The Market feels a bit… “Toppy.”

5 03 2012

Jonathan N. Castle, CFP®, ChFC®

Where does the time go?  It is already nearly the end of February and it seems like 2012 is speeding along faster than last year!  So far this year, the financial markets have been reasonably good to all of us, with the S&P 500 up about 8.5%, the Dow up 6.6%, and the NASDAQ up an eye-popping 13.9% as of this writing.

The Dow Jones Industrial Index has broken through the psychological barrier of 13,000 – the highest it has been since March of 2008 a few times now.  In fact, the markets have been remarkably – almost eerily – calm for the last 3 months, quietly marching upward, shrugging off the occasional bad news (such as the Greek bailout nearly unwinding last week and the ever increasing tension over oil in the mideast) with little more than an occasional flinch. 

As we have said for the past 8 months, we remain cautiously optimistic.  “Moderately Bullish” is a term that I have used in the past.  Based upon historical behavior of Secular Bear Markets, we expect that over the next 3 years or so, we will see substantial ups (and downs) in the markets with a slight overall uptrend.  

As it pertains to the current rally, we believe this leg of the rally is probably due for a drawback of some kind.  The next chart shows our reasoning for this.  When the market approaches a point where it had difficulty breaking through previously (such as the Dow’s 13,000 level), this is known as “resistance.”  Typically, as a market index approaches a resistance level, it generally will pause, draw back, and then, IF the level is to be broken, will punch through that level to achieve new highs.  Similar to a person drawing back before breaking through a door, the market will generally draw back before “breaking out” to a new level.  As we are at that resistance level now, a drawback would be a natural – even necessary – part of a normal market rally. 

Despite the recent market rally, we do not feel it is time to break out any party hats on a new sustained bull market just yet.  There are a number of reasons to remain cautious about the markets:

  • According to the Investment Company Institute – the total inflows (new money) going into equity (stock) mutual funds from February 1st through February 15th was a little over 4.6 Billion Dollars.  While this seems like a lot, compared to the inflows to bond funds, which netted 15.2 Billion – it was just a trickle.  Clearly, investors are not ready to assume lots of stock market risk just yet, and the recent rally did not have the market breadth that would indicate the start of a new bull market.
  • The price of oil is going up.  Part of the reason is that US refineries shut down every May to retool to EPA requirements, so oil nearly always rises during this part of the year.  However – increased tensions in the mideast are also driving oil prices higher.  Higher oil prices mean slower economic growth.  As businesses must pay more for energy, they spend less on payrolls and other things which drive growth.
  • Europe’s financial situation is still quite a mess.  While it seems that the European Union is working feverishly to keep from imploding – and they may well succeed – the fact is that Europe is already mired in what appears to be a deep recession.  This will have a global impact, slowing growth in emerging markets as well as within the United States.
  • Our National Debt is a significant problem – and only getting worse.
  • We are in an election year, so significant economic policy will likely not be passed until next year.  Given the uncertain outcome of the 2012 elections, it is anyone’s guess as to whether any new policies will be helpful or harmful.
  • The Bush tax cuts are set to expire this year.  This expectation is curbing business spending.
  • And the list goes on… given the recency of the 2008 market crash, investors are not yet hungry enough for returns to take additional risks and dive head first into the markets. 

However – there are numerous reasons to be bullish as well.  Institutional investors are slowly beginning to see the opportunity in stocks – and have publicly stated their plans to acquire more stocks in their portfolios over the next several years in preparation for a future bull market.  Some reasons to own stocks – and to expect the market will go up are: 

  • Stock valuations are more attractive than they have been in decades.  Based upon the price of stocks compared to company earnings, stocks are cheap.  In the past, investors who loaded up on stocks at current valuation levels were handsomely rewarded over the next 10 years.  Institutions know this – and their demand for stocks during this period may well keep the market afloat.
  • We are seeing a new “flurry” of IPO’s (Initial Public Offerings).  New companies – such as Facebook – offering publicly traded stock for the first time.  Historically, when there are a lot of IPO’s, the market does well.
  • We are seeing a significant increase in companies buying back their own stock.  Not only does this activity boost the stock market – but it is also an indication of what company insiders think of the future prospects of their companies.  Who would spend good money to buy their own company stock – unless they believed the company woud do well?
  • Corporations are hoarding more cash than ever.  While initially this might seem a bad sign – it is a an indicator of the huge potential that exists.  Eventually, this cash will be deployed.  When it is – there is enough of it to have an enormous impact upon virtually all parts of the economy.
  • Currently, the dividend yield on the Dow Jones is a very attractive 3.07%.  So, hypothetically if the market only goes up 5%, an investor who owned the Dow Jones would reap over 8% in total return.  It is only a matter of time before return-starved pension funds, institutions, and corporations currently investing in Treasuries earning less than 3% begin to move money to other assets to seek greater returns.  When this begins, the market has the potential to move up very quickly.

