Advice for Savvy Retirement Planning

The British Are Leaving!

Brexit!

Markets around the world on Friday are reeling from the historic vote that will launch the U.K. back into independence from the European Union, and saw British PM David Cameron resign his position. In a tightly contested vote, having originally been projected as a “Stay” outcome, currencies and stock markets across Europe and all over the world are opening sharply down this morning. The vote was followed by the single worst crash of the British Pound against the U.S. Dollar in history.

BrexitIn pre-market trading, U.S. stock market futures were down across the board over 3%, with 10-year Treasury yields down nearly 8%. European markets are all across the board, with the German DAX Index down over 8%.

Not unlike many short-term market setbacks, what is driving the currency and market drops worldwide is the intense level of uncertainty surrounding the British exit. Separation from the European Union would take years to accomplish, and could face many hurdles along the way. It is quite possible that British leaders could renegotiate terms of the deal, and even present a new vote, which could cause citizens to switch their vote.

The short to mid-term implications for the markets are increased volatility, on a significant scale. However, there is no indication that this is any reason to panic or begin selling positions in response to the vote. While there may be tremendous uncertainty and volatility in the short-term, this is unlikely to have long-lasting implications for the global economy.

This morning we are looking closely at cash positions in portfolios, eyeing opportunities to enter quality stock positions at very good prices. In addition, this is a great opportunity for adjusting stock/bond allocations, as the substantial drop in Treasury yields will precipitate a rise in bond prices. This could potentially set up a situation allowing us to sell bonds at high prices, and enter quality stock positions at distressed prices. Much will depend on how markets behave throughout the day.

We will keep you updated as the Euro situation unfolds.

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About Robert Henderson and Lansdowne Wealth Management

Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with a special focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog, The Retirement Workshop at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.

If you are an employee or retiree of General Dynamics, Pfizer, or L&M Hospital, and you would like advice and direction on managing your Fidelity 401K or Hewitt 401K plan, please sign up for our monthly newsletter, which provides complimentary ongoing advice, commentary, and model portfolios for each of those plans. You can sign up automatically at Your 401K http://www.lwmwealth.com/services/your401k.html.

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An Important Market Update – Is the Sky Falling?

The Sky is Falling

Well, not quite. In the past week, we have seen the S&P 500 (the broad U.S. stock market, generally speaking) drop roughly 7%. This represents nearly the entire drop in the S&P on the year. Prior to this past week, the market was more or less flat year-to-date, oscillating up and down after a strong start to the year. Foreign markets are faring no better, and in many cases dropping precipitously. Such is the case with China’s Shanghai Index, down more than 40% from its peak in June. On an intra-day basis (prior to intra-day recoveries), the S&P actually dropped into correction territory (down 10% from peak).

What’s Causing the Corrections?

Unlike major corrections, the current drop is being fueled by a number of factors. But the primary drivers seem to be weakness in the Chinese economy, concerns about the Fed raising interest rates, and the current weakness in oil prices. But the reality is that, despite all the speculation, nobody really knows why the market moved the way it did the past several days. Realistically, it was nothing more than pent up market emotions coming to a head.

Moments like this demonstrate the importance of a well-diversified portfolio. Over-reliance on any particular asset class, sector, or “theme” can wreak havoc on a portfolio. At the same time, significant selloffs create an opportunity for investment managers to buy quality investments at a discount, or at least at a reasonable price.

What’s The Outlook?

While the continued global economic recovery has been slow and gradual, it has also been consistent (and persistent). From the perspective of most economists, virtually nothing has changed about the overall economy to prompt any type of bear market scenario. Employment continues to improve (albeit slowly), consumers are continuing to spend, and debt levels are not considered a problem.

Fortunately, unlike recent bear markets, there is no major impetus for concern. Oil prices could certainly be a problem, but the upside of low oil prices is more cash in consumers’ pockets to spend. We’ve been talking about Fed rate adjustments for years, so most of that concern should be emotionally priced into the market. Of course it all falls back to China. A major downshift in economic activity in China could have wide implications. But despite that, the US economy still looks robust.

