Introducing our Newest Team Member!

Contributed by: Center for Financial Planning, Inc.

Exciting things are happening this summer at The Center! We are thrilled to welcome our newest team member, Lauren Adams, as our brand new Director of Client Services. Here at The Center, we are committed to providing an exceptional level of service to our clients, and we are continuing to invest in this area by bringing Lauren aboard. And that’s not all! As one of her first responsibilities, Lauren is tasked with further growing our client service team by hiring two new Client Service Associates. We hope to be able to introduce them to you here soon.

Lauren said she was eager to join The Center after finding us on Crain’s list of “Michigan’s Cool Places to Work.”* Originally from Michigan, Lauren worked as a stock analyst and manager in Chicago for Morningstar for several years while also earning her MBA from the University of Chicago Booth School of Business and CFA®, Chartered Financial Analyst®, designation in the evening. She’s excited to put these credentials to work helping further improve The Center’s operations and contributing to our investment process. 

Managing Partner Tim Wyman comments, “While working at Morningstar Lauren held a variety of roles that makes her uniquely qualified in this new Senior Manager position here at The Center. Most importantly, Lauren passionately embraces our firm values such as professionalism, a strong work ethic, and a desire to serve others.”

Lauren and her husband Chris decided to return to her home state of Michigan, but not before spending one year traveling the world and visiting over 50 countries (they were inspired by Jim Rogers’s book Adventure Capitalist). If you get the chance to speak with Lauren, be sure to ask her about her favorite countries!

*annual ranking of Michigan’s best work environments based on factors such as benefits, policies, perks, and engagement as measured by employee and employer-based surveys (awarded for 2014)

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Checkout our current blog posts HERE. See you there!

Recent Mortgage Rate Decline may offer Financial Opportunities

Contributed by: Nick Defenthaler, CFP®

Over the past month, interest rates on mortgages have declined significantly, posing the question to many clients if it would make sense for them to refinance or potentially accelerate a new home purchase that they may have been considering. Many factors cause mortgage rates to decline, but the most recent cause can primarily be attributed to the UK leaving the European Union, dubbed “Brexit” (click here  to read our recent blog on this topic and don’t forget to check out our investment focused webinar as well on 7/28!). Typically, when there is a surprise in the markets or volatility spikes, there is a “flight to safety” by investors and bonds are purchased. Bonds are a bit tricky at times to understand in the sense that when bond prices rise, interest rates usually fall. This “flight to safety” caused the yield on the 10-year Treasury bond to hit an all-time low of 1.36% on July 5th. Mortgage rates typically have a direct correlation to the 10-year Treasury bond yield so when you see those rates decline, usually mortgage rates will follow suit. 

Here are some items to consider if you’re thinking of taking advantage of these once again, historically low mortgage rates:

• How long do you plan on staying in your home? There is usually a cost to refinancing and we’ve found that you typically need to live in your home for at least two to three years after the refinance to justify the fees lenders will charge.

• Lowering the payment isn’t always the best option – consider reducing the term on the loan even if it means the payment will slightly increase. Being mortgage free in retirement is a beautiful thing!

• If you have an outstanding second mortgage or home equity line of credit, consider combining them into one loan with a fixed interest rate.

• If you have an adjustable rate mortgage (ARM), now could be a great time to move to a fixed rate to avoid payment fluctuations in the future.

• Consider a modest cash-out refinance to pay down high interest rate loans or use as a low interest rate option to fund higher education costs.

• Don’t make an impulse home purchase just because mortgage rates have declined – the cost of rushing into a major decision like buying a home can cost you far more than the savings you’d see by having a very low mortgage rate.

As with any major financial decision, such as a refinancing or a new home purchase, we encourage all of our clients to reach out to us before making a final decision so we can ensure it is in their best interest for their own personal situation. Please don’t hesitate to reach out if you’d like to talk through your options and see if changing your mortgage rate or term aligns with your overall financial plan and goals. 

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s blogs.