This balance between bullish and bearish factors is a normal part of the recovery process, but makes for a challenging investment environment. In summary, we remain cautiously bullish, with an expectation for occasional market corrections which may exceed 20% or more.  Likely, it will feel like taking three steps forward, only to take two steps back.  However, we feel that reasonable gains are available with the correct strategy.  The most successful investors that we have worked with have carefully chosen their risk tolerance, and then invested in portfolios scientifically designed around that risk tolerance – and remained focused on the long term.  

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.   

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.

Investment advisory services offered by Paragon Wealth Strategies LLC, a registered investment adviser.  http://www.WealthGuards.com 

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Should I Still Invest in a Crappy Economy?

20 09 2011

By Jon Castle, CFP®, ChFC®

It does not seem to matter who the potential investor is – whether they are already retired, are nearing retirement, or are a younger person with quite a bit of time until retirement… the question is often the same.  With interest rates being so low… with the markets unpredictible and volatile – what should I do?  The questions aren’t even really so straight forward as, “why should I invest my money now,” or “should I pay off debt first,” or even any of the other questions that, as a financial advisor for more than 15 years now, I’m used to getting.  The questions I am hearing now seem to have taken on the tone of confusion, despair, and a lack of direction, versus the questions I used to get such as “how should I invest,” or”what type of account – a Roth or a traditional IRA – should I have?”

Yesterday, when talking to a rather successful, nearly retired client on the telephone, she mentioned that she feels that she always has to take two steps backward for every three steps forward, and ideally, she would rather not see her account fluctuate at all once she retires next year.  “Isn’t there just something we can do with our money to earn a steady 6-8% or so with no risk?”  Unfortunately, the answer is NO.  While there might be many product salesmen out there who will try to convince you otherwise – the answer is still NO.   If there were -then all the institutions and large organizations in the world, who spend millions and millions of dollars trying to find or design such assets would have already found them.  A classic example of people and institutions trying to get outsized returns with no perceived risk is the recent mortgage debacle, and we saw how that turned out.

So – back to the original question – With the Economy on shaky footing (to say the least) and with the markets being… unusually volatile, to put it lightly – what should I do?

To answer this question, I had to turn to the history books, tenured academic research, and even some new research – but I think I found the answer.  Do EXACTLY what you have been told to do throughout the years.  Live below your means – save a portion of your income (assuming you are working and saving for retirement) and invest in a fully diversified portfolio designed specifically for your risk tolerance.  In fact – it is having the GUTS to invest during times like these that separate the winners from the… folks who wish they had as much money as the winners.

Last year, Dimensional Fund Advisors tapped into the database held at the Center for Research in Security Prices (CRSP) at the University of Chicago – the nexus of more Nobel-Prize winning research in economics than any other institution on the planet – to identify IF there was a direct correlation between a poor economy (as defined by low GDP) and poor investor returns.  In other words – SHOULD I STILL INVEST IN A CRAPPY ECONOMY?”

The Dimensional Study started by taking all of the world’s developed economies, examining their annual GDP growth from 1971 – 2008, and dividing them into two groups – High Growth, or Low Growth – for each year.  Clearly, much of what we hear on the news is about GDP growth – is our economy growing or not?  The higher the economic growth, the better – as this means reductions in unemployment, increases in personal wages, and, generally, a feeling of well-being, versus the cloud of general malaise that seems to have decended upon the world as of late.

Once the economies were divided into High Growth and Low Growth – the performance of their stock market indices was compared to their GDP Growth.  The question:  Does a poor economy (low GDP Growth) accurately predict poor investor returns?  The question was not – can an investor perform poorly during low-growth times (of course, we know that is possible) – but is there a clear and determinable correlation between a bad economy and a bad investor experience?

Oddly enough – the answer is NO.

                              AVG GDP                      AVG RETURN              Risk (Std Dev)

High Growth               0.92                             12.90%                          23.07

Low Growth               -4.02                            13.52%                          23.04

The data for Emerging Markets was similar, but quite honestly, the data for Emerging Markets only went back to 2001, and I felt this was just too short a time period to draw any reasonable conclusions.

When I first saw the data, I thought… well… this might be a sales pitch just to keep investors invested… we are still looking back only as far as 1971.  What about other periods of lousy growth?  And what about for the US in particular?  I wanted to check the data myself.  So, I delved into the CRSP database myself, using the French and Fama indices that go back as far as 1926, and to the Bureau of Economic Analysis (BEA.GOV) and compared hypothetical investor returns to the GDP growth (or lack thereof) during the 1970’s and during the Great Depression.

One particular period of interest to me was the years from 1972 to 1982.  Yes, this was after 1971, but I wanted to look at it further and in more depth from a portfolio manager perspective instead of just looking at the stock market.  How did it feel?  Remember the oil embargo?  Our defeat in Vietnam? The Cold War?  Carter’s “Misery Index?”  Double Digit Inflation?  During this period of time, the average GDP Growth was only 2.7% – well below the historical average of 3.4%.

The second period of interest was the period of the Great Depression.  Now the Great Depression itself lasted from 1929 to 1941 – but for this particular exercise, I wanted to look at the period starting about 2 and a half years AFTER the crash – starting with the summer of 1932 until the attack on Pearl Harbor, or December 1941 – the long, grinding years of the Depression.  During that period of time, our average GDP Growth was only 2.0% – the longest and weakest period of below-average growth on record for the United States.

