Monday, February 8, 2016

The upside of the market downslide

Without question, the investment world is down significantly since the beginning of the year.  And while there certainly is some cause for concern, I believe the situation also presents some opportunities.

Looking at the big picture, I’m concerned that the nation may slide back into a recession.  That, of course, would lead to a loss of jobs, households missing payments, and a return to a whole host of problems so many people crawled out from just of a few years ago. 

But although our nation’s economy has been growing at a snail’s pace for the past few years, I don’t foresee us falling back into the depths of the Great Recession.

The opportunities I see involve new investment dollars.  For example, if you’re eligible for a 2015 tax year contribution into an IRA, this is an exceptionally good time to make a contribution.  You’ve certainly heard the old adage, “Buy low, sell high.”  Well, guess what?  Most things are relatively low right now. 

Is there an investment you were considering six months ago?  I’d say you’re going to like it even more at current prices, especially if you have a long-term time horizon. 

Over the years, I can’t tell you how many times I’ve heard investors lament, “If only I bought ABC stock when it was down to X dollars per share.”  If you’ve ever made a comment similar to that, it may be the right time to take action. 

Yes, Murphy’s law says that the day after you buy something it’s likely to go lower, but there never is a buzzer indicating a market bottom to tell you that now is the precise time to jump in.  But there definitely are a lot of investments you can buy today at a much lower price than just a few weeks ago.

I’ve often joked that, as a financial advisor, I’m paid to worry.  And there certainly is plenty to be concerned about in the financial arena.  However, at the top of my worry list are the people who retired in the last couple of years and are drawing income from their nest egg. 

Why?  Let me run through some math.  For example purposes only, let’s say a retiree needs $30,000 of income per year from their savings.  Suppose they hit their magic number of $500,000 in their nest egg. 

At a six percent withdrawal rate, and assuming they’ve earned a reasonable interest, they can get their $30,000 without depleting their principal.  However, 2015 was relatively flat, so taking their $30,000 would drop the principal down to $470,000. 

So the next year, their nest egg loses value, dropping just over 10% to $420,000.  Now to get $30,000 of income, they have to withdraw 7.2%.  That extra 1.2% may not seem like much, but this is a dangerous path.

The sequence of investment returns is extremely important, especially in the early years of drawing retirement income.  A few down years in the early years of drawing income can cause irreparable damage to a nest egg.

With the investment world on a downward slope, it’s important to make your investment decisions wisely and your withdrawals cautiously.  Deciding to retire and start the withdrawal sequence once you reach a certain nest egg number, such as $500,000 may not be a prudent choice.

Monday, February 1, 2016

What in the world is going on?

With all due respect to the month of January, I’m glad it’s over. I’ve often mentioned that long-term investors frequently need to climb a wall of worry.  Unfortunately, the current wall appears to be a bit taller than many anticipated.

In today’s world, there’s an abundance of interconnected factors that can have a significant impact on your nest egg.  Take a look at the recently ended Detroit International Auto Show for example.

It was fantastically successful and it came on the heels of a record-breaking year for auto sales.  You’d think that would motivate a large number of financial analysts to be bullish on the auto industry, right? Especially with the price of gasoline far below $2 per gallon and interest rates hovering near 2%.

However, that’s not the case. One of the reasons for the short-term negative sentiment is the apparent economic slowdown in China.

Which, of course, translates into lower than anticipated overseas car sales by our domestic automakers.

But that’s only a part of the story.  A Chinese slowdown also means a lower demand for oil.  And now, at a time when Iran can legitimately re-sell oil on the worlds markets, the dominoes are falling.

The addition of Iranian oil creates a greater glut, which contributes to the domestic decline in production, which contributes to a slowing domestic economy.

Yes, it’s complex, but it’s all connected in this world of instant, 24/7 communications.  When something occurs halfway across the world we know about it immediately.  And it often has an impact on our daily lives and our finances.

The investment world has historically gone through various unpredictable cycles, much like our Michigan weather.  I believe, in the not too distant future, that we’ll look back at January and clearly see that it marked a transition, just like a sudden change in the weather.

There’s no shortage of events that have contributed to the recent downfall.  Our domestic politics, for example are nastier than I can ever recall.  As previously mentioned, China’s economy is beginning to slow down, causing their stock market to plummet.

