Money Clinic: Snowfall in Spring

There is an old saying that April showers bring May flowers. Well, if you look outside most areas in the northern U.S., you’re seeing snowflakes! Therefore, it is reasonable to infer that April snowfall creates dead flowers this May!

I guess the weather is fitting for the climate in the investment markets and the economy. After a long bull market run that has acted as a rising tide that has lifted almost all investments, now is the time to be more selective in your asset allocation process.

If your portfolio allocations are heavy on the equity portion due to the run-up of stock prices, you should consider how exposed you want to be to equities if there is a major downdraft or extended period of underperformance.

Markets hate uncertainty. Right now, there is plenty of uncertainty in many parts of the economy. Potential legislative and fiscal policy gaffes, possible trade wars, higher interest rates, high valuations in speculative investments and a relatively mature business cycle all lead to serious questions about how much room is left in the bull market.

Despite the recent correction, the U.S. equity markets still lead all major global markets in terms of valuation. While it would appear to be positive, it is also a sign of extended risk. The outlook for earnings has theoretically improved due to tax reform and other recent fiscal policy measures, but even with that boost, earnings do not support these valuations.

Moreover, if the recent tax cuts fail to “trickle down”, there is a real threat that consumers are not going to have money to purchase higher priced goods and services. This could also put the brakes on housing affordability and other real estate activity – especially if interest rates edge higher.

The scary thing about the fabulous bull market run since 2009 is that many consumers have had to draw down whatever savings they amassed before the multiple stock market corrections beginning in 2002 and they have run up credit-card debt to keep up with the basic necessities of life. Consumers are once again heavily leveraged with sub-prime auto loans, mortgages, and student debt. Furthermore, surging health care, rent, food, and energy costs will only continue to impede economic rates of growth.

Meanwhile, corporations continue to opt for share buybacks, wage suppression and accounting gimmicks to fuel bottom lines earnings per share.

This isn’t a formula for strong economic growth.

The biggest problem that I have seen developing over the last ten years is that it isn’t a severe correction or crash in the financial markets that has me worried, but the ongoing structural shift in the economy that is depressing the living standards of the average American family.

One thing is for sure, the easy money has already been made. Now it’s going to be a lot harder to make money in the markets and you better make sure your appetite for risk is appropriate for your investment time horizon.

If recent weather patterns tell us anything, it is that we should always be positive but still be prepared for the worst.

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Money Clinic: Skip-Over Technique

So, you’ve worked hard, played the investment game well and have accumulated plenty of money for retirement. You’ve done some basic estate planning to make sure your heirs don’t get clobbered in probate. You’ve made sure that you and your spouse have enough income to last for your lifetime. Everything seems to be working out as planned.

One thing that you may be overlooking is that it could be very possible that you simply cannot spend all the money that you’ve accumulated. Even if you or your spouse live past your life expectancy, there is a risk that a good chunk of your money won’t stay in your family.

There are a few solid strategies that help to make sure the money you’ve worked hard for stays in the family. You’ve heard of the Mellon’s, Rockefellers, Kennedy’s and countless other billionaires that use creative money strategies to hold on to their wealth generation after generation, right?

Well, you don’t have to be a billionaire to use some of the same strategies they use to grow and protect your wealth.

Relatively common examples of wealth transfer planning include making annual gifts to children and/or grandchildren, paying tuition for grandchildren, creating irrevocable life insurance trusts, and using all or part of your gift tax exemption sooner rather than later. Without setting up corporations or family limited partnerships or complicated trust funds, which are often irreversible, you can apply a few simple techniques to keep more money in your family instead of giving it to the government.

One of the simplest strategies is to use a “skip-over” tactic where you put money into a single premium life insurance contract (or a single premium annuity if you are uninsurable) and still retain ownership of the contract while you are alive. The trick is to name your children as the primary beneficiaries instead of your spouse.

While this may seem to be a disheartening gesture toward the love of your life, it is actually an extremely practical money maneuver if it is implemented properly.