My question was – how could today’s investors, using a properly designed, diversified portfolio,  have done during that time?  Were these two periods of time – arguably the worst periods (economically) in the past hundred years – a bad time to be invested?

Assume a relatively simple, domestic portfolio:  T-Bills (15%), 5-Year Treasuries (15%), US Large Stocks (11%), US Large Value, or underpriced, dividend paying stocks (21%), US Small Value Stocks (18%), US Small Stocks (10%), and Very Small, or Micro-Cap Stocks (10%).

Looking at the indices only (remember – there were VERY few mutual funds at the time of the Depression, and certainly no ETF’s,) we can get an idea of how an investor might have done.  The following numbers do NOT account for any fees, commissions, taxes, etc – but we can still draw conclusions.

From the period of 1932 – 1941, the above, simple, diversified portfolio (indices only) would have achieved an AVERAGE ANNUAL return of… wait for it… 19.29%!!  In fact one dollar invested as described above in the summer of 1932 would have grown to about $4.50 by December of 1941.  During the Great Depression!!

From the period of 1972 to 1982, the above, simple, diversified portfolio (indices only) would have achieve an AVERAGE ANNUAL return of… 14.82%!!  One dollar invested as described above in December of 1972 would have grown to about $3.49 by December of 1982.  During the Carter Years and the Misery Index!!

Were there periods of volatility, market corrections, and even stagnation in the investor’s portfolio?  Absolutely – in particular, a sharp market correction in 1936 would have scared out many undisciplined investors, and a particularly unpleasant 18 month bear market from 1973-1974 would have tested investor mettle.  But the facts remain – a fully diversified, properly balanced investor would have been able to achieve significant returns during those times.  In fact – there are a number of economic theories that suggest that investors who have the GUTS to invest (and remain invested) during these uncertain times are the ones who enjoy the GREATEST rewards.  These are the riskiest, most emotionally draining times to invest – as a result, the Capital Markets reward those investors more readily and more predictibly than the comparatively “timid” investors who only remain invested during the “good” times.

Today, the Fed and the International Monetary Fund (IMF) are projecting the US economy’s GDP growth to be about 2.7% for the next two years.  The media harps daily on the miserable shape of our economy, and politicians are using the economy as opportunities to further their agendas.  These are things that we must endure as a people, or change with our votes.

However – it is critical to SEPARATE our concerns about the economy – from our own INVESTMENT POLICY.  The two are NOT necessarily correlated.  A miserable economy – historically – does NOT mean miserable returns for an investor who is disciplined, creates a sound, diversified, low-cost investment STRATEGY with strict risk controls, and then implements it with courage and discipline.  In fact – it is EXACTLY these types of investors who have historically been the winners over the long term.

___________________________________________________________________________

This blog article does not constitute legal, tax, or personal financial advice.  Please consult your own financial professional for personal, specific information.

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.

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





What’s Your Retirement Number? Higher than You Might Think!

7 09 2011

by Michelle Ash,  CFP®, CDFA™

As I start to write this article, I feel like maybe I should give readers a caution like you see at the start of some TV shows:  “The program you are about to watch contains disturbing images. Viewer discretion advised.”  This message is important!!!, but the telling of it isn’t necessarily going to be pretty.

Recently I have had the opportunity to experience a new phenomena in my career.  In the past couple of months, much by happenstance, our firm has had a number of younger individuals engage our services.  By younger, I mean they are generally of or near my own age demographic:  late 30’s to mid-40’s.  These individuals have generally been contemplating their future retirement, among other financial goals, and have hired us to put together a retirement plan to see how they’re progressing on that path.

Previously, our firm has primarily worked only with individuals ages 50 and above, who are often in what I call the “final chute” towards reaching retirement.

I have long observed the unpleasant circumstances that loom ahead for individuals who have not planned and saved well for retirement.  But since I was usually seeing those individuals at or near the age at which they had hoped to retire, I wasn’t necessarily able to understand what decisions might have led to their current status.

Having the opportunity to work with individuals who are twenty or even more years away from retirement, I can see the habits that cause success, or prevent one from achieving it.  In the process of that observation, I am also noticing an extremely disturbing trend.

The issue is thisI notice a general assumption that contributing the maximum funding to one’s 401(k) plan is all that really needs to be done to fund a retirement.

Now, I realize and agree that for some people, getting to the point where they can actually save $15,500 per year of their salary, the current maximum funding allowed for an employee under age 50, is a fabulous goal in and of itself.

But what bothers me is when I see individuals or couples making $150,000 per year, $200,000 per year, sometimes even more than that, and they think that just maxing their 401(k) is all they really need to do in order to be able to retire at age 60, live a long retirement, and have a lifestyle largely commensurate with that they currently live.

I guess I just have one thing to say to these people:  WAKE UP.  You are living in a fantasy, and if you stay there, the reality you are faced with once you get to retirement is NOT going to be a pleasant one.

