The Life Insurance Puzzle

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We read an article last month in Investment News that suggests that life insurance should not be used as a savings vehicle. As you might imagine, there was some uproar among the life insurance industry readers that heartily disagreed with the premise of the “Guestblog” by Blair Duquesnay.   Ms. Duquesnay believes that there are certainly appropriate purposes for life insurance, but saving for retirement is not one of them. She stated in a follow-up that “life insurance is an instrument of protection, not accumulation.” We wanted to look a little closer into this to understand both sides of the argument.

First, let’s start with some of the universally acceptable reasons for having a life insurance policy. As Ms. Duquesnay says, life insurance should be purchased, in general, “because there will be a financial impact” on a business or family if someone dies. Certainly, protecting our loved ones or business partners is prudent and responsible. If something happens to you, you might want to provide a benefit for regular or special spending needs, potential increased child care costs, a mortgage payoff or other debt relief. Similarly, a death benefit might help cover college costs or provide a lifetime of comfortable support to our dependents. Some policies can be used for estate planning, long-term care or asset protection. It is also true that, in general, the need for a life insurance death benefit may decline over time, as your life circumstances change.

Let’s talk about the different types of life insurance:

1.Term Life, or annually renewable life insurance, offers an affordable premium to buy a particular level of insurance for a specific period of time. Maybe you use it, maybe you won’t and maybe you keep it going, maybe you don’t, but, either way, at the end of the term, the policy expires and, generally, there is no longer a need to have it. There is no additional value to the policy beyond the safety net of the death benefit.

2.Whole Life is the most common form of permanent life insurance, which means the benefit coverages will be around for your lifetime, as long as you pay the premiums. There are two parts to it – an investment portion (cash value) and an insurance portion (face value or death benefit). Premiums are fixed and are considerably higher than term policies, with high mortality charges for keeping the guaranteed death benefit. These products are designed to stay in force for your lifetime and come with steep surrender charges if you terminate the policy early. There are also substantial up-front commissions and fees for investing part of your premiums in a tax-deferred account. You can access your cash value by taking a loan out with the insurance company against the account value in the policy and they will charge you interest. If you stop paying the premiums, you may be able to switch to a paid-up policy that will be worth the existing cash value, but in general, these products are expensive to keep in place.

3. Universal Life is designed to also be a permanent insurance policy, but is considered adjustable because the policy offers the flexibility of changing premium amounts and having a fixed or increasing death benefit. If you need to stop paying or reduce premiums, your accumulated cash value can be used to keep the policy from lapsing. Once the policy value goes to zero, the policy and death benefit lapse forever. There can be steep surrender charges if terminating or withdrawing from your account, which will reduce any accumulated cash value. Like Whole life policies, your premium pays a portion to a high-interest cash value account and a portion for a death benefit. The growth is dependent on the performance in the accounts, on investment earnings (or losses) and on the amount of your premium contributions. The flexibility can be beneficial, but the policy value can deteriorate and lapse and the fees and costs are much higher than a term policy.

4. Variable Life – these are policies built like Universal life contracts (there are also hybrid Variable Universal Life policies, just to make it more confusing), but the investments are kept in managed mutual fund sub accounts with investments selected from a menu. This gives the policy holder more investment choice (and risk) for the cash value account in the policy. However, like Universal life, the same risk applies – the accumulation is dependent on the amount paid with your premium and the performance of the investments in the cash value account. The flexibility might be attractive, but it also increases the risk to the policy. Again, once the policy value goes to zero, the policy and death benefit lapse forever.

There are more insurance products and deeper complexities to the above definitions, but this is a basic outline of some of the life insurance choices. As you can see, the “permanent” life insurance policies and their saving (or investment) option can be costly and will allow for less flexibility in the growth of your investment savings than using standard investment accounts not tied to insurance. We generally find that the expensive fees, commissions and surrender charges keep us from recommending these products as a saving vehicle. “Buy term and invest the rest” is the motto of most fee-only advisors. The insurance industry is always working to improve these products and find the sweet spot for combining protection with accumulation. We certainly agree that there may be appropriate circumstances for using the more complex insurance products. At DWM, we don’t sell any of these insurance products, but we are happy to review your current policies or insurance needs to help you find the sweet spot for you and your family!

Mother Nature is in Charge!

Americans are getting a little disaster weary.  From the horrific wildfires out west to torrential rains and flooding all summer in the east, it has been quite a year.  And in the south and east, we all know what August means…hurricane season is upon us!  Mother Nature is getting on our nerves in 2018!

How can we protect ourselves to minimize the risks to our homes, our property and our livelihoods?  Mitigating risks from catastrophic events starts with prevention and planning by both government and individuals.  Prevention can start with using damage-resistant building materials, having elevated home designs, enforcing safe building codes, developing flood plain management systems, securing or removing hazards ahead of storms and by having evacuation or escape plans in place.  FEMA has an 81 page guide of Mitigation Ideas to deal with earthquakes, landslides, floods, hurricanes, hail, lightning, tornadoes, severe winter weather and more.  https://www.fema.gov/media-library-data/20130726-1904-25045-2423/fema_mitigation_ideas_final_01252013.pdf  There are many threats coming from our environment, but many things that can be done to lessen some of the painful aftermath of these occurrences.

