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.


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.


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

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

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 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:
  • 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.

Should my financial advisor and attorney discuss my Will?

15 08 2011

by Michelle Ash, CFP®, CDFA™

Imagine this:  a husband and wife learn that the wife is probably going to pass away in the next few months due to a terminal illness.  While dealing with their grief and trying to enjoy their remaining time together, they also try to prioritize putting financial affairs in order so that the husband has less to deal with after her death.  He will be busy learning to be a single dad to their young children, and helping them cope with the loss of their mother.  Avoiding the hassles of probate and any other avoidable financial issue is a high priority to them.  They meet with their financial advisor, discuss their situation, and ask him to help them make sure everything is in order.  He takes a brief look at things and assures them that all of the accounts he handles will be transferred with no problems.   Unfortunately, the advisor overlooked the fact that the two taxable accounts he manages were not in joint name of husband and wife, but rather were only in the wife’s name.  The couple took the advisor at his word, only to find out later that he was incorrect and assets that should have just simply transferred to the husband would now be tied up in the legal process of probate.  Months later, the husband still awaits the process to be complete.  Adding insult to injury, probate assets are not available to any heirs until probate is finished, so the husband has to go without this money that would otherwise be very helpful to him until probate is done.

A recent blog reader posed the topic of this particular post:  “Should my financial advisor meet with my will lawyer to make sure everything is okay when I die?”

After reading the story I just shared, which is unfortunately true and was told to me by a recent new client to our firm, I have to say that my general answer to this question is – YES, there should be coordination between your financial professionals and your estate planning attorney.

Does this mean that every financial planner should be going with every client to every discussion about a will, trust, power of attorney or any other estate planning document?  Not necessarily.  But it is important to realize that when you spend the time and money making your estate plan, you might as well take the next step and make sure that the estate plan is going to actually be effective once it needs to be.

Components of a basic estate plan

Let’s stop for a moment and define what I mean by an estate plan.  Generally, every adult’s estate plan should consist of a Last Will & Testament which documents what happens to your possessions when you die.  Your estate plan should also probably include ancillary documents such as a health care power of attorney, living will, and durable power of attorney.  These ancillary documents are things that come into effect in the event of your incapacity, not your death.  You might think that incapacity would be pretty rare, but what if you were in a bad car accident and unable to make health care decisions for yourself for a few days?  Who has the authority to do that for you?  A health care proxy (also called health care powers of attorney) can direct who has that authority.  A durable power of attorney indicates who you authorize to make financial decisions for you.  A living will indicates the conditions under which you want to be kept alive if you are either in a persistent vegetative state or end stage of a terminal illness.

Many people hear the term “estate planning” and may think “I’m not wealthy enough to need estate planning.”  True estate planning, however, is about a broad range of issues, including health care (and spending of assets for it), children fighting over money, second marriages, caring for elderly parents, and multigenerational relationships, among other things.  Consequently, these are issues that can affect all of us, not just those one might deem as “wealthy”.

Having the documents isn’t enough

Clearly in my example the couple did make the effort to ensure their estate plan would be carried out as they wished.  Perhaps involving the estate planning attorney, however, could have helped the couple know for certain what items needed to be addressed prior to the wife’s passing.  Perhaps the financial planner and the attorney could have worked together to make sure the planner was clear on what changes needed to be made.

Estate planning work is often extremely complex.  Many individuals develop one or more trust documents to go along with their will.  Some people own businesses and have buy/sell agreements and other contractual arrangements that will take effect in the event of their death.  Every professional has a specialty and while many financial planners have some degree of experience or expertise in the area of estate planning, the ultimate authority on how to carry out the client’s legal wishes after death is the attorney.

Recommended action plan 

My suggestion and full answer, then, would be as follows:

1) Hire an attorney who specializes in the area of estate planning in your state.  Just like a general practitioner doctor is not a brain surgeon, a general attorney is not necessarily a specialist in knowing all of the in’s and out’s of estate laws in your state.

2) Work with that attorney to develop an estate plan that addresses your needs.  It may be very simple; it may be complex.  Ultimately the design is up to the both of you.

3) Tell the attorney up front that you will want their help ensuring that all of the pieces of your estate plan are coordinated after they draft it for you.  It may cost you extra for this assistance, but what’s the point of paying for estate plan documents if they aren’t going to work?

