Coronavirus and Market Volatility

A few of you may have noticed some volatility in the markets this week… To the tune of roughly 1850 points off the Dow Jones Industrial Average, or a greater than 6% decline in two days. The recent volatility is by no means ‘normal’ for the equity markets, but the sudden spike in volatility may have also served as a ‘wake up reminder’ for equity investors after having been lulled to sleep by a steadily upward moving market for the past year.

While I personally do not enjoy days like we’ve experienced this week in the market, I do in fact appreciate them. And while I do personally enjoy most steadily upward trending days, such as we saw the bulk of market days in 2019, they do in fact worry me. A healthy market is one that takes two steps forward, then one step back, then two steps forward, etc. We really haven’t seen any steps backwards since December of 2018. Every so often the market needs to correct, regroup, and reprice itself before making a continued push upward.

Corrections and their bigger sibling, Bear market, almost always require some sort of catalyst. The severity and seriousness of the catalyst generally determines which sibling we will see. It is pretty obvious that the catalyst this time around is the coronavirus. Although it was identified in November of 2019, the gravity of the situation and the extent to which it would disrupt global commerce has only begun to be recognized by financial market this past week.

Stock prices, as defined by multiple valuation methodologies including the discounted cash flow (DCF) or dividend discount model (DDM), are the discounted present value of a future stream of cash flows. Depending on the model, those cash flows are either revenues or profits. If forecasted revenues or profits drop, by definition current stock prices should drop accordingly. The extent and degree to which corporate profits will be hampered by the coronavirus is still unknown. Warren Buffet, a well-known, long-term investor, has called this week’s market action a ‘buying opportunity’, because he is always looking 3+ years into the future…i.e. the ‘oracle’ of Omaha, not just a clever name. Jim Cramer, well-known market pundit and legendary hedge fund trader (hedge fund traders usually have very short-term time horizons), does not necessarily agree with Warren that this is a short-term buying opportunity. Cramer has argued that he wants to see a slowing of the spread of the Coronavirus and ideally a halt of the spreading before he sees it as a buying opportunity.

I am not going to pretend to be a doctor, scientist, or have any knowledge of how quickly or slowly the coronavirus may spread. As I sit here in my office overlooking the tarmac and LAX, a headline just popped onto my screen indicating that a stewardess for Korean Air who took multiple flights in and out of LAX last week just tested positive in Seoul. What I will be watching very closely is the extent to which the coronavirus impacts corporate profits and earnings projections, and more importantly… the extent to which companies are able to service their debt due to negative economic ramifications of the coronavirus. If we start to see a wave of corporate defaults without a swift and strong response from central banks, it is highly likely that little sibling will ‘evolve’ (to borrow from my kids Pokemon lingo…) into big sibling.

As Marv and I have discussed with many of you in recent months, during the course of 2019 we took a number of steps to decrease the risk in our portfolios. We did not see the coronavirus coming, but lofty and extended equity valuations combined with abrupt unconventional u-turns in monetary policy had created a cause for caution. It is difficult to ascertain this just by looking at the ticker symbols and security names on your statements, but here are some of the highlights of those de-risking modifications:

1) Increased gold from 0% to 5%, and then from 5% to 10% of portfolio values during the course of 2019. As of today in 2020, the S&P 500 index is down over 3.5%, while gold is up roughly the equivalent amount.

2) Increased the credit quality of your bond holdings to minimize exposure to non-investment grade (i.e. “Junk”) bonds, and minimized exposure to international and emerging market sovereign and corporate bonds.

3) Decreased our direct exposure to Emerging Market equities (i.e. Chinese, Korean) to essentially zero.

4) Consolidated our U.S. Equity exposure to large cap stocks, with an overweight towards value and dividend paying stocks.

5) And lastly for less aggressive clients, we have reduced our overall equity exposure by roughly 20%.

