Lone Ranger -

10 Wall Street equity strategists forecasted where the S&P 500 would finish 2011.  9 of the 10 prognosticators predicted the S&P 500 would end the year at 1325 or higher (note that the index ended 2010 at 1258).  Douglas Cliggott of Credit Suisse was the lone dissenter from the majority belief, forecasting a 1250 year-end value for the S&P 500.  The stock index finished 2011 at 1258.  (The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the US stock market.) (source: 12/20/10 issue of Barron’s).  

Big Surprise -

13 Wall Street bond market forecasters predicted on 12/20/10 where the yield of the 10-year Treasury note would be on 12/31/11.  12 of the 13 strategists believed the yield, which was 3.29% as of 12/31/10, would be at least 3.50% as of 12/31/11.  The actual 12/31/11 yield was 1.88% (source: Barron’s). 

Humble Pie -

Bill Gross, portfolio manager of the world’s largest bond fund, said on 2/15/11 that “inflation will go up and bond prices go down.”  As of 2/28/11, Gross had sold all of his fund’s holdings in US Treasury debt in anticipation of rising interest rates.  The yield on the 10-year Treasury note was 3.42% on 2/28/11.  The yield on the 10-year Treasury note was 1.88% on 12/31/11.  The yield on the 30-year Treasury note was 4.42% at the start of last year and 2.89% at the end of 2011.  (source:  Financial Times). 

Never is a Long Time -

Treasury Secretary Tim Geithner was asked on 2/07/10 whether the USA could ever lose its top credit rating.  Geithner responded “that will never happen to this country.”  S&P downgraded the United States from AAA to AA+ on August 5th , 2011.  The USA had been AAA-rated for 70 years (source:  ABC News).    

So what impact does this have on our investments you might ask?   Since we invest in US Treasury bonds and certain segments of the S&P 500 from time to time, we thought you might be interested in how the “expert’s” forecasts turned out.   Funds around the world continue to buy US debt (source: Wall Street Journal) and overall the stocks ended up about where they began.   We have made ETFs the core of your portfolio so we can have the flexibility to adapt to what is happening in the economy and the world markets based on what you need, not what the experts are predicting.    We also continue to execute our Advance and Protect strategy for you so that we focus on protection and our disciplined sell strategy rather than just buy and hold and hope for the best.   I heard from an investment advisor that “the market will do the opposite of what the majority of people think it will do at any one time,” and that’s what we have to be prepared for today.

YES, IT’S AN ELECTION YEAR….

As you may know by now, we are in a Presidential election cycle and voters are going to be asking themselves “Am I better off economically than I was four years ago?”  While there are many factors and issues that go into voter preferences, this is the major determinant in how Americans will vote in 2012.   During the last cycle, it looked like the economy was slipping but there was no incumbent running for reelection.  Towards October and November of 2008 it dived into a full power slide which in turn may have impacted the election significantly.  This time, employment and growth figures seem to be picking up momentum so we will see where that leads us.

We wish you and your families all a very Happy New Year and look forward to seeing and talking to you as we review your 2012 budgets and plan ahead for the year.

We are currently in a very uncertain economic environment.  Not many people would disagree with that statement.    While picking which way the market is going from day to day is next to impossible, we like to give you a long-term general sense of the market.   The recovery after the recession of 2007-2009 has been so slow in terms of economic and job growth,  and this is why it’s hard for investors to ascertain where markets are going so they can choose whether to participate in economic growth and or prepare for another recession (according to Warren Buffett, it is “very unlikely” the US economy will go back into a recession.)   That is why you keep seeing such volatility in stocks, bonds, gold, and currencies whenever there is another pronouncement from Europe or Washington.   

