Have You Saved Enough For Your (Grand)Child’s College Expenses?

 

anatomy of piggy bankHappy May 29th – a few days past – otherwise known as 529 day. According to the College Board’s “Trends in College Pricing” report, the cost of attending a four-year university rose roughly 3.5% from 2015 to 2016. Costs just keep going up. Have you done enough educational planning for Junior? Take a breath of fresh air and then check out how much college will cost at these schools for the upcoming 2016-2017 school year:

Average Cost of College 2016 2017 final

For those of you with younger ones or planning for a family, fortunately, there is still time! Read on as this blog is for you as it focuses on what may be the best college savings program out there: 529 College Savings Plans!

The 529 is a great opportunity for parents, grandparents, or other family members looking to help a child make college a reality someday. Studies show that children with money set aside for college are seven times more likely to actually go there.

529 Plans are state-sponsored investment programs that qualify for special tax treatment under section 529 of the Internal Revenue Code. These plans typically involve an agreement between a state government and one or more asset management companies. The contributor (e.g. parent, grandparent, etc.) of the account typically becomes the account owner and the account owner controls withdrawals of assets. The person for whom the plan is set up becomes the beneficiary (e.g. Junior).

Tax-Free Growth.  Earnings in a 529 plan grow federal tax-free and will not be taxed when the money is taken out to pay for college. The 529 account remains under the control of the account owner rather than transferring to the child at the age of majority as in the case of an UTMA/UGMA. Any U.S. citizen can participate in a 529 and the funds can be used at any accredited college or university.

Quality investment options.  Most 529 programs have a couple dozen quality equity and fixed income investment choices to choose from. Most programs will also allow you to choose an age-based asset allocation model which makes the underlying portfolio become more conservative as the beneficiary approaches college age. Or you create your own portfolio to match your risk tolerance (whether it be more conservative or aggressive) and expected timing of funds. A wealth manager like DWM can help you decide.

Contribution limits.  Unlike other tax-advantaged vehicles, 529 have no income limitations on who can contribute, making them available to virtually anyone. Contribution limits to 529 are determined by each 529-sponsoring program independently, but most are quite attractive with limits over $300,000 per beneficiary. To reach that total, a married couple can contribute as much as $140,000 within a single year (the limit is $70,000 for individuals) and, as long as no more is contributed in the following four years, the entire amount qualifies for five years of the gift-tax exclusion. (This type of 5year “front running” can be a great estate planning strategy for grandparents as well.)

Tax benefits.  There is no federal tax deductions or credits for 529s, but there typically is at the state level. Contributions to a 529 are fully deductible in South Carolina and up to $10,000 per year by an individual, and up to $20,000 per year by a married couple filing jointly in Illinois assuming you use an in-state program – Bright Start & Bright Directions in Illinois & Future Scholar in SC are all excellent choices. Contributions remain tax-free if used for qualified education expenses.

What’s a Qualified Education Expense?

-Tuition

-Required books, equipment, supplies

-Computer technology

-Room and board for ½+ time student

-Special needs expenses of a special needs beneficiary

Non-Qualified Withdrawals. Non-qualified withdrawals will not get the special tax treatment. With a few exceptions, such as when the beneficiary receives a scholarship, the earnings portion of non-qualified withdrawals will incur federal income tax as well as a 10% penalty.

Effect on Financial Aid. A 529 account is counted as an asset of parent if the owner is the parent or dependent student. This is typically more beneficial than other vehicles when calculating the expected family contribution figure.

What happens if the beneficiary decides not to attend college?

The tax laws make it easy on the family if the beneficiary for some reason doesn’t go to college or use the 529 earmarked funds. The account owner can simply change the beneficiary by “rolling over” the account to a “family member” of the original beneficiary with no penalty whatsoever. The definition of “family member” includes a beneficiary’s spouse, children, brothers, sisters, first cousins, nephews and nieces and any spouse of such persons; but typically and most logically it’s one of the original beneficiary’s siblings. Or the account owner can use the funds themselves – it’s always fun to go back to school and learn! Or the least likely option is “cash out and pay”, where the account owner can redeem assets for himself/herself as a non-qualified withdrawal and pay ordinary income taxes and a 10% penalty.

529s vs other college savings plans. Downsides of the others:

  • UTMA/UGMA: 1) Control/custodianship within an UTMA/UGMA terminates at age of majority (21 in Illinois & 18 in South Carolina), and 2) kiddie tax considerations and capital gain considerations upon liquidation
  • Coverdell Education Savings Accounts (“ESAs”) – maximum investment is only $2,000 per beneficiary per year combined from all sources within ESAs whereas 529s are typically $300K+ per beneficiary.

