Articles tagged with: economy

Why DIY Investment Management Is Such a Risk

Paying attention to the wrong things becomes all too easy.

If you ever have the inkling to manage your investments on your own, that inkling is worth reconsidering. Do-it-yourself investment management can be a bad idea for the retail investor for myriad reasons.

Getting caught up in the moment. When you are watching your investments day to day, you can lose a sense of historical perspective – 2011 begins to seem like ancient history, let alone 2008. This is especially true in longstanding bull markets, in which investors are sometimes lulled into assuming that the big indexes will move in only one direction.

Historically speaking, things have been so abnormal for so long that many investors – especially younger investors – cannot personally recall a time when things were different. If you are under 30, it is very possible you have invested without ever seeing the Federal Reserve raise interest rates. The last rate hike happened before there was an iPhone, before there was an Uber or an Airbnb.

In addition to our country’s recent, exceptional monetary policy, we just saw a bull market go nearly four years without a correction. In fact, the recent correction disrupted what was shaping up as the most placid year in the history of the Dow Jones Industrial Average.1

Listening too closely to talking heads. The noise of Wall Street is never-ending, and can breed a kind of shortsightedness that may lead you to focus on the micro rather than the macro. As an example, the hot issue affecting a particular sector today may pale in comparison to the developments affecting it across the next ten years or the past ten years.

Looking only to make money in the market. Wall Street represents only avenue for potentially building your retirement savings or wealth. When you are caught up in the excitement of a rally, that truth may be obscured. You can build savings by spending less. You can receive “free money” from an employer willing to match your retirement plan contributions to some degree. You can grow a hobby into a business, or switch jobs or careers.

Saving too little. For a DIY investor, the art of investing equals making money in the markets, not necessarily saving the money you have made. Subscribing to that mentality may dissuade you from saving as much as you should for retirement and other goals.

Paying too little attention to taxes. A 10% return is less sweet if federal and state taxes claim 3% of it. This routinely occurs, however, because just as many DIY investors tend to play the market in one direction, they also have a tendency to skimp on playing defense. Tax management is an important factor in wealth retention.

Failing to pay attention to your emergency fund. On average, an unemployed person stays jobless in the U.S. for more than six months. According to research compiled by the Federal Reserve Bank of St. Louis, the mean duration for U.S. unemployment was 28.4 weeks at the end of August. Consider also that the current U-6 “total” unemployment rate shows more than 10% of the country working less than a 40-hour week or not at all. So you may need more than six months of cash reserves. Most people do not have anywhere near that, and some DIY investors give scant attention to their cash position.2,3

Overreacting to a bad year. Sometimes the bears appear. Sometimes stocks do not rise 10% annually. Fortunately, you have more than one year in which to plan for retirement (and other goals). Your long-run retirement saving and investing approach – aided by compounding – matters more than what the market does during a particular 12 months. Dramatically altering your investment strategy in reaction to present conditions can backfire.

Equating the economy with the market. They are not one and the same. In fact, there have been periods (think back to 2006-2007) when stocks hit historical peaks even when key indicators flashed recession signals. Moreover, some investments and market sectors can do well or show promise when the economy goes through a rough stretch.

Focusing more on money than on the overall quality of life. Managing investments – or the entirety of a very complex financial life – on your own takes time. More time than many people want to devote, more time than many people initially assume. That kind of time investment can subtract from your quality of life – another reason to turn to other resources for help and insight.

Mike Moffitt may be reached at phe# 641-782-5577 or email: mikem@cfgiowa.com

Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

  

Citations.

1 – cnbc.com/2015/09/10/this-market-is-setting-a-wild-volatility-record.html [9/10/15]

2 – research.stlouisfed.org/fred2/series/UEMPMEAN [9/4/15]

3 – research.stlouisfed.org/fred2/series/U6RATE/ [9/4/15]

The Strong Dollar: Good or Bad?

What is dollar strength and who invests in it?

You may have heard that the dollar is “strong” right now. You may have also heard that a strong dollar amounts to a headwind against commodities and stocks.

While there is some truth to that, there is more to the story. A strong dollar does not necessarily rein in the bulls, and dollar strength can work for the economy and the markets.

