Tag Archives: Gainesville

7 Things You Need to Know About Term Life Insurance

life insuranceMy Comments: It’s very easy for financial professionals of all stripes to get into heated arguments about the merits of life insurance. Or the lack of merits, depending on your perspective.

A story I tell is about someone who in all seriousness asked “When is the best time to buy life insurance?”. And the answer was “About three months before you die. When would you like for me to come by and take your application?”

Therein lies the crux of the matter. And it is further complicated by the fact that even if I come by and take your application, three months before you die, there is no assurance the insurance company will accept your application and make an offer to insure your life. It only becomes a contract when the legally competent parties to the contract meet all the criteria of a legally binding agreement.

Now add in all the likely variables today, such as your health, your family health history, your age, your ability to pay premiums, the different kinds of life insurance, the tax consequences, your credit history, for how long you want or think you need coverage. All these variable conspire to make a problematical decision process.

But you have to start somewhere. I recently posted an article on Whole Life Insurance; here is another, this time about Term Life Insurance.

Sep 26, 2014 | By Stephan R. Leimberg, Robert J. Doyle Jr., Keith A. Buck

The two principal characteristics of term insurance are: the insured must die for any benefits to be paid and, by definition, the contract expires at the end of the term. Stated more specifically, a term life insurance policy promises to pay a death benefit to a beneficiary only if the insured dies during a specified term.

The contract makes no promise to pay anything if the insured lives beyond the specified term.

Generally, no cash values are payable under a term life insurance contract. If the insured survives the specified term, the contract expires and provides no payment of any kind to the policyowner.

1) When should term life be sold?

In general, some type of life insurance is indicated when a person needs or wants to provide an immediate estate upon his or her death. This need or desire typically stems from one or more of the following reasons:

A. Providing income for dependent family members until they become self-supporting after the head of household dies.
B. Liquidating consumer or business debts, or to create a fund, enabling the surviving family members to do the same when the head of household dies.
C. Providing large amounts of cash at death for children’s college expenses or other capital needs.
D. Providing cash for federal estate and state inheritance taxes, funeral expenses, and administration costs.
E. Providing funds for the continuation of a business through a buy-sell agreement.
F. Indemnifying a business for the loss of a key employee.
G. Helping recruit, retain, or retire one or more key employees through a salary continuation plan, and finance the company’s obligations to the dependents of a deceased key employee under that plan.
H. Funding bequests of capital to children, grandchildren, or others without the erosion often caused by probate costs, inheritance taxes, income taxes, federal estate taxes, transfer fees, or the generation-skipping tax.
I. Funding charitable bequests.
J. Preserving confidentiality of financial affairs. Life insurance proceeds payable to someone other than the deceased’s estate are not part of the probate estate and are not a matter of public record. It is not unusual for a beneficiary to be a lover, illegitimate child, faithful domestic servant, or have some other type of relationship with the insured that he or she may not want to be publicly acknowledged.
K. Assuring nearly instant access to cash for surviving dependents. Life insurance proceeds are generally paid to beneficiaries within days of the claim. There is no delay, as might be the case with other types of assets, because of the intervention of state or other governmental bodies due to settlement of tax issues, or because of claims by the decedent’s creditors.
L. Directing family assets to family members in a way that minimizes state, local, and federal taxes.

Generally, term insurance is not the most effective type of life insurance for all of these death benefit needs. However, term insurance may serve the insured’s needs in many circumstances. Because term insurance is not just one product, but rather many variations on a general theme different types of term insurance are indicated for different types of needs.

Keep in mind, term insurance, more than any other type of insurance, is pure death protection with little or no ancillary or lifetime benefits. Therefore, the two overriding considerations in the use of term insurance, regardless of the specific application, are:
• Will death protection alone meet the need?
• Will the coverage last as long as the need?

In short, with term — as with any other decision about the appropriate type of coverage — the product must match the problem.

Why Public Investment Really Is a Free Lunch

US economyMy Comments: The author of this article, which appeared in the Financial Times, is no stranger to economists, investors, and politicians.

