Bond investing today

Bond investing in today’s ultra-low rate environment has many investors frustrated and many professionals worried. Why? Because once interest rates start going up, the value of existing bonds goes down.

Here are some comments from the manager of a bond fund we use in our mutual fund portfolios … the Loomis Sayles Bond Fund:

Dan Fuss, known as the Warren Buffett of bonds, said his $23 billion Loomis Sayles Bond Fund is sitting on more than 20 percent of cash and cash equivalents, its highest level ever, because he sees scant opportunities in the bond market.

“If we saw a lot of value, we wouldn’t have those reserves,” Fuss told Reuters in an interview.

Fuss, vice chairman and portfolio manager at Loomis Sayles, which oversaw $199.8 billion as of December 31, said the Loomis Sayles Bond portfolio has been building cash since early 2013 and has boosted levels as fixed-income securities have become increasingly pricey.

Despite his high cash position, the fund has done very well.

In 2014, the Loomis Sayles Bond Fund has posted a return of 3.42 percent, outperforming 85 percent of its peers, according to Morningstar data. Over the past 10 years, on an annualized basis it has returned 8.37 percent, surpassing 94 percent of its peers for the same period, according to Morningstar data.

For its five-year record, the Loomis Sayles Bond Fund has posted returns of 14.61 percent, ahead of 85 percent of its peers.

 

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Boosting social security benefits for widows

The March 2014 issue of Financial Planning has an interesting article about claiming social security benefits.  Thanks to changes in the social security rules made in 2000 and our improvements in mortality, it is becoming more financially advantageous to delay filing for Social Security benefits past your full retirement date.  Workers born after 1943 and later receive an 8%  increase in benefits for every year they delay.

With many people working past the traditional age of retirement, families should consider delaying if they can afford to do so.  The authors state that:

The main conclusion is that the gains from delay are particularly large for primary earners in married couples, because when a primary earner delays social Security, it boosts the survivor benefit that the secondary earner would receive in the event of widowhood.

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Getting too clever about taxes can lead to financial catastrophe.

Many people are so concerned about taxes that they adopt investment strategies that actually lose more than they save in taxes.  Decades ago limited partnerships involving real estate, oil and gas or equipment leasing were purchased by high income individuals as tax shelters.  Many ended up losing some or all of their investment.

But there’s another common strategy involving stock options that have hurt some high net worth individuals.

An advisor tells the story of a client in the late ’90s who sought his help to minimize taxes on incentive stock options that had amassed enormous built-in gains.

The individual worked for a dot-com company and had stock options with a huge gain and wanted to minimize taxes.  One tongue-in-cheek answer is to wait until the stock crashes, eliminating the tax problem.  The strategy in case of a “hot” stock that can come down as fast as it goes up is to do a simultaneous exercise and sale, pay the tax at ordinary income rates and be thankful for the windfall.

But many people are reluctant to pay the tax and will choose to exercise their options and then hold the stock for a year and a day before selling it.  This allows them to pay tax at the lower long-term capital gains rate rather than the higher short-tem rate.

But here’s the problem with this strategy.  If the stock collapses before the year is up all their gains can be wiped out.  But it gets worse.  By exercising their options the techies became subject to the AMT (alternative minimum tax) and received a huge tax bill at the 28% rate.

As an example, if the techie exercised options worth $1 million they would owe $280,000 in taxes just for exercising.  If the stock went to zero, they could claim a loss, but still have to pay the tax.

The lesson for everyone is: be aware ahead of time of the potential consequences of tax avoidance strategies.  If they can lead to bad results, pay the tax.

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It’s your money. It’s easy to change financial advisors if you know how.

It’s estimated that as many as 25% of investors are dissatisfied with their current financial advisor.  Women investors and high net worth investors are the most dissatisfied.

If you’re not sure your financial advisor is providing the service and advice you deserve, getting a second opinion about your portfolio may provide the answers you’re looking for.

Most often, it isn’t investment performance that causes client dissatisfaction.  Here’s the acid test: do you feel good after you’ve had a conversation with your financial advisor of do you feel uncomfortable?  Were you being heard?  Were you being talked down to?  Was the advisor calling you to make a sale?

Change is rarely easy.  Many people don’t realize that finding another advisor and moving their account is actually easy.  You don’t have to talk with your current advisor or even let them know what’s going on.  Find another advisor first.

Once that’s done, your new advisor will lead you through the transfer process and show you exactly what to do.   He will prepare a new account form and a transfer form.  The rest is automatic.  Your new advisor and his custodian – the brokerage firm that will hold your investments for safekeeping – will monitor the transfer to make sure it goes smoothly.

If you wish to send your old advisor a gracious letter after the transfer process is started, feel free, but it’s not necessary as part of the transfer process.

If you want to get a copy of our brochure that goes into more detail, please ask for more information.