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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. 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 Defenthaler 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. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Investments mentioned may not be suitable for all investors. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Webinar in Review: Taking Control of your Student Loans

Contributed by: Clare Lilek

If you or a loved one has student loans, then you know it’s easy to feel overwhelmed at times. According to The Institute of College Access & Success, 70% of undergraduates have student loan debt of $35,000 on average upon graduating. Moreover, these numbers and percentages increase with degree level. With increasing numbers of Americans with student loan debt and the fact that managing multiple loans of various types and interest rates can cause confusion, Melissa Parkins, CFP®, and Kali Hassinger, CFP®, hosted a webinar on the subject in order to provide some clarity.

First, it’s important to determine whether you have federal or private loans; there are various sub-categories of loan types for federal loans. The majority of loans you will come in contact with are federal loans and they tend to have fixed-interest rates and the possibility of flexible repayment plans. Private loans tend to have less flexible repayment plans and interest rates are determined by credit scores.

Federal loans tend to be considered the preferred type of loan. They offer flexible repayment plans, varied interest rates, loan consolidation options, and the possibility of loan forgiveness (note on loan forgiveness: if you still owe money at the end of your federal loan period, the government will forgive that loan but the remainder will be taxed as income that year). Private loans, however, tend to be more straight forward since there is a standard repayment plan that is not based on your income.

One big tip Melissa and Kali offered is first getting organized with your loans. Create a list that outlines the type of loan, the lender, interest rates, and the term. (For help with creating this inventory check out Melissa’s latest blog on the subject.) They also offered a helpful flow chart for deciding whether or not you should refinance your federal loans:

Taken from Social Financial, Inc

At the end of the webinar, Melissa and Kali went over an in depth case study looking at specific examples of loans and potential refinancing options to save you money and to pay back your loans at a faster rate. Listening to this case study can provide more clarity on how creating a loan inventory may help you save money in the long run.

If you have questions regarding your own student loans, listen to the webinar and see if any of the information applies to you. As always, feel free to reach out to your financial planner or Melissa and Kali for any remaining follow up questions or to talk about your specific situation.

Clare Lilek is a Challenge Detroit Fellow / Client Service Associate at Center for Financial Planning, Inc.

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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. 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 and Clare Lilek, Melissa Parkins and Kali Hassinger not necessarily those of Raymond James. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Your Early Retirement and Your Aging Parents

Contributed by: Sandra Adams, CFP®

Last month, I wrote about how caring for aging parents can be a roadblock to planning for your retirement, particularly if you don’t have an aging plan in place for your parents. Well, let’s assume you successfully make your way to retirement. You’ve made it to the promised-land and are ready to do all of those things you’ve dreamed of doing for years…travel, spend more time with the kids and grandkids, and explore those hobbies you haven’t had time to enjoy.

And then…bam! Your parents are now older and in need of your assistance, just in time! On the one hand, it is perfect – you no longer have the stress of needing to balance work with the stress of caregiving, and you can give them your undivided time and attention. But on the other hand, this is now your time…the time you’ve waited years to enjoy…not to spend tied to someone else’s schedule and needs. For many retired couples, they are the primary caregivers for not one, but multiple sets of aging parents, which only adds to the stress (not to mention the marital tension!). Many are worried that their retirement will be spent caring for aging parents; or that by the time the caregiving is done, they will need a caregiver themselves!

So what can you do to ease the family stress and give your retirement a needed boost?

• Make sure that you and your family have planning conversations about the care for your aging parent and that you have a Family Care Agreement in place outlining everyone’s roles and responsibilities.

• Consider having professional resources that you can use, when and if needed, to give family members breaks (i.e. Home Care Agencies, Geriatric Care Managers and Professional Physicians that can serve as advocates in your absence, paid companions and drivers, etc.).

• Look into Respite Care Centers where your aging parent can stay for a short period of time and be safe and well cared for while you are away (if they are unable to stay alone).

Again, if possible, planning ahead is always critical. Knowing the available resources (and then actually using them) is an important part of the process. Caring for your loved ones yourself and being their personal advocate is something people take very seriously. But taking care of you, including taking some time off and tending to other personal relationships, is the key to a happy and healthy life. So, I strongly advocate for families sharing responsibilities and/or taking advantage of professional advocates like Geriatric Care Managers or Professional Physicians that serve as advocates so that they can take time off from full time caregiving. Taking advantage of such resources can allow for better quality personal lives and better quality time and caregiving with your aging parent in the long run.