We certainly can use property & casualty insurance to plan and prepare for the worst.  In hurricane-prone areas, for example, we have riders for “named storm” or “wind and hail” coverage that comes with our homeowner’s insurance.  The costs of the insurance can be reduced by increasing the amount of a deductible you want to have or, in other words, how much you can afford to pay out of pocket for repairs after a storm.  We also look for extra coverage for those circumstances when there is a widespread event like a hurricane that may drive costs up with higher demand for labor and materials.  Homeowners may want to have an extended coverage rider built in to help with those higher costs.  It is important to evaluate what your risk tolerance is for these situations and how much you want to pay to transfer some of the risk to the insurance company.  If your home is destroyed or badly damaged, do you have a comfortable level of protection for you and your family?

There has been much discussion on the 50 year old National Flood Insurance Program, as well. President Trump recently signed the legislation to extend the debt-ridden program until November 30th.  That means not dealing with necessary reforms until after hurricane season and mid-term elections.  The federal program, which is some $20 billion in debt to the U.S. Treasury, offers subsidized flood insurance to coastal or flood-prone areas where private insurers have pulled out or made it unaffordable.   As it is, the NFIP provides coverage with caps on claims for homes at $250,000 and on property at $100,000.  Many higher-value property owners may choose to also carry “excess” flood insurance to bridge the gap between the federal program caps and the value of their homes and property.

Unfortunately, the reduced premiums from about 5 million NFIP flood insurance policies nationwide cannot adequately support the claims that have come from recent events, including storms like Sandy, Katrina, Harvey, Maria, Irma and Matthew.  And hurricanes aren’t the only cause of flooding.  We have seen some of these epic rainstorms cause significant inland flooding and damage.   As the head of the SC Department of Insurance said recently, “our entire state is in a flood-zone.”  And this may be true for many areas in the South, East and Midwest.  It is clear there is a need for a flood program that can provide support for affected residents after a storm, especially as we see changing climate conditions and rising sea levels. Lawmakers thus far have been unable to find a bi-partisan fix to the financially strained system.

As homeowners and members of our communities, we should certainly do our share to prepare for these natural events and make sure we have a solid plan in place for our families and our property.  We can maintain our property, keep our own emergency fund and can participate in the insurance coverages available to help protect us.  And we should hope and expect that our legislators – local, state and national- will compromise to find solutions to reform existing programs and to prepare disaster plans that can assist all of us in the event of a catastrophic event.

At DWM, we use a holistic approach to evaluating your financial plan, including risk management.  We will help you review all of your property & casualty insurance policies to ensure that you have appropriate coverage for you and your family.  Let’s hope Mother Nature stays peaceful for the rest of the year!

Emptying the Nest

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It is an exciting time of year when smiling faces in caps and gowns are seen everywhere! Recently having the pleasure to witness my son’s graduation, the President of the University of South Carolina made sure that the graduates took the time to thank their parents for helping them get to this important occasion. Absolutely! So, congratulations, parents! Turning 21 or graduating from college are exciting milestones and your kids have now reached what we all consider to be the beginning of “adulthood” as they get ready to enter the “real” world. Kids grow up in all different ways and in all different stages – is your young adult ready for launch?

At DWM, we like to offer proactive financial advice for all members of our clients’ families. As your young adult is readying to depart the nest, however that looks, we think this is a good opportunity to provide some education, as they take the reins of their own financial future. Many college-aged kids have had a student checking account and understand how to use their debit card pretty well by now! They probably have some experience with having a job and budgeting for things they want to buy in the short term. However, some of the more complex financial topics can be intimidating for young adults, While they may have a solid background in finance, it is always good to review concepts like compound interest, building good credit, taxes, buying insurance and understanding 401(k)s, for once they land that first “real” job! We might suggest that a good place to start is by getting a copy of The Wall Street Journal. Guide to Starting Your Financial Life by Karen Blumenthal (https://www.amazon.com/Street-Journal-Guide-Starting-Financial/dp/030740708X ). This book covers issues about renting or buying your first home, basic investing, taxes, purchasing health insurance, buying a car, establishing good credit and saving for retirement, among other topics. Might make a perfect college graduation or 21st birthday gift!

In addition, this is a good time to help them make sure all of their accounts are properly set up, titled appropriately and that they have a savings program in place. Reaching the age of majority, which is age 21 for both Illinois and South Carolina, is a good time to change any custodial accounts like a UTMA and UGMA to individual accounts. It may also be helpful to talk about debt, perhaps review student loans and consider opening a credit card account to establish some credit history. Using debt wisely, having a good emergency fund and responsible budgeting are all really valuable conversations and will help your young adult navigate their new financial map.