Conclusion. There is over $230 Billion in 529s now up from less than $10B in 2001. The reason for this growth is people catching on to what really is a great tax-free funding vehicle for an important future educational need. Prepare for that financial burden today by saving early and saving often with a 529 account. Give us a call to help get you started or talk more about educational planning in general.

DWM 1Q16 Market Commentary: Are You Getting Enough Sleep?

satisfying sleep2It’s all perspective: If you had fallen into a deep sleep on December 31 and woken up March 31 and looked up your portfolio balance, it was like nothing really happened. Maybe up one or two percent. Decent start to the year…

But for those of us that woke up every day and are required to watch along closely, you know that 1Q16 was anything but tame.

January and the start of February were downright ugly for the stock markets with the Dow Jones having its worst start ever and the S&P500 torpedoing into correction status. But things turned on a dime in mid-February and markets rallied. The big catalysts being: monetary easing by central banks, firming of oil prices & other commodities, a healthy US labor market and a weakening dollar.

Let’s take a look at the scoreboard:

Equities: The MSCI AC World Equity Index registered +0.2%, essentially unchanged (or “unched” in trader lingo). Value lead growth for the first time in a while. In another show of turning tides, the S&P500 didn’t take top billing this time, up a modest +1.3%. Mid Cap stocks as represented by the S&P MidCap 400 Index fared quite well, up 3.8%. The equity markets abroad were rather mixed: more developed international equities had a rough showing, -3.0% as represented by the MSCI EAFE Index; while emerging markets proved to the big winner, up 5.0% as represented by the MSCI Emerging Markets Investable Market Index.

Alternatives: The big standout in alts: Gold – as represented by the iShares Gold Trust ETF, up 16.1% – had its best quarterly gain in three decades. Then again, some absolute return strategies were challenged by the whipsaw and fell into the red. In general, as a group, alternatives were also about “unched” using the Credit Suisse Liquid Alt Beta Index, -0.6%, as a proxy. More importantly, they played their role this quarter: They did a decent job protecting the first several weeks of the quarter when the equity markets were swooning. From empirical studies, we know that by minimizing the overall portfolio’s downside during times like these, the portfolio can sooner recover and achieve new highs that much quicker.

Fixed Income: We saved the strongest asset class on the quarter for last. Fixed income powered by dovish central bankers and declining yields had a pretty remarkable quarter. The Barclays US Aggregate Bond Index, the most popular bond benchmark, was up 3.0%. And like with equities, emerging markets stood out as evidenced by the JPMorgan Emerging Markets Bond Index, +5.3%. Fixed Income really hasn’t been the first pick from the litter for many asset managers in a long while, but this quarters shows why it deserves a place in everyone’s portfolio, even if it’s just a small allocation.

Here are some general comments looking forward denoted by negative (“-“) or positive (“+”) influence:

  • (-) Economies around the globe remain sluggish.
  • (-) Some areas within equities seem expensive. For example, the S&P500’s TTM P/E is 18.2, higher than its 10-year average of 15.8. Other areas, particularly emerging markets are the opposite – they’re downright cheap even after this quarter’s rally.
  • (+) The U.S. Fed in this quarter communicated that they are dialing back their pace of raising rates, which the markets definitely welcomed. Probably only one more, if any, tightening this year.
  • (+) Energy has bounced off lows. The market has already beaten up those companies that rely on higher oil prices. All the while, the consumer still is enjoying this “gasoline holiday”.
  • (?) Upcoming Presidential election hasn’t seemed to scare the market much so far, but volatility could increase as time marches on and uncertainty remains.

Probably the biggest thing is the change in tone: there is a much better tone of the markets than when we wrote our last market commentary. There’s hardly any recession talk now compared to a lot of it then. However, we still have a lot of the same uncertainty. And our markets are more correlated – meaning they move more in tandem – than ever. One big geopolitical or some strange unforeseen event or maybe an altercation of a current event can switch the tone immediately…at least for the short term. And, folks, anything can happen in the short-term.

So for those that like action, strap on the seat belt and enjoy the ride. Or for those that would rather relax, enjoy a nice long sleep and check your portfolio account balance next quarter. You may just sigh another breath of healthy fresh air and go back to bed. Sorry, long-term disciplined investing can be quite boring, but can be quite profitable.

To finish – and in another sign of positivity – Go Cubs! This is the year!

DWM 2015 Year-end Market Commentary

Uncertainty imageIf you had to summarize the markets in 2015 with one word, it would be “uncertainty”. Much of the reason for the poor performance of stocks, fixed income, and alternatives can be chalked up to uncertainty…uncertainty of what the Fed was going to do with interest rates, uncertainty to when oil supply and demand will come into balance, and uncertainty surrounding China’s economy. In last quarter’s market commentary, we wrote about having just finished an awful August/September stock market drubbing, only to see equity benchmarks almost fully recover in October. Unfortunately, the good vibes didn’t last long as another sell-off commenced in December after the Fed raised interest rates for the first time in over nine years. The end result: 2015 going down as the first losing year since 2008 for many investors.

