Asset Protection??

Normally, retirement plans are generally considered safe from creditors. A recent ruling by the Bankruptcy Panel for the 8^th U.S. Circuit Court of Appeals has called that safety into question. An individual was awarded ½ of his ex-wife’s 401(k) plan and her entire individual retirement account in their divorce settlement. He later filed for Chapter 7 bankruptcy and claimed those assets were exempt from creditors because they were in retirement plans. The Bankruptcy Panel disagreed on the basis that the retirement plans were not originally his; thus, they were subject to creditor claims.

Defined contribution 401(k) plans are sheltered from creditors in bankruptcy filings for individuals who own the plan. IRAs are also usually exempt from bankruptcy as well (subject to a cap under federal law that is approximately $1.2 million). However, once the assets are separated from the original owner, you should expect that the asset protection will go away. In the Supreme Court ruling of Clark v. Rameker, the Court held that inherited IRAs are not considered retirement funds for bankruptcy protection.

Although the 8^th Circuit ruling applies only in that district, other courts may follow suit. For protection, IRA assets received in a divorce settlement should not be intermingled with the individual’s own IRA. Co-mingling funds could possibly jeopardize the creditor protection of the entire IRA.

Please note that this discussion does not constitute legal or tax advice; it is informational only. Your individual circumstances should be discussed with your legal and/or tax counsel.  Paragon Financial Advisors is a fee only registered investment advisory company located in College Station, TX.  We offer financial planning and investment management services to our clients.

Thanksgiving-Turkey or Dressing?

Thanksgiving week, 2018 was an interesting one for the stock market. The S&P dropped 3.8% for the week putting us officially into a market correction. We closed the week down 10.2% from our last market high. This Thanksgiving week was the worst week since 1939. Monday, November 26, 2018 did see the S&P rebound (up about 41 points or one and half percent), but it has been a wild ride.

Why the Market Drop?

Investors are concerned about rising interest rates and tariff/trade talks. Oil has been down seven weeks in a row, dropping more than 20% in November. The EU is in the midst of deciding how Brexit is going to work out and there are additional political challenges in Europe. Tech stocks are down significantly; apparently due to reduced guidance in future earnings. Doesn’t pose a pretty picture, does it?

Things to Consider

Obviously, no one can predict the future; however, there are a few things to consider about what’s going on.

• Thanksgiving week had light trading volume. That trend usually happens over the Thanksgiving holidays. Light volume also tends to magnify pricing trends (down in this case).  The decline we experienced may not be as significant as we see.
• Black Friday shopping was strong. Online purchases were up about 28% over 2017. Employment data may mean that consumers have discretionary money to spend for Christmas.
• The G20 summit is approaching and trade is sure to be a major topic. President Trump and Chinese President Xi are scheduled to discuss trade topics. The fruitfulness of these discussions is definitely uncertain; however, we’ll have to wait and see.
• Further economic data is coming out this week: consumer confidence, GDP, new home sales, jobless claims—let’s see what happens.

The Bottom Line

Remember why your investment goals were established. You established an asset allocation with your risk tolerance and the long term in mind. See if your personal circumstances have changed before making drastic portfolio changes.  

Paragon Financial Advisors is a fee only registered investment advisory company located in College Station, TX.  We offer financial planning and investment management services to our clients.

Rocky Road Ahead?

October 2018 marked the 10^th year of the longest bull market in history. In 2017, the stock market (S&P 500) moved placidly upward; in fact, the market set record highs over 100 times since the Presidential election in November 2016. This year, 2018, has given investors pause to think, however. In late January, the S&P 500 peaked around 2873, fell just over 10% in February, and recovered to January levels by mid-August. Another record level in late September (around 2930), then the market fell about 7% in mid-October. The roller coaster ride, especially following last year’s “tranquility,” has been a concern to investors. This might be a good time to step back and look at the bigger picture. 

Historical Market Corrections

History can give some guidance on the severity of previous market corrections, as well as how long their recovery took. Since 1926, there have been 16 instances of market downturns more than 10%.

The longest and largest downturn was the Great Depression (Sept 1929-June 1945) during which the stock market lost 83%. That downturn lasted 34 months and the recovery took 151 months. The rampant speculation associated with stocks in the years preceding the downturn resulted in the Securities Exchange Act of 1933 (which regulated the offer and sale of securities—previously governed by state laws, commonly referred to as “blue sky” laws). That law was followed by the Securities Exchange Act of 1934 which created the Securities Exchange Commission and governed the secondary trading of securities.

