Tag Archives: investment advice

5 Tax Rules for Investors

IRS-formsMy Comments: What day is it? Yes, it’s HUMP day, especially for those whose career path involves helping others with their tax returns.

Maybe some of what you find here will help you before the next HUMP day, April 15, 2015.

by: Allan S. Roth, CPA, CFP

Compared with taxes, investing seems simple. As a CFP and CPA, a very large part of my practice is focused on maximizing tax efficiency, a strategy that often saves clients tens of thousands of dollars annually. With the higher 39.6% marginal tax bracket and the 3.8% passive income Medicare surtax in effect, tax efficiency is more important than ever.

I don’t define tax efficiency as minimizing taxes, but rather as maximizing the return after taxes. For example, clients might be able to avoid taxes by holding municipal bonds – but if they are in a low enough tax bracket, they might keep more income after taxes by owning taxable bonds.
That’s the better goal.

Tax alpha comes from several sources, including:
* Product selection
* Asset location
* Tax-loss harvesting
* Roth conversion
* Withdrawal strategies

There are some general rules to follow for each of these sources. The one big caveat, however, is that everyone’s situation is different – some clients may have huge tax-loss carryforwards, others may have nearly all of their portfolios in either taxable or tax-deferred assets. That means some circumstances require breaking these rules.


Product selection is one way to increase a portfolio’s tax efficiency. At the most basic level, picking investment products for the long run avoids turnover. Whenever a client sells an asset in a taxable account, it generates a gain or loss with taxable implications. So holding on to assets with gains defers those taxes – that’s like getting an interest-free loan from the government. Meanwhile, some investment products are more efficient than others. Mutual funds or ETFs that turn over their holdings generate taxable gains passed on to clients. According to Morningstar, the median turnover of active equity mutual funds is 49%. This creates both short-term and long-term taxable gains – and, by the way, tends to reduce returns even before these taxable consequences are factored in.

Index funds may also create turnover, particularly those with narrower focus. For example, a small-cap value index fund must sell when a company holding becomes larger or no longer meets the definition of value. Even an S&P 500 index fund must buy or sell whenever S&P makes a change.

The broadest stock index funds, such as the total U.S. or total international stock funds, have the lowest turnover and are the most tax-efficient. Even those funds, however, sometimes must sell to raise cash to buy large IPOs, such as Facebook or Twitter.


Once you help a client choose the appropriate asset allocation, location becomes critical. As a rule, tax-efficient vehicles belong in taxable accounts, while tax-inefficient vehicles belong in tax-deferred accounts, such as 401(k)s and IRAs. (Roth wrappers are much more complex – more on that in a bit.) The Asset Location Guidelines chart offers a general guideline for asset location.

There are several reasons to locate some stocks in taxable accounts. First, capital gains can be deferred indefinitely – by avoiding turnover – and possibly eliminated altogether, passing them on to clients’ heirs with a step-up in basis. And dividends are taxed at 15% for most; even for those in the 39.6% marginal tax bracket, they still carry a 20% rate – lower than ordinary income.

By contrast, holding stocks or stock funds in tax-deferred accounts has three distinct disadvantages:
* It converts long-term gains into ordinary income, which increases the tax burden.
* Because stocks tend to be faster-growing assets, they create more ordinary income later, when the required minimum distributions will be larger.
* It could cause heirs to miss out on the step-up in basis.

What does belong in tax-deferred accounts? Slower-growing assets that are taxed at the highest rates. (Think taxable bonds.) Since REIT distributions are ordinary income, they also belong in the tax-deferred accounts.

One addendum: Although I believe muni bonds are overused, they would be held in a taxable account. Clients should not own stocks in a tax-deferred account while they have munis in their taxable account, however. They would likely earn more by holding the stocks in their taxable account and taxable bonds in their IRAs, and dropping the munis altogether.

What about Roth accounts? Although this is a complex subject (and very dependent upon individual situations), a general rule of thumb is that stocks and stock funds should be held in Roth accounts only when there is no more room (from an asset location perspective) in the client’s taxable account. REITs are often properly located in Roth accounts.

There are many other variables that could change asset locations, of course, including whether a client plans to pass assets on to heirs or will sell them to raise money to live on.
asset allocation

In late 2008 and early 2009, losses were plentiful and recognizing those losses created valuable tax-loss carryforwards. While only $3,000 a year can be recognized, an unlimited amount can be carried forward to offset future gains. With U.S. stocks at an all-time high as of mid-January, harvesting those losses even now is critical as equities are sold for any reason, including rebalancing.

When doing tax-loss harvesting, be sure to watch out for wash sale rules, making sure that clients don’t buy back the same security within 30 days. To avoid having to exit stocks for a month when selling a broad stock index fund, consider buying a similar but not identical fund. For example, you could replace Vanguard Total Stock Index Fund ETF (VTI) with Schwab U.S. Broad Market ETF (SCHB). Because they follow different U.S. total stock indexes, this transaction should keep your client clear of wash sale rules.

It’s never fun to harvest losses, but the silver lining to share with clients is that bad times don’t last forever – and that there will come a time when those losses will save them a bundle.

Roth IRAs and 401(k)s can be critical elements of your clients’ portfolios. A common myth is that the Roth wrapper is better than the traditional account if the assets are held for a certain number of years. This is false. The only things that matter are the marginal tax brackets in the year of the conversion and the year of withdrawal. If the marginal tax bracket ends up higher upon withdrawal, the conversion will have been beneficial.

There’s another factor: Since no one can be certain what lawmakers will eventually do, having three pots of money – taxable, tax-deferred and in a tax-free Roth – is an important way to diversify against unpredictable politicians.

Rather than have clients contribute to a Roth wrapper, I typically have them contribute first to a traditional retirement account, and then do multiple partial Roth conversions from existing IRAs to take advantage of potential recharacterizations later on.

I consider traditional IRAs to be partnerships between the client and the government. As an example: A $100,000 IRA owned by a client in the 30% tax bracket would be 70% owned by that client; converting it to a Roth costs the client $30,000 to buy out the government’s share.

If that client does three $10,000 Roth conversions, he or she will owe $9,000 in taxes – $3,000 per conversion to buy out the government’s share. If they put each $10,000 conversion in different asset classes early in the year, they’ll have up to 15 months or (if the client files an extension) even up to 21 months to see how each performs. If, for example, the assets in one conversion tank and lose half of their value, the client can hit the undo button and recharacterize – thus having the government buy back its share at the full $3,000 original price.

