Market’s Long Overdue Correction Seems to Be Starting

Jonathan N. Castle, CFP®, ChFC®

I thought I would take just a moment to let everyone know that we have been watching the market closely. It looks like the long upward sprint the market has taken over the last 4 months might be coming to a pause.

This is not unusual at all; billions of dollars have been fed into the capital markets over the last 4 months as the veil of uncertainly about taxes and fiscal policy has been lifted. Pension funds and individual investors have flooded the stock markets and stock mutual funds with more dollars this past quarter than we’ve seen in a long, long time. Wall Street’s traders have seen their target prices for stocks met, exceeded, and exceeded again. In general, the economic data we’ve see reported has been mostly positive, with just enough bad news to remind us that the stock market still has its dangers, but not enough to get investors worried that another recession is around the corner.

So, with the information we have at present, it looks like we are in for a regular, run-of-the-mill correction of about 3 to 7%. This happens, on average, 3 times per year, and is the normal breathing of a healthy and functioning market.

It is important to keep in mind that large, painful, and excessively long bear markets typically occur only during times of great economic upset (Great Depression, Great Recession, Tech Bubble Burst, Oil Embargo). We are monitoring all of our indicators and have far better warning systems in place than existed in 2007 and 2008, and expect to be able to sidestep a great deal of the damage that those “Perfect Storms” tend to dish out. At this time, Recession Alert(TM) places the odds of the United States economy entering a recession within the next 6 months at only 6.4% – indicating that the stock market remains the best place to be for investors trying to stay ahead of taxes and beat inflation.

However, unexpected or “surprise” events can turn a normal 5% correction into an abrupt harsh 20% correction. This occurs every 3-4 years, on average. Good examples are the stock market “crash” of 1987, the breakout of Desert Storm, minor recessions, the downgrading of the US debt in 2011, and other geopolitical occurrences. Currently, we have two primary concerns that would fall into this category – the prospective bailout of Cyprus (and the EU issues that seem to never end), and the possibility of Kim Jong-Un actually engaging in real military conflict for no apparent reason other than to appear as a strong leader to his people.

The risk of military conflict does not lie in Korea’s ability to hurt the US; that risk is minimal from a military confrontation perspective. While the North enjoys a huge advantage over the South in artillery abilities, those abilities would likely be quickly eradicated by the overwhelming air superiority the US and the South enjoys. The real risk lies in the possibility of China, South Korea, or Japan entering any such the conflict and creating massive instability in the Far East. I believe that China would likely rather see peace in the region, but so far, they have taken a wait-and-see approach.

Whatever happens, we will remain vigilant and observe events as they develop. Ultimately, I believe that normal market functions will continue and am very optimistic about some of the developments we see occurring within our economy – especially in the areas of energy production, rail, manufacturing, home-building, and electronic medical records. I feel it is likely that the decade-long “Secular Bear Market” we have been mired in for the last several years is approaching an end, and that now is a great time to be a long-term investor! However, it remains important to make sure that investors are aware of their risk tolerances – and that portfolios are constructed properly in order to weather those occasional unexpected thunderstorm that can blow in rapidly and give us an uncomfortable bump now and then.

S&P500 1 Year Chart

Jon Castle

http://www.WealthGuards.com

This blog is for informational purposes only. This is neither an offer to purchase nor sell any securities. All investing involves the potential of loss – including invested principal. Indices quoted are general barometers of security price movement. You cannot invest directly in an index. All information is obtained from sources deemed reliable but not guaranteed. Past performance is not a guarantee of future performance. No tax or legal advice is given nor intended.

Investment advisory services provided by Paragon Wealth Strategies, LLC, a registered investment advisor.

10245 Centurion Pkwy. N. Ste 105, Jacksonville FL 32256 (904) 861-0093 www.WealthGuards.com

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements

A Valuable Tip for the Business Owner

Jon Castle, CFP, ChFC

As the end of the year approaches, it can be easy to become swamped with end of the year tasks. We look at that calendar almost daily, mentally ticking off that ever growing “to-do” list of things that we need to get done by the end of the year. I won’t even go into creating a list of examples; I’m sure that if you are a business-owner, that list has already popped into your head and you are populating it even as you are reading this article.

