Guest Blog Article – Threats of Market Fluctations by Michael J. Garry, CFP(R), JD/MBA

Threats of Market Fluctuations?

I would like to thank Michael J Garry CFP®, JD/MBA from Yardley Wealth Management for contributing to this month’s guest blog article.

 

Michael J. Garry, CFP®, JD/MBA - Guest Blog Article Threats of Market Fluctuations
Michael J. Garry, CFP®, JD/MBA – Guest Blog Article Threats of Market Fluctuations

One of our responsibilities as an investment advisor is to understand the volatility of the markets and enable you, as the client, to understand various events as each floods the media and grabs the attention of investors.

 

A large portion of the popular press is dedicated to the effects that the election could potentially have, post-Brexit conditions, and the inevitable possibility of the Fed hiking interest rates. While digesting these reports it is necessary to keep in mind the words of John Bogle, Vanguard founder, “The stock market is a giant distraction to the business of investing.” investors must remember that while various events around the world might be extremely important, they must not serve as a distraction to the long-term goals of investing.

 

These are timeless words to invest by, as is Bogle’s deeper explanation of them:

“The expectations market is about speculation. The real market is about investing. The only logical conclusion: the stock market is a giant distraction that causes investors to focus on transitory and volatile investment expectations rather than on what is really important – the gradual accumulation of the returns earned by corporate business.”

It is extremely easy to indulge in detailed analysis of economic news and thus, draw conclusions in terms of a portfolio but it is vital to not lose track of the real task at hand.

 

When this evidence-based investing strategy is realized and incorporated into the minds of each investor it will become a fairly simple task to acknowledge that these intrinsic events exist but will not hinder your ability to achieve the kind of investment success that John Bogle describes.

 

“In addition to providing you with these types of evidence-based investing strategies, our responsibility as fiduciaries is to discuss what actions – or inactions – are in your best interest when you decide that an economic event is of urgent matter. Essentially, it is both our desire and legal obligation to advise you when you are indecisive in terms of your investment decisions. Ultimately, it is necessary to keep in mind a few key points:

  • Market drops are an expected, unavoidable part of investing.
  • Our advice is simple and straightforward: Stay calm and stay the course.
  • Remember why you’re investing. If you’re saving for a long-term goal, such as a retirement, your allocation already factors in a short-term market drop.

We are aware that the media often presents events in ways that makes it difficult to digest as investors and therefore, so we are always happy to talk about the economic climate and to ensure that your strategy is aligned with your goals.

 

We believe that market conditions are always arbitrary in the near term. We take the long-term, evidence-based view that you benefit by focusing on long-term investing goals. Academic studies have found that market timing can cost about a percent and a half in foregone returns per year.

Our job is to remind our clients to remember we have prepared for market fluctuations and we don’t respond irrationally to them.

Michael J. Garry, CFP(R), JD/MBA, is the owner of Yardley Wealth Management, LLC, is an independent Financial Advisor who provides Fee-Only financial planning services and investment management in Newtown, PA, and the author of Independent Financial Planning: Your Ultimate Guide to Finding and Choosing the Right Financial Planner

2016 Federal & CA Tax Rates, Tax Tables, Personal Exemptions, and Standard Deductions | US Tax Center

I am always finding myself looking up the Federal and California tax brackets so I thought I would add the info here for quick reference.

2016 Federal Tax Rates, Tax Tables, Personal Exemptions and Standard Deductions

Source:https://www.irs.com/articles/2016-federal-tax-rates-personal-exemptions-and-standard-deductions

Single

Taxable Income Tax Rate
$0—$9,275 10%
$9,276—$37,650 $927.50 plus 15% of the amount over $9,275
$37,651—$91,150 $5,183.75 plus 25% of the amount over $37,650
$91,151—$190,150 $18,558.75 plus 28% of the amount over $91,150
$190,151—$ 413,350 $46,278.75 plus 33% of the amount over $190,150
$413,351—$415,050 $119,934.75 plus 35% of the amount over $413,350
$415,051 or more $120,529.75 plus 39.6% of the amount over $415,050

 

Married Filing Jointly or Qualifying Widow(er)

Taxable Income Tax Rate
$0—$18,550 10%
$18,551—$75,300 $1,855 plus 15% of the amount over $18,550
$75,301—$151,900 $10,367.50 plus 25% of the amount over $75,300
$151,901—$231,450 $29,517.50 plus 28% of the amount over $151,900
$231,451—$413,350 $51,791.50 plus 33% of the amount over $231,450
$413,351—$466,950 $111,818.50 plus 35% of the amount over $413,350
$466,951 or more $130,578.50 plus 39.6% of the amount over $466,950

 

Married Filing Separately

Taxable Income Tax Rate
$0—$9,275 10%
$9,276—$37,650 $927.50 plus 15% of the amount over $9,275
$37,651—$75,950 $5,183.75 plus 25% of the amount over $37,650
$75,951—$115,725 $14,758.75 plus 28% of the amount over $75,950
$115,726—$206,675 $25,895.75 plus 33% of the amount over $115,725
$206,676—$233,475 $55,909.25 plus 35% of the amount over $206,675
$233,476 or more $65,289.25 plus 39.6% of the amount over $233,475

 

Head of Household

Taxable Income Tax Rate
$0—$13,250 10%
$13,251—$50,400 $1,325 plus 15% of the amount over $13,250
$50,401—$130,150 $6,897.50 plus 25% of the amount over $50,400
$130,151—$210,800 $26,835 plus 28% of the amount over $130,150
$210,801—$413,350 $49,417 plus 33% of the amount over $210,800
$413,351—$441,000 $116,258.50 plus 35% of the amount over $413,350
$441,001 or more $125,936 plus 39.6% of the amount over $441,000

 

2016 Personal Exemption Amounts

For tax year 2016, the personal exemption amount is $4,050 (compared to $4,000 in 2015).