Let’s run what I’ll call an “average” desired retirement.  It’s a standard many clients describe to me as “comfortable” but is certainly not lavish by most accounts.

• Retire at age 60
• Have $48,000 per year for expenses and budget needs (in today’s dollars)
• Have their house paid off by retirement
• Dollars for Property taxes, homeowner’s insurance, health insurance, and Medicare supplements are extra expenses above the base $48K
• Spend an extra $5,000 per year on travels or other hobbies while healthy
• Upgrade their vehicle every 7 years or so
• Have enough money to cover emergencies, home repairs, and medical emergencies
• Have enough money to last the rest of life no matter how long that lasts

After factoring in inflation, this scenario results in retirement costing approximately $96,000 in year one and $346,000 in the final year (assuming death at the age of 95).  Imagine if, just like going out to eat where your waiter hands you a final bill at the end of the meal for all of the different courses you ate, someone were to hand you the bill for your retirement at the very end of it.  If someone were to add up year by year the total cost of this retirement, the “number” that would result would be $8,905,800. **(Assumptions are listed below.)

Have you ever seen that commercial where people are walking around carrying their retirement “number”?  I have heard many people say they’ve been frightened by the size of some of the numbers.  Guess what – unfortunately those numbers can be very real!

Fortunately, there is a potential income source to help offset that need:  social security.  (As a sidebar, the cynical Gen X’er in me wants to say “yeah right, like we can count on that!)  We’ll assume there is no pension income, since a majority of Americans today, particularly younger ones, are no longer eligible for corporate pensions.  Using current rules, social security would account for approximately 39% of the overall need mentioned above. **

But that still leaves us over $5 Million dollars of future money needed in retirement that is unaccounted for.  This is not, of course – the “number” that needs to be accumulated prior to retirement, since accumulated dollars will likely earn a return during retirement.  However, it does accurately reflect the total likely cost of retirement – and can give insight to the size of the number which would need to be accumulated prior to retiring.

Let’s assume our hypothetical family has already saved $100,000 in 401(k)’s, which is the average amount we tend to see amongst individuals around age 40.  Solving this equation to determine how much money this family needs to save from this point forward, from age 40 until retirement at age 60, results in needing to fully fund each of their 401(k)’s at $15,500 per year each, PLUS save an additional $1,445 per month, or $17,340 per year.

Is this possible?  Especially if this requires them to save a good bit more than the maximum contribution allowed for most employer plans, it requires getting serious about their financial goals – and doing something about them – or… accepting something less.  Many people don’t like to hear advice like that, but please understand that it is not a judgment – it is just math.

I realize that at this point, some people reading this article might just want to throw in the towel and give up altogether.  As I said earlier, for many people, just getting to the point of contributing the maximum amount to a 401(k) can be a great goal.  I do not mean to diminish that accomplishment.  Ultimately, any savings you do will be better than nothing.  But what I do hope to do is cause people to realize that it takes a lot of hard work and a lot of saving to get to the point of a comfortable retirement.

With that in mind, my general suggestion to people working towards retirement, regardless of age, would be to save, save, and then save a little more.  That, or work with a CERTIFIED FINANCIAL PLANNER™ professional who can help you determine what your actual “number” is, and then make sure you’re doing everything you can to achieve it.

Expense Assumptions: 

  • House is assumed to be paid off prior to retirement.
  • Property taxes and homeowner’s insurance = $5,000 per year, inflating from today at 3.71%
  • Travel/Other Hobbies Budget of $5,000 per year inflates from today at 3.71% and ends at “advanced age” of 82 when many seniors no longer travel or pursue other hobbies as much.
  • Car upgrades begin in year 3 of retirement, occur every 7 years, and cost the equivalent of $20,000 today inflated at 3.71%.
  • Age at death = 95 for both spouses
  • Emergency savings, home repairs, and medical emergencies not accounted for since they are not quantifiable in this fact pattern.

Income Assumptions:

  • Social Security income is drawn at age 62 for both spouses.
  • Benefit amount = $18,960 per spouse, based on earnings that equal or exceed the current earnings cap of $106,800 throughout both spouses’ entire working history for 38 years (age 22 to 60).  (Source:  http://www.ssa.gov)
  • Inflation rate of 2.5% assumed on social security benefits, since Social Security benefits have not historically kept up with the rate of inflation.
  • Both spouses are assumed to live until the age of 95, meaning the family receives both social security incomes throughout retirement.

 Additional Savings Needed Assumptions:

  • Rate of Return = 7% annually.  This 7% is a mathematical figure, is hypothetical, and does not represent the returns of any particular investment or product.  Rate of return is applied to both existing accumulated dollars and future invested dollars.
  • Starting investment assets accumulated equal $100,000 in 401(k) plans.
  • Need reflected ($17,340 per year) is a total additional savings need , above 401(k) contributions of $15,500 per spouse ($31,000 total combined).  Total annual savings needed is therefore $48,340.
  • Investment time horizon:  Age 40 (current age) to age 95 (age at death).
  • Assets accumulated are assumed to be fully invested for the full lifespan of our hypothetical couple.  Both income and principal are consumed to meet retirement needs.

