Given the legions of unhappy Americans currently weathering the worst recession in decades, U.S. financial services firms fell to their lowest rating ever in the sixth annual Customer Advocacy ranking by Forrester Research Inc.
Forrester defines customer advocacy as the perception on the part of customers that financial services firms do what’s best for them, not just the firm’s own bottom line. The firm’s on-going analysis demonstrates that customer advocacy drives retention and deepens customer relationships. Consumers who rate their company high with regard to customer advocacy are more likely to save more, borrow more, and buy other products from that firm and are less likely to switch to another financial services company.
I believe the results of the study indicate that more people could benefit from the services provided by independent fee-only financial planners and NAPFA members. Fee-only planners are usually compensated the same, regardless of the products recommended or utilized. Thus, there is no conflict of interest between the best interest of the client and what will make the financial advisor the most money. Additionally, people should ensure they are working with a financial planner who accepts a fiduciary responsibility to their clients. A fiduciary is required to act in the best interest of their clients at all times, whereas a non-fiduciary only commits to act in a way that does not harm their clients. Big difference. Please contact me to learn more about the fee-only and fiduciary concepts.
Wednesday, May 27, 2009
Tuesday, May 26, 2009
Find Your Balance, Boost Your Wealth
Congratulations to those who didn't adjust their retirement accounts during the gloom of last year. Retirement accounts are long-term investment vehicles, and investors should stick to their investment strategy, during both the good times and bad. Some sold their equity positions as the market was down, and have now missed the rebound.
However, it is likely you are not making an adjustment that should be made. Most investors do not rebalance their portfolios frequently enough. If you entered last year with a 60% stock/40% bond mix, your portfolio is likely now close to a 50%/50% split. Without rebalancing, your portfolio will miss the upside you were looking for with your original asset allocation.
History shows rebalancing will increase the return of a portfolio and decrease the portfolio's risk over time. The following chart illustrates this utilizing data from 1970 thru 2006.
Additionally, according to a study conducted by Schwab, a 60%/40% portfolio of $100,000 would have grown to $2.9 million from 1970 to 2008. However, if the portfolio was rebalanced annually, the portfolio would now be worth $3.5 million.
Speak to a financial planner or investment manager to learn how to setup automatic rebalancing in your retirement accounts.
However, it is likely you are not making an adjustment that should be made. Most investors do not rebalance their portfolios frequently enough. If you entered last year with a 60% stock/40% bond mix, your portfolio is likely now close to a 50%/50% split. Without rebalancing, your portfolio will miss the upside you were looking for with your original asset allocation.
History shows rebalancing will increase the return of a portfolio and decrease the portfolio's risk over time. The following chart illustrates this utilizing data from 1970 thru 2006.
Additionally, according to a study conducted by Schwab, a 60%/40% portfolio of $100,000 would have grown to $2.9 million from 1970 to 2008. However, if the portfolio was rebalanced annually, the portfolio would now be worth $3.5 million.
Speak to a financial planner or investment manager to learn how to setup automatic rebalancing in your retirement accounts.
Friday, May 22, 2009
PE Ratios at Historical Levels - What Does it Mean?
Last week's "Chart of the Week" (posted May 15th) illustrated the current plunge of S&P 500 earnings. Today's chart illustrates how this plunge in earnings has impacted the current valuation of the stock market as measured by the price to earnings ratio (PE ratio). Generally speaking, when the PE ratio is high, stocks are considered to be expensive. When the PE ratio is low, stocks are considered to be inexpensive. From 1936 into the late 1980s, the PE ratio tended to peak in the low 20s (red line) and trough somewhere around seven (green line). The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s) and the dot-com bust (early 2000s). As a result of the current plunge in earnings and the recent 2.5 month stock market rally, the PE ratio has spiked to the low 120s – a record high.
I do not believe the market's current PE ratio signals the market to be overvalued. Rather, this statistic indicates the market is anticipating earnings to return to normal levels soon. An increase in earnings would quickly bring PE ratios back to historical levels. However, I would expect this ratio to drop soon even if earnings don't recover, because if earnings (the denominator) don't increase, stock prices (the numerator) will likely fall.
