funeral arrangements.

Luyt stresses that, regardless of your financial means, your Family Guidebook can cost you next to nothing to create. All it takes is your time to reflect, review and routinely renew your intentions. Add this one to your list of soon-to-be-successful New Year’s resolutions.

Now, I’ll move on to time-sensitive things that you probably shouldn’t put off until next year. As I mentioned a couple weeks ago, it might actually save you money.

If we assume the nearly identical tax plans of the House Republicans and President-elect Trump will actually be implemented, your ability to deduct charitable donations, property taxes, state income taxes, and in most cases, even your mortgage interest, may be long gone.

Even if the contemplated changes fail to materialize, we absolutely know we can still deduct these expenses in 2016. So, your proactive planning has no downside.

To ensure your ability to deduct these expenses, consider paying early your winter property tax bill, your next estimated state income tax payment and even your January mortgage payment before the end of the year. Under most scenarios, and for most taxpayers, this will result in lower taxes.

Importantly, for those with charitable intent, talk to your adviser soon about storing up multiple years of your charitable donations by opening a “donor-advised” fund. It’s extraordinarily easy, anyone can do it and there’s still time. To add to your pressure, there are only twenty six days left to plan. Start now!

For more tips on year-end financial planning, join Jason P. Tank, CFA and local attorney, Greg Luyt, on Wednesday, December 14 at 6:30pm for their joint presentation for the Front Street Foundation’s Money Series held in the McGuire Room at the Traverse Area District Library. Visit FrontStreetFoundation.org or call (231) 714-6459 to register.

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Planning for Coming Tax Law Changes

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Thanksgiving is not normally the time to talk taxes. Yet, here we are. With single party rule coming to Washington, expect to see real tax policy changes ahead. With these changes, you should consider a few steps before the new year begins.

Let’s review the possible – I’d say, very probable – tax law changes for households.

First, expect to see fewer tax brackets. The current 10% and 15% brackets will collapse into a single, new 12% tax bracket. And, in place of the current 25% and 28% brackets, expect a new, wider 25% tax bracket. You are right if you feel these changes appear inconsequential.

The more interesting changes will be for taxpayers in the current 33%, 35% and 39.6% tax brackets. If you fall into this slice of households, you should expect only the lower 33% bracket to survive, among other tax cuts.

Next, instead of keeping track of your various deductible expenses – a practice called, itemizing – you will no longer need to account for things quite so closely. Most people will fall into the camp that uses the “standard” deduction as it is slated to double in size.

If you stay in the camp of taxpayers who will still itemize, it’ll only be because you have a very large mortgage or you donate a lot of money. All other deductible expenses – property taxes, state income taxes, medical expenses and professional fees – will be a concern of the past.

This will make things much simpler, but not necessarily more lucrative to most households – here’s why.

The current plans also call for you to lose all of your personal exemptions. This will work to hike your taxable income. For most, the doubling of your standard deduction will only work to offset this hike. For most households, the final result of these changes will be a wash.

As Shakespeare once said, for most people, these changes will feel like “much ado about nothing. “ The substantial changes will be for high earners.

With the lower tax rate on higher income, a far lower, special tax rate on self-employment and small business income, the elimination of the extra tax on investment income, the possibility of higher earners now getting to claim the larger standard deduction and with a possible elimination of the estate tax, the proposed changes beginning in 2017 are, indeed, consequential for high earners.

As with any changes in tax law, proactive moves can help to lower your tax bill before the start of next year. For many households who will no longer be able to itemize, these moves may include paying your winter property taxes early and making planned charitable donations now. Pausing now to anticipate these possible changes before year-end could very well put money in your pocket.

For more tips on year-end financial planning and beyond, join Jason P. Tank, CFA and local attorney, Greg Luyt, on Wednesday, December 14 at 6:30pm for their joint presentation for the Front Street Foundation’s Money Series held in the McGuire Room at the Traverse Area District Library. Visit FrontStreetFoundation.org or call (231) 714-6459 to register.

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Legacy Planning, a Lasting Impression

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As the holidays approach, it’s a natural time to reflect on the meaning of generosity. While today’s needs should rightfully capture our immediate attention, it is inevitable that tomorrow’s needs will make an equally compelling case. Like most things in life, there is a place for striking a balance between these competing interests. In the world of philanthropy, this balance is achieved through the use of legacy giving.

What is legacy giving? How does it work? Can anyone do it? These are a few of the questions I considered as I thought about the upcoming Money Series presentation by Phil Ellis, Executive Director of the Grand Traverse Regional Community Foundation on how people can create a plan that supports the causes that have shaped their lives or those of their loved ones.

Legacy giving is about extending into perpetuity your passions and causes in ways that can benefit those who will inexorably follow in your footsteps. When legacy giving is done well, it’s a wonderful thing to see.

Compelling stories of legacy giving jumped off of our community foundation’s website as I perused the long list of local charitable funds. In a world of unfiltered cynicism, it was frankly a refreshing exercise to undertake.

For example, Andrew Shotwell, attorney with Smith & Johnson, recounts his experience from the planning through the giving stage of the Ernest B. Isaacsen Scholarship Endowment. Mr. Isaacsen was awarded our local Chamber of Commerce’s distinguished citizen award 67 years ago. His story certainly shows the power of legacy giving. So much so that Mr. Shotwell’s musings about how those charged today with choosing scholarship recipients often say, “What would Ernie think of this application?”

Other stories include those of Cleo Purdy of Central Lake, who had a passion for providing enriching experiences for young children and their families. Following her death, her planned giving now supports playgroups, preschool and the literacy of young children in our region. In another example, following the passing of Karolina Holtrey in 2000, her legacy giving still provides ongoing support for Frankfort’s library, senior care, and various other educational opportunities in her former community. Finally, Traverse City’s own Dr. Ken Taylor believed in the need for excellent and available health care for everyone. Since his passing, his daughters have worked to ensure that his guiding vision extends well beyond his lifetime.

To learn about legacy giving, join Phil Ellis on Wednesday, November 16 at 6:30pm for his presentation for the Front Street Foundation’s Money Series held in the McGuire Room at the Traverse Area District Library. Front Street Foundation is a nonprofit with a commitment to provide open-access to financial education, for all. Visit FrontStreetFoundation.org.

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Preventing Financial Fraud of Seniors

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The problem of financial fraud and exploitation of seniors continues to grow day by day. With many billions of dollars stolen from retirees each year, more must be done to help minimize the damage inflicted by financial scammers.

This effort will take a combination of public awareness through education and a concerted effort to protect the most financially vulnerable among us.

In my career, I have personally witnessed two financial frauds involving my own clients. In both cases, the perpetrator used popular scams, known as the IRS scam and the Grandparent scam.

Most financial frauds have a common thread. The crook probes for a targeted victim’s emotional vulnerabilities – from outright memory loss to a general limitation in understanding financial concepts – and then expertly exploits it.

Studies have shown that a person’s ability to grasp semi-complex financial situations “on the fly” – known as fluid intelligence – tends to steadily diminish with age.

Interestingly, as people grow older, their fluid intelligence can begin to diverge markedly from their overall mental skills and knowledge built-up in other important areas of their life. This divergence helps to explain why otherwise intelligent people fall for seemingly obvious scams. It also explains why many victims keep the crimes a secret due to their embarrassment and shame.

Through increased public awareness – not only for the elderly but also for their loved ones and caregivers – I believe we can help to combat scammers and to arm future victims and their families before a crime is committed.

To begin raising that awareness, here are some tell-tale signs a potential scam is underway.

The first sign is the con artist will pressure the victim to either act quickly or they will downright scare the victim, such as the threat of imminent arrest or even the revocation of their driver’s license.

In addition, the scammer may impersonate someone in a position of authority, pretend to be a loved one in need of financial help or will fake romantic interest in order to gain the victim’s trust.

Certainly, the challenge of prevention is complicated given advances in technology that allow criminals to easily mask their true identities and to avoid prosecution. Given this, developing proactive strategies and practices is our best line of defense to help protect the most vulnerable among us.

To learn more about how to better protect yourself or your loved ones against financial fraud, join Jason P. Tank, CFA, on Wednesday, October 19th at 6:30pm for his presentation for the Front Street Foundation’s Money Series held in the McGuire Room at the Traverse Area District Library. Front Street Foundation is a nonprofit with a commitment to provide open-access to financial education, for all. Visit MoneySeries.org.

Planning for the Future of the Family Cottage

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With summer now in the rear-view mirror, the process of closing down the family cottage in Northern Michigan is underway. This inevitably sparks thoughts of next year’s plans and family travel schedules. But, for some, it also sparks lingering thoughts about the need to develop a plan to ensure your cottage will remain in the family for decades to come.

The decision to embark on estate planning for your cherished cottage is often less about financial maneuvering than it is about emotional considerations. After all, the memories made on the lake or on the banks of the river are no doubt deeply engrained in your family’s culture.

The importance of this was summed up nicely by Dan Penning, a local attorney with expertise in succession planning for family cottages, ”One client showed me a large oak tree in the side yard of his family’s cottage, which had a peculiar pronounced branch protruding about halfway up the trunk. A tire swing on a chain hung from the branch.”

”Through the years, the chain became embedded into the branch and my client told me that the swing had been there when he was a child and that he had played on it just as his children, grandchildren and now great-grandchildren were playing there 75 years later!”

Mr. Penning continued, “Stories like these are not at all uncommon over my career in assisting families in their planning for the protection and continued use and enjoyment of their family cottages by themselves and future generations.”

The unique factors involved in a successful cottage plan often requires honest, self reflection. For example, not all families are great candidates for cottage succession planning. It may simply be that the kids don’t share the same affinity you have for your cottage. In addition, the financial means necessary to maintain a robust cottage succession plan may not exist. If this is the case, there is no point in trying to fit a square peg into a round hole.

