Category Archives: Investment Planning

5 Ways To Avoid Retirement Rip-offs

USA EconomyMy Comments: These five ways are not foolproof, but will at least give you pause for thought. In a couple of months, I’m starting a series of free workshops sponsored by the American Financial Education Alliance whose mission is to promote financial literacy across the United States. Check out their website if you are curious.

By Kathy Kristof – MoneyWatch – April 6, 2016

Federal regulators are cracking down on advisers who profit from providing venal advice to retirement savers with new rules that demand that the industry adhere to a so-called fiduciary standard. Officials estimate that imposing this standard, which requires advisers to act in the client’s best interest, will ultimately save American consumers $17 billion annually lost to conflicts of interest — in other words, where the adviser pockets the profit instead of you.

While consumer advocates lauded the soon-to-be-enacted rules on Wednesday, some acknowledged that the battle may not be over. Financial services companies, complaining that the rules are overly burdensome, have threatened to sue. In the past, they’ve also persuaded members of Congress to throw language into pending legislation to derail the rules.

“The industry complaining about unnecessary and burdensome regulations is like an NBA player complaining about getting called for a foul,” says Scott Puritz, managing director of Rebalance IRA. “Sports fans want officiating to be fair and even-handed; retirement savers need the entire personal finance industry to be guided by a level playing field of rules and pro-consumer protections.”

Largely technical in nature, the new fiduciary standard rules are designed to reduce invisible conflicts of interest that arise because of the way some advisers are compensated. Simply put, high commissions paid on some financial products encourage advisers to sell — and sometimes churn — these products. These rules will require all advisers to adhere to a higher standard when selling products and to warn customers with a disclosure statement what their conflicts of interest may be.

That said, the rules will not be fully enacted until 2018 — assuming that they survive any potential challenges in the court system.

“These are a step in the right direction, but consumer self-defense is very important,” says Liz Davidson, author of “What Your Financial Advisor Isn’t Telling You.”

What should you do to protect yourself from retirement rip-offs?

Don’t buy from the bank:

In explaining the need for the rules, Secretary of Labor Thomas Perez cited a couple who had been talked into pulling $600,000 out of Vanguard mutual funds to invest in annuities sold through their bank. The annuities charged exorbitant fees and performed far less well than the mutual funds that they abandoned. This rotten advice would arguably prove illegal under current law, which bans advisers from peddling investments that are “unsuitable” for their clients. It would be even more illegal under a fiduciary standard. Still, as a practical matter, bankers are notorious for selling high-cost investments of dubious value. Your bank is a good place to open a checking account — and, maybe even to get a credit card. It’s a rotten place to buy investments.

Beware advisers buying meals. In recent months, postcards inviting consumers to learn about retirement investments at hosted meals have become so common that financial advisers at the Tarbox Group in Newport Beach decided they had to be proactive. They asked clients who got the postcards to bring them in so they could look up the background of the advisers hosting the seminars together. The result? “About half of them have bankruptcies or disclosure events,” says Mark Wilson, chief investment officer at the Tarbox Group.

If your adviser can’t keep his own finances in order well enough to stay out of bankruptcy, it’s a clear warning sign. So too are “disclosure events” — financial speak for when an adviser is sued by a client or is sanctioned for bad behavior by regulators. The meal itself should make you suspicious, Wilson adds. The idea is to work on psychological cues that make us feel like we need to reciprocate when someone gives us something. At the very least, look up an advisers background here before you attend a seminar.

Stick to what you understand.
Good investments are straightforward. Buy stocks and you’re buying a piece of a public company, expecting to share in its future profits. Buy bonds and you have an I.O.U. from a company, government or agency. Buy a certificate of deposit and you have a government-guaranteed savings account. Buy a Real Estate Investment Trust and you have a piece of a commercial real estate enterprise that will pass a portion of its profits on to you each year.