You are allowed to claim one personal exemption for yourself and one for your spouse (if married). However, if somebody else can list you as a dependent on their tax return, you are not permitted to claim a personal exemption for yourself.

The personal exemption amount “phases out” for taxpayers with higher incomes. The Personal Exemption Phaseout (PEP) thresholds are as follows:

Filing Status PEP Threshold Starts PEP Threshold Ends
Single $259,400 $381,900
Married Filing Jointly $311,300 $433,800
Married Filing Separately $155,650 $216,900
Head of Household $285,350 $407,850

 

2016 Standard Deduction Amounts

There are two main types of tax deductions: the standard deduction and itemized deductions. You can claim one type of deduction on your tax return, but not both.

For example, if you claim the standard deduction, you cannot itemize deductions – and vice versa (if you itemize deductions, you cannot claim the standard deduction). You are allowed to use whichever type of deduction results in the lowest tax.

The standard deduction is subtracted from your Adjusted Gross Income (AGI), thereby reducing your taxable income. For tax year 2016, the standard deduction amounts are as follows:

Filing Status Standard Deduction
Single $6,300
Married Filing Jointly $12,600
Married Filing Separately $6,300
Head of Household $9,300
Qualifying Widow(er) $12,600

 

Note that there is an additional standard deduction for elderly or blind taxpayers, which is $1,250 for tax year 2016. The additional standard deduction amount increases to $1,550 if the individual is also unmarried and not a qualifying widow(er).

 

Please Note that Information Below these lines, refers to California Taxes, Rates, Deduction and the Information Above these lines and this Statement refers to Federal Taxes, Rates, Deductions, Etc.

 

2016 California Tax Rates, Tax Tables, Personal Exemptions and Standard Deductions

Source: https://www.ftb.ca.gov/forms/2015_California_Tax_Rates_and_Exemptions.shtml

Rate of inflation

The rate of inflation in California, for the period from July 1, 2015, through June 30, 2016, was 2.1%. The 2016 personal income tax brackets are indexed by this amount.

Corporate tax rates

Entity type Tax rate
Corporations other than banks and financials 8.84%
Banks and financials 10.84%
Alternative Minimum Tax (AMT) rate 6.65%
S corporation rate 1.5%
S corporation bank and financial rate 3.5%

Individual tax rates

  • The maximum rate for individuals is 12.3%
  • The AMT rate for individuals is 7%
  • The Mental Health Services Tax Rate is 1% for taxable income in excess of $1,000,000.

Exemption credits

Filing Status/Qualification Exemption amount
Married/Registered Domestic Partner (RDP) filing jointly or qualifying widow(er) $222
Single, married/RDP filing separately, or head of household $111
Dependent $344
Blind $111
Age 65 or older $111

Phaseout of exemption credits

Higher-income taxpayers’ exemption credits are reduced as follows:

Filing status Reduce each credit by: For each: Federal AGI exceeds:
Single $6 $2,500 $182,459
Married/RDP filing separately $6 $1,250 $182,459
Head of household $6 $2,500 $273,692
Married/RDP filing jointly $12 $2,500 $364,923
Qualifying widow(er) $12 $2,500 $364,923

When applying the phaseout amount, apply the $6/$12 amount to each exemption credit, but do not reduce the credit below zero. If a personal exemption credit is less than the phaseout amount, do not apply the excess against a dependent exemption credit.

Standard deductions

The standard deduction amounts for:

Filing status Deduction amount
Single or married/RDP filing separately $4,129
Married/RDP filing jointly, head of household, or qualifying widow(er) $8,258
The minimum standard deduction for dependents $1,050

Reduction in itemized deductions

Itemized deductions must be reduced by the lesser of 6% of the excess of the taxpayer’s federal AGI over the threshold amount or 80% of the amount of itemized deductions otherwise allowed for the taxable year.

Filing status AGI threshold
Single or married/RDP filing separately $182,459
Head of household $273,692
Married/RDP filing jointly or qualifying widow(er) $364,923

Earned Income Tax Credit

The California earned income tax credit is available to California households with federal adjusted gross income (AGI) of:

  • Less than $6,718 if there are no qualifying children.
  • Less than $10,088 if there is one qualifying child.
  • Less than $14,162 if there are two or more qualifying children.

The maximum amount of investment income to remain eligible for the credit is $3,471.

Nonrefundable Renter’s credit

This nonrefundable, non-carryover credit for renters is available for:

  • Single or married/RDP filing separately with a California AGI of $39,062 or less.
    • The credit is $60.
  • Married/RDP filing jointly, head of household, or qualifying widow(er) with a California AGI of $78,125 or less.
    • The credit is $120.

Miscellaneous credits

  • Qualified senior head of household credit
    • 2% of California taxable income
    • Maximum California AGI of $71,370
    • Maximum credit of $1,345
  • Joint custody head of household credit/dependent parent credit
    • 30% of net tax
    • Maximum credit of $440

AMT exemption

Filing status Amount
Married/RDP filing jointly or qualifying widow(er) $89,467
Single or head of household $67,101
Married/RDP filing separately, estates, or trusts $44,732

AMT exemption phaseout

Filing status Amount
Married/RDP filing jointly or qualifying widow(er) $335,502
Single or head of household $251,626
Married/RDP filing separately, estates, or trusts $167,749

FTB cost recovery fees

Fee type Fee
Bank and corporation filing enforcement fee $100
Bank and corporation collection fee $365
Personal income tax filing enforcement fee $81
Personal income tax collection fee $266

The personal income tax fees apply to individuals and partnerships, as well as limited liability companies that are classified as partnerships. The bank and corporation fees apply to banks and corporations, as well as limited liability companies that are classified as corporations. Interest does not accrue on these cost recovery fees.