The U.S. Dollar Index has soared lately. Across July 2014-February 2015, the USDX (which measures the value of the greenback against key foreign currencies) rose an eyebrow-raising 19.44%.1

On March 9, the European Central Bank initiated its quantitative easing program. The dollar hit a 12-year high against the euro a day later, with the USDX jumping north more than 3% in five trading days ending March 10. Remarkable, yes, but the USDX has the potential to climb even higher.2,3

Before this dollar bull market, we had a weak dollar for some time. A dollar bear market occurred from 2001-11, partly resulting from the monetary policy that the Federal Reserve adopted in the Alan Greenspan and Ben Bernanke years. As U.S. interest rates descended to historic lows in the late 2000s, the dollar became more attractive as a funding currency and demand for dollar-denominated debt increased.4

In Q1 2015, private sector dollar-denominated debt hit $9 trillion globally. Asian corporations have relied notably on foreign currency borrowing, though their domestic currency borrowing is also significant; Morgan Stanley recently researched 625 of these firms and found that dollar-denominated debt amounted to 28% of their total debt.4,5

So why has the dollar strengthened? The quick, easy explanation is twofold. One, the Fed is poised to tighten while other central banks have eased, promoting expectations of a mightier U.S. currency. Two, our economy is healthy versus those of many other nations. The greenback gained on every other major currency in 2014 – a development unseen since the 1980s.4

This explanation for dollar strength aside, attention must also be paid to two other critical factors emerging which could stoke the dollar bull market to even greater degree.

At some point, liabilities will increase for the issuers of all that dollar-denominated debt. That will ramp up demand for dollars, because they will want to hedge.

Will the dollar supply meet the demand? The account deficit has been slimming for the U.S., and the slimmer it gets, the fewer new dollars become available. It could take a few years to unwind $9 trillion of dollar-denominated debt, and when you factor in a probable rate hike from our central bank, things get really interesting. The dollar bull may be just getting started.

If the dollar keeps rallying, what happens to stocks & commodities? Earnings could be hurt, meaning bad news for Wall Street. A strong dollar can curb profits for multinational corporations and lower demand for U.S. exports, as it makes them more expensive. U.S. firms with the bulk of their business centered in America tend to cope better with a strong dollar than firms that are major exporters. Fixed-income investments invested in dollar-denominated assets (as is usually the case) may fare better in such an environment than those invested in other currencies. As dollar strength reduces the lure of gold, oil and other commodities mainly traded in dollars, they face a real headwind. So do the economies of countries that are big commodities producers, such as Brazil and South Africa.6

The economic upside is that U.S. households gain more purchasing power when the dollar strengthens, with prices of imported goods falling. Improved consumer spending could also give the Fed grounds to extend its accommodative monetary policy.6

How are people investing in the dollar? U.S. investors have dollar exposure now as an effect of being invested in the U.S. equities market. Those who want more exposure to the rally can turn to investment vehicles specifically oriented toward dollar investing. European investors are responding to the stronger greenback (and the strong probability of the Fed raising interest rates in the near future) by snapping up Treasuries and corporate bonds with longer maturities.

Stocks can still rally when the dollar is strong. As research from Charles Schwab indicates, the average annualized return for U.S. stocks when the dollar rises has been 12.8% since 1970. For bonds, it has been 8.5% in the years since 1976. A dollar rally amounts to a thumbs-up global vote for the U.S. economy, and that can certainly encourage and sustain a bull market.7

Mike Moffitt may be reached at ph# 641-782-5577 or email:  mikem@cfgiowa.com

website:  www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

There is a potential for fast price swings in commodities and currencies that will result in significant volatility in an investor’s holdings.

Citations.

1 – wsj.com/mdc/public/npage/2_3050.html?mod=mdc_curr_dtabnk&symb=DXY [3/9/15]

2 – reuters.com/article/2015/03/10/us-markets-stocks-idUSKBN0M612A20150310 [3/10/15]

3 – forbes.com/sites/maggiemcgrath/2015/03/10/u-s-equities-hammered-on-dollar-strength-and-oil-weakness/ [3/10/15]

4 – valuewalk.com/2015/02/us-dollar-bull-market/ [2/4/15]

5 – tinyurl.com/ptpolga [2/25/15]

6 – blogs.wsj.com/briefly/2014/12/24/how-a-strong-dollar-affects-investors-at-a-glance/ [12/24/14]

7 – time.com/money/3541584/dollar-rally-global-currencies/ [2/13/15]

 

Rising Interest Rates

How might they affect investments, housing and retirees?

How will Wall Street fare if interest rates climb back to historic norms? Rising interest rates could certainly impact investments, the real estate market and the overall economy – but their influence might not be as negative as some perceive.