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What clients say about our firm

We have been doing some market research recently.  We asked some of our clients to come in and tell us how they would describe our firm.  The other day a retired couple and their daughter came in and I asked them to tell me in one word or a brief phrase how they would describe us.  Here’s what they said:

  • Caring
  • Honest
  • Personal
  • Not a big Wall Street firm
  • Works for me
  • Cares for my financial well being
  • Talks to me
  • Class act

If you’re looking for a firm that’s honest, knows you personally, cares for you, works for you, and is in regular touch with you, let us hear from you.  We may just be the right fit for you.

 

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How the “Dogs of the Dow” can make you money while getting you tax-advantaged income.

The “Dogs of the Dow” is an investment strategy that became popular in the early 1990s following a book written by Micheal O’Higgins.  The premise is simple: invest in stocks that are currently disliked or have underperformed (buy low) and wait for the economy, or management, to turn the situation around (sell high).  The problem for investors is determining how to identify the stocks that meet these criteria with the least risk and the possibility of making a profit.

The “Dogs” strategy starts with the 30 stocks in the Dow Jones Industrial Average (the “Dow” ).  To be part of the Dow a company has to have been around for quite a while, be an industry leader, and have stable finances.  Investing in these stocks means that the risk of investing in a real “loser” are low.

So which of these 30 stocks are under-loved?  The “Dogs” use dividend yield as a proxy for being underappreciated and undervalued.  At any one time, the “Dogs” are the top 10 highest yielding stocks in the Dow.

The final step is to invest an equal number of dollars in each of these ten stocks, hold them for a year, and repeat the process.  This usually means that after a year some of the stocks you own will no longer be among the top ten dividend payers, and each stock will no longer be one-tenth of your Dogs portfolio.  You sell those who are no longer in the top ten, replacing them with stocks that have become one of the top ten dividend payers, and re-balance the Dogs back to equal dollar amounts.

The “Dogs of the  Dow” strategy has been promoted as a way of beating the Dow, and in some years it has.  But that’s not necessarily the reason it may be appropriate for some investors, especially those who are looking for tax advantaged income.

Let’s look at the tax code.  The maximum rate of tax on qualified dividends is:

  • 0% on any amount that otherwise would be taxed at a 10% or 15% rate.
  • 15% on any amount that otherwise would be taxed at rates greater than 15% but less than 39.6%.
  • 20% on any amount that otherwise would be taxed at a 39.6% rate.

In other words, “qualified” dividends (dividends paid by a U.S. corporation or a qualified foreign corporation)  are taxed like long-term capital gains, and at a lower rate than interest on CDs, corporate bonds and treasury bonds. At a time of ultra-low interest rates, getting a dividend of 3% to over 5% from a Blue Chip company may offer an attractive alternative to investing in bonds for those looking for current income.

In addition, of you sell a stock after holding it for a year and make a profit that is considered a long-term capital gain.  And long-term capital gains are also taxed at preferential rates.

There are some other requirements that affect the tax rate on qualified dividends and capital gains so consult your tax advisor about your particular situation.

The Dogs are not for everyone.  First, ten stocks are not considered a well-diversified portfolio and we at Korving & Company believe firmly in diversification.  Second, at some point the stock market will take another tumble and the Dogs will tumble along with the rest and we are also big practitioners of risk control.  Third, unlike CDs and high quality bonds, stocks never “mature” and pay you back your principal.  Investing in stocks exposes you to more risk that putting your money in the bank or purchasing short-term treasury bonds.  Before recommending that people invest in the Dogs, we carefully examine whether this is right for them.   Don’t buy the Dogs without getting professional advice.

However, at a time when many are anticipating that interest rates will go up, which means that bond prices will go down, people looking for income may want to consider if the Dogs are right for them.

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Why Stephen Korving Is One of the Best Financial Advisors Under 40

STEPHEN-KORVING

Stephen Korving was recently nominated as one of the country’s best Financial Advisors Under 40. Here’s a little background on Stephen.

After earning a degree in Finance from Virginia Tech, Stephen joined the prestigious institutional investment advisory firm Cambridge Associates. While there he was asked to join a new group designed to analyze hedge funds for institutional investors and ultra high net worth families.

His father persuaded him to join him at UBS, a major global investment firm headquartered in Switzerland. The goal: to provide regular investors the same level of expertise and care that institutional investors and the very wealthy were getting.  The crash of 2008 showed the risks that the major global investment firms were taking, so Stephen and his team began searching for a better way to serve their clients.  That led to the establishment of Korving & Company, an RIA firm, in 2010 with Stephen as President.

Stephen is a Certified Financial Planner™ Practitioner and a member of the Financial Planning Association.

He is active in a number of civic and charitable organizations, currently serving on the Board of the Portsmouth Museums Foundation and as a community adviser to PARC (Portsmouth Area Resources Coalition).

