Investor Ph.D: How Currency Movement Effect International Investments

Contributed by: Angela Palacios, CFP®, AIF®

Investors with the patience to hold on to their diversified portfolio that maintains a component of international have likely been rewarded this year.  Before this year, investors challenged the advice of diversifying their portfolio away from the U.S. as international investments, represented by the MSCI EAFE, noticeably lagged U.S. returns in recent years.  The chart below shows how the MSCI EAFE has performed vs. the S&P 500.  When the gray shaded area is above 0, this represents a time when the prior three years of returns have been dominated by the MSCI EAFE outperforming the S&P 500.  When you drill down into specific extended time periods when this happens, you can see that much of the returns come from the impact of the currency return (the lighter green portion of the return).  You see in recent years the S&P 500 has significantly outperformed international investments. 

A weakness in the U.S. dollar has contributed to the outperformance year-to-date by the MSCI EAFE (as of 9/30/2017 the MSCI EAFE was up XX% vs. the S&P 500 was up XX%).  When the dollar is in a cycle of weakening against foreign currencies, there is a natural tailwind helping performance.  Coupled with the global economy strengthening and political risks receding due to a failed populist movement in Europe, this could be a continuing recipe for international investing tailwinds.

Take a look at the impact on stock markets around the globe during these periods of different U.S. dollar trends:

Source: http://awealthofcommonsense.com/2017/04/how-the-dollar-affects-the-stock-market/

When the U.S. dollar index is retreating, Foreign and Emerging markets have outperformed and vice versa.  If the U.S. dollar continues its current trend of weakening or even levels out, we could continue to see the performance story dominated by foreign investments.

Angela Palacios, CFP®, AIF® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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This information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Opinions expressed are those of Angela Palacios and are not necessarily those of Raymond James. There is no assurance the trends mentioned will continue or the forecasts provided will prove to be correct. Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations. The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks. Please note direct investment in an index is not possible. Index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results.

Investor Basics: Exchange Rates

Contributed by: Nicholas Boguth

An exchange rate is just the price of one currency in terms of a different currency. For example, as I wrote this blog on 9/29/17, the USD/EUR exchange rate was .85. This means that 1 US Dollar would buy 0.85 Euro.

Exchange rates fluctuate though, and this is where things get complicated for investors. Inflation, interest rates, asset flows, trade, and economic stability are all factors that move exchange rates. Below is a chart showing just how much the exchange rate between the US Dollar and the Euro has fluctuated in the past 10 years.

Now these exchange rates may not directly affect you in your day to day purchases, but if you are invested internationally, exchange rates affect your portfolio. Head on over to our Director of Investments Angela Palacios’s blog (coming on Thursday!) to read about exactly how exchange rates have affected returns recently.

Nicholas Boguth is an Investment Research Associate at Center for Financial Planning, Inc.® and an Investment Representative with Raymond James Financial Services.

Financial Note: Asset Flow Watch 2017 3Q

Contributed by: Jaclyn Jackson

One of the most common ways to monitor consumer confidence and investor sentiment is to watch fund inflows and outflows.  Market analysts use fund flows to measure sentiment within asset classes, sectors, or markets. This information (combined with other economic indicators) help identify trends and determine investment opportunities.

July trends picked up where June left off, as international equities and taxable bonds continued to receive inflows. 

Most of these flows came through passive funds, but active flows were still positive.  Conversely, US equities saw outflows as valuations appear to be fair or high (depending on whom you ask) and administration confidence declines.  Accordingly, The International Monetary Fund decreased their US GDP growth forecast from 2.3% to 2.1%.  In terms of internationals, investors are opting for developed markets through foreign large blend funds.  Ultimately, this is a play for Europe.  The International Monetary Fund increased its expected growth rate from 1.7% to 1.9% in Europe.   Investors also sought out emerging market funds as the MSCI Emerging Markets index has double-digit returns year to date (28.3% returns YTD at the end of August).

In August, international equity inflows were positive but less positive than in July. 

The slowdown reflects lackluster corporate earnings internationally and uncertainty about North Korea.  Nonetheless, internationals remain compelling to investors with rebounds from Japan and Europe progressing.  MSCI EAFE returns have remained ahead of the S&P 500 in 2017.  Taxable bonds, specifically intermediate-term bond funds, remained the leading category group for inflows. Intermediate bond funds hit the “sweet spot” for many investors because they are usually not as severely impacted by rising rates as long term bonds and typically generate more return than short term bonds.  From January 1st through August 15th, intermediate bonds gained 3.2% beating both the Bloomberg Barclays US Bond Index and 2016 returns.  Differing from June and July, investors are trending back towards active management for their bond funds.