The second longest downturn was the early 2000 bear market in which the market lost 44.7% and lasted 25 months. The recovery period was 49 months.

The second largest market downturn was the Nov 2007-March 2009 liquidity crisis. The market lost 50.9%, lasted 16 months, and recovered in 37 months.

Let’s look at the record categorically (excluding the Great Depression which, hopefully, won’t happen to such an extreme again because of more stringent securities regulation). The total period is 1926 through October 2018—approximately 92 years.

• Greater than 50% downturn- One occurrence lasting 16 months and recovering in 37 months.
• Greater than 40% but less than 50% downturn- Two occurrences lasting an average of 23 months and recovering in an average of 35 months.
• Greater than 30% but less than 40%- There have been no such occurrences.
• Greater than 20% but less than 30% downturn- Four occurrences lasting an average of 8.5 months and recovering in an average of 18 months. (There have been no instances of a 30-40% downturn.)
• Greater than 10% but less than 20% downturn- Eight occurrences lasting an average of 8 months and recovering in an average of 5 months.

The Take-Away

Make no mistake—watching your investment portfolio lose money is not fun. It brings anxiety, especially for individuals near or in retirement and depending on their portfolio for a portion of living expenses. History is not guaranteed to repeat, but the data above does indicate that “this too shall pass,” and that a portfolio positioned to withstand downturns can prosper. An investor should have cash and short-term fixed income investments needed to cover 36-60 months of normal living expenses in a combination of personal savings and an asset allocation in the portfolio. Stocks remaining in the portfolio will then be given time to recover with no necessity to sell at a loss to cover distribution needs.

For individuals who are not near retirement—congratulations! Stocks just went on sale. You have an opportunity to buy desirable companies at a discount. You should maintain your 3 to 12 months cash “ready reserve,” and consider your risk tolerance and future time horizon, but a downturn may be an opportunity to really boost your future portfolio performance.

Let’s also consider the other alternative—selling stocks when the market is down. We’ll use the 2008 liquidity crisis (market downturn of 50.9%) in our calculations. Our hypothetical stock portfolio will be invested in an S&P 500 index fund with a $500,000 value at the beginning of the market downturn. At the bottom of the downturn, the portfolio retained 49.1% of its original value or $245,500. Definitely an uncomfortable feeling! Now assume the investor takes one of three actions listed below and fast forward to October 17, 2018.

• Sell the equities and go to CDs—Assuming a generous 2% CD rate, the portfolio would now be worth approximately $296,400.
• Sell the equities, wait one year until the market stabilizes, then reinvest in the S&P 500—The investor would have missed a year of gain in the S&P but realized a cumulative increase of 224%: a total portfolio value of approximately $549,900.
• Do nothing, hold the equities and wait—The S&P increased a cumulative of 378%; the portfolio value would be approximately $928,000.

But wait, you say. Suppose the market doesn’t recover as quickly. Let’s look at the periods of consecutive negative stock returns since 1926. There have been four such periods. The market was down four consecutive years during the Great Depression: 1929-1932. In 1933, the market rose 54%. The early 2000s saw three consecutive down years: 2000-2002, followed by a 29% gain in 2003. There were three down years in 1939-1941 followed by a 20% gain in 1942. The market was down two consecutive years in 1973-1974; the market gained 37% in 1975.

There are no guarantees in the stock market. What has happened historically may not happen in the future. However, the next time the market drops, have a cup of coffee and re-consider your long-term investing goals. Maybe the world isn’t ending after all. Paragon Financial Advisors is a fee only registered investment advisory company located in College Station, TX.  We offer financial planning and investment management services to our clients.