2016 California Tax Rate Schedules

Schedule X — Single or married/RDP filing separately

If the taxable income is
Over But not over Tax is Of amount over
$0 $8,015 $0.00 plus 1.00% $0
$8,015 $19,001 $80.15 plus 2.00% $8,015
$19,001 $29,989 $299.87 plus 4.00% $19,001
$29,989 $41,629 $739.39 plus 6.00% $29,989
$41,629 $52,612 $1,437.79 plus 8.00% $41,629
$52,612 $268,750 $2,316.43 plus 9.30% $52,612
$268,750 $322,499 $22,417.26 plus 10.30% $268,750
$322,499 $537,498 $27,953.41 plus 11.30% $322,499
$537,498 AND OVER $52,248.30 plus 12.30% $537,498

Schedule Y — Married/RDP filing jointly, or qualifying widow(er) with dependent child

If the taxable income is
Over But not over Tax is Of amount over
$0 $16,030 $0.00 plus 1.00% $0
$16,030 $38,002 $160.30 plus 2.00% $16,030
$38,002 $59,978 $599.74 plus 4.00% $38,002
$59,978 $83,258 $1,478.78 plus 6.00% $59,978
$83,258 $105,224 $2,875.58 plus 8.00% $83,258
$105,224 $537,500 $4,632.86 plus 9.30% $105,224
$537,500 $644,998 $44,834.53 plus 10.30% $537,500
$644,998 $1,074,996 $55,906.82 plus 11.30% $644,998
$1,074,996 AND OVER $104,496.59 plus 12.30% $1,074,996

Schedule Z — Head of household

If the taxable income is
Over But not over Tax is Of amount over
$0 $16,040 $0.00 plus 1.00% $0
$16,040 $38,003 $160.40 plus 2.00% $16,040
$38,003 $48,990 $599.66 plus 4.00% $38,003
$48,990 $60,630 $1,039.14 plus 6.00% $48,990
$60,630 $71,615 $1,737.54 plus 8.00% $60,630
$71,615 $365,499 $2,616.34 plus 9.30% $71,615
$365,499 $438,599 $29,947.55 plus 10.30% $365,499
$438,599 $730,997 $37,476.85 plus 11.30% $438,599
$730,997 AND OVER $70,517.82 plus 12.30% $730,997

Individual Filing Requirements

If your gross income or adjusted gross income is more than the amount shown in the chart below for your filing status, age, and number of dependents, then you have a filing requirement.

Filing Status Age as of December 31, 2016* California Gross Income California Adjusted Gross Income
Dependents Dependents
0 1 2 or more 0 1 2 or more
Single or head of household Under 65 $16,597 $28,064 $36,664 $13,278 $24,745 $33,345
65 or older $22,147 $30,747 $37,627 $18,828 $27,428 $34,308
Married/RDP filing jointly or separately Under 65 (both spouses/RDPs) $33,197 $44,664 $53,264 $26,558 $38,025 $46,625
65 or older (one spouse) $38,747 $47,347 $54,227 $32,108 $40,708 $47,588
65 or older
(both spouses/RDPs)		 $44,297 $52,897 $59,777 $37,658 $46,258 $53,138
Qualifying widow(er) Under 65 N/A $28,064 $36,664 N/A $24,745 $33,345
65 or older N/A $30,747 $37,627 N/A $27,428 $34,308
Dependent of another person (Any filing status) Under 65 More than your standard deduction
65 or older More than your standard deduction

* If you turn 65 on January 1, 2017, you are considered to be age 65 at the end of 2016.

 

For 2015 Federal & CA Tax Rates, Tax Tables, Personal Exemptions, and Standard Deductions  please see our older post here:

2015 Federal & CA Tax Rates, Tax Tables, Personal Exemptions, and Standard Deductions | US Tax Center

PLEASE NOTE THAT I HAVE COMPILED THIS INFORMATION FOR AN EASY PLACE TO LOOK UP AND REFER TO THE DATA.  I BELIEVE IT ALL TO BE CORRECT BUT I AM NOT RESPONSIBLE FOR ANY TYPOS.  THIS PAGE IS FOR INFORMATIONAL PURPOSES, PLEASE SPEAK WITH YOUR TAX EXPERT/PREPARER WHEN MAKING TAX DECISIONS.  THIS PAGE SHOULD NOT BE CONSIDERED TAX ADVICE.

Guest Article by Gregory A. Johnston, CFA®, CFP® – Factor Investing

Gregory A. Johnston, CFA®, CFP® shares with investwithsteve.com about factor investing.
Gregory A. Johnston, CFA®, CFP® shares with investwithsteve.com about factor investing.

Factor Investing –  I would like to thank Gregory A. Johnston, CFA®, CFP® for sharing his thoughts on Factor Investing.  At Reh Wealth Advisors LLC, we use some of the principles of factor investing and have used value and small tilts to our portfolio. If you are in the Illinois area and looking for great Fee-Only Planner be sure to look up Gregory and Johnston Investment Counsel.  Thanks for the great article Gregory, 

Regards,
Steve

Factor Investing

 

One of the newest things (I will refrain from using the word fad) in the investment world is the proliferation of factor investing.  It seems that every exchange-traded fund (ETF) firm has created a suite of ETF’s that seek to emphasize factor investing.

 

What Are Investment Factors?

An investing factor is simply a characteristic.  It could be a fundamental or technical characteristic.  A fundamental factor will use data from a company’s income and/or balance sheet while a technical factor would likely use some form of historical price change.  There literally are hundreds if not thousands of potential factors.  Examples of possible fundamental factors could be price / sales, and price / earnings.  Technical factors could be price change over the past 13 weeks as well as a calculation of momentum.

