US Stocks & the Federal Reserve - 2nd Quarter 2012

As the saying goes, “Don’t fight the Fed!” Many investment experts have noted the strong relationship between the market’s ups and downs and Federal Reserve policy. This chart, compiled by Doug Short at dshort.com beautifully illustrates the relationship between Fed intervention programs and the S&P 500. 

While Operation Twist is scheduled to end in June 2012, Federal Reserve board members have also started to use stated future targets for interest rates as a means to encourage market participants to invest in stocks. As recently as April 11th, Fed Vice Chair Janet Yellen indicated that the Fed’s “Zero Interest Rate Policy” could remain even past the initial 2014 target date. If markets stumble, some think that a third round of Quantitative Easing may also be possible.

There will come a time when markets need to stand on their own two feet. Based upon the words and deeds of the Fed, those days may be several years away.

Hat Tip: The Big Picture, Barry Ritholtz.

Unemployment Trends - 2nd Quarter 2012

Unemployment has been slowly falling over the past year, despite what you might be hearing from naysayers, and currently stands at 8.3% nationally according to the U.S Bureau of Labor Statistics.  Because of the severity of the recession we suffered in 2008 and 2009 unemployment has recovered much slower than in past recessions.  This has been despite the large amount of liquidity that the Federal Reserve Bank, or the Fed, has pushed into the system.  At this point the Fed has gone about as far as it can go to stimulate job growth.  So what needs to happen next to keep the unemployment trend heading downward?

Part of the problem is the private sector has simply been unwilling to hire so far during the recovery.  They have enjoyed nice productivity gains from their current employees and have not seen the need to hire until recently.  Now, however, productivity growth is slowing and they are realizing that they cannot squeeze anymore blood out of the stone.  But even with all of these job openings, the unemployment rate is not dropping as quickly as it should. 

There has been a “structural” change in the job market meaning that there aren’t enough qualified people available and in the right places to fill specific job openings.  Pairing a worker with a job opening is much the same in principle as a couple’s matchmaking.  You aren’t simply going to marry the first person you date.  Sometimes it can take a very long time to find the “right” person. 

Only a decade ago one could get a good job in the manufacturing industry with little or no higher education required.  Now you can see in the chart below, there has been a large spike in unemployment the less education that you have.

The economy is undergoing a structural change emphasizing the need for retraining in order to go into fields with employment opportunities.

According to the above chart manufacturing jobs are scarcer, employing 40% fewer workers than 12 years ago.  During that same decade, jobs in education and health services, which generally require more education, have grown nearly 20%. 

Retraining our work force and getting them to where the jobs are is what needs to happen over the next few years.  This takes a substantial amount of time and money to complete and is one of the root causes for the slow decline in unemployment.  Many workers leaving the workforce for retraining fall into a nonparticipation category that is not counted as unemployed because they are not actively seeking employment.  Once these people complete their retraining and find a job they are not considered as coming out of the pool of unemployed.  Over time this nonparticipation pool will become smaller but will not contribute to the declining unemployment numbers.

Ultimately, it could take years more before the unemployment rate falls back to its’ pre-recession levels but when it does our workers should be much better positioned for the fields with growing employment opportunities.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of Angela Palacios and not necessarily those of RJFS or Raymond James.

Heeding Warnings on Bonds - 2nd Quarter 2012

As an Investment Committee and firm, we have had concerns about the threat of rising interest rates for some time. The growing chorus of concern for future bond returns rose during the quarter including notable discussion from Warren Buffett in his annual Berkshire shareholder letter. 

Over the past 30 years, bonds have been a significant contributor to investor returns. It takes a veteran investor with a long memory to recall the last time that there were sustained negative real returns for bonds. Coming out of the 1970s, inflation was the chief enemy of the Fed and interest rates remained higher than inflation rates. This meant that even those investing in cash alternatives could preserve the purchasing power of their investments.

We all know what’s happened to the rate of return for cash alternatives since 2008. It has been brutal to pay your bank more in fees to hold your money than receiving back as savings interest rates which have been negligible or nonexistent. Since inflation has hovered between two and three percent, your cash alternative has had a negative real rate of return, that is the return of the investment minus inflation.