Old Age and Retirement

The World Economic Forum produced a white paper entitled “We’ll Live to 100-How Can We Afford It?” (Lead Author, Rachel Wheeler, Project Lead, May 2017) The basic premise of this white paper was the status of world-wide retirement plans and potential problems and reforms necessary to address those problems. The disclaimer in the white paper is that “…views in this White Paper … do not necessarily represent the views of the World Economic Forum or its Members…” In addition, these papers “… describe research in progress by the author(s) and are published to elicit comments and further debate.” The report is “… part of the Forum’s Retirement Investment Systems Reform project that has brought together pension experts to assess opportunities for reforms that can be adopted to improve the likelihood of our retirement systems adequately and sustainably supporting future generations.” The paper, in its entirety, can be accessed at  http://www3.weforum.org/docs/WEF_White_Paper_We_Will_Live_to_100.pdf  Our discussion in this posting is done without comment or endorsement of the contents of the white paper. However, in light of the positions taken by some candidates in the 2016 US Presidential election, it behooves us to look at some propositions being espoused in the academic community and conditions that exist in the international community.

Old Age

Life expectancy is increasing. For individuals born in 1947, the median life expectancy is 85 years; for those born in 2007, it is age 103. The increased life expectancy leads to a longer working career. If retirement age remains unchanged and current birth rates continue, the global dependency ratio (the ratio of the workforce to retirees) will decrease from 8:1 today to 4:1 by 2050. The position taken in the Forum’s white paper “…focuses on the sustainability and affordability of our current retirement systems.” Retirement “…system needs to be affordable for today’s workers and sustainable for future generations…"

Challenges to Retirement Systems

 

The primary causes of retirement systems problems, according to white paper authors, are increasing life expectancy and a declining birth rate. The authors identify five additional factors affecting global retirement systems:

1. Lack of access to pensions- Many workers (especially the self-employed) don’t have access to pension plans or savings products. Over 50% of global workers work in the informal or unorganized sectors of the economy. Forty-eight percent (48%) of retirement age people don’t receive a pension.
2. Low investment returns- Long term investment returns over the last 10 years have been significantly lower than historical averages. Equities have returned 3-5% below averages; bonds, 1-3% below. These lower returns have exacerbated pension plan shortfalls and reduced individual retirement savings balances.
3. Personal responsibility for pension plan management- Defined benefit plans have been decreasing in number while the number of defined contribution plans has been increasing. Defined contribution plans now account for over 50% of global retirement assets. The investment risk has thus been shifted from the employer to the employee.
4. Low levels of financial literacy- While investment risk has been shifted to the individual, the ability of those individuals to make sound investment decisions appears to be lacking. Most people are not able to correctly answer questions on basic financial concepts.
5. Inadequate savings- Individual savings in all countries are well below the 10-15% level necessary to fund a reasonable retirement income.

The Retirement Savings Gap

 

Historically, retirement income has come from three sources: 1) governmental sources (Social Security, etc.), 2) employer pension plans, and 3) individual savings. According to the authors of the white paper, the world-wide retirement savings gap in 2015 is estimated to be approximately $70 trillion with the largest shortfall being in the US. Of that gap, 75% is in the government and public pension obligation, 1% in unfunded corporate pension plans, and 24% in lack of personal savings. This gap is predicated on a 70% income replacement in retirement.

 

The Findings

 

The authors of the white paper espoused three key areas to address overall financial security:

• Provide a “safety net” pension for all persons
• Improve access to effective, efficient retirement plans
• Increase personal savings initiatives

The authors of the paper state:

 

“Poverty protection for the elderly should be the minimum requirement for any government pension system. It should be the responsibility of the government to provide a pension income for all citizens that acts at a “safety net” and prevents those who miss out on other forms of pension provision from dropping below the poverty line.”

 

“In countries where there are challenges to establish employer-based or individual pension schemes, introducing universal pension benefits may be the only way to significantly reduce poverty among the elderly.”

 

“Technology can make saving automatic by deducting contributions directly from employees’ pay before it reaches their personal accounts.” “Governments can make it compulsory for all employers to automatically enroll new employees into a retirement savings account and to contribute on their behalf.” (italics added)

 

Principles for Change

 

Authors of the white paper identified four principles that they felt should be addressed in retirement plan provisions.

 

Principle 1: The work force is changing. Occupations that are most sought after today didn’t exist 10 years ago. In addition, about 65% of today’s primary school children will work in jobs that don’t yet exist. The number of workers over age 65 is increasing; it has more than doubled since 1995. The number of employers for whom a person works over his/her career is increasing. That requires “re-tooling” work skills and portability of job benefits.