First of all, if your spouse has generous savings and more than enough income to live a prosperous lifestyle, the last thing he or she needs is more money than they can possibly spend that ultimately gets wasted in estate and income taxes when he/she dies.

Secondly, if your kids are in a higher tax bracket than you, it becomes very difficult to pass money to them without them incurring more tax than necessary. Its not that the kids are looking for a handout but there is no reason to waste hard-earned capital in taxes instead of keeping that money in the family.

Furthermore, if you can maintain control of the money while you are living, you still have the opportunity to use the source of funds if something devasting happens and you need to use it. In some cases, it could make sense to earmark this money for future medical or nursing home care costs on a tax-favored basis. Of course, the best financial product to use with this strategy is life insurance since it escapes federal income tax and inheritance tax upon death of the insured. Many policies also include provisions for tax-favored withdrawals as well, if used for critical health care or terminal illness.

The only drawback with the “skip-over” technique is that you have to plan this out while both spouses are still living. It just doesn’t work as well if there is nobody to skip over. Kind of dry humor, but true nonetheless.

The simple fact is that it becomes more difficult to use creative gifting techniques when there is only one spouse living. The gift tax exemptions are smaller, and the risks of gifting large sums of money are greater. Wealthy people understand this and often implement wealth protection strategies as early as the beginning phase of their retirement.

I always say that the purpose of the money dictates where you should put it.

Well, the best money maneuvers enable your money to serve multiple purposes. Since a “skip-over” strategy allows for control and tax-favored use of the money while alive, while providing potential tax savings at death, it makes an ideal multipurpose money maneuver and should be utilized whenever it is appropriate.

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Money Clinic: No Need to Keep Up with the Jones’s

U.S. stocks traded higher on Friday after the release of stronger-than-expected employment
data. The Nasdaq closed at new highs. Everything is back to normal, right?

Unfortunately for most American households, the stock indexes measure an economy far
removed from their own daily reality. For many American families, who collectively own a very small percentage of the stock market (even when you factor in their retirement accounts) the Dow and the S&P 500 are little more than numeric refractions.

Maybe this is the new normal?

While the U.S. economy added 313,000 jobs in February, wages grew less than expected, rising 2.6 percent on an annualized basis. So, jobs are growing – wages are not. This isn’t the kind of news that exemplifies a thriving economy.

A new Rural King just opened in our neighborhood. I’m sure they are creating at least 25 new jobs…at or slightly above minimum wage.

New jobs. Low wages.

Is this the sign of a thriving economy? Really?

While the recent tax cuts provided hope to create an economic boom as corporations increase wages, hire and produce more so that consumers can have extra money in their pockets to spend, the increase in take-home pay has already been offset by surging health care cost, rent, energy and higher debt service payments.

Low-paying jobs are plentiful but too many jobs are also being lost due to cut-backs and business closings. Even Toys-R-Us can’t keep the doors open.

In this “thriving economy”, many people are working two jobs to keep the economy above water.

On the other hand, numerous companies are using tax breaks to buy back their own stock. One of the primary tools used by businesses to increase profitability has been through the heavy use of stock buybacks. This will help many glossy-eyed investment pundits proclaim that earnings per share numbers are looking solid. On top of that, I’ve heard TV charlatans proclaim that a solid jobs number with lower wage numbers has muted inflation concerns, which is good for the markets.

Unfortunately, what is good for the markets is not necessarily good for the economy.

While tax cuts can be pro-growth, they must be focused on the high percentage of American’s that make up most of the consumption in the economy, not hoarded by the wealthy, which already consume at capacity,

The reality is that most U.S. companies are NOT increasing wages because higher wages increase tax liability, benefit costs, etc. Higher payroll costs erode bottom line profitability. In an economy with very weak top-line revenue growth, companies are extremely protective of profitability to meet Wall Street estimates and support their share price which directly impacts executive compensation.

Case in point: since March 2009, the S&P 500 is up around 300 percent.

How much of that return have you garnered?