4) Tell your financial professionals that you are updating your estate plan and want their help coordinating the pieces with your attorney.  Be sure to tell ALL of your financial professionals:  investment advisors, accountants, insurance professionals, even your bank, because each of them may play a role in proper coordination.

5) Many attorneys will draft instructions for you that you can take to the financial professionals, telling them what needs to happen.  If your attorney gives you these instructions, provide them to your financial professionals.  If the financial professionals don’t understand the instructions, disagree with them, or have something else that needs to be discussed, give all of the professionals and attorney permission to talk to one another.  You will likely have to sign disclosure forms allowing them to do so, but at least then you won’t have to be the go-between, trying to interpret what each is saying when there may be terminology you are unfamiliar with.

6) When you believe that all of the coordinations are done, let the attorney know what actions have been taken and ask them to check that everything is in good order.  You will likely need to provide the attorney with updated financial statements so they can verify the actions that were taken.  They may charge you extra, but here again, an ounce of prevention is worth a pound of cure.

In person meetings required?

Should these meetings and coordinations happen in person between the professionals?  Maybe; much of that depends on the complexity of your estate situation.  A large majority of what needs to happen can probably be coordinated by email or phone.  But if you have a large estate which will have a lot of complexity, it may be best to put all of the professionals in the same room.  This will allow them to brainstorm the possible solutions, pros and cons of each, and share them with you so that you can determine the solution that fits you best.

This blog article does not constitute legal, tax, or personal financial advice.  Please consult your attorney and/or 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.

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.


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.

The 8%+ Solution*. Seriously??

8 03 2011

  by Michelle Ash, CFP(R), CDFA(TM)

 This past Friday evening, February 26th, I went to my local bank’s ATM to make an evening deposit.  It was about 8pm, it was dark outside, and clearly the bank itself had been closed for hours.  As I was waiting for the machine door to open to accept my envelope, a piece of paper folded up and taped to the ATM machine caught my eye.  It’s headline read,


“Finally, A Safe, Sensible Alternative to Money-Losing IRAs: The 8%+ Solution*”.

Being a financial advisor, and firm owner, this naturally caught my eye.  The paper was taped with one small piece of tape and was clearly meant to be taken by a curious passer-by, so I decided I’d take it.  Down below the headline, the 8 x 10 sheet continued to espouse all the almost-too-good-to-be-true features of this investment strategy, and then the contact information for the advisor who could be contacted about the investment; who is not affiliated with the bank, by the way.

You know what they say about things that seem too good to be true, right?

They usually are, and the same thing is true here as well.  Technically speaking, the author of the flyer did not make any inaccurate statements or tell absolute falsehoods.  However, as a fellow financial professional, I would tell you that he did make all sorts of misleading statements that appear to be intentially designed to cause a consumer to believe one thing – while the truth is actually another. 

Let’s look at some examples:

1. The footnote of the title, “The 8%+ Solution*” says “*8% is the highest income guarantee in the industry; actual accumulation amount could be greater.  **If you add an initial optional bonus of 8%, your first-year earnings could be at least 16%. Product is guaranteed and insured by an A rated insurance carrier. Minimum deposit is $5,000.”

Other examples:

“Want a retirement account that compounds at 8% a year guaranteed- no matter what happens in the market? (But it could be much more!)”

“Would you like a financial vehicle that will guarantee you income for the rest of your life? (And you can pass it on to your family!)”

To the left is a picture of the flyer.  I include it because it’s just got so many wonderful-sounding details.






Sounds fabulous, doesn’t it?  So, now let’s talk about the rest of the story.



First of all, what product is this advisor talking about?  Answer:  an equity-indexed annuity with a guaranteed income rider.  Now, that’s a mouthful of words that, unless you’re in the financial industry, probably sounds like I just spouted off in Greek instead of English.

So let’s break that down.  I’m going to try and keep this relatively simple, since this is a blog and not a white paper.  And trust me, you could write quite a lot to really give an explanation of these things.

