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Balancing Investor Euphoria With Market Reality

By | Investments

Many social media users share nearly all aspects of their lives, from photos of cute kids and pets to their political views. And now, we even are seeing posts from exuberant investors bragging about their investment returns. For example, consider this social media post:1

“I strived to become a 401(k) millionaire someday, and this week, thanks to years of consistent savings and a long bull market, that goal has come to fruition, at the ripe age of 45.” This message was accompanied by a snapshot of his actual account statement.

Indeed, every investor proud of his or her success should be applauded for diligent and prudent investing over time. However, it’s worth noting that what goes up generally comes down. The question is: When?

If you’ve achieved significant gains over the past few years, we’d like to help you ensure that your current financial strategy still fits within the context of your own goals, risk tolerance and investment timeline. Feel free to contact us for a comprehensive review of your financial situation to help determine the next move to help you pursue your financial goals.

Strong stock market performance is generally attributed to a wide range of factors, including the prevailing policies of the current presidential administration. While fiscal policy can have a near-term influence on investor and business confidence, other contributing factors are more long term in nature. For example, changes in monetary policy may take six to twelve months to impact the financial markets.2

The same can be true for market declines. While an occasional one-day freefall does occur, most of the time a correction, such as the one that occurred in early February, is the culmination of contributing factors over time. In fact, stock market analysts had been predicting a correction for quite some time, so it did not come as a surprise to many in the industry when it happened.3 Moving forward, analysts expect continued volatility that could damper some of those proud moments many investors have shared.4

Even if investors’ exuberance has been dampened somewhat because of the recent market volatility, it’s important to remember what got them there in the first place: Disciplined investing. As such, a stock price slide can present the opportunity to buy when prices are low — further positioning a portfolio for future gains.In other words, perhaps euphoria and prudence can go hand in hand.

Content prepared by Kara Stefan Communications.

1 Sally French. MarketWatch. Feb. 1, 2018. “People are bragging about becoming 401(k) millionaires — and posting their balances to social media.” https://www.marketwatch.com/story/people-are-bragging-about-becoming-401k-millionaires—-and-posting-their-balances-to-social-media-2018-01-29. Accessed Feb. 12, 2018.

2 Oliver Pursche. Kiplinger. March 21, 2017. “The Fed/Trump Face-off: When Fiscal and Monetary Policy Collide.” https://www.kiplinger.com/article/investing/T023-C032-S014-fed-vs-trump-when-fiscal-and-monetary-policy-colli.html. Accessed Feb. 12, 2018.

3 Eric Rosenbaum. CNBC. Nov. 27, 2017. “Chance of US stock market correction now at 70 percent: Vanguard Group.” https://www.cnbc.com/2017/11/27/chance-of-us-stock-market-correction-now-at-70-percent-vanguard.html. Accessed Feb. 12, 2018.

Cecile Vannucci. Bloomberg. Feb. 9, 2018. “Volatility Explosion Is Sparking a Rush to Hedge at Any Cost.” https://www.bloomberg.com/news/articles/2018-02-09/a-conundrum-for-hedgers-now-that-you-need-it-the-vix-is-at-32. Accessed Feb. 12, 2018.

Kristine Owram. Bloomberg. Feb. 12, 2018. “Morgan Stanley Strategist Who Predicted Volatility Says Buy Now.” https://www.bloomberg.com/news/articles/2018-02-12/morgan-stanley-strategist-who-predicted-volatility-says-buy-now. Accessed Feb. 12, 2018.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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Financial Strategies in 2018

By | Planning

One philosophy of investing, as opined by Warren Buffett, is to be “fearful when others are greedy and greedy when others are fearful.”1 The nation’s eight-year bull market, however, has tested that philosophy. Most market analysts would agree that it was more important to be in the market and taking advantage of gains than to be “fearful” on the sideline.

But as 2018 moves forward, no one can predict the markets from one day to the next. A good bit of volatility has returned, relatively speaking, and many “greedy” investors may be feeling a little less confident. It’s during this late-stage business cycle that the seasoned investor is often distinguished from the seasonal investor.

Can you hold steady during performance freefalls? Moreover, can you afford to invest new money when the market is experiencing extreme fluctuation?

Those answers may lie less in your portfolio and more in your mindset and place in life. If you’re inching close to a certain financial milestone, such as retirement, it’s usually a good idea to seek to preserve assets by moving them into less volatile financial vehicles. However, if you’ve got a substantial time horizon before needing to tap your portfolio and can stomach a bit of volatility, investing when prices drop can position your money for greater opportunities for gains in the future.

Every day, we help our clients make these types of financial decisions based on their personal goals, timeline and tolerance for risk. There is no one-size-fits-all strategy for every individual. If you would like help assessing your current financial strategy against your short- and long-term goals, please give us a call.