The bottom line is that there is no tech bubble bursting like we saw 15 years ago, and no subprime mortgage crisis to contend with. What we have is a fear about prices. Investors are concerned about being caught with over-priced assets in an over-priced market. But other than during market bubbles, high stock market prices are generally not a cause of major stock market declines. What we CAN expect is continued volatility, well into the fall.

What it Means for Portfolios

Not a lot. It’s important not to make knee-jerk reactions to what are periodic and normal market drops. The markets has gone up relatively uninterrupted the past seven years, with a handful of material drops along the way, most notably in April 2010, August 2011, May & October 2012, and September 2014. So this drop seems right on schedule. While it may prove to be nothing more than a routine pullback, it could certainly evolve into something a bit more sinister. History would not suggest that, but it’s not beyond possibility.

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Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with a special focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog,The Retirement Workshop at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.

If you are an employee or retiree of General Dynamics, Pfizer, or L&M Hospital, and you would like advice and direction on managing your Fidelity 401K plan, please sign up for our monthly newsletter, which provides complimentary ongoing advice, commentary, and model portfolios for each of those plans. You can sign up automatically at Your 401K http://www.lwmwealth.com/services/your401k.html.

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IRA Contribution Limits 2017

IRA Contribution LimitsIRA Contribution Limits

Each year the IRS publishes updated IRA contribution limits, as well as catch-up contribution limits for the new year. Typically, the limits the IRS sets each year is based on inflation factors (with minimum $500 increases), so they do not necessarily increase the limit each year.

The IRA Contribution Limit for 2017 has been established with NO increase over 2016.

The limit on IRA contributions applies to both deductible and non-deductible Traditional IRA’s, as well as Roth IRA’s. You may contribute to either type (if you qualify), but you are still subject to the same total aggregate contribution limit.

Income Limits Adjusted Up $1,000-2,000

IRA contributions are only allowed if your Modified Adjust Gross Income is below a certain level . For single filers in 2016, that income threshold starts at $118,000 (up from $117,000) and ends at $133,000 (up from $132,000). In that range, your contribution is limited, eventually reaching zero. For married filers in 2016, that income threshold starts at $186,000 (up from $184,000) and ends at $196,000 (up from $194,000).

2017 2016
Roth IRA Contribution Limit $5,500 $5,500
Roth IRA Contribution Limit if 50 or over $6,500 $6,500
Traditional IRA Contribution Limit $5,500 $5,500
Traditional IRA Contribution Limit if 50 or over $6,500 $6,500
Roth IRA Income Limits (for single filers) Phase-out starts at $118,000; ineligible at $133,000 Phase-out starts at $117,000; ineligible at $132,000
Roth IRA Income Limits (for married filers) Phase-out starts at $186,000; ineligible at $196,000 Phase-out starts at $184,000; ineligible at $194,000


READ:
2016 Social Security Inflation Adjustment
401K Contribution Limits 2017
Don’t Buy-and-Forget the Investments in Your 401K Plan

Recent History of IRA Contribution Limits:

As you can see, the IRA contribution limits do not rise dramatically each year. Although over time, if investors are diligent about increasing their contributions, it can certainly make a difference.

  • 2017 – $6,000
  • 2016 – $6,000
  • 2015 – $6,000
  • 2014 – $5,500
  • 2013 – $5,500
  • 2012 – $5,000
  • 2011 – $5,000
  • 2010 – $5,000
  • 2009 – $5,000
  • 2008 – $5,000

Over Age-50 Catch Up IRA Contribution Limits

For those of you that are over age 50 (or turn age 50 before the end of the year), you are allowed an additional IRA “catch-up” contribution. These limits have not adjusted for inflation, but may at some point in the future:

  • 2017 – $1,000
  • 2016 – $1,000
  • 2015 – $1,000
  • 2014 – $1,000
  • 2013 – $1,000
  • 2012 – $1,000
  • 2011 – $1,000
  • 2010 – $1,000
  • 2009 – $1,000
  • 2008 – $1,000

IRA Deduction Limits

Roth IRA contributions are not tax deductible.

Your deduction is allowed in full if you (and your spouse, if you are married) aren’t covered by a retirement plan at work.