However, when your family’s structure points to both the desire and the means to ensure continued enjoyment of the family cottage for generations to come, the legal planning to create a lasting success naturally takes on the flavor of business planning.

Beyond the final legal structure chosen to transfer the ownership of your family cottage, the nuts and bolts of business operations must also be explicitly defined. These operational considerations take the form of shared financial responsibilities, cooperation on usage for each family member and their guests as well as the legal protection of the asset against future creditors or divorce, and many more.

To learn more about planning for your family cottage, join Dan A. Penning, founding member of The Penning Group on Wednesday, October 12th at 6:30pm for his presentation for the Front Street Foundation’s Money Series held in the McGuire Room at the Traverse Area District Library. Front Street Foundation is a nonprofit with a commitment to provide open-access to financial education, for all. Visit FrontStreetFoundation.org.

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Annuities, Exercise in Complexity

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Today’s annuities are so complex, it’s safe to say most people who’ve been sold one have little understanding of how they work. To help, let’s cover some general and specific features of both indexed and variable annuities, the types sold about 80% of the time.

During the accumulation phase, before you start to draw out money, variable annuities basically allow you to invest in mutual funds that rise and fall with the markets.

With an indexed annuity, your return is very loosely linked to a chosen stock market index. When stocks rise, you often receive just a small portion of the gain. In exchange, when the market drops, you don’t lose.

In essence, indexed annuities equip investors with training wheels along with knee, elbow, wrist pads and a helmet. All that protection can leave little to be desired. Often, indexed annuities give you only a small return, even in a good year for the market. While you might not lose, there simply isn’t much upside offered.

Becoming an educated investor in indexed and variable annuities requires you to decipher terms like, participation rate, cap, spread, crediting rate method, step-up feature, premium bonus, roll-up period, accumulation value, protected benefit base, living benefits, contingent deferred sales charge and guaranteed minimum rate, among many others. It’s like learning a whole new language.

Within many annuities, insurance companies also offer add-on insurance features that provide protections, at a cost, sometimes significant. These riders are designed to sweeten the annuity for the income phase, but they do require you to keep the product for a set number of years.

The most popular riders available for variable and indexed annuities are generally referred to as, living benefits. They often go by names that include the word, guaranteed. Put simply, among your normal annuity account balance, living benefit riders present you with a steadier “phantom” account balance that you cannot tap into unless you are willing to accept installment payments. These riders frankly make you feel a bit schizophrenic as you must follow multiple alternative account balances – both real and phantom – at the same moment.

Despite the sheer complexity of today’s annuities – whether you already own one or you don’t – gaining a working knowledge is a wise move. Based on the fact that about $250 billion of these annuities were sold last year, there are a lot of sales pitches to handle.

To learn more about annuities, join Jason P. Tank, CFA on Wednesday, September 14th at 6:30pm for his presentation for the Front Street Foundation’s Money Series held in the McGuire Room at the Traverse Area District Library. Front Street Foundation is a nonprofit with a commitment to provide open-access to financial education, for all. Visit FrontStreetFoundation.org.

Annuity Sales Face Greater Scrutiny

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Annuities are not typically purchased. They are most often sold. While annuities can be a valid solution for some, they can be entirely inappropriate for others. In my experience, annuity sales are too often sold to people who fear for their financial future. This is about to change and it couldn’t come a day too soon. Given the complexity of annuities, this is the first of two installments.

The Department of Labor, under their new and expanded fiduciary duty rules, clearly agrees with me. Once fully implemented, their new rules will subject many annuity salespeople to a much thicker layer of regulatory scrutiny. This will undoubtedly mean more objective advice is given to people facing important retirement decisions.

With that, let’s first define what an annuity is by describing the trade you’re making when you purchase one.

When you buy an annuity, you hand over your money to an insurance company. In return, you are promised a set of payments in the future. The point in time you begin receiving those payments can range from right away to decades later.

Let’s next categorize annuities by the way your money grows after you hand it over to the insurance company. Your return is either fixed or it’s variable.

With a fixed annuity, the insurance company promises you a set return on your money, like you’d get with a CD or a bond. With a variable annuity, your return is linked to stocks and bonds, like your typical investment account.

What makes annuities hard to evaluate are the extra features insurance companies build in. These features are often band-aids designed to soothe the real pain inflicted by your separation from your money – “Will I still have access to my money, if I really need it?” Or, annuity contracts contain bells and whistles designed to sweep away your pre-existing worries – “You no longer have to gamble at the stock market casino.”

Of course, the more flexibility and protections you desire in an annuity, the higher its cost and the lower your benefits. As much as they’d like you to believe it, the annuity industry has not yet discovered financial alchemy, unless you count their ability to consistently turn your fears into their fortunes. With a little education, your personal annuity decision – yes or no – will end up being what’s best for you alone, as it always should be.

To learn more, join Jason P. Tank, CFA on Wednesday, September 14th at 6:30pm for his presentation on behalf of the Front Street Foundation’s Money Series held in the McGuire Room at the Traverse Area District Library. Front Street Foundation is a nonprofit with a mission to provide open-access to financial education, for all. Visit FrontStreetFoundation.org to learn more.

Signs of Income Starvation

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Investors are starving for income like never before. Most recently, retirees, insurance companies, pension plans and others are tossing caution to the wind and desperately reaching for yield wherever it can be found. Based on history, this will not likely end well.

This summer has marked a new low in yields and a corresponding new wave of investor desperation. After the surprising U.K. vote to exit the European Union, interest rates plunged throughout the globe. Government bonds – about $12 trillion worth – now trade at negative yields. No modern-day finance textbooks discuss the notion of investors literally paying a government for the right to lend them money. Yet, this is the upside-down world of finance in which we now live.

Dealing with this world of low interest rates has pushed investors to seek alternatives to owning high-quality, low-yielding bonds or CDs. As a result, traditional income-oriented stocks, such as utilities and telecom companies, have surged about 20% in just the first seven months of this year. These are astounding returns for companies operating in slow-growing industries. Nonetheless, investors today view 3% dividend yields as mouth-watering. There appears to be very little fear of paying too much for these dividends. There should be.

Let’s put the current price of utility and telecom stocks into some historical perspective.

Currently, investors are so happy to receive their dividends that they have now bid up utility stocks to nearly 20 times their annual earnings. During my career, it has not been uncommon to see utilities trading about 30% to 50% lower than they do now. It is a basic fact of math that any return to normalcy – even a move in the direction of normal – will wipe away many, many years of the dividends these investors so craved. It takes a lot of years of dividend payments to make up for a 30% drop in the stock price.

It is ironic that Warren Buffett’s warning that investors “pay a very high price in the stock market for a cheery consensus” has been so turned on its head. Four decades later, it is now investors’ un-cheery consensus about ever being able to earn enough income on their money that has led them to ignore Buffett’s advice. Whether it is optimism or pessimism that leads investors to pay too much, the outcome will be the same. You should review your own portfolio now for any hints of desperate thinking.

Weak Q2 and First Half

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Once again, the US economy is simply confounding investors. 

While the consensus view of economic growth in the 2nd quarter of 2016 was about 2.5%, the first estimate came in at only 1.2%. This followed a very weak 1st quarter of 2016 at 0.8%, according to the third and final estimate. Together, the first half of 2016 showed GDP growth of about 1%. It appears the Fed is going to hold off on raising interest rates for a while longer. The data just doesn’t support the decision. 

The big bright spot in the 2nd quarter was consumer spending growth that offset a large drop-off in business investment. 
As has been the case for sometime now in this recovery – marked by low interest rates, steady job growth and a strong auto and housing market – the US economy has not been successful in achieving what Larry Summers once called, economic “exit velocity” – that speed where the positive fundamentals begin to reinforce more growth on its way to a virtuous cycle of economic recovery. 

Instead, it’s been a long period of spurts, stutters and stammers. That trend continues now seven years into the recovery. 

In addition, it looks like the 2nd quarter will mark the fifth straight quarter of declining corporate earnings. See pictures below. Yet, stocks hover near there all-time highs and prices relative to earnings are high on many broad measures. 

Yes, it’s confounding. So it has been in an extended era of extraordinarily low interest rate policy around the world.  


What Once Was Insane

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Back in 2009, I attended the annual meeting of Berkshire Hathaway, the conglomerate controlled by famed investor Warren Buffett. That year’s meeting held special attraction, taking place just weeks after the stock market hit its low during the financial crisis. Buffett served that day as investors’ North Star.

Prior to his much anticipated Q&A session, Buffett made a short presentation to a crowd of over 40,000 worried shareholders. His clear mission that morning was to calm and teach.

Buffett, in full professorial mode, highlighted a trade he made at the crisis-induced market low. In the midst of market panic, he had managed to sell a US government bond at a price that produced a negative yield for the buyer. Obviously, stuffing money under their mattress was just not a practical alternative.

Buffett’s lesson was clear. Investors had temporarily gone insane and rational behavior always returns.

Seven years have passed since his lecture and now trillions of dollars of government bonds across the globe trade at negative yields. Perversely, the US 10-year bond is now seen as attractive with its mouth-watering, positive yield of 1.5%.

What was once abnormal has become normal. Justifications abound. 
Central banks will hold rates low for much longer. Inflation is dead. Global growth is slow. As long as these conditions hold – and the cascade of consensus thinking says they will – yields will stay low or go lower.

The panicked investor Buffett once mocked is no longer. Interest rates at these absurd levels are now accepted as normal. There is no panic, but rather a cold calm about it all.

As the internet would transform the economy during the tech-stock bubble and the Fed-induced low interest rates justified ever-rising house prices and a credit bubble, what assumptions have we adopted as certain today?

