Will we have time to recover?

If there is a significant market decline in the next few years, a client is worried if they will be able to recover financially.  How would this decline impact her?  Will they have enough money to live, to pay their bills, to maintain their lifestyle?

The question makes sense. It is a common concern. It is worth exploring.

Let’s start by breaking down the concern.  “If there is a significant market decline in the next few years…”  The reality is that this will happen. We do not know when. We do not know by how much. History teaches us that we cannot accurately predict market declines in advance. And we cannot know the extent of the decline.

The key is that we do know, based on stock market history, that the world’s stock market’s will decline, and decline significantly at least once every 3-5-7 years. So an investor must understand and develop the resiliency that there will be a significant market decline every 5 years or so. It is not an if, but a when.

So if the investor understands that there will be market declines, which will occur, then the next factor to understand is that the market declines will be temporary, not permanent. The stock market declined in 2008-09, but has recovered and gone on to reach much higher levels. Many times the recovery takes only a few years, sometimes it can take longer. Working with an advisor, who can discuss these facts and provide support during market declines, will enable you to have the mental resiliency to live through the declines. We work through scenarios, with dollars and potential declines, to show how a decline would impact you.

“Will we have enough time to recover?”  This is a great issue, and where planning and perspective are vital. On the one hand, a woman who is 70 is concerned about the next stock market decline, let’s say in the next 2-5 years. But she is also concerned about whether she will have enough money for medical or nursing home care that may be necessary 15 or 20 years in the future, when she is 85 or 90, or even older. We must plan and work together to handle both concerns.

The answers to these questions are obviously personal, based on how much money each person or couple has, their health and other factors. In general, the answer is that a reasonable allocation to stocks is necessary, so that the portfolio can continue to have the opportunity to grow over the long-term. A 70 year individual or couple may become more concerned about not being able to recover from a near-term decline, but their life expectancy is almost 20 years (and keep in mind that average life expectancies mean 1/2 of the population will live longer than the life expectancy). They need their investment portfolio to be managed with a 20 or more year time perspective, not as if they have a 3-5 year time perspective.

It usually takes some good discussions, over a period of time, to help provide the confidence and mental resiliency for these varied time perspectives. As we develop a personalized asset allocation plan for clients, these discussions are important so clients realize that stock market declines are normal and temporary, in order to receive the long term benefits they want to achieve.

Tax Update

In his 2015 State of the Union address, President Obama introduced a number of tax proposals which would affect individuals and families.

At this time, due to the Republican control of both the House and Senate, we do not feel that any of the major proposals that the President discussed have a chance of being approved by Congress. Thus, they will never make it to the President’s desk to become law.

If you have read articles that have discussed these proposals, which range from an increase on the tax for capital gains  and dividends for high income taxpayers to changes in how assets are handled upon an inheritance, we recommend that you NOT be concerned about these at this time.

While it is possible that there will be some kind of tax reform or changes passed during 2015 or 2016, there is no planning that we would recommend now, based on the President’s speech.

What you can focus on

During the past week, my partner Keith Rybak attended the AICPA Personal Financial Planning Conference for 3 days. I attended a number of these sessions virtually, through the Internet. This is one of the largest advanced planning conferences in the country, with over 1,450 CPAs who specialize in investment management attending in person or online.

Some of the major tax takeaways from this conference, which may be beneficial to you, are:

  • Multi-year tax projections, if you think you will have taxable income above $200,000 in one of the next few years. With the introduction of the  3.8% Net Investment Income Tax (NIIT) in 2013, planning should be done if your income will fluctuate above and below the $200,000 level, depending on whether you are single or married. If possible, planning may be done to time certain sources of income to minimize or eliminate the impact of this tax.
  • A review of trusts and estate planning should be done in relation to the same 3.8% NIIT tax, as the taxable income level that trusts are impacted by this surtax are much lower than for people. If you have established trusts for your descendants, it may be valuable to review your documents to see if it would be beneficial to enable the dividends and capital gains from the trust to be passed through to your descendants, who may have a much lower tax rate.
  • Asset location of certain investments:  This is a topic that we have written about previously, as it is so important. Certain investments and mutual funds holding different types of assets can cause different types and amounts of taxable income to you. In planning your investment portfolio, it is beneficial to determine “where” your investments should be located, meaning whether they should be held within a taxable or retirement account, if you have the opportunity. A mutual fund that tends to generate more dividends than others should be held in a retirement account, not a taxable account. This will save you taxes, simply by where the fund is held.


If you have a questions about one of these technical matters, please contact us.

But almost more importantly, we want to talk with you about your goals, your dreams and concerns, as well as about your money. By doing this, we will be better able to work with you, to understand you better, and be able to plan and advise you more effectively.





Learning from 2014 for a Better Future

As one year ends and a new one begins, reflecting and learning from the past can help to create a better future.

For your investments and financial planning, many principles hold true year and after year. While financial markets are continuously changing and throwing “unexpected” surprises at us, adhering to a set of financial principles can provide calm in an otherwise volatile world.

The past year again taught us it is best to focus on what we can control.

Most financial market forecasts are not likely to be accurate or reliable, so don’t rely on them.