This past quarter the federal debt limit was a big part of the news.   There is a lot of misinformation about the debt out there so I wanted to give you a few facts about what is happening.  One of the issues that have to be addressed is not only the sheer size in dollar figures but also the debt as a percentage of our economy.   Authors Carmen Reinhart and Kenneth Rogoff have written a paper (“This Time is Different: Eight Centuries of Financial Folly”) on sovereign debt and its impact on a country’s ability to grow.  The authors conclude that a country’s growth slows substantially once the country’s level of public debt exceeds 90% of the size of its economy (source: Peterson Institute for International Economics, Harvard University).   The USA’s public debt is projected to be 71.2% of the size of our economy in 2012 (source: Congressional Budget Office) which led ulitmately to a downgrade of the Federal Government’s debt by Standard and Poors.   

So what impact does this have on our investments you might ask?   Since we invest in US Treasury bonds from time to time we thought we share a few numbers with you.  The yield on the 10-year Treasury note was 2.57% on 8/05/11, the day that S&P announced a downgrade of the USA from AAA to AA+.  Now 8 weeks later, the yield on the 10-year Treasury note closed last Friday (9/30/11) at 1.92% as funds around the world continue to buy US debt (source: Treasury Department).    Another result of the downgrade was a significant drop in the stock market over the past quarter and in fact the S&P 500* lost 7.0% (total return) in September 2011 [alone], its 5th consecutive down month.  The S&P 500 has experienced 5 consecutive down months only 3 times since 1990 including the negative stretch that ended last Friday (9/30/11).    This all took place in light of corporate profits being significantly higher than when the recession started in 2008.   In fact, the earnings projected to be generated by the companies in the S&P 500 stock index in calendar year 2012 are more than 6 times as large as the actual earnings of the 500 companies during calendar year 2008 (source: S&P).               

*The S&P 500 is an unmanaged index of 500 widely held stocks generally considered representative of the US stock market (source: BTN Research).   

What has a government that is set up to spend more than it saves (politicians don’t get elected on $ they save; they get elected on the $ they bring home to their districts/states) done about the federal debt you ask?    On 2/14/11 President Obama proposed $1.1 trillion of deficit reductions over the next 10 years.  On 4/13/11 he proposed $4.0 trillion of deficit reductions over the next 12 years.  On 9/19/11 he proposed $4.4 trillion of deficit reductions over the next 10 years (source: White House).  So forget about ten years, how is this year going to look?   Fiscal year 2012 (10/01/11 to 9/30/12) began a week ago Saturday.  The most recent projection (released on 8/24/11) for the fiscal year by the government anticipates $2.6 trillion of revenue, $3.6 trillion of spending, and a deficit of $973 billion (source: Congressional Budget Office).

All of this news requires us to be more vigilant than ever so that we can preserve, protect, and ultimately grow your money.  We look forward to meeting with you to discuss your strategy and make any year-end adjustments that will make your strategy more effective.

Given that we are half way through the year, it seems appropriate that we would give you a half time report on the world and how we are adapting your financial strategy to reflect what is happening.  (For you NFL and NBA fans, it might be the only half time report you get all year if they don’t solve their labor disputes!)   The first half of the year had mainly been dominated politically by government change in the Middle East and economically by government debt, the debt ceiling, and the annual deficit not only here in the US but overseas as well.  We are in a period of slow economic and job growth but companies seem to be doing a good job at maximizing their profits.  Congress is finally addressing in a meaningful way the question of how much debt is too much and what is being done to not just reduce it but simply to slow down its growth!   Now you might be asking “what does this have to do with my financial strategy?”  In most financial strategies, we are either growing our income sources for future distribution or distributing from our current income sources.   Current and future interest rates have a lot to do with that and the government sets the interest rates.  Because your income is reliant on interest rates, the higher interest rates are the less you have to save to provide your future income.  Given that the government debt is about to top $15 trillion, they are very motivated to keep interest rates down because even at 2% the government has to pay out $300 billion in interest alone every year.

INFLATION…

We have been in a very low interest rate environment for some time and with the federal debt situation it looks like we will continue to do so.  This tells us that we will have to save more and acquire more incoming-producing assets than in years past.  Inflation is also a key factor because the government’s chief tool to keep down inflation is to raise interest rates and it is not able to do so effectively until it starts reducing its debt.   We’ll give some statistics on the state of current inflation in the Planner’s Perspective of this newsletter.