Recharacterization also gives a client a chance to undo an unexpected impact from the dreaded alternative minimum tax. Tax accountants often underutilize the strategy of multiple Roth conversions – which can often be a vital part of tax planning.

When clients transition from accumulation to withdrawal modes, tax strategy continues to be critical. There is a general rule of thumb that a client should spend taxable assets first, tax-deferred assets second and Roth assets last.

It’s not a bad rule to start with, because spending down taxable assets lowers future income when clients will be withdrawing from tax-deferred accounts – which generally have a zero cost basis and generate ordinary income.

But the analysis becomes more complex if a client has an opportunity to pay taxes sooner at a lower marginal rate. If, for example, a client is retired but elects to delay Social Security until age 70 (a wise move for the healthy), a client may have more deductions than income. Thus, it would be advantageous to either take out enough money to stay within the 15% tax bracket ($72,250 for married couples filing jointly), or to do multiple Roth conversions to use up that low marginal tax rate.

From a broad perspective, advisors have a wide range of options to provide clients with tax alpha. Another example: Because most advisors don’t get to design portfolios from scratch, they wind up keeping some existing assets while building a more diversified portfolio. So clients who come to me with S&P 500 funds and want to own a broader index – but have large unrealized gains that would create a tax hit if sold – can create a total index by using a completion index fund such as an extended market index fund, which owns every U.S. stock not in the S&P 500. Just by avoiding the sale of the S&P 500 fund, the client gains a tax advantage.

In most cases, coordinating with the client’s CPA is critical. Since many CPAs do not have a strong understanding of investing, you may need to explain some of these strategies to them. Tax strategy is far from simple – yet if done right, planners can create large amounts of tax alpha for clients in any phase of life.

Allan S. Roth, a Financial Planning contributing writer, is founder of the planning firm Wealth Logic in Colorado Springs, Colo., and is a CPA. He also writes for CBS MoneyWatch.com and has taught investing at three universities.

Global Markets: At A Turning Point?

My Comments: This article was published two months ago, so it is interesting to see how the ideas expressed were validated or not over February and March. At the time, the focus was a just ended and very dismal January. Everyone was asking me about the rest of the year. And I didn’t have a good answer.

All I can say is that the programs I use for investing our money, yours and mine, have the ability to move to cash on any given day, and if the trend line is negative, to use strategies that allow investors to make positive gains when the rest of the world is watching their investments decline.

What I would have you understand is that two months does not make a year. Or that what happened in 2008-2009 will not define your life if you seek good advice. If anyone would like proof of this for the seven years from January 2007 thru December 2013, let me know. I’ll email you a hypothetical that I think is outstanding.

Edmund Shing / Jan. 31, 2014

What to think about Recent Emerging Markets-Led Volatility

Wow! This has certainly been an exciting few days for global financial markets, led by sharp weakness in various Emerging Markets (stocks, bonds, currencies). Figure 1 below highlights how the Russian Ruble and Turkish Lira currencies have both suffered extensive weakness against the US dollar over the last month or so, the weakness accelerating over the last few days.

( This is a fairly long article so I invite you to CONTINUE READING HERE. )

Where Does Gold Go From Here? Let’s Use 40 Years Of History As Our Guide

5-little-known-facts4-spouse-lgMy Comments: I’ve never been a gold bug. My mother collected silver but that had nothing to do with silver, or gold, as an investment.

But it should be included in the category most of us call “alternative investments”, along with real estate, precious metals and other commodities. I make sure my clients include alternative investments when they have the ability to diversify beyond the normal categories.

If you like gold, there are ways to play it just as there are with other investments. But if you are not going to own the idea, then be prepared to lose your money. On the other hand, if your timing is right…

Hebba Investments / Feb. 26, 2014

Let’s just get this out of the way – nobody truly knows gold will be in the short or medium term and certainly not next month or next year. Prognosticators and price targets abound, but in reality gold is a very difficult asset to predict because it has so many different factors involved in its price movements which include the understanding of the macroeconomic picture, the mining industry, the financial markets, and even the world political climate – not an easy task for any firm let alone individual investors.

If that wasn’t enough, the gold market is very opaque and its political nature means that it historically has been manipulated (GATA has done excellent research on this issue) by many types of entities for different purposes. So even if you get the fundamental analysis right, you could be dead wrong when it comes to the actions of the large players in the gold market.

But we do believe that even though gold may be tough to predict, there are fundamentals in the gold trade that make it a strong investment for the long-term. We may not know where the gold market is going in the short-term, but we certainly can use the fundamentals to give us a higher probability of seeing where it’s going in the long-term.

In the past we’ve gone into the fundamentals of why physical gold ownership and the gold ETF’s (SPDR Gold Shares (GLD), PHYS, CEF) should give investors very good returns over an extended period of time, but in this article what we want to do is analyze the historical price movements of gold. We’re going to analyze some research put out by the World Gold Council of the historical price action of gold in similar situations to where we find gold today to try and see where it could be headed – and how fast it should get there.

A Historical Gold Price Analysis
As bad as 2013 was for gold investors, it wasn’t very different from many other corrections that gold has experienced since the 1970′s. In fact, gold’s 37% drop from its September 2011 highs was only the fifth largest drop over the last 40 years.
gold-40-yearsAs investors can see, gold has experienced twelve pullbacks that have been greater than 20% since the 1970′s and Richard Nixon officially ended the gold standard. The current correction of 37% has been almost exactly average (36% is the average) and at a length of 28 months, has been a bit longer than the average 18 months seen in the research.

We don’t know for sure if the correction is over, and even though we would be surprised to make new lows we cannot count it out. But it is more than likely that we saw the bottom in December of 2013, as gold registered a London AM fix low of around $1190 dollars per ounce (it went lower intraday), and with the current turnaround it makes it a good time to calculate where gold will go from here based on its prior recoveries.

What we’ve done in the table above is summarize the average historical retracement lengths and gains. Then we’ve used the $1190 bottom that we reached in December 2013, to estimate the expected date and gain of gold’s historical retracement performance.