Encouraging saving and investing is a fundamental lesson and the “pay yourself first” concept is an important one. Remind them that they are paying their future self and that, just like the rewards for eating right, exercising and wearing sunscreen, saving and investing will benefit the health of their future self (as well as their current self!).

One idea that might help is having an automatic savings app like the one found in The College Investor article https://thecollegeinvestor.com/17610/top-automatic-savings-apps/. Also from The College Investor, you can find numerous financial and investing podcasts available that your young adult may take interest in. Here’s the link to get started: https://thecollegeinvestor.com/6778/top-investing-podcasts/. Or maybe they would want a subscription that focuses on the economy, like The Economist or Wall Street Journal.

If working and the business offers it, they should always make sure to contribute to their 401(k) to get the most advantage of any company match. And, if they don’t already have one, starting a Roth account is another great investment savings vehicle, especially while their starting incomes and lower tax brackets will allow them the opportunity to make annual contributions. Up to $5,500 of their earned income can be directly contributed to a Roth account and the compounded gains will never be taxed. Your young adult can set up automatic transfers to investment accounts or savings vehicles so they get used to not seeing those funds in their everyday account, just like 401(k) contributions. It is a great way to plant the seeds for a successful future!

Once the young adult has gotten some traction and they have good financial habits in motion, encourage them to contact us and check out the Emerging Investors program at DWM http://www.dwmgmt.com/investors/. You can learn even more about the EI program by clicking on this link and accessing one of our recent blogs written by Jake Rickord http://dwmgmt.com/archives-blog/index.php/2017/11/. Our Emerging Investors program offers a specialized financial planning model with DWM investment strategies that uses the automated Schwab IIP platform. Our goal is to help them graduate to full DWM Total Wealth Management clients down the road. The best way to reach the level of a TWM client is not just by higher earning, but by stronger and earlier investing. We love to educate and help others plan for their financial future. We are always available if you or your young adult have any questions and would certainly welcome feedback.   Please let us know how we can be of assistance!

 

The End of an Era

barbara-bush 2Barbara Bush was one of our country’s most cherished Grande Dames of politics and we were all saddened recently when she passed. With her signature white hair and pearls and her no-nonsense attitude, we were a little in awe, as well as inspired, by her example of family loyalty, faith, public service and good manners. She broke boundaries as the First Lady and championed education issues in her life, while remaining a loving wife and strong matriarch for her family. Regardless of what you think of her family’s politics, Barbara Bush was a woman to be admired.

Part of her legacy will now be the grace and dignity with which she managed her end of life. Surrounded by family at her home, she left this earth with the peace and comfort that we all might aspire to. Achieving that smooth and tranquil transition requires some planning, however. There are certain things that can and should be arranged and recorded ahead of time so that one’s loved ones are not unduly burdened and so that your own comfort and care are well-managed.

Caroline Feeney, in an article on wealthmanagement.com, recently outlined some of the lessons learned by watching Barbara Bush. We think these are valuable to review.

1.Understand Probate – Anyone who has been through probate will tell you to avoid it! Probate can be expensive, time-consuming and becomes part of the public record. Protecting your assets with proper titling and using a revocable or living trust can keep assets from going through the probate system. All revocable trusts remain private and anyone can set one up for their beneficiaries.

2.Plan for Contingencies – Think of all the scenarios that might come up. Select trustees and successor trustees with care and with a back-up plan. Consider the age, health and circumstances of beneficiaries, like substance addiction or divorce protection, when determining the age or terms of your designations.

3.Personal Property Memorandum – These are the softer, more sentimental items that you own. Houses and cars are protected by a trust or designated titling and a personal property memo provides a plan for the smaller tangible items. Someone will have to address these personal belongings when you are gone and, since you know them best, you should outline your plans for taking care of them. You only need to refer to the memo in a will or trust for it to be legally recorded. The list can be changed and updated, as you see fit, without involving a lawyer each time!

4.Palliative Care – Less than 30% of people have a Health Care Power of Attorney (HCPOA) that spells out the kind of care you want to receive and the people that you want making the decisions on your behalf if you cannot. The HCPOA allows an agent to make health care decisions, if you are incapacitated, for things like life support, tube feeding or organ donation. Consider those that might not be overcome with grief as agents who are tasked to comply with your wishes.

5.Prepare an inventory of all accounts – This includes a list of all bank and investment accounts with passwords, as well as all digital assets, including social media accounts. You can use a password vault or keep a handwritten list in a safe and then give access to one of your designated trustees.

6.Have Tax Planning Up to Date – The estate tax limits have increased in 2018 ($11.2M individual/$22.4M married couple), so most of us will not need to worry about estate taxes, unless the legislation changes again! It is still a good idea to have all of your information gathered, organized and up to date to make it easier for your executors, trustees and beneficiaries.

7.Designated Beneficiary Planning – We always help our clients make sure that all assets are titled properly, including real estate, investment accounts, qualified plans, bank accounts and life insurance policies.

8.Review Plan Regularly – Once you have a good plan in place, you should review it every year or two or as there are any life changes. At DWM, we keep copies of your documents with our own summary “estate flow” to help manage this.