I would ask that, once things settle down a bit – maybe even after the New Year – that you take off your “employee” hat and put on your “owner hat” just for a little while. No – I mean really take off the “employee hat.” Learn to think of your business as a Chinese puzzle or a Rubik’s Cube that you can hold in your hand. You own your business. It is a widget, a device, a tool, a construct of your own making that you must tinker with, work on, improve, re-engineer and tweak until you get it right. Why bother? Because some day – maybe not today – but someday in the future – you will hand that widget to someone else. Maybe… just maybe… if you solve the puzzle… if you do it right… someone will hand you a size-able chunk of money for that widget as you move on with your life.

This perspective of ownership takes a while to develop – but is one of the distinguishing characteristics of those successful entrepreneurs who truly get rewarded and compensated for the time and effort that goes into building a business. A business owner who eventually retires and sells a splendidly crafted business can enjoy a retirement that most never even dream of. A young entrepreneur who creates or acquires a business, cultivates it to perfection to the degree that it is purchased for a handsome sum… creates a life for herself that few others can even imagine.

How does one do this? Ultimately the key is working on the business instead of just in the business. We’ve all heard the same old mantra about creating business plans, setting goals, creating milestones, etc., etc., etc. This is not what I’m talking about. What I’m suggesting that you do is spend the time figuring out how to make you, the business owner,– and your most valuable and experienced employees, expendable within the business.

“What?” you may initially scream? “Me expendable?” Yes, that’s exactly what I mean. If your business relies upon your experience… your relationships… the collective knowledge that only you and your most experienced employees have… then you do not have a business. You have a job. You have a gang, a group, a team of people working together to get things done. This is not bad; quite the opposite. However, you do not have a Rubik’s Cube that you can perfect and then turn to someone else and have them buy that product. Essentially, you have a job.

Ideally, business are the most sell-able (and the most valuable) when they run themselves and the owner is not critical to the successful functioning of the business. When an owner can hire someone off the street, with only a little training, to fill the human needs of the business, and have the business continue to function at a high level of efficiency – then the business has inherent, proprietary value and can itself be sold as a product. When procedures are documented, and automated workflows exist within the business, so each task necessary is performed, tracked, and documented, in the proper order, by the right person, at the right time… so the service or product the business produces gets done. Ideally… without the owner being critical to that cycle.

Is this possible within your business? If not… how can it get that way? Set as a New Year’s resolution to deeply think about the way your business would operate… if you weren’t there. Impossible? Maybe. But maybe not. Or maybe you could get halfway there. Set a New Year’s resolution to start thinking that way. You might be surprised at what your business looks like by the end of next year!

Jon Castle

http://www.WealthGuards.com

This blog is for informational purposes only. This is neither an offer to purchase nor sell any securities. All investing involves the potential of loss – including invested principal. Indices quoted are general barometers of security price movement. You cannot invest directly in an index. All information is obtained from sources deemed reliable but not guaranteed. Past performance is not a guarantee of future performance. No tax or legal advice is given nor intended.

Investment advisory services provided by Paragon Wealth Strategies, LLC, a registered investment advisor.

10245 Centurion Pkwy. N. Ste 105, Jacksonville FL 32256 (904) 861-0093 www.WealthGuards.com

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements

Calm Before the Storm?

Jonathan N. Castle, CFP®, ChFC®

The financial markets – both stocks and bonds – have been relatively calm for the last 4 months, nicely rewarding investors who avoided the urge to “Sell in May and Go Away,” and instead remained invested with a sound and prudent investment policy. Since the short but abrupt 10% correction that ended on June 2, the global stock markets have steadily advanced, packing on about 15% of value in the US markets and almost 18% in overseas trading. Our strategy of skewing portfolios heavily toward large stocks and high-yield bonds has generally paid off, allowing our investors to capture most of the market’s gains, commensurate with each individual’s risk tolerance.

However, based upon our own observations of financial news, as well as multiple discussions with clients, there is a nagging feeling of unease that persists in the financial markets. Nearly every client we meet with displays at least some level of concern about the economy and the financial markets going forward, despite having reaped solid returns from investments so far this year.

