Monthly Archives: March 2016

How is the US Treasury managing the nation’s debt?

With interest rates at or near historic lows a lot of people are taking advantage of low rates to re-finance their debts.  Is the US Treasury taking this opportunity to lock in low rates?  Not really.

Here is First Trust’s commentary on the issue.

Instead of imposing strict fiduciary rules on Wall Street, banks, investment houses, and financial advisors, the government should apply similar rules to the managers of the federal debt. This is particularly true because unlike the private sector – which faces tough market competition every day – the debt managers at the Treasury Department have a monopoly.

These federal debt managers have been flagrantly violating what should be their fiduciary responsibility to manage the debt in the best long-term interests of the US taxpayer.

Despite a roughly $19 trillion federal debt, the interest cost of the debt remains low relative to fundamentals. In Fiscal Year 2015, interest was 1.2% of GDP and 6.9% of federal revenue, both the lowest since the late 1960s. To put this in perspective, in 1991 debt service hit a post-World War II peak of 3.2% of GDP and 18.4% of federal revenue.

In other words, for the time being low interest rates have kept down the servicing cost of the debt even as the debt itself has soared.

You would think that in a situation like this, with federal debt set to continue to increase rapidly in the future, that the government’s debt managers would bend over backwards to lock-in current low interest rates for as long as possible.

But you would be wrong. The average maturity of outstanding marketable Treasury debt (which doesn’t include debt held in government Trust Funds, like Social Security) is only 5 years and 9 months. That’s certainly higher than the average maturity of 4 years and 1 month at the end of the Bush Administration, but still way too low given the level of interest rates.

The government’s debt managers have a built-in bias in favor of using short-term debt: because the yield curve normally slopes upward, the government can save a little bit of money each year by issuing shorter term debt. In turn, that means politicians get to show smaller budget deficits or get to shift spending to pet programs.

But this is short-sighted. The US government should instead lock-in relatively low interest rates for multiple decades, by issuing more 30-year bonds, and perhaps by introducing bonds the mature in 50 years or even longer.

At present, we find ourselves in the fortunate situation of being able to easily pay the interest on the federal debt. But this isn’t going to last forever. If the government locks-in low rates for an extended period it would give us time to catch our breath and fix our long-term fiscal problems, like Medicare, Medicaid, and Social Security.

There’s no reason this has to be a partisan issue. The government’s debt managers should just treat the debt like it’s their own. If the government is determined to hold many others to a stricter standard, it should lead by example.

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Ending a bad habit

Did you ever hear about the famous feud between the Hatfield and the McCoys?  They lived in the mountains on the West Virginia/ Kentucky border in the late 1800s.  It all began in a dispute over a hog and led to the death of two dozen people over a 20 year period.  As time passed the original reasons were lost and the feud became a deadly habit.

Most people are creatures of habit.  Some habits are a good thing.  It’s a substitute for rethinking a lot of things we do automatically: we shower, brush our teeth and eat breakfast mostly out of habit rather than spending time wondering if we should.  It makes our lives easier.

The habit of saving money for retirement is also a good thing.  It’s a habit that leads to financial success.  But what we do with that money can lead to bad habits.  Getting into the habit of investing in the same thing year after year can lead to bad results.

For example, Microsoft (MSFT) has made some people – like its founder Bill Gates – one of the richest men in the world.  Adjusted for stock splits, it was $0.10 /share in 1986; today it’s about $54/ share, a gain of over 54000%.  However, if you had bought it in 1999 hoping to see that trend continue you could have paid $59/per share.  You would still be waiting to break even, having lost money over a 17 year period.

Unfortunately, this is the kind of habit that so many investors exhibit.   They may buy stock in a company they work for and develop the habit of sticking with it even if the company has problems.  General Electric (GE) has tens of thousands of employees who bought its stock.  They saw the price drop from $60/share to $6/share between 2000 and 2009.

They may read about a mutual fund in a magazine or on-line and buy it without doing the appropriate research and add to it out of habit.  Habits are a substitute for thinking about our actions.  Some habits, like exercise and punctuality are good.  But we should avoid falling into the trap of making investment choices out of habit.  To do so can lead us to the same fate of the investor who bought Microsoft 17 years ago or GE 16 years ago and is still waiting to get even.

One way to avoid the trap of using habits to make investment choices is to regularly re-examine your investments.  Ask yourself if you had cash, would you buy the same things you currently have in your portfolio?  If you don’t know the answer, this is the time to get professional guidance from an investment professional, a trusted fiduciary who has your best interests at heart.