If you have questions or wish to discuss this type of planning in greater detail, do not hesitate to contact me.

Sandra Adams, CFP® 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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Any opinions are those of Sandra Adams and not necessarily those of Raymond James. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Are your Medicare Premiums about to Increase?

Contributed by: Nick Defenthaler, CFP®

If you’re like most, chances are you have not heard of what’s known as the “hold harmless” provision set forth under the Social Security Act. To keep things simple, this provision is essentially in place to protect the majority of those on Medicare from seeing jumps in Part B premiums when Social Security benefits do not increase through cost-of-living adjustments (COLA). 

For the second year in a row, due to low inflation, the hold harmless provision is coming into play. This year, there was no COLA for those receiving Social Security and 2017 is projected to only see a minuscule 0.2% bump in benefits. If you’re single and have an adjusted gross income (AGI) below $85,000 or are married and have an AGI below $170,000, your Medicare Part B premiums will not increase – you are part of the group whom the hold harmless provision protects (approximately 70% of those on Medicare). For those with income higher than the thresholds mentioned above, however, (which is approximately 30% of those on Medicare), you will more than likely see yet another increase in your Medicare Part B premiums in 2017 that is currently projected to be approximately 22%.    

It’s also important to note that those who are “sheltered” under the hold harmless provision (AGI below $85,000 for single filers, AGI below $170,000 for married filers) are only those who are currently receiving Social Security benefits. For example, if you’re 66 years old, receiving Social Security benefits and enrolled in Medicare, you will not see a jump in your Part B premium. If you’re currently age 64 but plan on delaying Social Security benefits until age 70, however, there is a very high probability that when you begin Medicare at age 65, your Part B premiums will be higher than they are for current enrollees. 

As mentioned previously, the same situation occurred last year and the actual increases in Medicare Part B premiums ended up being much less than what was initially projected (here’s a link to when I covered the topic last year). In October, we will be hosting a webinar on Medicare and we’re hoping to have more clarity on any potential premium increases at that time. Keep your eyes open for more information surrounding this topic and our October webinar! As always, if you have questions before then, please contact us.

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s blogs.

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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. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Nick Defenthaler and not necessarily those of Raymond James. These hypothetical examples are for illustration purposes only. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

All about AMT: What it is and how it Might Apply to you

Contributed by: Matt Trujillo, CFP®

AMT.  It is one of those IRS acronyms that have a very bad reputation. Most people definitely seem to want to avoid it at all costs – but should they? Let’s find out what is really behind AMT—what it is, if it applies to you, and if it is really as bad as people think it is (or if there are some planning opportunities that might not be so bad).

What is AMT?

It’s a parallel tax code that is calculated alongside the “normal” marginal federal tax code to make sure tax payers are paying their “fair share.”

How does it work?

AMT excludes a lot of deductions that are common to a lot of Americans such as the mortgage interest deduction and state/local tax deduction. Essentially, you are given a flat exemption figure and once you exceed that exemption figure each dollar becomes taxable. For joint filers the AMT exemption is $83,800, each dollar after this is taxed at 26%.

Who does it apply to?

It can apply to anyone who files a federal tax return, but we typically find clients between $159,000 & $494,000 of taxable income most often subject to AMT.

What can you do about it?

If you find yourself in AMT you should really sit down and look at current vs. future income projections. If your income is projected to continue to increase, then AMT could actually present a planning opportunity.  If you think about it logically the alternative minimum tax is 26% and many of our clients find themselves in the 33%-39.6% marginal rates at some point in their working careers. So a 26% tax rate, when you expect to pay much higher, could potentially be a good deal.

In order to take advantage of the AMT rate you will actually need to reduce deductions and accelerate income. Having your financial planner coordinate with your CPA is a critical aspect to do this well in order to find a balance in how much to reduce deductions and how much additional income to accelerate.