Our concern today is that this negative real rate will spread from cash alternatives to other bond categories, most notably US government bonds. There are several ways that bond results can hurt investors:

• Rates rise: As interest rates rise, the price of bonds may go lower. This might result in reduced portfolio values on statements.
• Rates stay flat, inflation rises: Interest rates don’t have to rise to experience disappointing bond returns. A hidden threat is that interest rates remain extremely low while inflation rises. If you subtract the high inflation from low returns in bonds, you may end up with a negative real rate of return as mentioned below.
• Economic deterioration: Investors who move away from bonds that are more sensitive to interest rates in favor of credit risk sensitive bonds may be disappointed if slowing economic factors result in lower bond prices for bond diversifiers.

With baby boomers retiring, the bond conundrum really hits home. A historically tried and true source of retirement income may now be a source of risk. As one investor noted, this means portfolios may need to be much more carefully constructed and complex than they were in the past.

Some specific recommendations:

• Asset allocation: Carefully review allocation decisions with your financial planner and make sure that you are invested for the next 30 years and not the last 30 years. This is especially important if you’ve significantly altered your overall allocation in the wake of the market meltdown of 2008.
• Diversification: Not all bonds behave the same. Many types of bonds that did not exist in the last great rising rate environment of the 1970s may offer some aid to investors, or be the best option in a lousy lot. Bonds outside of the US should also be considered. Lower volatility alternative asset classes might also be included in the potentially “better than bond category”, although they take careful consideration and analysis. With diversification comes risk and complication, professional advice is recommended.
• Rethink income strategy: Bond coupons are not the only source of income for an investor portfolio. Stocks which pay dividends are one alternate source. Beyond that, we generally prefer a total return view where both appreciation and income can be used for portfolio withdrawals depending on which assets are overweight. This reinforces the buy low and sell high concept.

We have been discussing the threat of rising rates so much, that I feel like a broken record. Someday I will talk about a time when you could get a mortgage at 3.5%. It might sound as crazy to a younger audience as double-digit Certificates of Deposit rates sound today – something that is very difficult, if not impossible, to wrap my head around. Preparing for the shifting reality of bond returns is the highest priority of our investment committee today!

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Melissa Joy and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Investments mentioned may not be suitable for all investors. Past performance may not be indicative of future results. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. Diversification and asset allocation do not ensure a profit or protect against a loss. Please note that international investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. Dividends are not guaranteed and must be authorized by the company’s board of directors. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Is the Social Security System Bankrupt?

Will future retirees be a part of the largest renege by our elected officials? I am certainly not brave enough to address the political aspects of Social Security in a blog – so today – just the facts.  According to recent data from the Social Security Administration, in 2012 the maximum social security retirement benefit that could be earned by an individual reaching full retirement age (age 66) is currently $2,513 a month or $30,156 per year. Not a fortune, but you certainly wouldn’t pass it up.

As traditional pension plans go the way of the dinosaur, social security and personal investments are left to pick up your retirement income needs.  Although many folks discount the value of social security – the fact is that it provides a larger benefit than most believe (this is not to suggest that social security is a good or bad program – just that the retirement benefits can be significant). Assuming a life expectancy of 20-30 years past retirement age, the present value of the $2,513 a month income stream is roughly $670,000!  Thought of another way, if you needed to generate $30,000 per year from an investment portfolio for the next 20-30 years, you would require investments to the tune of $670,000 (assuming a 4.5% inflation adjusted withdrawal rate). 

As you can see, social security benefits can add up to a significant portion of your total retirement income.

In our next post, we will discuss when to take Social Security Benefits.

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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 Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

Julie and Sandy Help Spread Financial Literacy

Teaching kids about responsible budgeting sounds about as easy as herding cats, but the Center for Financial Planning’s own Sandy Adams and Julie Hall gave it their best shot … with some amazing results.

Partnering with the non-profit organization Junior Achievement, a group aiming to spread financial literacy skills to students from grades K-12 across the country, Sandy and Julie brought in a group of 8th graders from Detroit’s Burton International School. The day was dedicated to teaching the kids about personal finances in a very hands-on way.

