BEST STRATEGY FOR RETIREMENT

Best Strategy for Retirement - Work Longer or save more now?

Recent articles have recommended that retirees defer collecting social security until the age of 70 because the monthly benefit will increase by 8% between the ages of 66 and 70.  But I wonder if that is the best strategy for everyone?  The math is clearly accurate.  Procrastinators are biased toward a rationalization of avoiding saving and kicking the can down the road.  Those with limited discretionary incomes or living paycheck-to-paycheck may be unable to save so this strategy may be unavoidable.  However, this approach is rarely the best strategy for everyone.

A convincing argument in support of this approach is that saving 1% of your salary a year for 30 years or deferring retirement and social security payouts by just three to six months will provide the same results, according to a working paper from the National Bureau of Economic Research.  Also, Professor Sita Nataraj Slavov at George Mason University’s Schar School of Policy and Government (one of the authors of the above paper) opined that if a high-wage 46-year-old worker would obtain the same result by saving an additional 10% of his or her salary for 20 years or by working an additional 29 months past the age of 66.  Again, the math is convincing because working an additional four years from age 62-66 or 66-70 would increase one’s retirement income by 33% or 32% respectively, wrote Professor Slavov.   

I believe that these arguments are progressively more convincing at older ages because of the shorter times available for the compounding of savings.  Conversely, the younger savers normally outperform because of the power of compounding.

All things being equal, most retirees would be better off with more money at retirement.  Considering that retirement may approach close to one-third of most retirees’ lifetimes, an additional 32% income during retirement may be significant.  But I reject the premise as an ideal planning strategy for everyone.

For those with limited incomes and spotty work histories because of the economy, illness, disabilities, or family needs, working longer could be a financial savior.  However, for older workers unable to work because of health problems, employer downsizing, and age discrimination, working at later ages is not an option.  Reliance on working longer is not a strategy for success, but a possible bail-out for those who failed to plan or faced obstacles that interfered with proper planning.

A consistent and increasing retirement savings program from an early age, even if underfunded, is better than ignoring a future funding challenge.  If unforeseeable income problems occur, the nest egg will help to bridge the gap.  If not, the option to defer retirement for a bigger future is still an available option.

What about those who don’t want to work longer or defer collecting their social security?   More time to enjoy life is the motivator for many retirees.   Younger retirees might succeed by spending less, or accumulating more wealth through work, inheritance or even winning the Lottery.  This group might be divided between those who don’t care about great wealth or expensive toys, and high achievers who seek wealth at younger ages so they have time for discretionary pursuits including travel, hobbies and charitable or public service endeavors.  For those in poor health or shorter life expectancies, time is the most precious commodity. 

Planning for a perfect retirement based on mathematical principles alone is not a plan at all.  It may be a recipe for disaster.  Death is certain but not its timing.  Extremes of over saving and ignoring the enjoyment of life could be as bad as not saving and ignoring the future.  Since the future is always uncertain, those extremes could lead to dying too soon or living too long. 

We believe that the balanced approach of planning for a long lifetime, while enjoying the present, will provide an enjoyable and productive life today and tomorrow.  Everyone is different, so one size doesn’t fit all.  Helen Keller said:  “Happiness depends upon ourselves.” As Certified Financial Planners, our objective is to help clients properly plan for both foreseeable and unforeseeable future events, help them face most challenges, and confidently make their futures as big and happy as they desire. 

Marv Kaye                                                                                                                                          President & CEO                                                                                                                            Kaye Capital Management                                                                                                                         www.kayecapital.com

IS PATIENCE REALLY A VIRTUE?

IS PATIENCE REALLY A VIRTUE?

Some people are patient to a fault, while others have no patience. When I use the computer, my office manager tells me to be more patient. When I drive or channel surf, my wife jokes that if I had any patients I would have been a doctor. But as an investor since my teens, I developed an abundance of patience during the research process.

Studies have documented that most people are less patient as investors than they are in their daily lives. Patience seems to be the most difficult emotion to conquer in this world that values immediate gratification.

Why do so many people claim to be long-term investors, but act like short-term traders? We are regularly bombarded with too much information through television, newspapers and the internet. Some information is factual but most is opinion. Many analysts and forecasters freely share their opinions about the future but fail to share their hidden agendas. Some will be proven correct, but most are wrong. Very few are consistently correct – and they rarely share their opinions.

Of course, acting on all the stock tips, forecasts of extraordinary expected profits, or gloom and doom predictions may lead to excessive trading with dire consequences. Some ideas are on target, and a quick sale will be profitable, but at the risk of missing much greater profits over a period of years.

Facebook is an excellent example. After their initial public offering (IPO) the price immediately went up but then declined dramatically and the stock price remained low for some time. In hindsight, those who sold quickly made money but those who waited and watched the price decline finally sold and lost money. Patience was in short-supply while the price declined. When the price reversed along with positive earnings, those who lost money were reluctant to reinvest. The patient investor who believed in Facebook’s solid business model continued to hold the stock and ultimately earned a small fortune.

There are other examples where the price declined over a period of years. General Electric, formerly one of the greatest global companies, declined after Jack Welch retired as the CEO, and the stock remained depressed for well over a decade. Sometimes too much patience is clearly not a virtue but poor judgment.

The better strategy is to begin with a fundamental basis for buying a stock based on the company itself, including management, sustainable earnings history and growth, market share, competitive advantage, dividend history, etc., and the stock, including P/E ratio, growth, momentum, volatility, and whether it is over or undervalued. Many set a target price objective based on valuation. Others, like Warren Buffett, prefer a holding period of forever. But even Buffett changes his mind based on future events that require a sale or substantial reduction in his position, such as recent liquidations in IBM and Wells Fargo. The point is that if you just buy based on a tip, price movement is the dominant factor motivating a sale. With research and understanding of a company, there is confidence to patiently hold the stock through short-term periods of declining prices.

There are many other areas where investors become too impatient to their detriment. Several studies in the investment industry document that the average investor underperforms the long term performance of their fund because they sell too soon. For one reason, buy orders increase exponentially when optimism runs high. Sell orders increase during declines and pessimism. This pattern is counter intuitive to the principle of “buy low, sell high”. Contrarians, like Buffett who I promise not to quote again, has famously said he wants to be greedy when others are fearful. Those who follow the crowd buy at the top when stocks are popular and sell at the bottom when they fear they will lose their money.

One last example is the huge increase of open-ended investment company sales when the lead portfolio manager quits. Madison Sargis and Kai Chang, authors of a study by Morningstar entitled, “The Aftermath of Fund Management Change”, concluded that investors sold their funds when management changes were announced, even though his/her departure did not adversely impact the fund’s performance (Sargis & Chang, 2017). This selling frenzy often continues for a year or more. In most cases, the fund is run by a team of analysts and co-portfolio managers. They have a detailed investment philosophy and process to manage the money in a detailed and repeatable manner. After Bill Gross’s sudden departure from Pimco, huge redemptions from Pimco’s flagship fund totaled almost 60% of its assets. Pimco had and still has an extensive cast of talented professionals and resources, and their performance is still at highly competitive levels.

At Kaye Capital Management, we have a disciplined buy and sell strategy. When a portfolio manager departs, it triggers an immediate review of the fund. We do our research, investigate the remainder of the team, and exercise our judgment to sell immediately or wait and see the results over 2-3 quarters, and then decide. We sometimes conclude that the manager received the credit for the creativity and intellect of an experienced staff. In such cases, we are rewarded for our patience.

In many cases patience is a virtue but it can sometimes be a curse. With 20:20 hindsight, the answer is clear; but only experience, research, wisdom, and sometimes luck, lead to the correct decision going forward.

Marv Kaye, J.D., CFP® Kaye Capital Management

References Sargis, M., & Chang, K. (2017). The Aftermath of Fund Management Change. Morningstar.

THINK OUTSIDE THE BOX ABOUT RETIREMENT

THINK OUTSIDE THE BOX ABOUT RETIREMENT

Financial independence is the goal - Retirement is a choice

Most people start thinking about retirement at an early age based on when their parents retired or traditional retirement ages. Government employees with defined benefit pension plans have charts that illustrate the percentage of their salary they will receive at different future ages and years of service. Most people just think about how soon they can afford to stop working.

A better approach is to try to envision what you would like your life to be like in the future. How will you spend your time? What activities will make you happy? And what will it cost in today’s dollars to support your desired life style? A little dreaming about your life 20, 30 or 40 years in the future may affect your decisions today and potentially change your life. Retirement should ideally be about creating your greater future, not merely ending your working life.

Of course, dreaming is just the beginning. You must create a plan to get there. Consider how you achieved other goals in your life. Before selecting a career, most people considered their interests, strengths and weaknesses, the time, effort and cost required, and then committed over a period of years. They researched the requirements, nature of the work, potential salary and rewards before deciding if such a career would really be what they desired. The same process applies to every career, whether it is among the trades, sports, music, art, a profession, or business. Those who fail to commit to this process often must settle for less.

For simplicity, consider that our lives are divided into roughly three phases. The first phase involves growing up, attending school – high school, trade school, college, and graduate school. The second phase involves our working lives, which may include one or more careers. The third and final phase, called retirement, may last for 30, or more, years. Putting in some time to imagine your future activities, the needed new knowledge or skills, and the cost could greatly increase the likelihood of getting what you want. How curious that most people spend more time planning a two week vacation than the last 30+ years of their lives!

I admit that as a financial planner, I may be more committed to the planning process than the average person. My current career didn’t exist when I was a boy, but I believe that the financial planning career actually chose me. I set goals for everything including sports, music, college, and choosing law as a first career. But my views of retirement changed dramatically over time.

When I was young, early retirement was my goal – and I achieved it when I was 52. Shortly thereafter, in a second career when I was self-employed, my goals changed because my passion and satisfaction grew to the point that I loved the process and didn’t want it to end. It was impossible to foresee this feeling in my twenties. Although I was far from wealthy when I changed careers, I had a modest pension and sufficient resources to take the risk of giving up my legal salary and much larger future pension.

