Quarterly Economic Outlook
January 9, 2012 by Tom Licciardello, CFP · Leave a Comment
A Pivotal Year Ahead 
By: James Solloway, CFA, Managing Director, Senior Portfolio Manager
The Global Portfolio Strategies Group recently released its fourth-quarter economic outlook. A summary of its conclusions is provided below:
Europe’s debt crisis will continue to fester, although the endgame–including a restructuring of the eurozone–is within sight.
We expect recessionary conditions in much of Europe in the early part of next year.
The U.S. should avoid a recession. However, as has occurred in each of the past two years, there will likely be growth scares that temporarily pull down equity prices.
Emerging economies should continue to grow more quickly than developed markets, although the banking crisis in the eurozone will hurt the prospects of Eastern Europe.
China’s slowing growth could depress growth rates elsewhere in Asia.
SEI looks for another year of easy monetary policy in the U.S. and a further shift toward easing by the european Central Bank, as the latter combats recession and the impact of the sovereign debt crisis on the banking system.
Even in a scenario where the eurozone remains intact, we believe the euro itself could come under substantial downward pressure.
We expect inflation to remain mostly inactive for another year. However, unpredictable, high-impact events (so-called black swans), along the lines of last year’s Arab spring and Japanese earthquake/tsunami/nuclear meltdown, cannot be ruled out. Obvious candidates include an uncontrolled breakup of the eurozone, intensifying political and military tensions with Iran over its expanding nuclear capabilities and a political and economic collapse of North Korea in the wake of ruler Kim Jong Il’s death.
In terms of active asset allocation, we took advantage of the pop in stock prices during the final quarter of 2011 to even up our stock/bond positioning relative to strategic weights in the portfolios over which we have discretion. However, we continue to favor high-yield fixed-income assets versus investment-grade and sovereign debt. Within equities, we are overweight U.S. large-cap versus international, and remain particularly cautious on Europe ex-U.K. We also believe the exchange value of the euro could be at risk.
Read Jim’s full analysis – Pivotal Year Ahead
A Brief History of Market Turbulence
August 15, 2011 by Tom Licciardello, CFP · Leave a Comment
By: SEI Investment Management Unit
During periods of turbulence and uncertainty, it’s common to look at prior crises as benchmarks against which current conditions can be assessed, and there’s certainly no shortage of historic episodes that investors can look to for perspective. Economic and financial crises have been a regular feature of monetary economies throughout history. While no two have been exactly alike—they vary widely in size, scope, causes and length—they do tend to share some common characteristics.
Read SEI’s complete report – A Brief History of Market Turbulence
Economic Insights: Weekly Jobless Claims 8/6/2011
August 12, 2011 by Tom Licciardello, CFP · Leave a Comment
By: SEI Investment Management Unit
Weekly jobless claims compiled by the U.S. Department of Labor for the week ending August 6 came in at 395,000. This was a decrease of 7,000 from last week’s revised number of 402,000.
Our View
After 17 consecutive weeks of claims registering north of 400,000, this week’s number finally fell below that psychological mark while also setting a four-month low. Hopefully, this is the start of a new trend. With the market in need of positive data to at least partially offset recent negative developments, the claims number was welcomed by investors.
The four–week moving average, which is less volatile, fell to 405,000 from 408,250 the prior week. This is the preferred measure, as it smoothes weekly volatility and provides a better gauge of the labor environment. Individuals continuing to collect benefits fell by 60,000 to 3,688,000 for the week ending July 30. This statistic lags initial claims by one week.
With all of the recent market volatility, we need the recent good news from the labor front to keep coming. At this point, SEI continues to believe that the U.S. economy will not fall into a recession, and remains cautiously optimistic that moderate economic growth will pick up throughout the remainder of 2011.
Read the complete report – Economic Insights_Weekly Jobless Report
Resisting the Emotional Spin Cycle
August 8, 2011 by Tom Licciardello, CFP · Leave a Comment
Improve long-term returns with patience and focus
As we look back over the first decade of the 21st century, we can draw one undeniable conclusion – it was a bear of a time for investors. Major market declines from 2000 to 2002 and then again in 2008 dragged equity returns well below their long-term averages.
But research will show that, as disappointing as the markets have been, the average investor has fared far worse. As defined by Dalbar, Inc., the average investor refers to the universe of all mutual fund investors whose actions and financial results are restated to represent a single investor. This approach allows the entire universe of mutual fund investors to be used as the statistical sample, ensuring ultimate reliability. And get rid of the foot note from the disclosure section.