Mutual funds are simply investment pools that own investments like these and it should be easy to see what’s inside the pool. Simple, right? If someone is trying to sell you an investment that can’t be easily explained like these, watch out. “You should never buy an investment that you can’t explain to a friend or family member,” says Davidson. “You need to know what it is; what you paid for it; and understand how it fits into your personal financial strategy.”

Read.The new fiduciary rules will require anyone who sells retirement products to spell out any potential conflicts of interest. But like the disclosure statements you get with your checking account, it would not be surprising if the important details are buried deep in the fine print. This is your money. Read it. And don’t let anyone rush you through the process, saying it’s “just legalese.” If they give you a disclosure statement, you need to know what it says.

Likewise, if someone tries to sell you an annuity or “a private offering,” ask for the paperwork. It will be long. It will be boring. And it will spell out just how much your funds can be put at risk. Unless you have money to lose, you need to battle your way through the fine print to make informed investment decisions.

Ask. The new rules won’t go into full effect until 2018. In the meantime, if you don’t understand an investment or know how your financial adviser is compensated, ask. A good financial adviser will take whatever time is necessary to educate you about the right investments for you and what makes them appropriate. Good advisers will also not hesitate to explain how they are paid.

“We talk to people all the time who don’t know what they are paying for investment advice and they think it’s impolite to ask,” says Davidson. “Really? Would you go to the store and not ask what the products cost? You should be comfortable discussing these things with your advisers. You have to. It’s your money and nobody cares about it more than you.”

The Global Liquidity Trap Turns More Treacherous

bear-market--My Comments: Global liquidity or lack of it, is a prescription for investment success, or lack of it. If your retirement funds are threatened, then this might mean something to you. It’s not something to obsess over but it’s something I watch out for and hopefully find some remedies. Some of our presidential candidates will likely get us way deeper into this trap.

April 07, 2016 by Scott Minerd, Guggenheim Partners, LLC

For the first time since the Great Depression, the world is in a liquidity trap.

The unintended consequence of many central banks pushing negative interest rate policy is conjuring deflationary headwinds, stronger currencies, and slower growth—the exact opposite of what struggling economies need. But when monetary policy is the only game in town, negative rates are likely to beget even more negative rates, creating a perverse cycle with important implications for investors.

When central banks reduce policy rates, their objective is to stimulate growth. Lower rates are designed to spur savers to spend, redirect capital into higher-return (i.e. riskier) investments, and drive down borrowing costs for businesses and consumers.

Additionally, lower real interest rates are associated with a weaker currency, which stimulates growth by making exports more competitive. In short, central banks reduce borrowing costs to kindle reflationary behavior that helps growth. But does this work when monetary policy is driven through the proverbial looking glass of negative rates?

There is a strong argument that when rates go into negative territory it squeezes the speed at which money circulates through the economy, commonly referred to by economists as the velocity of money.

We are already seeing this happen in Japan where citizens are clamoring for 10,000-yen bills (and home safes to store them in). People are taking their money out of the banking system to stuff it under their metaphorical mattresses. This may sound extreme, but whether paper money is stashed in home safes or moved into transaction substitutes or other stores of value like gold, the point is it’s not circulating in the economy.

The empirical data support this view—the velocity of money has declined precipitously as policymakers have moved aggressively to reduce rates.

A decline in the velocity of money increases deflationary pressure. Each dollar (or yen or euro) generates less and less economic activity, so policymakers must pump more money into the system to generate growth.

As consumers watch prices decline, they defer purchases, reducing consumption and slowing growth. Deflation also lifts real interest rates, which drives currency values higher. In today’s mercantilist, beggar-thy-neighbor world of global trade, a strong currency is a headwind to exports.

Obviously, this is not the desired outcome of policymakers. But as central banks grasp for new, stimulative tools, they end up pushing on an ever-lengthening piece of string. The Bank of Japan and the European Central Bank are already executing massive quantitative easing programs, but as their balance sheets expand, assets available to purchase shrink. The BOJ now buys virtually all of the Japanese government bonds that are issued every year, and has resorted to buying exchange traded funds to expand its balance sheet.

