What should I do with the $300,000 I am about to inherit?

My Comments: What would you do if you just found out you were getting an extra $300,000? And to whom is this question posed?

The article appeared in a news feed on my phone this morning as I was drinking coffee and getting ready for the day. You can find it HERE.

I’m sharing it with you for other reasons, none of which should imply I’m about to have an extra $300k, because I’m not. Unfortunately.

Since it appeared in a public forum, there are financial advisors across the country, who when asked this question by someone, will immediately think of answers like these:

1. Buy stocks and bonds (I make a commission.)
2. Buy an annuity (I make a commission)
3. Invest in a managed portfolio (I earn a fee or % of the assets invested)
4. Buy a portfolio of mutual funds and let me manage them (I make a commission and a fee)
5. I’m a realtor also, so buy a property and hope it appreciates (I make a commission)
6. Buy a life insurance policy and gain tax advantages (I make a commission)
7. Etc., etc., etc….

To be fair, some of those thoughts crossed my mind since for the past 41 years, I’ve called myself a financial advisor and earned a living from commissions and advisory fees.

On the other hand, offering someone a litany of options, all of which might be valid choices, begs the question that should immediately follow the above question, which is “What are your strategic goals?”.

This implies that someone has developed and articulated their strategic goals, all of which surface when you ask yourself certain questions. For example:

1. I’m a long way from retirement, so do I want to spend it now or do I want to grow it and spend it in the future?
2. I’m close to retirement and this money will help a lot but I have an immediate need to pay down debt. Should I use it for that or perhaps pay off my home mortgage?
3. How much money do I make now and how significant is this $300k in the grand scheme of things when it comes to living my life the way I want to?
4. I know that receiving this money has no current income tax implications for me but if I successfully turn it into $400k, what are the future tax implications?
5. Does having this money present opportunities to limit other existential threats to my financial future like bankruptcy, my future health needs, living too long and being broke, paying more taxes than I need to pay?
6. How much risk am I willing to accept without getting really nervous?
7. Etc., etc., etc….

The lesson learned by me from the article is that there are people who are only in the ‘answer’ business and there are people in the ‘question and answer’ business and if this happens to you, you should first find someone in the ‘question and answer’ business that you can trust and enjoy working with, who will help you first define your strategic goals.

Advertisements

Bull Market Heading for Major Correction in 2018, Bank of America Says

My Comments: If I sound like a broken record, you have my apologies.

In these days of supposedly good cheer and optimism, no less an institution than Bank of America/Merrill Lynch says to be cautious. That’s good advice.

As I continue working on my book/course on retirement planning, I have one eye watching what’s happening in the world. I consider myself lucky that I still have two good eyes.

Watch for a publication announcement in the next few weeks. Happy Holidays!

By Bradley Keoun | Dec 6, 2017

Bank of America Corp. says signs are growing that the eight-year-old bull market in stocks and risky assets could soon come to an end.

And, as with all late-stage bull markets, the trick for investors is in getting the timing right.

The Standard & Poor’s 500 Index, a key benchmark for U.S. stocks, could peak at 2,863 during the first half of 2018, Bank of America analysts predicted in a report. That’s 8% above current levels.

But the second half could bring mostly gloom for investors, as the Federal Reserve tightens financial conditions by raising interest rates and shrinking its balance sheet.

Volatility — a measure of the size of daily price swings — could rise from this year’s unusually low levels. Inflation is likely to increase. Yields on corporate bonds could widen relative to those of U.S. Treasuries — an indicator of fading investor confidence in companies’ ability to repay their debt.

“Signs of bubble-like behavior abound,” according to the report, which cited examples like record-high art prices, soaring Bitcoin prices and a 100-year-bond sale by Argentina, the South American nation that has defaulted on its debt eight times in the past 200 years. Next year “could represent the move toward euphoria, which typically heralds the end of a bull market.”

Wall Street firms are becoming increasingly anxious about frothy conditions in financial markets, with Goldman Sachs Group inc. warning investors last week that stocks and bonds are trading at the highest average valuations since 1900.

Bank of America noted that much of the recent gains have been fueled by central banks like the Fed, which have pumped trillions of dollars into global markets in the past decade to kindle elusive economic growth.