If you ARE covered by a retirement plan at work, you can see the income limitations at the IRS website by going here.

IRA Income Limitations for Deductible Contributions:

If you ARE covered by a company sponsored retirement plan:

If Your Filing Status Is… And Your Modified AGI Is… Then You Can Take…
single or
head of household
$61,000 or less a full deduction up to the amount of your contribution limit.
more than $61,000 but less than $71,000 a partial deduction.
$71,000 or more no deduction.
married filing jointly orqualifying widow(er) $98,000 or less a full deduction up to the amount of your contribution limit.
 more than $98,000 but less than $118,000  a partial deduction.
 $118,000 or more  no deduction.
married filing separately  less than $10,000  a partial deduction.
 $10,000 or more  no deduction.
If you file separately and did not live with your spouse at any time during the year, your IRA deduction is determined under the “Single” filing status.

If you are NOT covered by a company sponsored retirement plan:

If Your Filing Status Is… And Your Modified AGI Is… Then You Can Take…
singlehead of householdor qualifying widow(er) any amount a full deduction up to the amount of yourcontribution limit.
married filing jointly or separately with a spouse who is not covered by a plan at work  any amount a full deduction up to the amount of yourcontribution limit.
married filing jointly with a spouse who iscovered by a plan at work $183,000 or less a full deduction up to the amount of yourcontribution limit.
more than $183,000 but less than $193,000 a partial deduction.
$193,000 or more no deduction.
married filing separately with a spouse who is covered by a plan at work  less than $10,000  a partial deduction.
 $10,000 or more  no deduction.
If you file separately and did not live with your spouse at any time during the year, your IRA deduction is determined under the “Single” filing status.

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Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with a special focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog,The Retirement Workshop at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.

If you are an employee or retiree of General Dynamics, Pfizer, or L&M Hospital, and you would like advice and direction on managing your Fidelity 401K or Hewitt 401K plan, please sign up for our monthly newsletter, which provides complimentary ongoing advice, commentary, and model portfolios for each of those plans. You can sign up automatically at Your 401K http://www.lwmwealth.com/services/your401k.html.

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Don’t Buy-and-Forget the Investments in your 401K Plan

401K InvestmentsThe buy-and-hold investment strategy for company sponsored retirement plans, such as a 401K plan, has become a relic of the past. Let me re-phrase that: Buy-and-forget investing is a relic of the past.

Read: 401K Contribution Limits

Buy-and-Forget is not an Investment Strategy
I often have prospective clients come to me with a stack of statements…brokerage accounts, 401K accounts, IRA’s, CD’s, and other odds and ends. Invariably, one or several of the accounts have been completely ignored over the years. In some cases, the investment allocations in their company 401K plan account is still invested with the same exact options they chose when they first opened their accounts.

Just recently, I helped a new client re-allocate his 401K funds that had not made a change in over 15 years. It was entirely invested in high-growth (or high-risk, rather) funds that performed superbly – until the year 2000. He had managed to eke out a total return (not annual return) of about 31% – over the course of 15 years. That works out to less than 2% per year (compounded). The technology bubble and growing euphoria for the stock market drove much of the investment gains in the 90’s, a situation which reversed abruptly in 2000, and is not likely to repeat itself anytime soon.

We are currently in an economic environment vastly different from years past. Interest rates are at an all-time low, unemployment still remains remarkably high, and the federal debt is unsustainably high and growing rapidly. The point is, what may have done well 5 or 10 or 15 years ago, is most likely NOT working well today.

READ:
401K Contribution Limits
IRA Contribution Limits

What to do
If you are the type of person that has neither the time nor inclination to regularly review your investments, you need to begin reviewing your 401K portfolios at least once per year. I usually recommend doing this at tax time, since you can get all your painful financial exercises out of the way at once.

The place to start is with your 401K plan provider. If you work for a large company, chances are they may have some great online tools to use to help guide you to an appropriate allocation. But buyer beware; some 401K product providers (brokerage firms, mutual fund companies, and insurance companies) will attempt to steer you towards the products THEY want to sell you. In some cases, these may not be in your best interest, even if they might be considered “suitable” for you. So make sure you are comfortable with the recommendations provided by online tools.