9.Use Professionals! – This includes a recommended estate attorney to prepare your plan, as well as a professional wealth manager, like DWM, to review it.

10.Everyone Can Have an Estate Plan – You don’t need to be a famous, well-connected political icon, like Barbara Bush, to be thoroughly prepared.

Estate planning can be a daunting and sometimes complicated task. Many of our clients have trepidation about the process when starting, but every one of them feel a great deal of relief and accomplishment when they have done all the work and have a good estate plan in place. Helping our clients navigate all of the requirements and considerations of estate planning is a very important and satisfying part of what we do at DWM. We are not lawyers, but we know our clients well and can help them understand the many objectives and appropriate pieces of a good customized estate plan. Please let us know if you would like to review your estate plan with us!

Happy National Social Security Month!

Many Americans are worried about the state of Social Security and the possibility that benefits will be reduced or even disappear in the future. Even those already collecting Social Security benefits may be concerned that their monthly check could be impacted by the swelling population of beneficiaries and the inability of the taxes collected from the current workforce to keep up with the demand.

Every April, the Social Security Administration celebrates with a month of highlighting the agency’s mission to “promote economic security” and educating all of us on their programs and services. Social Security was originally created by President Roosevelt in 1935, as part of his New Deal plan, to develop a comprehensive social insurance program. There are three parts to the benefits in Social Security – retirement benefits, survivor and death benefits and disability benefits. This is a pay-as-you-go system, so the payroll taxes paid by the workers and employers today fund the benefits for the beneficiaries of the three SS programs.

Social Security is the single largest federal program and accounts for around 24% of all federal spending. According to the most recent report from the Social Security Administration, the benefits paid out by the Social Security retirement program will be more than what’s paid in, starting in 2020. When the program started in 1935, many workers paid into the program, but few lived long enough after retirement age to collect much in the way of benefits. The Social Security Trust Fund was created when the taxes collected surpassed benefits that were paid out. However, in 2010, the government starting dipping into these reserves to address the insufficient revenue. This trust fund is expected to be completely depleted by 2034 and benefits could be reduced to 75%-80% of current payments, unless something changes that will increase the money going into the trust fund or decrease the amounts being paid out.

We have all heard about Social Security benefits running out and have heard about the need for reform. We jokingly thank the Millenials for supporting something from which they may never recoup any income. But it really is a serious issue for the many Americans who have not saved enough on their own. As Investment News contributor, Mary Beth Franklin, notes, “By 2030, all baby boomers will be older than 65, meaning one in every five U.S. residents will be of retirement age”. This, of course, will put critical stress on the entire Social Security program.

So what can be done? Each year, the Social Security trustees use their annual reports to recommend that lawmakers address the projected trust fund shortfalls. We have heard about “means testing” for benefits, which already impacts Medicare Part B premiums. Means testing could take the form of more income taxes, a reduction in benefits, a surtax or some other method to correct the program shortfalls. Another possible solution talks about tying Social Security benefit checks to prices rather than wages, as price increases are slower than wage growth. This could correct shortfalls over time, but may present other undesirable effects. In a recent article, Ramesh Ponnuru, a Bloomberg View columnist, notes, “An implication of that change [using prices over wages] is that over time Social Security would replace a smaller and smaller portion of the income people made during their working lives.”

Congress is looking at a tactic to address the problem of insufficient retirement savings with a bi-partisan (remember that word?) bill, the Retirement Enhancement and Savings Act (RESA). This legislation would create a retirement savings program allowing access for workers who may not currently contribute to an employer-sponsored retirement plan. It would also offer a collective ‘multi-employer plan’ (MEP) that allows small businesses to share in the costs of plan administration and make it easier for them to offer retirement savings plans to their employees. The more that Americans can save on their own, the less of an impact SS benefit shortfalls will have.

We will continue to watch and wait for the legislators and administrators to solve this problem with Social Security. At DWM, we are all about helping you determine ways to save more, protect that savings and then invest it to have appropriate growth to achieve your goals. We work hard to help our “vintage” clients evaluate all of their options and strategies when applying for Social Security benefits. Benefits taken at the earliest age of 62 will reduce your lifetime benefits, while waiting to begin until the maximum age of 70 can increase your benefits by 8% a year after Full Retirement Age (FRA) is reached. We evaluate which is the most effective strategy for each client – whether waiting and maximizing your benefits or starting benefits at FRA and possibly avoiding any benefit changes that may occur. There is much to consider, but we are here to help navigate the sign-up, the strategy choices and all of the tax implications involved. Please let us know if we can help enhance YOUR retirement savings!

LOOKING THROUGH THE GENDER LENS

Woman_with_wealth.jpgLast week, we celebrated International Women’s Day. Adopted by the UN in 1975, we recognize this global day of advocacy to celebrate women’s work and to promote women’s rights. It has been a troubling year hearing women’s stories of facing sexual harassment in the workplace and elsewhere, but yet a momentous year of watching women gain a collective voice against this treatment. The #Me Too movement has catapulted women’s rights to one of the top national conversations and focused attention on the goal to removing gender bias in many aspects of our culture. You’ve come a long way, baby, indeed!!