Here are some ways to accelerate income:

• Receivables: If you're self-employed, bear in mind that your income isn't taxable until you receive it, if you're using the cash method of accounting. Therefore, you should collect accounts receivable in the current year.
• Year-end bonus: If you're employed and are eligible for a year-end bonus, make sure you receive it before the New Year arrives.
• Restricted stock: If your employer compensates you with restricted stock, it usually isn't taxable until there is no possibility that you'll have to forfeit the stock. However, you may file a statement with the IRS within 30 days of receiving the stock, allowing you to treat the stock as vested so that you can include the value of the stock in your income now.
• ROTH Conversions: Moving some money out your traditional IRA into a ROTH IRA can be a great way to accelerate income and convert some money at a 26% tax rate and withdraw it when you are potentially in a higher tax rate down the road.
• IRA or retirement plan distributions: You may be able to increase your income in the current year by taking any planned distributions from your traditional IRA or retirement plan this year instead of next year. (If you aren't yet 59½, however, you may be assessed at a 10% premature distribution tax unless you meet an exception.)
• Installment notes: If you sold property and are receiving installment payments for it, you may cause the remaining installment payments to be included in income during the current year in one of three ways: (1) have the debtor pay off the note this year, (2) use the installment note as collateral for a loan, or (3) sell the note to a third party.
• Dividends: If possible, arrange to receive dividends before the year's end. 
• Lawsuits, insurance claims, etc.: If you're embroiled in a dispute that could result in the receipt of taxable income, you can accelerate the income by settling the dispute before next year. 
• Capital gains: If you have assets that would result in a capital gain if sold, consider selling them this year in order to accelerate income.
• EE bonds: If you have U.S. government Series EE savings bonds (may also be called Patriot bonds) and you've elected to defer taxes until the bonds are redeemed, cash them in this year.

Here are several ways to postpone deductions:

• Bunching deductions in the following year: Try to time your expenses to create deductions in the following year. For instance:
  • Schedule nonemergency visits to your dentist and doctor for the following year
  • Avoid prepaying property taxes and interest that is due the following year
  • Postpone charitable gifts until next year
  • Hold off on paying miscellaneous expenses (e.g., professional dues) until next year
• Minimizing depreciation deductions: Minimize your depreciation deductions by electing a straight-line depreciation method and forgoing the Section 179 expense election.

AMT can be very tricky to understand and navigate effectively. Be sure to work with a team of qualified professionals, including your financial planner, if you plan on delving into this complex area of financial planning. Like always, if you have questions regarding AMT and your options, give us a call!

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

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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 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 Matthew Trujillo and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Dividends are not guaranteed and must be authorized by the company's board of directors. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Second Quarter Investment Commentary

Contributed by: Angela Palacios, CFP®

Ever heard of the Chinese curse?  “May you live in interesting times.”   We certainly have the interesting part covered this year! 

Voters are showing that around the world they are fed up with the status quo. Donald Trump became the presumptive nominee as the republican candidate for President of the United States while David Cameron, Prime Minister of the United Kingdom, announced he will be stepping down after the UK voted to leave the European Union. 

Unfortunately, “interesting” usually translates to volatility in the markets and this quarter has been no exception. With the S&P 500 up 2.46% for the quarter and 3.84% as of June 30th for the year, the ride has not been as smooth as it may appear on the surface especially during the last trading week of the second quarter.

Brexit

An affirmative vote for the UK to leave the EU, or Brexit, caused a couple of days of uncomfortable downside volatility, but it did not last long. The media has a hay day with these “interesting” events and we find ourselves having to sift through the hype to dig into what an event really has to do with our portfolios. 

Let’s put some perspective around this. The United Kingdom only represents about 4% of the world’s GDP compared to the U.S. contributing 22% according to the World Bank’s Gross Domestic Product figures for 2015. In fact, the separation could take two years, after they invoke an agreement called article 50, to iron out the details and in the end may not even harm the world’s economy.  Article 50 must be invoked by the Prime Minister and likely won’t be done until later this year after David Cameron is replaced. 

The point here is that all is yet unknown and Brexit will certainly continue to cause headlines on occasion over the coming years as well as short term potential volatility. 

Overall, this should not impact long term returns in a significant way for most asset classes outside of the UK, and therefore we aren’t recommending a change to a diversified long-term investment strategy.   Our international holdings remain spread around the world and there are no outsized positions within the UK. These periods of short term volatility may be viewed as buying opportunities for our international portfolio managers.