So we have to be aware of inflation in everything we do because it erodes the value of the money we save every year.  In fact, since 1950, the value of the dollar has declined over 90%.*   Taxes are also a key ingredient in this mix because ultimately it’s what you keep rather than what you earn or have saved that is most important.  So the three key factors in long-term investing and your financial strategy are inflation, interest rates and taxes and we have to keep all these in mind with every investment that we make.

*Source: Bureau of Labor Statistics. Web: http://stats.bls.gov/.

SUMMERTIME…FALL…

Understanding the dynamics of how your financial plan navigates these economic forces is crucial to reaching your financial goals.  Your financial strategy is a fluid and dynamic plan that updates and adjusts but doesn’t change its core principles (accumulating or distributing, protection, low volatility or high volatility, etc.).  Every meeting we have together builds upon the foundation we have established to make sure your financial goals are achieved.  We look forward to meeting with you in the fall to discuss your strategy and make any year-end adjustments that will make your strategy more effective given any income and asset changes you have made throughout the year.  Have a wonderful summer and we’ll see you this fall.

On April 3rd, I completed my first triathlon, the Lavaman Triathlon in Hawaii and learned a few lessons that I want to share with you.    The first one is that a strong start and especially a strong finish are the key to not only races but many endeavors (particularly financial) in life.   At the start of the triathlon, I was determined to get into a good early rhythm and make sure that things were working as smoothly as possible.   This was all made possible by our coach who prepared us for every possible scenario based on his 30 years of coaching and participation in over 280 triathlons himself during the past 50 years.   We spent five months preparing for the race where I made sure I could complete all three distances but the three days prior to the race on location were by far the most valuable.  I tested swimming in the bay that would be our race course (with and without a wetsuit); biking and running on the actual course as well as what nutrition I would take prior to the race itself.  I was thus fully prepared and had gotten all my mistakes out of the way before the gun (actually a conch shell) sounded for the main event.  This helped me to have a mistake-free race and I even had an unexpected but pleasant surprise when my son Jordan ran with me the last quarter mile to the finish. 

Now how does this apply to my finances you might ask?   Being prepared and getting sound coaching is essential to having a successful financial strategy.  You can take simple steps like making retirement plan contributions automatic and on time, keeping a working budget and establishing a healthy surplus every month.   While I had a head coach and a nutritionist, I also had a separate run, swim and bike coach for each event in the triathlon.  I asked them a lot of questions and always consulted them when I was not getting the results I wanted in training.  You have us, your financial advisor, as your head coach; you also have coaches in estate planning, taxes, and risk management.   You need to see all of them when appropriate, test their advice on your own financial situation and take their advice in a timely fashion to make your strategy the most effective it can be.  Finishing strong is critical in planning because that is when mistakes can have the biggest impact.  If you tested your strategy early in your financial life and are confident in the race you are running you are likely to finish strong.  Having someone to help run you in to the finish and encourage you (like your financial advisor) certainly helps make it more worry-free and pleasant as well. 

SPRINGING INTO SUMMER…

We look forward to meeting with you in the next few months to discuss your strategy so we can help you make all the critical adjustments necessary for you to be successful.  We would like to review all your finances two to three times per year depending on your schedule and will be calling to get your help in gathering the information we need so the meeting can be as efficient and effective for you as possible.   Thank you in advance for your cooperation and have an enjoyable spring and summer.  We look forward to seeing you soon.

2011 is here and the elections are over.  We last talked about how the elections were a referendum on how the new administration is guiding our economy and judging by the huge Republican shift in Congress, the voters expressed that they want the government to go in a different direction.    Congress will be trying to enact those changes that will take the government in a different direction but will have to work with the administration to do so.  As a result, there has already been a significant tax deal which we will detail below. 