Why are rates rising?
You can cite three factors. The Federal Reserve is gradually reducing its monthly asset purchases. As that has happened, inflation expectations have grown, and perception can often become reality on Main Street and Wall Street. In addition, the economy has gained momentum, and interest rates tend to rise in better times.

The federal funds rate (the interest rate on loans by the Fed to the banks to meet reserve requirements) has been in the 0.0%-0.25% range since December 2008. Historically, it has averaged about 4%. It was at 4.25% when the recession hit in late 2007. Short-term fluctuations have also been the norm for the key interest rate. It was at 1.00% in June 2003 compared to 6.5% in May 2000. In December 1991, it was at 4.00% – but just 17 months earlier, it had been at 8.00%. Rates will rise, fall and rise again; what may happen as they rise?1,2

The effect on investments. Last September, an investment strategist named Rob Brown wrote an article for Financial Advisor Magazine noting how well stocks have performed as rates rise. Brown studied the 30 economic expansions that have occurred in the United States since 1865 (excepting our current one). He pinpointed a 10-month window within each expansion that saw the greatest gains in interest rates (referencing then-current yields on the 10-year Treasury). The median return on the S&P 500 for all of these 10-month windows was 7.93% and the index returned positive in 80% of these 10-month periods. Looking at such 10-month windows since 1919, the S&P’s median return was even better at 11.50% – and the index gained in 81% of said intervals.3

Lastly, Brown looked at the S&P 500’s return in the 12-month periods ending on October 31, 1994 and May 31, 2004. In the first 12-month stretch, the interest rate on the 10-year note rose 2.38% to 7.81% while the S&P gained only 3.87%. Across the 12 months ending on May 31, 2004, however, the index rose 18.33% even as the 10-year Treasury yield rose 1.29% to 4.66%.3

The effect on the housing market. Do costlier mortgages discourage home sales? Recent data backs up that presumption. Existing home sales were up 1.3% for April, but that was the first monthly gain recorded by the National Association of Realtors for 2014. Year-over-year, the decline was 6.8%. On the other hand, when the economy improves the labor market typically improves as well, and more hiring means less unemployment. Unemployment is an impediment to home sales; lessen it, and more homes might move even as mortgages grow more expensive.4

When the economy is well, home prices have every reason to appreciate even if interest rates go up. NAR says the median sale price of an existing home rose 5.2% in the past year – not the double-digit appreciation seen in 2013, but not bad. Cash buyers don’t care about interest rates, and according to RealtyTrac, 43% of buyers in Q1 bought without mortgages.4,5

Rates might not climb as fast as some think. Federal Reserve Bank of New York President William Dudley – whose voting in Fed policy meetings tends to correspond with that of Janet Yellen – thinks that the federal funds rate will stay below its historic average for some time. Why? In a May 20 speech, he noted three reasons. One, baby boomers are retiring, which implies less potential for economic growth across the next decade. Two, banks are asked to keep higher capital ratios these days, and that implies lower bank profits and less lending as more money is being held in reserves. Three, he believes households and businesses are still traumatized by the memory of the Great Recession. Many are reluctant to invest and spend, especially with college loan debt so endemic and the housing sector possibly cooling off.6

Emerging markets in particular may have been soothed by recent comments from Dudley and other Fed officials. They have seen less volatility this spring than in previous months, and the MSCI Emerging Markets index has outperformed the S&P 500 so far this year.2

Michael Moffitt may be reached at 1-641-782-5577 or email: mikem@cfgiowa.com
website: cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC.  Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor.  Cornerstone Financial Group and AIM are separate entities from LPL Financial.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Economic forecast set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The MSCI EM (Emerging Marketing) Europe, Middle East and Africa Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of Europe, the Middle East and Africa. As of May 27, 2010 the MSCI EM EMEA index consisted of the following 8 emerging market country indices: Czech Republic, Hungary, Poland, Russia, Turkey, Egypt, Morocco, and South Africa.

All indices referenced are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – newyorkfed.org/markets/statistics/dlyrates/fedrate.html [5/22/14]
2 – reuters.com/article/2014/05/21/saft-on-wealth-idUSL1N0NZ1GM20140521 [5/21/14]
3 – fa-mag.com/news/what-happens-to-stocks-when-interest-rates-rise-15468.html [9/17/13]
4 – marketwatch.com/story/existing-home-sales-fastest-in-four-months-2014-05-22 [5/22/14]
5 – marketwatch.com/story/43-of-2014-home-buyers-paid-all-cash-2014-05-08 [5/8/14]
6 – money.cnn.com/2014/05/20/investing/fed-low-interest-rates-dudley/index.html [5/20/14]

Is your portfolio ready for 2014?