When analyzing the economic situation for 2018, it may be helpful to study market analyst recommendations. For example, two themes Credit Suisse is focusing on in 2018 are global economic growth and the rise of the millennial generation as a major player in the workforce.2

At J.P. Morgan Chase, analysts are looking at more normalization in monetary policy in the developed world, while earnings, inflation and interest rates in the U.S. all could affect equity performance. Further, they see potential growth in international equities.3

BlackRock also is looking globally for growth, citing above-trend economic progress in Japan and emerging markets. Domestically, their strategists see outperformance in the technology and financial sectors, and cautions that inflation is poised to make a modest comeback.4

Meanwhile, Goldman Sachs Asset Management warns that investors will need to weigh the potential for more risks this year, including the possibility of interest rate hikes and escalating geopolitical developments.5

Specifically, asset managers at Columbia Threadneedle Investments cite threats from North Korea, the political situation in Saudi Arabia and conditions in Venezuela — one of the world’s largest producers of crude oil — as their biggest geopolitical concerns for 2018.6

 

Content prepared by Kara Stefan Communications.

1 Adam Brownlee. Investopedia. Jan. 21, 2016. “Warren Buffett: Be Fearful When Others are Greedy.” https://www.investopedia.com/articles/investing/012116/warren-buffett-be-fearful-when-others-are-greedy.asp. Accessed Feb. 15, 2018.

 2 Credit Suisse. “Investment Outlook 2018.” https://www.credit-suisse.com/microsites/private-banking/investment-outlook/en.html. Accessed Feb. 5, 2018.

3 J.P. Morgan Chase. 2017. “The investment outlook for 2018.” https://am.jpmorgan.com/blob-gim/1383507154112/83456/MI-MB_2018%20Outlook.pdf. Accessed Feb. 5, 2018.

4 BlackRock. 2017. “Global Investment Outlook 2018.” https://www.blackrock.com/corporate/en-us/literature/whitepaper/bii-2018-investment-outlook-us.pdf. Accessed Feb. 5, 2018.

Goldman Sachs Asset Management. Dec. 4, 2017. “2018 Investment Outlook.” https://www.gsam.com/content/gsam/us/en/outlook/annual-investment-outlook-2018.html?sc_cid=np-2018/nttbne/vboevvx84#question-1. Accessed Feb. 5, 2018.

Columbia Threadneedle Investments. Jan. 22, 2018. “Ted Truscott: Q&A on financial markets.” https://blog.columbiathreadneedleus.com/ted-truscott-qa-on-financial-markets?cid=twitter&sf179937211=1. Accessed Feb. 5, 2018.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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Mitigating Risk Goes Beyond Asset Allocations

By | Investments

What do Harvey Weinstein, “America First” policies and asset allocation have in common? Quite a bit, it turns out, when it comes to evaluating the various risk factors that can affect an investment or portfolio.

Anyone who’s ever taken a hot minute to observe the market or talk shop about the economy must realize any action that falls under the umbrella of investing comes with risk. The level of risk varies, however, depending on numerous factors, including the asset itself.

At our firm, we tend to focus on ways to help clients limit those risks. If you have any questions about your current risk factors, give us a call and we’d be happy to look at your current portfolio. We recommend you work with a financial advisor for insights into your particular situation. We can then assess those risk factors and recommend a variety of investment and insurance products that can help you work toward your short- and long-term financial goals.

For one example of a risk that is particular to an asset, let’s turn to bonds. We generally consider a bond investment less risky than a stock investment. But that’s mainly in consideration of market risk — which can dramatically impact stock prices. However, bonds are more impacted by interest rates, so in an environment of changing rates, they are exposed to a certain level of risk as well. That’s why trying to look at assets side by side is not as simple as an apples-to-apples comparison.

For investors who are looking to buy individual stocks based on companies, the garden-variety wisdom is to invest in a company you understand well. This wisdom is based on the risk of the unknown. If you don’t know the first thing about a company, how confident can you be in its performance? Not only do you want to review the company’s financial performance, track record, business costs, leadership, risk factors, dividend history and corporate governance, it’s not a bad idea to have some first-hand experience or exposure to that company’s product or service.1

While traditional asset allocation emphasizes diversification across asset classes (think, mixing stocks, bonds, cash, insurance, etc.), it’s also worth considering diversification within asset classes themselves, to work against underlying risk factors — for example, consider buying stocks from multiple companies, or different kinds of bonds. Risks run the gamut, from market risk and interest rate risk to currency and credit risk. Then, too, those risk factors may be more or less significant when applied to international companies, markets and even globalization trends.