So I developed a new philosophy for myself and others that was dually focused on both my working life and my future retired life. I still did the planning to calculate the cost of my greater future, but changed my goal to “financial independence” – a time when work becomes optional.
Once “financial independence” was achieved, I no longer thought about ending work. I knew that I could afford to quit any time I desired, so there was no longer any pressure. If my career was no longer challenging or fun, and the lure of more leisure time and different activities more compelling, I could transition at any time.

Why is this change of terms from retirement to financial independence so significant? Retirement is a fixed result without a clear funding plan. It doesn’t allow for unforeseen problems such as illness, disability, or loss of employment. A clearly designed financial plan, monitored regularly, could result in future income closer to 90% or 100% of your pre-retirement income. Therefore, if you still desire to quit working, or if life’s obstacles force retirement earlier than desired, your goal can still be obtained because financial independence makes work optional. Financial independence also opens the door to multiple choices, such as starting a new business, changing careers, working fewer hours and leaving more free time for family, travel or hobbies. While others may value work, money and free time differently than you do, only your feelings and values matter for your happiness.

If happiness is wanting what you have, then some may want to stop working while others who love their career may want to continue working. Some have many and varied interests that they would enjoy pursuing full-time. Others need more time to pursue other interests without giving up their livelihood completely. Some prefer more free time and are satisfied with modest lifestyles, while others have more lavish tastes but are willing to work longer to afford them. A happy retirement means different things to different people. While some will be happy living on 70% of their pre-retirement income, others desire more than 100% because they will spend more with seven free days each week. During pre-retirement, most discretionary money was spent on the weekends and vacations. Post-retirement, every day is a Saturday!

If you like my philosophy, think about how you spend your time on the weekends and vacations. Are you happy with the way things are going? What changes would you make? What would you do different? What activities or skills have you desired to pursue but lacked the time? Some take time and practice while others take more money. Once you complete the thought process and then commit to the planning, your life will likely be fuller and you will be happier, because you will want what you have for the last third of your life.

It is said that money can’t buy happiness. However, financial independence may enable a greater and potentially happier lifestyle, whether or not you are retired. The future is always uncertain, so leave your options open. I wish you a happy, productive and fulfilling life.

Marv Kaye, J.D., CFP®

Kaye Capital Management

Economy and Market Direction

Economy and Market Direction

The economy and financial markets have been improving and stable despite several challenging events globally.  We get few calls when the stock market does well, or even when it just muddles along.  Clients are happy and optimistic when they are making a buck.  Well, it seems that our clients are reflective of people everywhere.  Companies and Universities regularly survey people across the country and then publish their findings.called “Market Sentiment”.  It seems that market sentiment is high during periods when markets are steady, trending upward and volatility is low – like now.   Markets that are not too hot, not too cold, but just right are called Goldilocks periods.

During the last quarter, we enjoyed a continued global recovery in industrial activity, reduced global deflationary pressures, and generally accommodative monetary policy, even though the Fed is raising interest rates.  The markets are trading in a narrow range with low volatility.  There is political uncertainty in both the White House and Congress. Perhaps this high market sentiment is allowing too much good news to be priced into the markets and minimizing the risks of uncertainty. 

Nevertheless, the outlook for the domestic economy is positive.  The global expansion appears to be continuing, interest rates are rising, unemployment is at very low levels, companies are reporting steadily increasing earnings, and inflation has finally achieved the 2% target set by the Fed several years ago,  With this backdrop, it is difficult to forecast a major market decline in the near-term. 

Looking forward, we believe these trends will continue.  However, despite this tranquility, many changes have been taking place over the past few quarters and we have made several changes to our asset allocation models. 

There has been a shift of leadership from small cap stocks to large, from value to growth, from foreign developed-country stocks to domestic, and other shifts including real estate and gold.  We will continue to study these trends and to change our asset class weightings in an effort to reduce risk and enhance future returns.  At the moment, we are comfortable with our current diversification.

Risks ahead include political uncertainty with a new President who has no government experience.   He must learn how to move legislation along with a non-supportive Congress that includes many members of his own party.  He clearly overlooked Republican opposition in the failed bid to change Obamacare.  Future efforts to achieve his campaign goals will include tax legislation for corporations and individuals that will stimulate the economy and still be revenue neutral, and repatriation of corporate tax hordes that could be used to invest in new plants and equipment to generate new revenues and profits.  These goals are large and complex, so their likelihood of success may be deferred to 2018.   

As the U.S. transitions from a mid to a late cycle economy, there is a slowdown in hiring but the economic expansion is starting to hire workers nolonger being counted as part of the unemployed, wages and commodity prices are increasing, and fears of an imminent recession are disappearing. While few are projecting double digit returns on equities, most seem to be satisfied  just muddling along with positive and increasing investment returns.  There is nothing wrong with a feel-good Goldilocks economy. 

Most new jobs involve a period of learning and adjustment.   The complexity and challenges are often different than expectations.  One positive change for President Trump is that he has moderated many of his goals to more well-considered and pragmatic positions.  In recent negotiations with foreign leaders,  he offered to soften import taxes on foreigngoods in exchange for support in Syria and North Korea.  He may be relying on more astute advisors.  The enormity of the job may be changing the man.

The recent military reaction to Syria for using deadly chemical agents against their own citizens was applauded by Democrats and Republicans alike, and generally supported by other countries.  China and Russia were silent but diplomatic communications with both countries seems to be yielding positive results.  

Has he flipflopped on his goals or were several extreme positions merely to appeal to a majority of voters?  Did he really want to replace Fed chair Yellen for keeping interest rates low for so long and thereby weakening the U.S. dollar?  Would a major real estate developer who borrows huge amounts of money advocate higher interest rates?  Would he prefer the bragging rights of a higher dollar at the risk of hurting our exports?  Hardly!  His real beliefs would favor the opposite because they would stimulate the economy. 

As financial advisors, we have the difficult challenge of evaluating the current state of the economy, positioning investments to benefit from future market developments, and helping our clients to make smart decisions.  Our personal preference, opposition or support of our current president is a factor but irrelevant in doing our jobs well.  The future is always difficult to predict but that is our world.  So when the words and actions of our current president are inconsistent, we conclude that their actions reflect their real beliefs.  Clients often find comfort if they think our views mirror theirs, but our actions are solely based on how developments affect the financial markets and not our beliefs in favor or against policies.  The future of health care, tax reform, NATO, the Fed, and relations with China, Russia, Mexico, Israel, and the American economy will be judged by the actions of our President and Congress, among other factors.  We seek to benefit, regardless of our personal views.

So where is the market headed?  Equity prices are at an all time high.  The market hasn’t declined over 20% since 2008.  Does this mean that a major decline is imminent?  What if efforts to stimulate the economy succeed in creating greater future corporate profits so that prices are more historically reasonable?  We believe that market gains since the election have been greater than economically justified but the recent slowdown will give us time to see if future earnings growth will catch up with market gains.  We are cautiously optimistic that this will occur and therefore are fully invested. 

Why we do what we do

While we may or may not agree with our country’s leaders, our mission is narrow, but important – to act as fiduciaries in managing our clients assets to help them achieve financial independence and to help make their futures greater than their pasts.

We will continue to tinker with our models in an ongoing effort to reduce your risk, reduce expenses, and increase returns.  Unlike the former Maytag repairmen, who did nothing because their machines never needed service, we continually strive to get better in a constantly changing world. 

Marv Kaye, J.D., CFP

Kaye Capital Management

 

YEAR-END TAX PLANNING

YEAR-END TAX PLANNING

Tax planning this year is less certain than normal because of the election and the uncertainty of new soon to be proposed legislation for income tax reform. However, based on proposals from President-Elect Trump and a Republican majority in the House, planning may potentially be more beneficial.

While proposals are not the same as the eventual legislation, lower tax rates for most people is a likely outcome. It appears that some itemized deductions may be eliminated, except home mortgage and charitable, so we recommend claiming all current deductions before the end of 2016. Total taxes owed for upper income taxpayers may be unchanged because lower deductions may offset the lower tax rates for earned income. To the extent possible, income should be deferred to next year when taxes may be lower, especially for capital gains.

For those who would like to make large charitable gifts over the next several years, but prefer to deduct them this year against higher marginal tax rates, consideration should be given to opening a Donor Advised Fund before the end of 2016 to claim the entire deduction this year. Also, the temporary ability to make charitable contributions directly from an IRA has recently been made permanent. For those who are over age 70 ½ and do not need their required minimum deduction (RMD) for current spending needs, part of those taxable distributions could be donated to charity to reduce the taxable distributions.

Most salaried employees have little or no flexibility as to when they receive income but small business owners and self-employed people may be able to push receipts into next year. Retirees who are in their early 60’s may be in lower tax brackets next year may consider partial Roth conversions at 15% or 25% rates. The conversion with partially or totally avoid the obligation to take taxable RMD’s from their IRAs and instead withdraw funds tax-free at their own convenience whenever they are needed in the future. If they have sufficient other funds to meet their own spending needs, their beneficiaries will receive the funds tax-free. The proposed changes will not affect all taxpayers equally. Families that do not itemize and take the standard deduction and those with large capital gains may benefit. Also, as a result of the proposed change from seven tax brackets (with rates from 10% to 39.6%) to three tax brackets (12%, 25% and 33%), some people may find that the broader bands for tax rates may include more income in higher rate brackets. In those cases, accelerating income may result in lower taxes this year. For example, those who are now filing as “head of household” will not be able to do so next year because both the Trump and GOP tax reform proposals are eliminating that filing status. Therefore, some of the current 15% bracket will be increased to 25% and the entire 28% bracket will be increased to 33%. Likewise, current personal exemptions for each dependent are being changed to larger standard deductions for individuals and married couples regardless of family size. Most families will benefit, but large families with many dependents may have more income subject to higher marginal tax rates.