 

Principle 2: There is a gender imbalance. Retirement balances for women are 30-40% below those for men. Longer periods out of the workforce and lower salaries in general contribute to the lower retirement account balances. In addition, the longer life expectancy of women means those reduced assets need to cover a longer period of time. Unisex life expectancy tables and valuing work performed outside the workplace for retirement benefits could help alleviate this disparity.

 

Principle 3: Shared risks could reduce individual burdens. Collective defined contribution systems (as employed in some countries, such as Canada) could help with the burden on individuals for their retirement savings, account management, life expectancy, etc. Pooled money and risks could be based on “target” benefits. An example of such a plan, as presented by the authors, is shown below.

Defined Benefit Plan	Collective Defined Contribution Plan	Defined Contribution Plan
Pooled assets across all accounts	Pooled assets or notional accounts	Individual accounts
Predominantly employer contributions	Combination employer and individual contributions	Combination employer and individual contributions
Trustees determine investment policy and investments	Trustees determine investment policy and investments	Individual makes investment decisions
Trustees takes investment risk	Investment risk pooled	Individual takes investment risk
Trustees takes longevity risk	Longevity risk pooled	No longevity protection
Guaranteed pension	Target pension, not guaranteed	No target or guaranteed pension

Principle 4: All financial needs should be considered. People who save early for retirement will have much larger retirement savings than those who start later. However, retirement savings may not be a priority for younger employees. Therefore, the authors contend, the full financial picture (assets and debts) should be considered for financial need.

The Bottom Line

When one reads the World Economic Forum white paper and analyzes its recommendations, it is obvious that items presented are significantly different than what we have in the US today. However, as we examine our current public benefit systems (Social Security), it is also obvious that some changes must be made. Prudent financial planning means looking at alternatives and trying to plan for what “might happen.” Visit us at Paragon Financial Advisors to review your individual circumstances. Paragon Financial Advisors is a fee only registered investment advisory company located in College Station, TX.  We offer financial planning and investment management services to our clients.

 

           

Living on the Financial Edge

 Living on the Financial Edge

At Paragon Financial Advisors, we recommend our clients have a 3-6 month cash “ready reserve” to meet unexpected expenditures. For most Americans, accumulating that amount appears to be much easier said than done. In the May, 2016 The Atlantic magazine, Neal Gabler wrote an article entitled “The Secret Shame of Middle Class Americans.” Some of the items he mentioned (and the sources he quoted) are shown below.

Unexpected Expenses

A Federal Reserve Board survey designed “to monitor the financial and economic status of American consumers” found that 47% would not be able to cover a $400 unexpected expense unless they borrowed, sold something, or could not cover it at all. David Johnson (University of Michigan) surmised that Americans usually smooth consumption over their lifetime: borrowing in bad years and saving in good years. People are now spending any unexpected income (bonuses, tax refunds, etc.) instead of saving it.

A 2014 Bankrate survey found that only 38% of Americans had enough in savings to cover a $1000 emergency room visit or a $500 car repair. Nearly one-half of college graduates could not cover the expense through savings. In 2015, A Pew Charitable Trust study found that 55% of households didn’t have enough liquid savings to cover one month’s living expenses.

Another study by Annamaria Lusardi, Peter Tufano, and Daniel Schneider asked whether a household could raise $2000 within 30 days for an unexpected event. More than 25% could not; another 19% would have to pawn something or use a payday loan to raise the money. Nearly a quarter of households with an income of $100-$150,000 per year could not raise the $2000 in one month.

Liquidity or Net Worth

Is this situation only a liquidity problem or is net worth (the net sum of all assets including retirement accounts and home equity) also at risk? Edward Wolff, an economist at New York University, reported that net worth has declined significantly in the last generation. Net worth declined 85.3% from 1983 to 2013 for the bottom income quintile, decreased 63.5% for the second lowest quintile, and decreased 25.8% for the middle quintile. He looked at the number of months a household could fund its current consumption by liquidating assets if the household lost all current income. In 2013, the bottom two quintiles had no net worth; hence, they couldn’t spend anything. The middle quintile (with an average income of approximately $50,000 per year) could continue spending for 6 days. A family in the second highest quintile could maintain current spending for a little over 5 months.

Research funded by the Russell Sage Foundation found that the inflation adjusted net worth of the median point of the wealth distribution was $87,992 in 2003. In 2013, it had declined to $54,500—a decline of 38%.