In the past, one way American investors have diversified their portfolios is by investing in overseas companies. The recent trend toward “America First” has changed some of that sentiment, with more domestic money flooding into the U.S. markets. However, our long-term upward trend in performance leaves less room for growth, so it may be worth considering securities abroad again. If not, an investor runs the risk of being too domestically concentrated, which can yield two risky paths. One, growth stagnates at the top of the market, and potential gains abroad are left on the table. Two, if U.S. markets experience a setback, a heavy concentration can wreak considerable damage.2

One rising risk factor to consider: The threat of a sexual harassment scandal. From the flurry of recent allegations, it would appear some companies operate within a culture of inappropriate behavior. That puts those companies at higher risk for a scandal, which can impact its stock price and, subsequently, shareholder portfolios. For instance, as allegations about Harvey Weinstein’s misdeeds continue to surface, Weinstein & Co.’s financial standing has been hit hard. Just one more thing to consider when assessing investment risk factors.3

As different risks become more or less significant with the changing economy, just remember you don’t have to go it alone; call our firm for a consultation to see how your assets are positioned to cope with risk.

 

Content prepared by Kara Stefan Communications.

1 Saikat Neogi. Financial Express. Nov. 29, 2017. “Stock market investment tips: 3 big risk factors to beware of to ensure you don’t lose money.” http://www.financialexpress.com/money/stock-market-investment-tips-3-big-risk-factors-to-beware-of-to-ensure-you-dont-lose-money/951801/?utm_content=bufferb090f&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer. Accessed Jan. 29, 2018.

2 PIMCO. March 13, 2017. “Risk Factor Diversification.” https://www.pimco.com/en-us/resources/education/understanding-risk-factor-diversification. Accessed Jan. 29, 2018.

Nasdaq. Nov. 6, 2017. “Sexual Harassment is a Major New Investment Risk.” http://www.nasdaq.com/article/sexual-harassment-is-a-major-new-investment-risk-cm872105. Accessed Jan. 29, 2018.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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A Look at the Potential Effects of Tax Reform

By | Planning

The tax overhaul legislation that was passed in December has been billed as a means to streamline tax filings at both the individual and corporate level.1 We certainly could use it. According to the IRS, Americans spend a total of 6.6 billion hours a year filling out tax forms.2

While simplifying taxes is a good thing, the new legislation may have oversold that concept. That’s because a lot of time and money usually is spent on figuring out ways to take advantage of new tax laws, and this situation likely will be no different. Analysts expect many individuals and businesses to restructure their income streams to create more tax shelter opportunities.3

It’s important to follow the letter of the law when it comes to tax filing. We recommend you work with an experienced tax advisor to ensure you comply with the new law and benefit from any changes. If you could use a referral, please give us a call; we may be able to recommend tax professionals from our network.

The new tax legislation lowered the maximum corporate tax rate to 21 percent from the current 35 percent. It’s interesting to note that the majority of American businesses won’t be able to take advantage of that lower rate. That’s because most are already set up as pass-through entities (such as sole proprietorships, partnerships and S-corporations), which means the owner’s income is taxed at his or her ordinary income tax rate. But these business owners may deduct up to 20 percent of income, with limits. However, this deduction expires after 2025.4

Unfortunately, there likely will be some negatives that accompany reduced corporate taxes, such as lower tax revenues at the state level, which could mean budget cuts. Another concern is that Congress will cut federal programs next, which states currently depend on for about a third of their revenues. If federal agencies are forced to reduce headcount, for example, Maryland could be especially hard hit since so many federal employees live and work there.5

As a result, officials in some states are urging their legislatures to raise the state corporate tax rate to help offset expected federal spending cuts. In Florida, one official has proposed a rate increase and suggests the extra funds be allocated to raise teachers’ salaries, fund early childhood education programs and invest in vocational training.6 In California, two lawmakers are recommending a 10 percent surcharge on companies with net earnings of more than $1 million.7

Interestingly, because state utilities are regulated by the government, windfalls resulting from lower taxes may be required to be passed on to consumers — good news for utility customers.8

 

Content prepared by Kara Stefan Communications.

1 Barnini Chakraborty. Fox News. Dec. 18, 2017. “GOP tax bill: Can you really file your taxes on a postcard?” http://www.foxnews.com/politics/2017/12/18/gop-tax-bill-can-really-file-your-taxes-on-postcard.html. Accessed Feb. 7, 2018.

2 The Tax Foundation. “Business Tax Compliance and Complexity.” https://taxfoundation.org/federal-tax/business-tax-compliance-complexity/. Accessed Jan. 23, 2018.

3 Adam Looney. Brookings. Dec. 14, 2017. “How the new tax bill encourages tax avoidance.” https://www.brookings.edu/blog/unpacked/2017/12/14/how-the-new-tax-bill-encourages-tax-avoidance/. Accessed Jan. 23, 2018.

4 Zoë Henry. Inc. Dec. 20, 2017. “The Tax Bill Is Final. Here’s What U.S. Businesses Need to Know.” https://www.inc.com/zoe-henry/final-tax-bill-impacts-businesses-2017.html. Accessed Feb. 7, 2018.

