“Will a Stock Market Drop Affect My Dividend Payments?”

We got this question from a client of ours earlier this week in response to the stock market’s wild market ride.  It is a great question!

The quick and easy answer is “No, it shouldn’t.”  And we could pretty much stop right there.  But if you know us, you know we love to get into the explanation!  So here it goes…

Let’s go back to the very start, with “What is a dividend?”  A dividend is a payment of a portion of a company’s earnings distributed to the company’s shareholders.  Dividends typically are paid in cash, and the company’s board of directors decides the amount distributed.

Now the next question would be, “What causes a company to raise or lower their dividend?”  The answer is cash flow.  It all comes down to earnings and profitability and how much money the company has remaining after paying for all the things that keep it running, such as salaries, research and development, marketing, etc.  After those expenses and the dividend payment, the remaining profits go back into the company.

When a company pays a dividend, their board is essentially deciding that reinvesting all of the company’s profits to achieve further growth will not offer the shareholders as high a return as a dividend distribution.  That said, companies offer a dividend as extra enticement for investors to buy their stock.  Moreover, a steadily increasing dividend payout is an indication of a successful company.

Therefore, it stands to reason that a company’s steady or increasing profitability will typically lead to steady or increasing dividend rates, and a decline in profitability will lead to that company reducing or eliminating their dividends.  Most U.S. companies are loathe to reduce their dividend rates because it signals to investors that their profits are lagging, which results in their stock price getting pummeled.  And that is not a good thing for their company’s board or management.

The final long-winded answer: You will often see companies cut their dividends when there is a severe economic crash, but not in reaction to a market correction.  Since dividends are not a function of stock price, market fluctuations and stock price fluctuations on their own do not affect a company’s dividend payments.

If you have a question, feel free to send it our way!

(Here is an interesting tidbit: the term “dividend” comes from the Latin word dividendum, which means “thing to be divided.”  With a dividend, companies are dividing their profits up among shareholders.)

On Recent Market Volatility. An Open Letter to Our Clients.

And you thought we saw volatility last Thursday and Friday?…

It is normal to for you to wonder how all of this volatility affects your wealth.  As we are hearing it, China seems to be the straw that broke the camel’s market’s back.  Other forces added to the weight, including uncertainty over the timing of the Fed raising interest rates and the Greek debacle.  However, we do not think that any of these things are cause for long-term concern regarding your portfolios.  If you are feeling some stress because of the recent market volatility, remember:

Stock markets are supposed to go up and down

There have been over a dozen market pullbacks of at least 5% since March 2009, so this isn’t unprecedented.  We all realize that stocks are inherently volatile investments, and we must accept the fact in order to earn the expected higher long-term returns.  You have all undoubtedly heard us preach asset allocation and the importance of having a long-term, strategic view.  Your portfolio is invested in a model based on your unique financial and personal circumstances.  It is important to take the long view and realize that it is typical for bull markets to have corrections of 5% – 10%.

Market timing is a sucker’s game

None of us has a crystal ball.  Not even the traders and speculators on TV that want you to think that they do.  Luckily, you do not need a crystal ball to be a successful investor.  In times like these, it is best to keep your cool and stay invested.  Studies consistently show that missing just a few days of strong returns can affect your performance dramatically.  It is important to stay disciplined and not make short-term trading decisions based on fear and emotion.

Your portfolios are properly diversified

This is our most important point.  As we mentioned, we have invested your money in an appropriate allocation for you, so those investments that have not done as well as the stock indices the past couple of years (looking at you, bonds) should help cushion the blow from this market correction.  That is exactly why they are in there.  Having a mix of different types of investments is like having shocks and struts on your car – these things provide a smoother and more stable ride for your portfolio.  When the stock markets are going great, these other investments do cause drag, but we do not invest to beat an arbitrary benchmark, rather we invest to help you achieve your financial goals with the least amount of risk possible.

The things that are causing this correction are just noise

China is slowing.  So what?  To say that their growth rate is slowing is admitting that they are still growing, just at a slower pace.  Did anyone really expect them to grow at 20% per year forever?  Moreover, if you look at it from a numbers perspective, exports to China only account for 0.7% of U.S. GDP.

The Yuan is falling.  Just a few months ago weren’t the talking heads lamenting the thought of the Chinese yuan as the world’s new reserve currency?  Now that talking heads who brought you that idea are being proven wrong, they want you to believe that this is supposed to be bad, too?  Which is it that we are supposed to fear again?  We wrote a blog piece about this last week, so we won’t go into great detail rehashing it here, but our general reaction is, again: So what?