In fact, according to the bank, there may be little driving the stock market at this point except for bullish sentiment.

While there are ample gains are to be had by savvy investors, the risks are growing. By the end of 2018, the bank predicts, the S&P 500 could fall from its mid-year peak to about 2,800.

Signs are growing that the bull market is “nearing the end of its leash, triggering a mid-year pullback alongside potential for some of the best returns in the last gasps of the cycle,” the analysts wrote.

Yields on U.S. Treasury 10-year bonds could surge to 2.9% or 3% by the end of 2018, from about 2.37% now, the report said, a move that would lead to falling prices for the assets. According to the analysts, the tax bill could lead to $1 trillion or more of U.S. budget deficits, prompting the Treasury to issue more bonds and increase market supply of the securities even as the Fed proceeds with a plan to liquidate government securities currently held on its balance sheet.

“Balance sheet unwinding could mean a spike in net supply of Treasuries the market would have to absorb,” according to the analysts.

A key call in the report is that China’s bond and foreign-exchange markets could face a reckoning after officials for more than a decade encouraged heavy borrowing and spending to fuel economic growth. President Xi Jinping’s efforts to reduce debt in the country’s financial system could become “messy,” the Bank of America analysts wrote.

Investor fears of a Chinese currency devaluation sent markets reeling in early 2016, until officials managed to stabilize the exchange rate through strict capital controls.

So — proceed with caution.

Forecasting the Next Recession

My Comments: I may have retired from providing investment advice but I’ve not yet left the building. What happens in the world of money still interests me both professionally and personally.

Attached to this post, by way of a link to a 12 page, downloadable report, is a projection from Guggenheim that says we’ll experience a recession roughly 24 months from now.

Whether they are right or wrong, the next one is somewhere on the horizon. Knowing in advance when it might happen will help manage the financial resources you have that pay for your retirement.

Just don’t confuse the timing of a recession with the timing of market corrections of 10% or more. While there is some correlation, it is far from 100%. Also keep in mind the stock markets price things based on what people THINK will happen, not what actually does happen.

Here’s the link to download a copy of the report: Forecasting the Next Recession.

The Perfect Storm (Of The Coming Market Crisis)

My Comments: We do not live in a perfect world. Flaws are all around us. As responsible adults, we always try to make good decisions, and mostly we succeed. Until we don’t.

If you expect to live another 20 or 30 years, the money you’ll need to pay your bills has to come from somewhere. If you’ve already turned off the ‘work for money’ switch and retired, you’re dependent on work credits and saved resources. Maybe you have a pension that sends you money every month. Good for you.

If you are still working, you’re probably setting aside some of what you earn so you can someday retire and get on with the rest of your life without financial stress. At least that should be your plan.

This article from Lance Roberts, a professional money manager, needs to be read and understood. I’m not going to copy everything he says, but I do encourage you to follow the link I’ve put below. Make an effort to understand what he’s telling us. Your financial life may depend on it.

Know also there are ways to shift the risk of loss to a third party. For a fee, you get to enjoy the upside and avoid the downside. If you do live for another 20 – 30 years, where is your money going to come from?

Lance Roberts published this today, November 28th, and it can be found HERE.

10 Social Security Terms To Know And Understand

My Comments: Happy Thanksgiving everyone!

For those of you still not signed up and receiving monthly benefits, here’s some useful things to know.

For those of you who attended my Social Security workshops, you’ll recall the acronyms that appear on every page. There’s even a couple more here for you to learn.

Maurie Backman – The Motley Fool – Nov. 10, 2017

Social Security serves as a key source of income for countless retirees and disabled individuals.

It’s also an extremely complex program loaded with rules and terminology. If you’re attempting to learn about Social Security (which is something you should do, regardless of how old you happen to be), here are a few key terms you’ll need to understand.

1. OASDI

OASDI stands for old age, survivors, and disability insurance, and in the context of your paycheck, it’s the tax used to fund the Social Security program. The current OASDI tax rate is 12.4%. If you work for an outside company, you’ll lose half that amount of your earnings up to a certain income limit, while your employer will pay the remaining 6.2%. If you’re self-employed, however, you’ll pay the full 12.4% up front.

