Calm Before the Storm?

8 10 2012

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…

23 08 2012

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





Should I wait to retire for bigger Social Security benefits?

2 06 2011

by Michelle Ash, CFP®, CDFA™

Along the road of life there are many milestone ages – age 16 to drive, age 18 to vote, age 21 to drink, and so on.  When it comes to thinking about retirement specifically, there are a number of milestone ages there too – at age 50 you get your AARP card (usually without requesting it), at age 55 you can take penalty-free withdrawals from an employer plan like a 401(k) if you are retired or separated from service, and at age 59-1/2 you can take penalty-free withdrawals from an IRA.  The BIG milestone that causes many people to stop and think, though, is the age of 62.  What happens then?  Well, under current laws, age 62 is the first time in which a worker or spouse can draw social security retirement benefits.

However, age 62 is sort of like the minimum entry point to social security retirement benefits.  Think of it in the same way as if you were buying tickets to a sporting event or concert:  you’ve got the base tickets that cost the least and get you in the door but you might be in the nosebleed seating section; and then you’ve got better seats which cost more.  With social security, if you want a “better seat” – meaning a bigger social security check each month – then your additional “cost” is waiting until a later age to draw the benefits.

In fact, for individuals reaching the age of 62 today, their Full Retirement Age (FRA) is age 66.  As it’s name implies, that’s the age at which full benefits have been earned.  For individuals born in years 1955 or later, the FRA age is even higher than 66.  Under current law, the maximum FRA age is presently 67.

You’re not limited to the choices of age 62 or your Full Retirement Age as your only two options, however.  You can choose to draw benefits anytime in between those ages.  There is a sliding scale of reduced benefits that applies.  If you’re mathematically-minded and want to figure it out for yourself, you deduct 5/9th’s of one percent for every month you draw the benefits early.  I’ll give an example of how to calculate it in just a moment, however if you’re not inclined to do the math yourself, you may want to visit the Social Security Administration’s website at www.ssa.gov.  There you will find charts based on your year of birth that give you the exact percentage of benefit you would draw based on your age when you retire.  They break it down by month, so the data is very precise and helpful.

Here’s an example of how to calculate your social security benefit between ages 62 and FRA:

Jane wants to retire now at the age of 63.  Her Full Retirement Age is 66.  Her social security statement tells her that her FRA benefit is $2,000 per month.  If Jane wants to retire now at 63, she will multiply 5/9th’s, or 0.5555, times the number of months she’s retiring early.  In her case, it’s an even 36 months she’s retiring early.  So, Jane multiplies 0.5555 x 36 months = 20% (by rounding).  Jane multiplies that 20% times her FRA benefit of $2,000 and gets a reduction of $400/month.  So, her age 63 benefit will be $1,600 per month.

Factors to Consider

The numbers can give us a very monetarily-based answer, but like many things in life, the decision is often not quite so simple.  Consequently, very frequently we hear the question:  “Should I wait to retire for those bigger social security benefits?”

If Jane in our example knows her exact monthly budget and how much money she needs for her expenses every month, it might be very simple for her to decide whether the $1,600 per month benefit will be enough and whether to go ahead and retire.  But Jane might also look at things and feel like $400 per month of additional dollars, which she could have just by waiting three more years to retire, is an awful lot to sacrifice.  However, she also has to weigh in the fact that, during the three years between age 63 and 66 that she’s not receiving social security, that’s $1,600 per month that she’s not getting.  The question this often leads to is – “What’s my breakeven?”

Your Social Security “Breakeven”

Your breakeven is essentially the age at which the cumulative amount of extra money you got by drawing the benefit at an earlier age is equal to the cumulative amount of money you would have by waiting and getting a bigger benefit.  Generally, the breakeven is between 12 and 14 years after you began drawing early benefits.  What this means is that, if you believe you will live longer than 12-14 years in retirement, then you’ll have received more social security money by waiting to draw your benefit.  If you do NOT believe you’ll live that long and are planning to retire and no longer work, then you are better off drawing the benefit before your Full Retirement Age.

Continuing our example from before, Jane’s breakeven is exactly fourteen years.  At her age of 77, if she draws social security at age 62 and receives $1,600 per month, she will have received a total of $288,000 in benefits.  By comparison, if she were to wait until age 66 to draw her FRA benefits at $2,000 per month, she will have also received a total of $288,000 in benefits.  The real question then becomes – does Jane believe she’ll live beyond age 77?  If so, and if she wants a bigger paycheck, then she may want to wait.  If not, it may make sense to go ahead and draw benefits.

