Tag Archives: retirement plans

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.

12 Steps to a Blissful Retirement

retirement_roadMy Comments: Monday morning, the sun is shining, and perhaps an exciting week ahead. Only I tried retirement, and it was not blissful (billsful maybe). So I’m back working full time, knowing that what used to take me an hour to accomplish, now takes at least two.

That being said, whenever I see a list presented about something in which I have an interest, I tend to read it. I suspect that may also be true for some of you. Or at least it will be when you have enough years under your belt.

By Paul Merriman / Jan. 29, 2014

OK, maybe “blissful” is a bit too strong to be realistic as an image describing retirement. But some of the smartest people I know have figured out how to make this stage of their lives very satisfying and rewarding.

This article isn’t about money. I would be the last person to play down the importance of having adequate financial resources when you retire. But no matter how much — or how little — money you have, the quality of your life will be determined mostly by what you do with your time, energy and opportunities.

I’ve had the good fortune to know lots of very smart people, and they taught me a lot about how to live well. Here are some pearls of that wisdom:

1. What I just said
Happiness in later life isn’t a direct function of how much money you have. This is no surprise to the smartest people I know. To a large extent, your happiness depends on your attitudes, your behavior and your choices. This is equally true before you retire, but sometimes it becomes more obvious after you stop working.

2. You won’t stand out if you wait to be told what to do
The happiest people I know cultivate habits and follow rules that others don’t. Want examples? Look closely at the people in your life that you most admire. What do they do that you don’t?

3. Smart people know what makes them tick
They’ve found whatever it is that’s likely to make them want to get up in the morning — and they make sure their daily life has some of that special something. Want examples? Again look around at the people you know who are actively embracing life.

4. Have fun
The smartest retirees I know make a point to have fun every day. Here’s an interesting thing about fun: It isn’t the activity itself. What’s fun to one person (golf?) may be drudgery — or worse — to somebody else. If you pay attention, you may notice that what makes something “fun” is often an attitude of playfulness, mischief, creativity, surprise. Try to pay attention to what’s going on when you’re having fun. Chances are you will find that you’re focused instead of scattered, loose instead of uptight.

5. Search for balance
Smart retirees look for a balance of taking it easy and working on things that matter to them. The right balance between relaxation and activity won’t be the same for you as it will be for your friends, and it will undoubtedly evolve over time. The key point is to find it and maintain it.

6. Have a mission
The happiest retirees have at least one driving force or mission in their lives. It can be as complex and demanding as running an organization or as seemingly simple as mastering a craft or fulfilling a family obligation. You will know you have found this special something when, every time you do certain things, you just feel good about yourself and you’re glad to be alive. For many people, this leads naturally to my next point.

7. Find something you can do for others
Whether you realize it or not, you have something valuable to give somebody. If you figure out what that is, and if you actually give it, I am pretty certain that a couple of things will result. First, the world will be a little bit better place because of you; second, your life will be richer and more satisfying. In the words of an old country song , “He who’d walk a mile just to hold an empty hand, knows what it means to be a wealthy man.”

If you have an entrepreneurial bent, look around in your community and see what needs fixing. Then figure out whether or not you can get it fixed. If you are looking for a worthwhile established charitable or other nonprofit organization, I think a great place to start is at greatnonprofits.org .

8. Combine passion (No. 6 above) with generosity (No. 7)
When you find something that gets you out of bed in the morning with a spring in your step AND it’s something you regard as really worthwhile in some way, you have truly found your calling. If anything deserves to be called a home run in retirement, this is it.

9. Surround yourself with people you love and who love you
As I wrote last winter, the quality of your life will be shaped by the quality of people in your life. Cultivate friendships with young people, and try to learn from each of them. Many studies have found that having a close group of family and friends is strongly correlated with health and happiness in retirement.

10. Don’t wait too long to do the most important things on your bucket list
We’ve all known retirees whose health or other circumstances prevented them from doing things they had so eagerly anticipated. If travel is a high priority for you, as it is for so many people, do it in the early years of your retirement, while you are physically able.

11. If you are a grandparent, be a good one
Spoil your grandkids. Love them. Teach them. Learn from them. Introduce them to people, experiences and places they wouldn’t know otherwise. Remember that they will learn most just from the example you set. It’s highly likely that even decades after you are gone they will still remember some of the things you said and did. There are many books on grandparenting. One that I particularly like, by Janet M. Steele, is Great Ideas For Grandparents: How to have fun with your grandchildren and promote positive family relationships .