Here’s how the major asset classes fared in 2015:

Equities: The MSCI AC World Equity Index registered -2.4%. Emerging markets really took it on the chin, losing 14.9%, as represented by the MSCI Emerging Markets Index as falling commodity prices and the strengthening US dollar hurt these countries’ economies. On paper, the big cap US market benchmarks appeared to do better with the S&P500 only down 0.7% before reinvested dividends, but that is skewed by the outperformance of some of the largest capitalized names like Facebook, Amazon, Netflix, and Alphabet (formerly Google). Remove those names and the S&P500 would have similar figures to the Russell 2000 Small Cap Index (-4.4%) or the Russell Mid Cap (-2.4%).

Fixed Income: Fixed income investors aren’t jumping for joy at this year’s end. The Barclays US Aggregate Bond Index was up just a tiny bit, +0.6%; but the Barclays Global Aggregate Bond Index declined 3.2%. It was worse off in the high yield aka “junk” market which finished the year -4.5%. This index was weighed down by energy companies where long term solvency has come into question given these extremely low oil prices.

Alternatives: In theory, asset allocation using a diversified approach helps investors over the long run. This was a very untypical year in that the three major asset classes (equities, fixed income, and alternatives) finished the year with very similar small negative results, with the Credit Suisse Liquid Alternative Index down -1.0% for the year. We wouldn’t expect that trend to continue for 2016. For more detailed info on alternatives, please see our blog from last month at http://www.dwmgmt.com/why-alts/ .

At the time of this writing, the stock market is not off to a good start in 2016, with the Dow tumbling more than 1000 points in the first week, as the uncertainty of the Fed, China, and oil continues. But let’s chat about those three items.

  1. The Fed and interest rates: The Fed has indicated that it wants to keep raising, but at a very gradual rate. The last thing they want to do is harm the economy or US or global growth. In fact, Fed officials expect that rates will still be below 3.5% in late 2018. So this is not the same thing as slamming down on the brakes when going 80mph.
  2. China’s slow-down: This is not a one-time 2015/2016 event. China is undergoing a necessary and positive adjustment, shifting from an economy based on heavy manufacturing towards one based on service. This will take years to convert so investors should simply expect these type of headlines and not fear them.
  3. Oil prices: Consumers are loving these lower prices at the gas pump, but it’s creating havoc in the global markets. There’s a disequilibrium: demand is up, but supply is up more, way more! Many energy companies are suffering. Imagine if your paycheck got cut in half or more. It’s very hard to live on severely reduced income. You still have the same fixed costs. So what do you do? You can borrow money and hope for prices to recover, but they may not and you may go bankrupt. This ballgame is only in the middle innings and could get uglier. Fortunately, for the US consumer, these lower oil prices means extra money in our pocket which most likely leads to spending and boosting our economy even more.

2016 isn’t another 2008 in the making. Major market declines typically occur when the economy is heading south. That’s not the case as the US economy is one of the world’s healthiest right now: there’s strong job growth, solid inflation-adjusted wage growth, and cheap gas prices. For diversified investors, there are opportunities in areas where selling has been overdone and market cycles start to reverse. It’s been a rough start in 2016, but a long-term investor remembers to stay the course, be disciplined, and be rewarded in the end.

Uncertainty is the one thing that is certain about financial markets.  Expect it, but don’t fear it.

Brett M. Detterbeck, CFA, CFP®

DETTERBECK WEALTH MANAGEMENT

Why Alts?

2015-12-27 Janet PAINT (002)We get this question a lot, particularly as the events of the Great Recession fade away in our mental rearview mirror and the current equity bull market plods on.

Drop a dime in the jukebox and throw on “What Have You Done for Me Lately” by Janet Jackson as that is what many investors are asking about alternatives (“alts”) these days. In most cases, the answer is “not much, Janet (or Miss Jackson if you’re nasty).” But that shouldn’t cause us to change course and remove this extremely valuable asset class from your portfolio.

In fact, this is exactly the time when alts are essential to a diversified portfolio. Let’s reiterate why alts are such an important portfolio component: they are in there as a diversifying complement to the rest of your portfolio asset classes; the zig to their zag. This diversification comes in quite handy when equity returns decline, volatility increases, and interest rates rise. All of which are happening now.