The ECB continues to grow the definition of assets that qualify for purchase as sovereign debt alone cannot satisfy its appetite for QE. As options for further QE diminish, negative rates have become the shiny new tool kit of monetary policy orthodoxy.

If Dr. Draghi and Dr. Kuroda do not get the outcome they want from their QE prescriptions—which is highly likely—then more negative rates will be on the way.

It would not be a surprise to see the overnight rates in Europe and Japan go to negative 1 percent or lower, which will in turn pull down other rates along their respective yield curves.

Negative rates at these levels would make U.S. Treasurys much more attractive on a relative basis, driving yields even lower than they are today.

If the European overnight rate were cut to minus 1 percent from its current level of negative 40 basis points, German 10-year bunds would be dragged into negative territory and we could see 10-year Treasurys yielding 1 percent or less.

This experiment with negative interest rates on a global scale is unprecedented. While there may not yet be enough data to draw the final conclusion about the efficacy of negative interest rate regimes, I have little confidence this will work.

Monetary policy primarily addresses cyclical economic problems, not structural ones. Fiscal and regulatory policies are doing little to support growth, and in most cases are restraining it. Combined with negative interest rates, the current policy prescriptions are a perilous mix that is deepening the global liquidity trap.

Prepare For A ‘Rockier Road Ahead’

bear-market--My Comments: Investing money for the faint of heart is at best, a guessing game. Too much in ‘safe’ bonds and you get hammered when interest rates rise. Too little in ‘risky’ stocks at the bottom of a market trough and you get hammered when the next upturn happens.

As explained here, the ups and downs have been muted for the last few years and that is probably going to change. If your money is not positioned to take advantage of more volatility, you may not lose your money, but you will almost certainly lose purchasing power. Expect interest rates to stay low and inflation to increase.

Richard Turnill, The BlackRock Blog

There’s the old adage that a picture is worth a 1,000 words. I couldn’t agree more. That’s why in my role as BlackRock Global Chief Investment Strategist, I’ll be sharing a chart each week, here on the BlackRock Blog and in my new weekly commentary, that focuses on a key theme likely to shape markets in the weeks ahead.

Here’s this week’s chart below. It helps show why current low levels of stock market volatility look unsustainable; or, in other words, why now is a good time to prepare portfolios for a rockier road ahead.

The Federal Reserve’s (Fed) quantitative easing (QE) program—twinned with liberal doses of QE by other central banks—dulled market volatility to unprecedented low levels between 2012 and 2014. This period of exceptionally low volatility ended last year, as the Fed wound down its QE purchases and began to raise rates.

However, as evident in the chart above, markets have become eerily quiet recently. U.S. equity market volatility, as measured by the VIX Index, is hovering around its lowest level since August 2015 and is well below its long-term average.

This unusual calm follows declining market concerns about sliding oil prices, and the health of European banks and China. I do not expect this calm to last, and I see a return to the higher-volatility regime that was the norm prior to QE.

Why? The future path of monetary policy remains uncertain, and tail risks remain. A big Chinese yuan devaluation isn’t BlackRock’s base case, but it’s still a downside risk. Geopolitics, particularly as Europe confronts terrorism and migration, could also spark volatility. So, too, could rising global and U.S. inflation expectations.

How can you prepare? Gold can be an effective hedge if volatility spikes due to rising U.S. inflation fears, according to BlackRock analysis. I also like Treasury Inflation-Protected Securities (TIPS) and similar instruments. For more on what to watch in the week ahead, be sure to read my full weekly commentary.

Starting to Invest in 2016? Here’s What You Need to Know

Piggy Bank 1My Comments: After 43 years as a financial planner and investment company owner, I can say with certainty that the future outcome for your money is a combination of luck, discipline, timing and knowledge. I have no clue how we’ll do in 2016 but this is at least a start.