My first reaction, however, was that it tends to endorse Keynesian economics, from a source that up to now has argued that the way to achieve economic recovery and more jobs, is for there to be much less government, lower taxes, strict austerity. This is strongly echoed by our national politics with the Tea Party on one side and the Democrats on the other.

Europe has to a great extent followed the Austrian model, the antithesis of the Keynesian model. Today, there is strong evidence Europe is experiencing signs of recession once again, while our approach is steadily moving toward recovery and growth. What follows is an argument that it is within our ability to further boost our recovery and by extension, our standard of living.

By Lawrence Summers / October 6, 2014

The IMF finds that a dollar of spending increases output by nearly $3

It has been joked that the letters IMF stand for “it’s mostly fiscal”. The International Monetary Fund has long been a stalwart advocate of austerity as the route out of financial crisis, and every year it chastises dozens of countries for their fiscal indiscipline. Fiscal consolidation – a euphemism for cuts to government spending – is a staple of the fund’s rescue programmes. A year ago the IMF was suggesting that the US had a fiscal gap of as much as 10 per cent of gross domestic product.

All of this makes the IMF’s recently published World Economic Outlook a remarkable and important document. In its flagship publication, the IMF advocates substantially increased public infrastructure investment, and not just in the US but much of the world. It asserts that when unemployment is high, as it is in much of the industrialised world, the stimulative impact will be greater if investment is paid for by borrowing, rather than cutting other spending or raising taxes.

Most notably, the IMF asserts that properly designed infrastructure investment will reduce rather than increase government debt burdens. Public infrastructure investments can pay for themselves.

Why does the IMF reach these conclusions? Consider a hypothetical investment in a new highway financed entirely with debt. Assume – counterfactually and conservatively – that the process of building the highway provides no stimulative benefit. Further assume that the investment earns only a 6 per cent real return, also a very conservative assumption given widely accepted estimates of the benefits of public investment. Then, annual tax collections adjusted for inflation would increase by 1.5 per cent of the amount invested, since the government claims about 25 cents out of every additional dollar of income. Real interest costs, that is interest costs less inflation, are below 1 per cent in the US and much of the industrialised world over horizons of up to 30 years. So infrastructure investment actually makes it possible to reduce burdens on future generations.

In fact, this calculation understates the positive budgetary impact of well-designed infrastructure investment, as the IMF recognised. It neglects the tax revenue that comes from the stimulative benefit of putting people to work constructing infrastructure, as well as the possible long-run benefits that come from combating recession. It neglects the reality that deferring infrastructure renewal places a burden on future generations just as surely as does government borrowing.

It ignores the fact that by increasing the economy’s capacity, infrastructure investment increases the ability to handle any given level of debt. Critically, it takes no account of the fact that in many cases government can catalyse a dollar of infrastructure investment at a cost of much less than a dollar by providing a tranche of equity financing, a tax subsidy or a loan guarantee.

When it takes these factors into account, the IMF finds that a dollar of investment increases output by nearly $3. The budgetary arithmetic associated with infrastructure investment is especially attractive at a time when there are enough unused resources that greater infrastructure investment need not come at the expense of other spending. If we are entering a period of secular stagnation, unemployed resources could be available in much of the industrial world for quite some time.

While the case for investment applies almost everywhere – possibly excepting China, where infrastructure investment has been used a stimulus tool for some time – the appropriate strategy for doing more differs around the world.

The US needs long-term budgeting for infrastructure that recognises benefits as well as costs. Projects should be approved with reasonable speed. The government can contribute by supporting private investments in areas such as telecommunications and energy.

Europe needs mechanisms for carrying out self-financing infrastructure projects outside existing budget caps. This may be possible through the expansion of the European Investment Bank or more use of capital budget concepts in implementing fiscal reviews.

Emerging markets need to make sure that projects are chosen in a reasonable way based on economic benefit.

What is crucial everywhere is the recognition that in a time of economic shortfall and inadequate public investment, there is for once a free lunch – a way for governments to strengthen both the economy and their own financial positions. The IMF, a bastion of “tough love” austerity, has come to this important realisation. Countries with the wisdom to follow its lead will benefit.