5 Lydia DePillis. CNN Money. Jan. 8, 2018. “How the federal tax overhaul could reshape state budgets.” http://money.cnn.com/2018/01/08/news/economy/state-budgets-tax-reform/index.html. Accessed Feb. 23, 2018.

6 WUSF News. Jan. 22, 2018. “Gillum Proposes Corporate Tax Increase.” http://wusfnews.wusf.usf.edu/post/gillum-proposes-corporate-tax-increase. Accessed Feb. 7, 2018.

7 Edmund DeMarche. Fox News. Jan. 21, 2018. “California Democrats want some businesses to fork over half tax-cut savings to state.” http://www.foxnews.com/politics/2018/01/22/california-democrats-want-some-businesses-to-fork-over-half-tax-cut-savings-to-state.html. Accessed Feb.7, 2018.

8 Tracy Samilton. Michigan Radio. Jan. 23, 2018. “Residential utility bills could go down 3% thanks to corporate tax cut.” http://michiganradio.org/post/residential-utility-bills-could-go-down-3-thanks-corporate-tax-cut. Accessed Jan. 23, 2018.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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Preparing for Retirement — Do You Have a Plan?

By | Investments

For much of the 20th century, many employees who spent decades working for one company typically received a pension plan. According to the Center for Retirement Research at Boston College, 88 percent of all private-sector employees in 1975 had a pension.1 With the confidence of knowing their retirement would be covered by pension and Social Security benefits, perhaps they even saved little — but it would not have been all that necessary to learn how to invest.

Today, the number of private-sector employees with pensions has plummeted to 33 percent.This means that baby boomers (those born between 1946 and 19643) are the first generation of retirees to rely on defined contribution plans, such as 401(k) and 403(b) plans. In fact, many boomers don’t have the luxury of perhaps just saving a little; they have to save a lot.

In addition, many boomers have to learn about different types of investments, which can be daunting. In fact, the Financial Industry Regulatory Authority (FINRA) lists 12 broad types, each of which has its own subsets.4 That’s a pretty big responsibility to take on.

Here’s an idea of where we stand:5

  • 44% of baby boomers have no work-sponsored retirement plans
  • 43% have defined contribution plans
  • 13% have defined benefit (pension) plans

Bear in mind that back in the days when many employees could count on a pension plan, those assets were managed by professional money managers. These days, some company 401(k) plans include a “self-directed” option, which lets you decide how to invest your contributions yourself.6 We hasten to remind you that investing can be complex, and creating a financial strategy for retirement has been complicated by the fact that people are living more years in retirement than ever before. If you could use some advice to help manage your investment portfolio — including self-directed accounts — or to create a financial strategy, please give us a call.

In fact, outside investment advice in the defined contribution space is becoming more prevalent. A recent report by the Spectrem Group found that 73 percent of employer-plan participants use an outside advisor, such as a mutual fund company representative or an independent financial planner, to assist them with investing assets that are outside their plan. However, they do not necessarily consult with an outside advisor for their entire investment portfolio.7

Keep in mind that preparing for retirement involves much more than just accumulating assets. This preparation includes deciding on a Social Security claiming strategy; navigating defined contribution plan rollovers; considering tax consequences; and mulling possible part-time work during retirement. And we must do this while pursuing social and intellectual engagement opportunities so we can stay healthy and cognitively fit during our long retirement.8

It’s a lot to think about. The earlier we get started on our full-scale retirement plans, the better.

 

Content prepared by Kara Stefan Communications.

1 John Waggoner. InvestmentNews. Dec. 2, 2017. “Younger baby boomers face hurdles as they approach retirement.” http://www.investmentnews.com/article/20171202/FREE/171209994/younger-baby-boomers-face-hurdles-as-they-approach-retirement. Accessed Jan. 16, 2018.

2 Ibid.

3 The Pew Charitable Trusts. Feb. 15, 2017. “Retirement Plan Access and Participation Across Generations.” http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2017/02/retirement-plan-access-and-participation-across-generations. Accessed Jan. 24, 2018.

FINRA. “Types of Investments.” http://www.finra.org/investors/types-investments. Accessed Jan. 16, 2018.

5 The Pew Charitable Trusts. Feb. 15, 2017. “Retirement Plan Access and Participation Across Generations.” http://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2017/02/retirement-plan-access-and-participation-across-generations. Accessed Jan. 24, 2018.

6 Amelia Josephson. SmartAsset. March 22, 2017. “What Is a Self-Directed 401(k)?” https://smartasset.com/retirement/what-is-a-self-directed-401k. Accessed Jan. 24, 2018.

7 Spectrem Group. 2017. “How Plan Participants Use Advisors.” https://spectrem.com/Content/how-dc-plan-participants-use-advisors.aspx. Accessed Jan. 16, 2018.