If you do not have the resources of a 401K provider, or are not comfortable taking advice from an online calculator, you can consider seeking out a fee-only financial planner to assist you in creating a simple allocation for your 401K plan.

Robert Henderson is the President of Lansdowne Wealth Management, an independent, fee-only advisory firm in Mystic, CT. His firm specializes in financial planning and investment management for retirement, with an added focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog, The Retirement Workshop at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.

If you are an employee or retiree of General Dynamics, Pfizer, or L&M Hospital, and you would like advice and direction on managing your Fidelity 401K or Hewitt 401K plan, please sign up for our monthly newsletter, which provides complimentary ongoing advice, commentary, and model portfolios for each of those plans. You can sign up automatically at http://www.lwmwealth.com/services/your401k.html.

The Fiscal Cliff…And Other Dangers

Fiscal Cliff* Update – Since we posted this article, Congress has come to a resolution on the Fiscal Cliff debate. To learn about how it will impact you financially, see our latest post here – The Fiscal Cliff Resolved *

Some people have recently accused me of being a “Perma-Bear”. For those that are not familiar with that term, it generally refers to someone that is perennially negative about the prospects for the stock market (or consistently “bearish”). As it has been used to describe me, this could not be further from the truth. I consider myself more of a “realist”.

Over the past several months, my commentaries have provided backdrop for my prognostications. But don’t be fooled into thinking I am either alone in my beliefs, or that my bearish stance has been formulated on my own. There is a strong body of evidence, and a litany of respected industry leaders who are in agreement that trouble is on the horizon.

First Things First
Let’s first get some things out of the way. The stock market can be a complicated beast. I liken it to a young child with behavioral problems. You know what is expected from the child, and you typically know how they will react to typical stressors like hunger, fatigue, and boredom.  But you also never know at any given time if you are going to witness a little whimper, or a major meltdown. The same can be seen with the stock market.

You know intuitively that in the face of economic pressures, that the stock market should show signs of cracking. But unlike that fragile child, the stock market has the uncanny ability to hang on in the face of economic challenges well beyond what would typically be expected. Likewise, the market will also tend to overshoot expectations to the upside as well. Witness the late 90’s, when it seemed to clear to everyone that there was absolutely no reason for the stock market to be trading at such lofty prices. Yet it continued to march forward, presumably because nobody wanted to jump off that gravy train and sell out. But when the masses came to their senses, the aftermath was extreme.

The point is, despite that fact that the economy is at one of the most fragile points we have seen since WWII, the stock market continues to forge ahead. The only explanation we can muster is that there is so much hope (and prayer) that the Fed will pull (another) rabbit out of its hat, that investors are simply hanging on to the bitter end with their eyes closed. It sort of reminds me of the song lyrics made famous in the 60’s by Dusty Springfield…”Wishin’ and hopin’ and thinkin’ and prayin’”. And we will continue to forge ahead until all hopes have been dashed and the Fed runs out of options. Now, time is the biggest question.

Facing the Headwinds
Where exactly does one start when looking at the headwinds facing the current economic “recovery”? For the moment, I am going to forego discussion of Europe and focus strictly on the U.S. pressures. The world is a complex place, and it is no longer simple enough to look at world economies within a vacuum. But to keep this commentary to a manageable level, let’s just focus on domestic issues for now.

Unemployment
Last week’s employment announcement of 163,000 new jobs in July was certainly a positive surprise, as the trend had been significantly less in the preceding several months. But what was less talked about was the fact that unemployment actually ticked back up to 8.3%. Essentially, even with a positive “surprise” in job growth, the economy is still not creating enough new jobs to keep pace with population growth. Even worse, if we did not have so many people leaving the “active workforce” through layoffs, forced retirement, and lack of work, the stated unemployment rate would be even higher. At the current rate, it would take more than 10 years to get back to any sort of “typical” unemployment rate. It is estimated that we need to see job growth of around 200,000+ per month, every month, to make a dent in the unemployment rate, a figure that seems well out of reach at this point.
Unemployment August 2012

Maybe the most alarming statistic is the average duration of unemployment benefits of those currently receiving benefits. The previous all-time high (post-WWII) average duration for benefits was 21 weeks, back in 1983, with the average duration since 1950 hovering around 14 weeks. The current duration is…38.8 weeks. And this is DOWN from 41 weeks just last year! The implication is that we have more people on unemployment than almost any other time in history, receiving benefits for nearly twice as long as ever before.