At this point, while we are not enjoying the market volatility this week, we at Kaye Capital definitely feel like we have prepared your portfolios well for heightened volatility. Should we see corporate earnings forecasts erode substantially, or corporate defaults increase dramatically, we will take additional measures to reduce risk in our portfolios.

Sincerely,

Ken

Ken Watten, MBA, CFP®

Kaye Capital Management

Kaye’s Comments

Dear clients and friends,

I always look forward to reading Warren Buffet’s annual letter to shareholders of Berkshire Hathaway. Not only does it address all the usual financial numbers for the company, but it includes homespun stories to illustrate his investment philosophy, and a self-effacing sense of humor to minimize his investment prowess and take responsibility for poor decisions. His multi-decade history of success as a long-term investor coupled with his humor and wisdom earned him the moniker of the “Oracle of Omaha”. The excerpts below include some of the interesting highlights from his most recent annual letter, released on February 23, 2019.

The 88 year old Buffet t, as chairman, and the older mid-90’s Charlie Munger, as vice-chairman, head a team of investment professionals who purchase entire public companies to be run as private companies of Berkshire, as well as an assembly of public companies that they partially own. Notice that they don’t view their holding as a stock portfolio or collection of ticker symbols, but as companies with substantial earnings by companies that do not have excessive levels of debt. "Charlie and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their 'chart' patterns, the 'target' prices of analysts or the opinions of media pundits. Instead, we simply believe that if the businesses of the investees are successful (as we believe most will be) our investments will be successful as well. Sometimes the payoffs to us will be modest; occasionally the cash register will ring loudly. And sometimes I will make expensive mistakes. Overall – and over time – we should get decent results. In America, equity investors have the wind at their back."

In replying to the question by CNBC, Why investors shouldn’t use borrowed money to buy stocks, Buffett replied, “There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.”

Buffett also quoted lines from the Rudyard Kipling poem in the 1800s to illustrate investment opportunities available to those with limited amounts of debt. "When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt. That's the time to heed these lines from Kipling's If:

'If you can keep your head when all about you are losing theirs ... If you can wait and not be tired by waiting... If you can think – and not make thoughts your aim... If you can trust yourself when all men doubt you... Yours is the Earth and everything that's in it.'"

When asked why he didn’t make any deal; in 2017, Buffet explained that he couldn’t purchase them at a sensible price because the market priced stocks were at an all-time high. This strategy is consistent with his prior famous quotes including his advice to buy when others are fearful and sell when others are greedy. In this interview, he was more verbose and colorful. Buffett said, "Indeed, price seemed almost irrelevant to an army of optimistic purchasers. Why the purchasing frenzy? In part, it's because the CEO job self-selects for 'can-do' types. If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it's a bit like telling your ripening teenager to be sure to have a normal sex life. Once a CEO hungers for a deal, he or she will never lack for forecasts that justify the purchase. Subordinates will be cheering, envisioning enlarged domains and the compensation levels that typically increase with corporate size. Investment bankers, smelling huge fees, will be applauding as well. (Don't ask the barber whether you need a haircut.) If the historical performance of the target falls short of validating its acquisition, large 'synergies' will be forecast. Spreadsheets never disappoint."

Why have I dedicated a newsletter to such comments by Warren Buffett, especially at a time when one of his largest public investments in Kraft Heinz just suffered more than a 25% decline? Simply put, I believe that he embodies the most admirable qualities of academic brilliance, a well-considered investment philosophy based on minimizing risk of loss and seeking businesses with sustainable profitability that he has followed for many decades with unbridled success. Short-term profits are always nice, but excellent profits over many years provide better compound rates of return and fewer sleepless nights.

Warm regards,

Marv Kaye, J.D., CFP® President and CEO Kaye Capital Management www.kayecapital.com 310-207-KAYE (5293)

IS THE SKY FALLING? COULD WE PUT HUMPTY DUMPTY BACK TOGETHER?

January, 2019

IS THE SKY FALLING? COULD WE PUT HUMPTY DUMPTY BACK TOGETHER?