This conversation has also put the spotlight on the gender gap for pay and hiring practices. According to an article in Businessweek, working women still earn between 57% – 80% of the salary of a working man, depending on whether they are white, black or Hispanic. Women’s pay is catching up, but is predicted not to achieve equal status until 2058. This affects all of us, as women have less opportunity to save, contribute to Social Security and participate in the economy. Saving adequate retirement savings is harder for women. Women are able to save less for several reasons, the gap in pay being one of them. There may be career interruptions for children, a need to pay for child care while in the workplace, higher healthcare costs and, of course, women live longer, which all puts a strain on women’s ability to save for retirement and have adequate means when older.

Adding to the difficulty in obtaining adequate saving levels, research has shown that women are, on average, less risk tolerant in their financial decisions than men. According to Associate Professor from the University of Missouri Rui Yao, women and men do not think of investment risk differently, but income uncertainty affects women differently from men. That uncertainty may result in women keeping funds in asset allocations with lower expected returns to “buffer the risk of negative income shocks”. This can be a concern for any investor with low levels of risk tolerance, as they might have greater difficulty reaching their financial goals and building adequate retirement wealth because they are less likely to invest in more growth-oriented asset classes with bigger returns, like equities. “Risk tolerance is one of the most important factors that contributes to wealth accumulation and retirement,” said Rui Yao. At DWM, we review the risk tolerance of all of our clients very carefully. We make sure that their investment strategy matches well with their capacity for risk, as well as their tolerance for it, while making sure that they can achieve their goals for financial independence.

Despite fighting issues of sexual harassment and glass ceilings in the workplace, women have made some remarkable gains in their financial status. In 40% of American families, the primary breadwinner is a woman and, for the first time in history, women control the majority of personal wealth in the U.S. In fact 48% of all millionaires are women. Also, women will benefit immensely in the future transfer of wealth – from husbands who are older and die sooner or parents who now bestow equal inheritances to sons and daughters. Breadwinner women may control more wealth, but there is still a shortfall in other areas.

There are many arguments for equalizing our gender dynamics at home and at work – there is no doubt that enabling women to achieve their full potential is certainly better for women and their families. There is also a universal financial argument to be made. By some estimates, according to Sallie Krawchek of Ellevate Network, if women were fully engaged in the economy, GDP would increase by 9%! Ms. Krawchek’s article also cites multiple studies that conclude “companies with diverse leadership teams” outperform other companies on metrics including higher returns on capital, lower risk and greater innovation. This translates into healthier corporate environments that are rewarded on the bottom line. That is good for men, women and families! All of the reasons for closing the gender gap are important, but the financial benefits for everyone are significant and certainly can’t be considered controversial. As someone once said, “It’s the economy, stupid”!

While there remain roadblocks to women achieving equality in their financial status with men, we do think having these national conversations and educating both women and men on the benefits of empowering women will begin to make progress. We agree that deficiencies in retirement savings and the economic engagement of women are highly related and we hope changes are coming. At DWM, we look at the total wealth management for all of our clients equally and with consideration for every one of their life situations. We know that anything that has a positive effect on the financial success of women is good for us all.

The Mighty Dollar

With tax cuts and tax returns on everyone’s minds, we think it is a good time to look closely at our favorite currency!  We might call it “dough”, “bread” or “cheddar”, we have “bean”-counters to keep track of it and we use simple, gastronomic valuations, like the Big Mac Index, to compare it to its peers.  Thinking about the US dollar and its’ value might just make you hungry!   The dollars’ worth is determined by the foreign exchange market, but investors and economists alike are always looking for ways to value the currencies and look for explanations or even monetary conspiracies, to explain currency fluctuations.

In 1986, The Economist came out with the Big Mac Index as a simple way to discuss exchange rates and purchasing-power parity (PPP), which compares the amount of currency needed to buy the same item in different countries, in this case a Big Mac. The Wall Street Journal came up with their own modernized version of this same idea with their Latte Index, which compares the price of a Starbucks tall latte in cities around the world.  For example, in New York City, the WSJ reporter could buy a tall latte at Starbucks for $3.45.  Other WSJ reporters would need to spend $5.76 in Zurich, $4.22 in Shanghai, $3.40 in Berlin (almost the same as the U.S.), $2.84 in London and $1.53 in Cairo.  These simple comparisons of the price of a good that is available in many countries can be an indicator of whether foreign currencies are over-valued or under-valued relative to the US dollar.

There are some criticisms of these simple tools.  Costs of these products can depend on local wages or rents, which are generally more expensive in richer countries and can add to the cost of the product.  The price for a Starbucks Latte can even fluctuate amongst American cities or specific locations, like airports, which may have higher rents.  And adjusting these indices for GDP will change the data and perhaps improve their accuracy.  Some also have pointed to the ingredients in these particular items as causing value differences.  McDonald’s, for example, must use strictly British beef in the U.K.  Starbucks can be a little more consistent, as coffee beans are not generally grown in most of the countries they operate in, so the imported price is pretty standard.