The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary

Why Income Inequality Is a Drag On Economies

money mazeMy Comments: I’ve written before that it’s my belief that at some point, if income inequality between the haves and the have nots gets too large, social chaos will follow. The spread or relative level of spendable income between these two groups is continuing to widen. So it becomes just a matter of time until national leadership makes an effort to reverse the trend, or we as a people will make it happen. And it probably won’t be pretty.

Now I find there is a current economic cost for this inequality. Which means that to some extent a cost is being paid today by all of us, you and I and our families. It’s not somewhere down the road, it’s NOW. If this concerns you, you should make your concerns known.

By Martin Wolf / September 30, 2014

Big divides in wealth and power have hollowed out republics before and could do so again

The US – both the most important high-income economy and in many respects, the most unequal – is providing a test bed for the economic impact of inequality. The results are worrying.

This realisation has now spread to institutions that would not normally be accused of socialism. A report written by the chief US economist of Standard & Poor’s, and another from Morgan Stanley, agree that inequality is not only rising but having damaging effects on the US economy.

According to the Federal Reserve, the upper 3 per cent of the income distribution received 30.5 per cent of total incomes in 2013. The next 7 per cent received just 16.8 per cent. This left barely over half of total incomes to the remaining 90 per cent. The upper 3 per cent was also the only group to have enjoyed a rising share in incomes since the early 1990s. Since 2010, median family incomes fell, while the mean rose. Inequality keeps rising. The Morgan Stanley study lists among causes of the rise in inequality: the growing proportion of poorly paid and insecure low-skilled jobs; the rising wage premium for educated people; and the fact that tax and spending policies are less redistributive than they used to be a few decades ago.

Thus, in 2012, says the Organisation for Economic Co-operation and Development, the US ranked highest among the high-income countries in the share of relatively low-paying jobs. Moreover, the bottom quintile of the income distribution received only 36 per cent of federal transfer payments in 2010, down from 54 per cent in 1979.

Regressive payroll taxes, which cost the poor proportionally more than the rich, are projected to raise 32 per cent of federal revenue in fiscal year 2015, against 46 per cent for federal income tax, the burden of which falls more on higher earners.

Also important are huge increases in the relative pay of executives, together with the shift in incomes from labour to capital. The Federal Reserve’s policies have also benefited the relatively well off; it is trying to raise the prices of assets which are overwhelmingly owned by the rich. These reports bring out two economic consequences of rising inequality: weak demand and lagging progress in raising educational levels.

The argument on demand is that, up to the time of the crisis, many of those who were not enjoying rising real incomes borrowed instead. Rising house prices made this possible. By late 2007, debt peaked at 135 per cent of disposable incomes.

Then came the crash. Left with huge debts and unable to borrow more, people on low incomes have been forced to spend less. Withdrawal of mortgage equity, financed by borrowing, has collapsed. The result has been an exceptionally weak recovery of consumption.

It makes no sense to lend recklessly to those who cannot afford it. Yet this suggests that the economy will not become buoyant again without a redistribution of income towards spenders or the emergence of another source of demand. Unfortunately, it is not at all clear what the latter might be. Government spending is constrained. Business investment is curbed by weak prospective growth of demand. It is also unlikely to be net exports: everybody else wants export-led growth, too.

American education has also deteriorated. It is the only high-income country whose 25-34 year olds are no better educated than its 55-64 year olds. This is partly because other countries have caught up on the US, which pioneered mass college education. It is also because children from poor backgrounds are handicapped in completing college.

The S&P report notes that for the poorest households college graduation rates increased by only about 4 percentage points between the generation born in the early 1960s and that born in the early 1980s. The graduation rate for the wealthiest households increased by almost 20 percentage points over the same period. Yet, without a college degree, the chances of upward mobility are now quite limited. As a result, children of prosperous families are likely to stay well-off and children of poor families likely to remain poor.

This is not just a problem for those whose talents are not fulfilled. The failure to raise educational standards is also likely to impair the economy’s longer-term success. Some of the returns to education may just be the reward to obtaining a positional good: the educated do better because they have won a zero-sum race. Yet a better educated population would also raise everybody to a higher level of prosperity.