12. Keep your mate happy
If you are married or in a primary relationship, keep your spouse or partner happy. Some of the smartest people I know express that commitment by regularly telling their spouses: “You should have what you want.” Obviously you cannot give your spouse the world. But you can seriously adopt this attitude. As one of my friends likes to say, “Life works best when my sweetie is happy.”

You may not need any guidance other than that. But if you want specific ideas, here’s an article that suggests 50 ways to please a wife and here’s one written for women on 50 ways to please a husband.

There is much more that could be said about living well after retirement. You can find a lot of it in a book I like: The Joy of Not Working: A Book for the Retired, Unemployed and Overworked- 21st Century Edition by Ernie J. Zelinski.

Click HERE for the source article and all the links.

The Affordable Care Act’s Most Important Date: Not What You Think

My Comments: You already know my opinions about the PPACA and how it will morph over the next ten years. Here’s another element that will focus people’s attention as contrasts start to appear between states that are willing to participate and those that do not. Since Florida has chosen to NOT participate in the Medicaid component of the law, where will the money come from to take care of Florida citizens?

Personally, I don’t see why I have to see my tax dollars carry the full burden. Because they are, when you understand that non-insured people are being cared for. We’ve not yet reached the point of simply letting people die. Even though hospitals and physicians are paying up front for their care, the financial burden is reflected in higher than necessary prices across the board. Which you and I are paying.

by Charles Ornstein, ProPublica.

Many people have asked when we’ll know if the Affordable Care Act is a success or failure.

Was it October 1, the date of the federal health insurance marketplace’s problem-filled launch? Or was it the end of November, when Healthcare.gov was supposed to be fixed?

Is it December 15, the last day consumers can enroll (since extended) for coverage that begins on January 1? Or March 31, when the enrollment period for buying insurance for 2014 closes?

In my mind, there is a different date that will have far more bearing on the number of people covered under the law. It’s June 28, 2012, the date the U.S. Supreme Court ruled on the act’s constitutionality.

What most people remember about the high court’s decision is that it upheld the core of the law: an individual mandate that requires practically everyone to buy health insurance or pay a penalty.

But the most consequential part of the ruling, which got less attention at the time, gave states discretion over whether to expand their Medicaid programs for the poor.

The law originally called for each state to expand Medicaid to people making less than 138 percent of the federal poverty level (now $15,856 for a household of one or $32,499 for a household of four). But the court said states could refuse to go along and not risk losing the federal government’s contribution to their Medicaid programs.

Why is this so important? Because about half the states have refused the expansion (or haven’t approved it yet), putting Medicaid out of reach for millions of their residents. Those states include Texas, Florida and almost all of the south. Here’s a map of what each state is doing.

ACA by stateWe’re seeing Medicaid’s importance play out as consumers sign up for health coverage through the health insurance marketplaces. In fact, far more are enrolling in Medicaid than in private health plans. Consider this report Monday from The Wall Street Journal:
In Washington state, one of the states that operates its own exchange, 87% of the 35,528 people who had enrolled in new insurance plans from Oct. 1 to Oct. 21 were joining Medicaid plans, according to state figures. By Thursday, 21,342 Kentuckians had newly enrolled in Medicaid, or 82% of total enrollees. In New York, about 64% of the 37,030 people who have finished enrolling were in Medicaid.

Some states like Maryland, Washington and California are using aggressive outreach to get people into Medicaid, including contacting those who are already on other programs such as food stamps, said Matt Salo, executive director of the National Association of Medicaid Directors.

“When you actively go out and aggressively target people, they sign up,” he said.

It’s easy to understand why. Medicaid is free; private health plans may not be (depending on the subsidy a person qualifies for). Medicaid is relatively easy to sign up for; the private plans, not so much.

But in states that refused to expand Medicaid, millions of consumers are ineligible for this health coverage.

The Kaiser Family Foundation has an interesting policy paper showing the consequences of these decisions.

Igor Volsky at ThinkProgress has a good roundup of this issue, as does Dan Diamond at The Advisory Board. Diamond has done a great job chronicling the states and their Medicaid expansion decisions.

For states, the decision to expand Medicaid seems like a good deal. The federal government has agreed to pick up 100 percent of the cost for the first three years, and its support will phase down to 90 percent. Governors who reject the aid say they don’t trust the federal government will keep its word; they believe health costs are unsustainable, and they don’t believe their states will have enough money to pay their share in the future.

So what’s going to happen? Health care organizations and consumer advocates are hoping that some states will reconsider and sign on for the expansion, as Ohio did last week, giving coverage to about 275,000 people. But some officials, including North Carolina‘s governor, are holding firm against it.