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What these indices don’t tell us about the currency market is why fluctuations occur.  For example, why has the U.S. dollar hit a recent three-year low?  According to an article in yesterday’s WSJ, one simple explanation for a weakened dollar is that “the economies in the rest of the world are finally growing again, so their currencies are strengthening. The U.S. economy isn’t improving as fast—because it was stronger to start with—so the dollar’s falling.”  The Chinese yuan has gained 3.8% so far in January after gaining 6.7% in 2017, which has the officials at the People’s Bank of China concerned about their exports.  President Trump and the U.S. have been critical of any Chinese central bank policies that would devalue the Chinese currency and cheapen goods coming into the U.S.  This trade friction complicates China’s management of their currency, particularly as they attempt to make the yuan a more market-driven currency.

Adding to the currency gap with China and the drop in US currency values overall were comments made last week by the U.S. Treasury Secretary signaling Administration support for a weaker U.S. dollar as being “good for trade.”   Such overt comments are traditionally avoided by the Treasury Department, but may spotlight the Administration goals to reduce the trade deficit and allow currencies to float freely.  President Trump reiterated his stance on trade imbalances in his State of the Union address, pledging to “fix bad trade deals” and that he expects trade deals to be “fair” and “reciprocal”.  Another factor that may weaken the dollar is the belief that 2018 will bring a tightening of monetary policy by the international banks.  Some banks, like the Bank of Canada and Bank of England, have already raised rates.

A weaker dollar makes U.S. goods cheaper to foreign markets, but there is a risk of undermining confidence in an array of U.S. assets, like the U.S. Treasury market.  As the WSJ article explained, as the new tax law expands the federal budget deficit, the government will look to sell the debt to foreign investors.  Those investors may demand higher rates to compensate for the risks of a weaker currency and those costs could fall onto the U.S. taxpayers.

So, we should think about our American dollar today and perhaps look at our paychecks or tax returns to see what has changed.  At DWM, we are always careful to think about each and every one of your dollars – the ones you invest, the ones you save, the ones you spend and the ones you pay in tax.  Using the simple Big Mac or Starbucks Latte indices might help us remember all the factors that go into the value of a dollar around the world.  For me, I certainly prefer to imagine buying a tall latte in Zurich over a Big Mac!

 

 

Understanding Risk and Reward

Electronic Discovery Risk Assessment3-1024x664Mark Twain once said “There are three kinds of lies:  lies, damned lies and statistics”.  We are inundated nowadays with statistics.  Statistics are a scientific method for collecting and analyzing data in order to make some conclusion from them.  Very valuable indeed, though not a crystal ball by any means. 

When you study investment management, you must conquer the statistical formulas and concepts that attempt to measure portfolio risk in relation to the many variables that can affect one’s investment returns.  In the context of investing, higher returns are the reward for taking on this investment risk – there is a trade-off – the investments that usually provide the highest returns can also expose your portfolio to the largest potential losses.  On the other hand, more conservative investments will likely protect your principal, but also not grow it as much. 

Managing this risk is a fundamental responsibility for an investment advisor, like DWM.  You cannot eliminate investment risk. But two basic investment strategies can help manage both systemic risk (risk affecting the economy as a whole) and non-systemic risk (risks that affect a small part of the economy, or even a single company).

  • Asset Allocation. By including different asset classes in your portfolio (for example equities, fixed income, alternatives and cash), you increase the probability that some of your investments will provide satisfactory returns even if others are flat or losing value. Put another way, you’re reducing the risk of major losses that can result from over-emphasizing a single asset class, however resilient you might expect that class to be.
  • Diversification. When you diversify, you divide the money you’ve allocated to a particular asset class, such as equities, among asset styles of investments that belong to that asset class. Diversification, with its emphasis on variety, allows you to spread you assets around. In short, you don’t put all your investment eggs in one basket.

However, evaluating the best investment strategy for you personally is more subjective and can’t as easily be answered with statistics!  Investment advisors universally will try to quantify your willingness to lose money in your quest to achieve your goals. No one wants to lose money, but some investors may be willing and able to allow more risk in their portfolio, while others want to make sure they protect it as well as they can.  In other words, risk is the cost we accept for the chance to increase our returns.

At DWM, when our clients first come in, we ask them to complete a “risk tolerance questionnaire”.  This helps us understand some of the client’s feelings about investing, what their experiences have been in the past and what their expectations are for the future.  We also spend a considerable amount of time getting to know our clients and understanding what their goals are and what their current and future financial picture might look like.  With this information in mind, we can then establish an asset allocation for each client’s portfolio.  We customize the allocation to reflect what we know about them, looking at both their emotional tolerance for risk, as well as their financial capacity to take on that risk.  We also evaluate this risk tolerance level frequently to account for any changes to our clients’ feelings, aspirations or necessities.  While we use the risk tolerance questionnaire to start the conversation, it is our understanding of our client that allows us to fine tune the recommended allocation strategy.

