Advice for Savvy Retirement Planning

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.

How Can I Get In On The Facebook IPO?

*UPDATE* With Facebook stock now set to to start trading this Friday, I thought it would be worthwhile to re-post this article.

This is the Question of the Week. I have had no fewer than ten people – clients, friends, relatives – email or call me asking how they can buy shares of FaceboFacebookok in their IPO, which the company recently announced. Well, there’s some good news and some bad news. First let’s start with the bad news and get that over-with…

For the majority of individuals, it is all but impossible to buy shares of an IPO (Initial Public Offering). When a privately held company makes the decision to sell their company to the public, they do it for a variety of reasons. The most typical reasons are to raise additional capital for expansion, to pay back debt they have accrued over the years while expanding (think of it like refinancing a mortgage), to provide the various private owners and employee owners with “liquidity” – a way to get their money out of the company, or as a way for the founders to exit the business.

So when the company “goes public”, they hire an “underwriting” firm (investment bank) to manage the deal (in the case of Facebook, they have chosen Morgan Stanley as their lead underwriter), plus some other investment banks (the “syndicate”) to assist in the distribution and selling of the shares of stock. Typically, the first investors to be “allocated” shares of the IPO are institutions (such as investment banks, brokerage firms, and Investment Advisors such as mutual funds), followed by wealthy investors that are clients of the underwriting syndicate. Seems unfair, right? Well, the problem is, offering shares of a not-yet-public stock to thousands of small investors would be expensive and inefficient, and take a lot of time. Since the shares do not yet trade on an exchange, there are very specific rules outlined by the SEC regarding the process of bringing the shares public.

But the GOOD NEWS is that once the IPO shares are allocated and sold, and begin trading on a public stock exchange (such as the NYSE or NASDAQ), then the general public is now able to buy shares at the current market price, which may be higher or lower than the IPO price. In many cases, especially high-profile technology stocks, the stock price will tend to jump immediately upon becoming public. Although we don’t yet know when the shares will begin trading, it will most likely be a few months before they are available to the public.

That’s just a brief overview of the very complex IPO process. Of course, the natural follow-up question has been “so should I buy shares of Facebook once they go public?” Unfortunately, I can’t give an opinion on that in a public forum like a blog post or article (I do give my opinion to individuals that ask me). It will be up to each of you (and the help of your advisor, if you have one) to decide that. But what I will tell you is that buying shares of an IPO stock is not unlike buying any other stock. It requires careful thought and analysis. In fact, it probably takes MORE thought than buying a typical, mature stock, because there is not a lot of public reporting data available to analyze. If one were to consider buying the stock of a company like Coca-Cola or Home Depot (mentioned only as examples), you would have years (decades even) of historical operating data to analyze and form an opinion. This is not always the case with a non-public company.

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 a focus on the particular needs of women that are divorced or widowed. 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.

Savings or investments? Which is the best way to prepare for retirement?

How hard are you working to prepare for your retirement? You’ve probably already looked at several of the options available to you when it comes to finding a resting place for your retirement funds.

MoneyMost options can be placed into one of two categories. Either the money is being held in a savings account or the money is being used to invest.

Both options are a valid way to prepare for your retirement. In fact, a combination of both methods may be the best way to go. But as you make the decision on what to do with the bulk of your money, here are some things to consider.

Opening an actual savings account keeps your retirement money safe. It sits in the account and in most cases there are absolutely no risks associated with it. It gains interest each year, albeit a small amount. So, if there are no risks, why isn’t everyone going this route?

While the money is safe and sound in the savings account it isn’t really growing. Look at the current interest rate for a savings account.

Think about the amount you already have saved for retirement. Imagine putting it in the account and using the interest rate, figure out just what you will have earned at the end of the year. The results can be dismal.

A savings account provides security and stability, but your money just isn’t going to grow and work for you. It sits stagnant and won’t be making major increases any time soon.

[quote]A savings account provides security and stability, but your money just isn’t going to grow and work for you. [/quote]

Investments are almost the exact opposite of the savings accounts. Your money is actually being used.

There are several different ways to invest and you are getting a return on the money that is being used. Depending on the amount of risk and the duration of the investment, you could see a rate of return that makes you consider retirement years earlier than expected.

If the return is so high, why isn’t everyone investing? Return rates aren’t guaranteed. When you invest money into something you are taking a risk.

There is a chance that your money might not grow at all. At the end of the year you could have the exact same amount that you started with. On the downside, you could even end the year with less money than you started with. It is a risk and each investment takes a chance.

It is possible to choose investments that are lower risk. Some people want to invest but they aren’t looking to make a major rate of return.

They just want the funds to grow in a steady manner. The savings account doesn’t offer these individuals enough of a growth, so they turn to low-risk investments.

So, what should you be doing? Meeting with a financial adviser can provide you with the detailed information that you are searching for.

However, as a general rule, it is always a good idea to have a mix of both methods. Many younger people choose to invest more of their money than they save.

As they get older and closer to retirement, they may change the way they take care of their retirement funds. They may move more money into savings accounts and put their investments into lower risk categories.

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 a focus on the particular needs of women that are divorced or widowed. 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.

Creative Commons License photo credit: Lucas Lucas