The costs to society of rising inequality go further. To my mind, the greatest costs are the erosion of the republican ideal of shared citizenship.

As the US Supreme Court seeks to bend the constitution to the will of plutocrats, the peril is to the politically egalitarian premises of the republic. Enormous divergences in wealth and power have hollowed out republics before now. They could well do so in our age.

Yet even for those who do not share such concerns, the economic costs should matter. The “secular stagnation” in demand, to which Lawrence Summers, the former US Treasury secretary, has referred, is related to shifts in the distribution of income.

Equally, the transmission of educational disadvantages across the generations is also a growing handicap to the economy. A debt-addicted economy with stagnant levels of education is likely to fare ill in future.

3 Reasons Why Stocks Could Mint A Shiny Fourth Quarter For Investors

question-markMy Comments: My recent comments have told you about my concerns that there will soon be a major correction, that your investments, unless properly managed, will probably take a hit. On the other hand, there are those who believe strongly that there is much more yet to come on the upside. Frankly, I have no clue how this will all play out, other than that we are NOT in a brave new world and there is NO new normal.

Doug Short, Oct. 1, 2014

Investors often enjoy a strong wind at their back in the fourth quarter, based on seasonal patterns and stock market history. Will 2014 be different? When looking at the S&P 500, more than half of the index’s gains over the past 25 years took place during the final three months of the year.

Studying seasonal cycles can help investors gain perspective and align themselves with likelier outcomes. Of course, nothing is certain when it comes to investing, and it’s important to remember that these are average returns. In other words, every year is different.

For example, the fourth quarter of 2008 during the financial crisis was the worst quarter during the 15-year period.

Now, noted market technician Ryan Detrick tells The Street that some recent weak economic numbers may lower earnings estimates. “Still, historically the fourth quarter is the strongest quarter, so don’t ignore that going forward,” he said.

Here are three reasons why history suggests investors can expect good things in the next three months, even if the economy faces questions:

1) “Sell in May” goes the other way
For whatever reason, the stock market tends to do well in the 4th quarter. Since 1950, the S&P 500 has posted an average gain of more than 4% in the fourth quarter, and has finished higher 78% of the time. In fact, we are entering the half of the year that tends to be strong.

“It’s the beginning of the November through April period. The ‘sell in May’ goes the other way,” said Sam Stovall, chief equity strategist at S&P Capital IQ, in a CNBC article. “We are entering the best six months period, where the average gains since World War II has been 15.3% and the frequency of advance is 94%.”

2) The Presidential Cycle
Ok, so the fourth quarter is often kind to investors. What if we drill down further to factor in the so-called “Presidential Cycle.”

“Wouldn’t you know it, breaking down all 16 quarters during a four-year Presidential Cycle since 1950 found that the fourth quarter of the second year has the highest return average,” Detrick wrote at his Tumblr blog.

In other words, we’re hitting the strongest quarter every four years, with an average of 8%, and rising 88% of the time. But wait, it gets better.

Since President Obama is in his second term, this is actually his sixth year in office. So, Detrick went back to 1950 and crunched what happened during the sixth year of the administrations of Eisenhower, Reagan, Clinton and Bush.

“Doing this shows much different results than what the average second year of all terms have done, as year six is actually extremely bullish,” Detrick said. Each one is positive, and the average return is 23.24%.

3) The Santa Claus Rally
One big reason the fourth quarter tends to be strong is that December is a great month for the stock market. Since 1928, the S&P 500 has it best monthly winning percentage in December, with 64 gains and 22 losses. December is tied with July for the best average monthly gain at 1.5%, according to Yardeni Research.

Conclusion: The S&P 500 just extended its winning streak to seven straight quarters, and it’s reasonable to wonder just how long it can continue. Some investors are also worried that the Federal Reserve is winding down its economic stimulus, or QE.

The Russell 2000 has been the weakest index in 2014; what happens any day now could send an important signal to the broad markets. Still, history suggests that investors just might find a shiny new quarter during the next three months.

