Feelings

Mar 17 2015

 The biggest obstacle to investing success is our own Human Nature.

 Have you ever walked in an unfamiliar area when suddenly your pulse quickens, adrenalin courses through your body and you become hyper-vigilant?   You didn’t notice anything but your subconscious sensed danger and hit the panic button.  It is foolish to ignore these feelings.

But in the stock market, your gut feelings will lead you astray.

The first rule of investing is “buy low, sell high.”  Yet most investors are enthusiastic buyers at market tops and dispirited sellers at the bottom.  The S&P 500 has tripled since 2009 yet stock funds are experiencing massive cash inflows (the opposite of six years ago), margin debt is near all-time highs and sentiment indicators are lopsidedly bullish.  Bears are now an endangered species.

This enthusiasm is unjustified by (inflated) stock values, (declining) earnings estimates, the (less-than-robust) economy, or (deteriorating) geopolitics.  Alan Greenspan famously used the term “irrational exuberance” to explain this.

Why would stock investors pay such high prices?  They probably expect to sell to future speculators at even higher prices.  So far they have been right.

Ask a buyer to explain behavior that seems at odds with prudent investing and you will hear “I have a feeling…I’m hoping…my gut tells me….”  This suggests the desire for a share of seemingly assured stock profits came first.  The reasons will come later…if ever.

Someday, somewhere near the next bear market bottom, today’s buyers will morph into exhausted sellers, shattered by losses and driven by the powerful instinct to avoid more pain.  Selling will generate permanent losses but they won’t care.  Some will justify one more illogical act by promising to come back when “there is less uncertainty.” But by the time it “feels” safe again, prices will be much higher. A year after the 2009 bottom, the market was up 50%.

This is classic human behavior and don’t think you won’t be influenced by instincts hard-wired into our DNA by millennia of human evolution.   We need a “reality check” to keep us from going off the rails.

Your advisor could be that reality check.  So could a written investment plan that keeps you below your risk tolerance – provided you have the self-discipline to actually follow it.  Without a reality check you are more likely to be a casualty of the next market cycle.

Your instinct will be wrong…but it will feel so right.

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The Survivor Benefit Program ‘Special Needs Trust’

Feb 20 2015

hands (2)After numerous years as a MOAA legislative priority, the legislation allowing the Survivor Benefit Program (SBP) to pay a special needs trust passed at the end of last December. Many families have been waiting for this SBP change for years. What does it mean?

Within the SBP situation, a special needs trust is a legal document that establishes an account to oversee the financial situation for a mentally or physically incapacitated child—specifically a child by this law. By designating a special needs trust as the beneficiary of a SBP annuity, SBP income is paid to the trust and managed for the benefit of the incapacitated child’s life. A designated trustee manages the trust assets.

A key benefit of the special needs trust is that SBP income placed in the trust will not disqualify a child from other state or federal aid that may have been risked had the SBP income been paid directly to the child. The SBP income will be exempt from state financial means tests for determining other aid eligibility.

To qualify, the special needs trust must provide that upon the death of the beneficiary remaining assets in the trust revert back to the state. The state will use the remaining trust assets to offset their prior costs up to an amount equal to the total assistance paid on behalf of the beneficiary.

It will take a while for the DOD to figure out how to implement this new legal provision and put all the management systems in place. Right now there are no details for how to establish the trust for your beneficiary.

Here’s what we don’t know yet.

We do not know if current SBP participants will be given an option to change their SBP beneficiaries to the trust.

For all the retirees with incapacitated children who did not enroll in SBP at retirement, we do not know if the DOD will consider an open season enrollment to allow people to take advantage of this new beneficiary category.

We do not know if survivors currently receiving SBP income will be allowed to divert their income to the new trust beneficiary.

We don’t know how members coming up on retirement and making the SBP decision will be managed.

We will be working closely with the Service pay agencies to make suggestions and monitor the progress of the policy development. Until then, we are all in limbo. Please consult legal counsel for general information on special needs trusts.

