Monday, November 17, 2014

Are you prepared to ride the DJIA seesaw?

The often-mentioned Dow Jones Industrial Average (DJIA) is simply a basket of 30 domestic stocks that provide a barometer for the performance of the U.S. stock market. There are other measures, but the Dow is the one most frequently referenced.

In October, it appreciated a very respectable 2 percent. On the surface, you would likely say it was a decent month. On the other hand, it could have been a poster child for the phrase “investors need an iron stomach.” In other words, it was a really wild ride.

The stock market was open for trading on 23 days last month. As measured by the DJIA, the action was pretty evenly split. That is to say there were 12 days in which the market lost ground and 11 positive days that it gained.

Recently, the Dow has been hovering around the 17,000 mark, swinging above and below it with apparent ease. Historically, 17,000 is where no DJIA has ever gone before.

Generally, when the market is down 200 points in a day, you would consider it a really bad day. Conversely, when the market is up by more than 200 points in a day, you’d call it a really good day.

During the month of October, there were swings exceeding 200 points up or down on 19 of the 23 trading days. Clearly, it was not a time for the faint of heart.

Since we’re an automotive town, let me illustrate with an automotive analogy. If October were a stretch of road with the speed limit of 50 mph, we were either chugging along at 25 mph or flying at 70 mph.

Although we never actually traveled at 50 mph, we arrived at the end of the ride as if we had traveled all the way just a hair above the posted speed limit. On the surface it may have appeared to be an uneventful ride, but moment-by-moment it was wild and crazy.

Quite often, it’s best to simply tune out many of the world’s worrisome current events. Looking back at October, the Ebola virus was the dominant news story. But there was also ISIS and the bombings in Syria, tensions in Hong Kong, and tragedy with our neighbors in Canada.

Not to downplay any of these events, but history books are full of conflicts, crises and catastrophes that could be used to rationalize why you should avoid being an investor. And while history is no assurance of what lies ahead, time and time again the investment world seems to reward those investors who have an iron stomach and stay the course.

October was an absolutely perfect example. If you had let your emotions take hold, you would have missed out on a fairly respectable month. If you had watched the news on an hour-by-hour basis, you might have thought the world was ending.

There is a lesser-known index called the VIX, which measures volatility. It has often been referred to as the fear index. In non-technical terms, it was all over the charts in October, further confirming what a wild ride October was for investors.

I don’t recall ever experiencing a month quite like this past October. But it certainly reminded me why it’s so important to keep your emotions out of your investments.

Monday, November 10, 2014

Who wants you to be a millionaire? No one

Thank goodness the mid-term elections are over and done with. I anticipate we’ll begin hearing about the upcoming 2016 election within the next few weeks and I, for one, can hardly wait.

I intentionally try to avoid being political in this column, but there’s something that really bothered me throughout the recent pre-election campaign. The television ads. Specifically, it was how they seemed to vilify anyone who had money.

The ads would have you believe that everyone who is considered wealthy is selfish and doesn’t care about the schools or the environment. As a financial adviser I’m taken aback by this growing perception of people who are financially well off think it’s unfair to routinely criticize someone just because they have money. There seems to be some sort of automatic assumption that they came into their money dishonestly or illegally.

But it’s just as likely that they attained their financial status because they worked hard during their careers. And they probably put their families first and were active in their communities.

Generally speaking, most people accumulated their wealth because they were dedicated savers who stayed committed to their financial goals throughout their careers.

Simple mathematics shows that it’s possible. For example, let’s say you were to save $1,000 per month in a tax-deferred account at five percent interest. If you did so every year throughout a 35-year work career, you’d have in excess of $1,000,000.

This is obviously a hypothetical example, but it illustrates that, although it may be difficult for many, it can be done. That being said, if you’re just in the early stages of your career and don’t have $1,000 a month, you should still get into the habit of saving whatever you can.

This is especially important if your employer’s retirement plan provides a match to your contribution. Then, as you age and hopefully have more disposable income, Uncle Sam will provide more incentives to save even more.

The maximum annual contribution into a 401(k) this year is $17,500. If you happen to be over age 50, you can actually contribute an additional $5,500. That’s $23,000. Next year, both numbers increase. The maximum 401(k) deposit is $18,000 with an additional $6,000 for those over 50. That’s $24,000. If you’re in a financial position to take advantage of these provisions, I strongly encourage you to do so.