By Jason Hall Published January 10, 2016

Before you invest another dollar, there are some important things every investor should know to maximize returns, avoid unnecessary costs and losses, and even reduce taxes. Most importantly, it could keep you from making the most common mistake almost every investor repeats.

Use the best tool for the job

Things such as taxes, fees, and matching contributions can have a huge impact on your returns. For instance, if you’re not using one or more of the following, you’ll probably end up with less money when you need it than you would have otherwise:
• 401(k) or similar through work.
• Roth or traditional IRA with additional funds.
• 529 college savings plan.

Contributions to these kinds of accounts come with a bevy of tax benefits. For example, for every $1,000 you’re contributing to a taxable investing account instead of your 401(k), you’re paying an extra $150 in federal taxes, based on median U.S. income and tax brackets. Your employer may also match contributions to your 401(k). That’s free money — and it really adds up. If your employer matches 1% of your pay, we’re talking about $35,000 over 30 years, based on a 5% annual rate of return.

If your employer doesn’t offer a retirement plan, contributions to a traditional IRA are tax deductible in the same manner. Roth IRA contributions aren’t tax deductible, but the benefit happens when you retire. While 401(k) and traditional IRA distributions are considered taxable income, Roth distributions are tax-free. Who doesn’t want tax-free income in retirement?

If you’re saving for a child’s college, a 529 plan would also cut taxes, since both growth, and distributions for college expenses, would be federal (and state in some states) tax-free.

Simply contributing to the right account could be worth tens of thousands of dollars in tax savings alone.

Market crashes aren’t a bug — they’re a feature

Fellow Fool Morgan Housel put it best:

Markets crash all the time. You should, at minimum, expect stocks to fall at least 10% once a year, 20% once every few years, 30% or more once or twice a decade, and 50% or more once or twice during your lifetime. Those who don’t understand this will eventually learn it the hard way.

The key is time in the market, and not timing the market. So if you’re saving for your retirement in 20 or 30 years, you’re almost guaranteed to see your portfolio quickly lose 10% of its value dozens of times, fall by 20% 10 times, and possibly fall by half once or twice. Those are losses you’ll see every time you look at your portfolio.

But it’s how much things go up in between the drops that matters. Case in point:

If someone had invested $10,000 in a fund that matched the total returns (i.e., stock appreciation and dividends) of the S&P 500 on June 1, 1988, that person would have $127,000 today. America has gone through three recessions, two major wars, and the worst global financial crisis since the Great Depression, yet through all of that, anyone could have made 12 times the money simply by investing in a large group of U.S. stocks, and then doing nothing for 27 years.

Even after those huge drops in 2001 and 2008, our theoretical investor was still way ahead of the starting point. That’s time in the market.

Buy businesses, not stocks

One way to help avoid short-term mistakes is by keeping in mind that you own a piece of a real business. If you make the right decisions, you’ll own companies with durable competitive advantages, trustworthy management, and a strong market for their products or services.

Not only can this business-focused approach lead you to invest in higher-quality companies, but it will also be a hedge against letting your emotions take control when the next inevitable downturn happens. After all, if you understand that the business behind the ticker is strong, you’ll be much less likely to sell simply because the market is falling.

Now get out of the way

Investing isn’t easy — but we shouldn’t make it harder or more complicated. Let’s look at what we know, and what we don’t.
• We know the market historically goes up more often than it goes down.
• We know we can’t reliably predict when it will go down.
• We know what our goals, objectives, and time horizons are.

Put it together, and it’s simple. Invest. Stay invested as long as possible. And while none of the things mentioned here guarantee you’ll outperform the market, they’ll almost definitely help you avoid costly mistakes, and you’ll achieve greater wealth than you would’ve otherwise.

The Fed’s Rate Hike – What it Means

My Comments: In the past months and years I’ve featured the comments of Scott Minerd, the Chairman of Investment and CIO of Guggenheim Partners. This organization is not big, relatively speaking, as they ONLY have about $250 billion under management. (I could live very well on a tiny fraction of what that amount earns every year.)


