“Where’s my social security statement?”

fee-only financial planning, going digital

Remember that special green and white report, which includes your retirement benefit estimates at various ages and also a personal earnings history, that would show up in your mailbox every twelve months?

Well, if it seems like it’s been awhile since you last received one, it’s because the Social Security Administration, in cost-cutting mode, suspended mailing hard-copy statements with few exceptions beginning in mid-2011. The info is still available but you’ll need to go to www.socialsecurity.gov/mystatement and set up your account. (Be prepared for some deep questions that the agency employs in an effort to thwart identify theft.)  We’re urging all of our clients to do this this month as this information is a critical tool in financial planning. It can also serve as a reminder of the need for adequate personal savings to supplement these benefits. 

By the way, benefit payments are going digital-only too. If you’re currently receiving Social Security checks by mail, you must switch to direct deposit by March. You can set up direct deposits by going to the Social Security link above or by calling 800-772-1213.

Even though this switch from paper to digital will save the government $70MM+ per year, please recall that this program is “under water” and we wouldn’t be surprised to see these “entitlements” have significant changes in the near future. DWM uses sophisticated financial planning software to address these issues. We can literally stress-test your plan to see what happens if your Social Security benefits were cut or totally eliminated. There are also tools like www.maximizemysocialsecurity.com that we use to calculate maximum distribution strategies.

If you don’t already have an online Social Security account set up, take action now thereby keeping your financial planning up-to-date and making sure the government gets your hard earned benefits to you without any issues.

Core and Satellite Investing

From The Charleston Mercury, November 15, 2012

Let’s face it. We probably will have at least a few more years of slow growth along with world and investment environment uncertainty. Seems to me you have three choices: sit in cash (and make almost no return while inflation erodes your purchasing power), stay in your current asset allocation of stocks and bonds (and hope your portfolio doesn’t get hit like it did in 2008), or consider a core and satellite portfolio (designed to participate when the market goes up and protect your assets when the market goes down.)

Try to visualize your total portfolio as a car tire, viewed from the side. The rim and everything within is the core; the tire itself is the “satellite” portion. The core is composed of traditional equity and fixed segments seeking to provide higher expected returns with lower risk in a cost-efficient manner. The satellite portion is composed of investments that do not correlate with the traditional markets. The satellite seeks to provide solid returns and provide diversification and downside protection for the overall portfolio.

The core investments are in low-cost, tax efficient passive mutual funds and ETFs. Research, primarily the Efficient Markets Hypothesis, has shown that active management cannot consistently add value through security selection and market timing in efficient (traditional) markets. For the five years ended December 31, 2011, roughly 75% of actively managed mutual funds underperformed their benchmarks. There are three reasons for this: higher fees (operating expense ratios), more transaction costs, and more tax ramifications. Of these, the fees are the biggest culprit. Actively managed funds cost about one percent per year more than passive funds. That one percent shortfall ultimately results in underperformance and costs investors lots of money.

Therefore, a passive strategy in the core portfolio of traditional investments produces, on average, better returns.

On, the other hand, active management, can be more appropriate in inefficient markets. One good example is liquid alternatives. These publicly traded securities are non-correlated to the stock markets, are easily redeemable and may follow hedge-fund like strategies. The liquid alternatives should be considered for the satellite portion of the portfolio. These funds are specially designed to participate in up markets and protect in down markets. They have been shown to be particularly valuable in limiting losses during bear markets.

Consider a core and satellite portfolio, with passive investments in the core and actively managed liquid alternatives in the satellite. You get diversification, lower volatility and a portfolio designed to protect your assets and grow them. Something we all need in these uncertain times.

Les Detterbeck is one of a small number of investment professionals in the country who has attained CPA, CFP®, and CFA designations. His firm, DWM Financial Group, Inc., a fee-only Registered Investment Adviser, has offices in Charleston/Mt.Pleasant and Chicago. Les may be contacted at (843)-577-2463 or les@dwmgmt.com

China: World’s Number Two Also Faces Major Issues

fee-only financial planning, world-wide economy

The U.S. is the not the only major power trying to find solutions. China is too.

No, they are not grappling with taxes, budgets and deficits as in the U.S. Rather, China must deal with economic reform, environmental problems and political change. They need to shift from an economy built on exports and heavy internal infrastructure investments towards a more sustainable emphasis on domestic spending. In addition, the hyper growth development model has led to widespread environmental degradation. Lastly, most of the 1.3 billion people in China want political change. The Communist party and its 80 million members control, according to the New York Times, the economy, the courts, the news media, the military, educational institutions, civic life and the day-to-day affairs of citizens. And roughly 400 top party Central Committee leaders control the Communist party. Wealth is concentrated where the power is and corruption is rampant. And, we think we have problems.

The Communist Party Congress has been meeting in Beijing since last Thursday. Current leader Hu Jintao outlined his party’s policies that first day. It was a major event. He has been in office ten years and this was only his second such public address.  He called for broader economic and political reform. China’s economic progress in the last decade has been phenomenal, increasing GDP four fold. Yet, even Mr. Hu admitted that China’s development is “unbalanced, uncoordinated and unsustainable.”

Regarding political change, Mr. Hu said last week that “we will never copy a Western political system.” Four years ago, as the U.S. and Europe dealt with the financial crisis, China boasted of the triumph of its model of authoritarian politics which “produced strong, sustainable economic growth.”

Recently, there have been worldwide concerns that Chinese economic growth has been slowing; from a 14% real increase in 2007 down to 7.5% in 2012. However, September and October were stronger, primarily based on major increases in exports and new infrastructure projects, particularly railways. Barron’s reported Saturday that “the doomsday scenarios of hard landings are far-fetched.” Even so, the days of double digit economic growth for China seem to be over. Mr. Hu indicated that he thought economic growth over the next decade will be roughly 7% per year. This pace would likely put China’s economic machine ahead of the U.S. by 2020.

We’re all connected worldwide these days. The fragile recovery and potential fiscal cliff in the U.S. and the continuing problems in the Eurozone are key issues for China in the future. In March, Xi Jinping will take over from retiring President Hu. We’ll be watching closely as the new government deals with its economic, environmental and political issues. Let’s hope China and the U.S. both solve their major issues successfully.