Smart Retirement Income Strategies

retirement-exit-2My Comments: This comes from the staff at Financial Planning, a well known magazine that appears monthly and is subscribed to by financial professionals. It contains valuable information for anyone soon to be retired or even already retired. These are summaries and if you want to read the full article, reach out to me and I’ll help.

Financial Planning Staff / SEP 17, 2014

Clients worried about longevity, unknown health care costs and a persistent low-yield environment are increasingly turning to their advisors for solutions. As they near retirement, many are eager to address their future cash-flow needs. Based on our reporting, here are some of the best ways advisors can help clients generate income in retirement.

Delaying Benefits to Avoid ‘Tax Torpedo’ on Social Security

Many people who need retirement income in their 60s claim Social Security then, supplementing those benefits with IRA withdrawals if necessary, according to Mark Lumia, CEO of True Wealth Group in Lady Lake, Fla.

A double tax on Social Security benefits and IRA withdrawals has been called the tax torpedo; to reverse the process, seniors can delay Social Security until age 70 while using IRA funds for spending money until then. The later a client starts Social Security the larger the benefit will be, so smaller IRA withdrawals can generate the total required for retirement income.

“The formula for determining the tax on Social Security benefits includes IRA distributions in full but only half of Social Security benefits,” says Lumia. Thus, increasing Social Security by waiting until age 70 and consequently reducing the desired IRA withdrawals can dramatically lower the tax on Social Security benefits.

Lumia calculates that a retired couple with $97,000 of income ($70,411 in Social Security after delaying benefits to age 70 plus $26,589 from their IRA) would owe $6,492 less in federal income tax than a retired couple with the same $97,000 income receiving $40,006 in Social Security benefits after starting early plus $56,994 in IRA distributions. Over an extended retirement, such tax savings can be substantial.

When It Pays to Recharacterize a Roth Conversion

Tax-free Roth IRA distributions can be a valued source of retirement income; withdrawals are completely untaxed after age 59-1/2, assuming the account is at least five years old. However, building up a Roth IRA recently hit a snag thanks to the Affordable Care Act. “For some clients, dealing with the Affordable Care Act (ACA) exchanges adds another dimension to Roth IRA conversions,” says Marty James, a CPA/PFS who heads an investment and tax management firm in Mooresville, Ind. “Lost health insurance tax credits can increase the effective cost of the conversion.”

A Roth IRA conversion creates more taxable income. Higher income, in turn, might cost certain clients health insurance discounts, adding sharply to the premiums they’ll have to pay. One possibility is recharacterizing the Roth IRA conversion back to a traditional IRA which will wipe out the associated increase in health insurance costs.

“We’ll also look at investing in an oil and gas program that provides first-year deductions, to offset some of the increased income,” says James. In any case, it’s likely that this couple will postpone or sharply reduce Roth IRA conversions until they reach age 65 and become eligible for Medicare.

Rethinking the 4% Rule
By now, most advisors have gotten the memo: the long-held conventional wisdom about 4% annual withdrawals from retirement accounts no longer reigns supreme in the face of longevity projections and predicted long-term stock market returns.

“I have got 25 years of experience” and “my average client is nearly 60 years old,” says Roger Kruse, who owns FFP Wealth Management, a Minneapolis-based firm. With that kind of time helping clients, many of whom who have lived out most of their retirement years, he has come to recognize that –and “this is incredibly obvious,” Kruse says, “People spend less money as they age.” Why? “You travel less, you drive less and your out-of-pocket spending decreases,” Kruse says.

Looking to Dividend Stocks
When trying to help clients generate income in retirement, advisors may want to shift their focus from domestic stocks.

“We believe that that the lion’s share of a client’s equity holdings should be in large, cash-rich multinational companies,” says Greg Sarian of the Sarian Group at HighTower Advisors, a wealth management firm in Wayne, Pa. “We are in the mature stage of the economic cycle, so large-cap stocks may have better prospects now than small- or mid-caps.”

The tax tail shouldn’t wag the investment dog, as the saying goes, and Sarian sees much more than low tax taxes to like about dividend-paying stocks these days. “Dividends are increasing at many companies,” he says, and that may continue to be the case.