As of writing this, October 4th, 2017, September flows mimic July and August with outflows from US equities and continued inflows to international equities and taxable bonds. 

There are also positive inflows for municipal bonds and alternatives.  Outflows from the US are mostly from growth (especially large growth) and US large blend funds.  International equities experienced outflows last week, but are net positive for the month.  Bond inflows are steady with investors largely continuing to invest in intermediate term bond funds as wells as modestly investing in high yield municipals funds and national intermediate municipal bonds.

Bonds Lead the Pack

Even as rates rise, investors continue to pour assets into bond funds. Why is that the case? Income and diversification seem to motivate the trend.  Even if interest rates rise and bond prices go down, investors still want the guaranteed income stream bonds provide.  Some may also feel they can pick up higher payouts from new bond issues as interest rates increase.  In terms of diversifications, investors have seen gains from their US equities and feel like it is time to rebalance into a true stock diversifier; bonds.

Jaclyn Jackson is a Portfolio Administrator and Financial Associate at Center for Financial Planning, Inc.®

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This information does not purport to be a complete description of the securities, markets, or developments referred to in this material; it has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any opinions are those of Jaclyn Jackson and are not necessarily those of Raymond James. This information is not a complete summary or statement of all available data necessary for making and investment decision and does not constitute a recommendation. Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. Asset allocation and diversification do not ensure a profit or guarantee against loss. Past performance is not a guarantee of future results. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations. The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Barclays Capital US Aggregate Index is an unmanaged market value weighted performance benchmark for investment-grade fixed rate debt issues, including government, corporate, asset backed, mortgage backed securities with a maturity of at least 1 year. Please note direct investment in any index is not possible.

Investment Pulse: 3Q 2017

Contributed by: Nicholas Boguth

We’ve been busy here in the Investment Department! Check out some of our research highlights from the third quarter.

Angela Palacios, Director of Investments at The Center, attends Capital Group Advisor Forum

Angela traveled to Capital Group’s headquarters in California, to look under the hood at their investment strategies focusing on their process, people and investment outlooks.  You may know the strategies as the American Funds family. The discussion spanned from macro-economics to fixed income and equity discussions. On the macroeconomic front they discussed their recession outlook. Anne Vandenabeele, Economist, stated that expansions don’t die of old age, they die because imbalances build up in the economy or the Federal Reserve raises rates too quickly. They don’t see either of these scenarios right now. Most severe bear markets are when you have a bear market combined with a recession. While there may be a bear market in the next several years they don’t see a recession occurring at the same time. 

Clayton Shiver, Portfolio Manager at Stadion Money Management

Part of our investment process is to stay on top of investment products being offered in the marketplace. Nick Boguth met with Clayton Shiver to discuss Stadion’s alternative product platform and understand the team’s investment process. Clayton discussed their three sleeve alternative approach that included an equity, income, and trend sleeve implemented with the buying and selling of stocks and options in order to generate very different potential returns from the S&P 500 or Barclays US Aggregate Bond Index.

Matt Lamphier, Portfolio Manager at First Eagle

Matt Lamphier, director of research for the Global Value team at First Eagle Investment Management, joined us at our office for a jam-packed hour of investment updates. We discussed First Eagle’s investment process, outlook, and rationale behind their investments. Matt stressed the importance of being a value investor, and choosing companies that will outperform over the long term. One surprising statistic that Matt shared was that the average timespan of a stock in their portfolio is over 10 years!

What to expect next time…

We have a busy schedule next quarter and are looking forward to sharing highlights from our upcoming conferences including: Thornburg Investment Management, First Eagle, and Investment News.

Nicholas Boguth is an Investment Research Associate at Center for Financial Planning, Inc.® and an Investment Representative with Raymond James Financial Services.

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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Nick Boguth and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Raymond James is not affiliated with Anne Vandenabeele, Clayton Shiver, Stadion Money Management, Matt Lampier and/or First Eagle Investment Management.