Whether they’re real or imagined, North Korea’s nuclear claims are in the headlines and putting many countries on edge.  And tensions are even greater in the Middle East with sanctions lifted against Iran and their oil once again hitting the market.

Meanwhile, I believe interest rates are among the most overlooked factors contributing to global uncertainty.  European banks are softening interest rates at the same time our Federal Reserve is raising them.

By no means am I an expert on international banking, but with the financial world so globally intertwined I cannot see how both European bankers and our own Federal Reserve can be right.  They’re moving in opposite directions on interest rates.  Somebody’s got it wrong.

We are in the midst of a financial storm (world events) at a time when the financial world is changing seasons (interest rates). So what should you do?

Diversifying and keeping your emotions at bay can help. This isn’t the first difficult period I’ve seen during my long career.  I doubt it will be the last.  Experience has taught me that financial decisions made with the heart rather than the mind seldom turn out to be the best long term decision.  Above all, be patient.

Tuesday, January 26, 2016

How to be certain in uncertain times

The new year has not been kind to investors. In fact, to put it bluntly, it’s been downright brutal from the very start. The only bright spot is that we know what fueled the sudden downturn. Just take a look at what’s going on around the world.

There were the North Koreans testing a nuclear weapon. Or at least they’re claiming to. In China, a steadily sagging economy is perpetuating a staggering slide in their stock market. And in the rarely stable Middle East, tensions remain high between Iran and Saudi Arabia.

All this uncertainty has spurred an economic slowdown, which, in turn, has lead to dramatic drops in commodity prices. Oil prices have been the most visible; we see them every day at the pumps. But copper and steel have also taken terrific tumbles.

Yes, there’s no doubt about it. The world has been dealing with an onslaught of unsettling news.

In the midst of the uncertainty, there is a bit of good news. At least domestically. Our own auto companies are reaching unprecedented heights. In 2015, car sales were 17.5 million. While it wasn’t by much, it was enough to break the record of 17.4 million set in 2000. But bright spots notwithstanding, the pervasive mood is still one of caution and apprehension.

As a financial advisor who has guided many households through unsettling times, I suggest everyone keep a level head. Yes, it’s upsetting to see your daily account values tumble, but changing your financial course in the middle of a downturn may hurt your nest egg in the long run.

Of course, you could sell all your investments now and buy them back when things get better. But while this strategy may work for a rare few, in my experience not many investors ever get it right on both ends. They typically sell at the bottom and re-enter near the top.

Most are better served by developing a diversified strategy and maintaining it throughout economic cycles. Generally, it’s a good idea leave things to the money managers you had confidence to manage your funds in the first place

They follow your investments and the economic climate daily, affording them the opportunity to jump on opportunities that can add to the value of your portfolio.

Unfortunately, in the investment world it’s too easy to pull the plug on your well-thought-out plans. More often than not bad things happen when fear takes control.

Imagine you’re on a commercial flight and your plane suddenly encounters some severe turbulence. Would you consider asking the pilot if you could take over and land the plane?

That doesn’t make any sense, but that’s exactly what some are doing with their money. Modifications in your portfolio may be appropriate during a review. Tweaking a portfolio periodically may be in order. But total abandonment? It seldom turns out well.

Abandoning your strategy may make you feel better initially. But in the long term, the odds are your nest egg will suffer. I understand that it’s difficult to see account values fall. But I’m confident that investors who stick with their strategy will be rewarded for their commitment.
I don’t know when the slide will stop or the market will turn around. But I do know both events will happen.

Monday, January 18, 2016

Is your investment portfolio out of control?

From my perspective, time is moving at the speed of light. I’m continually reminded that we cannot control time. We can only manage it. To a certain degree, the same principle applies to investing. You can’t dictate your results; you can only manage your investments and hope for the best.

Let’s take a look at the conservative portion of your portfolio. You’ve likely got your money earning interest in a bank or credit union. You can- and certainly should- shop banks for the highest interest rate available. But other than that there’s not much you can do. You can’t control the interest rate; you can only manage it.

On the growth side of your portfolio, you can choose virtually any stock or mutual fund. The choice is almost limitless. Common, preferred. Domestic, foreign. By sector, by country. You name it.
Whatever you choose, your investments can move up or down on any given day. You can’t totally control outside events that affect the direction. But you can keep a close watch and manage your investments accordingly. And since it’s still early in the year, the good news is that you have more than eleven months to do just that.