Humpty Dumpty has obviously fallen over the past few months but he is not yet broken. We gave back most of the 2018 profits but our economy is still healthy and the US dollar remains the safest currency. Our economy is slowing but still growing and both market sentiment and momentum for stocks changed in the last few months but is now improving again. Volatility increased with program trading and algorithms by hedge funds, along with individuals selling for tax reasons and to protect profits in case the decline continues. The unanswered question is whether the bull market ended or if it’s just a bear market rally within a continuing bull market? The answer is not yet known but the next several weeks will provide more clarity.

We believe that the storm clouds are temporary and that the markets will recover but there are many other opinions, both negative and positive. At times like this, we rely most on the market fundamentals and try to understand the reasons for the decline. If everyone agreed, we would take comfort in the belief that such a consensus is usually wrong. Nobody knows the future. Historically, the market climbs a wall of worry. Today, there is much to worry about.

Why am I cautiously optimistic while others are negative?

I try to first understand the past before forming an opinion about the future. My biggest worries are as follows:

1. The market expansion since 2009 was the longest in history and could last longer. Bull markets don’t last forever but they don’t die solely of old age. There is usually a catalyst such as a recession. Our economy as measured by the GDP (gross domestic product) was growing by 3-4% in early 2018 because of the boost from the new tax act. That growth was unsustainable. Growth slowed to 2.8% in the third quarter and may slow a little more but there appear to be no great negatives. Housing and auto sales are weak, the price of oil declined but unemployment is low and wage growth is at 2.8%, inflation is under control at slightly over 2%. Rising short term interest rates have temporarily inverted the yield curve but not to the extent of foretelling an immanent recession.

2. The recent market decline erased most of the 2018 gains but stock valuations are now at very attractive levels. The average price is at a multiple of approximately 14.5 times earnings, down from about an average PE (price to earnings ratio) of 17. By most standards, stocks are reasonably priced today.

3. The Federal Reserve: The Fed has a legal mandate to maintain stable employment and stable prices to keep inflation within an acceptable range. Several years ago they set a target of 2% inflation and just recently achieved that goal. Their primary tool is to increase rates to avoid high inflation by discouraging borrowing and to slow economic growth, or decrease rates to stimulate the economy and recover from recessions. The last increase in December came at a time when the market was declining and economic growth slowing. Unfortunately President Trump was publicly challenging the Fed not to increase rates and threatening to fire the Fed Chairman if he did so. In my opinion, Chairman Powell raised rates in hopes of maintaining the independence of the Fed and not appearing to be a Trump puppet, thereby causing a predictable market decline. On the bright side, on January 4, Powell publicly clarified the Feds intention is to be patient in paying attention to the market and not follow a pre-set path for interest rates by noting that they are willing to shift their goals and policy as necessary. Too little, too late? Maybe it is but it is encouraging. Potentially, it may mean that either we won’t see another rate hike soon or that a rate decline is possible if economic fundamentals change.

4. Tariffs: Most economists disagreed with the bold unilateral U.S. policy of tariffs and predicted that it would cause major global problems. It could be argued that the motives were appropriate because of the inherent unfairness in the balance of trade with other countries, especially China. The public challenge instead of the past preliminary diplomatic approach of negotiations was unprecedented. The stated deadline is March 1st. A positive resolution of current negotiations with China will probably stimulate huge market gains. Failure to agree on a resolution may result in substantial pain to both economies. Large multi-national companies will be affected the most.

5. Government shutdown: Our country has now operated for several weeks without a budget deal. Congress and the president are both inflexible. Both sides want a budget but the Democrats refuse to agree to fund $5+ billion to build a wall and the Republicans won’t agree to a budget while President Trump refuses to sign the deal. Really? The entire country is in limbo, services aren’t being provided, and employees aren’t working or being paid because of a wall? Can’t a compromise be negotiated on a short-term basis in the interest of Americans? If all government employees were treated equally, and Customs were also not being paid, the result might be that everyone from other countries could illegally and casually walk across our border because no guards would be paid to keep them out. Do we need an adult in the room?