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The Importance of the Proper Portfolio Allocation

Feb 11 2015

We frequently get asked by members and audiences to help determine where a person should focus their investments. “What’s a hot stock tip?” “In what sector of the market should I be invested?”

We aren’t analysts, brokers or planners (we were but not now) at MOAA and we don’t provide stock tips or investment recommendations. We are educators and counselors on financial issues. We can help you be a savvier consumer and better investor. Our information is based on our experience, research and discussions with thousands of military and veteran members.

That said here’s a little educational food for thought—not a forecast but investor insight.

We have been in a flat stock market since the dot-com bubble burst in March 2000. Sure, the stock market has been volatile since March 2000 but it has moved sideways.

Dow Jones Industrial Index 1996 to Today:

dowchart

Flat markets are normal occurrences after sustained periods of economic growth. Historically flat markets average 16 years according to analysts from my past life as an investment adviser in a brokerage firm. The last flat market was 1966-1982. Remember what happened after that flat market.

Point being that based on the chart above, since 2012, it appears we may have busted out of the recent flat market. We don’t know of course; it’s only a mental exercise for now because no one ever knows for sure until after something has occurred.

If we have entered the next period of sustained economic growth, it is a unique situation as the economic signals are mixed. The dollar is strong, energy cheap, unemployment down, however interest rates are low, inflation is low, world markets are in flux and business fundamentals are varied. The real experts are all over the map with their opinions for the future.

We leave you with this. When folks ask about their investments, we try to direct people away from predictions, stock picking and market timing. These are losing strategies over long terms. A safer strategy is to determine an appropriate portfolio allocation and stick with it. An appropriate allocation is built expecting fickle market and economic conditions. Then regardless of what happens in the future, you have planned for it and can ride it out—good or bad.

Case in point, a 50-50% stock-bond portfolio—this is educational not a recommendation.

First off, 1999 through 2008 was the worse 10-year stock market average return in history at -1.4% (per Ibottson Associates and Kiplinger magazine measuring the S&P500 Index). The previous two worse 10-year average returns were 1929-1938 at -0.89% and 1930-1939 at -0.05%. (Please note: These were the three worse 10-year periods in our history and this was all we had to plan for?; -0.89, -.05 and -1.4%)

From 2000 to 2014, the 50-50 portfolio had a 6.58% average annual return. The best return was in 2003 at 26.2%. There were only three down years, 2001 at -0.6%, 2002 at -6.3% and 2008 at -17.9%. If you started in 2000 with $100, in 2014 you ended up with $260.

Same portfolio but this time you withdraw 4% a year for retirement income. Your average annual return after the 4% withdrawals was 2.3%. Better than most interest bearing accounts. You started with $100 in 2000 and ended up with $141 in 2014.

Learn more about investment strategies to include allocations, averaging down and re-balancing to help you build your wealth the painless way. You can do this.

Practicing What I Preach Part 1, Part 2, Part 3

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Using Bonds to Create a Paycheck for Retirement Planning

Jan 27 2015

Article does not represent an endorsement by MOAA.

By Hildy Richelson and Stan Richelson

Author Bio: Hildy Richelson and Stan Richelson specialize in fixed-income investing through Scarsdale Investment Group Ltd., a registered investment advisor. Hildy and Stan authored the award winning and best-selling book BONDS: The Unbeaten Path to Secure Investment Growth, Bloomberg Press, 2nd edition, 2011.

retirementplanning_WEB

The goal of retirement planning is to replace your earned income with a reliable and consistent stream of predictable income, (i.e., cash flow). This is called the paycheck system of investing, and its goal is to provide you with financial independence. You can rely on a paycheck from bonds to provide you with a secure form of income. High-quality bonds have low risk and low fees and are tax efficient.

The major sources of cash flow to replace or supplement your earned income include:

  • Rental income: requires managing one or more properties;
  • Dividend income: requires predicting the direction of stock values and may result in significant losses;
  • Annuity income: you make the insurance company your heir, and you give up control of your investment; and
  • Bond income: you receive semiannual interest payments and a return of your investment on a specified date.