Writing Covered Calls
Does implementing a covered call strategy make sense as a way to provide some income for retired clients?

“Absolutely,” says Nick Defenthaler, a planner at the Southfield, Mich.-based Center for Financial Planning, “But it’s important to point out that although writing covered calls for income is certainly one of the most conservative option strategies, it still contains risk. The premiums received are guaranteed upon writing the call but the underlying stock could plummet and lose substantial value during the contract period.”

Defenthaler favors writing calls on a stock that has appreciated in value and the client is willing to sell. “Why not write some options for additional income?” he asks. “If the stock gets called away, profit was still realized and income was also generated. The client, however, must be aware of and comfortable with the possibility of the underlying stock losing value during the option’s contract period.”

Combating Inflation
Partly because of continued growth in the U.S. economy coupled with the winding down of the Federal Reserve’s bond-buying program, the risks of continued low inflation are diminishing.

Widely followed Rick Kahler, president of the Kahler Financial Group in Rapid City, S.D., is telling clients it’s necessary to maintain exposure to asset classes that can outpace inflation in the long-term when interest rates rise –including equities.

“Retirement isn’t a time to pull back and load up on fixed-income investments and immediate annuities,” says Kahler. “Our clients’ investment portfolios need to recognize that inflation is built into our flat monetary system.”

Boosting Revenue With Real Estate Income?
Warning signs flash in most advisors’ eyes when retired clients enter their office with visions of creating extra income streams from real estate ventures.However, not all advisors feel that way.

Rich Arzaga, the founder and CEO of Cornerstone Wealth Management in San Ramon, Calif., embraces real estate investments for his retired clients.

“I think there is real opportunity to help these people out,” says Arzaga who teaches a course in real estate and financial planning at University of California, Santa Cruz. Other advisors say “no” to clients’ proposed real estate investments because the advisors “don’t know that asset class.” But, he says, “It’s a real disservice to clients.”

He does warn his retired clients to treat real estate investments, “like a business.” What does that mean? “Don’t fall in love with the property or the tenant,” he says.

Seeking Alternatives to Energy MLPs
For retirees, distributions from master limited partnerships have obvious appeal.
Thanks to rules set by Congress intending to attract long-term investors — rather than speculators — to pay for finding new sources of energy exploration and production, MLPs have the advantage that they don’t pay corporate income tax. As such, they act as “pass-through” entities, passing profits to investors in quarterly distributions.

But Judith McGee, who serves as chairwoman and chief executive of McGee Wealth Management, in Portland, Ore., an affiliate of Raymond James Financial Services, and other financial advisors dislike energy MLPs because of their illiquidity. “I’ve seen people really get stuck with these,” says McGee.

To have the investments perform at their highest rate of possible return and tax advantages, clients typically have to commit to keeping their stake in the MLPs for decades.
If her clients want a piece of the booming gas and oil discovery market, McGee prefers other energy investments, if those don’t pay the quarterly dividends. “There is a better way to play this. There are so many other options,” McGee says. She suggests some of the mutual funds that focus on natural gas pipeline investments or publicly traded energy companies. “Anytime one of my retired clients gets into something they can’t get out of quickly, I get worried,” she says.

Refining Bucket Strategies
If there’s a common denominator among bucket strategies in retirement planning, it’s the use of a sizable cash bucket. “We like to see retired clients with at least a year’s worth of needed funds in cash equivalents such as money market funds,” says Eric Meermann, client service manager with Palisades Hudson Financial Group in Scarsdale, N.Y.

Often, this mode of retirement planning groups a client’s other assets into fixed income and equity buckets. As the cash bucket is depleted, it might be replenished from the fixed income bucket, which in turn will be refilled from the equities bucket.

Other tactics could include using bond redemptions, interest income, stock dividends, or proceeds from capital losses to keep the cash bucket topped up. In any case, a bucket strategy for drawing down retirees’ investment assets needs a plan for refilling the cash bucket.

“In the drawdown phase, we use a client’s asset allocation to determine how to move money into cash,” says Meerman. “In 2008-2009,” he says, “when stocks fell sharply, our allocations became tilted towards fixed income. At that point, we wouldn’t use money from equities to restore a retiree’s cash position.” Instead, the firm rebalanced clients’ allocations, moving money from fixed income into equities, and retirees’ cash positions were refilled from fixed income rather than from equities.

