Alternative Investments

It has been a good run. Ten years after the 2008 “meltdown,” the bull market in securities is beginning to show its age. And, after a very placid 2017, volatility in the market is showing it’s alive and well. That volatility has been driven by interest rate expectations, trade/tariff discussions, and the mid-term elections. The elections are (mostly) behind us, but volatility may still be around for a while. Investors have made some money with this long bull market; now the goal is to protect those gains.

 Alternative investments can play a major role in hedging risk in the stock market; however, there are many different hedging strategies available. Many investors are not familiar with these strategies or how to access them. In general, there are two broad categories of alternatives: 1) those investments offering diversification from the stock market, and 2) those investments that reduce risk of loss of portfolio value while still maintaining some return potential.

Access to hedging strategies used to be a major problem; lack of liquidity (the ability to easily buy and sell) being a prime example. Many of these strategies are now available in a mutual fund format. Shares can be purchased or sold daily with valuations set at the end of the day. Some strategies are available as exchange traded funds (ETFs) which provide intra-day liquidity.

Correlation

Correlation is an analysis of the relationship of two data variables, or how the variables move in relation to each other. Normally this relationship is combined into a single number—the correlation coefficient. A correlation coefficient can have a value of +1 to -1. A value of 0 indicates that the variables have no relationship, i.e. they are independent. Positive values (>0) imply that when one variable goes up, the other variable goes up also. Negative values (<0) imply that wen one variable goes up, the other variable goes down. The magnitude of the number (the closer the coefficient is to a value of +/- 1) explains the degree to which moves in one variable are like moves in the other variable.

Diversification Alternatives

Since most investment portfolios contain stocks, alternative strategies which have a lower correlation to them can provide diversification benefits. Listed below are three strategies which have lower correlations to the S&P 500 over the last 10 years.

• Managed Futures- A fund manager utilizing this strategy usually invests in different asset classes (both long and short positions) depending on the manager’s analysis of which asset classes are going to increase or decrease. Successful ability to capture both rising and falling markets have a substantially different return profile from the stock market—a correlation coefficient of about -0.10.
• Market Neutral- A market neutral manager usually has a portfolio long (owned) on stocks the manager expects to rise and short (sold) on stocks the manager expects to under-perform the market. When the portfolio has similar long and short holdings, the return of the portfolio has returns less related to the stock market- a correlation coefficient of about +0.34
• Multi-currency- A multi-currency manager usually invests in different currencies depending on the manager’s perceived relative strength. Since returns are usually different between stocks and fixed income investments, this strategy has had a correlation coefficient of +0.48.

Risk Reduction Alternatives

Ideally, investors would like a diversification strategy that doesn’t significantly sacrifice returns. Such strategies would not only have less losses in down equity markets, but would also have more positive returns in up equity markets. Over longer time periods, these alternatives would outperform those alternatives that provide only downside risk mitigation. Examples include the following:

• Long/Short Equity- A long/short manager usually has a long (owns) position in stocks in which the manager expects to outperform the market and short (sells) stocks which are expected to under-perform the market. The manager may use the sale proceeds from the short positions to increase his/her holdings in the long positions.
• Non-traditional Bonds-Such a manager usually has the ability to invest in bonds of varying maturities, differing credit quality, differing economic sectors, or varying geographic areas as the manager perceives have value. A successful manager has the ability to move according to interest rate changes and other variables affecting the returns markets.

The Bottom Line

Make no mistake—investing involves risk! So does putting money under the mattress in times of inflation. However, if one can mitigate risk (even in a minor way), it surely is worth the effort. Please contact us at Paragon Financial Advisors to see if such alternative investments might benefit your investment portfolio.  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.

Goals Set-Goals Met!

The base of your financial planning should be your goals and objectives. Goals are basically a result or achievement toward which you are willing to expend time and effort. Goals vary with the individual’s wishes; hence, you set your own. Defining effective goals requires developing some particular characteristics for those goals. For example, “I want to retire comfortably” is not a well-defined goal. Additional information is required.