The financial markets are merely a reflection of the perceptions of hundreds of millions of investors, some of whom are highly sophisticated and understand the implication of governmental policies and economic data, and others who invest more by feel or intuition. Recently, there has been lukewarm (but not upsetting) economic news on the domestic front, a continuation of monetary easing by the Fed, and some positive developments in Europe that have led to a generally positive experience in the capital markets. Despite the calm, past experience has taught us that investors behave like lemmings and the stock market typically sets itself up to hurt the most people at any given time. I am reminded of Murphy’s Laws of Combat. There are several that presently come to mind:

• Murphy’s Law Number 26: The easy way is always mined.
• Murphy’s Law Number 38: If your attack is going really well, it’s an ambush.
• Murphy’s Law Number 32: In a crisis that forces people to choose among alternative courses of action, most people will choose the worst one possible (this one in particular may apply to Congress and the upcoming election)
• Murphy’s Law Number 44: After things have gone from bad to worse, the cycle will repeat itself.
• Murphy’s Law Number 145: Opportunity always knocks at the least opportune moment. (which takes courage to exploit…)

There are several very good reasons for unease – but it appears that there may also be a chance for opportunity to knock as well. Let’s take a look at the major issues that will be impactful on the economy and the financial markets over the next year or so.

Opportunities

Europe: The European Union seems to be finally getting its act together. The European Central Bank appears to be putting forth believable policies that may just keep the Union together and allow a “soft landing” for a number of the countries that are in deep fiscal trouble.

QE3 and Bernanke’s Printing Press:  The Fed’s announcement of QE3 is, in the short term, positive for the stock market and for the economy. Fortunately (for now) it does not appear that all of the ingredients for hyperinflation are present. QE3 does not cause the US to directly incur any more debt – but it does cause the Fed to print more money which can eventually lead to a weak dollar and inflation. Since other Central Banks are printing money as well, the Fed’s act of printing more money does not necessarily mean that the dollar will weaken against other currencies. So – for the short term, this is positive. For the long term – once the economy does truly begin to recover – this open-ended quantitative easing could be a catalyst for extreme inflation if fiscal tightening measures are implemented too slowly at some point in the future.

China:  It appears that China may have engineered a “soft landing.” If this is the case, it will have a positive impact upon our economy, as China is a significant trade partner with the US.

Dangers/Concerns

Fiscal Cliff:  The most dangerous upcoming challenge that we have to watch centers around the expiration of the Bush Era Tax Cuts. Originally scheduled to sunset in 2010, these tax cuts represent an aggregate economic impact of over $500 Billion dollars and are currently scheduled to expire at the end of 2012. If these tax cuts are allowed to expire abruptly, it would shock the economy and immediately push the US economy back into a harsh recession. It is likely that unemployment would rise quickly, every household in America would feel the impact, and the stock market would sharply pull back.

2012 Presidential Election:  Despite Romney’s good performance in the first debate, the markets currently still appear to be factoring an Obama victory. If Obama is reelected, then we believe that the markets will perhaps move sharply in one direction or another – but only for a very short period of time and for less than several percentage points, as amateur investors knee-jerk to the news. The impacts of governmental policy on industry sectors are some of the most widely studied economic subjects, and “bets” are placed months in advance. In fact, a number of studies have shown that the markets have a greater impact on presidential elections than presidential elections do on the markets. However – that being said, the consensus is that a Romney election will likely be better for the markets in the short term than would an Obama second term. Romney is a fiscal conservative, disagreeing with the Keynesian approach that the Obama administration is following. Historically, a Keynesian approach has not been particularly successful in creating economic prosperity, but has proven very effective at creating government debt and citizen’s dependency upon the government. Unfortunately, at some point, “production” must occur – which only occurs in the private sector and the free markets.

2012 Congressional Election:  It is likely that the Congressional and Senate elections will be more impactful to the economy than the Presidential election. If either side wins a mandate and can actually move forward with the responsible governance of the country, then we may see some of the more troublesome issues resolve themselves. It is our hope that Congress feels it has a mandate, and is empowered enough to move forward with “smoothing out” the expiration of the Bush Tax Cuts to the point where the US economy can avoid the upcoming fiscal cliff. If that is the case, then we may avoid recession and reap significant profits from the capital markets over the next several years.

So – in short – what do we see and what do we plan to do?