Interest Rates

The Federal Reserve voted to stay their hand at the June meeting and did not raise interest rates again but left an opening to possibly raise rates at the July meeting. Economic data has come in at its continued slow growth trajectory while inflation has been benign causing the lack of interest rate increases by the Fed. The Fed was also concerned about the Brexit vote occurring one week after their meeting and this may have caused them to hold off as well. 

Bond markets remind us once again why it is important to hold them within a diversified portfolio. As volatility picks up they rarely fail to cushion our overall portfolio returns and this quarter has been no exception with the Barclays Aggregate Bond Index up 2.21%.

Your Plan and Portfolio

While interesting times may lead to volatility you can bet that some portions of your portfolio may outperform others in any year.  At the Center, we monitor the allocation of your portfolio on a regular basis.  When volatility presents an opportunity to rebalance we will act on your behalf or notify you if a change is needed.  Adding money to your portfolio, managing positions, and tax loss harvesting are some of the strategies that we can take advantage of during periods of volatility. We also anticipate future cash needs so funds are available regardless of market returns.

Here is some additional information we want to share with you this quarter:

Checkout Investment Pulse, by Angela Palacios, CFP®, summarizing some of the research done over the past quarter by our Investment Department.

Investors often avoid that which they don’t understand despite the diversification or return benefits an asset class may provide. Check out Investor Ph.D .

This month Nick Boguth, Investment Research Associate, delves into the equities with a primer on investing in common and preferred stocks.

Jaclyn Jackson, Investment Research Associate, discusses some important developments for the Real Estate Investment Trust asset class.

We strive to keep you informed! You may tune in to our webinars for market updates (there is one coming up soon, Summer Market Update: Staying cool while markets are turbulent. Click here for information and to register). These are meant to supplement your conversations with us so don’t hesitate to reach out any time you have questions or concerns. Thank you for placing your trust in us!

Sincerely,
Angela Palacios CFP®
Director of Investments

Angela Palacios, CFP® 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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Please note that all indices are unmanaged and investors cannot invest directly in an index. An investor who purchases an investment product which attempts to mimic the performance of an index will incur expenses that would reduce returns. Standard & Poor’s 500 (S&P 500): Measures changes in stock market conditions based on the average performance of 500 widely held common stocks. Represents approximately 68% of the investable U.S. equity market. US Bonds represented by Barclay’s US Aggregate Bond Index a market-weighted index of US bonds. The foregoing information 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 Angela Palacios and not necessarily those of Raymond James.

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. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Please note that international investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility.

REITs Get Prime Location in Major Market Indices

Contributed by: Jaclyn Jackson

Any real estate broker would tell you, “location, location, location” is a key factor to consider when purchasing property. It comes as no surprise that on August 31st, 2016, Real Estate Investment Trusts (REITs - for more information on REITs check out the most recent Investor Ph.D.) will break away from Financials to claim prime residence as an individual sector in the Standard & Poor’s 500 and the MSCI market indexes. The new sector signifies the increasing importance of real estate as an asset class in global equity markets and is expected to strengthen the appeal of real estate investment trusts among a wider pool of investors.

With all the volatility markets have experienced this year (check out our First Quarter’s Investment Commentary for reference), investors may be curious about the implications of this change. The good news is that the REIT sector will likely produce positive changes that create better investment choices for investors, decrease volatility in the sector, and help investors build up portfolio diversification.

• More Options: Greater real estate investment visibility could spur the creation of new investment products; more REITs could go public; and non-real estate companies will have the opportunity to monetize their real estate holdings by spinning them into investment trusts. As a result, investors will have a greater variety of real estate investment options and can be more selective in choosing the best-fit investment product for their portfolio. 

• Greater Stability: Increased investment options and new investors might create positive equity flows for real estate equities which would ultimately increase sector liquidity. In other words, investors wouldn’t be stuck with their real estate investments and would be able to more easily sell and purchases real estate positions. Not to mention, a broadened investor base could also help curve the severity of real estate market cycles which would help the economy overall. Lastly, the separation from the Financials sector may help equity REIT stocks experience lower volatility.