8 Emily Brandon. U.S. News & World Report. Jan. 16, 2018. “How to Retire in 2018.” https://money.usnews.com/money/retirement/baby-boomers/articles/how-to-retire. Accessed Jan. 16, 2018.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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Keep an Eye on Interest Rates

By | Planning

Optimism often predates good news. Such was the case last year when, just before the end of the year, Congress passed legislation that significantly reduced the corporate tax rate. The anticipation of this fulfillment of one of President Trump’s pro-business campaign promises helped drive up stock prices in the latter half of the year — to the tune of a 24 percent uptick. In other words, the expectation for lower tax rates was already baked into market assumptions for 2017.1

Now the question is, what will happen in 2018? According to one market analyst, a challenge for this year’s equity markets will be the likelihood of the Federal Reserve raising interest rates further. If the economy grows by 3 to 3.5 percent this year, as the analyst predicts, this could trigger higher interest rates. Ultimately, higher rates can put a damper on stock prices and make bonds and CDs more attractive.2

We like to remind our clients of a couple of rules of thumb when it comes to managing an investment portfolio. First of all, remaining diversified is generally an effective way to help capture gains, reduce risk and work toward long-term goals. Second, bear in mind that what matters is overall portfolio performance, not individual sectors or investments.3 If you’d like help reviewing your current asset allocation strategy to make sure it’s aligned with your objectives, tolerance for risk and investment timeline, please contact us to schedule a consultation.

Remember that as interest rates rise, bond prices generally drop. However, as long as rates rise modestly and gradually — which is what the Fed projects — bond investors can still make money via their total return.4

The general forecast is for the Fed to increase the federal funds rate within a range of 2.75 to 3 percent by the end of 2018. With that said, note that there are some positives associated with higher interest rates, especially for retirees who rely on low-risk, fixed-income investments for income. Higher rates also could improve the pricing of annuities and credited interest rates.5

 

Content prepared by Kara Stefan Communications.

1 Knowledge@Wharton. Jan. 2, 2018. “Jeremy Siegel: What’s Ahead for the U.S. Economy in 2018.” http://knowledge.wharton.upenn.edu/article/jeremy-siegel-whats-ahead-u-s-economy-2018/. Accessed Jan. 8, 2018.

2 Ibid.

3 Mike Loewengart. Etrade. Jan. 2, 2018. “Putting a bow on 2017 with a turn to the new year.” https://us.etrade.com/knowledge/markets-news/commentary-and-insights/putting-bow-on-2017-with-turn-to-new-year. Accessed Jan. 8, 2018.

4 Jeff Benjamin. InvestmentNews. Jan. 6, 2018. “2018 outlook in bond investing calls for change.” http://www.investmentnews.com/article/20180106/FREE/180109957/2018-outlook-in-bond-investing-calls-for-change. Accessed Jan. 8, 2018.

5 Mark Miller. Morningstar. Jan. 9, 2018. “Retirees: What You Should Watch in 2018.” http://news.morningstar.com/articlenet/article.aspx?id=842831. Accessed Jan. 9, 2018.

Bond obligations are subject to the financial strength of the bond issuer and its ability to pay. Before investing consult your financial adviser to understand the risks involved with purchasing bonds.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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Exploring the Behavioral Biases of Investing

By | Investments

Despite the research and due diligence necessary in developing an investment portfolio, investors are frequently influenced more by their own emotional and behavioral biases than by data.1 These biases may include overconfidence, regret, impatience and the desire to “keep up with the Joneses.”

In fact, personnel from at least one asset management firm believe that the company has a better chance of outperforming the market by anticipating investor behavior. At a macro level, the behavioral biases of a large number of investors may be able to influence the expectations of company performance and even its stock price. By tracking patterns among such biases, it may be possible to capture a higher return on investment relative to other market fundamentals.2

Although there may be truth to that, we believe that investment selection should be based more on individual goals than on mass market speculation. As financial advisors, we help clients get to the crux of their objectives and design a financial strategy around their long-term goals, timeline and tolerance for risk. Markets will always fluctuate, regardless of the impetus, but our job is help reduce the impact of behavioral biases and help keep your financial strategy on track. Please contact us if you’d like to learn more.

Within the study of behavioral finance are subfields. For example, biases can be cognitive, meaning an investor may think and act in specific ways or by following a rule of thumb. A behavioral bias also can be emotional, relying on feelings rather than information. An example of this is “self-attribution bias,” wherein investors tend to believe their investment success comes from their own actions but blame poor performance on external factors.3

Cognitive biases often are characterized by the inability to fully process statistical information or by memory errors.4 In some cases, cognitive bias manifests in simply not acknowledging when there is too much information for a person to process. In this scenario, it is common for an investor to cling to the original reason he or she made the investment — even when presented with new and potentially damaging evidence.5

Another common investing behavioral bias is an aversion to loss. In fact, investors are generally more afraid of losing money than they are of embracing the thrill of stock market success. This inherent fear of loss can, in fact, make an investor unwittingly more conservative than he needs to be or, depending on financial circumstances, should be.6

 

Content prepared by Kara Stefan Communications.