He appeared on CNBC the other day. In my opinion, he has a terrific grasp of how money works and articulates it very well. If you are interested, click on the image above where you can see and hear what he said. It lasts about 7 minutes.

Why Things Could Soon Get Ugly For Stock Investors

bear marketMy Comments: Another voice predicting woe and gloom. I’ve tried to protect myself and my clients but there are no guarantees.

By Scott Barlow on Wednesday, Dec. 09, 2015

We’re about to find out what happens when a market rally built on a foundation of cheap borrowing rates is faced with the end of a credit cycle. It might not be pretty for equity investors.

The U.S. Federal Reserve’s slashing of interest rates from 5.25 per cent to 0.25 per cent during the financial crisis boosted stock prices in three ways. First, corporate chief financial officers were able to lower interest expenses by refinancing debt at lower rates. Second, companies borrowed funds at low rates to buy back stock, which increased earnings per share by reducing the number of shares outstanding (even if actual profits didn’t grow). Third, low yields motivated bond investors to buy equities, which drove valuation levels and stock prices higher.

There are now signs that the global credit cycle is rolling over – from expansion to contraction – and this threatens to severely undermine equity performance. The happy process whereby low interest rates led to corporate borrowing, share buybacks, higher valuations and higher stock prices may be about to work in reverse.

The shale oil producer industry has been the poster child for the cheap credit era. Shale producers financed new production capacity at very low borrowing rates but the cycle went too far. The trend resulted in an oil glut that drove crude prices lower by more than 50 per cent and, at this point, many debt-laden producers are struggling to make interest payment on their loans. Similar financial distress is now evident throughout the mining industry.

Financial strain, and even bond defaults, are not huge surprises to investors at this point. More alarmingly, there are indications that the pain is spreading beyond the commodity complex. Deutsche Bank research, as cited by the Financial Times, writes “From its starting point in energy a year ago, [the percentage of companies in ‘deep financial distress’] has now reached other commodity-sensitive areas such as transportation, materials, capital goods, and commercial services. But it did not stop here and is also visible in places like retail, gaming, media, consumer staples, and technology – all areas that were widely expected to be insulated from low oil prices, if not even benefiting from them.”

An increasing number of companies are now shut out of corporate bond markets, either because they can’t afford to pay the rising interest rates – the average yield on U.S. high yield bonds has exploded to more than 16 per cent above Treasury bonds – or because investors are no longer interested in buying their debt. Standard & Poor’s has counted at least 100 defaults globally already in 2015 and UBS has estimated more than $700-billion in corporate debt is at risk of further default over the next couple of years.

To make matters worse, corporate access to capital is being curtailed at the same time aggregate S&P 500 earnings is declining. Trailing 12-month earnings per share for the S&P 500 is currently $111.9, 1.1 per cent lower than $113 in December of 2014. This is being termed an “earnings recession.” Energy is the biggest problem – down 55 per cent from a year ago – but materials, industrials and financials are also seeing negative year-over-year earnings growth.

The Fed has never raised interest rates during an earnings recession but it looks very much like this is going to happen on Dec. 16. Markets, understandably, are already becoming twitchy and volatile.

Declining profits and rising interest rates are not a good recipe for investors. Stocks are expensive, struggling for revenue and earnings growth, while the Fed is about to raise rates and crimp the refinancing and buyback activity that helped the market rally.

The first quarter of 2016 is likely to see sluggish, minefield-laden markets. Investors will have to be nimble to avoid asset price downdrafts and look harder for profit growth.

A Wicked Wind Will Blow In 2016

money mazeMy Comments: Are you wondering about your investments going forward?

This will give you pause.

Dec. 4, 2015 by Bret Jensen

The market had a huge rally to end the week and clawed back Thursday’s large losses. The trigger for the rise was a better than expected November Jobs Report that also had an upward revision for October, which brought that number up to almost 300,000 jobs created in the first month of the fourth quarter. This brought certainty that the Federal Reserve will raised rates in less than two weeks for the first time since 2006. Investors, at least for Friday, seemed to be okay with this upcoming action.