Historically, gold has gained 69% from its low to its retracement date (the same length forward as the downturn – in the current case that would be 28 months). As investors can see, that would mean that we should expect gold to reach $2011 dollars per ounce in April of 2016 – an excellent return that we’re sure almost every gold investor would be happy with.

If we take it one step further and examine the average gain until the next gold peak, we find that historically gold has recovered 228% from its downturn low until its new peak. Using that in our calculations for our $1190 gold price, we would expect gold to reach $3903 per ounce – though for this calculation the date is much harder to estimate. If we had to put a date on it based on historic numbers, we would calculate the peak date as about 150% of the downturn length or about 42 months from the low (around June of 2017).

Conclusion for Investors
When it comes to gold we think the fundamentals are still very strong as the financial crisis is far from over, the debt load of governments continues to grow at a faster pace, geopolitical tensions continue to raise the odds of “tail-risk” event, gold all-in production costs hover around current prices, and we could go on and on. But this study by the World Gold Council gives investors a much more historical view on the past recoveries of gold, and it helps gold investors realize that these vicious drops in the gold price have happened before – twelve times to be exact.

Investors should remember that every single time the forward retracement (i.e. the same period forward as the length of the pullback) led to a gold price increase that averaged 69% – not bad at all even if that means a 2-3 year wait. Thus we remain gung-ho on gold and we believe it’s a good time to continue to build positions in physical gold and the gold ETF’s (SPDR Gold Shares , PHYS, CEF). For investors looking for higher leverage to the gold price, they may want to consider miners such as Goldcorp (GG), Agnico-Eagle (AEM), Newmont (NEM), or even some of the explorers and silver miners such as First Majestic (AG).

Gold investors don’t miss the forest for the trees here and get caught up in the daily or weekly movements in the gold price – history shows that we should be expecting much higher gold prices. If we match the average gain of the last twelve 20% declines, then we should expect to see a gold price of $2000 per ounce somewhere in 2016. Be patient gold investors because history is on your side.

Investors’ Next Disappointment Will Come From Risk Mismanagement

080519_USEconomy1My Comments: Reader of this blog know that I try to include meaningful comments about investments and investment outcomes. Over the years, I’ve done well for some clients and done poorly for others. And while the past is history, there are always lessons to be learned. I have a personal mandate to try and do better in the coming months and years.

Here are some really good insights that I think will help you. Mistakes are part of the game, whether you prefer to make your own mistakes or hire someone to make them for you. I’ve you’ve hired me, you know that we’re on a really solid track these days and the future looks really good.

John S. Tobey / 3/29/2014

Risk mismanagement is everywhere. Many investors (individual and professional), investment advisors and even Wall Street are guilty of overstating, underweighting or misunderstanding risk. As a result, portfolios are being designed to disappoint. Worse, we have finally reached the best of times for investing, only to have investors’ prospects mucked up by bad investment decisions.

Disclosure: Fully invested in stocks, stock funds and bond funds. No position in Oppenheimer Holdings, mentioned below.

So, what’s wrong? There are three basic mistakes being made:
1. Overstating risk and investing for the next catastrophe. Here, protection from risk is taking priority. The focus is on what could go wrong. The result? Invest for protection, avoiding or hedging (watering down) equity risk/return and holding “safe” investments.
2. Understating risk and investing for top return. This attitude is a return of the performance chaser, looking for more return and less risk. The mistake is buying into a trend that happens to be exhibiting those characteristics, thereby underestimating risk.
3. Misunderstanding risk and investing inappropriately. There are many types of risk at work. Understanding them and how they relate to the investor’s situation is imperative for investing appropriately. Too often, a risk measure is chosen that over- or under-emphasizes an investment’s risk (e.g., a high or low price/earnings ratio for a stock).

How to avoid the mistakes

First, realize risk is everywhere. OppenheimerFunds has a current ad, headlined “Taking risks is not the same as using risk.” It makes the key point about investing: All investments carry risk, so make sure to carry (use) risk for your benefit, not simply accept it as a cost of owning a desired investment. (Even cash carries risk – the loss of purchasing power through inflation – so an investor must choose which risks are acceptable and in what combination.)

Second, realize you can’t have it all. As a new stockbroker in the 1960s, I was given a sales kit that included the golden triangle. It depicts investing’s tradeoffs that exist in all markets – i.e., within the triangle below, we must pick our desired point. There is no ducking the fact that investing is the ultimate compromise – that we cannot have our cake and eat it, too. (Interestingly, Oppenheimer has brought this message back in its aptly-named website, GrowthIncomeProtection.com.)

Third, start with the basic allocation and work from there. The long-held, rule-of-thumb allocation is 60% stocks (equities) and 40% bonds (fixed-income). This mix provides the most oomph (return) per unit of risk. That doesn’t mean it should be every investor’s choice, but it is the perfect place to start. Varying from it has consequences that need to be understood and accepted.

Fourth, control that risk over time.
Controlling a portfolio’s risk means taking two actions:
1. Rebalance as needed. Different investments will follow different paths. The resulting performance differences reset the portfolio’s risk, so it’s important to periodically rebalance back to the desired allocation and risk level.
2. Monitor the chosen investments. Changes happen to funds and companies, so it’s important to ensure the reasons for choosing them remain in place. If not, they should be replaced.

Fifth, check performance infrequently and do not use it to change allocation. It’s a proven fact that more frequent checking makes risk look greater and trends look longer. Both erroneous perceptions can lead to equally erroneous portfolio allocation changes that adversely affect risk and return. If the portfolio has been designed appropriately, expect to keep the allocation unaltered. Only a change in personal circumstances might require an allocation change.

Sixth, avoid all combination investments unless you fully understand and need them. Wall Street is filled with combination investment “products.” While some have a financial purpose (e.g., convertible bonds and mortgage pass-through bonds), some are designed more for investors’ desires (e.g., leveraged funds and stock + written call funds). Options, by themselves, are also a combined investment. All of these investments have odd risk-return characteristics that need to be understood. Otherwise, investors can see win-win where none exists.

The bottom line
Happily, we are now in a normal market environment. That does not mean everything is headed up and there is no uncertainty – that would be an abnormal market. Rather, it means we can rely on time-tested investment wisdom to design our investment approach. Starting with the basic 60%/40% mix, we can fashion a portfolio that best fits our needs, ignoring today’s headlines and any left over Great Recession worries.