1 Tim Parker. Investopedia. “4 Behavioral Biases and How to Avoid Them.” https://www.investopedia.com/articles/investing/050813/4-behavioral-biases-and-how-avoid-them.asp. Accessed Jan. 5, 2018.

2 John R. Riddle. 361Capital. “Bounded Rationality: Tapping Investor Behavior to Source Alpha.” http://361capital.com/financial-advisor/viewpoints/bounded-rationality-tapping-investor-behavior-to-source-alpha/. Accessed Jan. 5, 2018.

3 Brad Sherman. Investopedia. April 12, 2017. “8 Common Biases That Impact Investment Decisions.” https://www.investopedia.com/advisor-network/articles/051916/8-common-biases-impact-investment-decisions/. Accessed Jan. 5, 2018.

4 Peter Lazaroff. Forbes. April 1, 2016. “5 Biases That Hurt Investor Returns.” https://www.forbes.com/sites/peterlazaroff/2016/04/01/5-biases-that-hurt-investor-returns/#74592db8d4ac. Accessed Jan. 5, 2018.

5 361Capital. “Behavioral Finance Basics.” http://361capital.com/wp-content/uploads/361Capital-Behavioral-Finance-Basics-Infographic.pdf. Accessed Jan. 5, 2018.

6 Peter Lazaroff. Forbes. April 1, 2016. “5 Biases That Hurt Investor Returns.” https://www.forbes.com/sites/peterlazaroff/2016/04/01/5-biases-that-hurt-investor-returns/#74592db8d4ac. Accessed Jan. 5, 2018.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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Debunking Market Myths

By | Food for thought

The world keeps changing, politics and social movements emerge, the stock markets fluctuate and a lot of our preconceived notions continue to be challenged. However, some things don’t seem to change, including myths about the markets and investing. Let’s take a look at some of the ones that still exist.

It’s true that it’s usually considered wise to diversify investments. However, it’s generally a myth that stocks rise when bonds fall, and vice versa. The reality is that, overall, both stocks and bonds increase in value over the long haul, and there are periods when they both rise and fall at the same time.1

Should this type of knowledge change the way we build a portfolio? Not at all. When you work with an experienced financial advisor, you’ll find that he or she is more concerned with the direction you are moving in, not the stock market. An asset allocation strategy and a portfolio of financial products should be designed to support an investor’s individual goals, not chase market returns. If you’re looking for advice on how to construct a portfolio to reflect your goals, risk tolerance and investment timeline, please give us a call. That’s what we do.

Another commonly accepted phenomenon is the way we define a bull or bear market — we base it on a percentage of rise or fall in performance. However, at least one market analyst believes that valuation of markets isn’t the critical factor for a bull or bear market, but rather the direction in which earnings ratios are moving.

Another common myth relates to politics. While politicians often take credit for rising stock markets, their actual impact is more often seen on individual stocks, such as when a president targets an industry for reform or support.3 Ultimately, it’s important for investors to stay focused on their own financial goals, not on how markets will react to election outcomes — because those responses are usually short-lived.4

There’s also the market cliché, “Sell in May and go away.” While markets do tend to slow down during the summer season (since 1950, the market has posted a mean return of 1.4 percent from May through October, compared to 7 percent for November to April), pursuing this strategy is a form of market timing.5 Another way to look at low-price periods is as an opportunity to buy low and wait for the possible rising tide.

And finally, the myth that men are better investors than women is just that — a myth. In fact, a new study from Fidelity reveals that women not only save more than men, but their investments earn (slightly) more on an annual basis.6

 

Content prepared by Kara Stefan Communications.

 

1 Ben Carlson. Bloomberg. Sept. 28, 2017. “Some Market Myths Hurt Investors.” https://www.bloomberg.com/view/articles/2017-09-28/some-market-myths-hurt-investors. Accessed Dec 29, 2017.

2 Barry Ritholtz. Bloomberg. Aug. 14, 2017. “How to Spot a Bull or Bear Market.” https://www.bloomberg.com/view/articles/2017-08-14/how-to-spot-a-bull-or-bear-market. Accessed Dec. 29, 2017.

3 Ryan McQueeney. Nasdaq. July 21, 2016. “Here’s How Presidents and Elections Affect the Stock Market.” http://www.nasdaq.com/article/heres-how-presidents-and-elections-affect-the-stock-market-cm652950. Accessed Dec 29, 2017.