So, you’re correct Miss Jackson, alts have not done much for us lately. But, as we pointed out at our fall seminars, what happens lately doesn’t dictate what will happen in the future. Recency bias is the erroneous significance that people put on recent events. As humans, we are innately emotional and hard-wired to think that these recent events will continue indefinitely. But that’s not how market cycles work. Many times, the best performer in one calendar year is one of the worst the following year. For example, REITs (Real Estate Investment Trusts) were one of the top performers in 2006 only to be at the bottom in 2007. Emerging markets were one of the best performers in 2007, only to be the worst performer in 2008. On the flip side, investment grade bonds were near the bottom of the class in 2010, only to be one of the better performers in 2011. International stocks were near the bottom in 2011 only to be one of the best performers in 2012. Hence, just because equities (and large caps in particular) have had several relative strong years in a row and alts have had muted results, doesn’t mean that will be the case for the next several years.

From 2009 through early this year, equities were providing the bigger returns and a well-diversified investor benefited accordingly. But things are changing. The Fed just raised rates, oil continues to slide, consumers aren’t spending as much, and investors could see 2015 as the first negative calendar year total portfolio return since 2008.

And speaking of 2008, let us not forget how gruesome that year would have been for many investors if not for the alternative asset class that kept returns in check. Alts like precious metals, currency strategies, and others were actually up in a time when equity benchmarks were down huge!

A basket of alternatives that DWM follows hasn’t exactly been “chart-toppers” the last few years. But that’s okay. We don’t expect for these to be double-digit return producers. As a whole, we are expecting the alternative asset class to return somewhere around 4-7% per annum for the next several years. But more importantly, our expectations for alts is that they won’t be down dollar for dollar when equities have a 10% or worse correction.

And that’s the real beauty. By using alternatives and avoiding a blow-up like many hard-core equity investors did in 2008, you don’t have a huge hole to dig yourself out of. The bigger the hole, the harder it takes just to get back to break-even, move forward, and secure those long-term financial goals of yours.

So, you’re right Miss Jackson. Alts haven’t done much for us lately. But, if you don’t fall prey to recency bias, you may understand that it is what they may do for us soon that can be so important.

DWM Fall 2015 Seminar Recap

emoji 2Money and emotions. Inseparable. We’re hard-wired that way. Since caveman times, we’ve always had an aversion to loss. And, that’s one of the reasons many people aren’t feeling so great about their money in 2015. All asset classes – equities, fixed income and alternatives – are all just about break-even for the first ten months of 2015. And, because our minds place more emphasis on recent events than longer term, many are wondering what lies ahead for their money and their net worth. Those were the subjects of our two annual seminars; yesterday at the Liberty Tap Room in Mt. Pleasant and last week at Emmett’s Brewery in Palatine. Both locations served as great places to not only deliver an important financial presentation, but also as a great place to just hang out and visit with one another.

In case you missed our 2015 seminar entitled “How Are You Feeling About Your Money Lately?” here are some of the highlights:

  • Looking at the last five centuries for clues to what’s coming next: Citing many facts from Northwestern University’s Dr. Robert Gordon’s report on U.S. economic growth, there have been waves of change. There was not much real economic growth before 1750. Then, in 1750, the first Industrial Revolution, which included steam and railroads, pushed economic growth for almost 8 decades. Industrial Revolution #2 was centered in the U.S. with the invention of cars, planes, electricity, communication and refrigeration. From 1870-1970, Americans moved from the farm to factories, working in the cities and manufacturing new products and buying them. It was a huge push on economic growth. Currently, we are in Industrial Revolution #3 covering the period 1960 until now and is characterized by computers, e-commerce and the internet. Dr. Gordon’s premise is that many of the positive characteristics in the 20th century that pushed economic growth, such as demographics, women entering the workplace, education advances, a rising middle class and low debt (federal, state and local) have diminished. Therefore, at this time it will be difficult for the U.S. to obtain an increase in its real growth rate of roughly 2% per year unless and until there is a major innovation breakthrough.
  • Last 100 years of bull markets and bear markets: Though bear markets seem “unbearable” when occurring, the fact is that they are much shorter in duration and much less in impact than bull markets. However, based on expected lower growth and inflation, the average annual stock market returns will likely be less in the coming decades than the 80’s and 90’s for example. Indeed, there will be bear markets at some point in the future. But that said, it is not wise to try to time the market; instead control the things you can control and stay invested in an appropriate diversified asset allocation and stick to your long-term investment plan.
  • Emotional biases: The markets are not rational because of human beings and their emotions and the fact that they sometimes trade on those emotions. As such, the markets tend to continually overshoot one way and then the other. Recency bias, loss aversion bias, anchoring bias, and other biases can have major (and typically bad) impacts on our decision making. For example, recency bias was the principal reason many investors felt compelled to get out of stocks in late September based on the last two months’ most dismal performance – had they traded on that emotion, they would have missed out the huge October rally upward. Emotional biases in investing can significantly disrupt sound investment plans but there are fortunately ways to cope including: understanding the problem exists, creating a culture of discipline which can be done by creating a sound investment plan (e.g. Investment Policy Statement), and working with a financial coach like DWM that keeps you and your emotions from hurting yourselves.
  • Other Key Metrics: Protecting and growing your net worth is much more than simply focusing on investment returns. One needs to regularly review and monitor other key measurements that matter. These include assets, additions to assets, planned date of financial independence, retirement income, inflation, investment returns, effective tax rates, goals (needs, wants and wishes), expected longevity, estate planning and stress testing, including risk management. There are many “financial advisors” out there willing to work with your investments, but not as many that are qualified and willing to go through a comprehensive financial planning process using the metrics above and providing other value-added services to completely help manage your financial life. DWM’s Total Wealth Management Process includes both Investment Management and Value-Added Services. The process has two parts: first, a series of initial meetings to review all aspects of a client’s financial life and provide review, recommendation and implementation. And, second, an ongoing process to monitor and adjust the plan through life’s twists and turns. It is focused on the client’s numbers and emotions and designed to help protect and grow their legacy and provide peace of mind.