Wednesday, May 20, 2009
Utah Educational Savings Plan Day
As May 29th has officially been dubbed "Utah Educational Savings Plan Day," I wanted to quickly review the benefits of utilizing a 529 plan to pay for a college education.
529 plans are a great savings tool because, although contributions are not deductible on a federal tax return, earnings withdrawn from the plan to pay for qualified higher education expenses such as tuition, books, and room and board are tax-free. The definition of "qualified higher education expenses" was expanded to include computers for 2009 and 2010. The tax-free advantage of these accounts can lead to incredible savings. For instance, if a father contributed $13,000 to his daughters 529 plan the day she was born, assuming a 10 percent interest rate, the account will be valued at $72,279 the day the daughter turns 18. That is $59,279 of tax free growth!
Although contributions to a Utah 529 plan are not deductible on a federal income tax return, the State of Utah will allow the contributor to claim a 5 percent tax credit on up to $1,740 per beneficiary if the contributor is single, or $3,480 if the contributor is married filling jointly. A tax credit is a dollar-per-dollar reduction of a tax liability, and is thus more valuable than a tax deduction. Consequently, the state will pay as much as $87 of a single contributor's State tax liability, and as much as $174 of State tax liability for a contributor who is married filling jointly.
529 plans can be setup for any beneficiary, including your child, grandchild, spouse, neighbor, friend, or yourself. Additionally, the person who contributed the funds can change the beneficiary of the account at any time. Thus, if your beneficiary decides not to attend college, another beneficiary can be named so the tax-free benefit of the account is maintained. Further, the funds can be used at almost every school across the country.
The last advantage of 529 plans are derived from the plan's contribution limits. In 2008, an individual can contribute up to $13,000 per beneficiary. An individual can make a contribution to an unlimited number of beneficiaries, and an unlimited number of individuals can contribute to the same beneficiary. Even more advantageous, an individual can contribute five years-worth of funds in any given year, as long as the combined five year contribution limit is not breached. For instance, an individual could contribute $65,000 to a plan in year one, but would then be prevented from contributing to the plan during years two through five.
A drawback of the 529 savings plan is that if the funds are withdrawn for a purpose other than higher education, all growth will be taxable as ordinary income AND will be hit with an additional 10% penalty. However, if the beneficiary is awarded a scholarship, an amount equal to the tuition covered can be withdrawn from the 529 plan free of the 10% penalty, although taxes would apply.
Utah's Educational Savings Plan (UESP) is one of the best in the country. The plan's use of low-cost, flexible Vanguard index funds make it a Morningstar favorite. Fees are a rock-bottom .22% - .35%.
Lastly, the State has declared May 29th (5/29) to be Utah Educational Savings Plan Day. Contributions made to a new 529 plan that day will be matched up to $20. If you've been looking for a way to invest in your child's future, why not take advantage of the great tools the State has made available to us. Schedule an appointment with me today to learn more about funding an account.
529 plans are a great savings tool because, although contributions are not deductible on a federal tax return, earnings withdrawn from the plan to pay for qualified higher education expenses such as tuition, books, and room and board are tax-free. The definition of "qualified higher education expenses" was expanded to include computers for 2009 and 2010. The tax-free advantage of these accounts can lead to incredible savings. For instance, if a father contributed $13,000 to his daughters 529 plan the day she was born, assuming a 10 percent interest rate, the account will be valued at $72,279 the day the daughter turns 18. That is $59,279 of tax free growth!
Although contributions to a Utah 529 plan are not deductible on a federal income tax return, the State of Utah will allow the contributor to claim a 5 percent tax credit on up to $1,740 per beneficiary if the contributor is single, or $3,480 if the contributor is married filling jointly. A tax credit is a dollar-per-dollar reduction of a tax liability, and is thus more valuable than a tax deduction. Consequently, the state will pay as much as $87 of a single contributor's State tax liability, and as much as $174 of State tax liability for a contributor who is married filling jointly.
529 plans can be setup for any beneficiary, including your child, grandchild, spouse, neighbor, friend, or yourself. Additionally, the person who contributed the funds can change the beneficiary of the account at any time. Thus, if your beneficiary decides not to attend college, another beneficiary can be named so the tax-free benefit of the account is maintained. Further, the funds can be used at almost every school across the country.