Webinar in Review: College Planning: How to Navigate Financial Aid and the FAFSA

Contributed by: Abigail Fischer

Filling out the FAFSA is only one of the many tasks requiring your attention while you, or your young adult, prepares for entering college. That’s why we invited Carrie Gilchrist, Ph.D, to join Nick Defenthaler, CFP® for the College Planning webinar. She is the Senior Financial Aid Outreach Advisor at Oakland University, and well versed at assisting families with their financial concerns.

Here are a few key points from the College Planning webinar:

• The FAFSA is available October 1st.

• Everyone should fill out the FAFSA, even if you don’t think you’ll be eligible to receive aid money. At the very least, you’ll be offered loans. At best, your college might use the FAFSA to determine who will receive university-based scholarships.

• Your completed FAFSA might offer benefits other than the typical education loan:

  • Federal Pell Grants (given through your school’s loan money bank)

  • Teacher Education Assistance for College and Higher Education Grant (TEACH)

  • Federal Supplemental Education Opportunity Grant (SEOG)

  • Federal Work-Study (the fed. pays 70% of your wages for on-campus jobs)

  • Parent PLUS Loans (parents can take out federal loans with much lower interest rates than a private bank loan)

• A CSS Profile is used to reward institutional aid, used by over 400 colleges nationwide.

• When filing the FAFSA within a divorced family, your federal aid need is determined by the custodial parent.

• If there is a significant change in your finances after your FAFSA has been submitted, contact the school and inquire how they can assist you through this school year.

• If you don’t need a loan, please don’t take a loan!

You need these documents to complete the FAFSA: 

• Taxed and untaxed income

• Current bank statements

• Records of investments

Here are some helpful websites:

• FSAID.ed.gov (to create your FAFSA ID)

• FAFSA.gov (for the FAFSA4caster and Net Price Calculator)

• cssprofile.collegeboard.org (CSS Profile Application)

The Center, and your financial planner, are here to assist you in planning for college, just give us a call!

Please check out the College Planning Webinar, recorded on September 21st, 2017:

Abigail Fischer is a Client Service Assistant at Center for Financial Planning, Inc.®

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Raymond James is not affiliated with Carrie Gilchrist or Oakland University. Links are being provided for informational purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

Ballin' on a Budget

Contributed by: Josh Bitel

When I was fresh out of college, one of the most important things for me to learn was how to budget properly. Considering I was taking on my first job with level, predictable income, I knew that it was critical for me to understand where my money goes each month. If I didn’t identify opportunities for savings, I knew I would blow through my money quickly, but I wasn’t sure where to start!

Identifying Financial Goals

Before I could create a budget, I had to identify some goals in order to give my budget a sense of direction. My goals were more short term in nature (pay down student loans, save for vacation, etc.), but long term goals are just as important. If you aim to retire someday, or a child’s education expenses are a concern, budgeting with these goals in mind is certainly a good idea. Once you have a clear picture of what you want to achieve with your budget, it can become much easier to accomplish these goals.

Understanding Monthly Income and Expenses

One of the more difficult, but most important, components of a budget is identifying monthly income and expenses. There is software available that you can leverage, or you can use the old school method and take pen to paper. Regardless of how you come to a conclusion, it is imperative to cover all the bases.

When considering income (outside of the obvious salary or wages), be sure to include any dividends or interest received. Alimony or child support expenses may also come into play depending on your situation. Expenses may be divided into two categories: fixed and discretionary. Fixed expenses are generally easier to document --  these will be your recurring bills or debt payments (Food and transportation can also be captured here). Discretionary expenses are generally more difficult to record (Entertainment expenses, or hobbies and miscellaneous shopping trips are common line items here). It’s also important to keep in mind any out of pattern expenses, like seasonal or holiday gifts, or car and home maintenance. Remember to always keep your goals in mind when crafting your budget!

Once you’ve gotten grasp on your monthly income and expenses, compare the two totals. If you are spending less than you earn, you’re on the right track and can explore ways to use the extra income (save!). Conversely, if you find that you are earning less than you spend, use your budget to identify ways to cut back your discretionary spending. With a little bit of discipline you can start finding capacity to save in no time!

Monitor your Budget & Stay on Track.