Actions we have taken: Portfolio changes

With respect for current market declines and uncertainty about the future market direction, we used our discretion to reduce portfolio risk by selling some equities and increasing fixed income. Risk is the only thing we can control, so all client portfolios from aggressive to conservative were rebalanced more conservatively. Depending upon future events, our plan is to either reduce equities further, or hopefully to rebalance back to our prior asset allocations.

A few gratuitous thoughts

Our forefathers wisely created three equal branches of government concentration of power in one person, such as the King of England. Unfortunately, they assumed a level of individual maturity and didn’t foresee the power of the parties to control their members so they vote as a bloc in exchange for financial and other support during elections. Money and power often overcomes the desire to vote one’s conscience. Is there a solution? I submit that a fiduciary standard might diminish the party’s power but enhance the citizens’ rights. As registered investment advisors, we have a legal duty to place our clients’ interest first. As a past LA County Retirement Board trustee, I was legally required to be a fiduciary in representing the interests of all employees, retirees, and the County of Los Angeles, regardless who elected or appointed me. Shouldn’t all elected members of Congress and the President of the United States be held to the same standard? I believe that such a requirement would lead to more collegiality, discussions and compromise across the aisle in Congress, and less concentrated control by both branches of government. We expect our elected representatives to vote based on their individually considered opinions, not based on instructions from the party or lobbyists. A fiduciary standard, properly monitored and enforced, would help to achieve more independence and honesty.

These thoughts do not favor either party. I believe both parties have legitimate values and concerns. My concern is that too much power results in extreme results, both left and right, with unintended consequences. For the best long-term solutions that benefit the greatest number of Americans, open discussions and compromise leads to lasting policies. There are no perfect agreements but progress toward perfection beats dissention, dysfunction, and gridlock.

Marv Kaye, J.D., CFP®

President and CEO
Kaye Capital Management

For a successful retirement, don’t follow the crowd

For a successful retirement, don’t follow the crowd

As youngsters in school, we were greatly influenced by our peer group.  We listened to the same music, wore the same clothes, played the same sports, and generally liked the same things.  We wanted to be accepted and popular so we tried to be like others so they would like us.  Being different took courage and often led to loneliness.  Adults are a more diverse and tolerant group, but the same principle applies within many subcategories of interests, such as careers, families, sports, entertainment, politics, and other interests.  Why is that?  The easy answer is that birds of a feather flock together.  I don’t disagree with this reality because there is a comfort associating with others who share my values and interests.  With multiple interests, different peer groups of friends or associates may be required.   When I was young, I had several groups of friends who were interested in school, gymnastics, jazz, clubs and fraternities, politics, investments, and law.  My friends were very different from each other and I liked them all for different reasons. 

The above strategy of “go along to get along” works fine in school and business but not for retirement planning.  It also tends to explain one reason why pre-retirees follow the crowd and fail to achieve their objectives.  Unfortunately, it you do what everyone else does, you likely will get what they get.  The facts are that a large percentage of older Americans are financially ill-prepared for retirement.

Of course, they don’t plan to fail, but they fail to plan.  They wait too long to get started and don’t benefit from the power of compounding.  They don’t learn basic economic and investment principles, but instead seek stock tips and advice from well-meaning but unqualified friends or advisors or “rules of thumb” from popular financial magazines.  Many have 401(k) plans at work with 3-5% employer matching contributions, but they pass on this free money by not participating.  I understand that family expenses, poor health, and spotty work histories interfere with the need to save at an early age.  Often this pattern of disregarding the future continues when things stabilize. 