1. We are watchful. If we actually do hit the Fiscal Cliff, we will likely have time to react before everything goes to heck in a handbasket. In the event that the Bush Tax Cuts do expire, AND we begin to see the effects in the markets and on the economy, we will shift to Defensive Portfolios where appropriate. The Defensive Portfolios are designed to perform quite well under extreme market stress. However, if the stock market ends up providing a strong return, the Defensive Portfolio will miss out on most of it. Consequently, we do not want to shift to the Defensive Portfolio unless we feel that the odds of a serious market correction are high. Unfortunately, one cannot have it both ways. Safety and high returns rarely go together. Additionally, changing portfolio structure will have significant tax consequences on non-IRA type accounts.

2. In the event that we avoid the Fiscal Cliff, we expect several opportunities to arise if the situation in Europe continues to improve. Having reduced our exposure to international and emerging markets nearly 2 years ago, their impending recovery will likely present us with significant opportunity for profit. Currently the consensus from most analysts is that it is too early to buy into these markets – but perhaps soon.

3. High Yield Bonds and Large Growth Stocks continue to appear more attractive than usual. We intend to keep these in the portfolios in percentages well above what we would hold normally. So far, this has played out well for portfolio performance.

4. Interest rates: Rising interest rates are the least of our concerns right now. Yes, rising interest rates do cause the price of existing bonds to fall – but interest rates will only rise if the Fed does a complete 180 degree turn from its present policy of quantitative easing. Likely, we will have plenty of warning – and a very robust stock market – long before we need to adjust portfolios to protect against rising interest rates. Once that occurs, however, we will make the necessary adjustments to insulate portfolios against falling bond prices.

As always, we appreciate the faith that you have placed in us by allowing us to advise you during these most “interesting” times in our lives. It is our hope that our watchfulness and our attempts at distilling complex and often confusing information adds value to your overall financial situation.

Jon Castle

http://www.WealthGuards.com

This blog is for informational purposes only. This is neither an offer to purchase nor sell any securities. All investing involves the potential of loss – including invested principal. Indices quoted are general barometers of security price movement. You cannot invest directly in an index. All information is obtained from sources deemed reliable but not guaranteed. Past performance is not a guarantee of future performance. No tax or legal advice is given nor intended.

Investment advisory services provided by Paragon Wealth Strategies, LLC, a registered investment advisor.

10245 Centurion Pkwy. N. Ste 105, Jacksonville FL 32256 (904) 861-0093 www.WealthGuards.com

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements

Stock Market at a 4-year High… Again…

While it has been an unusually long pause between market updates this time, I can assure you that we were not asleep at the wheel. In this instance, no news was good news, as the stock market has maintained its generally upward trend for the past several months with only moderate volatility for us to endure.

As of this writing, the United States stock market is approaching the high of 13279 on the DOW and 1419 on the S&P500 that it had previously reached on May 1st of this year, before the 10% correction that we went through during June and July. Since then, we have had generally uninteresting economic news on the domestic front, no real political unrest that has given us pause, and the Europeans continue to struggle through massive debt issues and one of the worst recessions that region of the world has had to face in several decades.

It can be easy to fall into the trap of thinking that “something good” must actually happen for the stock markets to go up. This is actually not the case. Given the fact that bond markets have gone up continually over the last several years, the current prices of bonds are so high, that most investors have begun to realize that future returns of the bond market are likely to be disappointing. We are beginning to see a shift of capital from what is historically an asset of moderate risk and return (bonds) to an asset class that historically has been riskier – but is currently acknowledged to be undervalued (stocks – especially blue chips).

As a result – nothing spectacular is happening in the economy to move us measurably forward, but as money shifts from bonds to stocks (or from sideline cash to stocks) – the price of stocks will tend to move up simply as a result of supply and demand. In other words – beause more and more investors are dissatisfied with the expected returns from bonds in the forseeable future – stocks seem like a more attractive alternative, especially for long-term investors. The current owners of the stocks must be convinced to sell them – and this “convincing” is done by investors paying higher and higher prices for the stocks over time.

Approaching a new or previous high is not without danger, however. Those who have invested for a while also understand that when the market approaches a previous high mark, it may fail to break through – almost as if an invisible lid has been placed upon the market itself. Sometimes, even in bull markets, the market must pull back and “take a new run” at the “lid” to break through. Currently the market does not have a great deal of momentum; while investors are buying stocks, they are not doing so with enough gusto or wild abandon for us to be convinced that a breakthrough will occur. So… a potential correction may be in store for us.