Will that stance hold firm as millions of people in neighboring states receive coverage? If the start of Medicaid is any guide, the answer is likely no.

That said, it took 17 years for the last holdout, Arizona, to sign on. In 1982.

Annuities Reconsidered

retirementSince I have grey hair, my clients tend to also have grey hair. And among our concerns is how bills will get paid as time marches on. Social Security and Medicare are lifesavers for many people as financial and health threats continue to surface. But there is much more at stake than social programs sponsored by the government.

The essense of these comments come from Gene Pastula, whose practice is centered in Southern California. He also has grey hair, and he spends his time running a financial practice. Once a week, he sends out his thoughts to fellow professionals, and I’m proud to be included among his colleagues.

The financial industry press is awash in articles about how to create retirement income from clients’ portfolios. What is the best way? …. Bonds, dividend paying stocks, some of both, bond ladders, floating rate and private debt instruments?

Most of these discussions completely ignore annuities as options. I sometimes wonder it that is because they don’t understand annuities, don’t get paid asset fees from annuities, or they truly think that annuities are not a good strategy for retirement income regardless of what history, The Wharton School, and common sense tells them.

Think about this…the most efficient way to get the maximum amount of retirement income from one’s portfolio, regardless of the return you actually receive, is to create an income stream that will spend your last dollar on the day you die.

No reputable advisor can provide assurance of accomplishing that for the client, but the insurance companies can. A Guaranteed Refund Annuity, a type of Single Premium Immediate Annuity (SPIA), will pay the retiree an income for life while promising to pay all of their money out, even if the annuitant dies before expected. Even if the annuity company is wrong in estimating their life expectancy (which they certainly can be), they will continue paying income for as long as the annuitant lives, even if it is well after the original premium deposit has been exhausted.

The result is typically a monthly income (annualized) rate for life of 6% to 10% of the premium deposit. When you include this as a part of the portfolio you will provide a guaranteed income rate of return 40% to 100% higher than you can currently offer using previously mentioned investments, while providing a guarantee that the income will last as long as the client. And the fact that this income is largely tax free for the bulk of the rest of their life further increases the relative value.

Now consider the possibility of laddering SPIAs as the client ages and inflation continues, requiring they have additional income. Older clients enjoy higher monthly rates. Or for added security, purchase a longevity annuity that employs a super discounted investment today to provide additional income at some predetermined point in the future. Call us and we can explain all of this to you. ( if you ask a question I can’t answer, then I call Josh in Gene Pastula’s office! ). I’m hoping you will be impressed.

As we have been saying for years, insurance planning is not an alternative to portfolio management. But it does play an important role in providing a safe, secure and predictable stress free retirement income.

Bits and Pieces – September 6, 2013

NEXT MOVE FOR FED – No one knows when the Federal Reserve will begin tapering its bond-buying stimulus program. That apparently includes the 12 voting members of its policymaking committee, as revealed by the release of the Fed’s 30-31 July meeting minutes. A few officials seek to move soon, while the more cautious are inclined to wait before making a move, according to the minutes. Ultimately, much rests on economic data that will be released between now and the Fed’s 17-18 September meeting.

BROKE? – U.S. Treasury Secretary Jacob J. Lew say a failure by Congress to raise the debt limit would “have disastrous effects for our nation” and could put at risk payments to Social Security recipients and veterans. “Extraordinary measures are projected to be exhausted in the middle of October. At that point, the United States will have reached the limit of its borrowing authority, and Treasury would be left to fund the government with only the cash we have on hand on any given day.”

100 DAYS AND COUNTING – The Treasury Department accounting of the U.S. government’s receipts, expenditures and borrowings indicates that the legally limited debt of the federal government has now been exactly $16,699,396,000,000 for 100 straight days. It seems of late our government has adopted the Few Good Men line, “You can’t handle the truth!”

ADD SYRIA – Wall Street has another thing to worry about besides rising interest rates and when the Federal Reserve will pull back on its stimulus: the crisis in Syria. Stocks were trading slightly higher in midday trading, but headed south and finished lower after Secretary of State John Kerry delivered a forceful statement to the Syrian government, condemning them for using chemical weapons against civilians, saying the use of the banned arms was “undeniable” and insisting there must be “accountability” for those behind the act. The stock market fell in concert with Kerry’s statement, clearly jittery about the prospect of the U.S.’s potential involvement in yet another conflict in the Mideast.