Goal Characteristics

A well-defined goal requires the following characteristics:

1. Specific- An effective goal is specific in nature. It clearly defines the desired result or achievement in an unambiguous manner.
2. Measurable- Goals must be measurable, i.e. you must have a way to determine the attainment of the goal and monitor the process toward goal attainment. Financial goals would be measured in dollars.
3. Achievable- Effective goals must be achievable. For example, a goal of playing quarterback for an NFL football team would not be achievable for me given my age, size, and athletic ability. Achievable does not necessarily mean easy. “Stretch” goals requiring significant effort are permissible as long as it is possible to achieve the final goal.
4. Relevant- Goals must be relevant; a relevant goal provides incentive for expending the effort required for goal attainment.
5. Priority- Most individuals will have multiple goals as they go through the goal setting process. Some goals will be more important to the individual than others. Therefore, goals should be ranked by priority. Which goals are most important and which goals have lesser importance? Identify and rank according to priority.
6. Time frames- An effective goal has associated time frames for completion and “mile posts” to monitor progress toward goal achievement.
7. Action Items- Action items outline the actions necessary to attain the goal. What needs to be done in order to successfully reach the goal?

Goal Definition

Let’s restate our retirement goal according to these parameters.

“My first priority is to retire in 30 years at an income level equal to 85% of my current income adjusted for inflation at 3% per year. In order to accomplish this goal, I need to save X dollars per year and my investment portfolio needs to grow at Y % per year.”

• This restatement clearly provides better definition with the characteristics discussed above.
• Specific/Measurable- “…retire… at an income level equal to 85% of my current income adjusted for inflation at 3% per year.”
• Achievable- certainly.
• Relevant/Priority- “…first…”
• Time frame- “… in 30 years…” with measurable mile posts—the value of the portfolio each year based on an assumed savings rate and portfolio appreciation rate can be identified and monitored.
• Action Items- “… save X dollars per year.”

We at Paragon Financial Advisors help our clients appropriately define, and attain, their financial goals. Please give us a call and we’ll help you.  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.

Social Security, If Not Now-When?

Social Security benefits are a component in the retirement planning of most Americans. However, those benefits pose questions for both younger and older employees. Younger employees are faced with the long term viability of the system (see our previous posting of “Social Security, Medicare, and You”. Older employees are faced with the question of how, and when, to start taking their benefit.
 
Social Security benefits are a function of age, length of working career, and earnings level. Therefore, we urge you to contact the Social Security Administration to determine your specific benefits. Our discussion here will be more general in nature and cover only the Old Age & Survivor Insurance (OASI) benefit.
 
Full Retirement Age (FRA)
 
Full retirement age is the age at which one is eligible to draw 100% of Social Security benefit earned. Retiring earlier than FRA reduces the amount received; retiring later increases the amount of benefit. Once benefits are begun, the amount is constant, subject only to cost of living adjustments (COLAs); that adjustment amount is tied to inflation. Full retirement age for benefits is shown in the following table:

 

Full Retirement Age

Year of Birth	Age Required for Full Benefits
1954 or Earlier	66 years
1955	66 years + 2 months
1956	66 years + 4 months
1957	66 years + 6 months
1958	66 years + 8 months
1959	66 years + 10 months
1960 and Later	67 years

The earliest age at which one can begin drawing benefits is 62. However, for those born in or before 1955, starting Social Security before FRA reduces the in full benefit by 6.25% per year. For those individuals born in 1960 or later, the reduction is 6.0% per year. Waiting until after FRA to begin drawing benefits increases the benefit by 8% per year until age 70. There are no further benefit increases after age 70.
 
Cost of living adjustments for Social Security are tied to inflation. In 2017, benefits increased by 0.3%. There have been years in which benefits did not increase; however, the average cost of living adjustment for 1985-2017 has been 2.6%.
 
Age 62 or Later?
 