As we have mentioned before, we are of the belief that the stock market will likely remain in a “trading range” for several years – with a slight slant to the upside (just enough to make investing worthwhile, I suspect) but not a roaring bull market that we enjoyed after the last recession. Instead, we are likely to enjoy several months of upmarkets, followed by several months of downmarkets… squeaking out 7 to 8% returns on an annualized basis, and paying for it with a good bit of volatility and lack of market direction. Dividends will likely play a significant role in creating portfolio growth. We have adjusted portfolios to try to maximize investor returns (within risk tolerance) for this scenario, and continue to admonish patience.

Most experts believe that we are unlikely to see any real economic or fiscal news between now and the election. While it is possible that world events may cause unrest, or that some good news may come out of Europe that bolsters markets for a while, in general it seems that most institutional investors are in a “wait and see” mood. Market movements, however, can give some insight into likely election results. A strong stock market during an election year has historically increased Presidential approval ratings and would likely increase the chance of the current President being reelected. If, on the other hand, the market should falter between now and November, incumbent approval ratings are likely to decline, thus increasing the odds of the Romney/Ryan ticket being successful on election day.

Jon Castle

http://www.WealthGuards.com

This blog is for informational purposes only.  This is neither an offer to purchase nor sell any securities.  All investing involves the potential of loss – including invested principal.  Indices quoted are general barometers of security price movement.  You cannot invest directly in an index.  All information is obtained from sources deemed reliable but not guaranteed.  Past performance is not a guarantee of future performance.  No tax or legal advice is given nor intended.

Investment advisory services provided by Paragon Wealth Strategies, LLC, a registered investment advisor.

10245 Centurion Pkwy. N. Ste 105, Jacksonville FL 32256   (904) 861-0093  www.WealthGuards.com  Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements

PARAGON designated as a Premier Advisor in Northeast Florida by NABCAP

PARAGON Wealth Strategies,LLC Designated as Premier Advisor in Northeast Florida by the NABCAP

PARAGON Wealth Strategies, LLC announced today that they have been recognized as NABCAP Premier Advisors, an exclusive group of financial advisors who represent the best in quality wealth management in Northeast Florida.

 

FOR IMMEDIATE RELEASE

 

 

PRLog (Press Release) – Aug 07, 2012 -
Jacksonville, Fla – PARAGON Wealth Strategies, LLC announced today that they have been recognized as NABCAP Premier Advisors, an exclusive group of financial advisors who represent the best in quality wealth management in Northeast Florida.  

The designation is awarded annually by the National Association of Board Certified Advisory Practices (NABCAP), a nationally-registered 501(c)(3) nonprofit organization, established to serve the needs of the investing public by helping identify top wealth managers.  The selection process is based on a proprietary system whose ultimate goal is to provide investors and advisors a trusted standard of excellence to help guide them within the financial services industry.

The evaluation process assesses 20 categories of practice management, which include areas such as customer service, risk/investment planning philosophy, credentials, team dynamics, fee/cost structure, and average AUM per client among other areas.

The NABCAP Premier Advisors were announced in the August 2012 edition of 904 Magazine.

PARAGON Wealth Strategies, LLC is an independent, fee-only Wealth Management firm staffed by CERTIFIED FINANCIAL PLANNERTM professionals specializing in successful retirement strategies.  PARAGON uses a unique 5-step process to help successful, retirement-minded individuals make the smart decisions about their money necessary to achieve their most important goals.  With its network of outside professionals, PARAGON’s team helps guide their clients to prudent decisions regarding Wealth Enhancement, Wealth Protection, Wealth Transfer, and Charitable Giving strategies.  Since PARAGON and its advisors earn no commissions, fees, rebates, or bonuses on any recommended product, clients can move forward with confidence that the recommendations they receive are based only upon diligent research and state-of-the-art financial analysis, tailored specifically for their unique situation.

About NABCAP
The National Association of Board Certified Advisory Practices (NABCAP) is a nonprofit organization created to establish mutually understood standards and practices among both investors and advisory practices.  Their primary mission is to educate and inform the investing general public with reliable, unaffiliated, unbiased and completely objective educational resources and information. NABCAP Premier Advisors lists are a powerful reference for investors to identify the top wealth managers in their local market. Visit http://www.nabcap.org for more information

http://www.wealthguards.com

10245 Centurion Pkwy N Ste 105

Jacksonville, FL 32256

Meet Little Johnny – Your NEW Business Partner!