Be sure you keep an eye on your budget and make changes when necessary. This doesn’t mean you have to track every nickel you spend; you can be flexible and still be comfortable! It is important to stay disciplined with your budget however, and be aware that unexpected expenses may pop up. With proper cash management, these unexpected events can feel less crippling. To help stay on track, you may find a budgeting software that you like to use, do your research and find one that is suitable for you. A vital takeaway, and something that can go a long way to help increase savings, is being able to identify a need vs. a want. If you can limit your “want” spending, you may be surprised how quickly you can save!

Josh Bitel is a Client Service Associate at Center for Financial Planning, Inc.®

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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Josh Bitel and not necessarily those of Raymond James.

Life Insurance and Divorce: A Cautionary Tale, Part One

Contributed by: Jacki Roessler, CDFA^TM

Years ago, I got a call from Lindsay, a divorced client that still sends shivers down my spine. Her divorce had been final for two years when her ex, Justin unexpectedly died from a heart attack. In order to maintain her living expenses, Lindsay had been dependent on Justin’s monthly child support payments for their two young children.  Once the initial trauma subsided, Lindsay pulled out her divorce decree and breathed a sigh of relief; Justin had agreed to maintain a $250,00 life insurance policy to secure his child support payments.

So; why the phone call?

Justin missed a premium payment and the policy lapsed. Lindsay’s child support income was gone and despite their divorce agreement, there wasn’t anything to replace it.

The worst part of this situation was how easily it could have been prevented.

Taking a step back, there are four parties to every life insurance contract; the insurance carrier, the policy owner, the insured (the measuring life) and the beneficiary.

Life insurance is a legally binding agreement that the carrier will make a lump sum payment to a designated beneficiary upon the death of the insured-in exchange for annual premium payments. 

The simplest and easiest solution was to require Justin to transfer ownership of the policy to Lindsay at the time of the divorce.  He would have remained the insured and the person responsible for premium payments.  However, when payments are missed, it’s the owner who’s notified, not the beneficiary. Once a policy lapses, it’s too late to reinstate it. A new policy can be obtained, but only if the insured is still in good health and is willing to cooperate with the application process!  Lindsay could have made the delinquent payment herself and then attempted to enforce the divorce agreement directly with Justin or through the court system. Either way, the policy would have stayed in force.

In my experience, attorneys can be very uncomfortable insisting on policy ownership transfers.

By the time agreement’s reached on the parenting schedule, alimony and who gets to the keep the house, no one wants to see the case fall apart over who owns the life insurance policy.  As it was in Lindsay’s case, this was a disastrous mistake on her attorney’s part.

As an additional reason to change ownership on the policy, keep in mind that only the owner can change the life insurance beneficiary. Suppose Justin had remarried and decided to switch the beneficiary to his new wife. Sure, he would have been in default of the divorce decree, but there wouldn’t be any consequences to that once he’s dead.

Another unexplored option in this case was to request that the insurance carrier send duplicate statements to Lindsay, the beneficiary. Since the divorce decree itself isn’t legally binding on third parties (like the insurance carrier), there isn’t any real way to force this on the carrier, but some will comply. 

A last option would have been a requirement that Justin pay annual premium payments instead of monthly. Although most people prefer to make monthly or quarterly payments on insurance contracts, this would have provided Lindsay with less to follow up on. Rather than being forced to confirm monthly payments, she’d only have to confirm once per year.

Luckily, Lindsay’s kids were eligible to receive Social Security survivor benefits, which helped replace some of the child support income and she was eligible for widows’ benefits while their children remained minors. Despite that, she was still forced to sell her house.

The moral to this tale? Sometimes the issue that seems nit-picky or trivial is the one that can unravel someone’s finances after a divorce.  If you’re dependent on an income stream to pay your bills, make sure you understand how it can be protected and then insist on it before you sign your judgment of divorce.

Are there any other tax issues or potential financial pitfalls related to life insurance and divorce?  Glad you asked and yes, there are! Stay tuned for my next blog!

Jacki Roessler, CDFA^TM is a Divorce Financial Planner at Center for Financial Planning, Inc.®

Irma’s Devastating Winds Don’t Devastate The Market

Contributed by: Nicholas Boguth

Hurricane Irma, one of the strongest and longest-lasting hurricanes ever recorded, recently passed leaving a long path of destruction behind it. People from the Caribbean to Florida prepared for the beast of a storm prior to labor day weekend, but there is only so much that could be done before its 180+ mph winds tore through the Virgin Islands on Wednesday the 6th, Cuba on Friday, and finally Florida and Georgia by Sunday. Entire islands were left in shambles across the Caribbean, Florida and Georgia sustained major damage, and millions of people are left without power and water.