Another risk, not discussed above
The academics refer to it as “specific” risk. It’s the uncertainty attached to an individual investment (e.g., a favorite stock), a non-diversified portfolio (e.g., a biotechnology fund) and an investment strategy (e.g., a small-cap growth fund). Selecting successfully can increase return, but picking poorly can reduce return. Because so many experienced investors are actively involved, Warren Buffett offered his advice to buy a broad index fund and leave the stock picking to others.

Social Security Tips: How to Use File & Suspend

SSA-image-2My Comments: I offer great thanks to the author of the following article, Michael Kitces. You’ll find his credits at the end of this post.

This will take a little time to read and understand. But if you are getting ready to file for Social Security benefits, or are just now starting to think about when and how to file, you need to read this and develop at least a basic understanding.

As part of our efforts at Florida Wealth Advisors, we will provide you with a no-cost analysis and report that creates a timeline to help you maximize your benefits over time. The two caveats are (1) we have no idea when you are going to die and (2) we make no assumptions about cost of living increases each year.

Getting it right is important. There are 97 months for you to choose from when it comes to filing for benefits. The difference between the best one and the worst one can be as much as several hundred thousand dollars over your lifetime. Doesn’t it make sense to ask us for one of these reports?

by: Michael Kitces / Monday, March 24, 2014

An especially popular strategy for maximizing Social Security benefits is to utilize the file-and-suspend rules. These permit an individual to file for benefits but suspend them immediately, allowing delayed retirement credits to be earned while letting the spouse begin spousal benefits simultaneously. They can even be used to activate family benefits for young children.

Yet the file-and-suspend strategy is not just an effective planning tool for couples and families with minor children. Since benefits that have been suspended voluntarily can be reinstated later, even singles may wish to routinely file-and-suspend if they intend to delay anyway, as a way to hedge against a future change in circumstances.
At the same time, there are caveats to the file-and-suspend strategy, as well: Suspending will put all benefits on hold (which limits couples from crisscrossing spousal benefits by having each file and suspend); filing and suspending also triggers the onset of Medicare Part A benefits, making a client ineligible to make any more contributions to a health savings account.


The basic concept of file-and-suspend is straightforward: A client files for retirement benefits (triggering all the rules that normally apply), but then suspends the benefits without receiving any payments (allowing the client to earn delayed retirement credits that increase the future benefit by 8% of the individual’s primary insurance amount). The strategy’s primary purpose: By filing for benefits, the client can render a spouse eligible for spousal benefits (only available once the primary worker has applied for retirement benefits), while still earning delayed retirement credits.
• Example 1: A 66-year-old man eligible for a $1,500-a-month benefit chooses to file-and-suspend, letting his 66-year-old wife begin a $750-a-month spousal benefit. The husband continues to accrue 8% a year delayed retirement credits on his monthly $1,500, which by age 70 rises to $1,980 a month, plus cost-of-living adjustments.

Notably, the ability to suspend benefits is available only to those who have reached full retirement age (66 years old for those born between 1943 and 1954; up to 67 for those born in 1960 or later). If benefits are filed early, the election generally cannot be undone (though clients can change their mind within 12 months of the first filing).

Even if benefits were filed early, they can still be suspended going forward once full retirement age is reached. This will not undo the reduction that applies for taking benefits early, though it can almost fully offset the original reduction as delayed retirement credits are earned.
• Example 2: A 66-year-old woman eligible for a $1,000 monthly benefit filed for benefits early at age 62, reducing benefits by 25% to $750 a month. If she now chooses to suspend benefits, she can begin to earn 8% a year delayed retirement credits for the next four years, ultimately increasing the benefit by 32%, back up to $990 a month. (Ongoing cost-of-living adjustments would also be applied along the way.)

While the file-and-suspend strategy is often explained as a loophole to maximize benefits, it actually was a provision added to the Social Security system in 2000, under the Senior Citizens’ Freedom to Work Act, to allow for the associated planning strategies (especially for couples’ benefits).

As noted in example 1, the primary purpose of the file-and-suspend strategy is for married couples to better coordinate the claiming of individual and spousal benefits – in particular, for one spouse to claim spousal benefits while the other continues to defer individual retirement benefits to accrue the credits. Otherwise, both members of the couple could face benefit delays. If the husband in example 1 had chosen to delay benefits without going through the file-and-suspend strategy, for instance, both he and his wife would have had to wait until he reached age 70 for retirement benefits.

File-and-suspend may be relevant even in situations where both spouses have their own benefits, but each wishes to delay. By adopting the file-and-suspend strategy, one spouse can claim benefits while both generate delayed retirement credits.
• Example 3: Both members of a couple are 66; the wife is eligible for $1,600 a month in benefits and the husband for $1,300 a month. Both are very healthy and wish to hedge against the risk that they could live well into their 90s, so both want to wait and earn delayed retirement credits. If the wife goes through the file-and-suspend process, then the husband can file a restricted application for just spousal benefits while delaying his own individual benefits. The husband gets $800 a month in spousal benefits based on his wife’s record, then can switch to his own $1,300 monthly individual benefit in the future (and earn 8% a year in delayed retirement credits while he waits). And because she filed and suspended, she also earns 8% a year delayed retirement credits on her benefit.

Another benefit of the file-and-suspend rules is that by filing, the primary worker not only activates eligibility for a spouse to claim spousal benefits, but also for dependent benefits to be paid on behalf of minor children as well (albeit subject to the maximum family benefit limitations).


While the file-and-suspend rule primarily helps married couples, the strategy also allows individuals who started benefits early to change their mind, suspend benefits and begin to earn delayed retirement credits.

There is another file-and-suspend planning opportunity as well. Under Social Security rules, those who are full retirement age can file for retroactive benefits, but only as far back as six months (resulting in a lump-sum payment of prior benefits). An individual who is 66 1/2 can retroactively file for benefits back to age 66, receiving makeup payments for the prior six months; at age 68, the payments can only go back to age 67 1/2.

Yet if the individual files-and-suspends at full retirement age, a subsequent filing for retroactive benefits goes all the way back to the date of the file-and-suspend. Under Social Security rules, there’s a difference between the standard filing for retroactive benefits and a request to reinstate voluntarily suspended benefits. To preserve flexibility, a client who plans to delay benefits may want to file-and-suspend rather than simply waiting.
• Example 4: A single 66-year-old woman is eligible for a $1,600 monthly retirement benefit. Because she’s in good health, she plans to delay her benefits until 70 to earn delayed retirement credits. But at 68, her health takes a significant turn for the worse and she believes she may not live much longer. Realizing there’s no longer a reason to delay her Social Security benefits, she applies immediately – and retroactively – but at best she can only get benefits going back to age 67 1/2.

