Reading the Tea Leaves

We are not big fans of fortune tellers, preferring to stick with what we can observe in the here and now. The here and now tells us that the American economy is getting better slowly and sluggishly, trending upward, something we refer to as the “Plow Horse Economy.”

We do, however, pay attention to what others are saying and if it sounds reasonable, we’ll share it.

Tony Crescenzi of PIMCO has made some points that seem reasonable and in line with our observations. Discussing the market’s reaction to the Fed’s non-move, he says:

“Investment implications and lessons for investors from this year’s tumult in the global financial markets: Rates are likely to stay low for longer … the Federal Reserve has demonstrated that it is likely to take a very gradual and cautious approach to its normalization of interest rates. Policy rates, globally, are likely to stay low through the rest of the decade, supporting equity and credit markets, as well as real assets.

Volatility will result from the unwinding of crisis-era policies…

Economic growth, rather than liquidity, is needed more than ever to bolster asset prices… investors are likely to focus …on economic growth and company cash flows when making investment decisions.”

Of course we think that economic growth, cash flows and profitability should always be the real basis for making investment decisions, and that a change in Federal Reserve policy (especially if it is as gradual as we anticipate) will have very little impact on these fundamental factors.

We received a call from a client the other day asking if we had a secret formula for coping with the recent market decline. We replied our formula was not secret at all. We adhere to our asset allocation strategy, which puts “shock absorbers” on the portfolios during times of market volatility. This means that our objective is to go through market declines with smaller losses than the overall market. While that strategy means that most of the time our portfolios won’t go up as fast or as far as the stock market during good times, it also means that during times when the markets are heading in the wrong direction our portfolios should outperform the stock market and we won’t have as much ground to make up when it begins to recover.

4 Reasons Why You Need a Good Financial Advisor Now

A good financial advisor has a number of roles: planner, investment manager, educator who is willing to teach you about investing, and sounding board with whom you can share your fears and aspirations.

Why is a Registered Investment Advisor (RIA), a fiduciary who puts your interests ahead of his own, so important now? People often get over-confident during a Bull Market. It’s when the market gets scary that financial professionals really prove their worth.

We have all heard the old sayings about being diversified, buy low and sell high, and stay the course. That’s often harder to do than it looks, especially in trying times such as these, when investor psychology overtakes reason. A financial advisor’s job sometimes involves protecting investors from themselves. And to protect them from all the bad advice that’s out there and from the bad actors in the industry.

1. The first thing that a fiduciary does is tell their clients that despite what you hear, no one can time the market. There may be some people who are exceptionally good at stock picking, but those rare individuals are not giving away their advice to you on TV, in Money Magazine, or in newsletters; I don’t care what they claim. If they exist at all, they are managing their own portfolios on an island in the Caribbean.
2. The retail financial services industry has an incentive to sell you expensive products as often as possible. And they are very good at it. Don’t get caught in the frequent trading trap; it’s not to your benefit. A fee-only RIA does not have an incentive to sell you investments to earn a commission.
3. Investors typically allow their portfolios to get too risky during the good times. When the stock market is going up, it’s too easy to get caught up in the excitement and ignore asset allocation guidelines. A good investment manager will rebalance your portfolio regularly to keep you from running into a Bear Market with a portfolio overloaded with risky stocks.
4. A fee-only RIA works for you. Stockbrokers, insurance agents, even mutual fund managers, work for the companies that pay them. They are legally required to work in the best interest of their employers, not their clients. Some of them do try to work in their clients’ best interests, but there can be large financial incentives to do otherwise. A fee-only RIA works only for you. We act in your best interest and use our expertise to allow you to take advantage of opportunities in good markets and weather the bad ones.

During volatile markets, we focus on the important things that really matter, not the daily chatter. We keep open lines of communication with our clients, helping them make sense of what’s going on, providing perspective, and helping them distinguish between what’s just noise and what’s a genuine trend. We work hard to control risk and manage portfolios to help our clients maintain confidence in their financial future.

If you want to receive our weekly commentary, view our latest guides, or get a free download of the first three chapters of our book “Before I Go”, or just find out about us, visit us at http://www.korvingco.com.

Women and Financial Advice

Glass ceilings continue to be broken!  Two women are currently vying for the office of President of the United States.  More women are attending college than men, and those women are graduating in larger numbers.  Affluent women are handling more money than ever before and are becoming their families’ primary breadwinner in increasing numbers.

Women are willing and able to hire financial advisors.  However, according to a number of studies, many women are unhappy with their financial advisors because of disrespectful and condescending attitudes from many in the advisor community.

Many women do not feel they are getting what they need or want because their advisors don’t listen.  Women don’t necessarily need different or unique investments. But they do want to have more detailed conversations about their goals and their concerns.  Women want a “deep, meaningful advisor relationship” according to one major research study of affluent women.  Women are generally more willing to share their personal information and concerns. These things actually allow financial advisors to do a better job!  For instance, women who have family members battling medical problems or drug addiction may find that these issues can have long-term financial implications on themselves and their families.