A Wall Street Journal article challenged how clients feel about their own risk tolerance and suggested that being afraid of market volatility tends to keep investors in a misleading vacuum.  The article suggests that investors must also consider the risk of not meeting their goals and, that by taking this into account, the investor’s risk tolerance might be quite different.

The WSJ writer surveyed investors from 23 countries asking this question:

“Suppose that you are given an opportunity to replace your current portfolio with a new portfolio.  The new portfolio has a 50-50 chance to increase your standard of living by 50% during your lifetime.  However, the new portfolio also has a 50-50 chance to reduce your standard of living by X% during your lifetime.  What is the maximum % reduction in standard of living you are willing to accept?” Americans, on average, says the article, are willing to accept a 12.65% reduction in their standard of living for a 50-50 chance at a 50% increase.   How might you answer that question?

So, bottom line, it is the responsibility of your advisor, like DWM, to encourage you to choose a portfolio allocation based on reasonable expectations and goals.  However, understanding your own risk tolerance and seeing the big picture of your investment strategy is also your responsibility.  Our recommendations are intended to be held for the long-term and adhered to consistently through market up and downs.  We know that disciplined and diversified investing is the strategy that works best for every allocation!

We want all of our clients to have portfolios that give them the best chance to achieve their financial aspirations without risking large losses that might harm those chances.  Through risk tolerance tools and in-depth conversations, we get to know our clients very well, so we can help them make the right choice.  After all, our clients are not just numbers to us!

HURRICANE SEASON 2017: SPOTLIGHT ON FLOOD INSURANCE

Water seems to be everywhere right now.  Hurricane season lasts until November 30th, but many of us in the coastal areas of the United States are already weary from this year’s active storm season.  Texas, Florida, Georgia and the Carolinas have seen widespread damage from Hurricanes Harvey and Irma and those in the East and Northeast are closely watching Jose and Maria to see what kinds of impacts they will bring.  As we watch the news and see the photos of flooded homes, streets turned into waterways and communities working to recover from the mess, the reported costs of these two storms seems almost unfathomable – estimates of the total economic cost for both storms range from $115 billion to $290 billion!  Many of those in need of assistance appeal to FEMA, the Federal Emergency Management Agency, and, while FEMA can provide small assistance payments as a safety net, much of the flood damage assistance must come through FEMA’s National Flood Insurance Program (NFIP) – and you must have a flood insurance policy to receive anything from them.

Premium rates for flood insurance policies are partially subsidized by the federal government and, without these subsidies, the cost for this type of insurance could be exorbitant.  Complicating the matter is that most banks won’t loan money to build or purchase homes in flood-prone areas without it.  Currently, flood insurance claims, partially paid-for by those premiums, will cover replacement costs for property of up to $250,000 and up to $100,000 for contents.  The average NFIP claim payment is around $97,000.  According to a September 10th Post & Courier article, in SC it is estimated that 70% of properties in the high-risk areas are insured.  Also, high-risk areas have a 1 in 4 chance of flooding during a 30-year mortgage, according towww.southcarolinafloodinsurance.org.   However, 30% of flood losses occur in flood zones that are not at high risk.  As the head of the SC Department of Insurance said, “our entire state is in a flood zone.”

The NFIP is now reportedly close to $25 Billion in debt, even before these most recent storms, and the program was set to expire on September 30th.  Last Friday, PresidentTrump signed legislation reauthorizing the National Flood Insurance Program until Dec. 8, 2017 and providing federal disaster assistance for the nation’s hurricane recovery.  This buys more time for Congress to consider reforms to the program, which, by all accounts, is drastically needed.  Reportedly, program costs overrun annual premium income, even without the catastrophic losses from natural disasters.  While a lot of communities have flood mitigation programs in place, there is much discussion that it is time for stronger flood-proofing standards – like making sure that all flood-prone properties are reinforced or elevated and redrawing outdated flood maps to properly assign risk to those properties.  Critics have claimed that the NFIP has wasted money rebuilding vulnerable homes when it would be cheaper to help homeowners move to higher ground.  There is also concern that “grandfathering” certain properties allows homeowners to pay subsidized rates based on outdated flood maps.

The National Flood Insurance Program was created in 1968 when private sector insurance carriers stopped offering the non-profitable coverage.  The idea was to transfer some of the financial risk of property owners to the federal government and, in return, high risk areas would adopt flood mitigation strategies to reduce some of that risk.  Some are now arguing that these subsidies mask the true risk of living in these high flood-prone areas and full actuarial rates for flood insurance premiums should be phased in, subsidizing only those truly in need.  In a Bloomberg article from September 18th, U.S. Rep. Sean Duffy (R-WI) and U.S. Rep. Earl Blumenauer (D-OR) are appealing for reform and suggest that “…the NFIP’s subsidized rates make flood-prone properties more affordable… and that for “ the sake of people’s health and safety”, it’s critical that we “stop paying to repeatedly rebuild flood-prone properties.”  They hope to encourage Congress to reform NFIP and to make bi-partisan recommendations to protect future flood victims.