 

GDP
A few weeks ago, Q2 GDP (essentially the value of all final revenues in the U.S.) estimated numbers were release. The estimate was for growth of just 1.5% (annualized). This comes on the heels of 2.0% growth in Q1. Clearly, the recovery that we had been experiencing since 2009 has fizzled out. For most people that don’t follow GDP numbers, we’ll put some perspective to it. Since 1945, annual GDP growth has averaged around 3.2%. The trailing 10-year average GDP growth is 1.7% (2003-today), and we currently stand at 1.5% growth.
GDP July 2012

What this suggests is that there is little impetus for an improvement in the aforementioned unemployment rate, since both improvements in unemployment and GDP have slowed considerably at the same time.

The National Debt, The Fiscal Cliff, and Interest Rates
There is a lot of media fixation these days on the so-called “Fiscal Cliff”, a series of Bush-era tax cuts set to expire at year-end, while the government is simultaneously preparing for spending cuts agreed to in last year’s debt-ceiling agreement. Though it goes without saying that these moves could have serious and widespread implications for the economy, there is a much larger problem concerning our national debt that is creating its own “cliff”, so to speak.

Unfortunately, unlike the Fiscal Cliff, the debt “cliff” has no date attached to it, which presumably, is why there is less discussion surrounding the seriousness of its potential impact. As I write this, the government debt hovers around $16 trillion. Servicing this debt has been (relatively speaking) manageable because the current rate of interest being paid on that debt is below 2.0%. This is more debt, and a lower interest rate than we have ever seen in our history.

Doing the math, debt service amounts to roughly $300 billion per year. Keeping in mind that we are in the lowest interest rate environment in history, and that rates will likely move up in the coming years, you can see the problem that this creates. If interest rates were to tick up just 1%, this would increase debt service requirements 50%, from $300B to $450B per year. And if in the likely event that interest rates return to the historical norm of roughly 5%, we would be looking at federal debt service of over $800B. And this is assuming the national debt doesn’t grow by a single dollar. If the debt continues to grow as projected by the CBO (Congressional Budget Office), in the matter of just a few years, we could be looking at debt service of over $1trillion. This is NOT unthinkable.

Wrapping it Up
Maybe I am a bit more bearish than some on the economy. But it is certainly not without merit. With stagnating growth in revenues and employment, and the government continuing to borrow without regard to the repercussions, it seems that we are winding down a steep, narrow path with thorns encroaching on all sides.

I should add, as I opened this article with, that the stock market can be resilient. It can grow in the face of uncertainty, and collapse at the drop of a hat. But the risks are clear and wide. This is not a time to have blinders on.

Implications for Your Portfolios
Our core portfolios have been very conservatively balanced for the past 3 months. Despite the recent run in the stock market, I still firmly believe that protection of assets and management of risk is paramount at this time. With the speed at which the stock market can unwind, maintaining a cautious stance is the most responsible thing to do. Though it can be uncomfortable at times to watch stock market runs when you are not fully participating, the pain can be even worse when the inevitable drops occur. We continue to maintain a 10-15% allocation to equities and are watching things closely.

If you are an employee or retiree of General Dynamics, Pfizer, or L&M Hospital, and you would like advice and direction on managing your Fidelity 401K or Hewitt 401K plan, please sign up for our monthly newsletter, which provides complimentary ongoing advice, commentary, and model portfolios for each of those plans. You can sign up automatically at http://www.lwmwealth.com/services/your401k.html.

Robert C. Henderson is the President of Lansdowne Wealth Management in Mystic, CT. His firm specializes in financial planning and investment management for individuals approaching retirement or already in retirement, with an added focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.

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Have We Separated From Reality?