Unfortunately, in the United States many seniors did not or could not save for retirement.  They must rely on Social Security and employment, if available.  This is a national crisis.  Previously, corporate America provided pensions for their employees with guaranteed lifetime income.  Today, only government employers and labor unions provide pensions, and most are seriously underfunded.  Unless future market returns are extraordinary or government revenues are high enough to pay billions of dollars to restore the pension plan’s financial stability, this crisis will get worse.  Is it likely that politicians will redirect their spending to shore up the pension funds or terminate them in favor or only offering 401(k) plan?  Will voters approve higher taxes to help seniors with inadequate retirement incomes?  Will Americans spend less today to have a greater nest egg tomorrow?  Will politicians make hard but responsible choices if it jeopardizes their re-election success?  I suggest the answer to these questions is “no”.  Everyone will follow the crowd, do what they have done before, but still expect or hope for a different result.  As a country, the problem is huge and sad.  For each potential retiree, it’s a disaster.

Realistically, there are either people at work or money at work. In theory, we can work forever and not need a retirement plan.  This may be a lifestyle choice for those who are financially independent, but a disaster for most who face the inability to continue working because of layoffs, age, poor health, and no backup plan.  Excluding lottery winners, inheritors, and those willing to live on social security, we need a pool of funds sufficient to provide the desired monthly income for our entire lifetime. 

There may be no perfect solution but following the crowd and doing nothing is not the right answer because it will only magnify the problem over time.  There are unpopular financial solutions to reduce the government/employer risk but they will also reduce the employee benefit.  Ultimately, the employee will have to take more responsibility for his or her future retirement.  This responsibility may lead to learning some financial principles, actively creating a plan, and opening bigger future possibilities by creating retirement income not merely sufficient to fund your needs, but also your wants for a happier, more fulfilling future.

So what should you do differently than following the crowd?  You are not a generic person like everyone else, but a complex individual with unique interests, needs, and wants.  I suggest that you start from the bottom up.  Review your current lifestyle, reflect on how happy you are with your current level of spending, and whether you can afford the things you enjoy.  Ask what more you would like, what positive difference it would make for your family, and what you are willing to give up to achieve it.  Once you understand the likes and dislikes for your spouse and yourself, and how important they are to you, commit to what changes you are willing to make so that your future could be better than the present.  Only you know what makes you happy.  Your dreams are different than those of your friends.  Yes, dream, envision the possibilities, and then select an experienced Certified Financial Planner® who you trust, respect, and with whom you would feel comfortable sharing your personal feelings, so her or she could help you strategize and develop a realistic plan for you to achieve and live your dream.  Your CFP® will have the skills to solve financial issues and provide viable alternative solutions. 

As part of a series of retirement strategies, my last blog discussed the power of compounding.  Upcoming blogs will discuss some financial planning tips to make smart decisions with your money, and investment strategies to implement your plan to achieve increasing assets so that you ultimately will have sufficient wealth to fund your successful retirement. 

Marv Kaye, J.D., CFP®                                                                                                                         President and CEO                                                                                                                             Kaye Capital Management        

Why is retirement planning like dieting?

Why is retirement planning like dieting?

Many people go through life from paycheck to paycheck without the ability to prepare for their future.  Some more fortunate people have ample incomes and the ability to prepare for their future but choose to ignore it while they prioritize all their wants for today.  Both groups are frustrating for a Certified Financial Planner® or a Registered Investment Advisor because they either can’t or won’t help themselves.  The reality is that we must counsel clients to make preparations for future income needs at a time when they are unable or unwilling to work.  As fiduciaries, we must legally place the interests of our clients before our own interests. 

Most financial advisors are not required to follow the same high standard.  Their industry lobbyists have actively opposed all efforts to mandate the fiduciary standard for everyone.  At Kaye Capital Management, we support the objectives of the fiduciary standard for both ethical and business reasons.

No one chooses to fail, yet many fail to plan because the need for immediate gratification is more pleasurable than planning for financial security several decades in the future.  This same dilemma often applies to matters of health.  The obesity of Americans is higher today than in the past.  We all know the benefits of exercise and eating nutritious foods but junk foods are faster and often taste better.  The research is readily available and the consequences are predictable but it’s easier to just kick the can down the road and deal with it later. Unfortunately, poor health and poor finances may not be reversible. 