This blog article does not constitute legal, tax, or personal financial advice.  Please consult your own financial professional for personal, specific information.

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.

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





Current Debt Crisis – A high stakes game of “Chicken”?

19 07 2011

by Michael Carignan, CFP®, CRPC®

Do you remember watching the old classic movies where two guys get in a  fight over a girl and they head out to the quarry for a game of chicken?  If you do, you might see some similarities to what’s going on in Washington right now.  The difference this time, however,  are the consequences for all of us if neither one of them blinks.  The controversy in Washington is loud and filling the airwaves with political rhetoric and scare tactics.  And, if you listen to the media, there might be some potentially disastrous consequences if our elected officials don’t come to an agreement soon.  So we thought it would be helpful to analyze this issue, try to understand what is going on, then turn to the history books to see if something like this has happened before and how it turned out.

While the current situation certainly can be frustrating, it actually is the result of the checks and balances built into our constitution.  While the President can authorize actions and spending bills,  it is up to the Congress to actually finance them.  Right now there is a disagreement between house Republicans – who hold a majority, and the President on how much is reasonable to spend and on what.  Without going into the individual spending priorities for each of them and their merits, let’s just address the most basic elements.  The President would like to spend more and raise taxes to cover the current spending needs – while the house Republicans want to cut spending dramatically (~$2T over 10 years) with no tax increases.  Each side of the argument has valid points, but neither side seems willing to compromise enough to make a deal at this point.

In the press, we are hearing that if the debt ceiling increase is not approved then the US Government is going to default on its obligations.  What does that actually mean?  The most common things we’ve heard are that the government will stop paying soldiers, medicare benefits and/or social security benefits.  What does that make people feel?  “PANIC”!  Even worse, we hear there may be a full default on US treasury debt across the board.  More PANIC!  The news evokes a significant emotional response, with the intent of making the audience watch more of the TV news to see if anything has happened in the last 30 minutes to change the situation!   Can either of these scenarios happen?  Yes, but let’s put it in simpler terms to try to understand the entire issue.

Let’s say a husband and wife are looking at bills coming due over the next few months and realize they are coming up short on money in the bank, because of a combination of things (say, medical costs, car repairs and overspending on luxury items). The wife refuses to let more money go onto the credit cards unless the husband agrees to reduce spending.  He still wants to keep going out to eat and tells her she needs to get a second job.  Neither of them want to relent and they keep getting closer and closer to the date they will have to pay the bills and still no agreement to increase the credit card limit.  What do they do? Do they refuse to pay ALL of their bills across the board and shut down the household? Do they declare bankruptcy?  Or is it more likely they will decide which bills have priority, and which ones, if not paid right away, are least likely to cause permanent damage and delay paying on those?

This appears to be the most likely scenario.  For those who are watching the news and listening to the pundits spin out their theories for what disaster is looming if politicians don’t come to an agreement, you may be asking if this has happened before.   You don’t have to look too far in the past to see another example.  Many in the press will say this is unprecedented, and the particular doomsday scenarios vary from channel to channel,  but the November 1995 government shutdown was quite similar in nature to the situation we face now.  Let’s see if this sounds at all familiar.

1. The Republicans in Congress are unhappy with the President’s desire to spend more money on entitlement programs than they like.

2. The President is unwilling to cut programs to the level that Republicans want and is unwilling to sign a budget and debt ceiling increase that are presented to him.

It seems that in both cases you can substitute Bill Clinton and Barack Obama and voila!  Today’s scenario recreated.  In 1995 the buzzwords were “balanced budget” and now the focus is on “debt reduction”.  The basis for the stalemate may be slightly different and some of the facts are different but it is actually a close parallel to what’s happening today.  So what happened when the government “defaulted” in 1995?  They suspended all “non-essential” government spending until there was an agreement.  Each side played the media to the max – pointing fingers across the aisle and blaming the opposition for the entire flap.   The Federal Government did not default on interest payments, nor did the Government stop paying soldiers, retirees, Social Security, or Medicare.  Instead, they did furlough government employees in the Environmental Protection Agency, Forestry Service and Department of Health.  They closed buildings and public parks but continued to fund the basic services we need to keep the country safe and functioning.

Was it a comfortable time?  Not at all.  Many  people were affected, and for a period of time the populace really wondered how much worse it might get.  Did the US markets crash? No…they were virtually unaffected.  In some opinions, the government shutdown actually had the benefit of bringing spending back under control and getting us to a point of an actual surplus — even if it was only for a brief period of time.