WAR WEARY – By press time, this may be a done deal but support for an attack on Syria among Americans is more than three times lower than support for U.S. involvement in Vietnam at the very lowest ebb of the war. Some believe the President must follow through on his “red line” threat in order to save face and rescue credibility. However, according to a Reuters poll, only 9% of American support intervention in Syria.

FINANCIALS AND FOREIGN POLICY – Jitters over a possible U.S.-led military strike against the Syrian government knocked Asian equities, with Japan’s Nikkei hitting a two-month low, and pushed oil prices and safe-haven gold to multi-month highs. An acute ‘risk-off’ mode also boosted the appeal of the Japanese yen, which held at a one-week high against the dollar and euro after having posted its biggest rally in more than two months. Against a basket of major currencies, the dollar was steady at a one-week low. Washington and its allies appear to be gearing up for a probable military action against President Bashar al-Assad’s forces, which were blamed for last week’s chemical weapons attacks.

RECOVERY? – How strong the economic recovery has been since the Great Recession ended in 2009 probably depends on viewpoint. For those in the top 5%, the recovery has been pretty good. As for the other 95%, well…maybe not so much. The lower income levels have fared poorly during the recovery because those demographics have their wealth concentrated in housing and are hit far more severely by falling prices, have a more difficult time finding jobs that pay at a rate commensurate with the positions they held. History has shown that highly accommodative monetary policy widens income disparity by awarding speculators and penalizing savers. While the S&P 500 is up nearly 150% since the March 2009 lows, that’s mostly helped those heavily invested in stocks.

EUROPEAN ECONOMY BETTER – Eurozone business activity picked up the pace in August, building momentum from a slight increase in July. The preliminary gauge of the Markit eurozone PMI for August reached a 26-month high, rising to 51.7 from 50.5 in July. Eurozone manufacturing had crossed the threshold of 50 into growth territory in July. The services sector followed in August, rising to a score of 51.0 from 49.8 in July.

EMERGING MARKETS SUFFER – Emerging market currencies continued to weaken versus the U.S. dollar after the latest speculation that the Fed will scale back its monetary easing program. Emerging markets have benefited greatly from the unprecedented free flow of money. Low interest rates in many developed markets have sent investors seeking better rates elsewhere. Among the hardest-hit currencies are the Indian rupee, the Mexican peso, the Brazilian real and the South African rand.

LONDON WHALE SETTLEMENT – U.S. government housing finance authorities are pressing JPMorgan Chase for at least $6 billion to settle lawsuits over bonds backed by subprime mortgages. The company is arguing that it should pay less to settle the claims by the Federal Housing Finance Agency. The FHFA litigation is among a raft of legal issues JPMorgan is trying to work through in addition to investigations over its $6.2 billion “London Whale” derivatives loss of last year. An FHFA spokeswoman declined to comment and the lawyers laughed all the way to the bank.

ANOTHER GOVERNMENT SUITmoney maze – A U.S. government lawsuit accusing Bank of America of fraud in the sale of billions of dollars of toxic mortgage loans to Fannie Mae and Freddie Mac is on track to go to trial next month after a judge rejected the bank’s bid to dismiss the case. The order clears the way for the case to proceed toward a scheduled September 23 jury trial. Only a few prominent cases tied to the financial crisis have ever gone to trial. The Department of Justice sued BOA last October, joining a whistleblower lawsuit originally brought by a former Countrywide executive. It alleged that Countrywide, acquired by BOA in July 2008, caused more than $1 billion of taxpayer losses by selling defective home loans to Fannie Mae and Freddie Mac, the mortgage financiers seized by the government in September 2008. Lawyers on both sides are deliriously happy.

Even Skilled Investors Can Use a Financial Advisor

profit-loss-riskMy Comments: Yesterday, the focus of my comments was that if you want to go it alone, that’s OK. Here, however, are some reasons for not attempting to go it alone and be solely responsible for your decisions. I can confirm, after 38 years in this business, that emotions play a huge role in whether or not you are successful as an investor. It’s not about fees, or lack of skill. It’s whether you can make objective choices when it comes down to YOUR MONEY THAT IS AT RISK.

Steve Garmhausen | Special to CNBC.com | Monday, 29 Apr 2013

In the past ten years, more investors have been turning to professionals for help with their portfolios. One measure of the industry—assets under management at registered advisors—swelled from $22 trillion in 2002 to nearly $50 trillion in 2012.

What’s behind that surge? More people need help as employer-sponsored pensions give way to self-guided retirement plans such as 401(k)s and they realize that investing in a globally linked market is complicated.

Yet, a growing number of investors and experts are embracing financial advisors for a more surprising reason: to help them avoid the most costly error investors can make, which is listening to their emotions.