Debt

Value Penguin did an analysis of Federal Reserve and Transmission data pertaining to credit card debt. In 2015, credit card debt per household was $5700. Thirty eight percent of households carried some debt; the average debt of those households was greater than $15,000. Apparently the rise of easy credit availability has supplanted the need for personal savings. The personal savings rate peaked around 13% in 1971, fell to 2.6% in 2005, and has risen only to 5.1% now. These debt levels reflect only personal debt; no serious attention is being paid to our $19 trillion government debt.

What’s Going On?

Financial products are becoming more sophisticated, both in quantity and complexity. Such additional products should provide a better way to manage personal financial “hiccups.” Lusardi and her associates (in a 2011 study) found that the more complex a country’s financial and credit market became, the worse the problem of financial insecurity becomes for its citizens. That study measured the knowledge of basic financial principles (compound interest, risk diversification, the effects of inflation, etc.) among Americans ages 25 to 65. Sixty five percent were basically financially illiterate.

Why are we at a financial advisory firm writing about this situation? The United States finds itself in the midst of a most unusual political situation. Some candidates for President of the United States are espousing theories or programs outside the normal capitalistic structure. Are conditions such as the ones described above partially to blame?

A crucial part of managing investment portfolios is attempting to monitor the economic, political, and social conditions that might affect the investing environment in the future. What will that environment look like and how will it affect the selection of assets going forward? We at Paragon Financial Advisors don’t have a crystal ball for the future, but we do try to help our clients invest for the long term. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas.  We offer financial planning and investment management services to our clients. 

The Retirement Plan-Success of Failure

When one reads about retirement planning, the writer usually focuses on planning for retirement. An equally important part of that plan needs to focus on what to do after retirement. A spending plan normally covers the adequacy of income over expenses during retirement and whether or not that income is sufficient over a long period of time. A well-developed spending plan is much more than that. Increasing life spans (and the corresponding lengthening of retirement years) has some interesting consequences.

A symposium at the recent Financial Advisors “Inside Retirement” conference (May 5-6, 2016 in Dallas, Texas) included a discussion on why people “fail” at retirement. Failure is not defined as “bankruptcy,” or inability to retire; , only a failure to live retirement as originally planned. Some of the items discussed for such failure include the following:

1. Health Care—Health care costs are increasing, even if one has health insurance. A retired couple could easily face medical costs in the hundreds of thousands of dollars over their life spans. A USA Today article (March 14, 2015, “How much will health care cost in retirement?”) quoted a study indicating that a man will spend $116,000 on health care in retirement; a woman will spend $131,000. Fidelity Investments has projected that a 65 year old couple retiring in 2015 will spend $245,000 on health care during their retirement.
2. Divorce—Surprisingly, an increase in divorces in the 50 plus age group has appeared. The reduction in assets from such a separation means a potentially lower standard of living for both parties. Multiple marriages (through divorce or death) may also bring the necessity of planning for a subsequent re-marriage. Pre-nuptial agreements, especially where a disparity of assets exists between the couple, can prevent many future problems and are a definite item to consider.
3. Overspending—Prior to retirement, a couple may spend more (especially on week-ends when they are not working) than they do in the normal course of living with a five day a week job. At retirement, every day is Saturday! Spending patterns may need to be adjusted significantly (i.e. reduced).
4. Children-Parenting never stops. Many children return home after college to save money until they “get established.” Helping a child with bills, a substance abuse problem, or even a special needs child can add significantly to retirement outflows.
5. Second Home-A second home purchased prior to retirement might be easily maintained financially while working. In retirement, property maintenance, insurance, property taxes, etc. may become more of a financial burden.
6. Business-Starting a business in retirement may sound appealing, especially if another family member (see “Children” above) is involved. Some basic rules apply: a) It will cost more than you think, and b) revenues will come in more slowly than you plan. Always have a good business plan and, if other parties are involved, have a written agreement spelling out what is to be done. Allocate a set dollar amount (the maximum which you can afford to lose in entirety) to prevent “throwing good money after bad.”
7. Identity-Many individual’s identity and self-worth are associated with their professional, work life. Retirement can change that significantly. Prepare for that transition. Retire to something, not from something.