For more information about the discussion above, don’t hesitate to contact us.

DWM’s “Spooky” 3Q15 Market Commentary

Nightmare on Wall StWith Halloween coming later this month, some people may perceive October as scary. But after the blood-bath that took place in the markets during the third quarter, August and September may well be claiming themselves as more frightening than Frankenstein and Dracula (or Freddy and Jason, for you 80s/90s movie buffs). In fact, it was the worst quarter that stocks have experienced since 3Q11. What is creating all of this horror one may ask? Well, the black cats are the uncertainty of what the Fed will do with interest rates and China’s economic slowdown (see our recent blog for more info). Fortunately, it’s not so gruesome for most of our clients, as they have well-balanced portfolios which also include fixed income and alternatives. These two asset classes can really help cushion the equity carnage in times like these.

Here’s how the major asset classes fared:

Equities: The MSCI AC World Equity Index suffered a 9.5% stabbing in the third quarter and has dropped 7.0% Year-To-Date (“YTD”). International funds had an even bloodier quarter, with the MSCI AC World Index Ex USA down 12.2% and now off 8.6% for the year.

Fixed Income: The Barclays US Aggregate Bond Index was up 1.2% and 1.1%, 3Q15 and YTD, respectively; and the Barclays Global Aggregate Bond Index +0.9% and -2.3%, respectively. Longer term bonds did the best, but not many people have much of that exposure going into the lurking rising interest rate environment. The lower the duration and lower the quality, the more ghastly it was for the quarter. High yields which correlate more to the equity market fared the worst, down 4.9%, as represented by the Barclays US Corporate High Yield Index.

Alternatives: We prefer alternatives that aren’t that correlated to the equity market for wicked times like these. Some alternatives did just that. For example, the BlackRock Long/Short fund was a positive at 0.7%, the Pioneer Insurance-linked Securities fund was up 4%, and the AQR Managed Futures fund was up over 6%. Unfortunately, not all of the holdings went a positive direction. MLPs have been under attack all year, as have many energy-related securities, but we think it is gravely overdone and there may be opportunity here. Gold is typically a great diversifier and behaves differently than equities, but it sold off in 3Q15. In any event, alternatives definitely fared better than equities, but unfortunately produced overall negative results in 3Q15, with the Credit Suisse Liquid Alternative Index down -2.5%.

So, is this Nightmare on Wall Street almost over? It should be noted that at the time of this writing, just a few days into the quarter, the markets have rallied. In fact, the S&P500 has risen 5.6% over the past five sessions, its’ best 5 day gain since December 2011. Ironically, in the ‘bad news is good news’ department, it was a weak jobs report last week that fueled the rally. See, the market is convoluted in that many times it reacts positively to bad news and vice versa. The weak jobs report was actually perceived as good because that means that weakness from abroad may be spilling over into the US, which cools expectations for a Fed increase in interest rates. And, as long as we stay in a low interest rate environment, that’s good news to stocks because the other asset classes aren’t as attractive on paper. Confused? Unfortunately, that’s how these markets work and why you want a professional wealth manager helping you.

Markets don’t always go up. And 2015 may go down as only the 2nd losing year for the stock market in the last 12. But that doesn’t mean that the Grim Reaper is lurking around every corner. It’s just part of a market cycle. By staying invested in a well-diversified portfolio made up of multiple asset classes, you can fend off the evil the market throws at you from time to time and come out unscathed. But you need to be disciplined and controlled, something a good Financial Sherpa can help you with. Don’t let emotions take over, which could haunt you for the rest of your life. Know that a disciplined investor looks beyond the concerns of today to the long-term growth potential of markets.