If the same woman had filed and suspended at 66, then when she got the unfortunate health news, she would be able to reinstate her benefits all the way back to age 66 – giving her a lump-sum payment for 24 months, rather than just six.

Alternatively, if the woman stayed healthy after doing file-and-suspend, she could still delay her benefits to age 70.

There are a few caveats to the strategy. First, remember that the request to suspend benefits will suspend all benefits, barring couples from crisscrossing spousal benefits.

The act of filing also makes the client eligible for Medicare Part A. In fact, because enrollment is automatic for anyone older than 65 who applies for Social Security benefits, clients can’t opt out of Medicare Part A even if they want to.

Automatic enrollment in Medicare Part A isn’t necessarily problematic – at worst, it’s duplicated coverage, but doesn’t have separate premiums or cost like Medicare Part B. However, it renders a client ineligible to contribute to a health savings account. For clients with a high-deductible health plan, file-and-suspend will render them ineligible to make new contributions.

Beyond these caveats, the file-and-suspend strategy provides a great deal of flexibility, a lot of opportunity to maximize Social Security benefits and the ability to hedge the risk of delaying benefits with the potential to reinstate the voluntarily suspended benefits in the future.

Michael Kitces, CFP, is a partner and director of research at Pinnacle Advisory Group in Columbia, Md., and publisher of the planning industry blog Nerd’s Eye View. Follow him on Twitter at @MichaelKitces.

What’s Happening In China These Days?

China dragonsMy Comments: China is today the 2nd largest and arguably the 2nd strongest economy in the world. It differs from us in a material way in that it has few of the myriad infrastructure elements of our economy, which have evolved over the past 235 years. In China, it’s very much a work in progress.

Which means there are going to hiccups along the way. We’ve had our share, and indeed we still have hiccups, as we saw in 2008-2009. But China is a different animal and if it sneezes, there is going to be snot everywhere. That’s not a pleasant thought, is it? Which is why as an investor, you need to pay attention. Or at least have someone managing your money who is paying attention on your behalf. Then perhaps all you need is a handfull of tissues.

Will it result in another crisis like we had a few years ago? Unlikely. Those seem to come along about once every 65 – 75 years. Lots of time to condition our grandchildren for that eventuality. In the meantime, just keep chugging along, especially if you have someone you can trust looking over your shoulder.

Investors Take Note: China’s ‘Lehman Moment’ Is Looming, Help Is Not On The Way / Steve Picarillo / Mar. 21, 2014

• Recent defaults in China are threatening to change investor perceptions of the safety of Chinese investments.
• The weakening property markets in China could slow the Chinese economy and potentially weaken Chinese banks.
• Investors have seen this before with Bear Stearns, Lehman and the Irish Banks, so we know how the book could end.
• Help may not be on the way as it appears that the Chinese government is willing to see defaults as it shifts to a more market-driven economy.

China’s first-ever default of a corporate bond may not have been China’s “Bear Stearns moment” or its “Lehman moment” but China’s Lehman moment can happen at any time and investors should take note.

Unlike the fall of (the independent) Bear Stearns and the demise of Lehman, Chaori Solar’s recent default did not change the market’s perception of credit risk inherent in the Chinese economy and Chinese investments. The reason? It was widely known that the solar company was in distress and at risk of being the country’s first corporate default. Moreover, unlike Lehman and Bear, the Chaori default did not add uncertainly as to the government’s intentions.

The Lehman and Bear events caused market panic as investors believed that the US government would have provided some form of support to prevent such a material default. Indeed, the fall of the independent investment bank Bear Stearns and the bankruptcy of Lehman Brothers marked key market events during the great recession. Investors across the globe certainly noticed these events which trigger other defaults across the globe. It is fair to say that investing and banking in the US has been altered for years to come. Chaori’s default did not trigger such market events; however, it led to fears that it could be the start of a surge of Chinese bond defaults. This fear remains well founded and may prove to be very accurate.

In the weeks since the Chaori default, shares in various Chinese property firms have fallen after the Chinese developer Zhejiang Xingrun Real Estate collapsed as it could not repay its estimated $500 million of outstanding loans. This default may be the defining event in China as it is the latest sign that the Chinese government will like to see some “dead bodies” as it moves toward a more market-driven economy. Government help does not appear to be on the way, as China’s central bank has denied reports that it is in emergency negotiations with the company.

China’s property sector is the main threat to the stability of the world’s number-two economy. Property developers in China have been a particular source of concern as many have increased their debt loads in recent years to buy land and build. The ripple effect of a deteriorating economy in China may very well lead to market disturbances across the globe. Investors will shift funds from China seeking investments that they perceive as safer. Moreover, a struggling Chinese economy, given its size and scale, will negatively impact exports of its major trading partners, thereby threatening to weaken the global economy.

Chinese financial institutions are at risk due to the brewing housing bubble. The average price of a new home in 70 Chinese cities increased at a slower pace than in recent months. Indeed, average new home prices in major Chinese cities rose 8.7% (year on year) in February, according to the National Bureau of Statistics, cooling from a 9.6% rise in January. While this does not sound all that concerning on its face value, however the trend is certainly worth noting.

Cities in China have taken to battle rising home prices amid fears of a bubble, and banks have increasingly tightened lending to real estate firms. This disturbing trend is extremely similar to those that led to the Great Recession in the US, the UK and in Europe. So we may know how this book ends.

As demand slows, developers will feel financial strain. The concern is this most recent default will trigger a series of similar distressed situations across weaker companies in the property sector. The most recent financial crisis in Ireland was sparked by the same types of events, a weakness in the property sector, leading to the near nationalization of the country’s banks. Similarly, Chinese banks have significant exposure to the property sector. Should defaults increase, banks would need to set aside more funds for bad loans and would likely become more risk averse, thereby further slowing growth or worst, potentially de-stabilizing the balance in Chinese banking.

The property sector has become a backbone of growth for the Chinese economy, accounting for 16% of gross domestic product, 33% of fixed asset investment and 25% of new loans in 2013, according to market estimates. Slowing property markets lead to a slowing economy.