The Crystal Ball of How Long You’ll Live

I always find it interesting to discuss longevity, or how long you’ll live, with people.  Actually, the first hurdle is sometimes discussing it at all, since some people don’t even want to think about it.  But in my world of financial planning, at least in terms of social security benefits, it often becomes the critical question.  If we all knew exactly how long we’d live, it would be very easy to then figure out when to draw benefits to get the most amount of money from the program.  Most of us, though, don’t really have that crystal ball, or at least not one that’s real accurate.  How can you estimate?  Here are the factors I’d suggest considering:

1. Family Longevity – how long do the people in your family tend to live?  Are their health and circumstances similar to yours?  If so, this might be a good indicator.  If circumstances are substantially different, however, they might not be a good comparison.

2. Statistics – what do the mortality tables say?  Statistically today, according to data from the US Census Bureau (1), a man who is age 60 today can expect to live to the age of 80.9, and a woman to the age of 83.9.  Sadly, younger individuals today actually have a LOWER life expectancy, likely due to childhood obesity and other problems facing our nation.  That’s a topic for a different blog, however.

3.  Personal Circumstances – how’s your own health?  Do you take care of yourself by being physically fit and eating healthfully?  Do you control your stress levels?  Do you have balance to your life?  “Yes” answers to these questions may tend to lead to a longer life.  “No” answers may, though not always, detract from it.

Factoring in Social Security Rule Changes

Everything discussed so far is predicated on the current rules of the social security program.  Whether those rules will remain the same, however, is anyone’s guess at this point.  Certainly we hear about the program needing to change because it’s going broke.  Will it change?  Your guess is as good as mine.  Without knowing the future of social security, all you can do is decide what YOU think will happen, and take action accordingly.

Do you believe benefits may no longer be offered between age 62 and your Full Retirement Age?

Do you think your Full Retirement Age might be raised?

Do you think benefit payouts will be reduced?

If you’ve answered “yes” to any of these questions, then you may want to give serious consideration to drawing early.  On the other hand, if you are not bothered by these possibilities, and prefer to make the decision on your own terms instead of succumbing to fears, then you may prefer to wait and draw social security when you otherwise would.

Two Important Social Security Rules to Be Aware Of Before You Decide

Another factor that is extremely important to consider if you are thinking about taking social security benefits prior to your FRA is this:  are you completely finished working, or are you just retiring from one career and may start working another?  The reason this is important is because, if you draw social security between age 62 and your FRA, then any wages you make over about $14,160 per year cause your social security earnings to have to be given back.  The general rule of thumb is that you lose $1 of benefit for every $2 you earn.  In general, if you earn more than $55,000 in annual wages, you’ll have given back your whole social security benefit.  Since by drawing it early  you’ve already locked in a lower benefit, it makes very little sense to draw it and then give it back.  Don’t think you can hide the information from the Social Security Administration (SSA) either, as they and the IRS do share data.  If the SSA finds out money is owed back to them, they will deduct it from your benefits – in a hurry.

There are caveats to these statements:  you can proactively suspend your social security benefits  if you see this issue coming.  You should also know that social security gives you credit on your earnings record for the continued wages you’re drawing so that it benefits your social security amount.  All of those items are beyond the scope of this particular article.  Generally, it’s easier to avoid the whole issue up front.  However, if you’re already in the middle of such a situation, it may be a good idea to either do some online research on www.ssa.gov, or make an appointment with the folks at the Social Security Administration for individual guidance.

Another important factor to be aware of is that the benefit you draw at your Full Retirement Age is NOT the maximum benefit possible.  Under present laws, if you were to defer your benefits until after your FRA, they could continue to increase until age 70.  Here’s the lucrative part:  the benefit increase is currently a guaranteed 8% per year.  If you’re going to retire late, don’t need the money right away, or think you’ll have really long life span, this may be a great way to grow your benefit with absolutely no market risk.  Age 70 is the maximum age, though.  Beyond age 70 the benefits do not increase by waiting, so it does not make sense to defer benefits beyond that age.

Other Considerations and Where To Go From Here

There are MANY other strategies that financial planners such as myself have discovered and can apply to individual situations.  If you are married, there are factors regarding the age and work status for both you and your spouse that may be important to factor into your situation.  Unfortunately, many of those get too complex to go into here.

What’s my best advice if you’re still uncertain about when to draw benefits after everything you’ve read here?  Seek the help of a qualified retirement specialist like a CERTIFIED FINANCIAL PLANNER™ professional to help you figure it out.  You can research professionals in your area by visiting the CFP Board’s website at www.letsmakeaplan.org.

Footnote (1):  Table 103. Life Expectancy, by Sex, Age, and Race: 2007.  Source: U.S. National Center for Health Statistics, National Vital Statistics Reports (NVSR), Deaths: Final Data for 2007, Vol. 58, No. 19, May 2010. See also http://cdc.gov/NCHS/products/nvsr.htm#vol58/.

 

Disclaimer:  This blog article is not personal financial advice.  Please consult your a 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.