At DWM, we recommend that you annually review all of your insurance, including property & casualty and flood insurance.  There are many ways coastal or flood-prone homeowners can mitigate their own risk with upgrades to roofs, windows, landscaping, hurricane shutters etc.  You should find out your home’s elevation and evaluate your risk.  You may also want to check on your flood zone and consider a flood insurance policy for added protection.  Flood insurance has a 30-day waiting period, so once there is a hurricane en route, it is too late to sign up and be covered in time.  For most policies not in high-risk flood areas, annual premiums range from $400-$700 under the current regulations – high-risk flood zones will be more.  We will continue to monitor the legislation as it approaches the next deadline of December 8th.  Luckily, our DWM office did not have to contend with any direct flooding issues, but we will most certainly be keeping an eye on the weather!

Please let us know if we can help review any of your insurance policies to make sure you have affordable and appropriate coverage on all aspects of your life and property.

Total Eclipse of the Sun

We all spend a lot of time thinking about our Sun.  In the summer, we want to know if clouds or rain will obscure the Sun’s heat and brilliance and perhaps impact our plan for outdoor activities.  We must think about the Sun’s intensity by protecting our skin and our eyes from the powerful UV rays with sunscreen, protective clothing and eyewear.  Sunrise and sunset mark the ebb and flow in our days with beautiful atmospheric displays.  The Sun, as we all know, keeps us alive on this planet!

On August 21st, our moon will pass between the earth and the Sun, throwing shade across a wide path of the United States that includes Charleston, SC.  Temperatures will drop, the sky will darken and animals will be confused about what to do. The Great American Eclipse of 2017 will begin in the Charleston area with the first phase at 1:17 pm, will hit the peak or “totality “ period at 2:46 pm and will finally end around 4:10 pm.  This is the first total solar eclipse to occur in the US since 1979 and is the biggest astronomical event that America has seen in years.

There are five stages to a solar eclipse and there are some interesting features to look for during each phase, for those of you getting ready to participate.  Here are the 5 phases:

1. Partial eclipse begins (1st contact): The Moon starts becoming visible over the Sun’s disk. The Sun looks as if a bite has been taken from it.

2. Total eclipse begins (2nd contact): The entire disk of the Sun is covered by the Moon. Observers in the path of the Moon’s umbra, or shadow, may be able to see Baily’s beads and the diamond ring effect, just before totality.  Baily’s beads are the outer edges of the Sun’s corona peeking out from behind the moon and the diamond ring effect occurs when one last spot of the Sun shines like a diamond on a ring before being obscured.

3. Totality and maximum eclipse: The Moon completely covers the disk of the Sun. Only the Sun’s corona, or outer ring, is visible. This is the most dramatic stage of a total solar eclipse. At this time, the sky goes dark, temperatures can fall, and birds and animals often go quiet. The midpoint of time of totality is known as the maximum point of the eclipse. Observers in the path of the Moon’s umbra may be able to see Baily’s beads and the diamond ring effect, just after totality ends.

4. Total eclipse ends (3rd contact): The Moon starts moving away, and the Sun reappears.

5. Partial eclipse ends (4th contact): The Moon stops overlapping the Sun’s disk. The eclipse ends at this stage in this location.

Historically, solar eclipses have been significant events and have been recorded dating back to 5,000 BC.  There are writings of mathematical predictions of eclipses from ancient Greece, Babylon and China.  Rulers and leaders often used the predictions of astronomical events to gain power or to offer reassurance to a fearful population.  George Washington was grateful for a heads up about a coming solar eclipse prior to a battle in 1777 so he could alleviate any superstitions that his troops may have.  And scientists have used the opportunity of an eclipse to study the Sun, measure distances and features in the universe and learn about the Earth’s atmosphere.  The discovery of hydrogen can be credited to a solar eclipse and a solar eclipse in 1919 provided observational data for Einstein’s theory of general relativity.  This year, NASA has set up many sites within the path of the eclipse to monitor, measure and capture data to further their knowledge.  There is much to be learned from studying these phenomena.

As we have seen throughout history, the science of astronomy can be used to predict and measure certain events and occurrences with regularity.  Wouldn’t it be nice if there could be more certainty in predicting the ups and downs of the stock market?  One study found that stocks around the world rise on sunnier days!  However, no one can predict the future.  We need to focus on what we can control, including an appropriate asset allocation, diversification and keeping costs low.  That is why actively managed funds underperform the benchmarks and why even the geniuses like Warren Buffet recommend using passive index funds.  At DWM, we think you should stick with your investing plan and not look for the latest fads or trends or even astronomical events to impact your strategy.

We hope that NASA and other scientists learn some spectacular new things from this years’ eclipse.  Here in Charleston, we will be avid, yet passive spectators to the historical occurrence and will use our ISO certified eclipse glasses to watch the once-in-a-lifetime event unfold.   Happy eclipse watching!