Equity-indexed annuity: is an annuity product wherein your invested principal’s safety is guaranteed, and has a minimum guaranteed return (usually around 2%).  “Your” money is never invested directly in the stock market like it may be with a variable annuity or a mutual fund.  Instead, the insurance company invests your dollars in very safe vehicles like government treasuries, and then uses the interest from those to buy calls on a stock market index.  If the calls make money from the stock market going up, your account gets credited with a portion of the earnings.  If the calls don’t make money, your principal was never at risk so it’s still safe.

Guaranteed income rider:  There are several types of these, but this one is most likely a “GMWB” – a Guaranteed Minimum Withdrawal Benefit – an optional rider that can be purchased for an extra annual fee and “attached to” the base annuity contract.  In jest, sometimes we refer to this as “magic money”.  Think of it like this:  when you buy an annuity with this optional guaranteed income feature, your annuity actually has two values.  The first value is your account value – the one that represents your ACTUAL money in the account.  This is the money that you could actually take out if you decided to withdraw your money or cancel the contract (minus possible surrender fees, but that’s a different issue).

The second value your annuity has is the “magic money” guaranteed income bucket.   THIS value is the one that gets the “guaranteed” 8%  growth – NOT your account value.  The ONLY way to access this value is in one of two ways – either 1) by turning this “magic money” bucket into an income stream similar to a monthly pension, or 2) by taking a preset amount in the form of withdrawals over your lifetime – such as taking 5% annually off of the “magic money” bucket.

Still confused?  That’s common, so let’s do a simple example, using option number 2 (the GMWB option).

Let’s say I have $100,000 that I put in one of these contracts.  It has a guaranteed interest rate of 2%, but the opportunity to earn more if the stock market goes up.  I also buy (and pay for via internal costs) a guaranteed income rider with an 8% guarantee.

Now, let’s say that I hold the annuity contract for 10 years.  During that 10 years the stock market does really poorly, similar to the years 2000 – 2010, not even surpassing my 2% minimum guarantee.

My ACTUAL account with the 2% minimum guarantee grows to $121,899.  This is the money I could take out if I want (assuming all surrender charges are zero).

OR, instead, I can use my guaranteed income rider, which, with its 8% guarantee has grown my “magic money” to $215,892.  The amount of annual withdrawals I can make will be based on my age and published in the contract.  Let’s hypothetically say I’m age 70,  and because the insurance company has calculated my mortality, I may be able to withdraw annual amounts of 5% of my “magic money”.  If you multiply 5% by the “magic money” value of $215,892, you get an annual withdrawal of $10,794 – for life.  If I take more money out – it “blows up” the contract and my “magic money” pot will be severely penalized in some fashion, depending upon the individual company and contract.  At no time can I get the $215,892 at any one time – although, if I live for longer than 20 more years, I may get more than that amount – in annual withdrawals.

Still confused?  At this point, most people are.  Honestly – the vast majority of financial advisors and financial journalists do not understand these products – so misrepresentations tend to abound.

And so here’s the real crux of my issue with this advisor’s flyer:  these products are very, very complex.  If you take some of their different features individually in isolation and discuss them, they sound great.  You might even think that everyone should want one.  However, the real key to success is understanding how all of the features work TOGETHER.  Only then can a buyer have a true understanding of the pros and cons of the product.

At the end of the day, am I saying equity indexed annuities with guaranteed income riders are bad?  No.  Neither am I saying they are good.  They are just a tool.  Much in the same way that a carpenter probably doesn’t look in his toolbox and decide his hammer is “bad”, I am not looking at this annuity as “bad” or “good”.  Like the hammer, it’s just a tool.  A hammer may be great for pounding in nails to hang a picture, but I probably don’t want to use it to sand fine furniture.

The real problem I have with the flyer I found taped to my bank’s ATM machine is that advisors representing the financial industry are supposed to a) understand their products, b) represent them accurately, and c) only recommend them to individuals for whom they are suitable.  These are the mandates that state insurance commissioners, FINRA (the Financial Industry Regulatory Authority), and SEC (Securities Exchange Commission) oversee to try and prevent consumer abuses.

In my opinion, this advisor seriously misrepresented a product to try and make sales, and by doing so, he made our industry look bad by his misrepresentations.  I take serious issue with this.  And I bet the Florida Insurance Commissioner will too.


All investing involves the potential of loss – including invested principal.  Indices 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 or insurance product.

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.

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