We all know that eating whole foods, limiting fat and sugar, and regular exercise is essential for good health.  The problem is having the discipline to stay on track.  Working with a qualified dietitian and physical trainer may help to provide knowledge and discipline to stay on track.  Since the planning period is very long, we believe that the best path to success is partnering with a professional who shares your long-term focus, is a fiduciary committed to monitoring your ongoing investment performance and suggesting procedural recommendations for staying on track by making smart financial decisions.  You might believe that this recommendation is self-serving, but careful selection of every professional is crucial, whether you engage a financial planner, physician, attorney, accountant, therapist, and dietitian.  Education, credentials, experience, plus personal chemistry and a belief that he or she is committed to your success.

Less money invested for longer periods achieves the identical result

Fortunately, the solution does not have to be perfect.  Modest monthly savings over long time periods potentially create larger nest eggs than big investments made shortly before retirement.  

In finance, understanding the power of compounding is essential.  Consider the ease of creating a $1 million retirement account at age 65 by starting a monthly savings program at ages 25 or 35 versus ages 55 or 60, and earning an 8% annual return. 

                                                                                                                                                       The principle illustrated is graphic, but not complicated.  Proper execution requires discipline and recognition that unforeseeable events may cause temporary gaps in funding without causing failure.  Future salary increases will get the plan back on track.  The pattern of funding, future investment gains and other variables will change, including an evolving commitment to achieving a bigger future.  Self-discipline, plus a relationship with a competent and caring financial advisor, will help to maintain a continued progress toward perfection.  For short-term trading strategies involving greater risk with a small percent of one’s total investments, some specialists may be better qualified for these goals.  For long-term retirement planning, we believe that partnering with fiduciary advisors who continually monitor investment accounts and provide ongoing procedural recommendations for other financial aspects of your life will improve the likelihood of success over the long term.

Returning to the metaphor of health and diet, losing weight is much easier than maintaining an ideal weight over the long term.  I know because I’ve succeeded and failed many times.  Behavioral changes are required because success is a marathon, not a sprint.  Short-term strategies like checking your weight on the scale daily may give false or misleading information and contribute to poor dietary decisions.  Weighing yourself weekly avoids some weight spikes from increased salt consumption, stress, hormonal changes, skipping daily walks or other variables.   But the discipline of eating reasonable quantities consistently is difficult and doing it alone seems almost impossible.

Similarly, the daily market prices vary for both financial and emotional reasons.  Trying to trade frequently based on misinterpreting the reasons for daily increases or decreases in share prices leads to increased trading costs, taxes, and stress with worse performance.  To succeed, two decisions must be perfect – the buy and sell.  Over time, most investments fluctuate in value but when the economy is strong and quality companies are purchased, they tend to increase in value over time.  Sometimes their positive fundamentals change and the stock should be sold.  If not, patience and confidence is required during modest market declines. 

Discussions with a competent advisor whose objectives are aligned with yours, may help to avoid selling prematurely during these times.  We monitor prices frequently along with interest rates, multiple economic indicators, and fiscal, political and world events.  When our research or future unforeseeable events change our assumptions or forecasts, we liquidate positions with small losses based on the facts.  We try to not let our emotions interfere with our logic.  Non- professionals tend to hold positions in hopes they will break even so they don’t have to admit defeat.

Long-term investment success requires continued education and diligence, plus flexibility and creativity, because past performance rarely duplicates exactly.  If it did, everyone would succeed.  Since the future is always unknown, solely looking in the rear view mirror never works well for either managing money or driving.  Yesterday’s guru may be today’s loser.  Investment success requires a combination of science and art, humility and diligence, plus confidence and patience.

In good times and bad, the team at Kaye Capital Management works together to help our clients achieve their financial goals.  We win if they win.  That has been the secret of our success for 50 years, long before KCM was founded in 1997.

Marv Kaye, J.D., CFP®                                                                                                                          President and CEO                                                                                                                              Kaye Capital Management         

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.