The last advantage of 529 plans are derived from the plan's contribution limits. In 2008, an individual can contribute up to $13,000 per beneficiary. An individual can make a contribution to an unlimited number of beneficiaries, and an unlimited number of individuals can contribute to the same beneficiary. Even more advantageous, an individual can contribute five years-worth of funds in any given year, as long as the combined five year contribution limit is not breached. For instance, an individual could contribute $65,000 to a plan in year one, but would then be prevented from contributing to the plan during years two through five.
A drawback of the 529 savings plan is that if the funds are withdrawn for a purpose other than higher education, all growth will be taxable as ordinary income AND will be hit with an additional 10% penalty. However, if the beneficiary is awarded a scholarship, an amount equal to the tuition covered can be withdrawn from the 529 plan free of the 10% penalty, although taxes would apply.
Utah's Educational Savings Plan (UESP) is one of the best in the country. The plan's use of low-cost, flexible Vanguard index funds make it a Morningstar favorite. Fees are a rock-bottom .22% - .35%.
Lastly, the State has declared May 29th (5/29) to be Utah Educational Savings Plan Day. Contributions made to a new 529 plan that day will be matched up to $20. If you've been looking for a way to invest in your child's future, why not take advantage of the great tools the State has made available to us. Schedule an appointment with me today to learn more about funding an account.
Tuesday, May 19, 2009
Volatility Index Passes Key Psychological Level
The Chicago Board Options Exchange Volatility Index, Wall Street's favorite measure of investor concern, pierced the psychological 30 level Tuesday for the first time in eight months, indicating the perceived need for portfolio insurance is diminishing.The VIX, calculated from Standard & Poor's 500 index option prices, tracks the market's expectation of future volatility over the next 30-day period and often moves inversely to the S&P benchmark.
Monday, May 18, 2009
Market Pullbacks Lead To "Madness"
A major nationwide broker/dealer is currently running a television ad that I find shocking. In the ad, an animated character says "before, I was happy to just let my 401(k) sit there and do its thing. Now, that just seems like madness." I think this ad is a perfect example of how out-of-whack emotions can get during times of market volatility, and just importantly, how the financial industry is more than willing to capitalize on the public's financial insecurities.
Remember, a 401(k) is a retirement (i.e. long-term) investment account. The ad seems to imply that a "buy and hold" strategy is no longer effective with 401(k)s, and that people should be making short-term transactions in these accounts. First, if retirement is more than seven years away, what the market does today is next to irrelevant. There is plenty of time for your 401(k) to recover from the 2008 decline. Second, there is a reason why most 401(k) plans limit the frequency of participant transactions. There was a time when these restrictions were not in place, and most individuals who actively traded their retirement accounts lost their shirts.
I don't blame casual investors who are not in the profession of personal finance to be confused about how to handle their investments. However, it is times like these where financial planners earn their fees and add the most value. Our clients hire us to be the voice of reason during hectic times. We have 100 years of history suggesting that over time, the market will increase in value by about 10 percent per year. I find it ridiculous to throw out that evidence because of a rough 15 month period.
Unfortunately, I think the ad illustrates that many in the financial planning industry are willing to capitalize on investor's fears to make a profit. Many in the industry are now touting nontraditional methods of investing because they realize the average investor is still feeling the sting of the market pullback. There is a reason these investment approaches are nontraditional: they are not historically effective. I believe investors who chase returns utilizing these nontraditional approaches will be stung again soon. At that point, those individuals will again be targeted by the same firms that are pursuing them now, only then, those firms will be advising them to "buy and hold."
Changing retirement planning strategies every time this pendulum swings is "madness." Find an independent financial advisor who will help you resist the temptation to chase this revolving door of investment approaches, and stick to the tried and true principles of long-term investing.
Remember, a 401(k) is a retirement (i.e. long-term) investment account. The ad seems to imply that a "buy and hold" strategy is no longer effective with 401(k)s, and that people should be making short-term transactions in these accounts. First, if retirement is more than seven years away, what the market does today is next to irrelevant. There is plenty of time for your 401(k) to recover from the 2008 decline. Second, there is a reason why most 401(k) plans limit the frequency of participant transactions. There was a time when these restrictions were not in place, and most individuals who actively traded their retirement accounts lost their shirts.