My intent is not to disregard the potential financial impact that a deadlock between Congress and the President could create, but instead to point out that putting the current situation in a historical context can help us have a better appreciation for what might happen, and how it may affect our lives individually.  None of us can have a direct impact on the negotiations in Washington, but there are things we can do to sleep better at night.  First, it is important to be financially prepared for unforeseen and uncontrollable events.  Even government employees can have a problem with a paycheck not showing up on time, so make sure you have adequate short term savings to cover a few months expenses.  Second, make sure your investment philosophy matches your risk tolerance.  If you find yourself overly concerned with the short term market impact of a negative news story, you need to consider whether or not your risk tolerance is appropriate.  “Flip-Flopping” back and forth between an ultra conservative risk tolerance, and a more aggressive one – essentially letting the media yank your strings – is a recipe not only for financial disaster, but will likely cause ulcers and high blood pressure as well.  Having a good understanding of what your particular investment philosophy is and how much of the market fluctuations you are willing to tolerate – and STICKING TO YOUR PLAN –  is especially important for those preparing for, and enjoying retirement.

 

This blog post is for informational purposes only.  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.  Past performance is not a guarantee of future performance.  This message is NOT personal investment advice and should not be taken as such, nor is it a recommendation to buy or sell any security.

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.

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





Why has everyone suddenly become fearful?

29 06 2011

Jonathan N. Castle, CFP®, ChFC

The economy was in recovery; the bulls were stampeding through Wall Street, and for a few short months we had a general feeling that maybe – just maybe – all would be well with the economic world.  Then things seemed to fall apart – first we had a Tsunami and a potential nuclear disaster in Japan; then President Mubarek of Egypt was ousted, and then we started dropping bombs on Lybia.  To top it off, Greece will probably go bankrupt – if not soon, then certainly at some point in the future, and everyone in the US is wondering if that will be our own future if our brilliant congressional leaders can’t quit their squabbling and decide one way or another on our own budget deficit.  Do we simply raise our own debt ceiling, allowing our government to put us deeper in debt, do we default on some of our debt, or do we cut deeply into some highly sensitive entitlement programs to try and balance the budget?  QE2 is ending, so the Federal gravy train of free money is coming to an end, right?  To top it off, the market has been floundering around – falling one day and rising the next with no clear direction, reminding us of the ever present danger of a sustained bear market that may push all of our retirements back a few more years.

So what happened?  What should you do?

Well – since everyone’s situation is different, I’ll start off with some assumptions.  In my experience, individuals who are generally successful investors have the following characteristics, so I am going to assume that if you are reading this – then you have met the following criteria.  If not – then disregard anything and everything I say.

1)  You have an investment PHILOSOPHY (i.e., set of guiding beliefs and a repeatable strategy) that you believe in enough to stick to through the long term.  You are aware that events that effect financial markets continually happen and are often unpredictible – therefore, your investment PHILOSOPHY provides you guidance on how you build your investment portfolio, and does not change from day to day.  You are also aware that, contrary to what Wall Street and the mass media (which is in their pocket, by the way) constantly advocate – “buy when the market is going to go up, sell when it is going to go down,” is NOT an investment PHILOSOPHY.  It is an investment FANTASY.

2)  You have carefully measured your risk tolerance.  This means that you know EXACTLY how much your portfolio can drop before you even THINK about making any changes to your overall strategy.

3)  You have carefully designed your portfolio to match your risk tolerance.  In other words – if your risk tolerance is such that you can bear a drop of up to 10% in your portfolio – but no more – then you are aware that the market typically will drop 20% or more every 3.5 years, on average.  Therefore – you have designed your portfolio so that 50% or less of your account would be effected by such a drop.  So- if the overall stock market drops 20% – but only about half of your portfolio is in the stock market – with the rest of the portfolio in cash, CD’s, and perhaps short-term bonds  – then you can reasonably assume that a 10% drop in your portfolio would be a likely outcome of such a correction – and would be bearable.  Keep in mind that during extended recessions or financial crises (such as occurred in 2008) that these parameters are often exceeded.  The 2001 crash, on the other hand – did not effect properly diversified portfolios as much.  Point being – you have structured YOUR portfolio to match YOUR risk tolerance.

Assuming all of the above – then my general advice, assuming that you have some time until you need ALL of your portfolio – would be to do nothing.  Nonthing at all!  Sometimes we have to scream out, “Don’t just DO SOMETHING – Stand there!!”

As far as all the other stuff going on, here is my take on current events.  Granted – I cannot foresee the future – no one can – but from looking into things and trying to keep everything within a historical perspective, here’s what I think is going on.

1)  The market first.  The markets are quite efficient.  With probably more than 100 million investors, analysts, gurus, institutions, etc. all playing in the market and trying to get the most profit for the least amount of risk – the markets as a whole factor in a great deal of information in a short period of time.  I believe that the potential outcomes of both a default by Greece, and the end of QE2 are already factored into the current prices of stocks and bonds – for the most part.  None of this information was kept a secret; markets have known for nearly a year about the end of QE2, and honestly – Greece’s entire economy is about the size of Rhode Island’s.  The threat to the EU is certainly there – but more on a political front than as a potential for a global financial meltdown.  I expect very little response from the overall market to either the end of QE2 or a Greek default.  In fact, I believe that Greece WILL default – but in stages.

