Tuesday, February 16, 2016

Happy New Year-2016(II)

On January 4, 2016, we wrote a blog about the volatility and performance of the financial markets in 2015. To say the financial markets have been “interesting” since then exemplifies an understatement. As we write this on Feb 11, 2016, the S&P 500 has declined approximately 10% since the end of 2015 and has fallen approximately 13% from its high in May of 2015. No way can one look at an investment portfolio in these market conditions and “be happy!” However, we should try to look at these conditions in light of 1) how to protect (to some extent) against such market moves, and 2) what to do now.
What’s the Perspective?
Fresh in most investor’s memory is the October, 2007- March, 2009 decline. The S&P 500 declined from about 1565 in October, 2007 to 676 in March, 2009 (a decline of about 57%!!). The S&P regained its October, 2007 high in March, 2013 (or 4 years later) on its way to 2131 in May of 2015. Obviously only one incident may not be representative of future market movements; however, the stock market historically moves up, even with the intermediate ups and downs.
How Should You Prepare?
So what does an investor do? With perfect hindsight, one would have moved into cash to avoid the downturn. Such market timing always brings the question of “when” to reinvest. Numerous empirical studies show investors suffer anemic returns because they wait too long to re-enter the market. For example, Putnam Investments published research showing that an investor who missed the best 10 days in the market during the time period 12/31/2000 -12/31/2015 would have an annualized return of 1.18% vs. the 5.80% earned by the investor who held the portfolio throughout the time period. That return differential represents $11,365 more on an initial investment of $10,000 ($23,295 vs. $11,930).
Numerous factors go into portfolio management; we will discuss only one here—asset allocation. Asset allocation involves having a portfolio positioned in such a manner that “not all eggs are in the same basket.” Some ramifications of that are as follows:
  1. Money needed in the near term is invested in cash or conservative bonds such that those needed moneys are not subject to the volatility of the stock market.
  2. Different investments in the portfolio can move in different directions relative to each other and the market in general (their correlation). We mentioned the S&P is down about 10% year to date; the aggregate bond index is up approximately 2% in the same time period.
  3. A subset of the correlation argument is use of alternative assets where the investment itself or the investment manager’s style is designed to give some portfolio protection in a declining stock market. Mutual funds utilizing a “long/short” or “market neutral” strategy are available to provide some loss protection and still maintain liquidity. Obviously the quality of that investment is highly dependent on the fund manager and fund strategy; care should be taken when integrating such assets into a portfolio.
What Do You Do Now?

Preparation is great, but it’s an historical thing. If it’s not done before now, you may be too late. So what does an investor do now? Consider the following:

  1. Review the cash needs from the portfolio for the next several years. Do you have sufficient cash or investments with gains to cover those needs? If so, you can “wait it out.” You have no need to go into panic portfolio liquidation.
  2. Almost every diversified portfolio will have some assets with a gain—especially if they have been in the portfolio for a while. Do some “tax harvesting” where assets are sold and the gains of the “winners” are offset by losses of the “losers.” This action results in avoiding taxation on the gain and allows resetting cost basis on investments in the future.
  3. What did you do the day after Thanksgiving? Millions of Americans went shopping because things were “on sale.” Apply the same mindset to the stock market. Stocks are currently going “on sale.” Investors may have hard time thinking about adding to positions in such markets, but for the right stocks and in the right portfolios, these times may be buying opportunities.
Let’s Review
We are not saying “do nothing.” We are saying that an investor should review his/her current portfolio in view of the investor’s needs/long term goals and should consider the composition of the portfolio. Wholesale selling in a down market usually works to the investor’s disadvantage. In addition, tax consequences of selling at a loss can be tricky and should be done with tax consultation. Also, buying declining securities of companies should be considered carefully—is the decline of stock price related to the general market sell-off or is there a systemic problem with the company?
We, at Paragon Financial Advisors, will be happy to discuss your portfolio and circumstances with you in these “interesting” times. Please feel free to contact us.  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.
NOTE: All investing involves some degree of risk and possible loss of principle. Stock offer greater long term growth potential but may have wider and greater price fluctuation while yielding lower current income. Bonds may involve credit/default risk resulting in loss of principle; they historically have provided consistent income. Alternative investing and techniques are specialized situations and should be used only when one understands the risks and restrictions involved. Nothing in this discussion should be construed as a general investment recommendation; appropriateness is dependent on the investor and his/her particular circumstances.

Thursday, February 11, 2016

Social Security Changes

The Bipartisan Budget Act of 2015 passed by the 114th Congress in December made some changes in benefits that were available for claiming Social Security benefits. How, and when, individuals and couples claim their Social Security benefits can have significant impact on the amounts received over the claimant’s lifetime(s). Usually, the minimum age for claiming benefits is 62; however, benefits will be reduced by 6 2/3 % for each year younger than the “full retirement age” (FRA) at which benefits could be received with no reduction. That FRA is dependent on the claimant’s date of birth. Benefits increase by 8% per year for each year beyond FRA that a person waits to start drawing his/her Social Security. The increase in benefit applied only until age 70; no further increase is available after that age. Two major changes were impacted by the Budget Tax Act; it eliminated “file and suspend” and “spousal benefit” provisions. The old rules are in place until April 30, 2016; after that, new rules are in place.

File and Suspend

The file and suspend provision allowed on individual who had reached his/her FRA to file for Social Security benefits but defer the collection of those benefits until sometime in the future. That delay allowed the recipient’s benefits to increase by 8% per year until benefit payments actually started. If, during that suspension time, the claimant decided to receive the original payment from FRA, that option was available. And, a lump sum for the amount that would have been received was available. In addition, auxiliary benefits might be available to a spouse or minor dependent. The real benefit was the spousal benefit (see below).

Restricted Claim for Spousal Benefits

The spousal benefits provision allowed a spouse (who had reached FRA) to file for 50% of their spouse’s Social Security benefit (who also reached FRA) while letting their own benefit grow. For example: Spouse A could receive $2000 per month at FRA; that spouse “files and suspends.” Spouse B (at FRA) could receive 50% ($1000 per month) while both spouses let their own benefits increase by 8% per year until age 70. Spouse B could then take the larger of the 50% or his/her own benefit.

The Rules Change

After April 30, 2016, an individual may still file and suspend at FRA; however, no one else may collect any benefits on the individual’s record while the suspension is in place (subject to the exception below). In addition, the option to request a lump sum payment for deferred benefits no longer exists.

Anyone who is age 62 or older at the end of 2015 retains the right to claim only spousal benefits when they reach age 66 and receive their (hopefully larger) retirement benefit at age 70. Anyone younger than 62 at the end of 2015 will no longer have the option of which benefit to claim; they will be paid the higher of their own benefit or as a spouse.

Divorcees who were 62 or older at the end of 2015 fall under the four year phase in rule also. They must have been married at least 10 years, divorced two years, and are currently single. They can file for spousal benefits at age 66 and change to their own higher benefit at age 70.

We at Paragon Financial Advisors work with our clients to help them achieve their financial goals. That includes evaluating Social Security options; we do request that each individual discuss his/her personal circumstances with the Social Security personnel to confirm their personal history. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.