One out of twelve households in the U.S. has a net worth in excess of $1,000,000, excluding the value of the principal residence. That translates into more than 9.5 million households. Of that 9.5 million, fewer than twenty percent inherited their wealth. In other words, wealth for the vast majority was earned, saved and invested. Which is to say, they made it happen.

There’s no question that a million dollars is a lot of money. But even if you were to have that much, there’s still no assurance you won’t encounter financial issues during retirement.

Keep in mind that, in retirement, health related issues could easily carve out a huge slice of a million dollars. And interest rates can have an adverse impact on a retirement nest egg if they continue to stay at today’s extremely low rates.

When all is said and done, attaining a million dollars is a goal that should be encouraged, not vilified.

Monday, November 3, 2014

When the elections are over, will anything change?

Election day is finally on our doorstep. I sincerely hope, as you enter the voting booth, that you don’t make your election choices based on the 30-second commercials that have taken over the airwaves.

They are misleading at best. And while I hesitate to say that some of them are intentionally so, I can say with certainty that some of them are contradictory.

That being said, I know how difficult it is to get your arms around certain complex issues when things are going at full speed in your personal life. In many instances, even if you know your stance on specific issues that are near and dear to your heart, it’s difficult to determine exactly where political candidates stand. After all the annoying and half-truth commercials, at the end of election day, some of you will be thrilled with the results and others will be disappointed. I kiddingly state that I’ve been voting for so long, I can remember elections where the final results didn’t require the intervention of attorneys to determine a legitimate outcome.

In the financial world, I’ve always cautioned investors not to become overly euphoric when their investments were making rapid gains. Conversely, I’ve urged them not to become too distraught when their bottom line took a downward turn.

In other words, it’s a good idea to stay calm and collected regardless of the direction of your fortunes.

And that’s exactly how I feel about election results. I don’t believe any one loss or victory by a particular candidate will suddenly alter the long-term financial planning objective of any household.

When the election dust settles and reality sets in, everyone is still going to be paying taxes. Young families will still need to save and invest for college and retirement. Empty nesters will still need to plan for a rapidly approaching retirement. And those already retired will continue to fret over the increasing costs of living.

Regardless of who wins or what propositions are passed, post-election is the time to make year-end financial adjustments.

For example, if you have a high-deductible health insurance program, you should consider making a contribution into a Health Savings Account. If you participate in either a 401(k) or 403(b) account, you should at the very minimum make certain you’re contributing enough to receive any employer match.

If you received a pay increase during the year, you should consider increasing the amount of your contribution for the balance of the year. Keep in mind that there are special provisions to encourage contributions for those over the age of fifty. If you’re over fifty, you should definitely take advantage of those provisions.

If there’s no company program, you can still take the initiative to open an Individual Retirement Account. Because they can be somewhat confusing, in that there are both tax deductible and non-deductible programs, I suggest you consult your attorney or financial planner.

In the short term, investors need to move quickly to put any finishing touches on year-end strategies. Long term, no matter who is elected, it’s not the responsibility of Lansing or Washington, D.C. to make or break your financial goals.

In spite of all the political promises, your financial success or ultimate failure is not decided in the ballot box. It’s up to you.

Monday, October 27, 2014

Big Ben gets cut down to size

I have often pointed out that the investment world is like a living entity. By that, I mean that it inhales and exhales, although on a much more irregular basis than humans.

The recent market downturn indicates that many investors seem to have forgotten about the inhaling part of the equation. Between the downturn, radical terrorism in Iraq, and the Ebola virus crisis, there are a lot of nervous households around the country.

And right in the midst of these worrisome issues, the politicians are trying to push everyone over the edge with their never-ending onslaught of political ads. Yet, every once in awhile, something happens in the investment world that adds a little levity and causes one to chuckle. Such an incident recently occurred in the world of finance that I just had to share with my readers.

Ben Bernanke served two terms as chairman of the Federal Reserve, the central bank of the United States. He served under both President Bush and President Obama, from 2006-14. In other words, he was gatekeeper of our nation’s money supply and instrumental in guiding the country through the financial crisis.

As Federal Reserve Chairman, his compensation was just under $200,000 per year. Since he left office, he has been on the speaking circuit where he commands more than $100,000 per appearance. He is intelligent, well educated, and widely known, not only in this country but also throughout the world.