Let’s take a look at some activities you can control. First, you can review the IRA rules to determine if you’re eligible to make a contribution.

If you don’t already have an IRA account, you can open one now, or contribute to an existing account and deduct the contribution on your 2015 tax return. This applies to a regular IRA account. Contributions to a Roth IRA are not deductible, but are withdrawn tax-free.

You can also manage your retirement plan contributions. The beginning of a new year is always a good time to review your previous year’s contributions. For example, if you were contributing five percent of your pay last year and it was relatively painless on your cash flow, now might be an opportune time to up that contribution to six or seven percent.

If five percent was leaving you feeling a bit squeezed, you could do some number crunching on the spending side of your ledger and find a way to do some trimming. Either way, it’s something you can control.

And while there’s much in the world that we can’t control, it’s not always a bad thing. Prices at the pump, for example, are down substantially. Conversely, health care costs continue to rise.
This past Christmas I received a fit-bit. For those that are not familiar, it’s a device that measures your daily steps. Clearly, I can manage that number; set and meet a daily goal. But, while it may help my health, it can’t assure good health.

The bottom line is that you can manage activities but you can’t control results. In order to do that you need to establish measurable investment goals and objectives. Carefully monitor your progress and make any adjustments that may be necessary.

When it comes to finances, nobody can ever guarantee results. That’s why it’s up to you to put your self in the best possible situation for success.

Knowing that you can’t dictate results, you need to manage the elements that lead to them. Save and invest and periodically review. That’s the best you can do.

Monday, January 4, 2016

Do you have the patience to be wealthy? Success takes more than wishing

I’m always amazed at how busy the gym is at the beginning of a new year. I doubt this year will be an exception. The locker room will almost certainly be packed, but by mid February the crowd will be back to normal.

Everybody wants to be fit, healthy and wealthy, but attaining these goals takes a lot of effort and a little luck. As with almost every aspect of life, success doesn’t come just because you wish for it.
Except for rare occasions, you have to work for success and in most cases that means a lot of hard work and sacrifice

For example, you can’t simply wish to become a doctor. It’s an admirable goal to be sure, but it requires countless hours of schoolwork. And that means long nights at the library, exams that need to be passed and, of course, residency at a hospital with long hours and minimal salary.

Many other professions follow a comparable path, but at the end of the day success is not achieved just by wishing for it.

Goal setting is also a huge part of your financial journey through life. You don’t achieve financial independence just by wishing and hoping for it. Again, there are rare occasions when that could happen. You could win a lottery, get lucky at a casino or inherit a fortune from a rich uncle.

But those are not things you can count on. The vast majority of wealth is achieved by saving and investing on a regular basis. You have to follow a well thought out plan and basically stick with it regardless of circumstances.

My experience as an advisor leads me to believe that many investors act a little bit like those people that come to the gym and soon disappear.

Because they didn’t achieve their desired results, they either quit or change direction. I’m not a fitness expert, but I do know it’s difficult to change your physique in a short period of time. You shouldn’t expect financial success to happen overnight either.

In the financial world, many investors become impatient too easily. In the course of a lifetime they might get discouraged and either give up or change strategies far too often. This is an especially important point to keep in mind today.

I can’t tell you not to be disappointed if you look at your year-end values and realize that 2015 was a down year. But I will tell you not to be discouraged. A bump in the road doesn’t necessarily mean you need to change your strategy entirely.

Might some reviews and modifications be in order? Of course. But wholesale changes are often nothing more than an indication of impatience. Patience is a common trait of many successful investors I know. That and a good, firm grasp of your financial goals.

As we begin a New Year, I want to remind everyone that setting goals is important. But just setting them is the easy part. The journey to achieve your goals entails a lot of hard work and commitment.
One of the greatest dangers along the way is becoming impatient during trying times and making wholesale changes to your strategy.

I’ve often said that successful investors need to have an iron stomach. I’m saying it again.

Monday, December 21, 2015

The difference between a gift and a loan

Like many of you, I’m looking forward to spending time and catching up with family members I haven’t seen very often during the year. With all the disastrous world events and the never-dull political season heating up, I’m certain there will be some interesting conversations, not just at my house, but also across the nation.
It seems like every January I receive a phone call from a client who learned over the holidays that their son or daughter was having some sort of financial issue. They want to discuss dipping into their nest egg to help out their loved ones.
For the most part, I have no problem with this. After all, family is family. And if you’ve been fortunate enough and are financially comfortable in retirement, I certainly understand why you would want to help family members.
However, I think it’s important to put defined parameters on the financial assistance. If you don’t, experience leads me to believe that misunderstandings over money can result in fractured family relations.