And while clients’ asset allocations don’t typically vary as they go through retirement, there is still “some flexibility with these plans,” Meerman says. “If there’s a significant decline in a client’s wealth, perhaps in a bear market, we might suggest spending less, which would mean taking less from the portfolio.”

“Are We There Yet?”

108679-bruegel-wedding-dance-outsideAs a parent, I remember this question well from days past. This time, however, it’s being asked by those of us with money invested in the global stock and bond markets.

All of us are following a life path that includes stops along the way. Some stops we choose to make and others are forced on us. Some of them are in good places and others not so good places. These comments talk about a bad one on the horizon and how your life might be better if you don’t have to stop.

Sometime soon, most likely in the next three 3 years, many of us will hit a road block. With that in mind, what follows is designed to help the reader gain a better understanding about how to have money positioned before that happens. This is particularly important if you are soon to be, or are already, retired.

In retirement, your investment focus will shift away from the accumulation of money and focus instead on the distribution of money. That’s not to say your money will no longer accumulate, but the emphasis will change. This is because instead of you working FOR money, money now has to work for YOU.

None of us individually has any control over the markets. What we do have is control over where and how our money is working for us. For almost everyone, the rules that define successful accumulation are different from the rules that define successful distribution.

Two primary drivers that define success in either phase are the stock market and the bond market, which is driven by interest rates. Knowing more about why this is relevant is in your best interest. You will also find it’s in your best interest to avoid the coming road block if you can.

Let’s first look at interest rates. Following this paragraph is a chart that shows the general level of interest rates in the U.S. over the past 222 years. In that entire time, you see four high points in green and low points in orange. The time span from high points to low points has been 27 years, 37 years and 26 years. The last high point was in 1981, 34 years ago. What this suggests to me is that with current interest rates near zero, an upturn in rates is going to happen. How soon is up for debate, but inevitable.
200+year interest ratesWhen interest rates rise, the effect on bond values is negative. No one is going to pay you as much for a bond that yields 4%, if with the same money they can buy a bond that yields 5%. This is a fundamental law of finance. Before the shift happens, you should be out of bonds and into cash or into tactical approaches that help you avoid losses.

Let’s now look at the stock market. Instead of individual stocks, I’m going to focus on the S&P500 Index, widely regarded as representing the entire US stock market. It includes the 500 largest capitalized companies in the US, many of whom sell globally, so their performance to some degree reflects what is happening across the planet.

The next chart reflects the closing price of the S&P500 on every given trading day over the past 40 years. These years largely reflect how the dollars you had invested in the stock market performed as it accumulated. Your goal at the time was to grow your pile of money as large as reasonably possible.

Retirement was down the road, and if a road block happened, it didn’t matter so much. What you heard everywhere was “buy and hold” or “hang in there”. But now the rules are different and the big question you must ask is “When Will The Next Downturn Happen?”. Or perhaps “Are We There Yet?”.

1974-2013 SP500From 1975 -1982, the rise was imperceptible. Then it started upward and in spite of what happened in 1987, it was a lot of fun. Then came the internet bubble that burst in early 2000 and we all experienced the pain associated with large declines in our account values.

Next came the mortgage bubble that burst in 2008-2009. Again there was a lot of pain and some of us are still recovering from that episode. For the past 3 years we’ve been watching what appears to be an inexorable climb up above previous historic highs.

I try to avoid promoting a sense of fear. However, there seems to be an inevitability about the fact that sometime, most likely in the next few years, there is going to be another bubble. Again there will be widespread pain and fear and gloom across the country, if not the entire planet. Perhaps a better question to ask is “Are You Ready For It?” Or maybe “When it Happens, Will You Be Able to Sleep At Night?”

My point is to cause you to evaluate or re-evaluate what you are doing now and consider options that will eliminate some of the pain that is sure to come, and to consider options that might even cause your accounts to grow.

