Taking Advantage of a Declining Stock Market Might Actually Help Your Retirement

savings questions

Saving for retirement is like a long journey.  On this journey, a declining stock market can work to your advantage if you take the opportunity.

A declining stock market is a chance to buy cheap; a time when stocks go “on sale.”  If the stock of a great company drops in price by half, you can buy twice the number of shares.  When it eventually recovers, you have twice the wealth.

“Dollar cost averaging” is an old technique that has been used by patient investors who put a fixed amount of money into their portfolios in good markets and bad.  It allows them to buy more shares when the market is cheap and fewer shares when the market’s expensive.

When workers put a fixed amount of money into their 401(k) plan this is exactly what they are doing.

Even people who are no longer adding money to their portfolios can take advantage of market fluctuations.  By rebalancing their portfolios regularly they buy more of what’s cheap and sell some of what’s expensive.

Taking advantage of these opportunities requires three things:

  1. Patience to view your goals from a long-term perspective.
  2. Keeping the emotions of greed and fear out of your investment decisions.
  3. Adding to your portfolio with regular contributions and strategic rebalancing.

Millions of people are using this approach to achieve their long-term savings strategy.  Using market declines to buy allows people to accumulate more money for retirement.  If you need help with patience, emotions, or investment strategies contact an RIA like Korving & Company.

Send for our free brochure: “Are You Ready for Retirement?”

 

 

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Is bigger really better?

Korving -1016 RET web

Everyone wants to see their business grow.  That’s true whether you own a small restaurant or an investment firm.  Some investors look at the size of the firm as an indication of the quality of the advice they will get, assuming that bigger is better.

But that is often the opposite of what they will experience.  Most people are aware that some of the best restaurants are small, with just a few tables, catering to a select clientele.  For the same reason, small investment firms are often better for their clients than large firms.

Large firms are the training ground for smaller firms.  Large firms recruit people who have no experience as investment managers and train them in selling their company’s products.  Once a financial advisor gains experience, he sees ways that his clients can be served better.  That’s the point at which he forms his own small firm where clients get the benefit of his knowledge and experience.

Clients who do business with small firms typically deal directly with the owners, who work for them, rather than employees who work for a paycheck.  As everyone knows, it makes a lot of difference when you’re dealing with the owner of a business rather than an employee.

Small firms are more flexible in meeting the needs of individuals.  Everyone is not the same.  Everyone has a different set of experiences, a different array of needs, and seeks a different level of service.  Large firms create policies and procedures that stack people in silos and try to impose uniform rules on everyone.  The larger the organization, the greater the need for uniformity and the less the business cares about any one individual.

If you have an investment portfolio worth a million dollars, an investment firm with assets-under-management (AUM) of $100 million will care about you and do its best to address your needs.  A firm with  AUM of $1 billion dollars will not care about you as an individual, you’re a statistic.

Korving & Company is growing Registered Investment Firm (RIA), but doing so in a way that makes sure that we always know our clients, care about them as individuals, and go out of our way to meet their individual needs.

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Buy a Paper Mill Heiress’s Greenwich Mansion for $5.5 Million

The seven-bedroom house sits on 10 acres.

 

Having recently inherited her mother’s house in the same community, Zelinsky is selling her old home for $5.495 million. The buyer of the 6,100-square-foot house (that measurement doesn’t include a partially finished basement) will benefit from Zelinsky’s family’s connection to the property and its surroundings.

 

Just in case you wanted to know what you could get if you had the money.  The grounds need some work.

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Buying insurance and annuities

Two kinds of insurance products are often sold as investments, and should not be:

  • Life insurance
  • Annuities

There may be a place for both of them in your financial plan.  But they are often bought for the wrong reason because they are often misrepresented by the agent or misunderstood by the buyer.

Insurance products are complex and difficult for a layman to understand.  Let’s first review the basic purpose of these products.

Life insurance – its primary purpose is to replace the income that is lost to a family because of the premature death of the primary earner.  A young family with one or more children should have a life insurance policy on the earners in the family.  Ideally the insurance is will allow the survivors to continue to live in their accustomed style and pay for children’s education.