High-quality bonds can be a good source of cash flow in retirement because, by investing in bonds, you can predict your monthly and annual income, plus bonds require no maintenance. Though the value of bonds will fluctuate just like any other investment, only bonds will return their face value on a specified date. (Face value describes the amount of money or principal you will receive when the bonds come due.)

What is a bond?

Bonds are debt securities. For example, the U.S. government raises cash by issuing Treasury bonds, Treasury Inflation Protected Securities (TIPS), and EE and I- Savings Bonds. Municipalities, federal agencies, and corporations also issue bonds. These bonds are purchased by individuals, U.S. and foreign institutions, and corporations. Tax-exempt municipal bonds are favored by individuals because they might not be subject to federal, state, and local taxes. However, you can purchase all of the other kinds of bonds in your retirement accounts.

Why not purchase a bond fund?

All bonds are not created equal. It’s recommended you buy high-quality bonds to avoid a potential loss. Why not just buy a bond fund? The bond fund may hold low-quality bonds, foreign securities, and derivatives that might result in large losses. Most bond fund or ETF buyers do not look under the hood. In addition, bond funds actually are quasi-equities and, unlike individual bonds, the funds never come due. The funds might also charge high annual fees, as well as burden you with the costs of trading. If interest rates rise, the value of a bond or a bond fund will decline. However, though the value of individual bonds will fluctuate, they will pay their face value when they come due. Read more about this in “Buy Bonds and Not Bond Funds.”

The bond ladder.

A powerful strategy for using bonds in retirement planning involves the creation of a custom bond ladder. Investing in a bond ladder means buying individual bonds that have different maturity dates. For example, you might have bonds coming due each year starting in year five and then coming due in each subsequent year through year 15. In addition, if you need a bigger paycheck for a specific purpose, such as your child’s college education in 10 to 14 years, you can purchase an unequal amount of bonds coming due in those years. The issuer is required to redeem the bonds in the maturity year, thus facilitating your planning.

If you plan on retiring in 15 years, you can establish a bond ladder that integrates your personal account and your IRA and Roth accounts that will mature starting in year 15. You can choose to reinvest the proceeds of your bonds as they come due to create more income or start living off the principal. Reinvested interest payments give you investment growth through the compounding of interest. Knowing you have cash flow from your bond ladder to supplement other sources of income, as well as the predictability of lump-sum payments, can relieve a lot of stress.

Tax benefits of municipal bonds.

The interest income paid by many municipal bonds is not subject to federal income tax. In addition, if you have made you legal residence (or domicile) in a state that has no personal income tax, such Texas, Florida, or the District of Columbia, you would not pay any state or local income tax on your tax-exempt municipal bond income, even if you find yourself stationed in a high tax state.

Benefits of bonds.

An investment in high-quality bonds will help you sleep at night. You can predict when the principal will be returned to you. You will get interest payments every six months for the life of your investment. You can plan for your future concretely instead of hoping that your investments will have risen in value just at the moment you need to withdraw funds. You can create a tax-free diversified bond portfolio no matter where you are deployed. You will be able to count on a paycheck that you have created.

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Smart Home Purchasing–Part I – Advanced Planning and Building Your Team

Jan 12 2015

housekeysBy Joe Gladden, Veteran Realty Serving America’s Military, Inc. and Susan Wallace, Senior Loan Officer Access National Bank

This the first article in a series regarding “Smart Home Purchasing.” Purchasing a home is a major financial decision and deserves a smart strategy, reliable team, thoughtful planning, the best available intelligence, and good tactics. These precepts should sound very familiar to military officers.

Before we start, we want to offer some insight on the financial environment. For the preceding six years, mortgage interest rates have been at unprecedented lows. Through the Fed’s “quantitative easing bond buying program,” interest rates have been kept artificially low in an attempt to stimulate the economy, in large part through the housing sector. No one has predicted that rates would have stayed so low for so long.