 

Why Do I Care About Investment Factors?

During the past few decades, academic researchers have identified certain factors that historically have outperformed other factors.  The factors identified as having outperformance characteristics include:  value, low size, quality, momentum, low volatility, and high yield.  So, over time, if an investor held a portfolio of these “factor tilts” they may have outperformed an index.

 

It is imperative to understand that the previously mentioned factors have been identified as historically providing excess risk-adjusted returns.  That does not mean these excess returns will be repeated into the future nor does it mean these factors outperform each and every year.  In fact, many of these factors will have several years where the factor may be out of favor.  So an investor will need patience to earn the possible factor outperformance.

 

How Are the Funds Created?

As previously mentioned, there has been a widespread increase in the number of factor-investing ETF’s.  Many firms will create a single factor ETF (think just value or momentum) while others will create a multi-factor ETF that seeks to combine multiple factors into a single portfolio.

 

Regardless of whether the ETF is a single or multi-factor fund, how the factors are defined and the portfolio is constructed is of critical importance.  There are several things investors should evaluate:

 

 

  • What characteristic(s) are used in creating the specific factor? For example, assuming a value-factor fund, is a single company characteristic used or are there other value characteristics that are averaged or perhaps weighted in some way?
  • Are there company size parameters in creating the universe of potential holdings?
  • How does the manager determine the number of holdings?
  • How does the manager deal with potential sector concentration (or lack of sector allocation)?
  • How often is the portfolio re-scored and rebalanced?

 

Additional Considerations

Most of the factors mentioned have been extensively researched and have historically provided excess returns.  However, investors should be aware that:

  • While historically providing a return benefit, that has no predictive power for the future
  • Now that there are many factor-based funds, using similar factor characteristics, will the “factor benefit” simply be arbitraged away because of the higher demand for that factor?
  • A factor does not necessarily outperform each day, month, or year. So an investor will need to have a degree of patience during those periods of underperformance.

 

With those caveats, investors might be able to identify specific factors that are in-/out- of favor at specific points in time and over-/under- weight a specific factor.

 

While the significant increase in the number of funds gives us a significant amount of pause, we believe these factor investing funds do bear watching and, when thoroughly evaluated (including underlying expense ratios), may be a reasonable addition to a portfolio.

 

On our website, there are links to a variety of investment-related information and articles.

 

About the Author

Gregory A. Johnston, CFA®, CFP®, CPWA®, QPFC, AIF® has over 25 years of investment and comprehensive finanical planning experience.  He started Johnston Investment Counsel in 1997 as an independent,  fee-only investment management and comprehensive planning firm located in Peoria, Illinois.  His clients include individuals, retirement plans, and endowments / foundations.

Guest Post by Dave Fernandez, CFP® 401(k) Options When You Leave Your Employer

“I would to Thank Dave Fernandez, CFP® of http://www.wealth-engineering.com/ for contributing his expertise on 401(k) and the options you have when you leave your employer” -Steve Reh 

401(k) Options When You Leave Your Employer

Guest Blog Article by Dave Fernandez about your 401k Options when you leave your employer.
Guest Blog Article by Dave Fernandez about your 401k Options when you leave your employer.

Regardless if you are retiring or moving to a new employer, once you leave your current job you will need to decide what to do with your 401(k).  You have a handful of choices.  I have outlined the benefits and disadvantages of each option below.  Your personal circumstances may favor one option over the other.  You should discuss your options with a fee-only financial advisor whenever you transition employment so he/she can help you determine which pathway provides the best choice for your unique financial situation.

 

1) If you have a balance of $5,000 or greater you can likely leave it in your current plan as most 401(k)’s provide a deferral option.

Benefits –

  1. This is the easiest decision and likely no action is required on your part. Although, I am always amazed how many investors choose this default option when there are better choices as described below.

Disadvantages –

  1. Every 401(k) plan has its own unique set of investment options. Your current plan may have a limited choice of investment options such as being overly U.S. centric.  We live in a global economy and most financial advisors recommend that portfolios should provide a decent amount of international options on both the stock and bond side of investment choices.
  2. Many 401(k)’s have incredibly high internal expenses. It is not uncommon to see mutual fund choices with expense ratios north of 1.5%.  It is very important to keep an eye on your overall investment expense exposure.  The more you can lower your investment expenses, the higher probability you can keep returns compounding for your long-term financial benefit.

Be aware that if your balance is less than $5,000, you will want to take action on one of the below choices as your employer may have the option to automatically cash your 401(k) account out or transfer you to an IRA.  Cashing your 401(k) account out can have large tax consequences as outlined later in this article.

 

2) Rollover your balance to your new employer’s 401(k) plan.

Benefits –

  1. This is a good way to consolidate financial assets, especially if you have more than one 401(k) from past employment. I always favor consolidation and simplification where possible.
  2. This could be a great choice if you have an excellent set of diversified investment options that are low cost.

Disadvantages –

  1. It is not uncommon for your benefits department at work to occasionally choose a new custodian or a new set of investment options in your 401(k) every few years. You have less control in this situation as you are forced to invest in whatever options are provided.  What may look great today could easily change unexpectedly.
  2. Your new 401(k) may have poor investment choices, and/or investment options with high expenses.

Most 401(k) rollovers are initiated from the 401(k) you are leaving.  Your human resources department or benefits office may require that you fill out a termination/rollover packet of paperwork.  Some 401(k) custodians may take direction over the phone.  Collectively you and your fee-only financial planner can determine what is the next step to move forward.

 

3) Rollover your 401(k) to an IRA

Benefits –

  1. This is typically a favored option. Once you set up an IRA you have the whole investment universe of options to invest in.  This could be mutual funds, ETFs or stocks.  It is easy to build a well-diversified portfolio when you have such a wide array of investment options to choose from.
  2. You have control over your money. You can always move your IRA to another investment custodian if you prefer a change of investment options.
  3. You will have control over investment expenses. There are a number of low cost investment options available via no-load mutual funds and ETFs at a number of investment custodians.