 

Students were encouraged to save money each month rather than spending it all. Many took saving very seriously, making frugal choices.

 

One child specifically said, “I want to make sure I can save a lot of money at the end of the month,” and was able to make a sizeable monthly (relative to income) charitable contribution as well.  

Julie says she left wishing she had experienced a field trip like that when she was a child. “Financial planning can and should begin at an early age so that our children are better prepared to handle their finances effectively in the future.”  

Rebalancing Game Plan

Spring is one of the best times to be a baseball fan.  Right now, we can like the Tigers simply because they are our team and because they’ve looked great in the first few games!  There is no baggage piled on yet, no insurmountable amount of losses, no injuries etc.  These days are for optimism and dreaming.  The players and staff have spent a lot of time developing a game plan and sticking to this plan could possibly make or break their season. Having a game plan is a big part of a team reaching their goal of the playoffs and for you, it is important in reaching your investment goals.

An investment strategy that uses a defined investment process cannot ignore one of the most crucial steps, monitoring and rebalancing.  The question is not if, but how.  Rebalancing encourages good investor behavior by forcing you to sell some of your winners and buy more of your losers. 

There are several ways to rebalance a portfolio: on a calendar basis, by utilizing cash flows, and opportunistically.

Calendar rebalancing is done by choosing a specific date, usually arbitrarily, to rebalance portfolios and can be done on a quarterly, semiannual or annual basis.  Studies have shown that there is not much performance differential between the different frequencies of rebalancing[1].  By utilizing a set calendar date to rebalance the best buy-low/sell-high opportunities can be missed.

In contrast, cash flow rebalancing can be used for accounts with cash moving in or out of the accounts.  For example, if a cash distribution is needed the asset that is the most overweight can be sold to raise cash.  If cash is flowing into the account, the asset that is most underweight can be purchased. 

Opportunistic rebalancing is the other option.  Look often, but actually rebalance infrequently.  Studies have shown that monitoring accounts frequently, i.e. looking at least bi-weekly increases the likelihood that rebalancing will  occur at the most opportune times, capturing sporadic buy low/sell high opportunities, more than doubling the increased returns from the rebalancing benefit over calendar rebalancing.

Whatever your rebalancing technique is, you need to have a game plan and stick with it over time.  Having a strategy can help take some of the emotion out of investing.  Speak to your Financial Planner today about establishing your plan and check out these recent blogs to help guide you.

Links to:

Introduction: The Investor’s Chief Problem

Strategic Allocation: Building your foundation

Tactical Allocation: Deck the Halls with tactical allocation

Types of Investments: Time to declutter

Buy Process: Salad Surprise

Sell Discipline: The Gambler

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[1]Daryanani, Gobind CFP®, Ph.D.”Opportunistic Rebalancing: A New Paradigm for Wealth Mangers.” 2008.   Journal of Financial Planning.

All illustrations are hypothetical and are not intended to reflect the actual performance of any particular security or investment account. Future performance cannot be guaranteed and investment yields will fluctuate with market conditions. Investing involves risk and you may incur a profit or loss regardless of strategy selected. 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 information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of [FA NAME] and not necessarily those of RJFS or Raymond James.

Center Wellness Goes Viral

From stretch breaks in the middle of business meetings to fresh fruit deliveries to the office, from walking meetings on the nature trail to healthy options in the break room, we take wellness pretty seriously. In fact, we’re even taking it to YouTube.   Workplace wellness programs provide the access, opportunity, support and encouragement for all employees to actively participate in improving their health.  What exactly is workplace wellness at The Center?  It starts with a core value that supports work/life balance. This important firm value is our springboard.   Our program is built on the following foundation:  

• Create an employee driven Wellness Committee
• Identify Center team members who are either mentors or champions for healthy activities
• Conduct a needs and interest survey
• Post healthy tips on a bulletin board
• Promote messages from national health organizations
• Provide workshops on relaxation, stress management, exercise, nutrition, and work/life balance topics

Our first priority is to create a healthy environment for Center team members.  But in pursuit of our goal with innovative programs and employee engagement, we attracted the attention of the Blue Care Network Healthy Blue Living marketing group.  They liked what we were doing so much that the interviewed several team members including Gerri Harmer, Jennie Bauder, Tim Wyman, Troy Wyman and Laurie Renchik.  The YouTube videos they created will help spread the word about some of the successful programs we support.   Promoting work/life balance for all Center team members is a goal we take seriously!