These women owe it to themselves and their families to interview a number of financial advisors until they find the right fit, depending on what they value most.  We work with a large number of affluent women clients.  Generally these women value that we listen to truly understand their aspirations, concerns, and fears; come up with solutions that address those issues; continuously monitor and manage of their portfolios; and provide proactive outreach.

Oh No They Didn’t!

The big financial news of the moment is that the Fed decided not to raise interest rates, though 13 of 17 Federal Reserve officials say that they see a rate hike by the end of the year.  In their statement, they cited “recent global economic and financial developments” as their reason not to raise rates today.  However, Chairwoman Janet Yellen cautioned that people should not “overplay the implications of these recent developments,” saying that they “have not fundamentally altered” the Fed’s outlook on the economy.  All of this leads us to believe that we are likely to see a similar media build-up around the Federal Open Market Committee’s (FOMC) December 15-16 meeting.  (There is another FOMC meeting scheduled for October 27-28, but at this point, there is no press briefing currently scheduled for that meeting.)

Whenever the Fed finally does raise rates, expect it to be a very SLOW process.  Ms. Yellen alluded to as much when she said, “the stance of monetary policy will likely remain highly accommodative for quite some time after the initial increase in the federal funds rate.”  Charles Schwab’s Liz Ann Sonders provided the following chart, which bodes well for the stock markets (unless we are all wrong and the Fed suddenly starts hiking rates quickly):

As we wrote just the other day, we expect the Fed to increase rates and would have preferred to see them do it sooner rather than later.  The rate increase is widely expected to be in 0.25% increments, which should not have any significant effects on the economy.

Following the Fed’s stand-pat announcement, the stock market actually declined slightly (and futures are down as we write this morning), indicating that their position is being interpreted as an indication that the Fed does not have total confidence in the strength of the economy.

Dear Fed: Just Do It!

Get on with it already! Ever since the crash of 2008, the Federal Reserve has kept interest rates near zero. The theory was that low interest rates would stimulate economic activity. But we are now in the sixth year of economic recovery. The government tells us that unemployment is 5.1%. The average person buying bonds looking for income is treading water.  After taxes, and inflation they are slowly losing purchasing power.

Raising rates from 1/8% to 3/8% should be a no-brainer. The much anticipated rate hike by the Fed, perhaps as early as tomorrow, has everyone quivering with anticipation. Our suggestion is to ignore the announcement. There is no secret trading strategy that tells how to “play” the Fed’s announcement.

Let’s say the Fed does indeed raise rates by 0.25% tomorrow. How would the market react? There could be a sell-off. On the other hand the market could rally on the belief that the Fed thinks the economy is finally strong enough to allow a modest increase in interest rates. In fact, both could happen: a sell off followed by a rally.

Should the Fed NOT raise rates this could be interpreted that the Fed sees dangers ahead for the economy.

Our own position is that raising rates by one-quarter of one percent will have no actual effects on American economic activity. The basis for economic growth comes from the private sector. It will come from new drugs to cure diseases, new apps to make your life easier, more technology to increase the supply of oil and natural gas. The cost of gasoline has dropped to under $2.00 in our area, which has a big effect on the budget of the average family. This, not a modest increase in interest rates, will have a bigger impact on the economy than anything the Fed does in the short term.

We have no idea what the Fed will decide and no one else does either. No matter what happens, short term gyrations in response to the Fed are just noise, distracting investors from the fundamentals. For those who believe in free markets and capitalism, what affects you and your portfolio happen far from Washington DC.

Virginia Pre-Paid Tuition: What You Need to Know

Virginia offers a prepaid tuition program to residents looking to save for future college educational costs, called Virginia529 prePAID.  The plan allows you to prepay future tuition and mandatory fees for Virginia colleges or universities.  However, there are several catches that you must be aware of that make this college savings option somewhat tricky to plan around.

You can only open accounts during a limited enrollment period each year.  Either the account owner or beneficiary must be a Virginia resident when opening the account.  This is not a big hurdle, but it is something that you should know.

You purchase the credits in semester increments, and this is where things really start to get confusing.

• First, you can only buy the credits from the child’s birth through the time they complete the ninth grade.  After the beneficiary has completed the ninth grade, you can no longer purchase any more prepaid tuition credits for them.
• Next, when purchasing semester credits, you can purchase either Tier1 or Tier2 credits.  Tier1 credits cover one semester of tuition at a Virginia public four-year college, where Tier2 credits cover one semester of tuition at a Virginia two-year or community college.  Applying a Tier1 credit to a Tier2 school will cover more than a semester of tuition, while applying a Tier2 credit to a Tier1 school will cover less than a semester of tuition.
• Furthermore, if you apply either Tier1 or Tier2 credits to an out-of-state college or a private college (even a Virginia private college), the credits do not necessarily transfer one-for-one and your pre-paid tuition might be worth less than what you thought it would be.