When should one begin drawing Social Security benefits? Should one draw a lesser amount for a longer period of time (longer life expectancy) or a greater amount for a shorter period of time (shorter life expectancy)? That’s a complex question with many variables. What is one’s current financial situation (i.e. does one need the money)? What’s the long term prognosis for life expectancy (current health, heredity, etc.)? How can a couple plan benefits to maximize lifetime income received? There is a “breakeven” point which can be calculated. Consider the following example:
 
John Smith is entitled to $1500 monthly benefit at his FRA of age  66. If he chooses to begin benefits at age 62, his FRA amount will be reduced by 25% (i.e. 6.25% for 4 years) resulting in a benefit payment of $1125 per month. If he waits until FRA and begins  drawing $1500 per month, he will forgo the $1125 per month that he could have been receiving or $54,000 ($1125 x 48 months =   $54,000). If he begins benefits at age 66, that forgone amount will be recovered at $375 per month ($1500 benefit at 66 vs. $1125 at 62) which will require 144 months ($54,000 ÷ $375 = 144 or 12 years). Therefore, John’s breakeven age is 78. If he dies before   age 78, he made the correct decision to take benefits at age 62; if he lives past age 78, delaying until FRA would have been more  advantageous.
 
Obviously, life expectancy is a key component here. In previous postings we have referenced mortality tables. For the above example, the probability of a male at age 62 living to at least age 76 is 73%. There is a 60% probability he will live to age 80, and a 21% probability of living to age 90.
 
To compound the problem, beginning Social Security benefits prior to FRA and continuing to earn income has consequences. There is an annual earnings amount allowed ($16,920 in 2017); for each $2 earned above that amount, Social Security benefits are reduced by $1. That restriction no longer applies if one draws benefits at FRA. There are special rules that may apply here, so individual circumstances must be considered.
 
The Bottom Line
 
Social Security benefits are a key component in retirement planning. How and when those benefits are begun can have a significant impact on long term financial well-being. We at Paragon Financial Advisors can assist our clients in planning for their future. Please call us to discuss your specific 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.

 

 

Social Security, Medicare, and You

Each year the Trustees of the Social Security and Medicare trust funds provide a report on the financial status of these programs—current and projected. The information below is from a summary of the 2016 Annual Reports www.ssa.gov, Office of the Chief Actuary, 2016 Trustees Report-Jacob J. Lew, Sec. of the Treasury and Managing Trustee, and Thomas E. Perez, Sec. of Labor, and Trustee).
 
In general, both programs (as currently scheduled) are facing funding shortfalls. Social Security and Medicare accounted for about 41% of Federal program spending in 2015. Both programs will have cost growth in excess of Gross Domestic Product (GDP) growth through the mid-2030s. This shortfall is due to: 1) growth in the aging population (baby boomers beginning retirement—about 10,000 per day) eligible for benefits, and 2) fewer employees entering the labor market (because of lower birth rates) to fund the programs. Medicare expenditures per beneficiary are also projected to increase above the growth in per capita GDP over the same time period.
 
Social Security
 
Social Security has two separate trust funds to provide benefits for two programs: 1) Old Age and Survivors Insurance (OASI), and 2) Disability Insurance (DI). Although the trust funds are technically separate, the Trustees typically combine the funds to provide the actuarial financial status for the total plan. Funding for plan benefits comes from combined payroll taxes from both employees and employers. Current benefit payments to plan recipients are paid from these payroll taxes and any excess payment is scheduled to be added to a “trust fund” to provide for future benefit payments. In the 2016 report, the Trustees project that combined fund asset reserves will exceed projected benefit costs through 2028; benefit payments will then begin to dip into trust fund reserves. Trustees currently project that those trust funds will be depleted in 2034. When the funds are depleted, projected tax income is sufficient to pay about three-quarters of projected benefits through 2090.
 