2)  Again, on the markets.  The economy is in recovery, but this occurs in stages.  Honestly I don’t understand all the wailing and gnashing of teeth – but I suppose that’s what drives in the revenue to the squawkers in the Media.  Remember those old rocket ships that had multiple stages – first the big rocket engine with all the fire shooting out of it, then a smaller booster rocket, and then another, and finally the little spaceship on the top of the rocket fires its engines and it goes off into outer space or to the moon?  Well, every time the rocket ended one stage, the engine would quit – there would be a pause – and then when the next engine would kick on the rocket would continue on its way.  We didn’t see all the media freaking out at every pause… squawking about how the rocket was going to fall back to the ground just because the first engine quit.  We don’t all jump out of our cars and start worrying that our car is broken everytime we shift from one gear to another… a marathon runner knows he can’t sprint for the full 26 miles… so why all the wailing and chicken littling every time there is a bit of bad news or a new report that wasn’t quite as good as the last one?  Economic recoveries take time.  This was the GREAT RECESSION, after all – over a decade in the making, so it stands to reason that it will likely take a decade or more to fix.

3)  There are a ton of reasons to believe that the stock market – and the economy – will continue to head in the right direction – upward.  First – the general index of leading economic indicators is still positive.  Yes, some of the coincident indicators have slowed down, but generally, they are still well ahead of recession territory.  Secondly, employment is still growing.  Yes, we’ve had a slow month or two of new hiring numbers – but employment is still growing.  And the number of temporary workers that have been hired is up to levels not seen since 2009, and companies typically hire temps before perms.

4)  Economic slowdowns (operational pauses) are absolutely normal after a run-up like we saw since last year.  This “pause” gives corporations time to think about their next moves – expansions, hiring, starting new projects, new marketing campaigns, etc.  Corporations have also been hoarding cash; it is only a matter of time before these corporate reserves are put to work in new growth opportunities and innovations.

5)  Stock buybacks are at an historic high right now.  Based upon P/E ratios, stocks are the cheapest they’ve been in 26 years (this from Bloomberg).  The Bush tax cuts are still in effect, corporate profits are higher than ever – and there is currently approximately 2 trillion dollars sitting in cash and on the sidelines ready to be deployed into the markets.  This all makes for a powder keg of bullish opportunity.

Ultimately, no one can see the future.  But I do believe that we as humans typically worry too much.  Supposedly about 95% of the things that we worry about never happen.  So, in this case – assuming all the above – my suggestion is that we just stand back and see where the markets take us.  I’m betting that place is up significantly from where we are now.

Disclaimers:

This blog post is for informational purposes only.  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.  Past performance is not a guarantee of future performance.  This message is NOT personal investment advice and should not be taken as such, nor is it a recommendation to buy or sell any security.

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.

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





So I’ve Been Saving…Now What?

17 05 2011

 Michael Carignan, CFP®, CRPC®

Have you ever wondered how to get a clear picture of all of your current financial resources and how much retirement savings you need to provide your vision of retirement, taking into account your potential health or market risks?  This is just one of many questions people ask when thinking about personal retirement planning.  If you find yourself in this boat, there are a number of solutions for you.  First, with some time, research and diligence, spreadsheets and off-the-shelf software, you can create your own retirement plan.  However, it is likely that if you are asking these questions, you probably don’t have one of those key ingredients to success, or you would already know the answer.  A more comforting solution may be to get some professional help.  WebMD can help you diagnose some medical conditions, but most people feel better having a trained medical professional give them their expert opinion and recommend a treatment if warranted.  In a similar fashion, finding the right financial professional to help you can be a key step in the right direction on your path to financial success.

Just like finding the right doctor is important, (you don’t want to go see your dermatologist if you have a cough) finding the right kind of financial professional can be equally important.  There are many financial professionals out there; selecting the right one may be the most important factor in ensuring you have a favorable planning experience.  There are some questions you need to ask when looking for a professional to help you construct a retirement plan.  The first question should be, “are they qualified to provide the answers I’m looking for?”  One good resource in this search is www.letsmakeaplan.org where you can search for a local Certified Financial Planner™.

Most people are more comfortable dealing with a doctor that has the same philosophy on treatment and they personally like.  By “same philosophy on treatment,” I mean, do they recommend a diet and exercise regimen, or do they push a diet pill to help lose weight?  If you and your doctor disagree on the basic philosophy of medical treatment, you probably will have disappointing results, since you won’t follow his or her advice.  In the same way, it is very important to look for a financial professional that has the same general philosophy that you do when it comes to investing and money management.  If you believe that it’s possible to outsmart the financial markets and pick the best performing mutual fund or stock next year, then you need to find a broker who believes that as well.  If you believe that investing involves taking some prudent risks and adhering to a long term plan with a scientifically designed portfolio, you likely should  find a different advisor.  Neither philosophy is necessarily wrong, but making sure you select a financial professional that has the same philosophy as you have is of paramount importance to a successful planning relationship.