• Increased Diversity: Typically, REITs have lower correlation to the performance of the broader market.  Therefore, greater access to REITs would allow investors to create more portfolio diversification. Investment diversification supports portfolio resilience and can help facilitate more consistent returns for long term investors. 

As stated by NAREIT Chair President and Highwoods Properties, Inc. CEO, Ed Fritsch, “REITs build, own, and operate the places where people live, work and play. These include state of the art industrial facilities, class A office buildings and welcoming homes, to name a few.” Let’s face it; real estate is ubiquitous to modern living and a growing part of major economies throughout the world. The individual REIT sector has the potential to create more diverse investment choices and develop new opportunities for investors.

Jaclyn Jackson 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 foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Jaclyn Jackson and are not necessarily those of Raymond James. Be advised that investments in real estate and in REITs have various risks, including possible lack of liquidity and devaluation based on adverse economic and regulatory changes. Additionally, investments in REIT's will fluctuate with the value of the underlying properties, and the price at redemption may be more or less than the original price paid. Diversification does not ensure a profit or guarantee against loss. Investing involves risk, investor may incur a profit or loss regardless of the strategies employed. Raymond James is not affiliated with Ed Fritsch or Highwoods Properties, Inc.

Investor Ph.D. Series: ADRs, and REITs …Oh My!

Contributed by: Angela Palacios, CFP®

Dorothy risked everything and traveled into the unknown when going into the haunted forest on her quest to return to Kansas.  At the Center, we prefer to walk in with our eyes wide open. Our Investment Department and Investment Committee conducts thorough research before recommending securities for your portfolio. Investors and advisors tend to stick with what they know when building their portfolios. In doing so, they can overlook opportunities to potentially increase returns or add diversification.  In other cases, investors may jump into less familiar asset classes at the wrong time.

In this installment of Investor Ph.D. we want to take you beyond just investing in domestic equity and preferred securities explained by Nick Boguth. Following are some assets we have considered that may not be at the forefront of your mind.

REITs

REITs or Real Estate Investment Trusts can offer the benefits of diversification, income stream and capital appreciation to an equity portfolio. A REIT is a company that owns income producing real estate. REITs can trade similarly to a stock traded on a stock exchange and be highly liquid or they can be private, non-liquid investments. They pay out all or most of the income they receive from their properties as dividends to investors and, in turn, investors pay the taxes on those dividends. Typical REITs can own commercial or private real estate including apartments, shopping malls, hospitals, hotels, nursing homes, industrial facilities, infrastructure, offices, student housing, storage centers, and timberlands.

A REOC or Real Estate Operating Company is similar to a REIT. The distinction that separates them is a REOC will take the earnings and income streams from their investments and reinvest into the business rather than paying it out to the shareholders. An investor would not expect an income stream from this type of investment, only capital appreciation.

ADRs

ADRs, or American Depository Receipts, are shares of a foreign company that trade on an American stock exchange. ADRs make investing in foreign securities much easier than having to factor in currency exchanges, costs, and logistics of trading on a foreign stock exchange. A bank purchases a block of shares from the foreign company, bundles them, and reissues on a domestic exchange denominated in U.S. dollars. The U.S. investor avoids foreign taxation while the foreign company enjoys increased access and availability to the wealthy North American markets. Once the ADR is listed on the U.S. stock exchange its price is driven by supply and demand. This can result in pricing of the security here to not follow exactly the pricing of the security in its home market. When this happens there is an arbitrage opportunity if the price is too high or too low when you translate its value back into the value in the home country’s currency and exchange. ADRs offer diversification and capital appreciation for investors by adding an international component to portfolios.

We have owned these types of investments for our clients through some of our money managers. We tread carefully into these spaces as many investors have been reaching for yield causing these investments to appear richly valued compared to their historical valuations.

Utilizing these types of securities doesn’t have to be as scary as it was for Dorothy to travel into the haunted forest. Arm yourself with knowledge and a good Financial Planner to help make the best decisions for your financial plan!

Angela Palacios, CFP® 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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The information contained in this post or 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 Andrea Palacios 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. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitable for all investors. Investing involves risk and you may incur a profit or loss regardless of strategy selected. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility.

Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.