4 Ben Carlson. Bloomberg. Sept. 7, 2017. “Markets Don’t Care Who the President Is.” https://www.bloomberg.com/view/articles/2017-09-07/markets-don-t-care-who-the-president-is. Accessed Dec 29, 2017.

5 Michael Brush. MarketWatch. May 12, 2017. “Opinion: Believing these 5 stock market myths will cost you money.” https://www.marketwatch.com/story/believing-these-5-stock-market-myths-will-cost-you-money-2017-05-12?siteid=rss&rss=1. Accessed Dec 29, 2017.

6 Chris Taylor. Reuters. June 7, 2017. “Why women are better investors: study.” https://www.reuters.com/article/us-money-investing-women/why-women-are-better-investors-study-idUSKBN18Y2D7. Accessed Dec 29, 2017.

 

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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Green Innovation and Investors

By | Food for thought

President Trump may have announced his intention to drop the U.S. from the Paris Agreement last June,1 but that didn’t stop commerce from pressing on with “green” innovation. Drawing from lessons learned from the emerging renewable energy industry, many global corporations have found there is money to be made by saving the world from pollutants.

More than 2.5 million Americans work in the “clean tech” sector, with employment in the solar industry alone boasting a 123 percent increase over the last six years. Even in sectors that are experiencing high research and development costs, profits are possible because the market for renewables grows stronger each year.

For investors, fossil fuels versus green innovation doesn’t have to be an either/or decision. Investment portfolios can hold stakes in tried-and-true blue-chip companies, many of which are expanding to include renewable divisions, as well as pure green startups.3

However, as with any investment, it’s important to consider investor goals, timelines and tolerance for risk with market opportunities. We work with clients every day to establish an asset allocation strategy that reflects both their circumstances and their interests. If you’re interested in a comprehensive review of this nature, we’d be happy to schedule a time to discuss this with you further.

We all know that the basis of solar power is exposure to the sun. While in the past, solar companies have focused on harnessing this exposure with roof panels, new innovation is exploring energy-harvesting windows and solar glass blocks in place of traditional brick siding. Both advances offer both light and heat sources for buildings and residences.4

As far as the new tax bill goes, there’s good news on the green front. The legislation retains existing tax credits for renewable energy and includes a $7,500 federal tax credit for the purchase of new electric vehicles.5

While clean energy may still cost more on some fronts than traditional energy sources, the cost comparisons are inconclusive. For one thing, they do not represent the cost of addressing pollution and health concerns generated by fossil fuels. If the price of coal, for example, included these ancillary expenses, cleaner renewable energy would appear much more affordable.6

And that doesn’t even include benefits to the environment.

 

Content prepared by Kara Stefan Communications.

1 Michael D. Shear. The New York Times. June 1, 2017. “Trump Will Withdraw U.S. From Paris Climate Agreement.” https://www.nytimes.com/2017/06/01/climate/trump-paris-climate-agreement.html. Accessed Jan. 18, 2018.

2 Brian La Shier. Environment and Energy Study Institute. Feb. 1, 2017. “Going Green in 2017: The Business Case for Renewable Energy.” http://www.eesi.org/articles/view/going-green-in-2017-the-case-for-renewable-energy. Accessed Jan. 18, 2018.

3 Jeremy Berke. BusinessInsider.com. Dec. 17, 2017. “The world’s largest oil and gas companies are getting greener after fighting with shareholders for months.” http://www.businessinsider.com/exxon-shell-bp-announce-renewable-energy-and-climate-initiatives-2017-12. Accessed Jan. 18, 2018.

4 Ben Coxworth. New Atlas. Aug. 16, 2017. “New glass blocks may be a clear choice for solar power.” https://newatlas.com/solar-squared-glass-blocks/50925/. Accessed Jan. 18, 2018.

5 Cathy Proctor. Denver Business Journal. Dec. 21, 2017. “Wind, solar, oil and gas — What the federal tax overhaul does for them.” https://www.bizjournals.com/denver/news/2017/12/21/wind-solar-oil-and-gas-what-the-federal-tax.html. Accessed Jan. 18, 2018.

6 John J. Berger. The Huffington Post. Dec. 21, 207. “Fostering Clean Energy Innovation — Financial Advisor Explains How To ‘Put A Stake in Fossil Fuel Industry’s Heart’.” https://www.huffingtonpost.com/entry/fostering-clean-energy-innovationfinancial-advisor_us_5a3c374fe4b0df0de8b063dc. Accessed Jan. 18, 2018.