Has Japan’s economic disease – following the bursting of their own credit bubble and marked by economic stagnation, demographic decline, persistent deflation and, yes, aggressive zero interest rate monetary policy – become investors’ new North Star?

The habit of real-time diagnosis is often a fool’s game in investing. Only in the aftermath of a burst bubble does a consensus narrative form.

Today, a new, dangerous consensus may be forming. With the justification and acceptance of insanely low interest rates across the globe – creating massive problems in meeting society’s future needs, such as pension and other retirement obligations – stocks are increasingly seen as the only alternative.

In the midst of a bubble, anchoring yourself to what you know can do wonders. While the chase for investment returns never ends, what I know is the desperate reach for returns never ends well.

Brexit and Inchworms

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A solid week has passed since British voters shocked the world with their decision to exit the European Union. This has given us some time to analyze the possible economic impacts of Brexit, as it is now known.

From an economic viewpoint, its ramifications on global growth are negative. When borders become more closed, impairing the flow of capital, decreasing access to workers and lowering trading opportunities, the impact on the economy is obvious. Just imagine if California or Texas or New York decided to secede from our union. It would affect not only the citizens of those states, but also people in Michigan and the rest of the world.

A growing and healthy economy lifts most people, to varying degrees. On the flipside, a stagnant and shrinking economy – a result much more likely after Brexit – disproportionately hurts people living on the lowest rungs of society’s economic ladder. Early voter analysis shows that poorer, less educated voters chose to leave Europe. Voting against one’s own economic interest is not a new phenomenon.

The vote to leave Europe was clearly based on non-economic reasons.

With the Brexit vote, the deciding factor hinged on issues of cultural sovereignty, rather than economic theory. Specifically, concerns of immigration policy played a serious role that tipped the balance.

Regardless of the motivations of the “leave” voters, the implications for the economy were indicated by the upheaval in financial markets. In part, the unprecedented decline of the pound sterling and stocks throughout Europe was a result of surprise. Unexpected events aren’t normally positive for financial markets. Nonetheless, the recovery in stock prices this past week could have been expected. Nothing moves in a straight line in capital markets.

However, the likely longer term effects can be visualized by watching an inchworm. The stuttering, stop-go nature of the economy’s forward progress can result in miscalculations along the way by businesses and investors. Those newly-launched expansion plans or that just-signed contract now face a different set of assumptions than originally planned. The global economy just became a bit more like an inchworm.

Looking forward, business confidence has also been impaired. Whether this hit to confidence is longer lasting will depend on how politicians throughout Europe and the UK handle the aftermath. Since the vote, uncertainty is heightened. In addition, the realities of the massive complexity of actually exiting the European Union hasn’t helped. It’s been aptly described as a messy divorce.

In my view, the Brexit vote has injected tangible uncertainty for businesses and markets, on a global scale. What affects the UK, affects the rest of Europe. And, what affects Europe, affects the US and Asia. With central bankers running out of policy bullets – with interest rates already at rock-bottom levels – and with global politics running on a potent mixture of anti-establishment and anti-globalization fuel, the situation will likely be uncomfortably volatile for investors.

In investing, discomfort can be a red flag or an opportunity. It is never easy to spot the difference.

Funny Charts Mean Little

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I found this chart to be kind of comical in the sense that it signifies almost nothing. Yet, it’s been cited by a big bank and it’s hit the CNBC newsfeed. Could a 2.5% swing in the level of current cash holdings in mutual funds mean all that much? Seems like an insignificant squiggly line to me. 

Who’s Afraid of a Fiduciary Duty?

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In this politically heated environment, yet another partisan battle ensues in Washington. It highlights a sad reality of how difficult it is to do what is so obviously right for consumers. In particular, the battle is over the concept that all investment advisors should adhere to a legal fiduciary duty to their clients when providing financial advice. Until very recently, this duty was largely followed by only a subset of financial professionals, registered investment advisors.

Viewed at a high-level, a fiduciary duty is simply the professional obligation to place the interests of the client first at all times and under all circumstances.

In many ways, the public’s ability to recognize a financial advisor acting as a fiduciary reminds me of that old legal definition of pornography – you know it when you see it. However, that doesn’t cut it when some in the financial services industry seem intent to blindfold the public. Amid a flurry of paperwork and small-print disclosures, most consumers are wholly ill-equipped and outgunned. That is precisely what industry regulation is designed to counter.

The quest to implore all financial advisors to operate under an obligation to act as fiduciaries has been the Holy Grail for as long as I can remember. Due to a massively powerful lobbying effort from those with a vested interest to avoid a legal obligation to first serve the interest of their customers, the foot-dragging among our regulators and politicians over the years was striking to watch. Finally, in April, the Obama administration took matters into its own hands.

Using the existing framework that imposes a fiduciary duty standard on financial advisors in their dealings with pension and employer-sponsored retirement plans, the Department of Labor simply expanded that same obligation to any professional who also provides advice to consumers who own an individual retirement account (IRA). In one fell swoop, that regulatory expansion brought almost every financial advisor into the fiduciary world. With a stroke of the executive branch’s pen, the last foot was dragged across the finish line.

Predictably and disappointingly, the House and the Senate – mostly along party lines -recently voted to strike down the new fiduciary duty rule. Obama’s veto last Wednesday successfully kept the rule in place.

In my view, despite the loss of a clear-cut competitive differentiator for me and my fellow registered investment advisors, the new fiduciary rule is a resounding victory for consumers. Let’s hope it survives our dysfunctional politics.

Understanding Your Investment Fees

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At the Front Street Foundation’s recent Money Series workshop, an attendee asked a deceptively difficult question. She wanted to understand how to figure out the cost of her investment program. That’s a simple enough request, right?

It should be easy for consumers to safely navigate the investment industry. Never is this more the case than it is today. Just last month, essentially every professional who provides financial advice must now operate under the same fiduciary duty rules independent registered investment advisors have always lived under. It is a long overdue and good change for investors.

Given this, my initial suggestion was for her to ask her current advisor what she’s paying. After all, it is a quick calculation for a professional to make and, now, it is her advisor’s obligation to provide her this information. Sadly, she didn’t trust her advisor to give her the straight scoop. She clearly has a larger issue to address, other than knowing the cost of her investment program.

I’ve been asked about fees often in my career and have helped calculate the fees paid by investors on countless occasions. Here’s a basic primer on how you can do it from the comfort of your own home.

For the typical investor who invest in mutual funds, grab your most recent brokerage account statement and go visit morningstar.com.

Each mutual fund you own has a unique ticker symbol. Find the ticker symbol on your statement and just enter it in the search box at the top of the website. Click on the resulting mutual fund’s tab labeled, Expense, and scan down the page for the words, “Net Expense Ratio.”

The net expense ratio is the all-in cost of your mutual fund, presented on a percentage basis. Simply take this percentage and multiply it by the current value of your mutual fund holding. Repeat this process for each mutual fund you own and, finally, add up all the fees. Yes, some math is required.

However, there’s more. If you have also hired an adviser to manage your investments, you are probably paying advisory fees too. Further, if you’ve chosen to work with someone who sells financial products for a commission, some deeper digging is required.

No consumer would dream of buying groceries, clothes or a plane ticket without knowing the price. It begs the question, why do so many do just that when it comes to their investments?

Jason P. Tank, CFA will present, “Understanding Your Investment Fees” at the Front Street Foundation’s Money Series on June 15th at 6:30pm in the McGuire Room at the Traverse Area District Library. Call (231) 714-6459 or visit FrontStreetFoundation.org, if you plan to attend. Front Street Foundation is a local nonprofit providing financial education for all people.

Spring Cleanup For Your Money

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It’s that time of year where you peer outside after a long winter and see an unwelcome amount of debris and disorder awaiting your spring cleaning efforts. The fortunate among us hire a cleanup crew. The planners among us pay attention to the friendly offer from the city to help haul it away for you. But, we’re clearly not all fortunate or planners.

While a nice looking yard is enjoyable, cleaning up your financial debris and disorder is far more important. Many people just never seem to get around to it. Let this serve as both a friendly reminder and an easy-to-follow starting guide.

As always, the most important step is the first one. Start by simply writing down your personal list of those nagging and long-neglected, money-related items in your life. But, be sure to keep it brief at first. People often craft an emotionally impossible list of things to accomplish. The result is entirely predictable; continued procrastination.

In the name of simplicity, craft your list into digestible bites that will allow you to move along the path to a simpler and more efficient financial setup. To begin, I will highlight three key areas you should focus on.
Start by taking a good look at your money mechanicals.

These are equivalent to digging out your dirty, outdoor furniture from winter storage or turning on your sprinkler system or taking your lawnmower in for that overdue tune up. If you ignore your mechanicals for too long, it gets awfully difficult to actually enjoy those summer moments. The same thing happens in your financial life.

I suggest an initial focus on three tasks and then move deeper from there.

Start by reviewing the inventory of your investment and financial accounts and taking special note of your current beneficiary designations for your retirement accounts and your life insurance policies.

Next, dig out your old, dusty, estate planning documents and make sure your former self’s thoughts are still valid and that nothing is worthy of a formal reevaluation.

Finally, have that short and important conversation with your spouse or loved ones about how they could actually access all of your accounts in the event you were no longer around. Write it all down on a single sheet of paper and keep it in a secure place. This simple step will absolutely save a lot of pain and inconvenience at a difficult time.

Together, these simple first steps will likely open up a world of profound thoughts regarding your financial affairs. Don’t let that scare you.

Slowing Earnings Growth

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Here’s a picture of the slowing growth phenomenon that’s now turned into a three or four quarter negative trend.