THE NEW TAX DEAL…

On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.   The Bush tax cuts are thus extended for all income levels through year-end 2012.   As a result, the dividend and capital gains tax rates remain at 15% through 2012.   The AMT is “patched” through 2011, mitigating its consequences for middle-income taxpayers in the same manner as in prior years.  The employee’s share of Social Security tax is reduced by two percentage points in 2011.  As a result, working taxpayers will pay Social Security tax in 2011 at a 4.2% rate (rather than the prevailing 6.2% rate). A worker with compensation in excess of the Social Security wage base maximum of $106,000 will save $2,120 in Social Security tax in 2011.    Most expired or expiring tax provisions are extended through 2011.   Of particular note, investors may move up to $100,000 from an IRA to a charity in each of 2010 and 2011 to satisfy their RMD requirement without incurring tax.  To provide investors with additional time to arrange this transfer, the legislation treats transfers from IRAs to charities made during January 2011 as if they were made in 2010.   Perhaps most surprising was that the compromise included estate and gift tax provisions more generous than any past estate tax change. These new rules remain in effect through year-end 2012:  a $5 million estate tax exemption and a 35% estate tax rate and reinstatement of stepped-up basis at death.  One thing is clear: eventually, taxes must go up. Whether higher taxes occur through further stratification of upper-income tax rates or through tax reform that eliminates many of the deductions we’ve come to expect, mathematically the budget deficit simply demands greater revenues. We have a two-year reprieve, but we are likely to be paying back our tax refunds with interest. *(source The Washington Update Jan 2011)    Now you might be thinking, “How do you stay up on all these changes and make the best recommendations for me?”  The same answer applies to executing the strategy as it does to designing it.   We know how to identify the issues that need addressing and then we rely on tax and legal experts to help us analyze your situation and make recommendations that best fit your financial situation.

EXECUTING THE STRATEGY…

In our last letter we discussed how to design a strong financial game plan.  As you may have seen or heard while watching the college bowl season or the NFL playoffs, executing the game plan is even more important than designing it.   Every coach knows that without proper execution and adjustments, the best plan is useless.   That is why open communication between you and your advisor to discuss implementation of action items and ongoing changes is so important.  We are the offensive and defensive coordinator that helps design how to grow and how to protect.   You are the head coach who helps set the strategy and then we make sure it gets executed properly.  Luckily we have unlimited timeouts to discuss strategy but the clock is ticking and we want to have a sense of urgency.    As always, we are continuing to work on your investment and financial game plan on a regular basis and look forward to our “huddle” with you to discuss it.  

Have a Happy New Year from all of us.

When October comes around in even numbered years that means one thing… November elections are around the corner.  Exercising our duty as citizens to elect our representatives brings out the best in us and is one of the key freedoms we enjoy as Americans.   While this isn’t a presidential election with the increase in media coverage that goes with it, there is a lot on the line for how our country and economy are going to fare for the next few years.   It is a referendum on how the new administration is guiding our economy as well as the effectiveness Congress has had in allocating our hard-earned taxpayer dollars.   It is our job as your financial advisors to make sure we keep up on the law changes in the tax codes and financial system.   We can thus make recommendations that will save you money based on these changes so that you can put more of your money towards the goals that are most important to you.

HEALTHCARE, FINANCIAL REFORM, AND TAX LAW…

These are the major new federal law changes that have taken place during the past few months and that will continue to phase in over the next couple of years.   We have gone into depth about healthcare in previous letters and the financial reforms that mainly affect large financial companies, so we will focus more on the tax law changes that will occur come January 1st.  The most notable change will come from the phase out of tax cuts from 2000, which are scheduled to expire in 2011.  This includes both income tax and estate tax (which this year is waived but will go up significantly in 2011).    So your question to us might be: “how do you stay up on all these changes and make the best recommendations for me?”  The answer is that we know how to identify the issues that need addressing and then we rely on tax, legal and healthcare experts to help us analyze your situation and make recommendations that best fit your financial situation.   We are the coordinator or financial quarterback to organize and direct what needs to be done.  You are the coach who helps set the strategy and then we make sure it gets done as efficiently and effectively as possible. 