As always, it is beneficial to accelerate capital losses, deductions and additional business purchases. Except for anyone already subject the AMT this year, fourth quarter state estimated taxes should be paid this year. Likewise, those paying large medical expenses, donating appreciated securities and maximizing planned charitable contributions should make those changes this year. Capital gains should be deferred but we don’t know if the current Obamacare 3.8% supplemental tax in addition to the capital gains tax will still apply.

The only certainty is the current tax rates. Proposals and wish lists generally result in watered down legislation after Congressional debates. It seems that most taxpayers will benefit while others may not. As always, discussions with your tax advisor based on your individual circumstances is the best approach.

Our best wishes to you for this holiday season and throughout the upcoming year.

Marv Kaye, J.D., CFP®

Kaye Capital Management

Get ready for future long term care need

Get ready for future long term care needs

The Ostrich strategy of ignoring your future long term care issues rarely works out well for most people.  The wealthy can finance the best care and the very poor will be taken care of with public funds but the vast majority of Americans will have a huge financial challenge.  Unfortunately, the cost of eldercare living arrangements is very expensive and the quality varies greatly.  Neither Medicare nor health insurance covers these costs.  It must be financed privately.

According to a report from Genworth Financial, the median annual bill for care in an assisted living facility is $43,200 ($118 per day) for a shared room.  A private room in a nursing home costs $91,000 a year ($249 per day).  However, in some states such as California, the cost is considerably higher, often exceeding $200 per day and up to $300 for the elite homes...

Those accustomed to shopping for the best deal may be sadly disappointed because this is one of the times that quality matters.  Living in an assisted care facility is different than saving money on a vacation by staying in a cheap motel as a place to sleep while you preserve money for touring and restaurants.  There is no touring and food is provided in a group setting without reserved tables or fancy menus.  Quality rooms and a well-trained and caring staff to assist with issues such as walking, dressing, toileting and other personal needs comes at a price.  These services are provided to residents who are dependent on others because they are unable to care for themselves.  Many have lost their cognitive abilities because of dementia and may even be unaware of the quality of their care.  At such times, a budget facility could jeopardize your health.  Moreover, as one’s medical conditions advance the cost increases further.

Since the need for such care doesn’t normally occur until the seventh or eighth decade of life, many defer planning until such care becomes necessary.  The strategy seems intuitive but in reality, the premiums for a long term care policy increase with age and the likelihood of an insurance company rejecting your application or premium increases with declining health.  They prefer applicants who are in good health who may not need to collect on the policy for many years, even though the premiums will be much lower.

For people with a home or condo that could be sold to pay for their future care may be a viable option if they are single or widowed, especially if they have no children or no concern about leaving money to their families. Married couples will still need their home unless or until both spouses/partners move into a facility together.   For those with a family member or close friend who is willing and able to provide care for free or a modest cost may be a solution.  But for most people, a form of insurance will best provide for their future care and still preserve other assets for their families.  In some cases, their families may find it in their own best interests to help fund the premiums.

Everyone’s situation is different.  Before selecting a solution, one should begin with a review of their financial resources including savings, investments, pensions, insurance and other assets.  Conversations with a spouse or partner, children, family and friends about the type of things you want or need in the future.  A visit to a few LTC facilities is often very helpful to decide what you would want for yourself when the time comes.  As they say, a picture is worth a thousand words.

When these matters are completed, a review of your will or trust will confirm that your planning in the past still represents your feelings today.  If not, schedule an appointment with an estate planning attorney to amend the documents, or if no documents were prepared, draft a will and trust, advance directive forms, or other forms as necessary.

The cost of long term care policies is normally reduced by 25% for couples.  Both spouses and partners qualify for the discount.  For those who still need life insurance, several newer hybrid life insurance policies have long term care riders that are very cost effective, easier to qualify for, and at cheaper rates than separate LTC policies. Owners of variable annuities can exchange them on a tax-free basic for some newer annuities with LTC riders.  The last two options eliminate the risk of future premium increases.

Not everyone will need future long term care assistance but it is better to plan ahead than to be surprised and unprepared.  I hope that this has been of some help to think about and prepare for the future based on your personal priorities. 

Marv Kaye, J.D., CFP®

Kaye Capital Management

Brexit and your Portfolio

In November of 2008, I had the honor of placing my brother’s “pilot wings” upon him in Pensacola, Florida.  He is currently a Marine helicopter pilot.  Most people can remember what was going on in the world circa 2007-2008, especially in the world of finance.  After the ceremony, I had the privilege of sitting with my brother’s commanding officer, who happened to be a Southern-blooded war-tested high-ranking Marine.  He asked me what I did for a living, and I told him.  His eyes widened and he quickly gave me a look-over as if he was evaluating me for post-traumatic stress disorder.  After apparently determining that I was still of sound mind, a giant wry smile arose on his face as he leaned back in his chair.  His next two words left a permanent mark upon me. 

 “Ammo and Canned Tuna Fish.”  

 My reply, “What???”

 “All I really need to survive and protect my family is Ammo and Canned Tuna Fish…..and I got a whole lot of both of them in my basement!”  

We all had a good laugh together, but I’ve thought about that nice Southern gentleman many times since then. 

Last night the British people decided that they no longer wanted to be a part of the European Union.  World markets are reeling this morning.  Do we believe this is a time for Ammo and Canned Tuna Fish???   NO 

  The next few days could be choppy, but we believe this will be short-lived.  A few additional facts for you:

  • Roughly a month ago, we took defensive steps to make all client portfolios more conservative.  Everyone has 10-15% more in cash, bonds and alternative hedge funds than normal.
     
  • We do not have any direct exposure to European or British stocks or currencies.  We have two global mutual funds, which have small exposures to each, so there is some indirect exposure but it is minimal.  We’ve calculated that our average client portfolio has less than 2% exposure to European stocks and less than 1.25% exposure to British stocks through the global mutual funds.

Why do we believe this will be short-lived? 

Most big institutions and traders called the election wrong and positioned trades for a “Remain” vote.  Those trades have to be unwound very quickly, and those using leverage likely suffered margin calls.  If they do not have the cash to cover the margin debt, they have to sell some other securities to meet the margin obligation.  It will likely take more than a day for these trades to unwind, so this may continue into early next week.  Then rationale should return to the world and markets should stabilize.

This is not the first time in history a country has left a trade union.  It has happened many times before, and we’re still here!  It will take six months to two years for the British government and corporations to redraft trade agreements and immigration policies with its European neighbors and during that time, British GDP will likely stagnate.  A mild recession there is probable, but they will survive and likely come out stronger than before.  It appears as though they may start to look more like Norway, who is not a member of the European monetary or trade union.   But Norway is doing just fine…

 What are we doing now with your portfolios, and what are we watching?

Sometimes the hardest thing to do in investing is to ‘do nothing’.  But that is what we are doing today.   We believe our portfolios are well-positioned for this, and do not feel the need to sell more in a panic.  And furthermore, since we believe this will be short-lived, we are doing nothing for the time being.  If things settle down next week, we will view this as a buying opportunity.

What would make us change our mind?

We think the biggest risk now is ‘contagion’, and that other countries may vote their way out of the EU.  If that happens, we may see the end of the European Union as we know it.  Should we see that occurring, we will take more steps to make the portfolios more conservative…..and possibly consider buying some Ammo and Canned Tuna Fish.  

Ken Watten, MBA, CFP®

Kaye Capital Management

Does your 401(k) Adviser Act as a Fiduciary?

 

Does your 401(k) Adviser Act as a Fiduciary? 

Over the last year, I have received a number of questions about being a fiduciary for 401(k) plans and how the new DOL Fiduciary Rule is going to change my business. Most of these questions are coming from people within the industry. In truth, The DOL Fiduciary Rule is not changing my business at all.

 For those of you who are not familiar with the new rule, all advisers who work with retirement plans are going to have to act as fiduciaries starting in 2017. What does this mean? It means advisers may no longer receive commissions or back-end fees for advising on retirement plans.

 More importantly, the new rule means that advisers will have to put their clients’ best interest before their own. This is a huge shift from how the 401(k) industry has been run in the past. Yes, there have always been advisers and there will always be advisers who act in their clients’ best interest. However, with this change, it removes the option to not act in your clients’ best interest.

What will this do to the retirement community? The fiduciary rule is a good thing for retirement plans and advisers who solely focus on the retirement business. The day of any adviser helping a company with a retirement plan is in the past. Now plan sponsors will need to look closely at who is advising them and what services they are providing. In truth, there are many people who say they are acting as a financial adviser, but in fact, they are just a middleman collecting a fee for doing nothing.

As a Plan sponsor, you need to actively ask your adviser if they are acting as a “fiduciary” adviser. (The official term is a 3(21) or 3(38) fiduciary for the plan.) If they are not acting as a fiduciary, it is time to reach out to someone who can act in your best interest. It looks like the responsibility of hiring a fiduciary is going to be on the plan sponsor. If you are not sure if you have a fiduciary, you should ask your adviser if you have an investment management or consulting agreement in place. If you do not, then they are probably not a fiduciary.

Remember, it is your job as a plan sponsor to make sure all fees charged to your participants are “fair and reasonable”. This includes annually benchmarking your plan fees to make sure none of your providers are charging more than is reasonable.

 Here is a free tool that will help you assess the fees associated with the plan and will tell you if your adviser is a fiduciary. Visit: http://www.kayecapital.com/free-fee-benchmarking-study/

Interest rates may soon rise

Interest rates may soon rise

The Federal Reserve attempts to stimulate or slow the economy by raising or lowering the Federal Funds interest rate, which is the official borrowing rate charged to member banks. Lower rates are an inducement to encourage borrowing and finance loans to invest in plants and equipment and stimulate the economy in an effort to avoid a recession. Higher rates tends to discourage borrowing and slow down the economy and prevent high inflation. Rates have declined for eight years following the 2008 Great Recession.

