If you have watched CNBC lately, you may have noticed the emerging trend of multiple "mini screens" on the television at once, each screen hosting a financial expert. It seems you can measure the amount of panic in the market by the number of mini screens present. Lately, as many as eight or nine mini screens have been squeezed onto the television at once.
At the same time, headlines in newspapers and magazines have been increasingly dire. Today, the top headline on horsesmouth.com (a website targeted at financial professionals) reads "Banks: On the Edge of Cataclysmic Failure."
Cataclysmic failure? Let's take a moment to distance ourselves from the fear-fueled media and compare our current position to other periods of financial distress. During the Great Depression, over 9,000 banks failed, with 744 banks failing within the first 10 months of the initial stock market crash in 1929. During the savings and loans crisis of the 1980's, over 3,000 banks went under. How many banks have failed since the current market decline began in October of 2007? In the media's eyes, what exactly constitutes a "cataclysmic failure?" During the last 16 months, 43 banks have failed.
Certainly, our economy is suffering through a serious pullback, and the failure of 43 banks should not be taken lightly. However, the point I'm making is that investors should not rush to action based on negative reporting by the media. Rash decisions based on emotion frequently have a detrimental impact on performance. An investor should have a financial plan that defines how investment decisions should be made and all investment decisions should meet the qualifications laid out in the plan. This will prevent emotions from driving investment decisions and improve long-term portfolio performance.
Of course, if an investor needs additional advice or help developing a financial plan, they should speak to a fee only, independent financial advisor who has no financial motivation to sell products. NAPFA financial planners are a great place to start your search.
Friday, January 23, 2009
Monday, January 19, 2009
Retirement Planning Seminar
Attend this free seminar to familiarize yourself with the 20 major decisions to successfully transition into retirement.
>> Do I have enough money to retire now?
>> How do I properly handle my 401(k)?
>> When should I start taking Social Security?
>> How should I diversify my investment portfolio?
>> How much money can I safely withdraw from my investment portfolio?
Attendees will receive a complimentary copy of The Retiring Boomer’s Financial Handbook as it will be used to guide the class discussion.
Hosted by Net Worth Advisory Group, a fee-only (no commission) financial planning firm specializing in helping clients prepare for retirement.
Tuesday, February 3
7:00 - 8:30 PM
SLCC Miller Campus
MFEC Building, Rm 223
9750 South 300 West
Sandy, UT 84070
To reserve your spot in the class please contact:
Lon Jefferies
801-566-0740
lon@networthadvice.com
Friday, January 9, 2009
Lessons Learned In 2008
Finally, it’s over! The worst year of stock market performance since the Great Depression ended last Thursday with the S&P 500 down 37%. In 2008, there was no place to hide in the financial markets, right? Wrong. An analysis of the following chart presents yet another argument for the value of diversification in an investment portfolio:
The return on government bonds is not a misprint: 22.59%. An investor with a well-diversified portfolio and an appropriate asset allocation mix of stocks and bonds felt a vastly reduced sting from market declines as compared to a pure stock investor in 2008. This is another illustration of diversification increasing return and lowering risk.
Three other facts communicated in the chart are worth noting. First, across the board, value stocks outperformed growth stocks in 2008. Consequently, most portfolios may need to be rebalanced because they are likely heavy on value and light on growth. Rebalancing should prepare your portfolio for a market rebound. Second, much like during the bursting of the tech bubble and after 9/11, international stocks did not protect an investor from losses. As a result, investors should consider the possibility that international stocks alone do not provide sufficient down-side protection. Such protection in down markets is more likely to be achieved with thorough diversification. Third, note that cash (treasury bills) did not keep pace with inflation, and cannot be considered a productive safe-haven for funds over time.
Sector allocation was a large factor last year. The “best of the bad news” came from the consumer staples industry, which lost only 15%. Not surprisingly, the finance sector was the worst performing sector during the year, losing nearly 50%.
The stock market has never lost money over the period of a decade. Even during the great depression of the 1930’s, the market squeezed out a small gain. However, the S&P 500 (all large cap stocks) has returned an annual rate of negative 3.5% during the first nine years of the twenty-first century. Losing 3.5% each year doesn’t sound like much, but if an investor placed $1,000 into the market the first day of 2000, the account would now only be worth $693. In fact, the S&P 500 needs to earn an astounding 40% return in 2009 to make investors whole for the decade.