Stock Market Reality CheckThe month of June was a good one. The S&P 500 was up over 6% for the month, but essentially just took back most of what it lost in the month of May (May was down over 8%). What we are seeing is the constant daily battle between bad news (unemployment, political battles, Fed actions, low GDP numbers, historically low interest rates, European meltdown, etc.) and good news (unemployment, political battles, Fed actions, historically low interest rates, European resolution?, etc.). Do you see the point I am making? Sometimes the same issues fall on both sides of the fence – often on the same day, and it creates this untethered whipsaw in the markets (known as volatility). Not a day goes by when we don’t read competing opinions (disguised as “expert” guidance from financial journalists with no real experience in finance) on the state of the market and its future.

The fact is, on a historical basis, we are still thickly settled amongst some of the most negative conditions the market has experienced in the past 100 years. This is not to say that recession and/or a significant market fall is inevitable. However, I DO feel that this is the likely outcome.  As we have talked about in the past, the economy can only overcome so many obstacles before it succumbs to overwhelming pressure. In the current case, I believe we are closing in on that point. Last week we witnessed the Federal Reserve announce further activities related to Operation Twist (selling short term notes and buying-up long ones) in an attempt to further manipulate the yield curve (lowering long-term rates for things like mortgages). During their announcement, they hinted (strongly) that they still had the ability to take one more shot at quantitative easing (QE3), whereby they would re-establish a policy of buying assets from banks and injecting further liquidity into the economy. The problem with this whole concept is that this is essentially the last shot they have at actually turning things around. They are, essentially, out of any other options should this fail to provide adequate stimulation to the economy. It is the equivalent of storming the beach with your last rounds of ammo, hoping to take down the enemy.

What we saw with previous rounds of quantitative easing (QE1 and QE2), was successively less-effective results. And now that we are at the point of a zero-interest rate policy, and long-term rates the lowest they have been at any point in history, other than the few years following the end of WWII, rates have very little room to move any lower (thus the diminishing returns from successive rounds of easing).

Now the Reality Part

The market recovered nicely beginning in 2009, through early 2012, with a few significant stalls along the way (notably, the summers of 2010 and 2011). Much of this was driven by restored confidence, a slow but steady drop in unemployment, and economic activity (GDP) that was showing signs of life. However, those three metrics, typical measurements of economic health, have all turned considerably worse in recent months. Unemployment appears to have stalled around the low 8% range (8.2% at last count), GDP continues to be revised downwards, falling to anemic 1.9% in the first quarter of 2012, and Consumer Confidence is now at a 6 month low.

Unemployment July 2012As we mentioned in our last commentary, government spending and stimulus has accounted for much of the growth and rebound over the past few years. Aside from a few pockets of investment here and there ( a warm winter helped construction in late 2011, as well as inventory buildup), government intervention has accounted for much of the growth. But again, with interest rates at near all-time lows, Fed intervention is no longer the shot in the arm that we have come to expect. It should be noted that we are now facing the only time in history when we have seen four straight quarters of sub-2% GDP growth and NOT been in a recession. This begs the question as to whether we have already entered another recession.

Impact on Portfolios

We continue to maintain very modest allocations to equities in light of current conditions (10-15%). For private client portfolios, allocations to income-producing investments make up the bulk of portfolios. This includes mortgage-backed securities (both US Government Agency as well as non-agency bonds), emerging-market bonds (for obvious reasons, we are not invested in bonds of most European nations), high-yield bonds, short-duration bonds, real estate, as well as small allocations to global equities.

For 401K model portfolios, we continue to maintain a conservative stance. Although many local 401K plans do not offer many of the alternative asset classes that we seek out to find relative value and income, it’s important that our allocations remain conservative in order to avoid potential abrupt downtrends in the market. As such, our most aggressive model portfolios for employee 401K plans remain at only 25% equities, one of the most conservative positions we have taken in several years.

Should conditions further deteriorate, we will consider further lowering our exposure to risk assets – both in our 401(K) plan model portfolios, as well as in our private client portfolios.