2. SSI

SSI stands for supplemental security income, and it’s different from OASDI in that it’s a program funded by general tax revenues, not Social Security taxes. SSI is designed to help those who are over 65, blind, or disabled with limited financial resources keep up with their basic needs.

3. FICA Tax

FICA stands for the Federal Insurance Contributions Act. It’s the tax that’s withheld from your salary or self-employment income that funds both Social Security and Medicare. For the current year, FICA tax equals 15.3% of earned income up to $127,200 (12.4% for Social Security and 2.9% for Medicare), but those making above $127,200 will continue to pay 2.9% FICA tax on income exceeding that threshold. In 2018, the earnings cap will rise to $128,700.

4. Social Security credits

In order to collect Social Security benefits, you must earn enough credits during your working years. In 2017, you’ll receive one credit for every $1,300 in earnings, up to a maximum of four credits per year. For 2018, the value of a single credit will rise to $1,320 of earnings. Those born in 1929 or later need 40 credits to qualify for benefits in retirement.

5. AIME

AIME stands for average indexed monthly earnings, and it’s used to calculate your personal Social Security benefit. The amount you receive from Social Security is based on your highest 35 years of earnings. To arrive at your AIME, your past earnings are adjusted for inflation so that they don’t lose value.

6. Full retirement age

Your full retirement age, or FRA, is the age at which you’re eligible to collect your Social Security benefits in full. FRA is based on your year of birth, and for today’s older workers, it’s 66, 67, or 66 and a number of months. Though you’re allowed to claim benefits prior to reaching FRA (the earliest age is 62), doing so will cause you to collect a reduced benefit amount — permanently.

7. Delayed retirement credits

Though waiting until full retirement age will ensure that you collect your benefits in full, if you hold off on filing for Social Security past FRA, you’ll rack up delayed retirement credits that will boost your benefits. Specifically, for each year you wait, you’ll get an 8% increase in your payments. Delayed retirement credits stop accruing at age 70, so that’s typically considered the latest age to file for Social Security (even though you can technically wait even longer than that).

8. Trust Fund

The Social Security Trust Fund was established in the early 1980s to cover any future shortfalls the program might face. If Social Security has a year in which it collects more taxes than it needs to use, that money is placed in the Trust Fund and invested in special Treasury bonds. Once Social Security’s incoming tax revenue fails to cover its scheduled benefits, the Trust Fund will be tapped to make up the difference. Come 2034, however, the Trust Fund is expected to run out of money, at which time future recipients might face a reduction in benefits.

9. COLA

No, we’re not talking about a soft drink. In the context of Social Security, it stands for cost-of-living adjustment, and it’s designed to help beneficiaries retain their purchasing power in the face of inflation. Back in the day, those who collected Social Security received the same benefit amount year after year. But beginning in 1975, beneficiaries have been eligible for automatic COLAs based heavily on fluctuations in the Consumer Price Index. COLAs are not guaranteed, however. If consumer prices don’t climb in a given year, benefits can remain stagnant. Such was the case as recently as 2016.

10. Survivors benefits

Survivors benefits are designed to provide income for your beneficiaries once you pass. Those benefits are based on your earnings records and the age at which you first file for Social Security. Surviving spouses, children, and even parents of deceased workers are eligible for survivors benefits.
Clearly, there’s a lot to learn about Social Security, but familiarizing yourself with these key terms will help you better understand how the program works. It also pays to read up on ways to maximize your benefits so that you end up getting the best possible payout you’re entitled to.

President Trump and Tribalism

My Comments: Some of you will see this as a political statement by me and perhaps recoil from it. I hope not.

We are in the midst of a national, if not global, re-evaluation of the values that underly society. On a personal level, I’m very troubled by Trump and how his values about life, about other people, about truthfulness, about the rule of law differ so greatly from my values. I’m less troubled by the political direction he’s pushing us.

That’s because, short of a global nuclear war, the outcome is very likely to be a re-affirmation of the assumptions that drove our nation and our economy toward greatness. Trump represents an effort to roll back the tides, and you know how that’s likely to play out. (See King Canute above.)

From an economic perspective, it’s a non-starter. Sooner or later, his narrow focus will doom him and those around him. Personally, I refuse to live in the past. I’m concerned about the now and tomorrow.