While all of this is speculative, it is based on historical experience. And unless you plan to be dead in a few months, how all this plays out could dramatically influence your peace of mind and financial freedom in the years to come. Not to mention the financial freedom of those you leave behind.

All of us have different pain thresholds. The more money we have compared to our accepted standard of living, the less likely the pain. What you choose to do with your life in retirement, however, is up to you.

If you take appropriate steps to protect yourself, then chances of a succesful retirement from a financial perspective are better. Living a life free from fear about your financial future is possible.

It’s up to you what you do. But I encourage you to believe acting sooner rather than later will be in your best interest.

(The charts were found at finance.yahoo.com)

by Tony Kendzior, CLU, ChFC / October 1, 2014





A Crisis Less Extraordinary

080519_USEconomy1My Comments: For those of you who can stomach economics and the sometimes arcane language of investments, this is an interesting analysis. It comes from a source called Seeking Alpha where I have a membership. Their articles are also infused with lots of charts which I often choose to leave out.

So if for any reason you cannot get to their site to continue reading and see all the accompanying charts, let me know and I’ll forward to you a PDF file with the full article. All this is to help you get ready for the next downturn which will happen.

Eric Parnell, CFA, Gerring Capital Management Aug. 14, 2014

• It is often said that the financial crisis that was unleashed from July 2007 to March 2009 was a once in a century event.
• But upon closer examination, the market shock resulting from the financial crisis was not all that extraordinary.
• In fact, it was rather modest in many ways when compared to other major historical bear markets.
• And this fact alone may be setting investors up for a far more challenging bear market experience the next time around.

It is often said that the financial crisis that was unleashed from July 2007 to March 2009 was a once in a century event. Some investors even take comfort in this notion with the belief that any future stock bear markets will almost certainly pale in comparison. In short, if one could survive the financial crisis, one can certainly weather what may come in the future. But upon closer examination, the market shock resulting from the financial crisis was not all that extraordinary. In fact, it was rather modest in many ways when compared to other major historical bear markets. Instead, the only thing that has been truly extraordinary this time around has been the policy response. And this fact alone may be setting investors up for a far more challenging bear market experience the next time around.

Second Worst Bear Market In The New Millennium

The bear market sparked by the financial crisis was not even the worst bear market we have experienced since the calendar flipped into the new millennium. In many respects, the bear market associated with the bursting of the technology bubble was worse. This is due to the fact that the magnitude of the decline during both bear markets was effectively the same. But stocks (NYSEARCA:SPY) reached the bottom of the financial crisis bear market in a little less than half the time at 412 trading days by March 2009 versus the more than 700 trading days before stocks reached their final post tech bubble bottom in March 2003.

2000 VS 2008Now some might say that what made the financial crisis bear market worse was the sharp magnitude of the declines from October 2008 to March 2009. To this I say nonsense. These two past bear markets moved in complete lockstep for the first 300 trading days. It was not until policy makers allowed Lehman Brothers to fail when the financial crisis bear market deviated to the downside. But the net effect of this outcome was the stock market equivalent of ripping the band-aid off quickly instead of slowly. In short, the Lehman failure delivered stock investors to the bottom much more quickly, which many could argue ended up being a great advantage. For even if policy makers helped rescue Lehman the same way they saved Bear Sterns six months earlier, it still would not have alleviated the rotting mortgage debt problem that was festering in the financial system at the time. Instead, the stock market likely would have continued dying a slow and painful death into the summer of 2010 if not longer. And since policy makers seemingly felt like they screwed up by letting Lehman fail, they have been overcompensating ever since by printing trillions of new currency to support the stock market and the economy, the latter of which has been in vain.

Verdict: Bursting of the tech bubble was worse than the financial crisis for investors.

Great Depression Markets Much Worse

The bear market during the financial crisis was also mild when compared to those during the Great Depression. When matched up against the bear market from 1929 to 1932, the financial crisis market was relatively mild in comparison until the very end and was not even able to catch up to the pace of the Great Depression bear market at its darkest moments. And while the financial crisis bear market ended after 412 trading days, the Great Depression bear market lower for a few more years before finally ended down nearly -90% on a price basis.