Disadvantages –

  1. If you are still working, you may end up with one extra investment account in a separate IRA. This is a minor disadvantage.  The benefits of investment selection and cost control provided with rolling your 401(k) to an IRA easily outweigh the disadvantage.

 

4) Cash out your 401(k)

Benefits –

  1. None, other than liquidity if you are in a situation desperate for cash.

Disadvantages –

  1. This is typically the worst decision you can make as any balance withdrawn is a taxable withdrawal. Your 401(k) custodian is required to withhold 20% in federal taxes, but your tax exposure could be higher depending on your marginal tax bracket.
  2. You will owe state income taxes on the withdrawal if you live in a state that taxes income.
  3. If you are under age 59 ½ you would also be subject to a 10% early withdrawal penalty.
  4. If you have an outstanding 401(k) loan balance, the loan would also become a taxable event and be subject to the taxes and penalties described above.
  5. You will miss out on any future tax-deferred compounded growth by cashing out your 401(k) today.

 

There are a couple of other scenarios to be aware of before deciding on one of the above choices:

 

  1. What if you have a loan balance against your 401(k)?
    • You typically have 60 days to pay back a 401(k) loan after leaving employment. After 60 days, your loan balance will likely be considered a taxable distribution and you will be subject to taxes and possibly a 10% early withdrawal penalty if you are under 59 ½ years old.
  2. What if you have greatly appreciated employer stock in your 401(k)?
    • You may have a tax preference option called Net Unrealized Appreciation or NUA which allows you to transfer the stock out of the 401(k) and pay ordinary income taxes on the cost basis and capital gains taxes on the gains. You will want to review this option in detail with your financial advisor and CPA prior to making any decisions.

In closing, I highly recommend you notify your financial planner of any employment changes which could impact your 401(k) options.  Once he/she is aware of your choices, they can help you determine what the best course of action is for your personal financial situation.  You can always ask your financial advisor to join you in a conference call with your benefits department and/or 401(k) custodian to make sure you both understand all of your options and what steps are required to move forward.

 

About The Author

 

Dave Fernandez, CFP® is a native of Arizona and has over 20 years of experience in the financial services industry.  He started his financial services career in 1995.  As a NAPFA Registered Financial Advisor, Dave owns a fee-only financial planning and wealth management firm, in Scottsdale, Arizona called “Wealth Engineering.”

 

Wealth Engineering, LLC

http://www.wealth-engineering.com/

 

Guest Post by Michael J. Garry, CFP®, JD/MBA – WHAT DO STARTUPS AND BABY BOOMERS HAVE IN COMMON?

Michael J. Garry, CFP®, JD/MBA

WHAT DO STARTUPS AND BABY BOOMERS HAVE IN COMMON?

 

“I want to thank Michael Garry, CFP®, JD/MBA the owner of a fee-only financial planning and wealth management firm, Yardley Wealth Management, LLC for sharing his expertise in this great analogy comparing baby boomers and start ups.”

Michael J. Garry, CFP®, JD/MBA
Michael J. Garry, CFP®, JD/MBA

One might read an article in Fast Company or the Economist about some of the classic financial mistakes that plague startups and think, “How could they have been so naïve?” Don’t be so quick to judge. When it comes to planning for retirement, Baby Boomers seem to be wrought by the same naiveté.

 

It is vital to be aware of these five common “mistakes” as you prepare to enter retirement.

Not Understanding Your Market

 

As a business owner, market research provides a big-picture view of your real business prospect. Likewise, in retirement, understanding the new world into which you are embarking will result in peace of mind later.

 

When planning your retirement, it is important to know whether your goals and aspirations are aligned with your physical, emotional and financial means.

Not Having Enough Startup Capital

 

People assume that their Social Security, investments, and pension will be enough to to allow them to live the way they’d like to through retirement. Many people underestimate their cost of living and have an unrealistic expectation of how their existing portfolio will perform.

 

Having a portfolio that is appropriately aligned with your risk tolerance, needs, and goals is paramount to having a secure nest egg. Without the proper plan in place one might find themselves with less cash flow than they bargained for.

Failing to Record Cash Flow

 

Understanding where your money comes from is very important. Social Security, Medicare, and retirement savings withdrawals have deadlines associated with them that, if ignored, can cost a person thousands. The more organized you are the more control you will have over your financial future.

Under-calculating the Hidden Costs of Operation

 

It is crucial to project and consider not only operational costs but also hidden and associated costs. The same can be said for the cost of living in retirement. Accounting for increased medical expenses, inflation, the need for a new vehicle every few years and maintenance on your home are just a few of the items that we see people forgetting to include in their annual budgets. Poor planning could leave you in a position where you feel bound by a tighter budget.

Overspending

 

When people retire they can be so elated by the freedom they suddenly possess, that they may lose focus on their future and their budget which can lead to a stark reality in short order.

 

Drawing down from your investments to make big purchases that are out of your budget, with the idea that you will make up for it by being more frugal later on could lead to disaster. What if the financial markets experience a downturn? You still need to make withdrawals for living expenses, but now your portfolio may not have as much cushion to ride out the temporary decline and bounce back as quickly as it would have, had you not unwisely splurged the prior year.

 

From Steve: “Thanks again Michael.  If you are in the Doylestown, PA, New Hope, PA, Newtown, PA, Yardley, PA, Pennington, NJ, and Princeton, NJ area and need help with overcoming some of these issues, do not hesitate giving Michael a call.”