Part of our firm’s mandate is to help people at all levels of wealth.  When Stephen is not managing the portfolios of his clients, many of whom are widows, he is helping people who are in financial difficulty by showing them how to budget and use their income wisely.

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Learning from mistakes

I have been an investor all of my adult life and a portfolio manager and advisor for nearly 30 years.  And looking back on that lifetime of investing experience I can can affirm that I have learned more from mistakes – my own and others – than I have from my successes.

That thought was brought home after reading and article in The Motley Fool titled The Best Way to Learn As an Investor.

Capitalism is all about making, and learning from, mistakes. Jeff Stibel, CEO of Dun & Bradstreet Credibility Corp., made this point well in Megan McArdle’s new book, The Up Side of Down. “The brain is a failure machine,” he said. “When you’re born, you have about all the neurons you’ll ever have. When you’re four, you have pretty much all the connections between those neurons you’ll ever have. Then the brain starts pruning. The brain starts shrinking. You’re actually learning by failure.” …

At a conference years ago, a young teen asked Charlie Munger how to succeed in life. “Don’t do cocaine, don’t race trains to the track, and avoid all AIDS situations,” Munger said. Which is to say: Success is less about making great decisions and more about avoiding really bad ones.

The article goes on to point out that you should try to learn by the failures of others rather than making all their mistakes yourself.  Here are a few of the biggest mistakes people make which lead to financial disaster and ruin their lives.

1. The overwhelming majority of financial problems are caused by debt, impatience, and insecurity. Most people want to appear richer than they are so they dress, drive cars and buy homes that they really can’t afford and live on borrowed money.  Living beyond your means is a recipe for disaster.

2. Complexity kills.   The investment industry is full of creative people who are busy inventing complex products.  Many of them are accidents looking for a place to happen.    The University of California system is losing more than $100 million on a complicated interest rate swap trade.  If you can’t understand an investment, stay away.  That’s why we make things simple here by focusing on simple investments that are easy to understand.  Simple investments usually win.

3. So does panic. People who survive plane crashes and being stuck in blizzards are the ones who did not panic.  If you have the desire to do something because of the emotions of either greed or fear, sit down until the feeling goes away.  Napoleon’s definition of a military genius was “the man who can do the average thing when all those around him are going crazy.” It’s the same in investing.

 

 

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Bitcoins

During a client meeting a few days ago we were asked about Bitcoins.  One of our clients had received a number of solicitations to buy Bitcoins over the last few months and he asked us for our opinion.

Bitcoins are an invented electronic “currency” that has attracted the attention of the financial press.  They are designed to appeal to people who are concerned about the value of more conventional currency.  Concerns about a national currency becoming worthless have been one of the main reasons that people have invested in gold, silver or other commodities.  These are said to have intrinsic value when paper currencies become worthless.  After all, gold and silver coins have been around a lot longer than pieces of paper with pictures of dead presidents.

Today’s transactions using conventional currency – like dollars – have largely been taken over by electronic transactions.  Every time you use a credit card, write a check, pay bills via your bank’s on-line bill pay program, you are moving ledger balances, not paper currency.  So why not use an alternative, global  electronic currency?

In my view, the problem with Bitcoins is not just that their value has gyrated even more widely than gold or silver, but that there is no national authority that stands behind their ultimate value.  The headline recently read: “Shutdown of Mt. Gox Rattles Bitcoin Market.” 

Once the pre-eminent marketplace for buyers and sellers of bitcoin, Mt. Gox stopped all transactions on Tuesday, and its website disappeared. The site later came back, carrying only a message that said the halt was “for the time being in order to protect the site and our users.”

We recognize that governments have often been guilty of debasing the value of their currencies.  However, we are not ready to jump on the Bitcoin bandwagon since they seem to be even more unstable and prone to failure and loss than all but the most irresponsible kleptocracies.

We advised our client to take a pass.

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Fee-Only Advisors

What’s a Fee-Only Advisor? It’s an advisor who is compensated only by the client.  He receives no compensation based on the purchase or sale of a financial product.  He receives no commissions, rebates, awards, finder’s fees, bonuses or 12B-1 fees (“mutual fund trailers”) or other forms of compensation from others.

The typical “broker” is paid by commissions to buy or sell stocks, bonds, mutual funds, life insurance, annuities, partnerships or other investment products.  Some of these commissions and fees are disclosed, many are hidden in the fine print and not obvious to the client.  This creates an obvious conflict of interest on the part of the investment professional.  They are under pressure to get their clients to do something even when the best course of action is to do nothing.  There is also an incentive to sell high commission products like partnerships, annuities or other insurance products and mutual funds with front end loads.

The fee-only financial advisor has no incentive to do anything but grow his clients’ assets because he is usually compensated by a fee based on a percentage of the assets he manages, thus aligning his objectives with that of the client.   Our RIA firm is fee-only.

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