The first increase of 0.25 basis points (1/4 of 1%) occurred in December 2015. The minutes from the April 2016 Fed meeting indicated an intent to increase interest rates again this year. The timing is still uncertain but many economists and financial professionals believe that the next Fed rate hike may occur in June or July.

Why is another interest rate hike being considered at this time when inflation is still at a historic low? The positive news is that the fears of deflation have eased, worries about China devaluing their currency have declined, oil prices have rebounded, and global growth has been improving. Moreover, the Consumer Price index rose 0.4% in April, as reported by the Labor Department. Further increases are expected as commodity prices and retail sales (except brick-and-mortar stores) are increasing, and consumers are spending money on online purchases, especially home improvement.

In an effort to be proactive, the Fed is balancing these events in an effort to achieve their target 2% inflation rate. Unfortunately, as we observed last year, the Fed’s uncertainty in timing interest rate increases caused increased market volatility. We expect market volatility to follow any future Fed interest rate increases.

In the long run, this news should be viewed positively. Although consumers are spending more, they are also saving more. According to Cornerstone Macro, the U.S. savings rate is approaching 5% today, from a low of 2.5% in 2007. Instead of using the equity in their homes as a piggy bank, consumers have been paying down debt and spending within their means.

Sincerely,

Marv Kaye, J.D., CFP®

Kaye Capital Management

Is the term “Smartphone” an oxymoron?

Is the term “Smartphone” an oxymoron?

 

“Smartphone” is a brilliant marketing term because it helped to sell millions of cell phones at higher prices.  The added tools provide increased technology, efficiency and convenience to quickly send and receive messages, check balances and execute transactions in the bank, brokerage or 401(k) accounts, or download hundreds of apps to perform previously unheard of tasks that we now rely on.  I can’t imagine living without my smartphone today, but at times I wonder how “smart” it is.

Performing routine tasks efficiently and quickly is a great time management option.  Examples include checking the weather, sports scores, stock prices, traffic conditions, or different credit card or bank statements.  Making reservations at restaurants, setting a timer for the parking meter, maintaining a record of my exercise program, calculating calories, keeping a wine inventory or “to do” list is convenient.  These quick tasks that take little thought can and should be performed on a smartphone.

However, decisions that require reflection and judgment are a different matter.  The ability and temptation to act without thinking in matters of great importance often leads to bad results.  Financial, retirement, and investment decisions frequently improve with thorough planning and consideration of alternative strategies to achieve the desired results.  In such cases, the smartphone becomes the dumbphone.

Our goal is to help clients make smart decisions with their money.  Acting without planning is like shooting a gun without aiming. 

An article entitled, “Why I Don’t Make Financial Decisions On My Smartphone”, appeared in The New York Times on March 25, 2016.  The author, Schlomo Benartzi, a professor at the Anderson School of Management at UCLA , recently conducted a study at Duke University and concluded that people taking a test of financial literacy on a smartphone did “significantly worse” than those using pen and paper. Participants understood less of what they read and made shortsighted choices.  

Multitasking resulted in less focused attention.  Another study referenced in the same article “found that people ordering their pizzas online chose those with 33 percent more toppings, 20 percent more bacon and 6 percent more calories.” Tools to make our life easier are great for simple tasks, like calculations.  Where judgment is required or making a choice between two potentially correct scenarios depending upon your view of future events, quick financial calculations often lead to making dumb decisions with our money.   John Wooden, the famous basketball coach from UCLA, said, “Be quick but don’t hurry.” 

If the future is always like the past, if passive investing always beats active stock analysis, if value always beats growth, if the cheapest mutual fund always outperforms the more expensive, then machines will make better decisions than humans.  It assumes that humans can precisely communicate their needs, wants and feelings to the machine.  In the future, smartphones will improve technically, but will humans?  Both have inherent limitations and are highly complex. 

In some areas we are looking for one correct answer.  In others, the answer may depend upon considerations that are highly personal.  Financial planning, like medicine, psychology and psychiatry, involves both science and art plus collaboration to find the best diagnosis, recommendation or options for one client or patient.  Smartphones are fantastic tools but they don’t collaborate.  Skilled physicians and Certified Financial Planner® professionals still deliver higher quality results than the quick and easy tools.   So we wonder if the term smartphone is an oxymoron.

 

[1] http://www.nytimes.com/2016/03/27/your-money/why-i-dont-make-financial-decisions-on-my-smartphone.html?mwrsm=Email

 

TAX SCAMS TO AVOID. DON’T BE A VICTIM.

Computer savvy and creative crooks are getting filthy rich preying on unsuspecting victims. We have all heard about invasions of the computer networks of huge companies with the theft of personal and sensitive information. For example, hundreds of thousands of Anthem Blue Cross clients suddenly discovered that their names, addresses, social security numbers and other confidential data were stolen during a computer breach originated from another country.

I was one of those victims and have since spent considerable time and aggravation because two federal tax returns claiming refunds were filed under my name. I discovered that trying to prove that I was actually the victim was far from a simple task. Nothing could have been done by me to prevent this fraud but many other frauds could easily be avoided. Hopefully, the following “heads up” of other common scams will help keep you from becoming a victim.

Revenue Service commissioner John Koskinen said, “Criminals continue to look for increasingly sophisticated ways to breach the tax system.” The most common pitfalls listed from the IRS’ annual “Dirty Dozen” list of the most common tax scams for 2016 are as follows:

Phone Scams: Phone calls from criminals impersonating IRS agents threatening taxpayers with lawsuits, attachment of property, garnishment of wages, police arrest, deportation and license revocation if taxes are not paid directly to the alleged IRS listed address immediately.

Phishing: Fake emails or websites looking to steal personal information. Never respond to or click on such requests claiming to be from the IRS. They are a scheme to steal personal information including passwords and social security numbers. They often pose as people or organizations you know and trust, such as a bank, credit card company or government agency. The scam emails may infect your computer with malware that allows scammers access and the ability to track keyboard strokes to gain sensitive information.

The IRS only contacts taxpayers by U.S. mail about a bill or refund and never by email.

Return preparer fraud: Unscrupulous return preparers set up shop during filing season to perpetuate refund fraud, identity theft and others scams. Anyone promising inflated refunds, charging fees based on a percentage of the refund, or asking you to sign a blank return should always be avoided. They often advertise by flyers and phony store fronts.

Fake charities: Phony charities with names similar to familiar or nationally-known organizations often solicit donations at portable tables in front of legitimate businesses. Contributions will not be deductible.
Abusive tax shelters: Tax shelters that look too good to be true are probably frauds. They put up a red flag for the IRS to investigate and likely scrutinize your entire tax return during an audit, resulting in large penalties or worse.

Large corporate computer invasions such as the ones at Anthem Blue Cross, Sony and others are impossible to avoid but carefully checking your credit card and checking account transactions regularly to spot fraudulent entries will allow you to file a complaint in a timely manner. A red flag might be an inordinate delay at a restaurant in a mall after you give the waiter your credit card and before he returns with your receipt. While you enjoy your desert, he may be shopping next door with your credit card.

One rarely suspects to become a victim of such frauds but they are all common and increasing in frequency. Be forewarned and aware. Prevention is always better than seeking restitution after discovery.

The A, B, C’s of Medicare

The A, B, C’s of Medicare

Clients frequently call us with questions about Medicare.  They rarely understand the difference in coverage for the costs of hospitalization, doctors or prescriptions.  As with many government programs, the complexity of hundreds of pages in the legislation is too confusing for the average person to comprehend.  Unfortunately, no simple summary can answer all the questions but the following article published by the Financial Planning Association® is a succinct primer for understanding the core principles.  We hope that you find it helpful.

Sincerely,

Marv Kaye, J.D., CFP®

Kaye Capital Management

 

 

                                   Understanding Medicare: Parts A, B, C, and D

 Description:
One of the best way to grasp how Medicare works is to review the major components of the program: Parts A, B, C, and D.

 Synopsis:


Medicare contains four components: Parts A, B, C, and D. Part A is hospital insurance designed to cover inpatient care in hospitals and rehabilitation facilities. Part B helps to cover physician services, outpatient care, preventive services, durable medical equipment, and certain home health care. Part C, also known as Medicare Advantage, consists of insurance plans provided by private carriers. Medicare Part D, which is prescription drug coverage, generally can be obtained as an addition to Original Medicare (Parts A and B) or by signing up for a Medicare Advantage Plan that includes prescription coverage.

 Body:

Medicare contains many rules that beneficiaries and their caregivers are required to learn. Perhaps the best way to grasp the program's details is to review the major components of the Medicare program: Parts A, B, C, and D.

Medicare Part A: Hospital Insurance

This insurance is designed to help cover the following:

·         Inpatient care in hospitals, including rehabilitation facilities

·         Care provided in a skilled nursing facility or hospice for a limited period

·         Home health care

For inpatient hospital care, Medicare typically covers a semi-private room, meals, general nursing, drugs, and other hospital services and supplies. Medicare typically does not cover long-term care or custodial care in a skilled nursing facility, although under limited circumstances, it may cover a maximum of 100 days during a benefit period if a doctor certifies that a patient needs daily skilled care.

Medicare Part B: Medical Insurance

Part B helps to cover physician services, outpatient care, preventive services, durable medical equipment, and certain home health care. Although the scope of Part B is extensive, there are many services -- such as dental care, routine eye exams, hearing aids, and others -- that are not covered as part of this program.

Medicare Part C: Offered by Private Insurers

Also known as Medicare Advantage plans, Part C consists of insurance plans provided by private carriers. For beneficiaries with Part C, Medicare pays a fixed amount every month to a private insurer for their care. Many Medicare Advantage plans include Medicare drug coverage, and all cover emergency and urgent care. In addition, certain plans may cover services that are not covered by Medicare, which may result in lower out-of-pocket fees for beneficiaries.

You can sign up for Medicare Part C when you first become eligible for Medicare. You can also sign up between January 1 and March 31 or between October 15 and December 7 each year. If you sign up at the beginning of the year, you can't join or switch to a plan with prescription drug coverage unless you already had Medicare Part D. If you sign up toward the end of the year, your coverage will begin January 1 of the following year.