 

Michael Garry, CFP®, JD/MBA is a NAPFA-Registered Financial Advisor, the owner of a fee-only financial planning and wealth management firm, Yardley Wealth Management, LLC located in Newtown, PA and the author of Independent Financial Planning: Your Ultimate Guide to Finding and Choosing the Right Financial Planner.

Guest Post by Greg Phelps CFP®- Asset Allocation Made Simple!

Asset Allocation Guest Post with Greg Phelps CFP

Asset Allocation Made Simple! A Guest Post by Greg Phelps CFP®

Asset Allocation With Greg Phelps CFP®
Asset Allocation With Greg Phelps CFP®

I want to thank Greg Phelps CFP®, President of Red Rock Wealth in Las Vegas, for joining us and providing his expertise on Asset Allocation.  The analogy for asset allocation I like use is baking a cake.  The asset allocation is recipe for baking  your cake, the stocks/bonds/mutual funds/ETFs are your ingredients, the cake is your portfolio.  I really like the way Greg explained the importance asset allocation and I hope you will too!

We talk about it all the time, you may even hear it on the news if you’re watching financial channels – but what exactly is asset allocation? Simply put, asset allocation is the process of dividing up your investments into groups of similar securities then allocating distinctly separate amounts of your investment capital in them.

 

Why would we do this? Because groups of similar securities grow and fluctuate similarly to each other, but relatively different to other groups of securities. By matching these groups together in different percentages you can reduce your overall portfolio risk and volatility. When stocks go up for example bonds may drop or stay flat, and vice versa.

 

It’s very important to note that the allocation plan must revolve around not only your risk tolerance, but your financial plan. We invest in stocks according to a solid retirement plan (as does Stephen Reh). After working with investors for over 20 years it still baffles me how most investors act like Nike and “just invest” without taking the time to match their investment plan with their financial goals and objectives.

 

Most experts believe that the importance of the individual investments and securities within your portfolio is a distant second to the percentages into which they are allocated. Study after study has shown that it’s not what stocks, bonds, or mutual funds you invest in, it’s the percentage allocation of assets such as stocks, bonds, cash and commodities that determines over 90% of your investment results!

Asset Allocation Guest Post with Greg Phelps CFP®

So just what are asset classes?

 

There are three main assets classes utilized in generating an asset allocation model for your investment portfolio.  All assets within each class exhibit similar characteristics. They are:

 

  • Equities (Stocks)
  • Fixed Income (Bonds)
  • Cash Equivalents (Money Market Instruments)

 

Some financial advisors and investors would add commodities to the list of primary asset classes. We believe indeed it is a primary asset class because it has illustrated very little correlation to the other asset classes. By correlation, we mean it fluctuates up and down in value highly independently from the other asset classes. For example, last year commodities plunged 20%+ while US large stocks were about flat.

 

That difference in movement is what we refer to as “non-correlation”. It’s the degree (or lack thereof) in which one asset class moves relative to another. The three or four main asset classes have very low or even negative correlation to each other. By allocating different amounts to them you can reduce your investment account fluctuations overall.

 

 

 

But what about different types of stocks or bonds?

 

The three or four primary asset classes can further be broken down into smaller groups of similar securities. We’ll call those “sub asset classes” for simplicity. The degree of correlation rises as each group is broken down further and further because the similarities between them rises.

 

Some sub asset classes include but are not limited to:

 

  • Large Value Stocks
  • Large Growth Stocks
  • Small Value Stocks
  • Small Growth Stocks
  • International Developed Stocks
  • Emerging Market Stocks
  • Real Estate or REIT’s
  • Commodities
  • Short Term Bonds
  • Intermediate Term Bonds
  • Inflation Protected Bonds
  • High Yield Bonds
  • International Bonds

 

The benefits of asset allocation

 

A primary goal for any investment plan is to mitigate investment risks, while maximizing potential investment returns. This can be done most effectively with proper asset allocation and broad portfolio diversification.

 

If you have any concerns whatsoever about investing in the stock market, bond market, or even cash and commodities you should give Stephen Reh a call and make sure your asset allocation is in line with your financial plan. Market bumps shouldn’t concern you if you’re plan is solid, and it will be if you take the time to work with Stephen.

 

 

Greg Phelps, CFP®, CLU®, AIF®, AAMS® is the president of Redrock Wealth Management, a fiduciary financial advisor in Las Vegas. Redrock is a member of the National Association of Personal Financial Advisors like Stephen Reh, and specializes on retirement transition and decumulation planning.

 

Greg, thanks again for accepting the invitation to contibute to www.investwithsteve.com.  You expertise is appreciated.  If you are in the Las Vegas area and looking for a fee only financial advisor, I recommend giving Greg a call.

401k Self-Directed Brokerage Option

Phillip+Christenson+Maple+Grove+Fee+Only+Advisor

401k Self-Directed Brokerage Option

Phillip+Christenson+Maple+Grove+Fee+Only+Advisor+Self-Directed+Brokerage+401k
Phillip Christenson

I’d like to thank Phillip Christenson, CFA for today’s post on the Self-Directed Brokerage option in your 401(k). Phillip is a Chartered Financial Analyst and financial advisor for Phillip James Financial located in Maple Grove Minnesota.  I highly recommend if you’re in that area you reach out to Phillip for further financial tips and help!

Thanks,

Stephen Reh CFA, MBA, CFP®

 _________________

Little Used Self-Directed Brokerage Option a Good Idea for Many 401(k) Investors

401(k) plans are a great way to save for retirement. They allow employees to put money away on a pre-tax basis to save for retirement. Even better, your employer will usually match some of your contributions up to a certain percentage. Many plans now even allow you to contribute after-tax dollars into a “Roth” 401(k). These are just some of the reasons 401(k) plans have become one of the primary ways people save for retirement. And as pensions become rarer, 401(k) plans are many times the only way people are saving for retirement. This makes them even more critical to a person’s financial future.  While these accounts have many benefits they still have some major drawbacks. One of the biggest of these problems is the number and quality of investment options employers offer within the plans. There are usually a handful of target-date funds (not my favorite investments), some actively-managed stock mutual funds, one or two bonds funds, and if you’re lucky a couple of index funds. As I mentioned, for many people this is their only source or retirement savings, so often a 401(k) can leave an investor missing out on key asset classes, under-diversified, and paying more expenses than necessary.