Since we’re nearly 5 years removed from the bottom that the S&P 500 index set on March 9, 2009, it’s probably a good time to reexamine where we are and whether or not we’re looking at a possible correction again. Of course, everyone has their own opinion on this and at this point it IS just OPINIONS. But facts (or lack of facts) usually back up a person’s opinions, so let’s try looking at some of the facts and see how those opinions are formed.
First, let’s look at the positives. The economy looks to be growing, albeit slowly. Total retail sales in the USA in calendar year 2013 were $5.085 trillion, up +4.2% from its total in 2012, according to Michael A. Higley’s “By the Numbers” 2/24/14 newsletter. The early February Federal Reserve meeting, the Fed committed to continuing the reduction in bond purchases, with an additional $10 billion reduction in quantitative easing bond purchases. That could indicate the Federal Reserve believes the economy is getting stronger. Their language about conditions and business/consumer spending was generally more optimistic.
The STOXX Europe 600 Index posted a third straight week of gains and climbed to its highest level in six years. News about the Eurozone economic recovery has turned increasingly positive. And with earnings season nearly over, S&P Dow Jones Indices says it’s likely that fourth-quarter 2013 earnings for S&P 500 companies will break a record, as they did in each of the preceding three quarters of 2013. This is a little deceiving, however, as I’ll explain shortly.
John Hancock’s most recent Viewpoints newsletter trumpets “Bias towards higher equity prices remain.” Mark Donovan, CFA, says that “at around 1,800, the S&P 500 Index trades at about 16.5 times estimated 2013 earnings,” and as such, “the equity markets look neither cheap nor overvalued.”

So is there anything to worry about?
Some others see some negative factors. LSA Portfolio Analytics sends us their weekly investment committee minutes. They noted many economic indicators came in weaker than expected in February: Empire manufacturing survey, the Philadelphia Fed manufacturing index, the NAHB housing market index. Housing starts for January fell -16.0% and building permits also lost ground, falling -5.4% compared to an expected decline of -1.6%.

Noted economist Harry Dent, who studies the world’s demographic trends as a predictor of future economic trends, thinks we are in a bubble that will burst soon. He cites the fact that margin debt – borrowing money to buy investments, is approaching the high of 2007. Stock buybacks are reaching very high levels as well, as 83% of the S&P 500 companies are buying back their shares compared to 87% in 2007. Stock buybacks artificially inflate earnings per share and can give the illusion that a company’s earnings are growing when they may not be; if a company for instance has $10 of earnings and 10 shares outstanding, that’s $1 of earnings/share. If they buy back 4 shares, now there’s only 6 shares outstanding, so the earnings per share goes up from $1/share to $1.67/share ($10 of earnings/6 shares) even though the earnings themselves did not change.

As for the market itself, since 2000 each successive major correction has only gotten greater. The 2000-2002 crash was nearly a 50% drop in the S&P 500, the 2007-2009 drop was over 55%. If the market drops to that same general level of support as in 2002 and 2009, the drop will be over 63%. Although there are a few exceptions, most bull markets don’t last much longer than 5 years!

While we are not predicting such a drop, we also would not rule it out. Given that anything is possible, we have been suggesting it would be worthwhile to stress test your portfolio against potential negative outcomes.

The Federal Reserve, Wall Street banks and other major hedge funds use stress testing to project their losses in the event of the unexpected. Stress testing is a routine part of our process.
We start by asking questions like, “Historically, what happened to this group of investments when the dollar crashes, the economy falls into recession/depression, or oil prices skyrocket?” We model over 60 scenarios – both positive and negative.
Our model measures the potential impact of these scenarios on investments using history as a guide, providing insight into the historical characteristics of portfolios.
The software then uses this data to project how your investments might react to future scenarios, both positive and negative. When running a stress test, each investment in your portfolio can be tested against 60+ scenarios in this manner, with the results combined and summarized for easy understanding.
You can see how the stress test works by going to www.cfgiowa.com and click on the “Take Your Free Stress Test” button on the home page.
Investing involves risk including loss of principal.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Income inequality and your investment account

A new article came out recently stating that the top 1% of the world population controls $110 trillion of wealth. http://www.oxfam.org/sites/www.oxfam.org/files/bp-working-for-few-political-capture-economic-inequality-200114-summ-en.pdf . I understand that many folks consider this a travesty, but before they get too excited about righting this inequality of wealth, they need to actually “run the numbers” and try to avoid being a hypocrite.