Medicare Part D: Prescription Drugs

There are generally two ways to obtain Medicare prescription drug coverage. If you have Original Medicare (Part A plus Part B), you can add drug coverage by obtaining it from an insurer approved by Medicare through Part D. Or if you have a Medicare Advantage plan, find out whether your plan includes prescription coverage as part of its program. Even if you don't take many prescriptions, you may want to consider signing up for Part D as soon as you become eligible. If you wait and try to sign up during a subsequent enrollment period, you may be charged a late enrollment penalty and be forced to pay higher premiums.

You can join Medicare Part D when you initially become eligible for Medicare or between October 15 and December 7 of each calendar year.

Infographic: Out of Pocket

Medical coverage from Medicare is far from a freebie. The following are costs that you may encounter.

  • Part A: No premium if you or your spouse paid Medicare taxes while you were working. For 2015, there is a deductible of $1,260 before coverage begins. You may expect to pay a portion of the cost for a hospital stay of more than 60 days during a benefit period.

  • Part B: A deductible of $147 for 2015 plus 20% of Medicare-approved amounts for medical services. The amount of additional monthly premiums depends on whether you are enrolled in Original Medicare or in Part C. With Original Medicare, the standard 2015 premium is $104.90 per month. Single beneficiaries with incomes above $85,000 and couples earning more than $170,000 pay higher premiums.

  • Part C: Costs and levels of coverage vary according to the plan. Contact plans that interest you to learn the details and to compare the costs and levels of coverage with Medicare Part A and Part B.

  • Part D: Pricing for prescription drug coverage is complex. For those who add Part D to Original Medicare, there is a monthly premium, an annual deductible, and copayments. There is a "coverage gap" that works as follows: After a beneficiary and the insurer pay $2,860 for prescription drugs during a benefit period, the beneficiary will pay 47.5% of the plan's covered brand-name perscription drugs until out-of-pocket expenses total $4,700, at which point catastrophic coverage takes effect. Effective the following calendar year, a new benefit period begins with applicable premiums, copayments, and other costs.

Medicare's rules can be confusing for many people. The Medicare website can be a valuable resource. Every year, Medicare also mails Medicare & You to beneficiaries and makes this fact-filled publication available online. You may want to review it to make sure you have an cost structure accurate understanding of the Medicare program.

Points to Remember

1.    Medicare consists of four components: Parts A, B, C, and D.

2.    Part A is hospital insurance designed to help cover care in a hospital or rehabilitation center. In addition, Part A may cover a limited amount of care in a skilled nursing facility or hospice.

3.    Part B is medical insurance that helps to cover physician services, outpatient care, preventive services, durable medical equipment, and certain home health care.

4.    Part C, also known as Medicare Advantage, consists of insurance plans provided by private carriers. For beneficiaries with Part C, Medicare pays a fixed amount every month to a private insurer for their care.

5.    Part D, which is prescription drug coverage, may be available as part of a Medicare Advantage plan or may be purchased in addition to Part A and Part B (also known as "Original Medicare").

Required Attribution


Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

© 2016 Wealth Management Systems Inc. All rights reserved.

(Financial Planning Association)

 

 

 

How are you?

Dear clients and friends,

Everyone I spoke with this year has started their conversation by asking, “How are you?” and expecting me to mention the declining stock market.  When I responded with, “fine” or “great”, they usually asked, “How is that possible?”  Well, I can’t be sure why my perverse reaction implies that I am out of touch with current events, but I can explain why it seems somewhat normal to me.  To be certain, I am aware of the recent market decline.  Moreover, I am worried, confused, and even fearful.  This isn’t the first time that I have experienced market declines since my first job in the trading department as a teenager, obtaining my securities license over 40 years ago, and studying the market history for many years and learning from both good and bad decisions.  Additionally, as a successful prosecutor I learned how to deal with adversity because I had to convince all twelve jurors to win a conviction.  The defense needed only to convince one juror to succeed.  Market declines are challenging, exciting and less competitive because nobody has a crystal ball to see future events.  Of course, I prefer rising markets and increasing profits, but the exhilaration of the competitive challenge during inevitable market declines is still exciting to me.

It is important to first understand what happened with this recent market sell-off, consider the cause, and decide if it is a normal market correction or the forecast of a recession.  Depending upon your interpretation, what action should be taken?  The main three options are to sell, buy, or do nothing.  Some do nothing because of confusion.  Others come to the same conclusion as a positive choice.  Doing something is more satisfying than doing nothing, but we chose patience for reasons explained below.

We believe that this decline is not the result of systemic economic risk like the cause in 2008.  During huge market declines as in 2008 and 2000-2002, we sell aggressively to minimize losses.  During periods of more normal market volatility with 5-10% declines, we either do nothing or increase our cash position by selling some equities to reduce risk.  We don’t try to time the market by selling and then buying back because we don’t believe it is possible to skillfully do it consistently.  The January 2016 decline may be the largest historical January decline, but at this point, we think it will be within the range of normal corrections.  Why? 

Our economy and currency appear to be the world’s strongest and most stable.  The primary causes seem to be limited to the energy sector and China.  The oil sell-off from close to $110 per barrel slightly over one year ago to almost $26 per barrel this week has serious global implications and has been a drag on stocks in the S&P 500 index.  Still, most sectors in our economy have been stable and improving.  Inflation and unemployment have been low.  The Federal Reserve finally increased the interest rate by 0.25% on December 31st, demonstrating confidence in the economic recovery.  Secondly, problems in China affect our market.  The Chinese accumulated huge debts to stimulate their economy.  There is fear that if their economy slows, they won’t be able to service their debt and may be compelled to devalue their currency to spur both growth and exports.

Why don’t we believe that the market decline will result in a recession?  Ultimately, we will have another recession, but not just yet, because the headwind for stocks is explainable by the oil decline, inflation decline that lowers long-term expectations, and implied numbers for corporate sales, earnings, and dividends.  Even though stock valuations decline, there is little change in the real economic growth.  Corporate growth rates, profit margins, and valuations may decline as labor costs and wages increase.  Nevertheless, higher worker incomes will likely increase personal spending and stimulate the economy.

While investors prefer easy answers, the causes of and solutions to economic problems are varied and complex.  The U.S. domestic economy and market must be viewed in the context of the global economy.  The joke a few decades ago was that when the U.S. economy sneezed, the world caught a cold.  Today, we are considerably less dominant globally and events in China, Japan, Europe, and even the emerging markets affect our economy and must be considered.  The largest and most stable companies today have become more global and have earnings exceeding well over 50% from doing business overseas.  In periods when our dollar is stronger with attractive exchange rates for other currencies, our largest companies face headwinds for exports because our products become more expensive to foreigners.  Conversely, imports for Americans are cheaper, creating pressures for our local companies to reduce prices to compete. 

So if this is not a time to sell, has the 10% market decline created a buying opportunity?  If the decline is over, the answer is yes.  If this market volatility continues for a few more weeks, we may not have seen the market bottom and lower prices will appear ahead.  As stated above, with no crystal ball everyone has an equal chance to predict the future.  Stock prices today are much lower than a month ago, but they could reasonably become cheaper.  By historical standards, according to FactSet, U.S. stocks as measured by the Dow Jones Industrial Average are currently valued at 1.4 times annual per-share revenue, but the average since 2001 is 1.3 times revenue, so it is possible that stock prices will decline further. (Arends, 2016) This may be a buying opportunity, or it could be a temporary stop before this decline reaches its unknown destination.  This uncertainty is called risk. 

Our interpretation of the data is that the correction is very scary but still within normal ranges.  The data is not predicting a bear market or recession, so we are not selling (except for about 5%), nor are we smart enough to really know if this is a market bottom.  The risk of that uncertainty gives no comfort to buying today and hoping for the best, so we are not buying.  We believe that further declines will be limited but the potential for a substantial recovery in the near future will be great, so we choose to remain patient.  If we are wrong in our forecast, we will take swift actions to reduce equities.  If we are correct, the losses will be quickly erased with the probability of greater gains ahead. 

Our approach is not without risk and our experience does not prevent constant concern and worry about the correctness of our decisions.  We have enjoyed past success but there is no arrogance because each market event is different and history never repeats itself exactly.  Still, the challenge and excitement of slaying the market dragon is always present as a motivator. 

As always, I thank our clients for their support and loyalty during good and bad times.  Since we get fewer phone calls from worried clients during each market decline, we prefer to believe that our past decisions have brought some confidence and comfort.  With best wishes for better days ahead,

Your designated worrier,

Marv

Marv Kaye, J.D., CFP

 

References

 

Arends, B. (2016, January 21). Retrieved from Marketwatch: http://www.marketwatch.com/story/look-out-stocks-might-fall-a-lot-further-2016-01-21

 

How to Pay for College and Survive

How to Pay for College and Survive

The major expenses that most people face include buying a house, saving for retirement, and paying for college.  The numbers have become so large that a multi-year savings plan is required for each goal.  The average American who is not living from paycheck to paycheck must prioritize.  There is not enough money to save for all goals at once.  College and retirement are more distant objectives.  The house is normally the most urgent priority. 

The most common result of this dilemma is that the more distant goals are neglected. Unfortunately, the funding problem is compounded because starting later requires larger monthly savings to accumulate the necessary nestegg to retire at the desired age or the retirement age must be deferred.  College expenses may require huge loans for the parent and/or child that often take many years to repay.  Fortunately there are alternatives for consideration that may potentially soften this dilemma for those willing to compromise.

The art of resolving all financial planning objectives involves judicious compromises to achieve the lion’s share of your most important goals without completely ignoring the other less urgent but still important priorities.  For example, buying too much life insurance could result in failing to save enough for retirement.  But if all savings go toward retirement without buying life insurance, the family could be devastated by an untimely death.  This is perfect if you can predict the future, but a disaster if your forecast is wrong. 