 

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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Evolution of the 401(k)

By | Investments

When employer-sponsored 401(k) plans were introduced in the 1980s, an unexpected consequence occurred: Pensions stopped being the norm. One reason is that companies found 401(k) plans less expensive than traditional defined benefit plans.1

At the time, 401(k) plans were touted as an opportunity for greater earnings and a richer retirement lifestyle. While it’s true that potential exists, it has not come to fruition for many of America’s workers. Analysis of data compiled by The Pew Charitable Trusts indicates that only about half of American workers participate in an employer-sponsored retirement plan, including 401(k) plans.2

As a result, many Americans are woefully short on retirement funds and savings. According to recent data from the Economic Policy Institute, households in which wage earners are between ages 50 and 55 years old have a median savings of only $8,000. It’s somewhat better — $17,000 — for those ages 56 to 61. Worse yet, a 2016 GOBanking Rates survey found that 35 percent of all U.S. adults have only a few hundred dollars in their savings account; 34 percent have none at all.3

These are averages, of course, but the numbers are bleak. Thirty percent of baby boomers will start retirement with less than $50,000 in savings — indicating many will rely almost exclusively on Social Security benefits.4 If you could use some retirement planning advice, please give us a call. We help our clients make decisions about generating retirement income, using both funds accumulated in employer plans and through individual portfolios, as well as insurance products.

In 1978, Congress passed the Revenue Act of 1978, which included a provision for Section 401(k) plans, offering a means for employees to defer compensation from bonuses or stock options from current taxes. The law went into effect in 1980. The following year, the IRS issued rules permitting workers to make tax-deferred contributions to their 401(k) plans directly from wages, which is when their popularity began to explode. By 1983, almost 50 percent of large employers were offering or developing plans.5

It was an easy sell. Employers liked them because they were cheaper to fund with matches, and the expense was more predictable than indefinite pension payments. Employees felt they were in the driver’s seat and could make better investment decisions for higher earnings. These projections turned out well for companies, but perhaps not as well for many employees, as 401(k) accounts rise and fall with the financial markets.6

Automatic enrollments in 401(k) plans, as well as automatic contribution increases each year, appear to have the potential to help Americans save more. According to a study by J.P. Morgan: 7

  • Among workers who automatically enrolled in their 401(k) plans, only 1% opted out and 96% were happy with the feature. Nearly a third of those surveyed said they would not have enrolled in the plan without the automatic enrollment feature.
  • Among those whose contributions were automatically increased each year, 97% were satisfied, and 15% said they likely would not have increased contributions on their own.

In 2006, a new rule allowed employers to offer Roth 401(k) plans, either as a separate plan or as part of their retirement program. The Roth 401(k) is funded with already taxed income, the earnings grow tax-free and qualified withdrawals made during retirement are not taxed.8

For now, 401(k) plans are a primary retirement savings vehicle for American workers. However, one of the caveats is that those tax-deferred income contributions and earnings deprive the government of revenues that could be used to reduce the deficit or for new spending programs. With new deficit concerns on the horizon, the tax status of 401(k) funds could be subject to greater scrutiny in the future.9

 

Content prepared by Kara Stefan Communications.

1 Kelley Holland. CNBC. March 23, 2015. “For millions 401(k) plans have fallen short.” https://www.cnbc.com/2015/03/20/l-it-the-401k-is-a-failure.html. Accessed Dec. 29, 2017.

2 The Pew Charitable Trusts. January 2016. “Who’s In, Who’s Out.” http://www.pewtrusts.org/~/media/assets/2016/01/retirement_savings_report_jan16.pdf. Accessed Jan. 11, 2018.

3 Ester Bloom. CNBC. June 13, 2017. “Here’s how many Americans have nothing at all saved for retirement.” https://www.cnbc.com/2017/06/13/heres-how-many-americans-have-nothing-at-all-saved-for-retirement.html. Accessed Dec. 19, 2017.

4 Suzanne Woolley. Bloomberg. Dec. 13, 2017. “Retirement, Delayed.” https://www.bloomberg.com/quicktake/retirement-redesigned. Accessed Dec. 19, 2017.

5 Kathleen Elkins. CNBC. Jan. 4, 2017. “A brief history of the 401(k), which changed how Americans retire.” https://www.cnbc.com/2017/01/04/a-brief-history-of-the-401k-which-changed-how-americans-retire.html. Accessed Dec. 19, 2017.

6 Ibid.

7 Dan Kadlec. Money. July 27, 2016. “The 401(k) Features Employers Can No Longer Ignore.” http://time.com/money/4422533/401k-features-employers-can-no-longer-ignore/. Accessed Dec. 19, 2017.

8 Denise Appleby. Investopedia. Nov. 30, 2015. “Roth 401(k), 403(b): Which Is Right for You?” https://www.investopedia.com/articles/retirement/06/addroths.asp. Accessed Dec. 14, 2017.

9 Suzanne Woolley. Bloomberg. Nov. 15, 2017. “Why Republican Lawmakers Are Eyeing 401(k)s for Their Tax Plan.” https://www.bloomberg.com/news/articles/2017-11-16/why-senate-tax-cutters-have-an-eye-on-big-401-k-s-quicktake-q-a. Accessed Dec. 29, 2017.

 

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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