SPY 2015

It would be nice to end what has been a challenging 2015 for investors with a nice Santa Claus rally. It would also give me a nice little rise to achieve my goal of a 30% cash allocation in my portfolio by the end of the year. I think the chance of a significant correction is higher in 2016 than it has been in many years. The obvious reason for this is the liquidity provided by the Federal Reserve over the past half dozen years has been a key driver of the market rally since 2009, how much of the rally it has been responsible for is anyone’s guess. As you can see from the chart above, the S&P 500 has done basically nothing since the central bank completed QE3 in October of 2014. There are three key reasons why I have this pessimistic outlook.

Lack Of Earnings:
2015 will go down as the first year since 2009 that profits within the S&P 500 will have declined year-over-year. The key factors to the lack of earnings growth are tepid global demand, the collapse of profits from the commodity & energy sectors and the strong dollar. With Japan back in recession, Europe muddling along while trying to deal with the largest migration wave since WWII, real problems in the emerging markets like Brazil, and with China growing much slower than it has in 25 years, it is hard to see worldwide demand being much more than it was in 2015, which were the lowest levels since 2009.

The dollar is up ~12% against the euro in the last year. It is up against other major currencies this year as well. This has severely crimped revenues and earnings for American multinationals. Given our central bank is just starting to tighten as European and Japanese central banks are still providing abnormal amounts of liquidity to their economies; this strength should continue into 2016.

It is also hard to see commodity and energy prices recovering with tepid global demand, a glut in capacity and a strengthening dollar. 2016 should be another year where the best case scenario sees earnings growth in the low to mid-single digits with the possibility that earnings will be flat or down slightly again next year. Given stocks are selling above historical valuations, this could make the market vulnerable to a significant pullback in 2016.

Key Signs Of A Top:
M&A activity by dollar volume has set a record in 2015. This is a classic sign of a market top. Peak previous levels of M&A activity occurred in 1999 and 2007, right before major breaks in the market. This level of M&A activity says companies do not have the confidence to use these funds to expand operations, build new capacity or are not finding good organic growth opportunities. Companies bought back almost $4 billion a day of their own stock in the third quarter. Stock buyback activity is also near record levels, another traditional sign of a market top.

In addition, TrimTabs recently came out with a report on insider selling in November, which saw some $8 billion in insider sales. This is $2 billion more than September and October combined. It also is the highest level since May of 2011, just before an almost 10% slide in the market over the next three months. Watching insiders engage in massive selling while their companies are buying back stock in record amounts does not strike me as a positive sign for the overall market or economy.

Collapse In Energy and Commodity Markets:
As my real-time followers that get my daily instablog know, my biggest worry for 2016 is the continuing collapse in energy and commodity complexes and their impacts on the credit markets. S&P put out a recent report noting that in November “Plummeting oil and gas prices pushed the percentage of junk bonds trading at distressed levels to the highest since the markets were recovering from the financial crisis”.

Further “The ratings firm’s so-called distress ratio increased to 20.1 percent in November, up from 19.1 percent in October and the most since September 2009, when it hit 23.5 percent. The ratio is calculated by dividing the number of distressed securities by the total amount of speculative-grade debt outstanding.”

Oil is struggling to hold $40 a barrel level. It is hard to overstate how ugly it is getting in commodity markets. Iron prices are at 10-year lows. The falloff in demand from China (steel production is down this year which one would not expect if its economy was truly growing at the “official” seven percent GDP figure) is the primary factor along with new capacity coming on line. Copper is also at multi-year lows.

If oil & commodity prices stay at these levels, we will see significant bankruptcies in small and mid-tier energy producers. Mining concerns could be become a graveyard given their high debt levels. Commodity based emerging markets like Argentina, Brazil and Russia will also come under additional distress and increasing default concerns. Any turmoil in the credit markets tends to impact the equity markets and this is my “black swan” for the New Year.