The Fed is going to raise interest rates. (Eventually.)  It was not that long ago that tapering was supposed to bring financial ruin to us all…  Look, we all know that the Fed is eventually going to raise rates.  We can argue about the timing, but whenever it finally happens and the federal funds rate increases by 0.25%, does anyone really think that will keep Apple from introducing the latest re-iteration of their products?  Or keep anyone from buying them?

We realize that we have been having some fun with things that may cause some of you serious concern.  What we do not take lightly as your advisors and financial fiduciaries is the amount of concern and care we place on your financial well-being.  In times like these, it is important to stay calm and avoid making hasty decisions that could harm you financially.  We will continue to monitor your portfolios with vigilance, and as always, please do not hesitate to contact us if you have any questions or concerns.

Rent or Buy?

Should you rent or buy a house? That’s a question often asked by young couples, recent divorcees and people who are undergoing life changes. The main reason that people want to buy rather than rent is because they view renting as throwing money away. In addition, buying a home provides a feeling of stability.

However, there are downsides to buying. Buying a house locks you into a situation. If your life changes, you lose your job, or wish to move, selling a home can be difficult and expensive. Owning a home means that you have upkeep and maintenance costs. If you rent they are borne by the landlord. The cost of rent is often less than the costs associated with home ownership; mortgage payments, real estate taxes, insurance and all the other costs that a home owner faces.

Over the long term, home ownership has been a good investment for many families. But the last decade has clearly shown that the assumption that a home will always go up in value is not true. Just ask the people whose homes are on the market as “short sales.”

If you are an individual who is contemplating whether to rent or buy, keep these issues in mind. If you’re not sure, get the advice of a financial planner who can run the numbers for you and help you make the right decision.

“The Yuan is Falling! The Yuan is Falling!” – Chinese Chicken Littles

The financial trauma of 2008 was so great that many investors still can’t get over it.  The U.S. stock market has more than doubled in value since the dark days of early 2009, but ever since then there have been recurring predictions of another crash.

The latest reason given for fear is China.  Specifically, the Chinese currency – the Yuan – has lost 3.5% of its value relative to the dollar in the last year.  A recent commentary by Brian Wesbury of First Trust put this in perspective.

The Chinese pegged their currency to the dollar at a fixed rate from 1995 to 2005.  Since then the Yuan has appreciated relative to the dollar by about 33%.  That is until this year, when for the first time the Yuan was allowed to decline slightly.  Wesbury referred to it as a “minor wiggle” and he’s right.  But since it was unexpected, it hit the headlines like a bomb and provided the latest opportunity for the perma-Bears to whip up hysteria.

But let’s put this in perspective, in the last year

• The Japanese Yen declined against the dollar by 17.6%,
• The Euro by 16.4%,
• The Canadian Dollar by 15.8% and
• The Mexican Peso by 19.9%.

The U.S. imports twice the amount of goods from these countries than it does from China.  But their devaluation of 15% to 20% happened without notice or comment.

In the meantime, the appreciation of the U.S. dollar means that foreigners pay more for a new Boeing 787 and we pay less for stuff made overseas.  That’s good for U.S. consumers and helps keep inflation in check.

The other thing that’s happening in China is that growth is slowing.  That had to happen, but for people who simply extrapolate a trend to infinity, it seems to have come as a total surprise.  What this means is that Chinese demand for raw materials is slowing.  Not stopping, just not growing as fast.  That seems to have caught mining companies and other basic materials producers flat footed.  As we write this the price of a barrel of oil is threatening to go under $40, a price not seen since 2009.  The same is true of commodities like copper and lumber.  While this is not good news for workers in those industries, it’s good for consumers who buy products made with copper or wood.

In our view, the “Plow Horse” economy is continuing its slow but relatively steady growth.  Markets have always been nervous and traders pay lots of attention to the news ticker.  But long term investors who have well-balanced portfolios should not be concerned with the latest Chicken Littles telling us that the end is nigh.

If you have questions or concerns, call us and we’ll be happy to chat.

The Importance of Having an Exit Plan for Your Retirement

I was speaking with a prominent surgeon recently, and the subject of a career “exit plan” came up.  He’s not yet 60, but he’s got a stressful job.  In addition, changes in the medical field over the past decade have made practicing medicine less attractive to him.  His exit plan was a combination of retirement and a second career.

The conversation stayed with me for a few days, and I wrote down some ideas that could help him — or anyone — craft a proper exit plan.