Ronald Brownstein on Nov 2, 2017

Although in dramatically different ways, Tuesday’s terrorist attack in New York and the Republican tax plan scheduled for release Thursday raise the same jagged question: In the Donald Trump era, is it possible for a deeply divided America to sustain any shared interest or common purpose?

The country obviously faced difficult divisions long before this president was elected. But he’s operated in a uniquely tribal fashion that has ominously, and even deliberately, widened those divides. In office, he has abandoned any pretense of seeking to represent the entire country. How deep a crevice he digs may turn on how much, if at all, the Republican congressional majorities resist his divisive tendencies.

Since announcing his presidential campaign, Trump has prioritized what I’ve called the “coalition of restoration”: the primarily older, blue-collar, non-urban, and evangelical whites who combine unease about America’s demographic and cultural change with anxiety about their place in an evolving economy.

Since January, Trump has repeatedly moved to show his coalition that he will resist the changes they fear. That impulse has been evident in his serial travel bans targeting mostly Muslim countries; his attempt to bar trans soldiers from the military; his forgiving reaction to the white-supremacist violence in Charlottesville, Virginia; and his support for preserving Confederate monuments.

Trump displayed a similar instinct following the New York attack, appealing to fear of the assailant’s Muslim background. In a flurry of tweets on Tuesday evening, Trump immediately denounced, as a “Democratic” invention, the “diversity lottery” immigration program that allowed the attacker to live in the United States. Leave aside that George H.W. Bush signed the lottery program into law, or that all Senate Democrats (along with 14 Republicans) supported ending it during the 2013 debate over comprehensive immigration reform. The key is that Trump’s reaction betrayed two central components of his political identity: his instinct to view any crisis more as an opportunity to divide than to unite, and how reflexively he portrays immigrants as a threat.

Trump is far from the first Republican tugged toward that dark star. But the party has sent mixed signals about how far it will follow him. On the one hand, this year’s attacks from Virginia gubernatorial candidate Ed Gillespie on so-called “sanctuary cities” and the Central American gang MS-13 have set a template for Trump-like anti-immigrant messages that many Republicans are likely to adopt in the midterms. On the other, Trump has struggled to build momentum for a bill to cut legal immigration in half, and he’s had trouble unifying congressional Republicans behind his demand for a border wall (which faces majority public opposition).

On immigration, Republicans appear genuinely divided—mostly by geography, partly by ideology—over how closely to join Trump in targeting whites most uneasy about the new arrivals. That hesitance is understandable given that, by 2020, minorities are likely to constitute a majority of all Americans under age 18.

But on taxes, congressional Republicans are placing an equally narrow bet. With Trump’s intermittent support, the GOP is advancing a tax plan aimed at a few voters at the pinnacle of the income pyramid. Although the numbers may change somewhat in the new House plan, the most comprehensive nonpartisan analysis of the GOP’s original blueprint found that it would shower fully four-fifths of its benefits on the top 1 percent of earners by 2027.

By diverting so much federal revenue to that one group, Republicans are ensuring future conflict with others. That lopsided allocation leaves them offering only small tax cuts to working-class voters, as well as possible tax increases to many upper middle-class families already recoiling from Trump’s behavior and cultural agenda. Their plan ensures they will pursue deep cuts in domestic discretionary programs that invest in the productivity of the increasingly diverse future generations—including programs in education and scientific research. It also means they will face growing demands from their fiscal hawks to cut entitlements, which benefit the predominantly white older population whose votes underpin their electoral coalition.

Stocks for the Long Run? Not Now

My Comments: There is increasing uncertainty about the stock market. This uncertainty has been growing now for the past 3 plus years. The long term trends described below, coupled with historically low interest rates, suggest the next decade will be disappointing to most of us.

This analysis comes from a Guggenheim Investors report published last September. I haven’t included all the many charts as you will be better served by going directly to the source to see them. https://goo.gl/UL1SSP

If nothing else, you should read the conclusion below…

September 27, 2017 |by Scott Minerd et al, Guggenheim Investments

Introduction

Valuation is a poor timing tool. After all, markets that are overvalued and become even more overvalued are called bull markets. Over a relatively long time horizon, however, valuation has been an excellent predictor of future performance. Our analysis shows that based on current valuations, U.S. equity investors are likely to be disappointed after the next 10 years. While the equity market could continue to perform in the short run, over the long run better relative value will likely be found in fixed income and non-U.S. equities.