Yes, the energy sector is a big part of the profit and revenue drag, but the earnings flatline has been far broader than just a single sector of the economy. This has certainly impacted Fed policy and has created a pause in investor optimism.

With the recent GDP print of 0.5% in the first quarter of 2016, on the back of only 1.4% annual growth at the end of 2015, a bit of investor anxiety is warranted. This is especially the case after a roughly 15% rebound in stock prices over the past two months.
slowing earnings growth

Yes, Fiduciary Duty Matters

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Senator Elizabeth Warren is onto something with her recent letter to the SEC about fiduciary duty.

As a fee-only, fiduciary-bound investment adviser, I wholeheartedly agree that my clients’ interests should always be placed ahead of other competing interests.

This fiduciary duty mindset is not universal in my industry.

In too many circumstances, advisers who hold themselves out as financial service providers for their clients are not duty bound by a fiduciary obligation to their clients.

Instead, a certain subset of professionals in the financial services industry are held to a simpler and, I believe, lower, standard of “suitability”, rather than a fiduciary duty.

In other words, many non-fiduciary duty bound advisers only need to offer products and services that are only just suitable enough for their clients.

Following this suitability standard may invariably lead to higher compensation to them or their firms and higher costs to their clients. That’s okay, as long as what’s been offered to them is suitable enough.

In contrast, the fiduciary-bound adviser has a higher hurdle to leap in their dealings with clients and the public.

In the linked article, Senator Warren is right to point out the contradictory statements of some companies in the financial services industry.

My belief is that all advisers should uphold and practice as fiduciaries to their clients. Investment advisers, like my firm, are required by law to be fiduciaries at all times and under all circumstances when they provide services to their clients.

It’s simple to do and, more importantly, simply the right thing to do.

Click image to read…

Fiduciary Duty Matters

Self-Defeating Fed Speak

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After reading dovish remarks from Fed chair Janet Yellen last week, these comments from another Fed governor stand in stark contrast. 

It begs the question if the Fed believes that its primary tool is its ability to manipulate expectations for interest rates in the future through the power of its words, this type of cross-talking between officials certainly doesn’t help in that policy tool. 
Rosengren to markets: You have it all wrong on rate hikes http://www.cnbc.com/id/103518094

Resting Hopes on Central Bankers

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After yet another violent market swoon and snapback, it is entirely possible investors are resting their hopes on a flawed belief.

The first quarter of 2016 displayed a range of emotion that could shake even the most rational of investors.

The first six weeks of 2016 saw stocks rapidly decline, at one point down around 10% to 15%. While the depth of the decline could reasonably be described as normal, the speed was certainly sudden. On the flipside, the market’s recovery over the second half of the quarter has been equally quick.

Today, in fact, most stock market indexes now hover around the zero line year-to-date. No gain and only the fading memory of pain.

It was quite a ride that no doubt favored investors who were either blind or deaf or internet-free, as it has since the recovery began in 2009. Contemplation and preparation has not been rewarded.

To begin the year, investors began anticipating the negative effects of the Fed’s move off of zero interest rates. That concern, coupled with the fact that the economy is still showing only subdued growth and corporate profits have been in decline, investors were quick to cry wolf.

As soon as their cries rang out, central bankers in Europe, Japan and China all responded with more easy money. In fact, describing it as easy money may be an understatement with a large portion of all government debt across the globe now trading at negative yields. Yes, unbelievably, negative interest rates require the investor to pay the borrower for the privilege to lend!

Following suit, our own central bank has consistently backed down the expectations for rate hikes this year and next.

It’s almost ironic that the Fed started to raise rates in December, citing a healthy enough economy to start “normalizing policy”, as they say. Now, growth has stalled out once again, as it’s done repeatedly.

Regardless, my observation is investors don’t care as much about economic growth or even profit growth as they do about the underlying support of central bankers.

The quick market bounce in mid-February almost perfectly coincided with a doubling down of promises of lower rates for longer and more asset purchases around the globe.

Investors reaction to promises of easy money reminds me of the long held belief that objects of different weight – a bowling ball and a feather – fall at different rates.

For thousands of years, this flawed belief was seen as an universal truth by the academic elite. That is, until Isaac Newton showed what other non-academics knew long before, all objects are affected by gravity just the same.

Are investors simply buying into a similarly flawed and long-held belief that central bankers and low rates will always be there to rescue them? We shall see, but I’m placing my bet on gravity.

Time to Tidy Up Your Finances

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The recent best-selling book, The Life-Changing Magic of Tidying Up, argues that life’s better when you eliminate your clutter. I believe the exact same principle applies to your financial life.

As you look at your pile of shoes, tools or warily peer into your messy closets, it’s no surprise your things get lost so easily. Too often, partially due to a distaste for all things related to money, people similarly neglect their finances.

If this describes you, your benign neglect may lead to costly and avoidable mistakes.

Over the years, I’ve noted two common habits that lead to financial disorder.

First, many people have too many investment accounts. It results in a cornucopia of accounts and the situation is overwhelming.

This type of shotgun approach – to just open accounts all over town and never look back – creates a situation that is often unmanageable for a normal person. And, as a general rule, what is unmanageable most often remains unmanaged. In the world of investments, I can assure you, that’s not a good thing.

People living in this disorganized state also have little idea about their overall investment allocation and the level of risk they are taking with their money. With their piles of unopened envelopes and email notices growing, they often don’t know their mix of stocks, bonds or cash. There are simply too many accounts and it literally stops them from moving forward with a strategic investment plan.

Second, failing to periodically clean out your financial closet can result in costly estate and tax planning mistakes.

For example, neglect can lead people to fail to update their beneficiary designations as their life situation changes, such as a divorce, death or having a new child. The benefits of good tax planning concerning your heirs can be large and to inadvertently throw them away is unfortunate, to say the least.

Another example is for those who have successfully completed basic estate planning moves – through the creation of trusts or other methods. Having to keep track of too many moving parts naturally lead to a failure to execute on the plan. When you don’t actually fund your trusts or properly designate your payable-on-death directives for your various accounts, all the planning in the world is wasted effort and can lead to avoidable expenses for your loved ones.

A good financial adviser will work to better organize your financial life. Helping you tidy up your affairs is one of their core functions to help you gain confidence with your overall financial strategy and plans. An uncluttered home – and an uncluttered financial life – invariably leads to an uncluttered mind. It might even feel, dare I say, life-changing.

Investment Costs Add Up

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Occasionally, I experience disappointments as an investment adviser. It comes with the territory as I get to see behind the curtain of the financial services industry. It saddens me to report, when it happens, it’s often not a pretty sight.

An individual recently came to me for advice about his IRA account. After years working with an adviser, his gut told him he needed another set of eyes to take a look. His hunch was right. In a nutshell, the investment expenses he was paying were outrageously high.

The primary lesson is, you should periodically conduct your own review. It’s not difficult to do. The savings you might find can add up to a substantial sum over time.

Casting the curtain aside, here’s what I saw.

First, this individual’s adviser charged him 1% of his account value per year for services that largely focused on investment management. He described to me a relationship that was very light on personalized financial planning. For that 1% fee, which isn’t uncommon, the delivered services shouldn’t be light on this front.

But, as they say, there’s more.

Next, his adviser chose to outsource his duties to another investment advisory firm. Outsourcing is also not uncommon in my industry, especially for advisers who either don’t have the professional skill or the inclination to actually manage their clients’ assets themselves.

However, as a prudent consumer, you should be very aware of the possible double-layer of expense an outsourcing decision creates. In this individual’s case, his adviser’s outsourcing added yet another cost of 1.25% per year.

Unfortunately, as bad as this might be, you guessed it, there’s more.

 Third, the outsourced investment adviser outsourced his work too. As part of their service, they chose to invest the money in various mutual funds that, together, added at least 0.75% per year in additional costs.

With the curtain fully drawn back, this individual incurred total expenses of roughly 3% per year. Expenses like these create a hurdle so high, few investors can ever get ahead. And, these expense layered cakes are not rare enough, especially for smaller investors who can afford them the least.

 Think about the math for a moment. With interest rates so low today and with the economy now entering its eighth year of recovery, future investment returns – after expenses like these – may indeed have a hard time staying in positive territory.

Learning how to analyze your investment costs is a skill worth developing.  

Comments on Buffett’s Annual Letter

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Just finished reading the letter portion of Warren Buffett’s annual report to shareholders. It’s always a good read.

My general impression is that Buffett is increasingly describing the wide-ranging operations of Berkshire in terms and structure that highlight the conglomerate his empire has truly become. The specifics of the many underlying, smaller businesses that Berkshire controls and the investments Berkshire makes in marketable securities, are largely gone from his commentary. This was once the bread and butter for professional investor readers. This is natural and reflects the sprawling nature of the business today. Still, his letter does lose a little bit of its “nerdiness” as a result.

It was noticeable to me that he used only one page – just a short list – to describe Berkshire’s investment activities and he made no detailed mention of bonds (a big part of Berkshires’s portfolio as a large insurer), the state of the economy or the current state of central bank policies that have produced unprecedented effects in financial markets today. His comments about the market and their transactions along the way were very sparse and no real mention was made of his investment lieutenants’ (Combs and Weschler) decision making or returns in 2015. Given the focus that many shareholders place on Buffett’s investment acumen, I found this somewhat odd. Especially so, given that he is 85 years old.

Overall, the businesses that Berkshire controls have certainly produced a very diversified set of income streams. The overall value of the company, from a book value relative to its current market value perspective shows that Berkshire’s common stock is reasonably priced at around 1.2x book value. In fact, this is the valuation level that Buffett has stated will prompt him to use Berkshire’s resources to buy back its own shares. This has not occurred often in his 60 year history.