There are a many potential triggers for a correction in the property market including a rise in interest rates, decreased credit availability or the introduction of a property tax. This risk of spreading “ghost towns” across China is a real reality as developers abandon projects due to lack of demand and financing.

Given the magnitude of property to the Chinese GDP, if this sector slows severely, there is no obvious replacement to support economic growth. So whether it is a Bear Stearns, Lehman or Irish bank moment, a defining moment is looming.

About the author: Steve Picarillo is an internationally known and respected financial executive, analyst and author. Steve has spent most of his career on “Wall Street” as a lead analyst covering large financial institutions, corporates and sovereigns in the US and in Europe. In addition to being an expert on global banking, credit ratings, banking regulations and compliance, Steve is a student of the global economic environment, a motivational speaker and an active philanthropist. The opinion in this article and other articles are the opinions of the author and of Creative Advisory Group, Inc.

Are We Looking At A Bond Bubble?

Interest-rates-1790-2012My Comments: There are just as many ways to lose money with bonds as there are with stocks. The risk is different; what happens to interest rates in the future vs corporate earnings and their relative size. That’s an oversimplification but you get the idea.

The chart above shows interest rates from 1790 – 2012. You can draw your own conclusions about where they are likely to go next. It won’t surprise anyone if it happens this year or three years from now, but happen it will. And yes, I’m sensitive to the length of the horizontal axis.

When it does, you need to be positioned to not only avoid losses, but to potentially make money. It can be done and smart people will make money. Who you talk with and when you act is up to you.

By Gillian Tett / March 13, 2014 / The Financial Times

The more money that floods into fixed income, the more risky any reversal

Seth Klarman, the publicity-shy manager of the $27bn Baupost hedge fund, has given investors a slap. In his quarterly investment letter, he declared capital markets are in the grip of a wild bubble.

“Any year in which the S&P jumps 32 per cent and the Nasdaq 40 per cent while corporate earnings barely increase should be a cause for concern,” he wrote, pointing to “bubbles” in bond and credit markets, and “nosebleed stock market valuations of fashionable companies like Netflix and Tesla”.

It might sound reminiscent of 1999, when “fashionable” technology stocks last soared on this scale. But there is a twist: today it is not equities but bond markets that may yet be the most significant cause of concern.

In recent years an astonishing amount of money has quietly flooded into fixed income funds, which buy corporate bonds, emerging markets bonds and mortgage debt. And as the US looks more likely to raise interest rates, creating potential losses for bondholders, the flows could reverse – creating destabilising shocks for regulators and investors alike.

Consider the numbers. Just after Mr Klarman issued his warnings, the investment research group Morningstar produced analysis that suggests US investors have put $700bn of new money into the most mainstream taxable US bond funds since 2009. Since bond prices have risen, too, the value of these funds has doubled to $2tn. That is striking. But more notable is that these inflows to fixed income have outstripped the inflows to equity funds during the 1990s tech bubble – in both absolute and relative terms.

Meanwhile, Goldman Sachs estimates (using slightly different forms of calculation) that $1.2tn has flowed into global bond funds since 2009, compared with a mere $132bn into equities. And a new paper from the Chicago Booth business school estimates that inflows to global fixed income funds have been almost $2tn since 2008, four times that of equity funds.

Given this, it is no surprise that investment grade companies have been rushing to sell bonds at rock-bottom yields (this week General Electric, Coca-Cola and Viacom were just the latest). Nor is it surprising that junk bond issuance hit a record last year; or that Moody’s, the US credit rating agency, warned this week that investors are so desperate to gobble up bonds that they are buying instruments with fewer legal protections than ever before.

But the $2tn question is what might happen if, or when, those flows change course. Until recently it was often presumed that corporate bond investors were a less skittish group than equity investors; fixed income funds were not prone to quite such wild sentiment swings.
However, the four economists who penned the Chicago Booth paper argue that this is no longer the case.

Analysing market data since 2008, they conclude bond market investors have an increasing tendency towards volatile swings and herd behaviour. That is partly because of fears that the US Federal Reserve could soon raise rates. But the sociology of asset managers is crucial, too.

“Delegated investors such as fund managers are concerned with relative performance compared to their peers [because] it affects their asset-gathering capabilities,” they note. “Investing agents are averse to being the last one into a trade [which] can potentially set off a race among investors to join a sell-off in a race to avoid being left behind.” And while such behaviour can affect all fund managers, the Chicago analysis suggests bond fund managers have recently become much more skittish than their equity counterparts.

One sign of this occurred last year when bond markets, fearing the Fed was about to tighten monetary policy, had a “taper tantrum”, the Chicago Booth authors say. They warn that “bond markets could experience another tantrum” when the “extraordinary monetary accommodation in the US is withdrawn”. And since it is now the bond funds, not banks, that hold the lion’s share of corporate bonds, if another taper tantrum does take hold that could be very destabilising.

Today, as in 1999, nobody knows when that turning point might come. But the more money that floods into fixed income, the more dangerous any reversal could be. Investors and policy makers alike need to heed the message from the Chicago paper – or from Mr Klarman. History may not repeat itself; but, when bubbles occur, it does have a tendency to rhyme.

Energy Price Spread: Natural Gas Vs. Crude Oil In The U.S.

My Comments: Followers of this blog may remember my frequent mention of Thomas P.M. Barnett, a prolific writer and thought leader on global economics and political forces. Years ago he said that within a couple of decades, the US would become a net exporter of energy. He asserted this transformation would re-write a lot of the rules as time marches on.

Today, the shift from being a net importer, complete with our reliance on crude oil from the middle east and Venezuela, is happening faster than most of us realize. And here we have, in dollars and cents, why the dynamics are changing the way our economy is going to operate in the coming decades.

Does it mean renewable energy sources will go away for a while? To some extent perhaps. But if you are an investor, of any description, this is background information that has the potential to change your life.