This usually means that younger families need more insurance.  However, there will be a trade-off between what a young family needs and what they can afford.  To obtain the largest death benefit, I suggest using a “term” policy.   “Whole Life” policies which have some cash value generally do not provide nearly as much death benefit and are less than ideal as investment vehicles.  Whole life policies are often sold using illustrations showing the accumulation of cash value over time.  What most people don’t realize is that illustrations are based on assumptions that the insurance company is not committed to.  This is the point at which an advisor who’s not in the business of selling insurance can prevent people from making mistakes.

Life insurance can also be used for other purposes.  One popular reason was to pay for estate taxes.  However, changes in the estate tax exclusion amount have made this much less attractive except to the very wealthy.

Annuities – useful for providing an income stream that you cannot outlive.  Like life insurance, it comes in a dizzying array of options that the average layman has trouble understanding. It is also one of the most commonly misrepresented insurance products.

Some of the most heavily promoted annuities are sold as investments that allow you to get stock-market rates of return without risk.  That’s one of those “too good to be true” offers that some people simply can’t resist.  The problem is that few people either read, or understand the “small print.”  Insurance companies are really not in the business of giving you all the upside of the stock market and none of the downside.  If they did, they would quickly go out of business.

These products are popular with salespeople because they pay high commissions.  Unfortunately they also come with very high early redemption fees that often last from 7 years to as much as 16 years.

If you have been thinking about buying a life insurance policy or an annuity you should first get some unbiased advice on what to look for.  Most insurance agents are honest, but like most sales people they would like you to buy their product.  It would be wise to get advice from someone who is an expert, but who is not getting paid to sell you a product.  There are a number of financial advisors who will provide guidance.  At Korving & Company we are Certified Financial Planners™ (CFP®) and licensed insurance agents, but we do not sell insurance products.   Since we don’t get paid to sell insurance we can evaluate your situation, advise you, and if life insurance or an annuity is what you need we can refer you to a reputable agent who can get you what you need.

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The Retirement Challenge

For most people, retiring means the end of a paycheck, but not the end of an active life.  The typical retiree spends 20 to 30 years in retirement and running out of money is their biggest fear.  When you retire, how will your lifestyle be affected?  Here are some of the things to take into consideration.

Retirement age – Modern retirees face lots of choices that their parents did not have.  There is no longer a mandatory retirement age, so the question “when should I retire” gets more complicated.

Social Security – The age at which you apply for Social Security benefits has a big effect on your retirement income.  Apply early and you reduce your monthly benefits by 25% – 30%, depending on your age.  Wait until you’re 70 and you increase your monthly benefit by up to 32% (8% per year), depending on your age.  If you are married, the decisions get even more complicated.

Pension – If you are entitled to a pension, the amounts you receive usually depend on your length of service.  The formula used to calculate the pension benefit can get quite complicated.  Those who work for employers whose finances are questionable may want to consider whether they will get the benefits they are promised.  If you are married, you will need to decide how much of your pension will go to your spouse if you die first.

Second career – More and more people go back to work after retirement.  Many don’t want to stop working, but do something different.  Others use their skills to become consultants, or turn a hobby into a business.  A second career makes a big difference in your retirement lifestyle and how much income you will have in retirement.

Investment accounts – These are the funds you have saved for retirement: in IRAs, 401(k)s, 403(b)s, 457s, and individual accounts.  These funds are under your control.  Most retirees use them to supplement Social Security and pension income.  They are the key to determining how well people live in retirement.

Combine these issue with the effects of inflation, market volatility, investment returns and health care costs and it becomes apparent that retirees need to plan.  If your retirement is years away, a plan allows you to make mid-course corrections.  If you’re already retired a plan will allow you to sleep soundly, knowing that a lot of the uncertainty has been removed.

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Baby Boomers are Getting Richer

According to Bloomberg writer Ben Steverman, Baby Boomers – “part of the wealthiest generation in U.S. history” – just keep getting richer.   The Boomers started turning 65 in 2011 and since then the S&P 500 Index is up 91 percent.

That’s fortunate because the worst thing that can happen to a retiree is for his retirement investment portfolio to decline just as he retires and begins dipping into his savings.  If  the market declines as he retires, with no income to replenish his losses, the retiree find himself in a financial hole he may not be able to climb out of.