When you retire, your income stops.  Even if you begin a second career, your income will probably decline.  The money you’ve saved suddenly becomes much more important because it’s the source of much of your retirement income.  Avoiding major losses becomes more important than making those savings grow further.

Our surgeon has investment accounts with a number of brokerage firms and is thinking of consolidating them with one provider.  We suggested he select the financial advisor he would most trust to provide investment management for his wife if he was no longer there.  By thinking of it this way, he can determine whom he sees as most trustworthy.

Consider how your own financial advisor is compensated.  There is nothing inherently wrong with working for commissions, but in my experience it can’t help but influence the advisor’s investment recommendations.  The “fee-only” advisor has fewer conflicts of interest.  In fact, advisors who are compensated based on the assets they manage have an incentive to avoid losses and maximize growth.

There is also the question of qualifications.  Some people in the business have broad planning and investment skills and are Certified Financial Planners.  Some are experienced portfolio analysts.

The cornerstone of an exit plan is a comprehensive financial plan.  It should articulate specific goals.  It should make reasonable assumptions about rates of growth, the rate of inflation going forward and your post-retirement income needs.  Without it, you’re flying blind.  And it’s not something you can draw up on the back of an envelope.  The plan may show that you can meet all your goals without changing your lifestyle.  It may show that you need to cut back.  Or it may show that you need a second career.

The time to begin this process is before you take the plunge.  It allows you to look before you leap.

Setting Realistic Goals

How realistic are your goals?  Some people work hard and exceeded the goals they had when they were young.  Others find their goals forever out of reach.  For example, most people want to retire in their mid-sixties.  That’s a goal, but is it realistic?  Are they going to have a pension when they retire and, if so, how much is it?  When are they going to apply for Social Security, and how much are they going to get?  Will they need a retirement nest egg, and how much will be in it?

Career choices will have a big impact on these answers.  A financial plan will also provide many of these answers.  But a plan is only as good as the assumptions we put into it.  As the old saying goes: “Garbage in, garbage out.”

The rate of return you get on the money you put aside has a huge impact on whether you reach your goals.  Studies have shown that many people have an unrealistic expectation of the returns they can expect on their savings and investments.  With interest rates near zero percent, putting your money in the bank is actually a losing proposition after taxes and inflation.  Investing in the stock and bond markets may lead to higher returns.  But the long-term returns that many people assume they can get often leads to taking unreasonable risks.

There is nothing wrong with having high goals.  The best way to check to see if your goals are high, but attainable, is to talk to a fee only financial advisor.  Preferably one that is a CERTIFIED FINANCIAL PLANNER™.  They have the experience and the expertise to let you know if your goals are reasonable and what you can do to reach them.

Contact us for a “reality check” today.

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The Trend: Fewer “Self-Directed” and More “Advisor-Reliant” Investors

According to Cerulli Associates more households rely on advisors than ever before.

Since 2010, the households classified as “self-directed” investors had shrunk from 45% to 33%, while households termed by Cerulli as “advisor-reliant” investors — regularly consulting with an advisor — had grown from 34% to 43%.  What drives this trend?

I can think of several reasons.  Two that come readily to mind are:

• the increasing complexity of financial markets and
• the number of dramatic financial shocks that people have experienced in the last 15 years.

I can remember a time, back in the 20th Century, when “investing” meant calling a well-know investment firm and buying a stock, like General Motors.  Well, good old GM went bankrupt a few years ago and since then about 25,000 mutual funds have appeared.  In addition there are options, derivatives, structured products, and – of course – ETFs (exchange traded funds).  And that’s just here in the good old USA.  But there’s a whole world out there that people can invest in: foreign stocks, foreign funds, world stock funds, emerging markets, commodities, to say nothing of foreign bonds and currencies.

Few people have the time to study all of these, so the rational thing to do is to find a financial advisor to help you make sense of it.

And then there are the financial disasters that decimated many self-direct portfolios.  In the year 2000 the dot-com bubble collapsed, devastating the portfolios of those riding the tech boom.  And who can forget the housing bubble that led to the financial crash of 2008, wiping out some of the major banks and investment firms and ending the dreams of a comfortable retirement for many people?  Professional advice should be concerned with risk control as their first objective, followed by getting a fair rate of return on your invested assets.

During all this time, financial advisors who were once employees of the major investment firms decided that they could best serve their clients by declaring their independence.  They set up their own firms, becoming Registered Investment Advisors (RIAs) offering fiduciary services.  That is another development that has helped to make financial advice more accessible to individuals and families, the mom and pops of the investment world.