Jonathan N. Castle, CFP®, ChFC

Steve and John had been friends for a long time. They were the best of friends since the fourth grade when Steve had helped John face down the school bully. They had played high school basketball together, gone to college together, and had even proposed to their future wives on the same night. Soon after, they went into the heating and air conditioning business together – an “Even Steven” partnership, they called it.  Steve, as
president and COO,  ran the crews and supervised the contractors while John, as CEO, pounded the pavement for business and coordinated the jobs.

Over the years their business grew. Before long they had 12 crews dispatched every day.  John’s business acumen and sales skills had the company’s services in high demand, and Steve’s people skills and work ethic kept customers loyal and crews productive. After 22 years, the business was worth 4 million dollars and generated revenues of over a million and a half dollars a year.  Then Steve and his wife were killed in a car accident by a drunk driver.

John was crushed – in addition to losing his best friend, he had also lost a huge part of his business and livelihood – the man who made things happen where the rubber met the road. Sure, there were good men on the crews, and with some training, one of them might be able to step up and shoulder some of the burden of being the big boss, but it would take months – even years – to train a replacement.

John sat in his office, head buried in his hands. There was a knock at his door, and in stepped what was to become his worst nightmare: Steve’s son Johnny. Johnny, John’s own namesake, was a 20 year-old high-school dropout with a known drug problem and expensive tastes. With a sinking sensation that bordered on nausea, John realized he was looking at his new business partner. As 50% owner of their joint business, Steve’s entire stake in their business now belonged to his only son – Johnny.

In the months that followed, Johnny did little to help the business other than demanding 50% of all revenues generated. Feeling he wasn’t getting enough money, and with little understanding of economics, he soon inserted himself into every business decision, from hiring to firing to bidding for contracts. Soon, loyal crews began departing to the competition.  No-show rates of employees skyrocketed.  The work that actually did get completed was rarely finished on time and rarely passed inspection.  Before long, the company was barely surviving – hanging on by a thread as it fought tooth and nail for each piece of business it landed.

Why did this happen? Was it fate? Hardly. Steve and John had simply made the same mistake that many business owners do – failing to realize their own vulnerability. With simple planning, the destruction of the business could have been avoided. Granted, nothing short of clairvoyance could have avoided Steve’s death in a car accident – but some simple business succession planning would have gone a long way to keeping the
business strong and viable during the months following Steve’s death.

All closely held businesses should consider business succession planning. While there are many solutions to a problem such as this, Steve and John would have been well served to create a buy-sell agreement. This agreement, which is a legally enforceable contract, would have given John the ability to buy out Steve’s stake in the business for a predetermined amount should Steve die or become incapacitated, leaving Johnny with no power to influence any business decisions whatsoever.

There are two basic types of buy-sell agreements: a cross-purchase agreement, and an entity purchase agreement. In a cross-purchase agreement, each business partner owns a life insurance policy on the life of the other partner – providing immediate cash with which to buy out the partner’s heirs, such as Johnny. In an entity purchase agreement, the business itself owns the life insurance policies on each partner. Typically, if there are three or more partners, an entity purchase agreement is the most inexpensive option for
all involved.

An additional benefit of this type of business succession planning is that the agreement can be structured in such a way as to allow the owners – through the business – to stuff the policies full of tax-deferred cash values. In the event that none of the partners die – which is usually the case – they can use the cash-fat policies as retirement bonuses or to provide supplemental income and tax-free death benefits to their families once they ultimately enter retirement.

Given Steve’s role in the business, it would also have made sense for the business to own a “key man” insurance policy on Steve’s life. In this case, had this protection been available, John would have had enough money to immediately search for, and probably recruit, an experienced foremen already performing Steve’s critical duties in another company. While the insurance would not have mitigated John’s pain of losing his best friend, it would have helped him replace Steve’s business skills in a relatively short
period of time.   While the premiums for the insurance policy would not have been taxdeductible
to the business, the death benefit would have been received tax free by the company.

As business owners, our businesses are often a large part of who we are.  The sacrifices every business owner makes to create and nurture a successful business are great – too great to have the results of those sacrifices disappear in a moment by failure to plan. Please consult with your financial planning professional on the steps necessary to protect and preserve what may well be your biggest legacy – your business.