He is obviously well off financially and apparently knows how to handle money. What brought a smile to my face was his recent attempt to refinance his mortgage to a lower rate. In spite of his credentials, and much to my amusement, he was initially turned down. Once the most powerful man in the financial world couldn’t get a mortgage a year later.

Of course, it was a happy ending for Ben. Details weren’t made available to the public, but many mortgage experts speculate that the initial denial was because he went from a making a steady income to one that was collected from time to time. Pretty strange since he was actually making much more.

I don’t necessarily want to be critical of the mortgage industry, but prior to the recession, just about anyone who could fog a mirror could get a mortgage.

Changes in the mortgage industry were most certainly in order, but, as with so many changes in laws and regulations, the needle moved from just being a problem all the way up to potential disaster. And somewhere along the way, common sense got lost in the shuffle.

As is the case in many industries, it appears mortgage companies were more focused on getting forms filled out correctly than on looking at circumstances and letting common sense prevail.

The banks blame the regulators and are fearful of additional litigation and fines. The regulators blame the banks for being too tight with their purse springs.

As a result, households with great credit ratings and strong personal balance sheets continue to have difficulty obtaining a mortgage. Just ask Ben Bernanke.

I’m fairly confident he was able to get his paperwork through underwriting with a simple phone call. But not everyone has his connections. Hopefully this incident will serve as a wake up call for bankers and regulators alike.

Monday, October 20, 2014

The buck starts here: The U.S. is still viewed as a safe haven

For many, this is an exciting time of the year. Hunters, for example, are busy preparing for their pursuit of the big buck. Many retailers are excited too, anticipating the onslaught of hunters coming in to gear up and put the finishing touches on their hunting camps. And, no doubt, anticipating some nice profits.

They’re already bagging bucks, as the bow season has been underway since Oct. 1. And when the traditional Nov. 15 opening date for the firearms season kicks in, more sales will be rung up.

It’s a simple fact. This time of year is important to Michigan. The hunt for the buck puts a lot of dollars into the state’s economy.The buck is also getting a lot of attention on the national scene. The buck I’m referring to here, of course, is the U.S. dollar, quite commonly referred to as a buck.

The slang term buck in connection to the dollar goes back to the days when the early settlers were trading with the Native Americans. The rate of exchange was a deer hide for a dollar, thus the term buck.

On a national as well as international level, the currency version of the buck has been making big news. Most Americans probably don’t pay much attention to how the U.S. dollar is doing relative to other currencies.

They don’t wake up in the morning, turn on the television and eagerly await the latest developments from the international currency scene. In other words, the dollar’s relationship to other currencies is something about which most Americans little know or care.

In reality, though, it has an impact on us each and every day. One example is the falling price of gasoline. The strength of the U.S. dollar versus foreign currencies is a major reason why gasoline prices have fallen. So far this year the dollar index, which is a measurement of the dollar’s strength against a basket of major foreign currencies, has climbed 7 percent. For 12 consecutive weeks the U.S. dollar is up against the euro and Japanese yen.

There’s no question that the rising dollar has taken a lot of economists by surprise, especially considering the staggering amount of our national debt. However, with all the turmoil around the globe, we are still viewed as the world’s safe haven.

One well-known politician was quoted as saying “It means we have the best horse in the glue factory.” While that’s not exactly what you would call high praise, a strong dollar does have some benefits. In addition to the falling price of gasoline, it also means a European vacation will be a bit cheaper than it was last year.

That’s not to say there aren’t any negatives. There are. For example, it’s now a lot more challenging for American car companies to sell their vehicles overseas. For that matter, almost any American company selling goods overseas now has a higher hurdle to overcome.

As consumers and investors, we need to be aware that the dollar’s movement up and down in value relative to other currencies can have an impact on our daily expenses and the value of our nest eggs. I believe it is a positive that, despite all of our nation’s financial issues, we are still viewed as the safe haven of the world.

Monday, October 13, 2014

What if you’re never president of the United States?

Slightly less than two weeks ago, former President Jimmy Carter turned 90. It’s been 33 years since he left the Oval Office. I am not saying that he’s the oldest former president, but no other president has survived that many years beyond his term in office.

In a similar fashion, former President George H. Bush has also been living an active life since his term in office. I bring this up in a financial column because both former presidents illustrate the point that, for a variety of reasons, people today are living longer lives.

In fact, lifespans today are so much longer than in decades past, retirement can easily represent a third of a person’s life. Unlike you and me, neither of the former presidents has to worry about running out of money in retirement. Of course, their pension checks are funded by your tax dollars.