I don't blame casual investors who are not in the profession of personal finance to be confused about how to handle their investments. However, it is times like these where financial planners earn their fees and add the most value. Our clients hire us to be the voice of reason during hectic times. We have 100 years of history suggesting that over time, the market will increase in value by about 10 percent per year. I find it ridiculous to throw out that evidence because of a rough 15 month period.
Unfortunately, I think the ad illustrates that many in the financial planning industry are willing to capitalize on investor's fears to make a profit. Many in the industry are now touting nontraditional methods of investing because they realize the average investor is still feeling the sting of the market pullback. There is a reason these investment approaches are nontraditional: they are not historically effective. I believe investors who chase returns utilizing these nontraditional approaches will be stung again soon. At that point, those individuals will again be targeted by the same firms that are pursuing them now, only then, those firms will be advising them to "buy and hold."
Changing retirement planning strategies every time this pendulum swings is "madness." Find an independent financial advisor who will help you resist the temptation to chase this revolving door of investment approaches, and stick to the tried and true principles of long-term investing.
Friday, May 15, 2009
Corporate Earnings Still Struggling
While the stock market is up sharply since early March, corporate earnings continue to suffer. This chart (courtesy of chartoftheday.com) helps provide some perspective as to the magnitude of the current economic decline.
The chart illustrates that S&P 500 earnings have declined over 90% over the past 20 months (with over 90% of S&P 500 companies having reported for Q1, 2009), the largest decline on record. In fact, real earnings have dropped to a record low and if current estimates hold, Q3 2009 will see the first 12-month period during which S&P 500 earnings are negative.
However, the stock market commonly improves before corporate earnings. Thus, the past two months of market performance has to be considered an encouraging sign.
The chart illustrates that S&P 500 earnings have declined over 90% over the past 20 months (with over 90% of S&P 500 companies having reported for Q1, 2009), the largest decline on record. In fact, real earnings have dropped to a record low and if current estimates hold, Q3 2009 will see the first 12-month period during which S&P 500 earnings are negative.However, the stock market commonly improves before corporate earnings. Thus, the past two months of market performance has to be considered an encouraging sign.
Wednesday, May 6, 2009
The Value of a Financial Advisor
New research shows 401k plan participants would be well-served to receive the services of a fee-only independent financial advisor. A Charles Schwab study revealed that 401k participants who sought professional assistance in allocating their assets earned a significantly greater rate of return than those who did not. The data examines 2006 returns and is broken down by age group.
The study reveals the significant value-added benefits 401k plan participants receive when they are educated regarding the impact of risk, return, time and diversification. Additional value was found to be added by financial advisors who persistently rebalanced a globally diversified portfolio.
The study reveals the significant value-added benefits 401k plan participants receive when they are educated regarding the impact of risk, return, time and diversification. Additional value was found to be added by financial advisors who persistently rebalanced a globally diversified portfolio.Add fuel to your 401k today. Contact me to schedule a complimentary consultation where we’ll identify high-quality investment options and design a diversified portfolio.
Tuesday, May 5, 2009
May 29th - Utah Educational Savings Plan Day
Morningstar has always been a fan of Utah's 529 College Savings Plan. This pattern held true last week, when Morningstar named the Utah Educational Savings Plan (UESP) 529 one of the top five college savings tools in the country. The plan's use of low-cost, flexible Vanguard index funds make it a Morningstar favorite. Fees are a rock-bottom .22% - .35%, and flexibility is provided by the five distinct age-based investment choices, which gives investors a good deal of choice to match the options with a level of risk they are comfortable with. Investors also have the option of three individual funds and a few static options to augment the age-based options or build their own portfolios.Additionally, as part of the American Recovery and Reinvestment Act of 2009, account owners can claim computers and related equipment as a qualified higher education expense for their college student in 2009 and 2010.
Lastly, the State has declared May 29th (5/29) to be Utah Educational Savings Plan Day. Contributions made to a new 529 plan that day will be matched up to $20. If you've been looking for a way to invest in your child's future, why not take advantage of the great tools the State has made available to us. Speak to your financial planning professional today about funding an account.
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