A less than perfect plan is usually better than one that risks failure in one of life’s desirable goals.  Discretionary, but not essential expenses, such as driving an older car, eating out less often or in less expensive restaurants, and deferring or taking cheaper vacations, can be used for higher priorities without imploding the foundation of a financial plan. 

Let’s look at today’s costs for a college education, various funding methods, and potential compromises to minimize future debt.

Paying For and Selecting the College are Both Important

Many times students select their favorite colleges without thinking about the cost.  Parents hesitate to limit the choice of school based on the cost because they want the best for their child.  The better approach is to discuss finances in a mature manner so everyone understands the reality that huge debts may require deferring the parents’ retirement or restricting the child’s spending options for decades until the loans are repaid.  In the September 21, 2015 Wall Street Journal article entitled “Questions Families Need to Ask About Paying for College”, the author Jillian Berman asked the following five pertinent questions:

1.      What does the student want to get out of college?

The list of schools should begin by listing the top three criteria they want from a college.  For general majors like education, sociology or psychology, most schools provide a decent education.  Less prestigious undergraduate colleges are more affordable so less debt is required, leaving flexibility for graduate school.

2.      How much are parents willing to contribute?

Most parents would like their child to be able to attend their dream school, but many are not financially able.  A family meeting to discuss the costs and sacrifices required may be helpful, especially where finances have not been openly discussed.  Naively embarking on a long-term debt could unravel if the parent loses his or her job, becomes disabled or faces a financial emergency.  Smaller sacrifices may assure success until graduation.

3.      How much longer might parents have to work?

Are the parents willing to work longer to pay back the loans?  Can they realistically assume that they will have a job for the extended period?  For example, if a couple earns $100,000 annually and funds $120,000 over four years of college, they may have to work up to 12 years to repay the loans plus interest.  To the extent that expenses are paid by cutting living expenses, deferring vacations and buying a new car, the loans can be reduced.

Colleges and universities are required to have a net-price calculator on their websites to estimate the net price of attendance.  This is an important tool to help rank schools by affordability.

4.      Should the student help out by working?

Part-time jobs are available in industry and on campus.  Financial-aid packages often include offers of work-study jobs.  The hours should be limited to 15-20 hours per week so the student can graduate in four years and maintain grades.  Also, financial aid rules have limits for annual earnings.

5.      How much debt should the student take on?

A good rule of thumb is that the total loans should not exceed the student’s expected earnings in his or her first year out of college.  Federal loans must be paid back within 10 years.  If the student borrows $35,000 and expects to earn $35,000 annually, the repayment over 10 years will require about 12.3% of his or her monthly income (including 4.29% interest at the current federal rate).  Income-driven repayment programs could extend the lifetime of the loan and require decades to repay the debt.  This would severely limit the student’s future lifestyle choices and quality of life. 

The above questions are all important but there are other options that those who are persistent and creative should pursue.  Once your family agrees on priorities, many strategies and resources are available to control and fund the cost of college.  Note clearly that the below suggestions may not be your first choices but the objective of a college education and degree will be achieved and the sacrifices will be reasonable.

The combination of a community college for two years, followed by a state university, is an attractive option for a great education followed by limited debt.  If a prestigious college is a priority, consider attending for years 3 and 4 to reduce the total cost.  The most important future question is “where did you get your degree? “

Debt for college and in life should be assumed very carefully.  For college, there are sources of “free money”, more accurately called scholarships and grants, because they do not have to be repaid.

Available Sources of “Free Money”

Many businesses, charities, and private individuals offer grants for people that are not financially able to attend school. Some of these grants may be based on field of study, location of the school, location of the student, or even religious beliefs. The first thing that any potential student should do is start looking for grant opportunities in their home area and with businesses and organizations they are familiar with, and then move to a broader scale search.

Government grants

The federal government has several grant programs, most of which are based on the awarding of money to students and their families who cannot afford the entire cost of college tuition, room and board, and supplies. The federal Pell grant is one of the most well-known grant programs offered by the U.S. Government. The Pell grant application is relatively simple and is completed by submitting a Free Application For Federal Student Aid, or FAFSA. Once the application is reviewed, the student will be sent a special form called the EFC, which stands for Expected Family Contribution. A Pell grant application should be sent in long before the fall quarter or fall semester deadlines.

Students can apply for Pell grant funding at any time of the year, but there is a cut-off date for the start of any college academic year. Students who apply for Pell grant funding can also apply for other federal grant programs.

After applying for Federal aid, students attending a college in the state of which they are a resident should also apply for state financial aid.

Corporate grants

Students can apply for grants from local companies or corporations that hire students with special skills. For example, high school students can ask their class advisor about how to apply for a grant from a software company that hires directly from college. In other words, grants are awarded to students intending to study the very material that qualifies them for a position with the company offering the grant.

Private colleges and universities also receive grant money from corporations and are willing to pass it on to students with excellent academic records. Private colleges have a special admissions department section that can advise students asking about how to apply for grants.

How to find sources for grants: Start with the internet

http://granthowto.com/college-grants/

http://granthowto.com/category/pell-grant/

http://granthowto.com/free-grants/

http://www.geteducated.com

https://www.fafsa-application.com/preparer.php

http://www.csac.ca.gov/ - for California residents attending an in-state public college

There are also specialized grants for women, students majoring in technology, or other areas where corporations provide funds to help fill a shortage of qualified employees.

Veterans and Their Dependents

Another source of aid is available to military veterans, their spouses, children, and stepchildren from the Montgomery GI bill. Students may qualify for aid issued on a monthly basis through this program. Students or their parents should visit or call the Veteran’s Center at their school for more information on how to qualify and what assistance may be available.

 

California Community Colleges

California community colleges have a program called the BOG (Board of Governor’s) Waiver that may waive tuition in part or entirely for students below a certain income level. Other forms of Federal and State aid assume that anyone under the age of 24 is a dependent of their parents and requires parental tax return information, so this is a great resource for those independent students who can prove independence through their own personal tax return.

 

College Scholarships

College scholarships are a form of grant money. Schools offer many different types of scholarship programs in an effort to attract the best students. These scholarship programs may include tuition costs or living expense, or both. You can qualify for these scholarships based on academics, sports, or other contributory programs like drama or band. Never overlook the opportunities that these scholarships provide. All students, regardless of income level should look into the scholarship opportunities offered by their school of choice.

Although grants and scholarships do not have to be repaid, it is important to remember that many scholarships and grants require that the student carry a specific grade point average (GPA) throughout their schooling, and if the scholarship is based on a specific industry, remain in that field of study throughout school. Students may be requires to submit grades to keep the scholarship or grant. Students receiving Federal and State financial aid are required to maintain a minimum GPA of 2.0.

Attending college can be costly, and many people believe that they are unable to attend school because of the expense. They fear the large debts that are associated with loans, and they believe that their dreams of attending college are simply unattainable. This, however, is not necessarily true. There are different programs available for college grants that can help cover the expenses associated with going to school.

Students who feel they are worthy of a grant – whether it be a scholarship or a hardship case – must first prepare themselves by putting together an educational resume. Before becoming concerned about how to apply for grants, students should draw up a resume that highlights all academic achievements, leadership roles, community involvement, and any talents that are noteworthy.

Letters of recommendation from teachers and civic leaders is always a good thing. These people should be presented with a copy of the resume drawn up by the student. It’s important to ask for recommendation letters long before any deadline for a grant application approaches.

It is also a good idea to write up an extensive essay that is separate from the education resume. This essay can be presented along with all applications. An essay of this type contains not only achievements and awards details, it also clearly defines what sets the individual apart from the competition.

The bottom line is that wealth is a circumstance of life that can be overcome by persistence, creativity and commitment to reaching your goals.  For college and in life, industriousness is a valuable skill for success.  If the dream of a college education is worthwhile, a little elbow grease to make it happen is a small price to pay.  All colleges have a financial aid office to answer questions and help students find the financial aid required to attend the school.

Financial help is available for those willing to do some research.  In some cases, the result could be a free ride.  In others, it may make the difference of going to college or minimizing future debt.  While not guaranteed, financial opportunities are available for those willing to spend time seeking the not so hidden treasures.  Good hunting!

With best wishes,

Marv Kaye, J.D., CFP®

Kaye Capital Management  

 

Works Cited

Berman, J. (2015, September 21). Questions Families Need to Ask About Paying for College. Retrieved from www.wsj.com: http://www.wsj.com/articles/questions-families-need-to-ask-about-paying-for-college-144280093

STRATEGIES FOR TOLERATING VOLATILE MARKETS

STRATEGIES FOR TOLERATING VOLATILE MARKETS

The recent market decline is making many clients nervous.  As your advisor, we employ different strategies depending upon our view of the expected length and depth of the decline.  Heroic changes were employed in the 2000-2002 and 2008 market drops but patience plus minor risk reductions for modest but normal market corrections seem more appropriate now.  We believe that our primary focus for long-term investors should be on their long-term goals, and not constant trading based on emotions and market noise. Market timing is both difficult and expensive.  It is important to understand that market downturns happen frequently but are usually followed by recoveries.


For clients who cannot handle market volatility, the best solution is a more conservative asset allocation model that seeks more stability and income and less fluctuation.  This portfolio may not achieve the same appreciation as more aggressive models but it will align the investment risk with your goals and help to cope with the market volatility. 


All investors should match their asset allocation model based on their risk profile.  The decision should not be based on just the desire to make as much money as possible (greed) or the reluctance to avoid all risk (fear).  To achieve your long-term goals, you should work backward from your future spending needs, your starting investment assets and ability to invest regularly, and then calculate your required average rate of return for success.  


Market declines should be expected but don’t overlook upside surprises that historically occur with even more frequency. Warren Buffett has been aggressive in making huge investments recently, consistent with his philosophy of buying when others are fearful.  