Elevated U.S. Equity Valuations Point to Low Future Returns

U.S. stocks are not cheap. Total U.S. stock market capitalization as a percentage of gross domestic product (market cap to GDP) currently stands at 142 percent. This level is near all-time highs, greater than the 2006–2007 peak and surpassed only by the internet bubble period of 1999–2000. This reading is no outlier: It is consistent with other broad measures of U.S. equity valuation, including Robert Shiller’s cyclically adjusted price-earnings ratio (CAPE), Tobin’s Q (the ratio of market value to net worth), and the S&P 500 price to sales ratio.

U.S. Equity Valuation Is Approaching Historic Highs

Here is the bad news for equity investors: At current levels of market cap to GDP, estimated annualized total returns over the next 10 years look dismal at just 0.9 percent (before inflation), based on previous trends. Intuitively this makes sense: Looking back at the history of the time series, it is clear that an excellent entry point into the equity market for a long-term investor would have been a period like the mid-1980s, or in the latter stages of the financial crisis in 2009. Conversely, 1968, 2000, and 2007 would have been good times to get out.

Market Cap to GDP Has Been a Strong Predictor of Future Equity Returns

Market cap to GDP is a useful metric because it has proven to be an accurate predictor of future equity returns. As the chart below shows, market cap to GDP has historically been highly negatively correlated with subsequent S&P 500 total returns, particularly over longer horizons where valuation mean reversion becomes a significant factor. Over 10 years, the correlation is -90 percent.

Market Cap to GDP Has Been a Good Predictor of Equity Returns 10 Years Out

It would be easy to assume that the rise in stock valuations is justified by low rates. A similar argument is made by proponents of the Fed model, which compares the earnings yield of equities to the 10-year Treasury yield as a measure of relative value. While there is some relationship between interest rates and valuation as measured by market cap to GDP, low rates do not explain why equities are so rich. At the current range of interest rates (2–3 percent), we have seen market cap to GDP anywhere from 47 percent to current levels of 142 percent—hardly a convincing relationship. In short, interest rates tell us little about where market cap to GDP, or other valuation metrics, “should” be.

Fixed Income Offers Better Relative Value

For a measure of relative value, we compared expected returns on equities over 10-year time horizons (as implied by the relationship with market cap to GDP) to the expected return on 10-year Treasurys—assuming that the return is equal to the prevailing yield to maturity. Typically, equities would have the higher expected returns than government bonds due to the higher risk premium, but in periods when equity valuations have become too rich, future returns on U.S. stocks have fallen below 10-year Treasury yields. Not surprisingly, past periods where this signal has occurred include the late 1990s internet bubble and 2006–2007.

The chart below demonstrates that if equities over the next 10 years are likely to return just 0.9 percent, 10-year Treasury notes held to maturity—currently yielding about 2.2 percent—start to seem like a viable alternative. The fact that S&P 500 returns over the past 10 years have not been as low as the model predicted can at least be partially explained by extraordinary monetary policy, which may have helped to pull returns forward, but in doing so dragged down future returns.

Conclusion

Based on the historical relationship between market cap to GDP ratios and subsequent 10-year returns, today’s market valuation suggests that the annual return on a broad U.S. equity portfolio over the next 10 years is likely to be very disappointing. As such, investors may want to seek better opportunities elsewhere. Equity valuations are less stretched in other developed and emerging markets, which may present more upside potential.

In fixed income, low yields should not deter investors, as our analysis indicates that U.S. Treasurys should outperform equities over the next decade. But as we explained in The Core Conundrum, low Treasury yields should steer investors away from passively allocating to an aggregate index that overwhelmingly favors low-yielding government-related debt. In particular, sectors not represented in the Bloomberg Barclays Aggregate Index, including highly rated commercial asset-backed securities and collateralized loan obligations, can offer comparable (or higher) yields with less duration risk than similarly rated corporate bonds. We believe active fixed-income management that focuses on the best risk-adjusted opportunities—whether in or out of the benchmark—offers the best solution to meeting investors’ objectives in a low-return world.