REVIEWS AND GAMEPLANS…

As anyone who has watched a team sport knows, a game lasts only a few hours but the pre-planning that goes into it takes hours and days to construct.  After each game, there is a review to discuss what worked and what didn’t work so the gameplan for the next game can be adjusted accordingly.   That is why we feel financial reviews are so important.  You would never see a quarterback developing and reviewing a gameplan without significant input from the coach, and we don’t want to change your financial strategy without significant input from you on a regular basis.  It is very challenging to write and implement a tax-efficient, growth-oriented, risk-managed, long-term gameplan (aka financial plan).  It is especially difficult to make sure that it is implemented and followed consistently.  Thus having a qualified Certified Financial Planner™ is invaluable in helping you to implement a great gameplan that takes into account all contingencies.  It is especially important to update your plan at year-end since any last minute changes that need to be made can still affect what you save, pay, or get refunded in taxes in 2011.   Once January 1st comes around, however, we have to wait until 2012 to see the results.

Please set aside some time for a review with us before the year-end so we can help you have the best gameplan possible and that we can make sure you are doing what is best for you, no matter what is going on in our government, economy or our country.

Immediately through 2010

Beginning on June 23rd, 2010, small businesses will be eligible to receive a tax credit of up to 35% of the premiums on the health care plans they offer to their employees.  This tax credit will be increased up to 50% of employee’s health care costs by 2014.  The full credit will be available to firms with 10 or fewer employees with average annual wages of $25,000, or firms with 25 or fewer employees and average wages of $50,000.  Also, beginning in June, companies with early retirees will see a new system of reinsurance established to offset the expensive cost of coverage for benefits of those between the ages of 55 and 64.

2011 through 2013

At the beginning of 2011, small businesses will be able to create a simplified Cafeteria Plan aimed at providing tax-free benefits to employees.  This plan would ease the administrative burden that many small business struggle through when sponsoring a plan for their employees.  Also, all employers will be required to enroll their employees in a new national public long-term care program, unless the employee opts out.  And finally, businesses paying providers of property and services of $600 or more during the year will now be required to file information reports with the IRS.

2014

Waiting periods for employees to be eligible for health coverage will be 60 days, and 90 day wait periods will be prohibited.  All plans must be offered on a guarantee issue basis, preexisting condition limitations are prohibited as are annual and lifetime limits.  Fees for large companies (over 50 employees) will begin to be assessed if they do not provide insurance to their employees.  The fee will be $2,000 per full-time employees excluding the first 30 employees.  Also, so-called “Cadillac Plans” will be subject to an excise tax of 40% on insurers and plan administrators for any health plan that exceeds $10,200 per year for individuals and $27,500 for family plans.

was the dominant news item in the market this quarter, ultimately resulting in Congress passing the largest Healthcare legislation in the past few decades.  It will affect almost every American in one way or another, either requiring healthcare coverage for the millions who currently don’t have coverage (similar to auto insurance), changing premium costs to consumers and businesses, new prescription benefits to seniors and new regulations on insurance companies.  We will be providing a complete analysis on what this means for you in our upcoming newsletter.

In the markets, we ended on a high note this quarter after a bit of a bumpy ride.  In this newsletter, however, I want to highlight another success story and continue to show how we help you make positive changes to your financial situation in all aspects of financial planning and money management.  Last month we talked about cash flow and budgeting in our first example and advanced retirement planning in the second.  In this month’s success story, we’re focusing on estate and legacy planning as you’ll read below.

SUCCESS STORY:  BUILDING A FIRM FOUNDATION

A financially independent client asked us to help figure out how to sustain a legacy to their children and grandchildren.  They had been funding a garden dedicated to their mother for years but wanted to pass down this responsibility to future generations.  We discussed a number of solutions but decided that the best solution for them was a private foundation that could provide an endowment into perpetuity.  Ultimately this commitment allowed the garden volunteers and staff to go out to the surrounding community, leverage their endowment, and create an entirely new garden and experience for everyone who would subsequently enjoy it.   This is exactly what we try to help our clients achieve.   We want them to help serve as catalysts to achieve something that has more impact than they could ever provide on their own. In fact, the foundation this client set up has funded over a dozen charities and projects in other states across the country.