Medicare
 
The Medicare program also has two trust funds: 1) Hospital Insurance Trust Fund (Part A), and 2) Supplementary Medical Insurance Trust Fund (Parts B and D). Part A of Medicare helps pay for the cost of hospitalization, home health care following hospital stays, skilled nursing care, and hospice care for the elderly and disabled. Part B of Medicare helps pay for the costs of physicians, outpatient hospitalization, and home health services. Part D subsidizes the cost of drug coverage.
 
The Trustees project that the Part A trust fund will be depleted in 2028 (two years sooner than projections in the 2015 report). Part A expenditures have been exceeding income received since 2008; at fund depletion in 2028, revenues are projected to pay 87% of Part A costs. Parts B and D are adequately funded because current law allows funding from both general revenues and beneficiary premiums. However, because of an aging population and increasing health care costs, the cost of Parts B and D are expected to grow from 2.1% of GDP in 2015 to about 3.5% of GDP in 2037.  Trustee projections in the 2016 report are that total Medicare expenditures will grow from about 3.6% of GDP in 2015 to 5.6% of GDP in 2040. The costs are projected to increase to about 6.0% of GDP in 2090.
 
The Bottom Line
 
Social Security and Medicare benefits are a key component in long range planning for most individuals. The 2016 Trustee Report indicates that changes in these plans will be forthcoming. Please contact us at Paragon Financial Advisors to see how your future plans may be affected.  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.

Equifax Data Breach – How Should I Respond?

You’ve probably heard by now that Equifax, one of the four major credit reporting agencies, experienced a security breach resulting in the exposure of the personal information of 143 million Americans between May and July of this year.

 

While Paragon does not have a relationship with Equifax, we feel that it is important to reach out and let you know how you can protect yourself.

 

What Happened?

 

Equifax reported that hackers accessed people’s names, Social Security numbers, birth dates, addresses, and in some cases, driver’s license numbers. They also stole the credit card numbers of around 209,000 people. Thus, your personal information may have been compromised.

 

What can I do to protect my information?

 

Rather than going to the Equifax website to assess whether your personal information may have been compromised as suggested by some, we recommend you presume it has been compromised and take the following proactive steps:

 

1. Change the passwords to all your online accounts, particularly the accounts at your financial institutions.
2. Check your credit reports from Equifax, Experian, Transunion by visiting annualcreditreport.com. Federal law allows you to get a free copy of your credit report every 12 months from each credit reporting company.
3. Consider putting a freeze on your credit with each credit reporting agency, particularly if you identify suspicious activity on your credit report. Freezing your credit is the only way to prevent those with your personal information from opening new accounts in your name. A credit freeze limits who can see your credit report information.

How do I initiate a credit freeze?

Contact each of the credit reporting agencies separately to request a credit freeze.

Equifax 1-800-685-1111 | www.freeze.equifax.com
Experian | 1-888-397-3742 | www.experian.com/freeze/center.html
TransUnion | 1-888-909-8872 | www.transunion.com/securityfreeze
Innovis | 1-800-540-2505 | www.innovis.com/personal/securityFreeze

Please note that each agency charges a fee to initiate a credit freeze (approximately $10 per agency).

 

Can I still get a credit card or a loan after initiating a credit freeze?

 

Yes, but you will need to notify the credit agencies to lift the freeze before you ask the lender to approve you for credit.

If you have any additional concerns or questions, please feel free to contact us directly.  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.

Hurricane Harvey

Hurricane Harvey has come—but hasn’t gone. This storm is one the Gulf Coast will remember for a long time. A sudden strengthening category 4 hurricane trapped between high pressure areas dumping a year’s worth of rain in several days is not something one plans for. However, it happened and we’re left with the cleanup.

Priority One--Are You and Your Family OK?

Our primary concern is for our family and loved ones. Loss of “things” is not easy, but loss of life is irreplaceable. We encourage our clients to let us know if they have suffered loss and how we might help. The recovery process is arduous; let us help you if we can.