The benefit provided by diversification is clear. Using the index funds above, a portfolio consisting of 50% large cap, 20% mid cap, 10% small cap, and 20% international stocks has only lost 1.85% annually since 2000 and needs only an 18% return in 2009 to break even for the decade. By further diversifying your portfolio with 70% stocks and 30% bonds, an investor has already earned a positive 1.67% during the 2000’s. Bottom line: constructing a balanced portfolio and rebalancing often will improve a portfolio’s performance and reduce volatility.
Now would be a great time to speak to an independent financial advisor about developing a diversification strategy for your investment portfolio.
The return on government bonds is not a misprint: 22.59%. An investor with a well-diversified portfolio and an appropriate asset allocation mix of stocks and bonds felt a vastly reduced sting from market declines as compared to a pure stock investor in 2008. This is another illustration of diversification increasing return and lowering risk.
Three other facts communicated in the chart are worth noting. First, across the board, value stocks outperformed growth stocks in 2008. Consequently, most portfolios may need to be rebalanced because they are likely heavy on value and light on growth. Rebalancing should prepare your portfolio for a market rebound. Second, much like during the bursting of the tech bubble and after 9/11, international stocks did not protect an investor from losses. As a result, investors should consider the possibility that international stocks alone do not provide sufficient down-side protection. Such protection in down markets is more likely to be achieved with thorough diversification. Third, note that cash (treasury bills) did not keep pace with inflation, and cannot be considered a productive safe-haven for funds over time.
Sector allocation was a large factor last year. The “best of the bad news” came from the consumer staples industry, which lost only 15%. Not surprisingly, the finance sector was the worst performing sector during the year, losing nearly 50%.
The stock market has never lost money over the period of a decade. Even during the great depression of the 1930’s, the market squeezed out a small gain. However, the S&P 500 (all large cap stocks) has returned an annual rate of negative 3.5% during the first nine years of the twenty-first century. Losing 3.5% each year doesn’t sound like much, but if an investor placed $1,000 into the market the first day of 2000, the account would now only be worth $693. In fact, the S&P 500 needs to earn an astounding 40% return in 2009 to make investors whole for the decade.
The benefit provided by diversification is clear. Using the index funds above, a portfolio consisting of 50% large cap, 20% mid cap, 10% small cap, and 20% international stocks has only lost 1.85% annually since 2000 and needs only an 18% return in 2009 to break even for the decade. By further diversifying your portfolio with 70% stocks and 30% bonds, an investor has already earned a positive 1.67% during the 2000’s. Bottom line: constructing a balanced portfolio and rebalancing often will improve a portfolio’s performance and reduce volatility.
Now would be a great time to speak to an independent financial advisor about developing a diversification strategy for your investment portfolio.
Friday, January 2, 2009
2009 Estate Planning Figures
The new year brings updated estate planning exemption figures. Occasionally, the IRS adjust these figures in order to keep pace with inflation. 2009 estate planning exemption figures are as follows:
-The estate tax exclusion was increased from $2 million to $3.5 million. This figure represents the amount that an individual can pass to heirs upon death without paying estate taxes. Of course, an unlimited amount may be passed to a spouse without paying taxes. Through proper planning (such as a bypass trust), a couple can now pass up to $7 million to heirs upon death without paying taxes.
-The generation-skipping tax (GST) exemption also increased to $3.5 million. The GST allows individuals to pass assets directly to grandchildren. Increasing this exemption will increase the benefit of stretch IRAs.
-The lifetime gift tax exemption will remain $1 million. Individuals can give up to $1 million dollars collectively throughout their lifetime without paying gift taxes. Only gifts amounts above the annual gift tax exclusion count towards the $1 million exemption.
-The annual gift tax exclusion amount increased from $12,000 to $13,000. This amount can be given to an unlimited amount of individuals annually without counting towards the lifetime gift tax exemption.
Have your estate planning attorney converse with your financial advisor to construct a unified and comprehensive financial plan.
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