Here’s to a not-so-scary October. Happy Halloween!

Ask DWM: I’m Getting a New Vehicle. Should I Buy or Lease?

buy vs leaseThe answer really depends on what the effective rate is (lease vs purchase), how long you typically keep your car, and total miles you drive annually.

  • If you like to get a new car every 3 years or so, you should consider a lease.
  • If you prefer to keep your car a long time, then you probably should buy it.
  • If you put over 15,000 miles per year on your car, avoid a lease as there can be penalties for mileage beyond that. On the flipside if you drive very low miles, e.g. less than 7,500 miles per year, you most likely would be better off buying, as your vehicle would be worth more than the vehicle “residual value” at lease-end.

Beyond the generalities, you should also look at the buying effective interest rate and the leasing effective interest rate as they are not always the same. Many times car companies will offer incentives one way or another.

One of the most important tips is to have a figure in mind of what you want and what you want to pay before you go to the dealership. The automotive industry is so goofy with pricing – MSRP may be 5%+ more than what others are actually paying – so do your homework using Emdunds.com or some other car site where you can actually “build” the car to your liking and get the “true” price of that vehicle. Furthermore, there are still “bad guys” in that industry that cannot be trusted, so paying attention to detail is important or they’ll take more than their fair share from you. Don’t let them pull the “how much can you afford?” trick.

Next big tip is to negotiate your deal to buy the vehicle assuming you will be using cash for the purchase. Hopefully, the negotiated price is close to the “true” price identified in your research. Then, once you have established this number, have the dealer give you pricing if, instead, you lease the car or you finance the purchase. This will give you the information to determine the effective cost of financing or leasing or whether buying for cash may be best. Note: Do your own interest rate calculation or have us do it. Dealer stated rate can be deceptive and incorrect.

Other tips:

  1. It’s no myth that dealerships are pushing to get vehicles off their lot before month-end to make quota. That said, put your purchase or lease off until the end of the month. Furthermore, the winter months can be an excellent time to get into a new vehicle as the lease and purchase incentives on the previous year’s models can be very attractive.
  2. Certified, pre-driven vehicles usually are more bang for the buck. It is true that the minute you drive a NEW car off the lot, it depreciates significantly! With a certified, pre-driven vehicle, you aren’t paying the “new car premium”, but you are still getting a low mileage car which carries a nice warranty.
  3. Is the vehicle for business or personal use? For business use, a lease may be something to consider as the lease payments may be fully deductible. Purchasing the car won’t benefit you as much in this case as income tax rules typically provide only a small amount of annual depreciation for purchased vehicles.
  4. Go online and compare the pending lease or purchase. There are lots of sites out there to compare and analyze. We like Lease Guide.

Cheat sheetGetting a new vehicle is fun, but can also be a challenging process. Deciding whether to lease or purchase is just one of the hurdles. If you need any assistance during your process, please give us a call. We’re happy to help!

REMINDER: Markets Don’t Go Straight Up!

Most equity markets were down 3% today, and most equity are markets down 5% this week! It’s the worst week for the Dow since 2011! The Dow is now in correction territory. What’s going on???

It’s been an unusual year. January and February were quite good. But not much has happened since then until this week’s market sell-off.

China’s apparent slow-down seems to be the main catalyst to what triggered this week’s ugliness, but we continue to have the uncertainty as to when the Fed will raise rates, if/when Greece will leave the Euro, and mixed second quarter earnings reports and economic news.

It is times like these that investors need to remember that markets don’t just go straight up. Markets don’t work that way- they go up and down! Not every calendar year can be an “up” year. As a long-term investor, you not only stay invested, but even may see this as an opportunity to buy more.

There have been over a dozen market pullbacks of 5% or more since March 2009. This is another one! Generally, when the market comes back, it does so quickly. So, it’s a fool’s game to try to time the market and jump in and out of it. No one has a crystal ball. Furthermore, we know that over time that staying invested is your friend. Studies show that just missing a few days of strong returns (which we could very well get next week or later this month), can drastically impact overall performance.

The market constantly over-reacts and then reverts back to the mean. Do not get caught up in emotion and sell and buy at the worst times. Unfortunately, humans are not wired for disciplined investing and usually trade poorly based on fear. They wind up selling at the lower prices (on fear) and buying at the higher prices (on elation) per the graph below.