My opinion on Berkshires’s lower book value multiple is that it better reflects the reality that a management transition will occur sooner rather than later. Given its complex conglomerate structure – again, one highlighted by this year’s letter – Buffett’s successors will have a challenge during a transition.

Election Issue: Social Security Reform

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In the high heat of this election cycle, Social Security reform will likely slide closer to the front burner. If not, it should.

As an investment adviser who disproportionately works with near- or currently- retired people, I see firsthand the important role Social Security plays in their overall financial picture.

For a large proportion of retirees, Social Security represents the majority of their retirement income. For this reason alone, digging into our presidential candidates’ Social Security reform proposals is a high priority.

Bernie Sanders appears to provide the most detailed Social Security reform proposals on record. Naturally, he focuses on increasing the program’s funding to help shore up its long-run financial sustainability.

Sanders primarily proposes raising the cap on wages subject to payroll taxes earmarked for Social Security. Under his plan, today’s maximum threshold of around $120,000 per year in earnings subject to this tax would remain. His new proposal is to restart collecting the payroll tax once a worker’s earnings exceed a new threshold of $250,000.

Importantly, in exchange for these additional contributions, affected taxpayers would receive no additional benefits and the money raised would be used to support the benefits of those with a lower history of earnings.

Hillary Clinton’s proposals center on her opposition to retirement age hikes, privatization plans or payroll tax increases for the middle class. Clinton has expressed openness to Sanders’ idea of raising the cap on earnings subject to Social Security payroll taxes, but provides no specific plans.

Donald Trump’s main idea for Social Security is to produce faster economic growth. However, I am not aware of an analysis of how economic growth affects the long-run financial position of Social Security. Beyond the economic growth argument, Trump has also suggested that wealthy people voluntarily return their benefit checks and that he’d reduce “waste, fraud and abuse.”

Marco Rubio and Ted Cruz both support increasing the retirement age and lowering the inflation rate for benefit payments. Both also support the idea of younger workers developing private accounts within the system.

While Cruz’ plan for privatization appears similar to Bush’s previously failed attempt, Rubio’s private account proposal appears to be designed as a supplementary source of retirement savings, rather than a replacement for Social Security.

Social Security is the ultimate political hot potato, no doubt. Understanding the candidates’ reform proposals – with details that allow for deeper analysis and thoughtful debate – is a basic right of voters. The goal of any reform, as I see it, is to reach a collective view on how we’ll maintain Social Security as a pillar of financial support to the millions of retirees who need it. Benign neglect won’t get the job done.

Jason P. Tank, CFA of Front Street Wealth Management will hold a free educational workshop on “Navigating Social Security’s New Rules” on March 9th at 6:30pm in the McGuire Room at the Traverse Area District Library. Call (231) 714-6459 with questions, visit frontstreet.com/workshop to learn more.

Battle Plan for Investment Volatility

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Stock markets are down this year between 10% and 15% across the globe. From their recent highs set in 2015, the drop has been an even larger 15% to 30%. Now is a good time to talk battle plans for handling this type of investment volatility.

While investment battle plans are best established prior to declines, it’s never too late and today’s lessons will no doubt help you tomorrow.

Your first line of defense is to do an investment risk assessment.

A proper risk assessment is a function of your age, income, assets, debts and your lifestyle desires. Together, these factors define your financial capacity for taking risk. It’s the brains, but not the heart of the matter.

A clinical exercise in financial accounting just isn’t sufficient to capture the power of your emotions. While investment advisers tend to denigrate investors’ emotional decisions, let me provide you with a more-nuanced view.

Like it or not, your emotional tolerance for risk will always be a part of you. Discounting who you are is generally a futile fight. Given this reality, your focus should be on properly aligning your portfolio’s high-level structure with your tolerance for taking risk. If you don’t know your portfolio’s asset allocation, review it now.

Your next line of defense is to actually know what you’re invested in.

If you own mutual funds, like most people, you should work to understand the investments sitting inside those funds. Remember, a mutual fund is just a box with wrapping paper on it. What’s inside is what matters most. If you don’t know the type of funds you own, find out.

Your third line of defense is to be diversified.

Diversification is often cited by investment advisers. Sure, it’s good, classic advice; don’t put all your eggs in one basket. But, calling it good after simply noting a long list of holdings on your account statements may open you up to some hidden risks.

Ask yourself if your portfolio is hanging on a common thread. For example, in your search for income in a yield-starved world, do you own too many real estate funds, lower-quality bonds or even safe-looking bond funds that rely on leverage?

Upon deeper analysis, you may have exposed your portfolio unknowingly and are actually undiversified. After all, diversification is not about how many investments you own. Rather, it’s about the commonalities and differences between them. If you are unaware of the factors that affect your portfolio, I’d suggest you start doing your homework

Jason P. Tank, CFA of Front Street Wealth Management will hold a free educational workshop on “Battle Plan for Investment Volatility” on Feb 24th at 3:30 pm in the Blue Room at the Traverse Area Chamber of Commerce. Call (231) 714-6407 with questions, visit frontstreet.com/workshop to learn more.

Retirement Income: From Where & When?

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One question has rung through loud and clear following my two recent columns on the big rule changes with Social Security and the development of a safe spending rate in retirement.

Soon-to-be and current retirees want help developing a holistic plan for the “living off my savings” phase of their retirement journey.

Specifically, their burning question can be broken down into three smaller questions. First, from which accounts should we withdraw our money and in what order? Second, how exactly will my Social Security benefits affect our tax bill? Third, what steps could we take now to help minimize our tax bill in retirement?

Our financial system is a ridiculously complex maze for retirees to navigate. At the center of the complexity sits our tax code.

Regarding the question of which accounts should be drawn from first and in what order, most retirees have two forms of savings. They have savings that have already been taxed and savings that have yet to be taxed.

To begin, it’s important to understand that the mere act of drawing from your already-taxed savings does not trigger a tax bill. Only your dividends, interest and realized gains result in tax payments. In contrast, the act of drawing from your tax-deferred savings creates immediate taxable income.

Given this, choosing the best source of retirement income clearly depends on your own tax picture. For this reason, sound advice about the best source of retirement income wholly depends on your personal financial setup. This requires some basic tax modeling of your present and future tax picture.

Next, you may not realize that Social Security benefits are often taxed. The proportion of this benefit that is taxed can range from none to a maximum of 85% of the benefit. The tax owed depends entirely on your other income, some of which is voluntarily created by drawing from your tax-deferred accounts, such as your IRAs.

With this understanding, the decision of which pot of savings to draw from – your already-taxed savings or your tax-deferred savings – can impact the amount of tax owed on your Social Security.

Finally, there are planning techniques that might allow you to minimize your future tax bills in retirement. Among these techniques are strategic, partial Roth IRA conversions and the possible utilization of the 0% capital gains tax rate on your federal tax return.

Intelligent planning for the “living off my savings” phase is increasingly on the minds of current and soon-to-be retirees alike. The educational steps you take now will no doubt pay dividends later. Best of all, those dividends are completely tax-free!

Jason P. Tank, CFA of Front Street Wealth Management will hold a free educational workshop on “Retirement Income: From Where & When?” on Feb 10th at 6:30pm in the McGuire Room at the Traverse Area District Library. Call (231) 714-6407 with questions, visit frontstreet.com/workshop to learn more.

Central Bankers: They’re Back Again

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Global central bankers are back at it again!

With Mario Draghi at the ECB talking about revisiting their policy in March – a code phrase for potentially increasing their current quantitative easing policy – along with Japan’s central bankers actually beginning to charge their banks 0.1% on excess reserves, it appears global central banking is taking its next step on the path to total manipulation of their respective economies.

Now, the Fed truly stands alone. Will the Fed pause and reverse itself if markets continue to waiver? Will such a reversal even matter? The burning question is whether or not monetary policy had lost its grip on markets.

Finding Your Safe Spending Rate

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More goes into planning for and sustaining a retirement than meets the eye. On the surface lies plenty of generic advice from the financial planning industry. Yet, beneath the surface are a slew of assumptions about a largely unknown future. To understand how to manage your sustainable retirement clearly takes more than simple rules-of-thumb.

It should come as little surprise that your retirement decision may be dominated as much by feelings of insecurity as it is by feelings of excitement. Thankfully, the balance between these two emotional poles can be tilted in your favor with pre-retirement planning.

For example, one critical first step for a soon-to-be retiree is to develop a deeper understanding of your post-retirement budget. During your working years, budgeting is all-too-often dismissed. However, when your income becomes more-fixed and less-active in nature, spending choices take on a new sense of importance.

During meetings with soon-to-be-retired clients, my early fact-finding focuses on gaining a better understanding of the true cost of their lifestyle. Without that understanding, retirement planning – and the day-to-day services that follow from that planning – can feel like stumbling in the dark.

With your lifestyle’s financial obligation defined, the traditional survey of your assets and debts and the review of your various sources of income begin to take on the deeper purpose of building financial sustainability.

Of course, the financial obligation that springs from your choice of retirement lifestyle must be met by sustainable income. For most retirees, at the base rests Social Security and, for a shrinking number, pension income. Together, these are just two legs of the proverbial three-legged financial stool.

The final leg of a sustainable retirement is built from income earned from your personal savings. While some might be generated from real estate or even business interests, it often must be earned from traditional sources, such as IRAs or after-tax savings and investments.

It is here, within this portion of private savings, where you may have a lack of confidence of how much you can safely spend from private savings each year.

This central question about your safe spending rate, known in the industry as the sustainable withdrawal rate, is where financial planners toss around overly-simplistic rules-of-thumb. In reality, the assumptions that underpin rules, like the “4% Rule”, are complex and debatable. For good reason, this subject dominates the thoughts of many financial planners. Honestly, it rarely strays far from my mind when managing my clients’ investment portfolios.