But longevity is one of the reasons that so many pension funds are either struggling or have been discontinued. Who could ever have imagined that so many people would live such long and fruitful lives?

By contrast, Civil War General and former President Ulysses S. Grant didn’t have it quite so well as former presidents have it today. He was elected to office at the young age of 46. When he left office, some poor financial decisions were made and he became dependent on his military pension.

Remember, there was no Social Security at the time. So, in order to supplement his retirement income and provide money for his heirs, he wrote his memoirs with the assistance of Mark Twain. Grant passed away from cancer at the young age of 63.

In today’s world there are definitely a lot more financial perks for former presidents and other politicians after they have left office. Such financial security did not exist a hundred years ago, but nowadays, I’m sure we would be shocked to hear that a former president was struggling with pocketbook issues.

My point is that the general public just doesn’t have the kind of income security that former presidents have. In fact, the majority of people today are nowhere near being on the financial trajectory that would lead them to a worry-free retirement income.

As someone who works with a lot of retirees, my observation has been that most people who worry least about their retirement income are those that began preparing early in their careers.

Yes, they contributed regularly into an IRA or whatever other retirement program that their employer provided. Just as important, they continued to participate in these programs whether the economic times were good or bad.

Like former Presidents Carter and Bush, I would prefer for everyone to have a relatively healthy and active retirement for many years to come. Unfortunately, you won’t have the financial benefits of being a former president. And, unlike President Grant, it’s highly unlikely you’ll find anyone willing to pay you a bundle for your memoirs.

That’s why it’s incumbent upon you to make certain you can reach age 90 with minimal financial concerns.

Having a reliable, steady income and a decent sized nest egg doesn’t just happen. It takes a lifetime of effort in order to make the retirement years the golden years we all dream about.

Monday, October 6, 2014

Many Michiganders can’t afford basic necessities

Because of unacceptable player behavior off the field, the National Football League has been all over the news. To the league’s credit, though, they’ve been partners with the United Way organization for more than forty years.

Our great state is in the center of Big Ten Country. For non-sports enthusiasts, the Big Ten Conference now has 14 schools, and one of the recent additions is Rutgers, the State University of New Jersey.

I recently discovered that Rutgers was in Michigan this summer for something other than a football game. They conducted a study for the Michigan Association of United Ways. Called ALICE (Asset Limited, Income Constrained, Employed), the study dealt with “the population of individuals and families who are working, but are unable to afford the basic necessities of housing, food, child care, and transportation.”

It found that 40 percent of our state’s population falls into that category. In other words, nearly half of Michigan’s population struggles to make ends meet. I think you’ll agree it’s a sad state of affairs when so many Michigan households can’t afford basic needs as defined by ALICE.

As someone that enjoys surveys, studies and numbers, I found ALICE to be as thorough and detailed as any I have ever reviewed. It was almost to the point of being overwhelming.

What hourly wage is needed to make life in Michigan affordable? It varies from county to county, but overall for a family of four (2 adults/2 children), the magic number seems to be just over $25, a number easier to attain if more than one family member works.

According to the Bureau of Labor Statistics, 63 percent of our jobs pay less than $20 per hour, with most of them in the $10 to $15 per hour range. And that number is based on a full-time workweek, even as we are evolving into a nation of part-time workers.

In other words, Michigan is an expensive place to reside, while at the same time we are in need of higher paying full-time jobs. I suspect the high cost of living has driven a number of higher end households and businesses to relocate out of Michigan. And that’s on top of the many Michiganders who left looking for jobs during the economic downturn.

ALICE found our population to be very diverse, quite typical in this ever-changing world. Contrarily, it seems the phrase “a typical family of four” is becoming about as rare as a company that still provides a pension plan.

To Michigan’s credit, we were one of the first states to undertake this thorough analysis through United Way and Rutgers University. In many ways, the findings confirm reality.

Somehow, we need to continue to make Michigan an attractive place for businesses to call home. We need to re-establish our workforce as one that’s educated, dependable, reliable and enthusiastic.

I’ve personally observed that Michiganders who have been fortunate are also extremely generous. As we close in on the holidays, please remember to be generous to our neighbors who are in dire need and struggle to balance the budget every month.

While the study points out just how many are struggling, I’m confident that Michigan is poised to become one of the states where businesses want to set up shop and offer well-paying jobs.