Upon doing a little math, I found many of my clients are in that top 1%. That’s right! Before you get too impressed, consider this: the richest 1% globally control $110 trillion of wealth. There are 7 billion people on earth, so $110 trillion divided by 7 billion equals about $1.5 million each. A farmer client who owns 240 acres of Iowa land (a small farm for those who might not know) or a small business person who owns her business debt free, along with a home and a $500,000 401k, could also fall in that 1%. Heck, a person who can save $275/month and increases that with the inflation rate can get to $1.5 million by retirement age.¹

So to be more fair to the less rich, let’s just take from the “super rich”. That would probably do it, right? Well, according to Forbes list of richest people in the world, the top 50 have roughly $1.2 trillion of wealth.² If you confiscated ALL their wealth, it wouldn’t come close to paying down the total public (government) debt in the world of $52.6 trillion (http://www.economist.com/content/global_debt_clock). It wouldn’t even pay the interest on the debt! And, the $1.2 trillion spread out evenly over every man, woman and child on earth, would give everyone $171.43. Would that pay your cell phone bill for 5 months? Or if you confiscated ALL the wealth of the top 1 percenters and spread it out evenly, everyone would get $15,714.28. For those in third world countries who face REAL poverty, that’s certainly a lot. But in the U.S., although it’s considered poverty, it’s not enough to help most people for any length of time.

How does this affect your investments? When the government attempts to help those in poverty, it spends money on social programs. Since it doesn’t currently bring in enough money through taxes, it borrows the difference from investors with help from the Federal Reserve (our banking system in the U.S.)

Our Federal Reserve creates money out of thin air (“prints” money to increase the money supply) and has been using that money to buy U.S. government-backed debt. That extra money enters our economy.³ Some of it ends up in the hands of citizens. Some spend it, but some save it. For those who save it, some ends up being invested in stocks, some in their businesses, and some in real estate, among other places. This typically pushes asset values higher, which makes those people appear richer….on paper.

They may not be poor but many of them saved that money themselves and they don’t consider themselves rich. When the stock market last crashed, in 2008-2009, many of those people lost nearly 50% of that wealth. Not all of those folks were born with a silver spoon in their mouth. Their plans for a successful retirement hinge on a decent 401k and Social Security. And Social Security is funded by a trust fund expected to be exhausted in around 20 years, with the source of this information being the 2013 Annual Reports summary on the Social Security website itself (http://www.socialsecurity.gov/oact/TRSUM/tr13summary.pdf) and run by a government that is $17 trillion in debt (http://www.treasurydirect.gov/NP/debt/current). The unfunded (future) liabilities of the United States government are projected to be over $127 trillion…more than $1.1 million for every taxpayer alive today.4

So as easy as it is to despise rich people, not all are evil and taking from them won’t come close to solving the problem anyway. And as much as we’d like to think government is the answer, not all government is good and as the debt increases, it probably means much larger problems and much less wealth for everyone when the bubbles pop again like some did in 2008-2009.

Towards that end, we run what-if stress testing scenarios for our clients simulating multiple economic events that could impact their life’s savings, helping them understand the very REAL consequences of actions by governments, terrorists, and the like. Being informed about, and in charge of, your portfolio is the best way to understand and deal with the certainty of uncertainty that affects our life.

Finally, if you really think that rich people have more influence over government than poor people, you may be right. But by that logic, we should all vote for smaller government. There would be fewer people in the government to influence and a chance to reduce the federal debt, which may help save Social Security in the future for us and our kids. If we achieve wealth equality, we’ll need it!

¹annual interest rate 7.5% for 45 years, increasing contributions by an inflation rate of 2.5% and compounding annually. For illustrative purposes only. Not based on any specific investments. Investing in securities involves risk, including potential loss of principal.

² http://www.forbes.com/billionaires/list/

³http://www.independent.com/news/2012/feb/25/how-us-federal-reserve-creates-and-destroys-money/

4http://www.usdebtclock.org/

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Investing involves risk including loss of principal.