Most individuals work long and hard during their active career; they look forward to a retirement period that matches their expectations. We at Paragon Financial Advisors assist our clients in developing plans for and during retirement. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas.  We offer financial planning and investment management services to our clients.

Medicare in 2016

All Social Security recipients are aware there was no cost of living increase in Social Security benefits for 2016. However, some recipients are facing a reduction in their Social Security check. The reason: the Medicare Income Related Monthly Adjustment Amount (IRMAA). The amount individuals pay for their Medicare coverage is a function of their modified adjusted gross income (MAGI) as reported on their tax return to the IRS. Higher income levels mean increased cost for Medicare for the same level of Medicare benefit. If the MAGI plus any tax exempt interest income exceeds $85,000 for an individual or $170,000 for a couple, the cost of Medicare Parts B and D increase. There is an increasing increment paid based on 5 levels of income.

Parts B (Doctors) and D (Drug)

For example, at the highest level, an individual making more than $214,000 ($428,000 for a couple) will pay $389.80 per month instead of the standard $121.80 for Part B benefits. That additional amount is paid by both spouses in the case of a couple receiving Social Security benefits. Those individuals in the highest income bracket would pay an additional $72.90 for their Part D drug benefits. The bottom line: each spouse in a couple receiving Social Security benefits (who are in the maximum tax bracket) will pay an additional $340.90 per month with no increase in benefit.

What to Do?

We will not get into the debate of higher income individuals should have to pay more, even though they have been taxed once on wages subject to the Social Security tax. Our point is that prudent financial management dictates managing one’s affairs to minimize tax payments. To that end, there are some basic things that could be done. By managing MAGI, one can possibly eliminate stepping into a higher Medicare bracket. Type of account (taxable or tax qualified) holding various investments, tax loss harvesting on securities held, and required minimum distributions made directly to a church/qualifying charity from an IRA are some examples of actions available.

We at Paragon Financial Advisors will help our clients evaluate possible courses of action the help reduce Medicare (as well as other tax) costs; however, these actions should be verified with your personal tax preparer or CPA to ensure they are appropriate for your circumstances. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

Social Security Changes

The Bipartisan Budget Act of 2015 passed by the 114^th 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.

Happy(??) New Year! - 2016

The Markets-2015

 

Well, 2015 is in the rear view mirror; and what a year it was from an investing perspective. Let’s look back at the financial markets over the year. The S&P 500 was down .73% for 2015; the Dow Jones Industrial Average was down 2.23%; the Barclay’s Aggregate Bond Index was down 1.84%; and interest rates on the 10 year US Treasury rose from 2.09% in January to 2.27% in December (with a corresponding decrease in bond values). This means that a blended portfolio of 50% stock in an S&P index fund and 50% bonds in an aggregate bond index fund would have returned negative 1.29% for the year.

 

But that’s not the whole story. When we look at the components of the S&P (the sectors that comprise the index), we find an entirely different story. There was significant difference in the sector performance—as follows:

 

Sector                                                   2015 Return                        Weight in Index

Consumer Discretionary                           +8.4%                                    12.8%

Healthcare                                                 +5.2%                                    15.2

Information Technology                           +4.3%                                    20.5

Consumer Staples                                     +3.8%                                    10.2

Telecommunications                                 -1.7%                                     2.5

Financials                                                  -3.5%                                     16.5

Industrials                                                  -4.7%                                     10.0

Utilities                                                     -8.4%                                      3.1

Materials                                                   -10.4%                                    2.7

Energy                                                       -23.6%                                   6.4

 

In addition, there was significant volatility in stock prices in 2015. The S&P 500 index crossed over its flat line beginning value 26 times (positive to negative and vice versa) during the year. Looking at the consumer discretionary sector (up 8.4% for the year), had volatility of monthly changes during the year ranging from +9.0% to -6.6%.

 

What does this tell us? First, while there is empirical evidence giving credence to passive index investing, such a strategy would not have worked well in 2015. Second, the variation in sector returns implies the opportunity for positive returns exists through active investment management. But what form does that active investment take?