I miss my late father a great deal, but he imparted to me a piece of advice I will always treasure. He was adamant that he never wanted our family to have disagreements over money.
As a financial adviser I’ve witnessed many financial arguments among family members. I’ve seen long-time family businesses break up because the kids running the inherited company disagreed over money issues. Often to the point that the children totally disassembled the family business their parents had built.
You might not own a business, but when a family member corners you during the holiday and asks for financial help, you probably will if you’re able. That being said, if you do help a son, daughter or other family member, it’s important to have your money, your heart and your documents in order.
For example, I’ve had some clients complain to me months later that their loan wasn’t being repaid. When I ask if the recipient knew it was a loan and not a gift, the typical response is, “I thought they did.”
The lesson is clear. When money is involved, make certain both parties understand exactly what’s expected. If it’s a gift, make clear it’s a gift. If it’s a loan, I suggest an amortization table, and a signature acknowledging the loan.
I know. You might think giving a loved one a loan table and asking for a signature is cold and unnecessary. As a seasoned financial adviser, however, I’ve witnessed more than one family splintering over money issues. Defining the financial assistance will minimize potential issues.
My hope is that you will enjoy the warmth and beauty of the season free of financial concerns. But if they do arise, don’t just pull out your checkbook. Find out what created the problem. After all, if someone asks you for money, you should be allowed to ask questions.
A little due diligence might enable you to get to the cause of the financial problem and maybe even find a way to solve it. As a concerned parent, you don’t want to throw money at a reoccurring issue. You want the issue resolved for the long term.
In the meantime, I want to wish all my clients, readers and their families a Merry Christmas.

Monday, December 14, 2015

A healthy dose of technology provides peace of mind

By no means am I a technology expert. In fact, I’m often kiddingly ridiculed at the office for my lack of expertise. Recently, when I had an issue with an Excel spreadsheet, I contacted one of my sons to guide me through the problem.

I remember spending a fortune for an IBM computer several years ago. It came with two floppy discs and I proudly upgraded to an Amber monitor. It was the beginning of a trend.
Every time I have upgraded hardware or installed new software, no matter how easy the experts claimed it was to install, I’ve had issues. That being said, I still learned to embrace technology early in my career.

New technology is expensive, but as it rapidly evolves the price goes down. A few decades ago you could pay upwards of $100 for a desktop calculator. Today, they fit in your shirt pocket, and if you don’t want to pay a few dollars, your local insurance guy probably gives them away.

Just last week I wrote about cell phones and the add-on taxes that seem to keep creeping up. Today, I want to make my clients and readers aware of a relatively new technology that could be of great benefit.

As a financial advisor, many of my clients are in or near retirement. Not surprisingly, with today’s healthcare advances, quite a few of them are caring for an elderly parent. And believe me, shouldering both the financial and health care responsibilities of an elderly loved one is no easy task.
Fortunately, recent technological advances have made it much easier to keep track of your elderly loved ones. I’m not talking about something as “outdated” as putting an online camera on grandma’s fireplace mantel. It’s far more sophisticated than that.

You may or may not have heard of the Internet of Things (IoT), but you probably have noticed that a large segment of our population is wearing rubber wristbands to keep track of their steps every day.
In fact, many people compete against one another and actually have the daily results posted online for all the competitors to review. Some of these wristbands not only count steps, but also have emergency features that are activated in the event of a fall and are programmed to contact loved ones or even call for an ambulance.

In the not too distant future, I believe there will be a lot of wearable technology that will help you care for and monitor your loved ones without invading their personal space. Technology already exists to monitor pulse rate and blood pressure. GPS tracking systems are available to help in case a loved one becomes disoriented. And experts estimate that the IoT will consist of almost 50 billion interconnected objects by 2020.

I think it’s reasonable to assume that, as the technology improves, prices will ultimately decrease. Initial prices, that is. As with home alarms and cell phones you’ll need to factor in monthly fees to determine the actual overall cost.

Healthcare planning is an integral part of financial planning. Helping aging loved ones with their healthcare issues is a huge responsibility, but new — and affordable — technology coming onto the market can help provide peace of mind; For your elderly loved ones and for you