Older boomers have experienced what is arguably the best-case scenario: The S&P 500 has returned 269 percent since its March 2009 low. As a recent study in the Journal of Financial Planning shows, wealthy retirees can be very cautious about spending down their savings. This instinct, along with the stock market’s new record, suggests that many boomers are likely to end up with far more money than they know what to do with.

Researchers followed the spending and investing behavior of 65- to 70-year-olds from 2000 to 2008. The poorest 40 percent of the survey respondents generally spent more than they earned, according to the study, which was funded by Texas Tech University. Those in the middle were able to keep their spending at about 8 percent below what they could have safely spent from pensions, investments, and Social Security.

The wealthiest fifth, meanwhile, had a gap of as much as 53 percent between their spending and what they could have spent.

For individuals, broad statistical averages like these are not very useful.  As retirement looms, everyone should have a plan that will help them determine what happens if they get lucky and the market goes up, and what they can safely plan to spend if the market goes down.

Contact us for more information.

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Negative Interest Rates – Searching for Meaning

We have mentioned negative interest rates in the past.  Let’s take a look at what it means to you.

Central banks lower interest rates to encourage economic activity.  The theory is that low interest rates allow companies to borrow money at lower costs, encouraging them to expand, invest in and grow their business.  It also encourages consumers to borrow money for things like new homes, cars, furniture and all the other things for which people borrow money.

It’s the reason the Federal Reserve has lowered rates to practically zero and kept them there for years.  It’s also why the Fed has not raised rates; they’re afraid that doing so will reduce the current slow rate of growth even more.

But if low rates are good for the economy, would negative interest rates be even better?  Some governments seem to think so.

Negative interest rates in Japan mean that if you buy a Japanese government bond due in 10 years you will lose 0.275% per year.  If you buy a 10 year German government bond today  your interest rate is negative 0.16%.   Why would you lend your money to someone if they guaranteed you that you would get less than the full amount back?  Good question.  Perhaps the answer is that you have little choice or are even more afraid of the alternative.

Per the Wall Street Journal:

There is now $13 trillion of global negative-yielding debt, according to Bank of America Merrill Lynch. That compares with $11 trillion before the
Brexit vote, and barely none with a negative yield in mid-2014.

In Switzerland, government bonds through the longest maturity, a bond due in nearly half a century, are now yielding below zero. Nearly 80% of Japanese and German government bonds have negative yields, according to Citigroup.

This leaves investors are searching the world for securities that have a positive yield.  That includes stocks that pay dividends and bonds like U.S. Treasuries that still have a positive yield: currently 1.4% for ten years.  However, the search for yield also leads investors to more risky investments like emerging market debt and junk bonds.  The effect is that all of these alternatives are being bid up in price, which has the effect of reducing their yield.

The yield on Lithuania’s 10-year government debt has more than halved this year to around 0.5%, according to Tradeweb. The yield on Taiwan’s 10-year bonds has fallen to about 0.7% from about 1% this year, according to Thomson Reuters.

Elsewhere in the developed world, New Zealand’s 10-year-bond yields have fallen to about 2.3% from 3.6% as investors cast their nets across the globe.

Rashique Rahman, head of emerging markets at Invesco, said his firm has been getting consistent inflows from institutional clients in Western Europe and Asia interested in buying investment-grade emerging-market debt to “mimic the yield they used to get” from their home markets.

Clients don’t care if it is Mexico or Poland or South Korea, he said, “they just want a higher yield.” ….

Ricky Liu, a high-yield-bond portfolio manager at HSBC Global Asset Management, said his firm has clients from Asia who are willing for the first time to invest in portfolios that include the highest-rated junk bonds.

How and where this will end is anybody’s guess.  In our view, negative interest rates are an indication that central bankers are wandering into uncharted territory.  We’re not convinced that they really know how things will turn out.  We remain cautiously optimistic about the U.S. economy and are staying the course, but we are not chasing yield.

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Making Smart Decisions About Social Security

Social Security CardDeciding when to start collecting your Social Security retirement benefits is an important choice that will impact the income you receive for the rest of your life.  The decision can also affect the income and lifestyle of a surviving spouse.