If you are an employee or retiree of General Dynamics, Pfizer, or L&M Hospital, and you would like advice and direction on managing your Fidelity 401K or Hewitt 401K plan, please sign up for our monthly newsletter, which provides complimentary ongoing advice, commentary, and model portfolios for each of those plans. You can sign up automatically at http://www.lwmwealth.com/services/your401k.html.

Robert C. Henderson is the President of Lansdowne Wealth Management in Mystic, CT. His firm specializes in financial planning and investment management for individuals approaching retirement or already in retirement, with an added focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog at http://lwmwealth.com/blog and the firm’s website athttp://www.lwmwealth.com.

Nine Common Mistakes Investors Make

GoldWe see some of the same mistakes repeated over and over again by ordinary investors…

Mistake No. 1:
Looking For a ‘Magic Bullet’

Many investors look for the “best” mutual fund thinking that there must be a handful of funds that can bring the desired return. In fact, each mutual fund focuses on very specific types of investments, such as large company stocks, small company stocks, government bonds, etc. In any given year, any one of these market sectors could do well or poorly. Investors may want to use a mix of different types of funds. This is called asset allocation. Many mistakenly believe that asset allocation is designed to provide greater returns. That’s simply not true. Its goal is to reduce volatility risk. Smoothing things out can make it easier for investors to ride out market turbulence, and avoid major portfolio losses.

Mistake No. 2:
Getting out After Markets Drop

Market declines are inevitable. However, despite all advice about “staying the course,” many investors sell out of their stock position during market declines, often after the decline has bottomed out. Somehow they believe that they can sit on the sidelines until the markets go back up again and then jump in. The problem is that we become aware of market declines and market surges only after they have happened – when it’s too late to do anything. Following the market decline of 2008, investors sitting on the sidelines from March through December of 2009 missed one of the largest market rallies in history. Although there are strategies and indications when markets are overheated, it’s tough for most individual investors to know when to get out and just as tough to know when to get back in.

Mistake No. 3:
Stopping Contributions When Markets are Dropping

For the long-term investor, there really is no better time to be adding money to investment accounts than when they are down in value. Although we know that past performance can’t guarantee future results, long-term investors have the potential to benefit by continuing to purchase during market declines, reaping rewards later if the values return. This works best when the investor is using mutual funds or other broad collections of securities.

Mistake No. 4:
Confusing Stock Market Value with the Economy

The economy is the sum total of all the economic activity in the country: jobs, business profits, debt, consumer spending, and lots of other factors. The stock market represents the perceived value of stocks of individual companies. Companies can make money during recessions. And great economies can lead to poor stock market returns. Profits affect the perceived value of a company, and so stocks can rise during recessions. Just because the economy is slow to recover, that doesn’t mean the stock market will be. The 1990’s were a great period for the stock market, but what we found that much of it was based on speculation and wildly over-inflated stock prices. Investors have to realize that the stock market and the economy can be two entirely different things.

Mistake No. 5:
Paying too much attention to the media

The almost constant onslaught of news about the markets and the economy can cause investors to focus on short-term data that really doesn’t have anything to do with their long-term performance. There is always some crisis somewhere that affects the markets, but in the long run, the markets will for the most part reflect business profits of companies. Just make a list of all the worries and predictions made by the talking heads over the course of a week, and then see how many of those issues are talked about six months later – or six days later. Investors need to stay focused on their long-term plan and not be scared out of the market by short-term events. Remember: media exists to sell advertising – sensationalism sells.

Mistake No. 6:
Choosing an Investment Simply by Historical Returns

Investors often select mutual funds in a retirement plan or investment account based on how they performed over the past several years. There are several reasons why this mistake keeps happening. First, that superior performance may have been due to certain stock selections that just happened to be really profitable, or a particular market condition that no longer exists. That’s now in the past, and no help for the future. Additionally, the manager who did all that great stock-picking may have left the fund for a better deal somewhere else based on their great performance. So a fund’s track record alone isn’t enough. Investors need to consider what type of stocks the fund invests in, who the managers of the fund are, what the expenses of the fund are, the style of the fund, and what the stipulations of the fund are in the prospectus.