The bond buying program was recently terminated based on economic recovery. And, in a speech in Paris on November 7, 2014, with the expressed intent to mitigate financial markets volatility in advance, Fed Chairwoman Yellen announced the intent to raise the prime interest rate “sometime in 2015.”

Based on this we believe that home mortgage rates will finally increase in 2015 and that this is important “intelligence” for those considering a home purchase or refinance.

Planning and Preparation for a Smart Home Purchase
Build Your Team

When assembling your team to purchase a home, the single most important decision you will make is choosing the right lender early in the process. This may come as a surprise from a Realtor® so we will explain our thoughts on this. While the loan qualification and processing have always been tedious and time consuming, since the “housing market collapse,” it has been become more so by a factor of 10. The Dodd/Frank Act, intended to prevent bad lending practices, seriously complicated the process even for folks with high incomes, low debt, and credit scores north of the 800 mark. It placed the onus directly on the lending institutions, specifically the underwriters, and this equates to mountains of verification.

Why is the loan officer/lender so critical? When loans are not approved in time for the contractual settlement date, or if they are declined late in the process, the purchaser may be found in default which can potentially result in forfeiture of the escrow or suit for specific performance of the contract.

From our experience, the best (least painful) loan experiences occur when a highly knowledgeable, experienced loan officer is engaged throughout the process to settlement. The loan officer may use a processor, but must stay personally involved and accountable through every single step. It should be the same loan officer, not just the one who answers the 800 number, and they must be highly accessible for timely communications. Unfortunately, in some of the better known lending institutions, the loan officer (experience level and knowledge unknown) takes the loan information by phone. The file is handed off to a processor and accountability tends to dissipate. When interviewing lenders, compare interest rates, terms, and fees, but insist on service and accountability by the loan officer throughout the process. If this can’t be assured, then move on to the next company.

Realtors® love to trumpet their sales volume as proof of experience and success. Okay, it’s an interesting data point but it doesn’t follow that the highest volume agent is going to provide you the best possible service. An argument can certainly be made that the highest volume agents may be too busy to provide highly personalized service. In many cases, high sales volume is due to “teaming” rather than actual personal sales and you may sign up with an agent to find that you are handed off to one of their team members at different times for different phases of the process.

Referrals from happy clients and references are the best qualifier of agents.

Like the loan officer, personalized service with excellent communications is the key to a good experience.

Highly professional Realtors don’t “sell you a house.” Rather, they facilitate a very complex (and growing more so) process that helps you find the home you want and then navigates you through the contract process and settlement. They are process oriented, highly organized, and always prepared. In the military we quickly learn never to brief the boss without a ton of preparation. You should expect your Realtor to be prepared for every meeting and home tour. They need to be thinking several steps ahead in the contract process and negotiations. They need to know the market and be prepared to defend their contract offer/counteroffer recommendations on pricing and terms. Accessibility and strong communication skills are a must.

Today, the technology factor is critical, and they should be on top of the ever changing technology curve. Listings links that meet your criteria, complete with digital photography and video tours, can now be automatically sent to your email; contracts and all forms can be completed, scan/emailed, and even signed electronically. Facetime and skype can be very powerful tools in interviewing loan officers and Realtors® a continent away. A purchaser living in Germany can complete their house hunting trip in the DC region, return to Germany, and complete the process easily almost anywhere on the planet.

A sidebar regarding technology. Many purchasers start their searched on their own through powerful online sites such as realtor.com, Zillow, or Trulia. These can be extremely valuable tools, but it is important to understand their limitations which will be addressed in our next post.

A final comment on building your team. Start the process as soon as you think you may be moving to a specific area. Six months out is not too early to interview and screen lenders and Realtors®. And starting the loan qualification process, reviewing listings, early will enhance an informed decision and reduce stress.

We hope this is helpful and that you will tune in for the next article on Finding the Right House to Call Home.

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