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Global Stocks Lower After Brussels Explosions

Major Stock Indexes

4:09 PM EDT 3/22/2016

Last Change % CHG
DJIA 17582.57 -41.30 -0.23%
Nasdaq 4821.66 12.79 0.27%
S&P 500 2049.80 -1.80 -0.09%
Russell 2000 1096.95 -1.63 -0.15%
Global Dow 2315.94 -7.42 -0.32%
Japan: Nikkei 225 17048.55 323.74 1.94%
Stoxx Europe 600 340.30 -0.52 -0.15%
UK: FTSE 100 6192.74 8.16 0.13%

 

Currencies

4:09 PM EDT 3/22/2016

last(mid) change
Euro (EUR/USD) 1.1224 -0.0018
Yen (USD/JPY) 112.28 0.33
Pound (GBP/USD) 1.4214 -0.0154
Australia $ (AUD/USD) 0.7623 0.0045
Swiss Franc (USD/CHF) 0.9724 0.0025
WSJ Dollar Index 87.26 0.10

Futures

3:59 PM EDT 3/22/2016

last change % chg
Crude Oil 41.48 -0.04 -0.10%
Brent Crude 42.54 0.31 0.73%
Gold 1248.5 4.3 0.35%
Silver 15.895 0.048 0.30%
E-mini DJIA 17497 -31 -0.18%
E-mini S&P 500 2041.75 -1.00 -0.05%

Government Bonds

4:08 PM EDT 3/22/2016

price chg yield
U.S. 10 Year -6/32 1.939
German 10 Year 7/32 0.215
Japan 10 Year 3/32 -0.101
 
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Thoughts from around the investment world – 4

Today we’re featuring First Trust.  Here are some unconventional thoughts from their March 21st Morning Monday Outlook:

1 – The Panic of 2008 was not caused by tight monetary policy.

2 – Zero percent interest rate policy (ZIRP) and Quantitative Easing (QE) did not save the US or global economies.

3 – Monetary policy in the US is getting looser as the Fed hikes rates, and,

4 – Negative interest rates in Japan and Europe are not working.

If anyone’s interested we would be happy to provide a summary of their thoughts on these subjects.  We think it’s important to look at the economic world from the perspective of people who live in “Realville” and examine conventional wisdom, which is so often wrong.

Regarding the first point, keep in mind that all the “smart people” in and out of government were convinced that real estate was safe because it could not go down.  Flipping houses for ever more ridiculous prices became a national obsession and formed the basis for an entire cable TV network.

And when it ended the ultimate culprits pointed the fingers of blame to everyone except themselves, leaving millions poorer.

We will have more to say on these topics in subsequent posts, including the new phenomenon of negative interest rates which some central banks have already adopted.

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Buy an Irish Castle for $7 million

It’s fun every once in a while to think about what it would be like if money was no object.  For today’s thought experiment we went to Ireland and found a storied castle for sale.

It’s Glin Castle, 700 years old, which was the ancestral home to the FitzGerald clan.  Think of it as Downton Abbey set in Ireland.  Located in west County Limerick, it sits on 380 acres, 23 of which are “pleasure grounds”—the woodland walks and gardens, both landscaped and informal, that surround the building. It’s been upgraded and operated for a time as a luxury bed-and-breakfast.  The furnishings are extra.  See HERE for more views.

... of <b>Glin</b>, who gave me a private tour of her residence, <b>Glin Castle</b>

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Four “Hidden” Ways We Help Our Clients Save Money

We often tell clients that our long term investment objective is to provide them with a fair rate of return over time while working to minimize the amount of risk they take.  Part of that objective is achieved by finding ways to save them money.

Buying the right mutual funds can save clients a lot of money.  Many mutual fund families offer the exact same fund in several different “share classes.”  The primary difference between each share class is the expenses the fund charges the client.  After deciding which fund we want to buy, we choose the least expensive version of that fund.  This means that our clients keep a bigger share of the fund’s returns.

We also pay attention to the tax consequences of our investment strategy and work to minimize the taxes that our clients pay at the end of the year.  Occasionally we will sell some losing investments to offset gains in other investments.  At the end of the day, this allows our clients to keep more of their money.

We help clients understand how much they need to save for retirement.

For example, we might tell them that buying the new luxury car that they really want every three years will mean they have to work for another five years to meet their stated retirement goals. This helps them with their decision making.

 Making sure our clients understand how much they can safely spend and where they should take the money for their goals is a key value-added service that we provide.

 

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Avoiding Tax Scams

Financial Advisor magazine ran an excellent article about a scam that is being run by people pretending to be IRS agents. One of these scams defrauded more than 5,000 people out of more than $25 million.  Here’s how one scam works:

Victims are told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, they are then threatened with arrest, deportation or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting.