The best five-year return in the U.S. stock market began in May 1932, after the 1929 market crash but still during the Great Depression.  The next best five-year period began in July 1982, when we were in the middle of a huge recession with double-digit levels of unemployment and interest rates.  The U.S. stock market rebounded from 15 corrections since 1975.  So, is the glass half empty or half full?  Is the recent market action merely giving us a heads up for another long-term buying opportunity? 
 
The prudent investor globally diversifies based on his or her time horizon, goals and risk tolerance.  If the focus is on achieving long-term goals, and being comfortable with the emotional drain of tolerating short-term ups and downs, and your expectations are realistic, you will be more likely to stick with your long-term strategy and remain invested during the tough times that will surely follow. 
 
Diversification by definition includes some investments that are performing well and some that are doing poorly.  It seems counter intuitive to intentionally include both.  However, market rotations frequently occur between the best and worst asset classes because money seeks out of favor categories in an effort to buy low.  The amateur often does the opposite and buys the best performing stocks with the expectation that they will always go higher.  The dot com crash wiped out the dreamers.  Still, there will be future bubbles when prices achieve much higher multiples than normally.  During such times, many investors continue buying at unsustainable levels.  To paraphrase Warren Buffett again, he sells when others are greedy.  


Since we really never know the future for certain, it is comforting to diversify for more stability with some investments always going up.  If all investments are perfectly correlated, then everything will go up and down in tandem.  The mixture depends on the degree of risk desired.  Cash and bonds provide stability and income, and stocks provide growth.  However, the characteristics and performance between large, mid and small stocks differ.  Foreign developed and emerging market stocks often move on a different timetable.  Real estate and commodities often goes up and down at different times than other assets classes.


We don’t have to review the patterns more than the past few years to recall when large and small domestic stocks provided all the positive results in 2013, but small stocks did poorly in 2014 and foreign stocks did poorly in both years only to reverse course starting early 2015 when they became a favored category.  Of course, we all recall the meteoric rise in the price of gold to over $1800 per ounce, followed by a decline to today’s price of close to $1100.  During this period bonds did well because of declining interest rates.  Because of this rotation, each of these asset classes could be included in a diversified portfolio.  Over the next several years, their performance will likely be different than the past.  


Market timing is often the fool’s game.  It requires two perfect decisions – getting out at the top and back in at the bottom.  It is enticing because if done perfectly it will outperform all alternatives.  Some have a knack for getting out near the top and others can often identify market bottoms.  Few get both trades right, and almost none do either consistently.  It is expensive, tax inefficient, and time consuming.  
 
Our conclusion is not to actively time the market or to “set it and forget it”.  The diversification or mixture of different asset classes should be somewhat dynamic and actively managed based on economic circumstances but the overall level of risk should be more steady and passive based on your current and expected financial needs and emotional risk tolerance.  The markets will fluctuate and, without a crystal ball, cannot be controlled.  The amount of risk you assume, however, can be.


Invest regularly and the negatives of investing at market tops will be balanced by purchases at the market bottoms.  The amount of time in the market is a more valuable strategy than attempting to time the market.


A well thought out and sound investment strategy will not guarantee results but should put the odds on your side, provide both positive financial results and emotional solace, survive the peaks and valleys of the market and help to achieve your financial goals.
With best wishes for your financial success,

Marv Kaye, J.D., CFP®
Kaye Capital Management
11835 West Olympic Blvd., Suite 385E
Los Angeles, CA 90064
310-207-KAYE (5293) Telephone
310-231-1213 Fax
Marv@kayecapital.com
www.kayecapital.com

 


Investment decisions should be based on an individual's own goals, time horizon, and tolerance for risk.

Past performance is no guarantee of future results.

Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments.

In general, the bond market is volatile, and fixed-income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed-income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. Lower-quality debt securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer.


The commodities industry can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions.
Changes in real estate values or economic conditions can have a significant positive or negative effect on issuers in the real estate industry, which may affect your investment.
The S&P 500 Index is a market capitalization–weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.
The Dow Jones Wilshire 5000 is a market capitalization-weighted index of approximately 7,000 stocks.


The Barclays Capital Global Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar denominated.
MSCI EAFE (Europe, Australasia, Far East) Index is a market capitalization-weighted index that is designed to measure the investable equity market performance for global investors in developed markets, excluding the U.S. & Canada.


1. Historical returns for the various asset classes are based on performance numbers provided by Ibbotson Associates in the Stocks, Bonds, and Inflation (SBBI) 2001 Yearbook (annual update work by Roger G. Ibbotson and Rex A. Sinquefield). Domestic stocks are represented by the S&P 500® Index, bonds are represented by U.S. intermediate-term government bonds, and short-term assets are based on the 30-day U.S. Treasury bill. Foreign equities are represented by the Morgan Stanley Capital International Europe, Australasia, Far East Index for the period from 1970 to the last calendar year. Foreign equities prior to 1970 are represented by the S&P 500® Index.
It is not possible to invest directly in an index. All indices are unmanaged.

Fed’s Indecisiveness to raise interest rates

Fed’s Indecisiveness to raise interest rates

 

The recent market volatility seems to be unrelated to the growing recovery and stability of our economy.  I wonder if the Federal Reserve should have clearly explained why they might increase short-term interest rates to achieve their objective of managing our economy. 


To stimulate the economy during periods of recession, the Fed lowers interest rates to encourage borrowing and spending.  When the economy heats up and inflation increases, the Fed raises interest rates to discourage borrowing and reduce inflation.  Our former Fed chairman outlined a range of target interest rates and inflation that would trigger such policy changes.  It was objective, understandable, and predictable.  However, the recent deletion of the word “patient” from their statement about when they would begin to raise interest rates inferred that an increase was imminent, and that contributed to unnecessary market volatility.  


Actions in Europe are causing further confusion because their economy is where we were a few years ago, in recession.  The ECB (European Central Bank) is following our strategy of quantitative easing to lower interest rates and stimulate their economy.  Their currency declined in value resulting in close to parity with the U.S. dollar.  These diverging economies are causing a reversal of fortune for our countries.  The attractive exchange rate allows U.S. importers and vacationers in Europe to buy foreign goods at a big discount.  However, U.S. exporters are suddenly less competitive while European exporters are enjoying ballooning profits.


Considering that the national unemployment rate is down to 5.5% and inflation at well under their 2% target, it appears that no action to increase interest rates is called for by the Fed’s own standards.  Americans are glad to have jobs but many highly trained and educated workers are still unemployed.  The recovery has been slow but steady.  Salary increases should follow the growth in sales and profitability.  Acting too quickly to increase interest rates could reverse this trend.  Waiting too long could require more extreme future measures.


Pimco expects global growth to accelerate +2.75% from around 2.5% in 2014.  (Forecast from their 3/2/15 Cyclical Forum)  They stated in their February 2015 Global Update:
“Our favorable outlook for the U.S. reflects healthy levels of consumer confidence, rising utilization rates and increasing plentiful financing, which should continue to underpin the recovery.  With sustained growth likely to support a healthy pace of payroll gains, wage pressures are expected to gradually rise as the unemployment rate falls further.  While the sharp decline in oil prices may temporarily push headline inflation into negative territory, we expect the Fed to take its policy signals from marginal wage gains and begin to raise policy interest rates gradually in the second half of 2015.  As a result of the stronger growth outlook and likelihood of policy normalization, we expect the strength of the U.S. dollar versus other currencies to persist.”


Dr. Mark Skousen, economic professor at Chapman University, said that the Fed’s greatest fear is deflation, and raising interest rates could disrupt the entire recovery of our fragile economy.  He opined that they might postpone raising rates until inflation and the GDP trend upward.  (Interview on CNBC 4/2/2015) 


For possible damage control, Federal Reserve Chair Janet Yellen later stated that a rate increase was unlikely for “at least the next couple” of meetings.  The market responded favorably. 

Marv Kaye, J.D., CFP® | Kaye Capital Management

PRENUPTIAL AGREEMENTS: DOES LOVE REALLY CONQUER ALL?

PRENUPTIAL AGREEMENTS:  DOES LOVE REALLY CONQUER ALL?

 

As a financial planner, I believe in planning bigger futures for my clients, but I have learned that there are subjects where I am unable to add value because they fall outside of my area of expertise.  Pre-nuptial agreements (commonly called pre-nups) fall in to this category.  Pre-nups identity the separate property of each fiancé (assets owned prior to marriage) and if, or under what circumstances, those assets or their future earnings should remain separate property or become community property (assets owned equally by both spouses).  This process begins with questions of law but quickly transcends into the emotional questions of "fairness,” the definition of which depends on one's perspective.

When two young people with few assets meet, fall in love and marry, their life is simple.  All assets are community property.  Upon separation, all assets are divided equally.

However, when one party comes to the marriage with substantially more assets than the other, he or she wants to assure that those assets are secure should the marital bliss end in dissolution.  That person usually believes that a pre-nuptial agreement is fair.  The other person often believes that their love is being diminished by money.  Who is correct?
 
Is it naive to believe that the marriage vows will result in a lifetime of happiness?  Or should the statistics of broken marriages and no fault divorces justify self-preservation at the outset?  Does either view increase the likelihood of either result?  Both views have some merit.

If pre-nups were illegal or if they had a time limit whereby 20% of separate property vested into community property every five years, would marriages last longer or would they be terminated before each five year anniversary?

Confused?  I am perplexed.

My only conclusion is that the "haves" see perfect clarity, as do the "have-nots".  As the disparity of wealth increases, the issue of fairness becomes clearer.
  
The equitable solution is easier to resolve if the couple included someone on the Forbes list of the 100 richest people.  Because of the huge disparity of wealth, no reasonable person could claim a community property right to the assets but the wealthy party could easily provide a separation package of several million dollars and still be financially secure.  
..
Circumstances involving the merely affluent person running a family business or the professional who built a practice over many years prior to marriage are different and potentially more difficult.  Lacking the resources, they might disagree about the terms of an equitable agreement.  For example, the woman who agreed to put her career on hold, become a stay-at-home mom, raise the children, and support her spouse with a stable home life might refuse to sign a pre-nuptial agreement.  She might claim that she would be contributing to the family’s financial success.  In such case, should all the separate property assets remain separate forever?  Should a portion of the assets become community property?  If the assets increase in value during the marriage, should the profits be shared either equally or equitably?  