Next

Insurance agents are going to be overwhelmed with claims in the coming days. There are some things you can do to make their (and your) life a little easier:

• Make only the repairs necessary to prevent further damage. The adjuster will need to see the full extent of the damage. TAKE PICTURES.
• Save all receipts—replacement housing, food costs, transportation, expenses for daily living. You may be eligible to receive an advance from your insurance company.
• Make a list of all damages as soon as possible. Document to the best of your ability.
• File your claim as quickly as possible. Document all interactions with insurance companies, FEMA, or anyone else with whom you discuss the damage.

Homeowner’s insurance coverage usually does not cover damage from rising water; though your first contact should be with your insurance company. For rising water, the National Flood Insurance Program provides basic coverage for building property and contents. For claims not covered by insurance, check for disaster assistance as President Trump has declared much of the Gulf Coast as a disaster area. To research and apply for aid, go to https://www.disasterassistance.gov/

For small business owners, the U.S. Small Business Administration has low interest disaster loans for small businesses in declared disaster areas. (https://www.sba.gov/loans-grants/see-what-sba-offers/sba-loan-programs/disaster-loans)

A home equity line of credit may provide assistance if established before the damage was done. Check with your friendly banker.

Taxes

People living in a disaster area may be allowed to delay tax filings and payments without penalty. Be sure and keep records of all costs relating to the disaster as these may be claimed as a casualty loss on tax returns.

No question that there are trying days ahead for many Gulf Coast residents. Let us at Paragon Financial Advisors know if we can help.  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.

Are We There Yet?

It is no secret that returns in the capital markets (stocks and bonds) have been volatile (and below historical averages) for the past few years. Some market “experts” are predicting that those lower returns will be the “new normal” for some years to come. If that prediction is correct, individuals must save more to maintain their desired standard of living in retirement.

We are presenting below a “savings checkpoint” table for determining whether your current savings amount is “on schedule” to fund retirement at your current standard of living. The table is a function of current age and income level. This table is based on J.P. Morgan Asset Management’s proprietary model with their capital market assumptions and an 80% confidence level.¹  Several additional assumptions are involved:

• The assumed annual gross savings rate going forward is 10% (about twice the current US average savings rate).
• Pre-retirement investments earn 6.0% per year.
• Post-retirement investments earn 5.0% per year.
• Inflation is 2.25% per year.
• Retirement age is 65 for the primary wage earner; age 62 for the spouse.
• Retirement will last 30 years.

You can use the factors in the table below to determine if your accumulated savings is sufficient:

Age	$50,000	$75,000	$100,000	$150,000	$200,000	$250,000	$300,000
30	-	0.5	0.8	1.3	1.8	2.1	2.2
35	0.3	1.2	1.5	2.1	2.6	3.0	3.2
40	0.8	1.9	2.3	3.1	3.7	4.1	4.3
45	1.5	2.8	3.3	4.2	4.9	5.4	5.7
50	2.4	3.9	4.5	5.6	6.4	7.0	7.3
55	3.4	5.2	5.9	7.2	8.2	9.0	9.3
60	4.5	6.8	7.5	9.1	10.4	11.2	11.7

The income levels across the top are gross income (before taxes and savings). Go to the intersection of age and income level to determine the appropriate factor. For example, a 40 year old person earning $100,000 per year has a factor of 2.3. Multiply your current salary times that factor to determine the amount you should have saved today or $230,000 in this case (2.3 x $100,000). Savings are assumed to continue at 10% per year until retirement.

Are we there yet? Please visit us at Paragon Financial Advisors to determine whether your savings level is sufficient to provide the retirement lifestyle you desire. We can help you plan for your future financial goals. 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.

 

¹The J.P. Morgan model uses household income replacement rates from an inflation-adjusted analysis of Consumer Expenditure Survey (BLS) data (2011-2014). Social Security benefits are assumed using modified scaled earnings in 2017 for a single wage earner at age 65 and a spousal benefit at age 62 reduced by Medicare Part B premiums.