Caught in the emotional cycle of investing, many investors continue to pull in and out of the market, abandoning long term strategies, and paying the price with suboptimal returns. A study of investment behavior by a major investment research firm underscores the point. DALBAR, Inc., compares the long-term returns (up to 20 years) of equity fund investors against the S&P 500 Index, which represents a buy-and-hold strategy. In every year since 1998, the average investor has significantly underperformed the index. And although the gap between the two has narrowed in recent years, the average investor continues to hurt themselves with their investment behavior.
How can we improve our behavior in the coming decade, especially in the light of continued volatility? While we can’t say for sure where the markets are headed, the volatility in the recent past should not surprise us. Coming off a major rebound in 2009, a moderate pullback was to be expected, at least until the economy can sustain a long-term recovery.
But as we tell investors time and again, focus less on market behavior and more on your own behavior. The research shows, market timing doesn’t pay. Below are several strategies that have served investors well for generations.
U.S. Credit Downgrade—How Would It Affect Investors?
June 21, 2011 by Tom Licciardello, CFP · Leave a Comment
In recent weeks, major credit rating agencies have expressed renewed concern over the fiscal outlook for the U.S. government, even raising the possibility that it could eventually lose its AAA rating. What are the implications for investors? There’s both a short- and a long-term dimension to this question. In the near-term, the Treasury estimates that if its statutory borrowing limit is not soon raised by Congress, it could default on interest and debt repayments by August. This risk is still viewed as remote, but if it did occur, it could cause significant dislocation in markets, and a credit rating downgrade would be justified. Additionally, rating agencies worry that the U.S. government is on an unsustainable long-term fiscal path. Does any of this lead us to believe that investors should not own U.S. government debt?
Read the full report from SEI How Would a Credit Downgrade Affect Investors?
U.S. Inflation—Not a Serious Threat
June 3, 2011 by Tom Licciardello, CFP · Leave a Comment
Inflation is the topic on everyone’s mind. In the United States, a visit to the gas station is enough to cause most people to worry. In emerging-market countries, the rising cost of food has resulted in significant geopolitical unrest. While the prospects of $5-per-gallon gasoline and $4-per-gallon milk aren’t things we like to consider as consumers, as investors, SEI’s portfolios managers don’t view inflation as a major concern. Read the full report:
U.S. Inflation – Not A Serious Threat
Weekly Economic Update from SEI
May 31, 2011 by Tom Licciardello, CFP · 2 Comments
With a plethora of economic reports due in the next few days, all eyes will be on the fragile recovery. The housing market looks like a “double dipper”, but what will the next round of reports bring, and what impact will it have on your portfolio?
Compass Capital Corporation Economic Update
May 19, 2011 by Tom Licciardello, CFP · Leave a Comment
Please take a moment to view our video:
A Midyear Financial Checkup Can Make For a Smarter Second Half
July 26, 2010 by Tom Licciardello, CFP · Leave a Comment
This is not the time of year when everyone wants to stay indoors with their finances. But a midyear review of your tax situation, retirement and spending issues can be far more valuable than the rushed attempt most people make at the end of the year — or when it’s too late at tax time.
Summer’s actually a good time to do this task because there’s still enough time to correct lapses in savings, spending or tax planning.
Budget: How’s your spending going? It’s a good time to see what’s being spent on non-essentials and whether you can make some cuts and redirect those funds towards bills or savings. A look at the last six months of spending may reveal opportunities to reduce spending and redirect money toward more necessary goals. Also, take a look at such things as gym memberships, magazines that are piled up and coffee expenses. If you’re not using these things, you can probably live without them. Doing this exercise can identify a surprisingly large amount that’s unaccounted for that can be redirected to debt payment, savings and investments.
Taxes: If you got a sizable refund in April or found it necessary to empty savings to pay Uncle Sam, it’s definitely time to reassess what you’ll owe at tax time next year. Also, if you think you’ll have some losing stocks in your taxable investment accounts, keep an eye on those in case you’ll need to offset gains in your portfolio at the end of the year.
Retirement savings: If you are on schedule to max out your contributions to your company retirement plan this year, great. But don’t forget to check your existing IRAs and other retirement accounts to see if you’ll have enough cash on hand to contribute the maximum in each account by their respective deadlines next year.
Health and health insurance: Increasingly, what we pay for health insurance will be tied to the state of our health. While the weather is good, commit to a plan to walk or hit the gym a specific number of hours a week.
Emergency fund: We encourage you to have between three to six months of living expenses in an emergency fund. If you don’t have that minimum, go back to your spending review and see where you can start socking money away.
College savings: If you are saving for your child’s education or your own, check to see if you’re on track with the goals you made for the year. It’s also a good idea to read the latest news on financial aid since schools change their financial aid policies annually. Even if your kid’s still in grade school, it’s a good idea to learn as much about college financial aid while you’ve got plenty of time to learn.