Just look around, most Americans are unhappy, over-worked, contemplating divorce, plagued with enormous debt, and still trying to keep up with the Jones’s. Many Americans, no matter where they live and how much they make, maintain their finances precariously close to the edge of break-even. Those working multiple jobs are feeling even more pain. Furthermore, stress about retirement preparations and worry over personal finances at work are causing employees to be less productive while at work.

Wages are failing to keep up with even historically low rates of “reported” inflation. It is very likely that your inflation, if you spend money on food, rent, education and health care – let alone any discretionary spending, is higher than “reported” inflation. Is it any wonder that almost half the population has less than $10,000 saved for retirement? A lot of people just don’t make enough money to save for retirement let alone to cover financial emergencies.

We are living in a time where there is a glaring economic anomaly. It is crucial that you adhere to strong financial fundamentals and put rigid savings and investment rules in place that have stood the test of time.

It all begins with doing everything in your power to make yourself more valuable. Follow this with a commitment to developing strong financial literacy skills.

Finally, forget about keeping up with the Jones’s – they aren’t doing that great.

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Money Clinic: No Excuses

Diversification is a fundamental principle of investing, but it isn’t the only one. In fact, there is one major principle that precedes it: make sure you own financial products that have a reasonable expectation of providing a useful return and serve the purpose of your goals.

Sometimes, the best financial task is not to “just” own a diversified portfolio; it’s to avoid owning bad investments. Don’t sacrifice your portfolio at the altar of blind diversification. Every investment should stand on its own merits, as well as work with your other assets to make them function better.

Many times, “diversification” becomes an excuse for financial institutions to sell you crap and get paid for underperformance. For example, your advisor may have sold you a “well diversified” portfolio holding U.S. stocks, emerging markets, commodities, and corporate bonds, which means that you are invested into multiple asset classes that would all be expected to go up in a growth environment. The fundamental problem with such a portfolio is that while it’s spread out across several different asset classes, it is very poorly diversified, because the portfolio just owns multiple asset classes all aligned towards the same risk – benefitting if the economy grows, and at risk if a recession occurs.

To do it right, you must take a closer look at the returns of each fund that you own to make sure it is performing better than its peers. You also need to make sure that there isn’t a lot of overlap in the fund that would contradict investments in the other classes.

Furthermore, you have to consider the weighting and risk category of each class that you have in your portfolio. In any given year, each asset class is going to produce different returns. Basically, you want to have the right fund in the right class at the right time to garner the greatest returns for your level of risk.

You see, there is a lot more to “diversification” than you might think. You can’t allow yourself to get sold a poor financial product just so that you can say that you are diversified!

The purpose of the money ALWAYS dictates where you should put it. That means that you might earn a lower rate of return on a certain asset class but that is okay because its role may dictate it.

Some of your investments may serve as a hedge against a declining market. Their performance may lag in a strong bull market but that doesn’t mean you shouldn’t include them in your portfolio. Savings accounts hardly pay any interest, but you must have liquid money for emergencies and to make asset purchases when they go on sale.

The problem with buying investments that do not meet your objectives is that there is no meaningful way to track how their performance helps meet your objectives. For example, purchasing an annuity with a great income rider doesn’t help you if you don’t really need extra income or specifically need “tax-free” income. On the other hand, it might be the perfect choice if you want a guaranteed income source in the future.

So, make sure to purchase financial products that provide reasonable returns that serve a purpose in your portfolio, as well as potentially make your overall situation better.

There are no excuses to own bad investments just for the sake of diversification.

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Money Clinic: Pass/Fail

The stock market is bouncing back nicely after a slight correction a few weeks ago. I pounded the table and told you that you could test the quality of your “financial advisor” during this last downdraft in the markets because he was supposed to put some money to work for you.

Did he pass? Or, fail?

Unfortunately, the financial services industry is wrought with financial service professionals who just gather assets, collect fees and do nothing to earn their keep. It is a sham that the industry has taught its salespeople and it not only costs you money in fees, but also in performance.

For example, if you have a $500,000 managed money account or an account filled with mutual funds, your advisor should have moved about $50k that you should have had available from taking profits at the end of 2017 and put that money to work when the market fell 10%. With a market rebound, you could then take profits and pocket around $5,000.