So, how can we address this major flaw of these accounts? With a Self-Directed Brokerage option. Not all 401(k) plans offer it but I have recently been seeing it in more and more plans. Soon I expect it to be a standard feature in most 401(k)s. So what is it? Well, this little known feature opens up a world of investments that an employee wouldn’t normally have access to within the constraints of a 401(k) while still keeping the tax qualified status of your account. Let’s say the average 401(k) plan has 10-15 investment choices, the Self-Directed Brokerage option provides access to literally thousands of investment choices. These additional investments will allow you to build a more complete portfolio. For example, you might want to be invested in Real Estate but your 401(k) doesn’t have any Real Estate Funds (REITs). With the brokerage option you would certainly be able to find the right Real Estate fund for you. This is where working with a financial advisor might be beneficial because they can help you wade through all the different choices and help you pick the best investments for your situation.

The self-directed brokerage option can also help you save money through reduced fund expenses. No matter which side of the investing coin you fall on (active or passive) you should be able to find lower cost investments using this feature. However, I have seen 401(k) plans that charge a small fee to utilize the self-directed brokerage option. It is usually a nominal amount and the savings from lower cost funds should more than offset the cost but it should be considered before making your final decision.

A 401(k) is very powerful tool that can help you save for retirement and save on taxes. But it gets even better if your plan allows you to choose the Self-Directed brokerage option. Check with your employer to see if it’s available through your retirement plan. You might also be able to find it by logging into your online account and looking for it yourself. Either way consider taking advantage of it to improve your overall retirement portfolio.

 

_________________________________

Thanks again for posting Phillip. 

I agree with Phillip that self-directed brokerage can be a great option for investors working with advisors or for savvy DIY investors.  For those employers wondering if they should add the option, you may want to investigate your liability and the need to vet the options inside the brokerage window.  In general, I would be cautious for employers to offer this option.  Here is a link to an article in Forbes discussing it:

http://www.forbes.com/sites/ashleaebeling/2014/08/28/dol-questions-401k-brokerage-windows/

** The information on this website is intended only for informational purposes. Investors should not act upon any of the information here without performing their own due diligence. Reh Wealth Advisor clients should discuss with their advisor if any action is appropriate.

2015 Q4 Update – 2015 Q3 Stock Market is it 2011 Again or 2008 — Spoiler it was 2011

2015 Q4 Update Stock Market Rebounds

Update to the Article: 2015 Q3 Stock Market, Is it 2011 Q3 Again or 2008 Q3?

I realize that people are likely more interested in my opinion on the current market drop but I first want to revist our last market drop.  I will have another article about our current market conditions soon.

Here is a link to our previous article below:

2015 Q3 Stock Market is it 2011 Again or 2008

What Happened in Previous Market drops of Q3 2011 and Q3 2008?

As a reminder here is the performance for the S&p500 in Q2 2008 and Q3 2011.  An ugly 8.87% and an uglier 14.92% loss in 2011.

Q3 Comparison

 

 

 

What Happened in Q4 2011 and Q4 2008?

And here is a reminder how Q4 went in both time periods.

Q4 Comparison

 

Update – Let’s Look at 2015 Q4

2015 Q4 Update Stock Market Rebounds

 

 

 

Thankfully, the 4th quarter of 2015 looked a lot more like the 4th quarter of 2011.

 

As mentioned previously,  2008 tended to be an anomaly in that it was one of the worst years we have experienced in the stock market; certainly it was the worst of my lifetime.  Our bias is to remember things we experience and give a greater likelihood of thinking it will occur again (the phenomena is called the “Availability Bias”).  The Availability Bias is the bias that is how we estimate future probabilities based on how easy it is to remember.  A good example would be our current drought in Southern California.  Most Southern Californians would likely overestimate the probability of future droughts based on the ease they can remember our current drought.

Where are we at a valuation Standpoint as of 12/31/2015?

The equity market does not appear to be valued too high or too low.  According to the most recent data as of 12/31/2015 in the JP Morgan “Guide to the Markets”, most measure show that the market is fairly valued.

JPMorgan_market_Valuation_12-31-15

 

JPMorgan_market_Valuation_measures_12-31-15

(Source: JP Morgan)

The P/E (Price to earning measure), CAPE (cyclically adjusted Price to earnings), and P/CF (Price to Cash Flow) all show a market that is fairly valued.

Dividend yield, Price to Book value, and Earning Yield less Baa Bond yield all show that the market is slightly undervalued currently.

So how do I feel about it currently?  As I stated last quarter, I actually think the market is fairly valued and there is both upside and downside and I feel that our best course of action is a diversified portfolio.  If valuation measure were dramatically different, I might feel otherwise.

What about the Bond market with the recent Fed Rate Increase?  I am worried about the bond market but I think for investors in diversified portfolios, the fear is over blown.  The Fed raised rates slightly but it the impact on bond prices was relatively tame.  I think the Fed will be cautious about raising rates unless inflation kicks up.

What is our takeaway?

When markets misbehave (go down), we should look at times in history to see what happened.  We should look at valuation ratios to see if the market is reasonably valued.  In many cases, the best course of action is to 1) take tax losses if you can 2) rebalance if you are too far from your model 3) Trust your asset allocation and risk to prevent you from performance chasing.