Special goals: If your car is suddenly looking like it will need to be replaced or if this might be the last year for your furnace, see if you can direct more money into a reserve fund to cover replacement costs or at least a heavy down payment. If there’s a vacation you want to take by the end of the year or a special household purchase you want to make, focus on the cash you’ll set aside to make that happen. Of course, if you have credit card debt rolling over from one month to the next, maybe that should be your initial focus.
Credit: If you haven’t set a schedule for receiving your three credit reports throughout the year, do it now. You have the right to get all three of your credit reports – from Experian, TransUnion and Equifax – once a year for free. You can do so by ordering them at http://www.annualcreditreport.com. By staggering each receipt of your credit reports at different points in the year, you’ll get a continuous picture of how your credit picture looks. Also, you’ll have the opportunity to focus on possible errors in a single report, which will give the other two credit agencies time to update their files.
As Annuities Get Attention in Washington, It’s Worth Reviewing the Basics
June 17, 2010 by Tom Licciardello, CFP · Leave a Comment
Recent research from the Financial Planning Association® (FPA®) shows that planners are embracing annuity products to help a more conservative generation of clients protect assets and reach their retirement goals. Apparently the White House is getting in on the annuity bandwagon as well.
The question is, should you? First, start with the definition. An annuity is a financial product that accepts funds from an individual with a plan to grow them, and then at a specific time begins a stream of regular payments to guarantee a steady flow of inflation-protected cash to that individual until they die. Annuities come with various features, which will be detailed below.
The whole notion of guaranteed payments after an economic crisis seems to be more attractive these days.
A report in the April FPA Journal of Financial Planning stated that 35 percent of advisers surveyed said the recent financial crisis had changed the way they viewed annuities and as a result, they were more likely to use or recommend them than they were before the crisis. Washington also appears to be getting friendly with annuities as a conservative solution for those in retirement. In January, the Obama Administration released a report from its Middle Class Task Force favoring annuities as one of a series of tools that might offer guaranteed life income to millions of Americans.
Annuities have plenty of promoters and detractors, and it’s best to start by reading as much about them as possible first, and then discussing your retirement savings choices with your tax professional and an experienced financial adviser. Some basics:
Annuities come in two flavors – fixed and variable: Fixed annuities offer a return that are tied to interest rates or a particular index, meaning these are “fixed” investments your money will always be tied to. Variable annuities are invested in a series of investments — including mutual funds — that allow the investor to change their investment allocations. If you are willing to pay heftier fees, you may be able to receive a guarantee that your variable annuity will not dip below the value of the initial principal.
Tax-deferred growth, but payments are taxed as ordinary income: Just like a 401(k) or IRA, the contributions and earnings within an annuity grow tax-deferred until the funds start coming out. But also like a 401(k) or IRA, you pay a 10 percent penalty for early withdrawals if you are younger than age 59 ½. Yet there’s a tradeoff for a lifetime guaranteed payment, and that’s the taxman. All withdrawals are treated as ordinary income and don’t qualify for more favorable long-term capital gains treatment.
Money for life, but check the company thoroughly: The number one selling point of any annuity is that the issuer – typically an insurance company that writes up an annuity contract – guarantees that you will receive money for as long as you live. Of course, you need to make sure the insurance company behind the annuity contract is financially healthy. Check its Comdex ranking, which is an average percentile ranking of credit ratings provided for life and health insurance companies by firms such as Moody’s Investors Service, A.M. Best Company and Standard & Poor’s Corporation.
Fees and commissions can be steep: Always ask how much commission an agent makes – and planners can be agents if they are properly licensed – when they sell you an annuity. And be sure to compare commissions and ongoing fees on any annuity products you consider. Also keep in mind that some annuities can charge a surrender fee if you withdraw your money before age 59 ½ in addition to the 10 percent penalty.
Compare promised returns: We’re still in a low interest-rate environment. Understand how any annuity you’re considering will react in various interest rate scenarios.
Check out consequences of transferring an annuity: Find out what the tax and economic ramifications might be for transferring an annuity to spouses or other family members when you die. This effort should be part of an overall review of your personal finances and the creation of an estate plan.
Stay diversified: Keep in mind that putting everything you have into an annuity is not good financial planning. Discuss how you should allocate all your assets as you head into your retirement years.
This is the Year for Your Estate Plan
June 8, 2010 by Tom Licciardello, CFP · Leave a Comment
Why 2010 is the Year You Should Pay Closer Attention to Your Estate Plan
Estate planning is an essential part of anyone’s personal finances — no matter how wealthy you are. But even for those who have been diligent about planning for their spouses and heirs, this is a year when it may make particular sense to re-examine your strategy.