As we enter the new year, it would be wise for you, a current or soon-to-be retiree, to establish your own personalized safe spending rate. Only then will a confident retirement – and, yes, a worthwhile New Year’s resolution – be sustained.

Jason P. Tank, CFA of Front Street Wealth Management will hold a free educational workshop on “Finding Your Safe Spending Rate” on Jan 13th at 6:30pm in the McGuire Room at the Traverse Area District Library. Call (231) 947-3775 with questions.

Interest Rates to Rise Slightly

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The Fed did it! After nine years since the last rate hike, and following seven years of near zero interest rates, the Fed and Janet Yellen last Wednesday finally raised short-term rates by a whopping one quarter of one percent. The financial markets, which had been displaying concern and worry during the decision’s build-up, largely sloughed it off.

Listening to Yellen during her follow-on press conference, what strikes me is the Fed’s propensity to represent the consensus view. As economic cheerleaders, this is quite natural for the Fed, of course. What else could they say and how else could they feel other than believe the near-term future will resemble the recent past? The past trend is always the future trend to consensus thinkers. This is precisely why the majority of investors fail to anticipate a change in the trend.

For example, as the calendar turns, many will read market prognostications for the year ahead. Already I have noticed news stories that indicate stock market returns will be in the range of 5% to 10%. For as long as I can remember, I’ve seen this range of returns anticipated time and time again. Not coincidentally, that range fits the long-term historical return of stocks in the US.

Published along with the news release of the Fed’s decision last Wednesday, Fed governors made public their own individual projections of economic growth, inflation expectations and unemployment over the next few years along with their long-range expectations of these same measures. What’s striking about this report is their consistent lowering of economic growth and inflation relative to their prior projections. The Fed has consistently been too optimistic.

Like many economists and investors, the Fed has looked for inflation to rise back to its long range target of 2% per year. Today, that measure sits closer to 1%. The consistent undershoot of inflation is not a phenomenon of the US alone. Many of the largest economies in the world are also experiencing what’s known as disinflation – a decrease in the rate of inflation. This was true prior to the drop in oil prices and does raise questions about possible structural issues for the global economy that may lead to continued subdued inflation rates.

It’s fair to say that the largest concern of all central bankers is for disinflation to morph into deflation – that is, an outright drop in prices. This is what Japan struggles with today following their own financial crisis many decades ago. Global central bankers, through zero interest rates and asset purchases, responded to this prospect with an unparalleled monetary experiment.

The question is, did the experiment work? With the Fed finally raising interest rates off the floor, the largest impact may be in the confidence “signaling” impact for investors. In other words, if the Fed feels it’s safe to finally raise rates after seven years in credit crisis-recovery mode, they must feel the trend is their friend. Outside of asset price appreciation and a now-larger pile of low-cost debt, a definitive answer to the question remains unanswered.

Social Security New Rules – Part II

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In this second segment of in my series on the new rule changes within Social Security, I will delve into other aspects worthy of deeper analysis.

Where my previous column highlighted the late April 2016 deadline faced by a 66 year-old couple planning on using Social Security’s “file-and-suspend/restricted application” trick to maximize their benefit, this week focuses on how the new law affects two younger demographic groups; those age 62 to age 65.5 and those younger than age 62.

Over the next four years, Congress is winnowing down the filing options that Social Security now offers. As time passes, the available choices for retirees will become fewer and fewer. The upside of this narrowing of choices is the beauty of simplicity for future retirees. The downside, as you might have guessed, is your Social Security benefits over your lifetime will likely be less than those received by the prior generation.

To begin, if you won’t reach age 62 by the end of this year, you will not be allowed to restrict your filing to just your spousal benefits. If you fall into this younger group, Social Security will simply pay you the greater of your own earned benefit or the benefit you’re entitled to receive as the spouse of another then-collecting worker.

With these simplified rules, for the youngest among you, Congress just took away your ability to begin collecting your spousal benefit – which can begin at age 66 – while also simultaneously deferring the benefit you may have earned yourself. That “restricted application” trick is over for you.

This ability to collect only your spousal benefits – and watch your own benefits based on your work record grow year after year after year – is now only available to those who are at least age 62 by the end of 2015.

For this slightly older group – let’s call them the middle demographic – you will still have the right to collect your spousal benefit at your full retirement age, to continue to let your own benefit grow 8% per year until age 70 and then, finally, to switch over to your bigger benefit. But, there’s a catch to remember with this strategy.

Unlike the older retirees profiled last week, for this middle demographic to be allowed to restrict their filing to only their spousal benefit, their spouse must also be collecting their own benefit.

With deadlines approaching and with the key role Social Security plays in retirement income planning, understanding the rules has gained importance.

Social Security New Rules – Part I

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There is yet another financial planning deadline looming on the horizon. Congress was nice this time as this newest deadline occurs when the snow melts by April 30, 2016. Nonetheless, time seems to move at an accelerated pace and May will be here before you know it. For that very reason, planning around the latest rule changes regarding Social Security is something to act upon well before then.

To begin, Social Security presents complexities that are not fully recognized by most people. Many retirees consider Social Security a benefit that is simply started at a particular age. Most commonly, surprisingly, people apply at the earliest eligible age of 62. In fact, almost half file for benefits at the earliest moment possible and, as a result, accept a permanent 30% reduction in benefits for life.

On the other hand, some people plan extensively to maximize their Social Security benefits. The latest law changes – hot off the presses – significantly affect their well-laid plans. These people should bone up now on the changes as Congress has set a clock that’s ticking down.

For background, the most classic Social Security maximization strategy is one used by dual-income couples. The strategy goes something like this, assuming a same-age couple.

The higher earning spouse – let’s say it’s the husband, in this case – files for benefits at age 66 and then immediately suspends his Social Security benefit. This move is called, file-and-suspend. During his benefit suspension period, his eventual benefit will grow 8% larger for each year he waits to collect – until he hits age 70.

Now, because he formally filed for benefits, his wife is entitled to receive her spousal benefit equal to 50% of his benefit amount, even if he’s chosen to not collect his benefit. All spouses are entitled to receive this 50% benefit. In this example, she is not filing to receive the benefit she’s earned through her own lifetime of work. Instead, she’s only choosing to receive her likely smaller spousal benefit. This move is called, filing a restricted application.

The trick is, while she’s collecting her smaller spousal benefit, her own eventually larger benefit – the benefit that’s based on her work record – will continue to grow 8% per year, until she too reaches age 70. For dual-earning couples, this strategy works to maximize their Social Security benefits.

And, here’s the punchline, this strategy – for those who haven’t already put it in place – will end on April 30, 2016, unless they act by then.

Of course, the myriad of Social Security claiming strategies are nearly endless and deserve individualized analysis. In future columns, I will address additional situations affected by the recent law changes. Change is clearly a rule and Social Security’s new rules are no exception.

Jason P. Tank, CFA will hold a free public educational workshop on this topic on December 9th at 6:30pm at the Thirlby Room at the Traverse Area District Library.

No Holiday From Financial Tasks

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As part of my series on end-of-year financial tasks, there are a few deadlines that many people need to pay attention to as they do annual planning with their investment advisors and other consultants.

I’ll highlight one in particular that is of extreme importance for many senior investors. I’ve discussed this in past columns, but it bears repeating given the onerous penalties you face if you do not comply with the law.

Once you reach age 70 1/2 and forevermore, you face what is referred to as a “required minimum distribution” from your IRA accounts. Like too many things, this one goes by an acronym of RMD. Essentially this is your annual requirement to withdraw a certain minimum dollar amount from all of your tax deferred accounts.

The logic behind this is the government wants to finally collect its take on the money you’ve put away and invested free of taxes. Their required minimum distribution rule assures the tax is paid.

If you don’t comply – whether or not your neglect is completely benign – the penalties are extraordinarily harsh. They can total 50% of the expected annual distribution. Please don’t forget. With penalties like these, a double-check is just a smart policy.

Typically, after your first required minimum distribution has been processed by your account custodian or brokerage firm, the subsequent distributions from your tax-deferred accounts will become automatic. This lessens the burden placed on you to remember each year.

However, your first distribution must be set up manually either with your advisors help or by you if you are a do-it-yourself investor. It’s often this first year where an oversight can occur.

While it should be simpler than this, there are a few nuances with required minimum distributions that are worth discussing further.

The first involves people who may have inherited an IRA from a non-spouse loved one. In this case, the required minimum distribution rule can be much more burdensome. With Inherited IRAs, the custodians or brokerage firms often do not set up an automatic process in subsequent years as they do for non-inherited IRA account holders. Therefore, Inherited IRAs require some extra care.

In my experience, the prospect of forgetting to take an annual distribution occurs with situations of Inherited IRAs. To minimize the risk, my advice is to speak to an advisor the moment you inherit an IRA.

In addition, in the year in which you turn 70 1/2, there are special rules regarding the required timing of the first annual distribution. To discuss the benefits of this special first-year rule, it may require a personalized conversation with your investment advisor and your tax consultant to help craft the most tax efficient strategy.

As is often the case in life, the busiest times of the year, such as the holidays, often inconveniently correspond with some of the most important times of the year to review your financial situation. There’s simply no way around it, no matter how much you and your advisers would love to have the ability to turn back time!

The Season for Financial Planning Strategies

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It’s the season to do some year-end financial planning. If you haven’t spoken with your adviser in a while, this may be a great time to engage in a conversation about any changes in your financial life.

Throughout my career I’ve seen a number of opportunities lost due to a lack of coordination between clients’ many different advisers. Please don’t let this happen to you.