When it comes to Social Security, you may be wondering whether you should: 

  • Start collecting early but receive a reduced benefit?
  • Wait until Full Retirement Age to start collecting your full benefit?
  • Delay past Full Retirement Age to maximize your benefit?

To help make an informed decision, you’ll want to consider a number of key factors, including your marital status, your health, your plans for retirement and your retirement income sources…just to name few.

Your Full Retirement Age (FRA) is the age at which you qualify for 100% of your Social Security benefits (known as your Primary Insurance Amount).  Your FRA is based on your year of birth.

When you’re ready to start collecting benefits, you should apply for Social Security no more than four months before the date you want your benefits to start.

If you start collecting Social Security benefits and then change your mind about your choice of start date, you may be able to withdraw your claim and re-apply at a future date, provided you do so within 12 months of your original application for benefits.  All benefits (including spousal and dependent benefits) must be repaid and you may only withdraw your application for benefits once in your lifetime.

You generally have three main options when it comes to choosing when to start collecting your benefits—often referred to as your Social Security “filing strategy.”

  • Start collecting early
  • Start collecting at Full Retirement Age
  • Start collecting after Full Retirement Age

Each filing strategy has advantages and disadvantages.

Order our white paper on Social Security claiming strategies by calling our office or going to our website.

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Would You Prefer to Have $1 Million Cash Right Now or a Penny that Doubles Every Day for 30 Days?

Albert Einstein is credited with saying “compound interest is the eighth wonder of the world.”

To get back to the original question, would you prefer to have $1 million today or one cent that will double every day for 30 days?  If you chose the million dollars, you would leave millions on the table.

If you chose the penny and passed up the million dollars, on the second day your penny would be worth two cents, on day three it would be four cents, on the fourth day it would be 8 cents.  By day 18 the penny will have grown to $1,310.72.  By day 28 it will be worth over a million dollars:  $1,342,177.  On the 30th day it would be worth an astounding $5,368,709!

If the penny were to be allowed to double for another 30 days, the penny would grow to over $5 quadrillion (five thousand trillion!) dollars.

One of the things this illustrates is that compound growth takes time to make a dramatic difference.  For the person who wants to have enough money to retire in comfort, starting early is the key to success, even if the starting amount is small.

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Should you own real estate?

Old house Stock Photo

We visit Nerdwallet from time to time to answer questions from readers looking for financial advice.  One recent question was from a single mom who’s buying a new house and is thinking of keeping her old house as a rental property.  She wanted to know if it was a good idea to sell most of her stocks and use the proceeds to buy the new house rather than selling the old one.

This question is not uncommon.  We have a number of clients who have invested in rental real estate.  The answer is not clear-cut and depends to a large extent on the individual.  Are you are a handyman and love to work on carpentry projects?  Or are you a single mom who’s disappointed with her stock market investments?

In the run-up to the Great Recession, lots of people got into real estate, flipping houses for a quick profit.   For many people that experience ended in grief when housing prices collapsed.  However, many people view real estate as an investment rather than a place to live.

So what are the issues involved?  Here’s part of my answer (edited):

You have to take taxes, liquidity and return on equity into consideration.  First, when you sell your stocks you will have to pay capital gains taxes on any profit.

The second issue is the fact that while stocks are liquid (easy to sell) a house is not liquid in case you have to sell to meet a financial emergency.

The third thing to consider is what the return will be on the equity on your rental property.  The rent you receive is not all profit.  From this you have to deduct taxes and maintenance.  Then there’s the problem of actually collecting your rent: some tenants won’t pay on time – or at all – and how do you evict them?  And when people move you will have to repair and paint to get it ready for the next tenant.   Unless you’re handy you may have to pay a company to manage the property for you, which reduces your income.  Finally the return on real estate has actually been lower than the return on stocks over long periods of time.

On the plus side, you can view free cash flow from rents as similar to dividends from stocks.  And there are tax benefits from deprecation on rental property.

The bottom line, there are benefits to owning commercial real estate, but there are also drawbacks. Once you make a commitment to owning rental property, there’s no easy way out.  People should think long and hard before plunging into this market.

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