If you’re one of the shrinking do-it-yourself crowd, check us out and see why you may be much more comfortable with us as your advisor.  And if you are one of those with an advisor but wonder if you could do better, feel free to get a second opinion.  We’re a family firm.  We deal with several generations of families that look to us for guidance.  We look forward to hearing from you.

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The Challenges in Achieving Financial Security

We put together a new research report that looks at the challenges in achieving financial security for today’s investors and how creating a financial plan can help.

It wasn’t that long ago that achieving financial security was a relatively minor challenge and that financial planning was thought of as a discipline that only applied to the very wealthy.  Consider the fact that, just a few decades ago, the average life expectancy was 74 years.  At that time, a three-legged stool of Social Security, personal savings, and guaranteed pensions supported the majority of retirees.  It is no wonder that so few people were concerned with outliving their money!  However, much has changed since then.

This easy-to-read research report looks at the current investment environment, the challenges most people face that, if not addressed, can impede their financial well-being, the importance of setting financial goals, what financial planning really is, and how creating a financial plan can help you achieve financial security for you and your family.

If you’d like a free copy of this report, click here now to download it.

Financial Guidance for Regular, Middle Class Investors

As major brokerage firms focus on the multi-millionaire and billionaire clients, the so-called “mom and pop” investor class, those that typically define themselves as “regular” or “middle class,” is getting less love.  Yet these are the people who are most in need of financial advice.

If you have, say, Donald Trump’s wealth, you really don’t need much advice on your saving rate… or advice on when to apply for Social Security.  You can be sure that Trump has a plan, but it’s not going to focus on retirement.

The middle class needs this.  But it’s hard to get unbiased investment and planning advice from the major Wall Street investment firms.  That’s where the growing ranks of Registered Investment Advisors (RIAs) come in.

In many cases RIAs are experienced financial consultants who don’t want to be employees of huge mega-banks pushing proprietary products.  They want to do the right thing for their clients; to act as fiduciaries.  They want to be able to give truly unbiased advice about the right investments for their clients, not rewarded by a big firm for selling in-house mutual funds or the deal of the day.

RIAs get to know you as individuals.  They have access to the latest technology.  Many are willing to create a financial plan for you without requiring you to turn your investments over to them.

If you hire them to manage your money they will often save you money by reviewing your estate plan, give advice on how to title your accounts, send tax information to your accountant, and make suggestions for passing your estate to your heirs with the least fuss.  All this as part of their over-all service.

If this sounds like something you would like to explore, check out our website, give us a call or come see us.  We’re conveniently located in North Suffolk behind the police and fire station on RT. 17.

Breaking Away from the Big Box Store

A new independent RIA (Registered Investment Advisor) sat down for an interview recently about the reasons he left one of the major investment firms. We found most of his reasons familiar because they are the same reasons we set up our own independent firm five years ago.

Here are some of the things he said.

The financial world has changed ….

Besides working at [three different firms I have] more than 30 years in the business. Post–financial crisis, the world around us has dramatically changed. Over the past several years, I’ve seen former colleagues leave to start their own practices. They were doing so well that about two years ago I started seriously exploring my own options.

He likes the freedom of independence …

At [his last firm] I found their support a little cookie-cutter in nature. As part of an organization serving about 7,000 other advisors, I felt like my practice was being forced to manage our clients in a way that appealed to the lowest common denominator. … I still felt limited in what type of services I could offer my clients.

Simply helping business clients connect with bankers, lawyers and other professionals can prove very beneficial. At [Big Box Store], I had to make sure to refer outside businesses only if they met with the wirehouse’s approval. I found that somewhat limiting. … So being able to control my own referral network should create more opportunities to provide a broader network of value-added contacts to clients.

What else can you do that you have not been able to do before?

A big advantage of being independent is being able to advise clients with assets held at other institutions. But we’re also finding more freedom in other areas. For example, one of our clients owns a business that lends to farmers. He has asked me to help open a new line of credit worth about $30 million and shop for the best deal. With another client, we’re helping him interview investment bankers and begin a formal process to sell his software business, which we think is worth between $40 and $50 million.

At Korving & Company, a lot of what we do for our clients has nothing to do with investment management. Right now we are helping a recent widow gain control of her financial affairs. She asked us what we owe her for our services. As a client, there is no extra fee; it’s part of our holistic service model when we act in our fiduciary capacity.

If your financial advisor works for a major firm he is constrained – in many ways – by the limitations placed on him by his employer. Give us a call and see what independence can do for you.