I don't know the answer.  There are equities in the positions of each spouse.
 
What I have learned are the limits of my mandate as a financial planner and the wisdom of not taking sides.  When I was a young attorney and planner, I honestly answered a client's question about whether he should prepare a pre-nuptial agreement and I still regret not suggesting that he discuss the question with a domestic relations attorney as the expert.  It would have avoided years of hurt feelings, blame and discord.  Fortunately, I was a quick study and never repeated that lack of judgment.  Some questions demand clear answers while others require absolute neutrality.

The attorney could give clear advice to one client as his or her advocate but could not represent both parties because their interests are conflicting.  Likewise, if my client is the couple, I have a fiduciary relationship with both parties and cannot act as an advocate for them individually where their interests may conflict.

If only one party is my client, I could be both an advocate and a fiduciary before the marriage.  However, my client and I should realize that our relationship would quickly change after the marriage and conflicts of interest may require termination of the relationship.  Such potential conflicts are foreseeable and should be discussed.  Success of a long-term relationship relies on trust, so positions that undermine trust should be avoided.

A referral to an attorney who can be an advocate for each client is essential.  Each party should have their own attorney.  The individuals will ultimately resolve the issue of fairness to their satisfaction, and most importantly, without any resentment or distrust toward the financial planner with whom they have a continuing relationship.  Where the success of the relationship is dependent on the respect and trust of the client, both wisdom and compliance with the financial planner’s legal obligations require neutrality when facing conflicting positions. 

Marv Kaye, J.D., CFP® | Kaye Capital Management

The Complete Wealth Advisor

The Complete Wealth Advisor

 

I often wonder if the specialist is better than the generalist.  It seems intuitive that the specialist, whether in sports, academia or business, is more knowledgeable and competent than the generalist.  However, as time goes on, I find that the interaction between financial planning and asset management, objective and emotional decisions, confusion between one’s goals and dreams and the competing goals of a life partner may sabotage the ultimate goals.

In law and medicine, the business model is often referred to as the “practice”, rather than the business of law or medicine.  At first blush, it seems pompous, but there is quite a difference between the objectives of business, where the cost of materials, gross sales, and profitability is the dominant consideration, and professions, where the best interests of the client trump profits.  This distinction is very important.  If the bottom line focus of business shared some of the ethical and fiduciary requirements of attorneys, doctors and financial planners, the actions that almost destroyed the American banking system and caused the Great Recession in 2008 might have been avoided.

As wealth managers, we seek the highest return at a given level of risk for investments to achieve the life goals of the client.  Making more money in the short-term with greater volatility and uncertainty may create discomfort, and even fear, for some clients who are not emotionally prepared to commit for the longer term.  The tendency is to believe that rising markets will continue forever and unless one continues to take risk, they will not achieve their goals.  Or worse, when the markets correct, they should sell or risk losing all their money.  Emotions often interfere with the objective and intelligent focus of the normal market fluctuations and long-term trends.  As a result, the uninformed feel greater comfort buying at the top and selling at the bottom, just the opposite of the principle of making money by buying low and selling high. 

Warren Buffett, arguably one of the world’s smartest investors, reduced his stock position in the fall of 2007 until he had a 28% position in cash, which he held well into 2008 as the market declined by about 45%, and then aggressively began buying depressed stocks at much cheaper prices and valuations.  Baron Rothschild, member of the Rothschild banking family, is credited with saying that "The time to buy is when there's blood in the streets."

Investing without regard to one’s life goals is like going on vacation without a clear destination.  The specialist understands how to prepare for vacation but the generalist has a broader understanding of the types of vacations, finances and various ways to travel.  Similarly, financial planning without a clear strategy of implementation to accomplish those objectives is pointless.  The melding of the planning and implementation requires a skilled generalist with the education, training, experience, and fiduciary commitment, to assure that the client’s goals remain paramount.  This involves the specialized credentials of the CFP® and the money manager, the wisdom and caring of the counselor, the persistence of a coach, and the cooperation and trust of the client.  Each component is essential but success requires trust and a team effort.  Many adjustments are required over time to deal with both foreseen and unforeseen events because the future never exactly mimics the past. 

In football, position coaches are the technicians who focus on the fine points for each position on offense and defense but the head coach has a better understanding of the big position.  Neither is better, they merely fulfill different roles.  The financial planner, who understands and coordinates the many financial and legal strategies, as well as the lifestyle needs and wants of the client, is in the best position to see the big picture and direct the overall strategy as the generalist.  The experienced Certified Financial Planner designee, who has no conflicts of interest and places the clients’ interests before his or her own, has the greatest potential to achieve a positive result.

Marv Kaye, J.D., CFP® | Kaye Capital Management

OUR OUTLOOK FOR THE ECONOMY FAVORS EQUITIES

OUR OUTLOOK FOR THE ECONOMY FAVORS EQUITIES

 

Despite the oil crisis and threat of interest rate increases in the U.S., sagging economies in Europe, the Far East and emerging countries, and increasing market volatility this month, I believe that economic growth will improve in 2015 for the following reasons:
1.    The U.S. economy is growing, with a boost from the drop in oil prices.  Our gross domestic product (GDP) growth is approaching 4%, in the opinion of JP Morgan Asset Management.
2.    The federal budget deficit and trade deficit are both declining (source: U.S. Treasury Department and the Bureau of Economic analysis); this trend should help support U.S. equities and the dollar. 
3.    The U.S. dollar is arguably the strongest world currency.  Of course, this helps our purchasing power for imports but may create a drag on exports for our larger multinational companies.  Small stocks, with lower foreign sales, may benefit.
4.    Inflation is very low and now, with the oil price decline of over 45%, below 2%.  Low inflation is generally good for financial assets.
5.    Economic weakness in China and Europe are creating an environment for continued low interest rates and helping our consumer and business economy.
a.    Most forecasters believe that domestic interest rates will increase this year in line with the Federal Reserve’s stated intent to increase the Federal Funds rate starting this summer.  I disagree because the oil price decline already lowered inflationary pressures.  There is little reason to slow our economy and risk causing a recession.  A reasonable forecast is to be cautious this year or defer interest rate hikes to 2016.
6.    Estimates for fourth quarter earnings growth in the U.S. are as high as11%, but for a negative1% for foreign companies.  (Source: RBC Capital Markets)
7.    Dividend yields for S&P 500 stocks are higher than that of the 10-year Treasury bond.  The opportunity to benefit from a higher dividend, favorable tax treatment, plus the potential for capital appreciation is very compelling.  This disparity occurred four times in the last 50 years with large equity gains over the following twelve months in the other three cases.  (Source: Bespoke Investment Group)


If the trend in January continues, our belief in diversification may be rewarded.  Unlike last year, domestic small cap stocks, foreign large cap stocks, and emerging market equities appear to be leading the S&P 500.  It is still early to project that this trend will continue.  Volatility has been extraordinary.  On balance, we are optimistic that this will be a good year and that it will continue in 2016, a presidential election year, where neither party wants to rock the boat with new legislation.  

Marv Kaye, J.D., CFP® | Kaye Capital Management

New Year Resolutions

New Year Resolutions

 

This is the time that many people reflect on the coming year and make New Year Resolutions.  I also have been a serial maker of resolutions with mixed results.  I noticed that some resolutions were successful, while others failed.  Lack of motivation or frustration often sabotages the resolution, but the wish continues as it is deferred from year to year.  The process is not empowering, but the reason is crystal-clear.


As with all successes and failures in life, the difference is between a wish-list and a plan.  Certain goals fall into the category of wishes but are very difficult to do.  Examples include losing weight, getting into physical shape, getting organized or improving relationships.  They tend to be vague, unrealistic or poorly defined.  However, where the motivation is powerful and urgent, or motivated by pain and need, the carefully defined resolution must have a plan for success.
As financial planners, we deal with this process successfully by carefully defining the need, creating a goal, establishing a time horizon with regular milestones, and reviews for accountability.  Most importantly, the plan must be in writing.  I remember that in my first week of law school, my contracts professor said that "an oral contract is not worth the paper it’s written on."  Likewise, oral resolutions are wishes - not plans.


Goal-setting must be specific, realistic, and clearly defined.  Worthwhile goals are difficult and should be broken down into small pieces with short time horizons that are easy to achieve.  Every success should be celebrated when it is achieved.  Instead of minimizing each accomplishment by observing how far away the goal remains, pat yourself on the back because you did it and you are one step closer to your goal.  Create a time-line and write down your first accomplishment.  Tape it to a wall and add to it regularly.  Ignore all naysayers and thank all supporters.  You deserve it!


As you progress, expect to encounter many obstacles.  Think about the possibilities in advance to minimize the surprises.  Scheduling regular reviews will allow small adjustments to get back on track.  Understanding your weaknesses that caused past failures and being flexible may help to tailor plans to your lifestyle.  Seeking perfection often sabotages success.  For example, if your goal is to lose weight and you don’t plan for gaining weight during a vacation, it could cause you to get frustrated and just give up.  However, if you accept that gaining some weight and having fun is normal you still have a positive attitude knowing that in a couple weeks you will be ready to move forward again. 


Saving enough money for retirement may be the hardest goal.  It takes a huge commitment over several decades and involves overcoming many obstacles, both foreseen and unforeseen.  In comparison, learning to play the piano, losing weight, quitting smoking, or getting into shape are easy.  The process is the same.  Both involve creating a plan and getting started.  Think about Nike and “just do it”!


Resolutions with reasonable expectations are worthwhile.  Wish-lists, not matched with a strong desire, are a waste of time.  Over a lifetime, one annual resolution, taken seriously, will result in many happy celebrations.

Marv Kaye, J.D., CFP® | Kaye Capital Management