Financial Frontlines®

Want your voice heard on the President’s proposed plan?  Check out this web site and add your comments.  You can even help add up the proposed appropriations.

 http://readthestimulus.org/

Enjoy.

So you’ve heard it a hundred times.  Only invest in stocks if you have a long term horizon.  Here we are in this economic downturn and some of you nearing retirement are wondering, “What is long term?  I have 5, 10, 15 years to go.  Is that long term?”  I have to share a little information to lead up to the answer.

Start with the fact that our economy goes through up and down cycles as a normal course of events.  The cycle goes up when demand for goods and services goes up and the supply system kicks in to meet demand.  Demand decreases and the cycle heads down because the need for goods and services decreases.  We are currently suffering from exaggerated demand fed by easy credit and the lack of personal savings—the rally cry was spend, spend, spend!  The economy overheated; AKA “the bubble.”  This resulted in an overextended supply system as it worked to meet artificially high demand.   We are feeling the pain as the supply system readjust to a normal state.  Retail sells down, lower production, loss of jobs, higher savings, tighter credit…  How long can it last?

“How long can it last?” and “What is long term?” are related.  We are talking about economic ups and downs.  The Gross Domestic Product (GDP) is a measurement of the state of our economy; economic growth or not.  Consumer and business spending are significant parts of the GDP along with government spending and exports-imports.  Typically the GDP increases 2.5 to 3% a year.  So growth is the norm.  That’s a good thing and indicates your investments are up more than they are down most of the time.

Here’s a chart of our GDP from 1930 to 2007 (I’m using 2007 because I have a full year’s data through that year):

Lots of positive and little negative.  But when negative hits, and depending on the timing of when it hits in your life plans, it can be painful.  The average GDP downturn, or recession, lasted 10 months.  We are in the 14^th recession since 1930.

Let’s compare the GDP chart with what happened during the same time period in the stock market as measured by the Dow Jones Industrial Average.

Because the stock market is driven by company earnings, the rather consistent nature of positive GDP growth drives nice growth in the stock market.

Come on Shane, what’s the answer!  Well, of course it depends on several factors.  Nothing is cut and dry.  Are you still working?  How long have you been working?  How much have you saved?  What is your allocation in your investment portfolios (401k/IRAs) between stocks and bonds?  How many more years until retirement?  Are you still contributing to your portfolios?

If you are still working and contributing to your portfolios, you will regain your “losses” quicker by having a majority stock portfolio and through consistent purchases during the down period.  Your rebound time averages approximately one year for younger workers (< 10 years on the job) and approximately 2 years for more senior workers (> 10 years on the job).  Buying while the stock market is low decreases the share price of your holdings by increasing the number of shares bought and owned at cheap prices.  When the market rebounds, you don’t have to wait until the market returns to its pre-recession levels because you have lowered the bar, so to speak, with a lower average share price in your portfolio.  What?  If you buy a shirt for $30, your average shirt cost is $30.  If you buy two more shirts at $10 each, your average shirt costs is now $16.60.  If this was the stock market instead of shirts, to be back at even, the market would only have to climb back to $16.60 and not $30 to make you whole.

If you aren’t working and/or not contributing, your wait is longer.  This is assuming you remain invested in stocks.  Let’s look at this a couple of different ways.

First look. If you start the clock right now at your current account values, then, approximately 80% of the time you’ll be in positive territory after a 5-year period.  You’ll have a 95% chance of a positive return over a 10 year period.  And over 15 years you are virtually assured a positive return.

Second look.  You want to know when you will be back to whole based on your October 2007 account value.  No one knows the answer to this.  Historically, it has taken up to 20 years after the Great Depression but usually it is less.  If this is your objective, to be made whole the quickest way possible, you’ll need an outstanding stock picker–not probable.

For the future, all you workers must understand the economic cycles and how they affect your portfolio.  If you are 10 years or less from retirement, note if we are rising or falling in the cycle.

If we are rising, start pulling profits off the table on the way up to lock in your gains.  Don’t get greedy and ride the wave all the way up before you pull the profits.  You’ll get caught as the cycle goes over the top and you will lose value fast.

If the cycle is falling, buy like there is no tomorrow.  Decrease your average share costs and prepare for the rebound.

We’ve had two bubbles burst since 2000.  We should have learned our lessons by now and know how to react.  There are so many variables in this discussion that we can only hope that things go according to the norm.  Then we somewhat know what to expect.  Best wishes everyone.

Thanks to data and reports from the Dow Jones, Washington Post, Employee Benefit Research Institute, Department of Commerce, Bureau of Labor Statistics, U.S. Bureau of Economic Analysis, and American Funds.

I was recently asked to help an elderly couple find an estate planning attorney and to accompany them to the meeting to draw up the Will.  I did some checking around and found someone who could help them.  Their estate was relatively simple and they wanted to leave everything to each other and then when the second spouse passed away to distribute the estate to their children and grandchildren.  The attorney drew up the Will and the couple signed it.  Not that different from what many of us would do.

I asked the couple if I could look through their assets to make sure everything was o.k.  This is when I discovered they had a potential problem.  Even though they intended to leave everything to each other, their liquid assets (bank savings accounts and US Savings bonds) which were the majority of their non-real estate portion of their estate were held in joint tenancy with one spouse and one of their children.  For example, one savings account was a joint account with husband/father and son.  The couple did this so that the son could access the money if the husband was incapacitated.  However, this arrangement did not meet the couple’s goal to leave everything to each other.  Assets held in joint tenancy do not transfer in accordance with the Will, but become the property of the joint tenant.  This would mean that the surviving spouse (wife) would not inherit the funds but the joint tenant (in the example above the son) would.  This could put the surviving spouse (wife) in a difficult financial situation.  I immediately notified them of my concern and they started to rectify the problem.

Unfortunately, the husband died before all the assets could be re-titled.  The good news is that the children were informed of the intent of the couple and they are supporting that intent by a gifting program back to the surviving spouse, so in this case it turned out o.k.

There is a lesson here for all of us.  Check how your assets are titled and make sure that your Will and titling plan complement each other.  Remember, your Will only disposes of assets that you “control” such as those owned “fee simple” (like a car titled in your name only) or tenancy in common (similar to a partnership where you control your portion of the asset).  If joint accounts or joint tenancy with right of survivorship (JTWROS) assets are shared with someone other than who you want to inherit the asset it is time to take action to change the account ownership arrangement.

As an investment adviser, it concerned me when survivors were left unaware of their financial state of affairs or without the ability to manage their financial obligations.  The surviving spouse is suddenly at the mercy of someone else to manage the finances.  A spouse relying on someone else whether family or stranger makes for uncomfortable or risky partnerships.  Many spouses I worked with were sensitive about being perceived as a burden or felt foolish about being so uninformed about their own business.

To illustrate my point, I have known survivors who knew absolutely nothing about their family accounts.  Some couldn’t write a check or pay a bill.  One survivor thought that $200 in a checking account would last indefinitely as long as each check written was for less than $200.  These were intelligent people.  It was just that they didn’t get involved for whatever reason or weren’t allowed to get involved.

So now I ask, does your spouse know about your family financial programs and how to manage those programs?  You know…things like sources of income after you are gone, banking and investment accounts, paying bills, insurance policies, credit cards, wills, etc.

Please get your spouse involved in your financial situations enough to handle the basics and be a savvy consumer.  Train him/her if you have to.  You don’t want to cause a hardship after your death because you didn’t involve your spouse in your family finances.  At the very least, appoint a financial manager to run things after you are gone and introduce your spouse to the person.  Share the master financial game plan.