Some additional specific questions you should ask are:

    • Do you prefer fee based or commission based compensation for your advisor?
    • Do they have experience with other clients like you?
    • Can they advise you on all aspects of your financial life or will you need several advisors to get the answers you need?
    • What is the charge for the plan?  In most cases, you get what you pay for; if it’s free there is going to be a sales agenda you might not know about right away.
    • What is included in the service they provide?
    • Will they be able to help you implement planning suggestions?  If so, is it a requirement of the planning process?  Be careful of the solutions that can only be done through them.
    • Do they make “suitable” recommendations or are they a “fiduciary”?  (For more information on the difference click here)

Finding a professional that you can understand and trust is critical when choosing to have a retirement plan constructed for you and your family.  You are unlikely to follow the advice, good or bad, if you do not trust the person providing the advice.  Once you find your ideal fit of personality and capabilities, be ready and willing to provide answers to all of their questions, since a retirement plan is only as good as the information you provide.  Don’t hesitate to ask them probing questions and provide honest answers if they ask you some difficult questions.  When dealing with the money you have worked so hard to accumulate, stumbling into retirement without a carefully crafted plan can be a dangerous prospect at best. Once your retirement plan is complete, then it becomes time to “work your plan” if you have a few more years, or “live your plan” if you are already retired.

The earlier you start planning for retirement the better, because finding yourself in retirement and unsure if you’ll be able to live it how you’d like is a scary proposition.  It has been my experience that those who are most successful in retirement have taken the time to get the advice that helps them sleep well at night, knowing they have done everything they could to create the retirement they wanted for themselves and their family.

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.

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





So I’ve Been Saving…Now What?

4 04 2011

 Michael Carignan, CFP®, CRPC®

Have you ever wondered how to get a clear picture of all of your current financial resources and how much retirement savings you need to provide your vision of retirement, taking into account your potential health or market risks?  This is just one of many questions people ask when thinking about personal retirement planning.  If you find your self in this boat, there are a number of solutions for you.  First, with some time, research and diligence, spreadsheets and of-the-shelf software, you can creat your own retirement plan.  However, it is likely that if you are asking these questions, you probably don’t have one of those key ingredients to success, or you would already know the answer.  A more comforting solution may be to get some professional help.  WebMD can help you diagnose some medical conditions, but most people feel better having a trained medical professional give them their expert opinion and recommend a treatment if warranted.  In a similar fashion, finding the right financial professional to help you can be a key step in the right direction on your path to financial success.

Just like finding the right doctor is important, (you don’t want to go see your dermatologist if you have a cough) finding the right kind of financial professional can be equally important.  There are many financial professionals out there; selecting the right one may be the most important factor in ensuring you have a favorable planning experience.  There are some questions you need to ask when looking for a professional to help you construct a retirement plan.  The first question should be, “are they qualified to provide the answers I’m looking for?”  One good resource in this search is www.letsmakeaplan.org where you can search for a local Certified Financial Planner™.

Most people are more comfortable dealing with a doctor that has the same philosophy on treatment and they personally like.  By “same philosophy on treatment,” I mean do they recommend a diet and exercise regimen or a or do they push a diet pill to help lose weight?  If you and your doctor disagree on the basic philosophy of medical treatment, you probably will have disappointing results, since you won’t follow his or her advice.  In the same way, it is very important to look for a financial professional that has the same general philosophy that you do when it comes to investing and money management.  If you believe that it’s possible to outsmart the financial markets and pick the best performing mutual fund or stock next year, then you need to find a broker who believes that as well.  If you believe that investing involves taking some prudent risks and adhering to a long term plan with a scientifically designed portfolio, you likely should  find a different advisor.  Neither philosophy is necessarily wrong, but making sure you select a financial professional that has the same philosophy as you have is of paramount importance to a successful planning relationship.

Some additional specific questions you should ask are:

    • Do you prefer fee based or commission based compensation for your advisor?
    • Do they have experience with other clients like you?
    • Can they advise you on all aspects of your financial life or will you need several advisors to get the answers you need?
    • What is the charge for the plan?  In most cases, you get what you pay for; if it’s free there is going to be a sales agenda you might not know about right away.
    • What is included in the service they provide?
    • Will they be able to help you implement planning suggestions?  If so, is it a requirement of the planning process?  Be careful of the solutions that can only be done through them.
    • Do they make “suitable” recommendations or are they a “fiduciary”?  (For more information on the difference click here)

Finding a professional that you can understand and trust is critical when choosing to have a retirement plan constructed for you and your family.  You are unlikely to follow the advice, good or bad, if you do not trust the person providing the advice.  Once you find your ideal fit of personality and capabilities, be ready and willing to provide answers to all of their questions, since a retirement plan is only as good as the information you provide.  Don’t hesitate to ask them probing questions and provide honest answers if they ask you some difficult questions.  When dealing with the money you have worked so hard to accumulate, stumbling into retirement without a carefully crafted plan can be a dangerous prospect at best. Once your retirement plan is complete, then it becomes time to “work your plan” if you have a few more years, or “live your plan” if you are already retired.

The earlier you start planning for retirement the better, becasue finding yourself in retirement and unsure if you’ll be able to live it how you’d like is a scary proposition.  It has been my experience that those who are most successful in retirement have taken the time to get the advice that helps them sleep well at night and knowing they have done everything they could to create the retirement they wanted for them and their family.

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.

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