Oh, did he call and just tell you that everything will be ok and to just hang on while markets plummeted?

Of course!

Unfortunately for you, he left $5 grand on the table that could have went toward paying his fees!!!

A financial advisor’s number ONE job is to MAKE YOU MONEY! It isn’t to hoard your assets, charge a fee and just let your money ripple in the markets without taking actions that can make you money.

I can’t believe the disinterest that “financial advisors” have in helping you to reach your financial objectives. They really have you fooled into thinking that they are paying attention to your money while they sit around and collect your fees and plan the next “client appreciation” function.

How about doing your job Mr. Advisor and act on my account! That would show me that you REALLY appreciate all the fees I’m paying you!!!!

The buy-and-hold investor has only averaged around 3% since 2000. This is a far cry from the 6-8% annualized return assumptions promised to “buy and hold” investors. Back out your fees and you’re barely keeping up with inflation!

In addition, annualized rates of return and real rates of return are VASTLY different things. The destruction of capital during market downturns destroys years of previous capital appreciation. Therefore, the SECOND job of a financial advisor is to PROTECT YOUR MONEY!

One way to help protect your money is by generating extra returns for you during corrections through hedging. Another way is to always have some powder dry so that you can take advantage of buying opportunities when they arise. You can’t buy low when you don’t have money available to purchase good investments when they go on sale.

Most financial advisors invest your money in the markets with no real personal consideration. There just isn’t enough time in the day to give everyone equal attention. They have hundreds of clients and have to split their time between servicing their best clients and attending posh sales award trips. I’m not saying that you shouldn’t pay someone to help you. However, the best way to win is when everybody wins, and your money is his top top priority. Work out a fair fee structure that makes both you and your advisor money when you do well, and he protects your downside.

Furthermore, most of the stock mutual funds advisors use are just sheep because they are almost fully invested all the time. They run money until they face distributions and then it is first-come-first served on who gets their money. It’s always the buy-and-hold gang that ends up holding the bag and taking losses when they sell their investments because they can no longer take the pain.

Remember, the goal is to stay in the game. People who get wiped out by serious downfalls tend to be those who never take anything off the table, sell in a panic and buy again when they feel better (which is usually at much higher levels). Then it becomes “catch-up” time and desperation sets in. They find themselves in the slaughterhouse hoping to get out. Most just get slaughtered.

Think about it, what are you going to do when the next prolonged correction wipes out most of the gains accrued from the current market cycle? Can you really say that your advisor took swift actions when necessary to make you extra profits? Does he have a plan in place to protect you from getting slammed when the market tilts the other way? Or, is he just going to chant “buy and hold, everything will be ok”?

It isn’t enough anymore to know, like and trust someone to be your financial advisor. They must help you put every dollar towards its greatest use and optimize the performance of each financial asset that you own. They must ensure that all of your assets are working together to meet your financial objectives. If you are fortunate enough to get invited to investment house functions like dinners, golf outings and other events but you weren’t important enough to put money to work during a fire-sale in the markets, then you are being cheated. You are the one paying for those lush dinners with the management fees you pay. However, you are paying for incompetence. You’re paying for lackluster interest in your valuable assets.

Your “financial advisor” must also be graded on how well they manage your account – not by having it rise an average 3% over the last eighteen years but by comparing YOUR results against some benchmark that measures an unmanaged index. For example, have YOUR returns matched the returns of the S&P 500 index since 2009? If you are paying a money manager to invest part of your money, it is vitally important to understand that any financial decision you make must be considered thoroughly because of the impact that it has on your whole financial picture and how it may affect other assets you own. Don’t deal with any advisor who wants to sell you a financial product (that usually makes him fees or commissions) that doesn’t make your WHOLE financial situation better.

When it comes to money, there is ONLY ONE way to grade your financial advisor. Does he PASS, or does he FAIL? The market provides plenty of tests that help you rate your financial advisor. You are not going to meet your financial objectives if you are paying someone that fails. Find someone that PASSES all the tests to help you GROW and PROTECT your money.

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