People tend to buy when markets are on the way up and sell on the way down. That costs the average mutual fund investor nearly 4 percent a year, based on data from research firm Dalbar Inc. If you invested $100,000, losing nearly 4 percent a year would mean you’d end up with about $130,000 instead of $280,000, assuming a 6 percent annual return.

Dalbar found that “psychological factors” account for 45 percent to 55 percent of the persistent gap in investment returns. In short, investors can’t resist running with the herd.

Case in point is the Great Recession. In March 2009, when the markets hit a trough, household net worth had fallen from a high of $64.4 trillion in second-quarter 2007 to $50.4 trillion in first-quarter 2009. Americans’ stock holdings plunged 5.8 percent to $5.2 trillion, and mutual funds holdings slid 4.1 percent to $3.3 trillion, as investors pulled $300 million out of their equity funds at the bottom of the market, according to data from the Investment Company Institute.

“I do think there is a very strong case to be made for a sensible advisor to help you make the right decisions,” said Charles Ellis, founder of consulting firm Greenwich Associates and former chair of the investment committee for Yale University’s endowment, as well as a longtime proponent of buying inexpensive index mutual funds directly.

An advisor may also be able to help you establish a plan you feel comfortable sticking with.

Dalbar President Louis Harvey argues that the seeds of bad buying and selling decisions are planted well before ill-timed transactions. An investment strategy must meet needs as well as risk tolerance, he said.

“We found that when there is a mismatch; you have reactions that lose people money,” Harvey said.

While not a sure-fire solution, a financial advisor can provide a counterpoint and a reminder that staying invested through downturns yields the best returns over time.

“I don’t think there’s any dispute that a lot of people out there could do a good job of investing their own money,” said Michael Branham, president of the Financial Planning Association. But, he added, “there’s so much volatility in the market that it’s easy to get emotionally charged either way.”

The surging stock market is most likely emboldening investors again. Current low bond yields can make it tempting to jump at higher-risk fixed-income investments. It’s tempting to pour in more money, right? But then you’d run the risk of buying high—falling into an emotionally driven move, such as investors who sold during the March 2009 low.

An outside voice of reason can be a major advantage for many investors, said Mark McNabb, clinical professor of finance at the University of Texas at Dallas. “You need someone to act as your filter sometimes,” he said.

Dean Harman, president of Harman Wealth Management, recalled meeting with a client who told him that, on one hand, she didn’t want to lose money. “On the other hand, she was saying, ‘Should I get aggressive so I can make more money?’ ”

Dean reminded her of the long-term goal they had agreed on—funding her retirement to the tune of $56,000 a year.
“I brought her back to what her goal is,” Harman said. “As long as we can deliver the income she needs, and a modest amount of growth, she doesn’t need more than that.”

He said he views an aggressive stance on behalf of this client, who has $1.5 million with Harman Wealth, this way: If it were successful and increased her assets under management to $3 million, her life wouldn’t change that much. But if the posture were to backfire and the portfolio fell to $700,000, “then she’s in real jeopardy of not being able to generate the income she needs to meet her goals,” he said.

“Manage to your goal, not to what the markets are doing,” Harman advised.

Austerity Exposes the Global Threat from Tax Havens

My Comments: Unless you have been to the Cayman Islands, or happen to make far more money than you actually need to live your life, the idea of an offshore tax haven is pretty remote. You’ve heard about them, but since they are so far removed from your reality, they seem to stay under the rug. Here’s an article from the Financial Times that suggests we should pay more attention to what they represent for all of us.

By Jeffrey Sachs

The curtain has been pulled aside on the once secret world of tax havens, and the scale of abuse is nearly beyond reckoning. Week after week, Americans and Europeans worn down by budget austerity have learnt about the secret accounts of their politicians, tax evasion by leading companies and hot money destabilising the world economy. The darker truth is that these havens are not gaps in the world’s financial system; they are the system.

How many politicians and political parties have secret accounts abroad? Inevitably, given the nature of the arrangements, we cannot say for certain – but the list of those that have come to light is long. US presidential candidate Mitt Romney was found to have huge wealth in the Cayman Islands, never adequately explained. In France, Jérôme Cahuzac has resigned in disgrace from his position as budget minister following the revelation that he held a secret account in Switzerland. He has since been charged with tax fraud. Spain’s ruling party has been making payments from secret Swiss accounts for years. One senior Greek politician has been sentenced to jail for falsifying financial declarations. Many more revelations will come, especially now that investigative journalists have their hands on the records of hundreds of thousands of offshore accounts.