 

Looking Ahead

 

One can read all the tea leaves from the past and discuss what has happened historically in similar circumstances e.g. market performance in election years, market performance post interest rate increases, etc. But, if one is pursuing an active management strategy, looking at the current state of affairs should assist in the active management tactics to take going forward. Some macro-economic items to be considered (by no means a comprehensive list) are listed below:

1. Interest Rates—The Federal Reserve has begun its policy of “normalization” with its first rate increase in December, 2015 (up 0.25%). The Fed’s policy statement from December, and Chairwoman Yellen’s press conference, has been focused on inflation as the primary driver of future rate increases. The Fed’s 2% target inflation has not been forthcoming and has driven speculation of another 1% rise in rates in 2016. However, economic indices offer different (and sometimes conflicting) information that may affect this rise in rates.
2. Oil Prices—As we begin 2016, oil is currently in the sub $40/bbl. range. This is a boom to some parts of the economy (the general consumer) but a bust to others (oil related industries). There is significant turmoil in the Middle East but the need for oil revenues should continue as many countries are so dependent on oil revenues that reduced production does not appear to be a factor.
3. Strong US Dollar—The US $ has been strengthen over the last two years, making US exports more expensive to foreign markets and multi-national overseas corporate earnings worth less if repatriated to the US. While this strengthening may slow down, it is doubtful that there will be a significant decline.
4. US Gross Domestic Product (GDP)—Current projections for economic growth in the US are in the 2-2.5% range; by no means robust but significantly better than the global outlook. The tax cut-spending package passed by Congress in December will add a stimulus to GDP but with a corresponding deficit that will likely increase in 2016 by 1% of GDP. The debt-to-GDP ratio (already at troubling levels) will begin to rise again. (Note: This excessive debt is a subject worthy of its own discussion and more than we can include here!)
5. Global growth is slowing; especially China which appears to be transitioning from manufacturing and construction into services.

 

So what does the astute investor do? Economic indicators are giving conflicting advice.

• Rising interest rates imply decreases in bond values.
• Unemployment rates are coming down (don’t ignore the calculation methodologies of this number), but the percent of the labor force employed remains at historic lows.
• The Institute for Supply Management (ISM) December, 2015 manufacturing data showed a contraction for the second month. Overall manufacturing is slowing, but new orders and production increased over November. The ISM manufacturing index for December was 48.2; anything above 50 indicates economic expansion and anything below 50 indicates contraction.
• Credit spreads (the difference between “high yield” or “junk” bond yields and high quality bond yields) are increasing; this implies a greater risk in the junk bond market.
• There is a widening gap between corporate earnings and sales results. In the third quarter of 2015, 60% of reporting companies exceeded their earnings per share (EPS) estimate; however, 59% of the reporting companies missed their sales estimates. How did this happen (expense reduction??)? In addition, there is a widening gap between the normal accounting EPS and the “adjusted” EPS being reported by some companies. Adjusted EPS eliminates some “extraordinary” or “non-recurring” expenses which results in a higher EPS. The gap between normal and adjusted EPS has been approximately 30% (normally about 10%) with adjusted being the higher.

What to Do?

Given the above, what’s an astute investor supposed to do?

First of all, consider your goals and objectives. Position your portfolio according to those goals and your risk tolerance. Attaining your goals with a risk level that makes you sleep well at night is more important than “chasing return.” For example, some investors have been increasingly pursuing risker assets in their search for maximum return. But if your goals are funded by a more moderate approach to returns, why take the extra risk. This shift basically involves an “asset-liability” matching strategy (matching your needs from the portfolio against your asset allocation) vs. a “maximum return” strategy.

Second, use these periods of market volatility (a normal part of market activity) to reposition diversified portfolios to your target levels.

Third, continue to maintain a diversified portfolio consistent with your goals and objectives. It is important to note here that diversification may be taking on a new meaning. The traditional “stocks, bonds, cash, commodities” portfolio allocation may require a different perspective; a perspective that provides more flexibility and a wider opportunity set of choices. There other markets available which may provide suitable investments (infrastructure, re-insurance, emerging markets, frontier markets, etc.). Alternative investments and hedge fund techniques (real estate, long-short investing, merger/acquisition, distressed security investing) may be beneficial in a portfolio. However, these investments/techniques have peculiar characteristics (possible lack of liquidity, extremely long time horizons, etc.) which require due diligence before investing.

We, at Paragon Financial Advisors, assist our clients in reaching their desired financial goals with an appropriate risk level. 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 more 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.