** The information on this website is intended only for informational purposes. Investors should not act upon any of the information here without performing their own due diligence. Reh Wealth Advisor clients should discuss with their advisor if any action is appropriate.

 

Value Premium Dead or Poised for a Comeback in 2016 Investments?

Value Premium Dead or Poised for a Comeback in 2016 Investments?

It has been thoroughly documented in research (Fama and French) that there is a value premium where in the long run value stocks have better risk adjusted performance than growth stocks.

For the 10 years ending in October 31, 2015, the Russell 1000 Growth Index outperformed the Russell 1000 Value index by 2.35% annualized.  That is a significant difference, especially since history and research has told us that we should expect value to outperform most decades. (source: Pimco)

What has made this past decade favor Growth?

Pimco argues there are two reasons and those reason are grounded in low rates. (Chart Source: Pimco)

Value Premium - Lower Rates Have Promoted Growth over Value
Lower Rates Have Promoted Growth over Value

Reason #1 – Low rates are a reflection of fear about economic growth following the financial crisis

After the financial crisis, future expectations for the economy were weak. Further, we have seen muted growth in the economy the past 10 years, especially compared to the growth in the stock market from 2009-2015.

Value stocks tend to be stocks whose value is tied to their current earnings and thus their returns tend to be more cyclical and tied to the growth and performance of the global economy.  Growth stocks are less dependent and grounded by expectations of the overall economy.  The price of a growth stock is more dependent on earnings much further into the future than value stocks that are priced more by their current or shorter term earnings.

For example, no one expects Coca Cola to sell many more cans of Coke in the next 5 years than they did the past 5 years because their distribution and product is very mature.  Conversely, many would expect Netflix to grow quickly as more people become interested in consuming media via streaming video.

Reason #2 – Lower Interest Rates lead to lower discount rates which favors growth stocks.

Pimco also argues that stocks value is the discounted future cash flow (earnings) of the company.  As the amount we discount the earnings drops, the value of the future cash flows increase.  Since growth stocks have a higher percentage of the earnings occurring in the future vs Value stocks, the prices of growth stocks have gone up more than value stocks.

 

Recent Outperformance has led to a relative valuation gap compared to previous years

Value Premium - Value Trading at a Discount to Growth

With Growth outperforming value, it appears on a price to book ratio, the gap in value between growth and value stocks going forward appears to favor value according to Pimco.

 

Pimco further argues that a relatively few large growth companies have propelled growth stocks higher and the performance of a few stocks (called a narrow market) tends to be unsustainable over time.  Therefore they see a strengthening economy, rising, rates, a valuation discount, and a narrow market led by few large growth stocks all pointing towards the potential return for the value premium.

(Chart Source: Pimco)

My Question – Are things truly different this time or are we merely seeing a moment in time that value underperforms.

 

Generally speaking, there is regression to the mean (tendency for trends to reverse) in outperformance.  The question facing us today is that it has been academically shown that value stocks have better historical risk adjusted returns vs growth stocks and our question is “will value prove to be better going forward?  Or are we facing a new situation when the value premium is gone forever?”

I tend to fall into the camp that most times in the financial world someone tries to tell me that this time is different, its more likely to be the same.  In my  opinion, Growth has had its time in the sun and at some point value will outperform.

Due to the academically proven risk adjusted returns of value stocks we have overweighted value in our portfolios and recent history has hurt our returns.  However, going forward, I feel the value “tilt” will help drive the performance of our portolio.  As always, past results do not guarantee future returns.

Much of the analysis in this report was from this great article on Pimco:

http://blog.pimco.com/2015/11/24/equities-are-conditions-right-for-value-versus-growth/

** The information on this website is intended only for informational purposes. Investors should not act upon any of the information here without performing their own due diligence. Reh Wealth Advisor clients should discuss with their advisor if any action is appropriate.

Update to our Stock Market Reflection Article – Data as of 9/30/15

I wanted to write an article with an update to some of the data since we last looked at it in the following article:

https://investwithsteve.com/2015/08/stock-market-pull-back-time-to-reflect/

Annual Returns and Intra-Year Declines

As we previously discussed, at that time through July 31, 2015 the market had only declined 4% from its market high.  Due to a rough August and September, we can see the S&P500 declined 12% from its high:

Stock Market Intra year declines
That 12% drop is almost at the average intra year drop of 14.2%.  As a reminder, we can see that despite several years were there were relatively large drop, many years still ended up being positive.  That scenarios increases the risk that an investor might sell at the wrong time or may incorrectly time the market.

Current Valuation – the Market is still fairly valued

By looking at the major valuation metrics (P/E, CAPE, Div Yield, P/B, P/CF, and EY Spread), the market is slightly undervalued.  Since its less than one standard deviation (far right column), I would actually classify this market as “fairly valued”.  We are not seeing panic or greed driven values currently.

SP500 Valuation Measures

 

P/E Ratio is Poor Predictor of Short Term Performance but much better at Intermediate Performance

Although the model predicts good returns over the next year, the R Squared is only 9% so using P/E to predict the next 12 months is a dangerous proposition.  It does show that according to P/E, we are not seeing a dramatically overvalued market.  As we have discussed before, the 5 year performance based on P/E is much stronger with an R Squared of 43%.  That means the current P/E can explain 43% of the next 5 years performance.   The current P/E indicated the next 5 year should be good for the market.

 

PE and Returns

 

 

I would like to thank JP Morgan for their always excellent quarterly guide to the markets where the slides came from.

https://www.jpmorganfunds.com/cm/Satellite?UserFriendlyURL=diguidetomarkets&pagename=jpmfVanityWrapper

** The information on this website is intended only for informational purposes. As always, past results do not guarantee future returns.  Reh Wealth Advisor clients should discuss with their advisor if any action is appropriate.