Groups such as Apple, Google and Starbucks have been shown in recent months to have used outlandish accounting gimmicks to shelter their profits. These include Google’s claim, approved by the US Internal Revenue Service, that its intellectual capital resides in Bermuda. There are thousands more like them working with the tax authorities to keep their money out of reach. Banks such as HSBC and UBS have been caught in the money laundering that facilitates this process.

How much tax revenue is lost to the global havens? Here, too, we can only guess but the numbers are likely to be vast. Recent estimates by the Tax Justice Network suggest that deposits are in the range of $21tn.

The havens serve countless purposes, yet not one is for the social good. They support massive tax evasion. They underpin a global system of bribery to corrupt officials. They service the accounts of drug runners, arms traders and terrorist groups. They create veils of secrecy through shell companies, which allow tax evasion, land grabs and environmental destruction.

The prime movers of the world’s tax havens are the US, Switzerland and the UK. Indeed, many of the leading havens, including the British Virgin Islands, Cayman and Bermuda, are British Overseas Territories. The secreting of trillions of dollars in the Caribbean has been undertaken with the support of America’s IRS, and with the approval of the US political class and Wall Street.

These playgrounds of the rich and powerful were largely hidden from the public’s view during the long financial boom. In the new world of austerity following the 2008 crash, however, they are increasingly seen as a cancer on the global financial system that must be excised.

The public’s animus was greatly accelerated by the Cyprus crisis. The island has for many years been a notorious secrecy-and-tax haven, especially for Russian money. Yet this was winked at rather than controlled. Then Cyprus blew up – a reminder of how an unregulated financial centre can quickly turn into a mortal threat to the world economy.

Many of the reforms that are required are obvious. All foreign bank accounts in any jurisdiction should be reported back to the national tax authorities of the account holders. Unreported incomes diverted to overseas accounts in the past should then be taxed at national rates with penalties for evasion. The thousands of hedge funds and corporations domiciled in the Caribbean for operations in the US and Europe should be required to redomicile in the US and Europe. Beneficial ownership should be disclosed on all foreign-owned companies.

Angela Merkel, the German chancellor, François Hollande, the French president, and David Cameron, the UK prime minister, have recently acknowledged the need for a serious clampdown, yet the real actions still lie ahead. Barack Obama, the US president, has spoken in the past about cracking down but has not said much recently. All eyes are now turning to US and European leaders in advance of the summits of the Group of Eight leading nations in June and the Group of 20 in September to see whether the politicians are beholden to the needs of the public or to heedless and destabilising private greed.

The writer is director of the Earth Institute and author of the forthcoming book, ‘To Move the World: JFK’s Quest for Peace’

Retirement Ratio: Portfolio Performance and Uncertainty Measurement

investment-tipsMy Comments: This was written a couple of years ago, but the message will resonate today with many people. For those who have expectations of retiring at some point, there is an incentive to accumulate as much retirement money as possible. All the while being sensitive to how that money is put to work.

The article is a little heavy on the math, so if you’re an engineer, this will not faze you. If you’re an English major, perhaps a little bit. But I encourage you to make the effort anyway.

A fundamental argument is that your money has to grow at least as fast as inflation, otherwise in terms of purchasing power, you are losing ground. In days past, we used to talk about the safety of Certificates of Deposit where the interest rate might have been 4%. Lost in the discussion was that inflation was 3% and taxes consumed more than 1% of the interest, which meant you were simply going broke safely.

Today, the markets are as uncertain as ever. But it doesn’t take specific knowledge or total acceptance of risk to allow yourself to think that an annual rate of return over the next several years can be in the 7% – 9% range. Click on the image that accompanies this post to get an idea what I’m talking about.

April 20, 2011 by Lowell http://itawealthmanagement.com/author/lowell/

What is the Retirement Ratio (RR)? I never heard of such a ratio, at least as it is defined below. Before going into an explanation, let me digress and address similar ratios. Portfolio performance measurements that combine both return and risk are readily available to investors. The Sharpe ratio is perhaps the best known “efficiency ratio” where it measures the amount of return earned per unit of risk. This Wikipedia reference may be easier for ITA readers to make sense of the Sharpe Ratio.

Scrolling down the Wikipedia Sharpe ratio page, one sees other performance/uncertainty measurements. Those of interest are Jensen’s Alpha, Treynor ratio, Information Ratio (IR), and Sortino ratio. Of these five ratios, my favorite is the Sortino although the Information Ratio is used for portfolios tracked using the Captool software. It is possible to extract performance and volatility data from Captool to come up with a ratio that closely approximates the IR.