Mistake No. 7:
Not Having a Goal

Ask any number of investors what rate of return they expect on their investments, and their answers sound something like, “Uh, I guess I want them to grow as much as possible.” This mistake creates a situation where an investor never knows if they have achieved their goal. Investors can avoid this mistake by knowing what they expect their returns to be over a certain period of time. For example, let’s say that you have decided that you need your money to double in value 12 years from now. To achieve that goal, your account would need to average 6-percent growth per year. This target helps you to decide what to invest in, how to mix up your investments, and lets you know if you are on track. If you know that you are on pace for that rate of return, market declines will be much less worrisome and the urge to “get out” will be easier to avoid.

Mistake No. 8:
Getting Your Advice From the General Trough

There are lots of people in the media handing out specific financial planning and investment advice. However, that advice is often general in nature and provided without any knowledge of a particular investor’s specific individual needs, desires, or any other unique factors. Knowing any or all of these extra pieces of information might change the recommendation that is being presented on the TV or computer screen. General advice, such as the rules for contributing to an IRA account, can be very helpful. However, specific advice as to whether you should convert an IRA to a Roth-IRA requires knowledge of your individual situation.

Mistake No. 9:
Following the Herd

When markets have been rising over several years, the urge to “get in” or to put more money into investment accounts can be strong. Conversely, when markets are declining, the urge to pull out or move to cash can be even stronger. These impulses can be made even more intense when it seems that everyone else is doing them and that you might be left out of a market rally or be stuck in a market decline. Long term-investors who want to achieve their goals may want to avoid both.

Mistake No. 10:
Comparing Your Overall Portfolio Returns to the Stock Market

Although it is customary to use the S&P 500 or Dow Jones Industrial Average as a proxy for U.S. stock market returns, it is not a good way to compare portfolio returns. Why? Because most investors should not be entirely invested in the stock market. Just as one would not wish their portfolio to drop as considerably as the stock market when there is a major correction, they should also not expect it to rise as much in times of prosperity. This is the thesis behind asset allocation.

Robert C. Henderson is the President of Lansdowne Wealth Management in Mystic, CT. His firm specializes in financial planning and investment management for individuals approaching retirement or already in retirement, with an added focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.

If you are an employee or retiree of General Dynamics, Pfizer, or L&M Hospital, and you would like advice and direction on managing your 401K plan, please sign up for our monthly newsletter, which provides complimentary ongoing advice, commentary, and model portfolios for each of those plans. You can sign up automatically at http://www.lwmwealth.com/services/your401k.html.

“I’ll Sell Once I get Back to Even”

HopeAs a financial advisor, nothing pains me more than to hear these words from investors. But more often than not, after experiencing a significant drop in value from a stock, individual investors have this misdirected belief that waiting for the price to return to what they bought it for is the most prudent decision.

This is one of the primary drivers behind why individuals often feel incapable of investing successfully. But rather than look at their own behaviors, they find it easier to blame Wall Street, the government, the banks, or the person that gave them the advice in the first place. In many cases, you may have purchased the stock of a very good company, at the very wrong time. Go back to the late 90’s and look at what some very good company stocks were trading for (Microsoft at $55, Cisco at $77, HP at $66 – compared to $25, $28, and $18 respectively today). However, there is a simpler way to make hold or sell decisions on a stock.

The natural emotion is to hold on to your stocks until the very bitter end, painfully waiting for the moment when you will no longer capture a “loss”, since you never sold the stock. But remember, there is opportunity cost in holding on to that stock, and potential tax benefits that are being foregone. Rather than using emotion in your decision process, the logical question that should be asked is “if I had this money in cash today, would buying THIS stock be the most prudent investment decision?” If the answer is “no”, then you have made your decision. Most often, there is good reason for why the stock has dropped in value. If that’s the case, it might make more sense to lock in the loss (and potential capital loss for tax purposes) and seek out a better investment. In other words, there may be a better alternative than your current holding that would get your original investment back to “even”.

Remember, what happened in the past is irrelevant. The market doesn’t care (or know) what you paid for your stock. As we approach year-end, it might be worthwhile to crack open those November brokerage statements, and see if you can generate some tax losses before year-end on stocks you have been hanging on to for too long.