To prod you forward, I recommend you first review any major changes in your financial life during 2015. For example, did you incur unusually large medical expenses this year? Have you sold something that resulted in an extraordinary gain or loss? Has your income increased considerably? Or has it possibly decreased due to a job loss or job change? The list of possible changes in your life is vast.

With this information in hand, there are many opportunities to save money. Unfortunately, many are connected to a deadline of December 31 involving our overly-complex and often unforgiving tax code. It’s clearly too much for a normal, busy person to follow. Therefore, if you’ve engaged advisers for your investments, tax planning and legal affairs, encouraging a coordinated level of service can work wonders.

For example, do you know that federal capital gains are taxed at a 0% rate if your taxable income falls below the 15% federal tax bracket threshold? If you are sitting on unrealized capital gains from years worth of gains, you may be able to take advantage of super low capital gains taxes in a year in which you earn less than typical.

In addition, if you are able to show less taxable income this year than normal, it may be intelligent to consider a partial Roth IRA conversion from part of your regular tax-deferred retirement accounts. Of course, the analysis required for Roth conversions is not simple and does involve making a reasonable set of assumptions about the unknowable future. Doing that analysis is a smart move.

Another possible retirement savings strategy is available to self-employed individuals who have the desire to save more and pay less tax today. If you qualify, a high-earning small business person can save much more through a little-known vehicle called an Individual 401(k) than they can through a regular IRA. Unlike a regular 401(k) plan for a small business, these special use 401(k) plans are not complex or costly to set up or maintain.

However, if you don’t make the right moves with this information by December 31, you stand to miss out on these planning opportunities and more. As the famous Nike ad once said, just do it – before the busy holiday season. Amazingly, it’s once again just around the corner.

Rollovers Are Just Too Complicated

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Great article on Bloomberg that tells the truth about how a fix needs to happen regarding the unwarranted difficulty in transferring and consolidating old retirement plan accounts. We can attest to the fact that the process is unduly complex. If this describes you, please let us know if you need help. Click to read

rolloverarticle

 

There’s Value in Warning Signs

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The Chinese panicked, stock markets around the world choked and the Fed blinked. What a quarter it was, replete with swings only a die-hard baseball fan could enjoy.

After a 6% drop in broad US market indexes, is this just the beginning of a deeper decline or only a long-awaited, run-of-the-mill correction with continued gains ahead?

It’s true, some headline data describes an economy that is still growing. Following a weak first quarter affected by the cold, the government’s official guess for the second quarter showed nearly 4% growth. The unemployment rate is down to almost 5%. Inflation, excluding energy prices, is still well below the Fed’s arbitrary 2% target. And, with rates low, auto and home sales are doing just fine. All in all, the view from 30,000 feet looks fine enough.

Now, to the on-the-ground view. We all know financial markets don’t operate on how things appear today. Instead, they focus on that never-to-arrive and always-uncertain, tomorrow. Given this, I think markets are flashing yellow warning signs.

First, risks are rising in lower-rated corporate bonds. Lower-quality bonds have declined about 5% in short order. This is raising concern among investors as weakness in junk bonds has traditionally been a leading indicator for periods of weak stock markets.

Next, stock prices are way down for companies most sensitive to cyclical economic shifts, such as industrial companies, big-ticket equipment manufacturers, commodity- and basic material companies as well as transportation companies. Compared to the market as a whole, these sectors have felt a much bigger brunt of the recent market downdraft.

In the midst of this under-the-surface activity, what’s catching my eye?

To begin, despite the uncertainty in the oil and gas market, I feel strongly there is value to be found in the massive carnage. Choosing even among the blue chip companies, such as Exxon Mobil, investors can benefit from large dividends at today’s low prices.

Next, there are a number of financially-strong industrial companies, such as Dow Chemical, that actually benefit from low energy prices. At a 4% dividend yield today, Dow provides the type of income that helps to battle this inhospitable rate environment. In addition, companies in the midst of corporate transformations, like Alcoa, offer good prospects. I also see tremendous value in a much-improved General Motors that currently pays a dividend of almost 5%.

Lastly, many blue-chip tech companies are just flat-out bargains today, in my view. With huge cash piles and serious earnings power, I think companies like Apple, Cisco and Microsoft are too hard to ignore for long-term investors.

Now, if the current yellow warning signs turn into bright red stop signs, you should also fully expect to see bargains go lower still. That’s the way markets work, of course, so please be sure to diversify and use common sense.

I do believe a change is afoot in markets today. Navigating it is going to require skill and investors might just want to get re-acquainted with seeing some red figures in their quarterly statements. If managed properly, for the prepared investor, yellow and red are not colors to be ignored or to be feared.

First and Second Level Thinking

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Regular readers know I often express myself in tones of varied skepticism. While I admit this tendency comes naturally to me, you should know it serves a deeper purpose. Let me briefly explain.

There is something inherently comforting when things sit in a state of balance. In investment markets, however, things are constantly in a state of flux, to one degree or another. Given this, an intelligent investment management process is often lonely and rarely involves broadly following the crowd. Skeptical investors love to ask questions and test the consensus view.

Influential investor and market thinker, Howard Marks of Oaktree, recently wrote about what he refers to as first-level and second-level thinking. His memo did a nice job of highlighting a concept that helps to explain why I feel a healthy sense of skepticism is beneficial as an investor.

First-level thinking tends to reflect the obvious facts already in the news. China’s slowing, commodity prices are down, sell oil stocks, avoid multinational companies and own the US dollar. With gas prices so much lower now and with interest rates still so low, buy consumer-oriented stocks that cater to domestic shoppers.

Now, a second level thinker, in reaction to a first-level thought, might sound very different. Yes, energy and commodity prices are down a ton and it does look like China is headed toward a rough slowdown. But, US oil and gas producers are busy lowering their costs and are finding ways to innovate. With their stock prices down so much and – as long as their balance sheets can hold up – I think they’ll make it through this down cycle. These companies might now be trading at bargain levels.

First level thinkers tend to feel more confident with validating information. It creates a comfortable emotional feedback loop as it follows a seemingly, logical, straight-line relationship. As their confidence builds, they seek safety in the crowd. Soon, ever larger numbers of investors adopt the same comforting view. And, over time, it becomes the consensus view of far too many investors.

The second-level thinker can appear allergic to the consensus view of the day. As uncomfortable as it can feel, second-level thinkers know that following the consensus is not how money is made or how losses are avoided in investment markets. Actually, just the opposite tends to be true over time.

Second-level thinking can appear counterintuitive and can come across as skeptical or stubborn and can be viewed as somewhat pessimistic. Instead, I’d argue that second level thinking is inherently optimistic about the fact that – because things are always changing and are never in balance – great opportunities are always around the bend.

So, the next time you look at your portfolio or begin to make an investment decision, ask yourself if you are making a first- or second-level decision. And, if the decision feels a bit tough or uncertain, you’ll very likely have a good idea.

 

Is the Bull Market Still Alive?

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The stock market has recently delivered quite a ride for many investors. The word I hear most to describe the volatility is, roller coaster. However, the most common advice I hear in my industry is, don’t be emotional, don’t panic, the bull market is still alive.

Before addressing the common refrain that this recent market blip is/was just a correction in the midst of a continuing bull market, I too agree that panic is not wise behavior. Panic often leads to poor decisions, unless you really are being chased by a wild animal.

It is often cited that China is the reason for the recent market volatility. We all like to find a proximate cause for any change in our surroundings. Yes, the Chinese stock market is down nearly 40% in three short months. But, this has only erased a 60% gain during the three months prior to that.

Rather than pin the market downturn on China alone, I view it as a symptom of a larger, global economic ailment; one rooted in the very prescription used to quell the ‘08 credit crisis and subsequently slow global economic recovery.

I remember back to the ‘80s when my “little brother” – who now towers over me – used to play a simple computer game, SimEarth. In this game, the goal was to tweak the elemental makeup of the environment in order to spur the sustainable development of plant-life and the animal kingdom in a simulated world.

I had no interest in SimEarth back then and, voila, my brother became a scientist and I became a money manager! Who knew that SimEarth would now indirectly apply to my life’s work?

Since late 2007, central bankers around the world have been playing their own version of SimEarth. Their prescription was no less than a change in the basic rules of capitalism; zero interest rates for almost a decade.

Like the basic makeup of our natural atmosphere, interest rates act as the driving force behind all asset prices. The world of financial markets operates in a constant state of comparative analysis. Every investment choice is measured against an alternative with interest rates sitting at the center of the analysis. For at least the past decade, central banks have manipulated capitalism’s atmosphere.

Viewed in this context, the frantic chase for global riches in China, along with large amounts of capital rushing into other developing markets, is simply an outgrowth of the desperate reach for investment returns in a world of suppressed interest rates. The likely effects are artificially high asset prices and greater volatility near the end of the experiment.

With the US stock market, as measured by the Shiller P/E ratio, still valued at levels only seen in 1929, 1966 and during the tech and housing bubbles, it might not be such great advice to bank on the resumption of six-year old bull market. Panic, never. Plan and prepare, always.

Markets: Where and When, What and Why?

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As an investor, it’s important to ask the right kind of questions. Especially during periods of markets in stress, forget the “where and when” questions and try to focus on those that begin with “what and why.”

Over the span of four successive days from last Wednesday through Monday, the US stock market dropped 1%, 2%, 3% and 4%. The total decline was fast and furious and resulted in a long-awaited 11% drop.

It’s about time. I’ve been expecting this. You should expect more ups and downs along the way. If this quick drop has left you a bit shocked, there is always time to reevaluate your overall risk in your portfolio.

I’ve personally seen a number of people who are far too invested in the stock market. When I pointed it out, they largely appeared unaware. I suspect it was due to a lack of asking the right type of questions.