Originally, the Sortino ratio was written as follows.
S = (R – MAR)/DR where
R = portfolio return
MAR = target return or Minimal Acceptable rate of Return.
DR = downside risk (DR sets the Sortino Ratio apart from other Return/Uncertainty ratios.)
MAR was changed to DTR™ for reasons given below.

In Chapter 3 of “The Sortino Framework for Constructing Portfolios” page 24 I quote, “I think the Sortino ratio was an improvement at that time in that it measured risk as deviations below the investor’s DTR™. What we now call DTR™ was called MAR in the original Sortino ratio. Attorney’s advised Sortino Investment Advisors (SIA) of a potential liability because referring to something as a “minimal acceptable return” could lead people to think we were promising that return at a minimum, so we changed it to DTR™.” Note that Desired Target Return™ is now a trademark term. One can only hope the entire English language will not be trademarked over the next 100 years.

One very important difference with the Sortino ratio (SR) is the denominator or Downside Risk. Instead of using the common mean-variance, the SR uses a semi-variance calculation. Why is this so important? Instead of measuring the portfolio volatility both above and below a mean, the semi-variance calculation only penalizes the money manager for downside risk, hence the DR designation.

The importance of DR came to my attention through two sources. 1) “Wealth Management” by Harold Evensky and 2) Captool software manual.

Quoting Evensky, “When Markowitz wrote his paper on Modern Portfolio Theory (MPT), he noted that a measure of distribution known as semivariance would, theoretically, be the best measure of risk. At the time, most computers did not have the computational power to handle semivariance. Consequently, Markowitz opted for the more practical measure of mean-variance. Today with greater computational power available at very low cost, there is an increasing interest in considering more complex solutions to investment issues, including the use of semivariance.” I suspect the difficulty of programming semivariance with the computers of the 1950s was a major hurdle as well as inadequate computing power.

The second source that peaked my interest in semivariance is more obtuse and it comes from the Captool manual. In describing Sigma (Standard Deviation) it is defined as follows. “This is a measure of the volatility of an investment’s ROI performance, and is often considered a good indicator of the investment’s risk. It is computed as the standard deviation of a number of ROI performance observations for the security or portfolio being evaluated. This standard deviation should not be confused with other, more simplistic standard deviation measures of an investment’s price. These suffer as a measure of risk, in that they penalize upside price movements as well as downside movements. Captool’s “sigma”, on the other hand, does not penalize consistent upward price movement. Furthermore, it is superior to simplistic price-based “Ulcer Indices” in that those can fail to properly handle price movements due to dividend distributions. Distributions are properly accounted for by a total return on investment measure such as is computed by Captool.” While I don’t know exactly how Captool calculates their Sigma, I strongly suspect it a semivariance calculation as it does not penalize “consistent” upside volatility.

With this background, we finally come to describing the Retirement Ratio (RR).
Retirement Rato = (P – R)/DU where
P = Internal Rate of Return (IRR) of Portfolio
R = Greater of either the IRR of Benchmark or the sum of Inflation Rate plus Retirement Withdrawal Rate. We currently use ITA Index, a customized benchmark.
DU = Downside Uncertainty or the semi-variance of the benchmark. I prefer the term, Uncertainty, as it does not carry the variety of meanings laid on the term, Risk.

This form of the ratio looks identical to the Sortino ratio only we use R instead of DTR™. R sets a higher standard than Desired Target Return (DTR™).

A little more detail or description of R is in order. To determine R, we are looking for the greater of two values. The first value we look for is the Internal Rate of Return of the benchmark. If P > R, then the portfolio is performing better than the benchmark. This is a desired goal, but extremely difficult to reach as active mutual fund managers well know.

The second value we look for is Retirement Target Return. The second form of the Retirement Ratio looks identical to the first form shown above, only we substitute Retirement Target Return (RTR) for R. Exactly what is the RTR? It is the sum of the current inflation rate plus the percentage the investor needs or anticipates withdrawing from the portfolio during retirement. Normally this value ranges from a low of 0% plus inflation to a maximum of 5% plus inflation. Should we experience deflation, that would factor into this form. Anything higher than a 5% withdrawal rate greatly increases the probability of the retiree running out of money. Withdrawal rates around 2% to 4% are recommended.

To calculate the Retirement Ratio, and this is built into the TLH spreadsheet, we use an IF THEN equation to look for the higher of either the IRR for the benchmark or RTR.