How did the market respond?

We are constantly reminded that the markets do not like uncertainty, and this rings true when you look at short periods of volatility, but look at all of the uncertainty that we’ve seen in the past 15 years. Since ’02, we’ve had 3 presidents from republican, to democrat, back to republican, Congress party control flipped multiple times, we’ve seen 2 major wars, devastating natural disasters, massive oil spills, major business and even city bankruptcies, and a “Great Recession”. What did the S&P 500 do over the past 15 years? It is up about ~9% annualized, which is right on par with the average return of the S&P over the past 100 years.

Reminder: be a long term investor. Do not try to time the market, and if you ever have any questions – we are here to help!

Nicholas Boguth is an Investment Research Associate at Center for Financial Planning, Inc.® and an Investment Representative with Raymond James Financial Services.

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Nick Boguth and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results.

Finding the Right Professional Partner: A Personal Story

Contributed by: Sandra Adams, CFP®, CeFT™

I suffer from migraine headaches. Soon after I graduated from college, I began to get these debilitating headaches more and more often (up to 3 or 4 times a week), sometimes lasting entire days at a time.  I have spent years working with numerous medical doctors, as well as tracking the headaches -- what I eat and drink, how I sleep and various other life habits in an attempt to find a way to stop them from occurring.  The traditional medical doctors I’ve seen have prescribed numerous medications (and subsequently increased dosages of those medications) in an attempt to treat the headaches – but with no results. Until recently, when I took a different approach…

I found a different professional partner to consult with about my headaches – a doctor who consults on the whole body/body systems and does not try to treat just one symptom. 

By working with a doctor who was looking at how my entire body was functioning, I found out that there were some underlying problems that existed with how my body was handling stress and by adjusting a few small things with my diet and sleep, I have all but eliminated by migraine headaches over the last several months.

What, you might ask, does this have to do with financial planning? 

Choosing the right professional partner, no matter what facet of your life, is extremely important.  Just as it made a world of difference for me to find the right medical partner, it is important for clients to find the right financial partner.  A partner who only focuses on investments or just on insurance may not be the right partner for you if you truly need someone to look at your entire financial “body” to make sure everything is working together in perfect harmony.  If you have not yet found the right professional financial partner and are looking for someone to look at your entire financial lives, contact our Center Team – we are here to help!

Sandra Adams, CFP® , CeFT™ is a Partner and Financial Planner at Center for Financial Planning, Inc.® Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

The Importance of Friendships as We Age

Contributed by: Sandra Adams, CFP®, CeFT™

As a younger planner, I remember hearing planners older and wiser than I counseling clients to think twice before making the decision to leave their lifelong homes and communities upon retirement to move near children in a distant state (or country).  Despite that advice, many clients still think the best move as they age is to be nearest children (and grandchildren). 

However, they often regret that decision for a number of reasons:

• They find their families have their own lives to live and just don’t have the time to spend with them that they thought they would (spending time with “Mom and Dad” is not a priority);

• They may find that their children decide to relocate again, and then they are left in a location that they are unfamiliar with and have no family or community to call their own;

• Most importantly, they find that they truly miss the friends and community they spent years building.

Several conversations in client meetings recently have confirmed to me the importance of longtime friendships in the lives of older adult clients.  Friendships are especially important to those who have been widowed; it seems that family members provide support immediately after a death, but once they have a need to go back to their normal routines, it is friends that provide the emotional and social support that help widows get through the next months and years that are most difficult.  And for many older adults who have attempted to move away and start friendships in unknown communities, they realize that it is their longtime friendships that they truly value and miss (and sometimes find themselves wanting to come back to in older age).

Studies by the National Institutes of Health show that maintaining friendships and staying socially active are key components to a happy, healthy longer life.  Making the right decisions about where to live and near who are key decisions for quality of life and part of your retirement planning.  If you have not yet had these conversations about YOUR future retirement plan, contact your financial planner today.

Sandra Adams, CFP® , CeFT™ is a Partner and Financial Planner at Center for Financial Planning, Inc.® Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

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This information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Opinions expressed are those of Sandra Adams and are not necessarily those of Raymond James.