On another note, one of the most enduring benefits of the foundation to the family is the yearly family foundation meetings.  They truly bring the family together by helping others. We also helped the family realize some very valuable tax benefits by helping them donate assets that would have otherwise incurred large tax liabilities, which significantly offset taxes on their retirement income.  By allowing their children to research and create ideas to help allocate foundation money to causes where they could make an impact, the foundation has grown in scope to encompass something far more than the founders could have ever imagined.  It goes to show that a small, well thought out investment, can pay huge dividends for years to come.

We will continue to provide you with examples of success stories to show not only how you can improve your financial situation but also help your family positively impact others.  We look forward to meeting with you to discuss these issues in our annual or semi-annual meetings with you and/or in our monthly coaching calls.  Have a wonderful spring and summer ahead.

Financial (In)Dependence…?

A financially independent client came to us to ask if we could help a friend (we encourage clients to enlist us to help not only their friends but especially their adult children) who had a number of serious but solvable financial problems.  She had no job, poor credit, huge monthly minimum payments on her credit cards, and only a couple hundred dollars in the bank (I know, that sounds like most of this country).  Not knowing what she was spending was also a leading factor in the problems she was incurring.  She had sold her house to join forces and move to a bigger house with one of her children but they had told her she couldn’t be on the title because of her credit.  They were taking advantage of her weakened financial situation and were making life very difficult for her.  Her objective was to buy a condo and be able to live on her own. Within twelve months, we had uncovered a six-figure hidden asset and converted it to cash, used it for a down payment on a new home, and and made it possible for her to find a well-paying salaried job, start contributing to her 401k, and ultimately have a much better relationship with her children and grandchildren.

Turbo Charge Your Retirement Fund

Finally, we helped another successful client build a large retirement fund in only four years that will be able to provide significant retirement income in the years ahead.  Most people think of retirement accounts like IRAs and 401ks that have strict limits on tax deductible contributions as well as income limitations to even contribute to them.  If you are self-employed, over 50, and have an income that significantly exceeds your expenses, even if it is only for a relatively short time we can help set up a retirement plan that can save you tens of thousands of dollars in taxes and ultimately be rolled over into an IRA to provide a sizable retirement income for your future.  All told we probably saved this client over $200,000 in taxes over four years which went straight into their retirement account.

For the rest of us it’s time to gather our tax information and hope we took enough deductions and withholdings to get a refund (or at worst write a very small check) from the IRS.   We become very aware of how effective our tax planning was at this time and frequently make a resolution to do better at it next year.  It’s our job here at Permanent Value to take the guess work out of tax time and help make effective tax planning a part of your financial routine.  We want you to be confident you did everything possible to minimize your tax bill.   We engage top tax experts to scrutinize your financial situation and give you the best tax advice when it makes sense for you, well before the end of the year.  This is what full-service comprehensive financial planning is all about.

You should also be confident your investment expert is being tax efficient with your portfolio, taking losses where appropriate to offset gains and income taxes and making sure retirement accounts are fully funded and deducted.  It’s amazing how many mistakes we see with new clients who have forgotten significant tax issues that could have saved them thousands of dollars.  Something as simple replacing one investment for something similar but better could save thousands of dollars.  That is why we feel it is so crucial to have planning meetings well in advance of the end of the year to identify potential tax savings and implement changes that could decrease the taxes you are paying year after year.  By having an open dialogue between your financial planner and your tax preparer, you keep your team on track and working for you to save you money and ultimately reach your goals.

SHOULD AN ANNUAL REVIEW BE ANNUAL?

Not necessarily.  This is the time of year we normally assess what happened last year and set out plans for the year ahead.  In order to make sure your financial house is always in order we strongly advocate a two meeting and oftentimes three meeting cycle for the year to fully implement all aspects of your comprehensive financial plan.   It takes a financial quarterback with the right qualifications (i.e. a Certified Financial Planner) and experience to navigate through the rough waters of the economy and your finances and sail into calm waters and stay there.  Expect a call from our office this quarter to set up your next review, so we can go over your comprehensive financial plan and start preparing for your 2010 taxes.