Tax Records -- Trash It or Stash It?

Whether you’ve just finished your tax preparation regimen or you’re pushing the limits and still gathering your information, you’re likely facing a pile of papers on your home office desk (or perhaps the kitchen table).  If you haven’t already gone through the process of organizing your financial records in 2012, now is the time. 

In a previous post, I provided financial document retention guidelines that will be helpful in the tax-time clean-up process.  When cleaning up the tax mess, here’s what you should keep:

• Records of Income - shred your paystubs once you have your W-2; keep your W-2 with a copy of your tax return.
• Interest, Dividend and Capital Gain/Loss Records – keep until the appropriate 1099 is received.  Keep year-end statement for investment accounts to track progress, and purchase confirmations until the investment is sold.
• Charitable Donations and Deductible Expenses – Keep with your tax return.
• Real Estate-Related Papers – keep all records for 3 to 6 years after the property is sold and all taxes paid.  Although most real estate sales these days won’t have capital gain implications (current tax law allows up to a $250,000 gain for single filers and $500,000 for joint filers before there is income tax assessed on the gain), you may be able to use a loss on real estate for a tax advantage.
• Tax Returns – Keep them forever.

While it may seem that there are more records you need to keep than those you can shred, remember there are ways to lessen the burden on your space.  Personal scanners are inexpensive and can allow you to electronically file and store these important documents; just be sure to back up your files. Or, if your financial advisor has an electronic document management system, he or she may be willing to hold a copy of your records in your client file.

Whether it’s the New Year or Tax Time, or another time during the year that triggers your financial record keeping clean-up, use our easy-to-use record retention guidelines and make it an annual event! You might even consider printing out this blog and filing it away for easy reference when tax time rolls around again.

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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 Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

Before You Tell Your CPA “You’re Fired!”

It’s that time of year again … when you gather up all of your tax documents, send them to your CPA or tax preparer and wait for the results.  Will you pay or will Uncle Sam be sending you a check?  For those that find themselves owing money on April 17, the first thought many times is, “Help – I need a new tax preparer!” Before you go firing anyone, check a few important lines on your tax return: 

• Line 43:  Did your taxable income increase over last year? 

• Line 44:  What is the total amount of tax owed for the year? 

• Line 72:  How much was withheld from your various income sources throughout the year? 

Remember, it is possible to pay less income tax than you did last year and yet OWE money to the IRS at tax filing time. How can that be?  Perhaps you simply had less withheld over the year.  

Here’s an example:

Joe and Sandy had to pay $2,000 more at tax time then they did last year.  However, the “extra” tax wasn’t really extra at all.  The total tax due for the year was about the same as last year.  The difference?  They had less tax withheld from their wages, pensions, or IRA distributions this year.  So, they owed the same amount for the year, but they paid (read: withheld) less throughout the year.  So, don’t go firing your tax preparer just yet! You may need to adjust your withholding via Form W-4 to avoid any surprises next April.

You should discuss any tax or legal matters with the appropriate professional.

Saving for Tomorrow with TED Talks

If you haven’t heard of them before, TED Talks (TED stands for Technology, Entertainment, and Design) offer a wealth of inspiration and discussion points. As their tagline says, they truly have Ideas Worth Spreading. At The Center, we regularly discuss insightful TED video talks whether they offer thoughts on personal growth, practice management or investing.

One of my favorite TED Talks was recorded in November 2011 and featured Shlomo Benartzi. Benartzi is an economist in the field of behavioral finance and his work and studies seek to help improve an investor’s chances of saving to meet goals such as retirement. Anyone who thinks that they might need to save for the future – and that should encompass practically everyone – could benefit from viewing this video. 

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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 the speaker and not necessarily those of RJFS or Raymond James. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment decision.