Emotions

I’m sure many readers are nervous after this latest week with all this uncertainty in the air. However, if you use a wealth manager, like DWM, we can help you focus on what can be controlled:

  • Create an investment plan to fit your needs and risk tolerance
  • Identify an appropriate asset allocation target mix
  • Structure a well-balanced, diversified portfolio
  • Reduce expenses through low turnover and via passive investments where available
  • Minimize taxes by using asset location, tax loss harvesting, etc.
  • Rebalance on a regular basis, taking advantage of market over-reactions by buying at low points of the market cycle and selling at high points
  • Stay Invested

In closing, a pullback / correction like this one might actually be a very healthy thing because it may signify that the underlying assets’ valuation is getting back in line with fundamentals. So don’t get anxious over this latest short-term market volatility. By all means, there is a lot of “noise” this month. We’ve seen “noise” before and we’ll see “noise” again. Instead, remember that, over the long-term, the markets have rewarded discipline, through world events of all types. Check out the graph below, put your mind at ease, and have a great weekend. Let us deal with the “noise” and give us a call if you’re still feeling anxious next week.

Markets Have Rewarded Discipline

DWM 2Q15 Market Commentary

Sideways fireworksIt was a special year for me. Instead of just my normal one annual firework viewing, I was able to see a number of displays this season including one in Kentucky, one in Wisconsin, and one in my hometown of Glen Ellyn, IL. On top of that I was able to witness the market fireworks that came early in June. Usually we wait until the 4th of July for fireworks. But not this year as the second quarter was chugging along somewhat quietly until “bang goes the dynamite” in the last week of June. The Greek turmoil was the cause of these fireworks and it sent global markets tumbling and cut the year’s gains to almost nothing. It’s unfortunate as we think that “Grexit” is overblown – please see our recent blog for more on Greece.

Let’s take a closer look into each asset class:

Equities: The most popular index, but generally not the best one for proxy use, the S&P500 managed to eke out a small gain for 2Q15, +0.28%, and is now up only 1.23% for the year. The MSCI ACWI Investable Market Index, a benchmark capturing ~99% of the global equity markets, registered 0.35% for the quarter and has returned 2.66% Year-To-Date (“YTD”). International funds continue to outperform domestic ones in 2015.

Fixed Income: It was a difficult quarter in bond land as we saw the Barclays US Aggregate Bond Index fall 1.68% and 0.10%, 2Q15 and YTD, respectively; and the Barclays Global Aggregate Bond Index drop 1.18% and 3.08%, respectively. Corporate bonds really suffered as represented by the iBoxx USD Liquid Investment Grade Index, off 3.82% for the quarter and now down 1.31% for the year.

Alternatives: It wasn’t a great quarter for stocks or bonds and unfortunately not a good one for alternatives either. A lot of the areas that did well in the first quarter stumbled this time around, for example, managed futures and real estate. MLPs were also down but we believe MLPs are mistakenly getting lumped into the “sell-anything-related-to-oil” trade. There were some bright areas. For example, there are insurance-linked (“catastrophe”) funds that continue to chug along with positive returns. They have really no correlation whatsoever with the financial markets as they are tied to natural events instead. We love non-correlation like this!

So at the half way point of 2015, many investors are sitting with small, albeit positive net gains for the calendar year. We are cautiously optimistic about the second half as there are many positives out there including:

  • The US economy is definitely headed in the right direction – unemployment and wage data keep improving. We are expecting a modest pick-up of growth in the second half.
  • Even with the Fed poised to start raising rates later this year – a sign of US economy strength – comfortably low US inflation should continue and is good news for American businesses and consumers. It also lends support for stocks.
  • Outside of the US, central banks are easing which usually is a catalyst for global markets.

That being said, beyond Grexit, there are other headwinds including:

  • China’s stock markets have been in extreme whipsaw lately. Hopefully there is no spillover effect for the rest of the world.
  • Large cap domestic stocks as represented by the S&P500 are a little pricey. The S&P500 finished 2Q15 at 17.9 times Trailing Twelve Months (“TTM”) earnings. That’s higher than the 15.7 average for the last ten years and higher than the 17.1 at the start of the year. Frankly, US stocks have risen so fast since the financial crisis of 2008 that future gains are likely to be weaker than historical averages. (On the flip side, a lot of the international markets look relatively cheap.)
  • The Fed, via its unprecedented QE program, has created this artificial low rate environment which has led to recent major volatility in bonds. Not only should we expect this to continue, but it to lead to increased volatility in other asset classes. Furthermore, nervousness is abundant as the Fed tries to unwind this artificial un-natural setting.

In conclusion, the “fireworks” may continue and keep us on our toes. The market doesn’t always go up. We need to remember to be patient when quarters, and perhaps years, like this come along. It’s important to stay disciplined, to stay focused on the long-term, stay invested, and not let emotions drive irrational behavior based on short-term events.