Those things, in our opinion, make planning around the Virginia pre-paid tuition plan very difficult.  Before the ninth grade, college planning is a distant goal.  Narrowing down college choices is something that probably very few people sit around and do with their 4th grader.  Knowing where that child will eventually decide to go to school, or even whether your family will still live in-state when that 4th grader eventually heads off to college, is a wild guess for most.  Even if your child loves one particular school, knowing whether they will eventually be able to make it into that school is a whole other issue.

The benefit to the plan, and its allure, is that you can lock in the future tuition and fee payments now so that you will not have to worry about whether tuition prices continue their rapid increase.  However, you should at least be aware of some of the potential pitfalls involved with the plan before jumping in.  For more information, visit the Virginia prePAID plan website, or feel free to contact us.

8 Things Every Parent Should Know About 529 College Savings Plans

We often are asked by parents (or grandparents) of young children about college savings plans.  529 college savings plans offer tax-advantaged ways to save for the various costs of higher education.  While these plans have a lot of name recognition, many people still have questions about the details.  Since it is the first day of school for most kids here in Virginia, it seemed an appropriate time for us to share these eight things you should know about 529 college savings plans:

1. Earnings on 529s are tax-free, as are withdrawals, as long as you use the money for qualified educational expenses.  Qualified expenses include tuition and fees, books, room and board, supplies, and even computer-related expenses.
2. There are no income restrictions to open and contribute to a 529 account.  Even high-income earners can open and fund college savings plans.
3. The money in a 529 account can be used towards in-state or out-of-state schools, both public and private.
4. The contribution amounts are very high: you can contribute up to $350,000 per beneficiary into a 529 account.  (Keep in mind that you will need to get a little deeper into gift tax rules if you intend to contribute more than $14,000 to a 529 account in any one calendar year.  You can do it, but you should know the rules first.)
5. The beneficiary is portable.  If your child decides they want to do something else instead of going to college, you can name someone else the beneficiary (sibling, first cousin, grandparent, aunt, uncle, or yourself).  You do not need to decide on a new beneficiary the moment that your child decides not to go to college.  For instance, you could hold onto it and eventually name your grandchildren the beneficiaries.
6. Charitable family members can contribute to an existing 529 account that you own or set up their own 529 and name your child as beneficiary.
7. In Virginia, putting money into a 529 plan has the added bonus of providing a state tax deduction for contributions up to $4,000.  Thirty-three other states also offer state tax deductions for contributing to a 529.
8. If your child gets a scholarship, you will not lose the money.  You can use the plan to cover expenses that the scholarship does not, such as books, room and board, or other supplies.  You can keep the plan open in case your child goes on to graduate school.  You can change the beneficiary and name another college-bound relative.  A final option would be to simply cash out the plan.  Doing so would subject you to income tax and a 10% penalty on the earnings.  If you were feeling generous, you could name your child the owner and let them cash it out at their (presumably) lower tax rate.

If you have questions, or are interested in finding out how to start a 529 plan, please let us know!

Numbers, the Law of Averages, and the Dow Jones

As we wrote last week, volatility is back.  Two weeks ago today, August 20, saw the Dow Jones Industrial Average (DJIA) dip by 358 points.  Since then the stock market has taken investors on a wild ride.

We were wondering what the average daily price movement was during the past couple of weeks, and after a little research and some Excel wizardry, got the answer:

• The last 10 trading days (August 20 – September 2) have seen an average move of 356 points in the DJIA.

Then we wanted to see what the DJIA did the 10 trading days prior to August 20:

• From August 6 – August 19, the two weeks prior to this recent two-week period of volatility, the DJIA moved an average of 96 points per day.
• The average daily price movement these last two weeks is more than 3.7 times the average price movement the prior two weeks.
• Even more telling, from August 6 – August 19, there were 6 days that the index moved less than 100 points. From August 20 – September 2, there was only one such day.
• During the month of July, the DJIA moved an average of just under 103 points per day, or less than a third of the average daily price movement these last two weeks.

(Another interesting tidbit that seemed to escape mention by the talking screaming heads on TV: despite last Monday’s big drop, both the DJIA and the S&P 500 closed up for the week ending August 28.  The DJIA was up 1.17% while the S&P 500 was up 0.95%.)

Eventually we will revert to the mean.  We are still not convinced that interest rates, China’s growth rate or currency movements are that big a deal.  Put another way, we do not think those things are enough to derail the slow “plow horse” economic improvement domestically.

We urge everyone to take a long-term view on investing and keep a cool head during bouts of market volatility.  We will continue to monitor the markets, economic conditions and our clients’ portfolios.  If you have any questions, concerns or comments, please do not hesitate to contact us!