Jon Castle

http://www.WealthGuards.com

This blog is for informational purposes only.  This is neither an offer to purchase nor sell any securities.  All investing involves the potential of loss – including invested principal.  Indices quoted are general barometers of security price movement.  You cannot invest directly in an index.  All information is obtained from sources deemed reliable but not guaranteed.  Past performance is not a guarantee of future performance.  No tax or legal advice is given nor intended.

Investment advisory services provided by Paragon Wealth Strategies, LLC, a registered investment advisor.

10245 Centurion Pkwy. N. Ste 105, Jacksonville FL 32256   (904) 861-0093  www.WealthGuards.com  Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements

How can I protect my 401(k) from the European Debt Crisis?

Jon Castle, CFP, ChFC

What a question, huh?  This question seems to be on the minds of many investors these days.

Most economists are predicting that the European zone will suffer a period of slower than usual growth – or even short periods of shallow recession – as they try to work their way out of the debt crisis that they are currently in. Since we are, in reality, a global economy, this means that markets both here and abroad will likely be volatile and moderately stagnant for the next several years. It may well feel like we take 3 steps forward in the market, only to be followed by 2 steps backwards – for a while.

Morgan Stanley did a wonderful study called “The Aftermath of Secular Bear Markets” in which the authors of the study tracked the 19 major bear markets over the last century (only 4 were in the US). All major bear market corrections (defined as a market drop of 47% or greater) were followed by a rebound rally, (2009) then a mid-cycle correction (2010 & possibly 2011), followed by a period of 5-6 years of volatile, sideways behavior, before a new bull market started. So, based upon that historical precedent – we are about 2 years into the sideways part. (if you Google this study, you can read about it directly. Here is a link to see it visually:  Trading Range.  Note that the chart on this link was published in 2009, so the “we are here” mark is has moved 3 years to the right .  It was right on as far as predicting the mid-cycle correction(s) in 2010 and 2011.

The sideways part (the trading range of 5.6 years, on average) is the period of time where the economy heals itself, and goverments try to “unscrew” what went awry in the first place.  This is where we are now.  Likely you see daily evidence of this natural process – Democrats and Republicans squabbling over policy but not really changing anything, the Fed printing money, banks hoarding cash and trying to get their books in order, finger-pointing, governmental gridlocks, and daily predictions of great bull markets or terrible bear markets. While difficult to live through – this is actually part of the NATURAL healing process of a free-market economy. Once you realize where you are in the cycle, then it becomes much easier and far less confusing to stay the course.

So – to answer thequestion – the secret to being a successful 401(k) or other retirement plan investor in which you have to save money over time, and have, say,  10 or 12 or more years to retirement, would be:

1)  Build your portfolio to a risk tolerance that even if the market drops 20 or 30%, you will NOT freak out and will NOT stop investing.  That means you may have to have 30%, 50%, or even 70% of your money in the “safer” investments like government bond funds, or even cash.  A good rule of thumb is – whatever percent of your portfolio you have in the stock market – that is the percent that it will go down when the market corrects. So – if the market drops 20% (which it does every 3 years) – and 50% of your money is in stock funds – then your portfolio will drop by about 10%. (50% of 20% is 10%.)  If you can hang through a drop like that – but no more – and keep investing, then that’s your risk tolerance threshold (limit).  If your personal limit is more like 20%, you can build your portfolio more aggressively – like 70% stock funds, or maybe even a little bit more.  With 10 or 12 years to retirement, you’ve got plenty of time to make it up, so you can afford to be more aggressive.

2) KEEP INVESTING.  When the market goes down – and your portfolio goes down – but you keep investing – you are buying up shares of the funds ON SALE.  If you see a sale at a store – you wouldn’t throw away everything you bought previously, would you?  Then why do people do this with stocks or mutual funds?  If they are on sale – buy more!! Keep buying over time – during that volatile period that I mentioned above – and when the steady bull markets DO come back (they will – we just don’t know when) then you will likely be extremely pleased with your investments.

This blog post is not personal investment, financial, or tax advice.  Please consult your financial professional for personal, specific information.  Indexes mentioned are a general barometer of the stock or bond market they represent.  You cannot invest directly in an index.  Past performance is no guarantee of future results.
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Investment advisory services offered by Paragon Wealth Strategies LLC, a registered investment adviser. http://www.WealthGuards.com