Samantha Azzarello / Feb. 11, 2014

The energy production boom in the United States over the last seven years has led to a very interesting and dynamic relationship between natural gas and crude oil. From the vantage point of units of energy, the price spread between natural gas and crude oil is significant, with natural gas giving a lot more energy bang per buck compared to oil. In BTU terms, $1 of natural gas can obtain 200,000 units of energy (at a spot rate of $5/million BTU) compared to $1 of WTI oil which garners 60,000 units of energy (at a spot rate of $97/barrel). This is a whopping 330% energy content price gap – even after the polar vortex and deep freeze have raised natural gas prices. This massive energy price gap raises questions about how long it may persist, and our read of the market consensus appears to measure the time required to narrow the gap in decades, while our own base case scenario is that it could happen in just three to five years. Our objective in this report is to frame the issues that may decide the future of the energy price gap between US natural gas and crude oil.

This chart shows the cost trend in dollars to generate one BTU ( British Thermal Unit ).
Energy cost in $ per BTU

Round I: Shale enters the Ring
A brief historical perspective is useful. In tandem with large discoveries of shale-related natural gas, new technologies (fracking and horizontal drilling) have allowed shale-related natural gas production to increase by a tremendous 417% between 2007 and 2012. This surge made up a large portion of the overall increase in natural gas production, which expanded by over 20% in that same period. With a much larger supply, natural gas prices fell by over 50% from 2006 into 2013. Natural gas prices averaged just over $7/million BTU during the 2003-2008 period, with the average price dropping to below $4/million BTU during 2010-2013. Regardless, natural gas like many commodities has been susceptible to price spikes – with a high in the period of $13/million BTU reached in 2005 and a sustained period of $10/million BTU occurring in 2008. Indeed, natural gas prices have tended to display even more volatility historically than crude oil prices. And recently, the extreme deep freeze and stormy weather experienced in the Midwest, Eastern and Southern parts of the US in the winter of 2013/2014 has resulted in increased demand pushing Henry Hub Natural Gas spot prices above $5/million BTU, at least temporarily, although still lower than the average price in 2002-2006 before the production boom.
Crude oil supply has also increased within the US, by 23% since 2007. Yet, WTI crude oil prices have risen from approximately $72/barrel in 2007 to $98/barrel in December of 2013. While not as volatile as natural gas, there have been some temporary periods of high prices, and no one should forget crude’s staggering high of $145/barrel in June of 2008, preceded by prices maintained above $120/barrel in May of 2008. Looking through the price spikes, on average crude oil prices are some one-third higher now than in the years preceding the expanded production in the US, with a trading range over the last 12 months of $92-$106 per barrel, displaying a tendency toward reduced volatility.

With both crude oil and natural gas production rising in the US, and despite some temporary price spikes, average natural gas prices are lower and crude oil prices higher than before the production revolution began. As noted already, this differential price behavior has resulted in the wide energy price gap, whereby natural gas provides three times the BTUs per dollar that crude oil does. As potential substitutes in some cases, and as future substitutes as technology and uses evolve, the unusual price spread patterns between the two sources of energy are likely to result in a dynamic relationship, which could play out in the US energy markets over the next 5 to 10 years.

That is, such a significant energy cost gap would logically set in motion market forces leading to a shift in usage patterns having the potential to close the spread over time. Decisions to invest and develop new or expanded uses for natural gas depend in part on whether or for how long one expects natural gas to remain the less expensive source of energy. We would note that direct competition is not a necessary condition for the price spread to close. Before 2005, a BTU price gap did not exist, and there was little direct competition between crude oil and natural gas as sources of energy.

Our perspective, however, is that structural change in the natural gas market is re-setting conditions in a way such that the energy price spread between natural gas and crude oil may close faster than expected. When two energy sources have only limited direct competition, closing the energy price gap may take decades. If the natural gas and crude oil come more directly into competition with each other as sources of energy for end-users, then the energy price gap might be closed in a matter of years.

Round II: Shifting Usage Patterns
Crude oil is an energy source mainly used by only one sector. According to the US Energy Information Administration (EIA), 71% of total crude usage in the US is related to transportation, while industrial sector uses account for approximately 20%, and power generation and commercial use is negligible. Natural gas, contrastingly, is a much more diversified energy source in terms of use. Usage is currently split amongst the power generation, industrial, and residential/commercial end-use sectors at approximately 30% each. For our analysis, however, the sector of most interest is transportation, where natural gas usage is only a modest 3%, but growing quickly. From 2007 to 2012, natural gas consumption in the US transportation sector increased by 22%.

This report will discuss the potential interplay between natural gas and crude oil in each of the principal end-use sectors in turn, starting with where there is indirect competition (residential/commercial use and power generation), followed by some direct competition (industrial) and finally focusing on the transportation sector where there is the most potential for a direct, head on battle between the two energy sources that could profoundly influence relative price dynamics in future years in the US.


It Is Informed Optimism To Wait For The Rain

profit-loss-riskMy Comments: Yes, the title above is a little odd, but the word “optimism” caused me to stop and read.

By every contemporary, standard definition, I am a “financial advisor”. That term is restricted, or should be, to those of us providing financial advice to clients that conforms to a fiduciary standard. Simply put, we SHOULD be bound legally, morally and ethically to do what is in the client’s best interest.

Recently, I met with a family whose matriarch has been a client for almost 20 years. The objective was to help her and her heirs come to terms with advice I had given her over those years that, because in retrospect, I gave her flawed adice. It  could now cause them some additional grief when she passes. My suggestion was to cause the funds to be repositioned such that the additional grief would not happen. If what John Hussman suggests below does happen, their grief will be compounded signficantly unless they adopt the changes I suggest.

Unfortunately, inertia ruled the day and with the advice of another financial person, it was decided to leave things alone. My hope is the family will read this and come to a different conclusion. While I cannot guarantee the avoidance of the cliff described by John Hussman, what I have virtually all my clients invested in are programs that will perhaps make money when everyone else is losing their shirt. The numbers from 2008 and 2009 were all positive.

John Hussman Mar. 10, 2014

Based on valuation metrics that have demonstrated a near-90% correlation with subsequent 10-year S&P 500 total returns, not only historically but also in recent decades, we estimate that U.S. equities are more than 100% above the level that would be associated with historically normal future returns. We presently estimate 10-year nominal total returns for the S&P 500 averaging just 2.2% annually over the coming decade, with zero or negative nominal total returns on every horizon of less than 7 years. Regardless of very short-term market direction, it is urgent for investors to understand where the equity markets are positioned in the context of the full cycle.