If the Retirement Ratio is greater than zero, we have a high probability of not running out of money regardless what the market is doing. To check this logic we also run a Monte Carlo calculation based on another set of variables. The Monte Carlo analysis gives us a long-term probability picture while the Retirement Ratio informs us how well we are doing from month to month and year to year.

Should readers need an example to better explain the Retirement Ratio calculation, you only need to request it in the comments section and I will go through a few with assumptions. Many times examples shed light on difficult concepts, and the RR is a tad complicated.

Record U.S. Stocks at Lowest Valuation Since 1980

USA EconomyMy Comments: Many of my clients are elderly clients. For many, their investment horizon going forward is not 20 years or more. They have little need to take what many of them think of as aggressive steps to grow their money.

On the other hand, good advisors today are encouraging their clients to be more aggressive. There is a pervasive and collective sense that the next 12 to 24 months are going to be very positive months for the stock market. Not that there might not be a 4% correction or two along the way, but nothing that suggests anything like what we saw in 2008-2009.

So this article is yet another that if you believe the world is NOT coming to an end anytime soon, you should put some of your money to work in the stock market. Call me, I have a good solution.

Source: http://www.investmentnews.com/article/20130324/REG/303249997

Even though U.S. stocks more than doubled during the four-year bull market, individual investors’ aversion to equities has left companies in the S&P 500 cheaper than at any record high since 1980.

The S&P 500 rose to an all-time closing high of 1,563.23 March 14, up more than 130% from its 2009 lows.

The index trades at 15.4 times reported profit, below the average 19.9 reached in bull markets since 1962, according to data compiled by Bloomberg.

The Dow Jones Industrial Average erased all losses from the financial crisis March 5 and has gained about 11% this year.

Although individuals have added almost $20 billion to U.S. stock funds so far this year, the amount is just 3.5% of the withdrawals since 2007 and compares with $44 billion placed with fixed-income managers in 2013, according to the Investment Company Institute.

For bulls, the absence of private buyers shows that there is plenty of money to keep the rally going.
Bears contend that the pessimism means the rally is too dependent on Federal Reserve stimulus and will fizzle once central bank support ebbs.

“I was down on the floor of the New York Stock Exchange when the Dow hit its new high, and there weren’t any champagne corks popping or people getting excited,” Michael Holland, chairman and founder of Holland & Co., said March 14.

“Valuations are extremely low. When there’s an absence of really bad news, the path of least resistance is up,” said Mr. Holland, whose firm oversees more than $4 billion.

The S&P 500 has risen about 9% this year. The Dow industrials were trading above 14,530.11 last Wednesday.
In March, the number of Americans filing for jobless benefits fell to the lowest level in almost two months, retail sales increased more than forecast and the housing market strengthened.

Indexes did give back a bit last week as the euro area imposed a levy on Cypriot bank deposits to reduce the cost of rescuing the nation’s lenders.

About $10 trillion has been added to U.S. share values since the market bottomed on March 9, 2009, during the worst financial crisis in seven decades. Confidence among households was shattered by the S&P 500′s 57% plunge from its October 2007 highs.

Institutions have been the main beneficiaries of the rally.

Individuals drained more than $600 billion from equity mutual funds in the six-year period though 2012 before becoming net buyers in January, data from the ICI show.

Even now, private investors remain skittish, withdrawing an estimated $1.7 billion in the two-week period through March 6 and pushing $10.5 billion into bonds.

“This big rotation from bonds to equities is not in full swing,” Alan Zlatar, who helps oversee $65 billion as head of multiasset class investments at Vontobel Asset Management Inc., said March 13.

“Our clients are seeking returns, and so far most of them have tried to stay within the bond space,” he said. “What speaks in favor of equities is, of course, that the alternatives are extremely pricey.”

Stocks are close to the least expensive ever versus government bonds, as measured by a valuation method favored by former Fed Chairman Alan Greenspan that compares earnings with interest payments.

S&P 500 companies currently generate profit equal to 6.5% of their share prices, about 4.5 percentage points more than yields on 10-year Treasuries.

The average spread in the past 10 years was about 2.5 percentage points, data compiled by Bloomberg show.

The combination of stocks being near all-time highs and declining trading volume indicates that money isn’t coming into the market and that equities are rising because fewer people are selling, according to Murray Roos, co-head of European equities at Deutsche Bank AG.

On average, 2.53 billion shares changed hands in S&P 500 companies each day this year, Bloomberg data show. That compares with 3.59 billion between 2009 and 2012.

“There aren’t sellers. That’s why the equity market is looking fundamentally cheap,” Mr. Roos said.
“We’ve got latent demand for equities,” he said. “We are at the start of a protracted move up in equity markets.”