In closing, the best firework display I saw this year was the one last week in Kentucky. It was amazing! Besides being kicked off by a 15 minute video that gave thanks to our troops, the fireworks were synchronized to music from AC/DC to the theme song from Frozen, “Let it go!” Unlike the other fireworks events I attended, only this one had a unique set of fireworks that actually go up, make a huge bang, and then go sideways. Yes, sideways, as in totally horizontal for some time. Frankly, I think it may be appropriate if our markets moved like these fireworks: up for a short while and a healthy move sideways…

Brett M. Detterbeck, CFA, CFP®

DETTERBECK WEALTH MANAGEMENT

Anatomy of a Portfolio Change – Core Equity Spotlight on SCHF

money on the brainAs part of our ongoing series of spotlighting one of our Investment Model preferred holdings, I would like to provide some color on the Schwab International Equity ETF (symbol: SCHF). SCHF is brand new to our Core Equity Model Portfolio so we thought it may be educational to our readers to go through the mechanics involved during a portfolio change to spotlight some of the behind-the-scenes processes.

Our main investment management goal: participating in “good” times and protecting in “bad” times. To put it in baseball terms, and I must do that as the Chicago Cubs are playing meaningful baseball still here in June, those that have worked with us know that we aren’t focused on hitting “home runs”; instead we are more interested in avoiding unnecessary risk and “hitting steady singles and doubles.”

How we seek to accomplish our goal:

  1. We have three main strategies: our Core Equity, Core Fixed Income, and Liquid Alternatives models.
  2. We use a combination of passive and active styles within our strategies. We generally use passive for our Traditional Core Equity and Fixed models, and use active for our Liquid Alternatives model.
  3. We generally only use relatively low-cost mutual funds and ETFs. (From last month’s blog, you learned that our Core Equity model had a weighted OER of 0.34% (now 0.32% after change described below), and our Core Fixed Model has a weighted OER of 0.37%.)

So, what’s our process? Here’s the short list in layman’s terms:

  1. Keep informed and educated. We stay abreast of the latest by reading a lot, attending conferences and trade shows, and networking with others both inside and outside of the financial industry.
  2. Constantly monitor the investment landscape for what’s new and knowing what’s already out there.
  3. Monitor and track current holdings. Adjust weights if needed.
  4. Analyze if anything out there is better than what we already have in place.
  5. Avoid unnecessary transactions and over-trading: transactions can be costly if not done correctly. Furthermore, it may lead to unnecessary tax ramifications.
  6. Understand where the market cycle is and never fall victim to trading based on emotion. I.e. buying the latest fad (buying high) or selling something temporarily out of fashion (selling low).
  7. Rebalance regularly to get your asset allocation percentages in-line with their target, thus, in concept, buying low and selling high.
  8. Trade efficiently. Strive for best execution. Every client is treated fairly when traded on a global basis.
  9. Ultimately, make thoughtful, wise changes where expected value is apparent. (No knee-jerk reactions).

Now, let’s look at that process in action. Last month, as part of our regular research, we came across a swap opportunity within our Core Equity strategy.

We found some advantages of holding the Schwab International Equity ETF (symbol: SCHF) over one of our then current Core Equity model holdings: the Dreyfus International Stock Index mutual fund (symbol: DIISX). Listed below are the major reasons why:

  • Similar coverage: both seek diversified international developed exposure, something we desire to hold for a minority allocation within this Core Equity strategy.
  • Lower Operating Expense Ratio (“OER”): SCHF has the lowest OER of any of its peers in this space at a ridiculously lean 0.08%.
  • No transaction fee: Typically, ETFs have a $8.95/trade transaction fee, but as part of Schwab’s relatively new ETF OneSource platform, SCHF can also be bought and sold with $0 transaction costs which is the same as DIISX, but…
  • Not subject to a Short-Term Redemption Fee (“STRF”): Mutual funds on Schwab’s OneSource platform generally need to be held for 90 days or are subject to a 2% STRF. STRFs were put in place to prevent “day trading” these funds which in many people’s eyes are meant for the long-term. However, ETFs are a different breed of animal in that they trade intra-day and the day trading issues are really not valid. As such, ETFs both on and off Schwab’s ETF OneSource platform are not subject to any STRF. Fabulous!

DIISX had been good at providing us with diversified international developed exposure while charging a modest 0.60% OER. But in this fast paced age, new products are increasingly becoming available. A lot of them are just a silly variation of something we already have, or something completely unnecessary. But every once in a while something decent comes out which may not be a perfect fit at first, and we keep it on our radar. In the case of SCHF, we needed to make sure that Schwab ETFs would develop a meaningful following and that this security would have appropriate liquidity (measured by its average trading volume) – those are both valid today. Furthermore, the success so far of the Schwab ETF OneSource platform, with its attractive characteristics listed above, made our decision to make a portfolio change an even easier one.

As always, please don’t hesitate to ask any questions about costs, trading, investment vehicles or anything else. And, go Cubs!