Importantly, this expectation fully embeds projected nominal GDP growth averaging over 6% annually over the coming decade. To the extent that nominal economic growth persistently falls short of that level, we would expect U.S. stock market returns to fall short of 2.2% nominal total returns (including dividends) over this period. These are not welcome views, but they are evidence-based, and the associated metrics have dramatically higher historical correlation with actual subsequent returns than a variety of alternative approaches such as the “Fed Model” or various “equity risk premium” models. We implore investors (as well as FOMC officials) to examine and compare these historical relationships. It is not difficult – only uncomfortable.

Objectively, there is no specific level at which investors can be told “no, stop, don’t” once the speculative bit is in their teeth. Historically, however, such periods have typically reached their extremes when a syndrome of overvalued, overbought, overbullish, rising-yield conditions emerges. By the time one observes extreme conditions simultaneously – rich valuations, overbought market conditions, lopsided bullish sentiment, and rising 10-year yields – equity markets have generally been at precarious and climactic highs. Prior to the current market cycle, these points singularly include 1929, 1972, 1987, 2000, and 2007 (slightly broader criteria also would include 1937). In the uncompleted half-cycle since 2009, however, we’ve seen these conditions at the 2011 market peak (followed by a near 20% decline that was truncated by investor enthusiasm about fresh quantitative easing), and several instances over the past year – specifically, February 2013, May 2013, December 2013, and today.

Investors and policy-makers that focus attention on some alternative valuation measure (usually because it seems pleasantly benign) would be well-advised to examine the data, and compare the historical relationship between competing measures and actual subsequent market returns. Remember also that outliers are instructive. For example, the actual total return on equities in the decade following 1964 was much weaker than one would have projected, because stock valuations collapsed at the 1974 market low. Conversely, the actual total return on equities in the decade following 1990 was much stronger than valuations would have projected, because valuations became so extreme by the 2000 bubble peak. To the extent that stocks have done a few percent better in the most recent 10-year period than valuations would have projected, it is because stocks have become so profoundly elevated at present. Such outliers are the first thing to be wiped out over the completion of the market cycle.

Again, regardless of very short-term market direction, it is urgent for investors to understand where the equity markets are positioned in the context of the full market cycle. While the most extreme overvalued, overbought, overbullish, rising-yield syndrome we define has generally appeared only at the most wicked market peaks in history, investors have ignored those conditions over the past year. We can’t be certain when the deferred consequences will emerge. But a century of market history provides strong reason to believe that any intervening gains will be wiped out in spades.

A final note – in my view, it is incorrect to believe that the 2008-2009 market plunge and financial crisis were caused by the housing bubble. The housing bubble was merely the expression of a very specific underlying dynamic. The true cause of that episode can be found earlier, in Federal Reserve policies that suppressed short-term interest rates following the 2000-2002 recession, and provoked a multi-year speculative “reach for yield” into mortgage securities. Wall Street was quite happy to supply the desired “product” to investors who – observing that the housing market had never experienced major losses – misinvested trillions of dollars of savings, chasing mortgage securities and financing a speculative bubble. Of course, the only way to generate enough “product” was to make mortgage loans of progressively lower quality to anyone with a pulse. To believe that the housing bubble caused the crash was is to ignore its origin in Federal Reserve policies that forced investors to reach for yield.

Are Gold And Silver Ready To Rumble?

My Comments: I’ve never been much of a gold bug. I recognize it’s value as a trading opportunity and the need for a large portfolio to include what are thought of as non-traditional investments. But since it tends to increase in value during times of high inflation and general woe and gloom, and being a person whose natural inclination is optimism, it tends to disappear from my personal radar.

Plus there are some in the blathering media who seem to glorify the act of owning gold, as though having some was a path to rightousness.

A recent conversation with someone caused me to see this as it crossed my desk and I thought you should be aware there is a strong sentiment that you can make serious money with gold over the next couple of years.

James P. Montes, Equity Management Academy / Mar. 2, 2014

At first glance, silver appears to be moving in step with gold. Gold’s up 11% year to date and up over 7% month to date, while silver’s up 10% for the year and gaining 11% for the month.

“The silver market is showing quiet strength and major support has been defined in the $19 to $20 levels for May Silver.” Commented Karl Schott, a silver specialist with the Equity Management Academy. The fundamentals have not changed and in fact have gotten stronger.

“Silver is finding its own support independent of gold due to strong buying from China and India and an increase in industrial production of electronics,” including smart phones, said Eric Sprott, CEO Sprott Asset Management in a recent phone interview.

Now let’s deal with some reality in the real physical gold market in 2013. As we discussed in 2013, the supply/demand data suggests to us that physical demand was overwhelmingly greater than mine supply.

Here is a chart showing the World Gold Supply

It is obvious to us that precious metals markets were manipulated in 2013. It is also obvious that demand far exceeded annual mine supply. Now let’s analyze what should happen, going forward, with these revelations. If gold prices are back on their long-term trend, ex-manipulation, a linear progression of the gold chart from 2000 to 2014 would suggest a price of $2,100 now (62% higher than the current $1,300 level) and $2,400 by year-end (Figure 2).

Trend showing price of goldThe gold and silver markets have met and fulfilled all expectations for an upswing into the late February time frame as documented and published on Seeking Alpha.

The silver market needed a rally above 20.97 to turn The VC Price Momentum Indicator up and complete the expected initial target zone level of 22.10 documented in last weeks’ report and culminate this initial advance. “The gold and silver markets have given a very powerful confirmation of the 1 to 3 month outlook for an initial bottom confirmed late December into late February. Major resistance shows up in the 1336 to 1347 area for the April futures contract. The silver major resistance shows up in the 22.10 to 22.37 levels basis the March contract.”

Echoing my comments, “The market will provide us with another opportunity to get long again for those that missed the initial breakout. A close below 1322 would confirm a correction into the 1311 to 1297 areas is possible where it would offer traders/investors with another ideal buying opportunity to get long. Buy corrections and add to your long-term positions in silver as we approach the 21.44 to 21.02 levels. A close below 21.71 would confirm a possible test to the mid to low 21 area for March silver futures.”

Our Live trading room subscribers exited all long positions short – term to intermediate above 22.10 for May silver. They were well informed and prepared days ahead of silver moving towards these expected levels of resistance and realized some very substantial profits. The weekly high was 22.18.

( If all of this interests you, then here is the link to the original article where you can get the full monty about both SILVER and GOLD.- TK )