    • As 2014 began, most economic forecasters were confident that interest rates would rise. The opposite occurred, as the yield on the 10-year US Treasury notes significantly declined from 3.03% to 2.19%.*
        • We are convinced that you are better off with our long-standing fixed income strategy of structuring a ladder of bond maturities over many years, rather than trying to “bet” on the future direction of interest rates.
    • We doubt anyone accurately predicted the major decline in oil prices which occurred in 2014, which has continued into 2015. Oil has dropped from nearly $110 per barrel as of January, 2014 to $53.45 as of December 31, 2014. It has declined even further to around $46 per barrel as of 1/14/15.
          • There will be companies and geographic areas that will benefit from this oil price decline and others that will be hurt. Overall, we feel this will be a net positive for the global economy.
          • The price decline has been very quick. It is likely that oil and gas prices will increase at some point, as oil companies adjust their future investments and production and as overall demand increases. We cannot know the future movements of oil prices and the rate of either declines or increases.

Be resilient and positive.

    • The media tends to focus more on the negative and on short term issues and problems. Each year brings a new set of concerns and surprises. One of this year’s was Ebola. You are best to focus on the longer term and remember that companies have shown great abilities to be resilient and adapt to changes.
    • While many have expressed concern over various economic and policy issues, companies have continued to sell more, be more profitable and return more to shareholders. Of the 30 companies in the Dow Jones Industrial Average, 28 of them increased their dividends during 2014, with an average dividend increase of 11.65%.*
    • The S&P 500, which represents US large companies, is often stated to average 8-10% annual returns. However, in the past 89 years, it has never actually delivered a total return between 8-10% in a single calendar year. In fact, since 1926, there have been 28 years with gains or losses in excess of 25%. Investors should expect the unexpected every year.*

Discipline, diversification and rebalancing are very important.

    • Faced with ever changing financial markets, new technologies and wild swings in oil and commodity prices, our philosophy of broad global diversification is logical and time-tested.
    • We strongly feel you will have a greater opportunity for reaching your financial goals by adhering to this consistent strategy, by being disciplined, regularly rebalancing and having a portfolio tailored to your personal needs, as opposed to continuously trying to predict the next winning company, industry or country.

Each of the major concepts above is identical to the ones in our January 2014 client quarterly letter. We expect that these same principles will continue to apply in 2015, and many years thereafter.

Note:  This is an excerpt of the quarterly client letter that was mailed to our clients in January 2015, along with their quarterly reporting statements, which are easy to read and understand.

*Source: Weston Wellington, “Down to the Wire” column dated January 13, 2015, Dimensional Fund Advisors

Financial Figures To Know in 2015

As 2015 begins, you should know the following financial figures:

  1. The % of your assets invested in stocks: One of the biggest factors in your investment returns is the % that you have invested in stocks. It is also a major factor in the level of risk that you desire to take. If you intend to be 50% invested in stocks, are you aware of your current stock allocation? We monitor this on behalf of our clients, so their allocation is in line with their desired investment plan.
  2. $18,000: amount which can be contributed to most 401(k) and 457 plans for 2015, an increase from $17,500. If you are older than age 50, you can contribute an additional $6,000 above those levels in 2015, which is an increase from $5,500 in 2014.
  3. FICO Score: You should know what your credit score is, especially if you are planning to purchase a home, want to re-finance a mortgage or obtain a home equity loan. One convenient way to regularly monitor your FICO score is by having a Discover It credit card, as they provide your FICO score on each monthly statement.
  4. Your current mortgage interest rate:  You should check this, as mortgage and refinancing rates have declined significantly in recent weeks.  A 30 year fixed rate mortgage may be obtained for below 4%, while a 15 year fixed rate loan and shorter term variable rate loans may be close to 3%. We do not recommend that you pre-pay most mortgage debts, as discussed in this blog post. Click Here
  5. The number of credit cards that are in your own name. It is important if you are married, that each person have at least one or two major credit cards in their own name, to establish your own individual credit history.
  6. $5,430,000: the federal estate tax exemption for one person, which is an increase of $90,000 from the 2014 amount of $5,340,000. For a married couple, $10.8 million of assets can pass estate tax free upon death.
  7. Number of online passwords: I hope this is a large number, as you should NOT be using the same passwords on multiple websites. I strongly encourage you to utilize a password manager app, like 1Password or LastPass, which will make this much easier to manage. See my blog post on this topic.  Click Here
  8. $14,000: the 2015 annual gift tax exclusion amount, which is unchanged from 2014. This is the amount you can gift to any one individual without affecting your federal estate tax exemption. If you are married, a couple can gift $28,000 to a person.
  9. Up to $300,000: The amount of money which can be contributed into a defined benefit plan for 2015. You can contribute $53,000 into certain defined contribution plans, like profit sharing plans, for 2015. The maximum annual benefit for defined benefit plans is unchanged at $210,000. If you are self-employed, a consultant or own a small business, please contact us to learn about these plans, their significant tax savings and related opportunities.
  10. The expense ratio of your mutual funds or money managers:  In general, academic data shows that lower expense ratios are highly correlated with  better long-term performance. We can review your portfolio, to help you understand the cost of your investments.

If you have questions or would like more information about any of these items, please contact us.