Here’s what you must know: the IRS never solicits payments by phone or e-mail.  If they need information they will always write a letter first.  Do not respond to e-mails that appear to be from the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System.

There are a number of other frauds that involve taxes.  A thief may steal your identity and fraudulently file a tax return and claim a refund.  There are several ways to avoid this happening to you.  First, protect your identity by shredding all documents that contain personal information.  Second file early and electronically; electronic filing eliminates paper documents with sensitive information will not get stolen in the mail.

Beware of tax preparer fraud.  It is important to choose carefully when hiring an individual or firm to prepare your return. This year, the IRS wants to remind all taxpayers that they should use only preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs).

Beware of “Free Money” from the IRS or scams involving social security.

Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing in community churches around the country. These schemes promise refunds to people who have little or no income and normally don’t have a tax filing requirement – and are also often spread by word of mouth as unsuspecting and well-intentioned people tell their friends and relatives.

 

We protect your identity and work hard to safeguard sensitive financial information.  It’s why we provide you with a password protected Lock Box when we send information such as performance reports to you electronically.

For more information, please contact us.

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Getting Cookies

Cookies are not really on my diet, but she brings them anyway.  “She” is a very sweet, lovely lady of a certain age who drops by regularly to chat and bring us cookies.

We got to know her when her husband died and a friend referred her to us.   She was a homemaker and her husband handled the finances.  When he died, he left a collection of stocks, bonds and mutual funds scattered among several investment firms.  She was not quite sure where everything was.  There was a funeral to arrange.  Then there were life insurance forms, social security forms, pension forms, and every day bills that needed to be paid.  There was so much paperwork involved in getting it all together that it was overwhelming to her.

That’s where we came in.  This was something we had done many times before.  In fact, we had written a book on preparing for this day: BEFORE I GO.  So we helped her make sense of it all.  And then we offered to help her manage it.

That’s when she started to bring us cookies and stopped to chat, even if there was nothing pressing we had to discuss.  They were nice, friendly visits that allowed us to keep up with her children and friends.  She would tell us about the trips she took and the people she met.  And despite the fact that we shouldn’t be eating them, we loved her cookies.

She stopped driving recently and we don’t see her coming in the door any more.  So today I’m going to the store, buy some cookies and stop at her house.  It’s her turn to get cookies.

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Three benefits of a Separately Managed Account

A Separately Managed Account (SMA) is an investment account managed by a professional investment manager that can be used as an alternative to a mutual fund.  They provide diversification and professional management.  But they differ from mutual funds in that an SMA investor owns individual stocks instead shares in a fund.

Here are some of the benefits of SMAs.

  • Customization: Investors in SMAs can usually exclude certain stocks from their portfolio.  They may have an aversion to certain stocks, such as tobacco or alcohol.  Or they may have legal restrictions on owning certain stocks.  SMAs allow some customization that’s not available in mutual funds.
  • Taxes: Investors in SMAs can take advantage of tax loss harvesting at the end of the year by instructing a manager to sell certain stocks to reduce capital gains taxes. In addition, an SMA has another advantage over mutual funds in that each stock in an SMA is purchased separately.  Mutual fund investors are liable for “embedded capital gains” even if the shares were purchased before the investor bought the fund shares.
  • Transparency: You know exactly what you own and can see whenever a change is made in your account.  Mutual fund investors don’t see the individual securities they own or what changes are being made by the portfolio manager.

These are features that are attractive to certain investors.  However, they are not for everyone.  Most SMAs require minimum investments of $100,000.  That means that they are only appropriate for high net worth investors who will typically use several SMA managers for purposes of diversification.  In addition, the fees associated with SMAs are often higher than fees for mutual funds.

For more information, please contact us.

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Five reasons for Trusts

In the past, estate planners usually cited two reasons for setting up trusts:

  • Minimize probate
  • Avoid estate taxes

There are several ways of avoiding probate without a trust and the federal estate tax does not apply to estates under $5,450,000 in 2016.  This removes a big reason for setting up a trust.

Here are five reasons for setting up a trust that are usually not considered.

  1. Divorce.  Setting up and funding an appropriate trust can protect a child or heir from losing family assets in a divorce.
  2. Changing a legal location.  If a trust is revocable the actions of a local court do not inhibit the heirs from moving.
  3. Serving disabled loved ones.  A special needs trust can be used to protect assets for an ill child or spouse.
  4. Minimizing identity theft.  If a trust is set up using its own tax identification number, the trust may be protected if your social security number is compromised.
  5. Protecting the elderly.  As people age, they can suffer cognitive impairment.  If the trust is drafted properly, successor trustees or co-trustees can be named to manage the older person’s financial affairs.
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