At times like these, the questions I get most begin with where and when. They also tend to be formed by fear and greed and often focused on fortune telling.

Where is the market headed? When is the selling going to stop? Where is the bottom in oil? When is China’s government going to stop the contagion? Where’s the Fed now?

The reality is most investors – including professional advisors – don’t know much about where markets will be tomorrow, next week, next month or even next year. Honestly, many don’t have a clue about much at all.

While questions of when and where tend to lead to emotion-based decisions, I’ve found the best action-leading questions start with the words what and why. These are the questions that tend to drive deeper thoughts and fact-based decisions.

What’s trading at bargain levels now? Why not own more energy stocks after such huge declines? What dividend does this company pay based on today’s stock price? Why not sell that stock with it now priced for such good news? What’s management going do with that huge pile of cash? Why shouldn’t I buy more with it down over 20%? What level of exposure to China does this company really have?

Over the years, my view is, people have distanced themselves from an understanding of the investments in their portfolios. I cannot entirely blame them for this. The cloud of complexity can get pretty thick in the financial industry. The cynic in me wonders if the pile of acronyms and flurry of buzzwords are secretly designed to intimidate the public.

In moments like these, my advice is to take note of the types of questions you’re asking yourself and others. What exactly do you have to lose by doing that?  

 

Beware of IRS Impersonation Scam

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jasonheadshotQ: A friend of mine recently received a very disturbing phone call from a person identifying themselves as an IRS agent. On the call, this supposed IRS agent threatened to arrest my friend if she didn’t immediately pay her back taxes. She followed his very detailed directions to send a MoneyGram for over $2,000. Is her money long gone? Is this a scam? If so, can you please warn others?

A: Your friend is not alone. According to government reports, to date about 5,000 people have now lost over $15 million to this IRS agent impersonation scam. They have already received close to a half million complaints from citizens. Clearly, this scam fools enough vulnerable people.

Rather than paraphrase the definitive source, the IRS has addressed this particular scam on their website. Here’s what they say;

“Note that the IRS will never: 1) call to demand immediate payment, nor will the agency call about taxes owed without first having mailed you a bill; 2) demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe; 3) require you to use a specific payment method for your taxes, such as a prepaid debit card; 4) ask for credit or debit card numbers over the phone; or 5) threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.”

The victims of this fraud do see the red flags, yet their common sense still fails them. For example, I’ve heard of cases where the victim knew to call their financial adviser or a relative before sending any money. However, the fraudster countered with intensified threats of imminent arrest if they hung up their phone. The perpetrators always have a well-rehearsed response.

I have personal experience with another fraud that involved my wife’s now-deceased grandmother. In her 90’s and amazingly on Facebook, she was contacted by a man impersonating her seriously-injured grandson stuck in a foreign hospital. Unable to reach other relatives – deftly name dropping some of her Facebook contacts – this fraudster convinced her to send over $1,000 to pay for his medical bills and a plane ticket home. Her own bank obliged, with far too few questions asked.

These predators need to be stopped, or at the very least, slowed. With our aging society and with technology that enables crooks to hide in plain sight, these scams will continue to grow. I call on regulators and our legislators to introduce additional “speed bumps” into the financial system. It’s a very small price to pay to protect the most vulnerable among us.

Until then – and I know it might be a long, long wait – I ask all readers who know of someone who might fall for such scams, particularly those with memory impairment, to pass along this column to both them and to their loved ones.

August 4, 2015 | Jason P. Tank, CFA

 

Revisions, Revisions, Revisions.

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The recently released GDP report came out today, along with the revisions to their previous calculations stretching back over the past four years. I always find these revisions interesting, in the sense that it highlights the futility of reading too deeply into the markets’ reaction to current-day, real-time economic releases.

Overall, the stretch of 2011, 2012, 2013 and 2014 showed an even slower economic recovery than previously estimated. And, it wasn’t fast to begin with.

GDP Chart Revisions
Overall, it’s safe to say the we’ve seen about 2% growth per year over this entire recovery since the summer of 2009. And, we’ve even seen two years of sub-2% growth, in 2011 and 2013.

It’s quite amazing the companies have done as well as they have, unless one looks at anemic wage growth and the tepid business investments made over this period. Those moves, coupled with large share buybacks, has upheld earnings per share growth that investors like to see.

These decisions do have longer term ramifications on economic growth, however. I think we’re seeing these ramifications in the picture above.
For 2015, so far, we’ve now seen a 0.6% first quarter and a 2.3% second quarter. Together, the first half has shown growth of about 1.5%. If the second half accelerates – as most expect – for whatever reason – another 2% full year is in the cards.

This is certainly an odd recovery, to say the least – especially in the face of such low rates and robust stock market performance (especially 2013). Disconnect is a reasonable adjective to use.

Anecdotal China Slowdown News

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I saw this headline today from the WSJ regarding the effects of the China slowdown on multinational, industrial company United Technologies. It points the dependence many U.S. companies have on continued Chinese growth.

China Slowdown

 

Pay Attention to China’s Con Game

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jasonheadshotFor those willing to pay attention, there’s more to the world of finance than the ongoing Greek tragedy. While Europe delays Greece’s inevitable default, China’s stock market is in the midst of a serious meltdown. Investors in the US might ask, why does this matter to me and my money?

Chinese budding focus on consumerism is a key supporting factor in US investors’ portfolios. In many ways, the pervasive assumption of the continuation of the Chinese economic miracle parallels our own real estate bubble.

As long as real estate was rising, everything was fine. As long as the Chinese consumer is alive and well – following the thought forward to its logical conclusion – the global economy will be fine too. And, remember when the subprime mortgage meltdown was small and contained? It sounds quite similar to the current commentary on the sudden decline in China’s stock market.

Finally, like our real estate market before reality struck, China’s astounding economic growth also stretches back many decades. And, importantly, it is now slowing. What once was greater than 10% growth in China, is now likely down to 5%, if that.

Adding to the sense of mystery surrounding China’s official economic statistics is their ability to magically meet their own projected growth of “about” 7%. For example, on July 14, they announced exactly 7% growth for the just-ended June 30 quarter. Amazingly, they are able to compile and calculate their data much more quickly than the US.

The official statistics coming out of China are probably fake.

However, what’s not fake is the 30% decline in their stock market in less than a month. What’s not fake is the huge decline in global commodity prices. What’s not fake are the reports of a sudden drop-off in car sales across China. And, finally, what’s certainly not fake are the hard-to-imagine-here government actions taken to stop their stock market rout.

The Chinese government has not only cut interest rates, but also relaxed margin trading rules, suspended all trading – no buying and no selling – in 50% of all stocks in the market, banned all new IPOs, restricted short-selling, threatened short-sellers, pressured insiders and executives to not sell any shares, provided loans to companies to buy back their own shares, allowed insurance companies and pension plans to buy stocks for the first time and they’ve also arranged for all brokerage firms to buy, buy, buy!

So far, their efforts have worked to halt the market decline – for now. What comes following the re-opening of normal market forces? My hunch is, not Chinese consumer and investor confidence. Why does that matter? Remember, there’s no doubt we’re all in the midst of a global confidence game.

July 16, 2015 | Jason P. Tank, CFA

 

A Sign of Automated Group-Think?

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Reading today’s Barron’s, I spotted this little tidbit on the difference in returns – for 2015 so far – between dividend paying companies and non-dividend paying companies.

The uniformity of the effect on returns from one factor alone – recently rising interest rates – points to some level of automation or algorithmic trading, in my estimation. That is, computers simply programmed to all do the same thing at the same time; sell higher yielding stocks and buy low yielding small cap stocks.

If it’s not this, then – at the very least – it is a sign of investor group-think.

The Churning of the Markets

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Given that I’ve been declared the world’s hardest person to shop for, my family finally threw in the towel this year and gave themselves an ice cream maker for my birthday!

We’ve particularly enjoyed that magic moment when the machine’s relentless churning begins to transform our mix into real ice cream. It’s a moment filled with sweet anticipation that’s been a welcomed break from the type of churning I’ve seen in financial markets in 2015.

Since the start of the year, stocks as measured by the S&P 500 index, have churned sideways, producing a small gain of less than 2%. And, bonds, as measured by the Barclay’s Aggregate Bond index, have declined a little less than 1%. Taken together, it’s not uncommon for a balanced portfolio to show close to zero return for the first half of the year.

The most cited culprit of this unproductive churn is the Federal Reserve’s public hemming and hawing about the future path of interest rates. Much as asset prices over the past six years have been positively impacted by abnormally low interest rates, the anticipation of the eventual rise in rates is now producing a chilling effect.

Think of interest rates as a barometer, of sorts. Interest rates, in part, set up the environment in which all assets are valued by investors. Since the Fed’s experimental zero interest rate policy began in late 2008, the Fed has imposed an artificial pressure on prudent investors to shun safety and embrace risk.

In my professional opinion, the Fed’s experimental policy of low rates was never about providing cheap money to spur demand for businesses to increase their productive capacity. Companies borrowed the cheap money, for sure. Yet, with much of it, they’ve repurchased massive amounts of their own shares and funded larger dividend payments. In essence, the Fed’s policy created a not-so-sweet mix of financial, rather than actual, engineering.

The recent churning we’ve seen in many financial markets – in stocks, bonds and currencies – is a sign the Fed’s mix is at that magic moment of change. The very nature of experiments – such as the Fed’s zero rate policy and their purchase of trillions of bonds – is the uncertainty of their outcome.

To pretend to know the outcome is pure hubris. However, to prepare and adjust is most certainly not. Unlike my homemade version of Ben & Jerry’s Sweet Cream, I get the feeling this Fed-induced churning of markets will probably not turn out nearly as tasty!

June 29, 2015 | Jason P. Tank, CFA