With the nonstop flurry of legislative activity in Washington, Congress has still not acted on the phase-out this year of the estate tax. If nothing is done this year, the heirs of any person who dies in 2010 won’t be liable for any federal estate taxes, no matter how big the estate. (The carryover basis rules for 2010, however, may give rise to additional planning considerations.)
Yet the potential bad news will come next year when the estate tax is scheduled to return with a vengeance on all estates over $1 million in size (the threshold was $3.5 million for individuals in 2009) with a potential return to a 55 percent top tax rate..
It’s worth a trip to your estate planning attorney and your financial planner to help ensure your paperwork is in order and the previous plans you’ve made won’t cause problems.
Family trusts – also called bypass or credit shelter trusts – are of particular concern. These trusts work this way: Individuals add what’s known as a formula clause to their will or revocable trust that distributes up to the maximum amount of assets that can pass free of estate tax to the trust if the individual dies before their spouse. The creation of the trust helps ensure that once your spouse dies, neither these assets nor any appreciation on them will be subject to estate tax. But if you die this year, a failure to address the formula clause could potentially cause you to unintentionally disinherit your spouse.
The bottom line: It’s worth making a call to a financial planner and your estate attorney to make sure your plans are still in order.
And what if you’ve never made an estate plan? Even if you’re not particularly wealthy, you definitely need one. Here are some specific things you should do and make sure you have in place:
Make a financial plan: You can’t have a very effective estate plan without a full grip on your finances. First, sit down with us to create a financial plan so you can gain an understanding of all the various aspects of your finances from your income and investments to your debt. Add various facts about your family situation to the mix, and that’s the starting point for an estate plan.
Make a will your first priority: Unless you have a very complicated estate, a standard will with wording common to your state may be satisfactory to properly dispose of your assets, but it’s generally a good idea to get feedback from an estate attorney to make sure your will fits you and your financial structure.
How Much Term Life Insurance Should You Own?
June 8, 2010 by Tom Licciardello, CFP · Leave a Comment
You may have read that term life insurance rates are at historic lows and that now is the time to buy. It’s worth a quick primer on why life insurance is necessary and who should buy it before getting to specific amounts that individuals should own.
First, a quick definition of what term life insurance is. A term policy is a policy with a set duration on the coverage period – anywhere from one to 30 years – and when it reaches the end of that term, the policyholder decides whether or not to renew it. Term policies provide no cash buildup like whole or universal life insurance – it only provides a death benefit at the time the insured dies. Because term doesn’t provide that investment component – the cash value that can be borrowed against – term is generally cheaper to buy than whole or universal life.
There is plenty of debate whether consumers should buy term or whole life. Some critics argue that whole life is a poor choice because you arguably could get a better return from other investments. Though limited, there are good purposes for these investment-feature policies – generally as part of an estate-planning strategy.
But the first point is to decide whether you need insurance. People without dependents generally don’t, while people with spouses and families generally do. The primary point of life insurance is to replace income or eliminate debt if a breadwinner dies.
As for the decision on what kind to buy, it helps to get some advice. A well drafted plan can help you determine the right insurance products to buy based on your needs and other assets.
Through our planning process we can help you decide how much life insurance to buy and over how long a period. Some critical questions that should be asked when purchasing insurance:
- How much income would your spouse and your children need to replace your income over a period of years based on your current age?
- Will your spouse or guardian need to provide childcare support?
- Is there a mortgage to pay off?
- Are there substantial short-term debts, like credit cards or auto loans, to pay off?
- What are estimated college expenses for children and spouses, and when will those expenses start?
- How much will burial expenses be?
- Do you have any other life insurance?
- Are there anticipated expenses for care giving for elderly relatives or children or family members with special needs?
- Do you anticipate substantial estate taxes when you die?
- Do you have any other assets that can be liquidated sensibly or will bring in income?
Keep in mind that youth and health will also be factors in how much insurance you can afford to buy. And keep in mind that life insurers will investigate suspicious claims, so be honest about all facts you report.
Many term life policies are both “renewable” and “convertible.” Renewable means you can renew your coverage without a medical exam. The latter allows you to convert your term life policy into an equivalent cash value policy from the same carrier, should this make sense during the term of the policy. Again, the kind of coverage you choose should depend on your own personal needs and we can help you determine what those are.
Not only can we shop numerous life insurance carriers for the best rates, we also know it’s important to work with the most financially healthy carriers.
One more thing. Don’t buy insurance and forget about it. Make sure that every few years you are reviewing your insurance purchases as part of your overall financial plan. Life circumstances change – incomes rise and fall and family size changes. Your insurance holdings always need to reflect current needs and conditions.