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Archive for the ‘Investing Strategy’ Category

Exchange Traded Funds (ETFs) have been growing in popularity with investors and their advisers.  They offer low costs and opportunities to more precisely create an asset allocation or take advantage of trading and hedging ideas.

Currency Exchange Traded Funds have grown popular over the course of 2011 to investors who are attempting to gain exposure to foreign currency while avoiding the cost and complexity of the foreign exchange (Forex) market. Investing in foreign stocks and bonds can be a good investment when looking for a financial diversification and also offer the potential of producing substantial returns.

Up until recently, an investor’s only choice to hedge foreign exposure has been through the Forex markets. These markets can be complex for most investors and require substantial capital at risk.  Investing in Forex is promoted by some as a speculative way to make profits.  But an investment in foreign currency comes with the risk of losing money through exchange rates.

ETF’s that focus on currencies are a less complex way to hedge an overseas investment. They give the average investor the opportunity to invest away from the US dollar. ETF’s are also used as ideal instruments for investors to diminish the loss of money due to exchange rates.

Why Invest in Currency Exchange Traded Funds?

Investing in an ETF is much less complex than investing in the Forex market. Although the Forex is the most liquid market (trillions are traded each day), it can be difficult for the average investor to get a seat at the table considering the capital that may be needed and the trading costs incurred. ETF’s offer a simpler way to invest in foreign markets.

If an investor feels as though there is potential economic growth overseas or in an emerging market, ETF’s are a perfect vehicle for international exposure.  Buying individual stocks overseas may be difficult for US investors and may be costly as well.  Mutual funds are a great way to gain access but they have higher costs compared to ETFs.

Why invest in currencies?  Consider this:  Living in the US means that your source of income and most of your investments are denominated in US dollars.  If your portfolio is loaded with domestic investments (and most investors tend to be woefully under-allocated in foreign equity positions), adding a currency ETF to your portfolio can help balance your investments and add diversity to your portfolio away from the US dollar.

Let’s say you are investing overseas through mutual funds in your 401(k) or brokerage account.  Most of these portfolio managers tend to not hedge their exposure to currency changes.  This can turn a positive fund return into a loss when converting back to the US dollar.

Now an investor may want to hedge by holding a position in a foreign currency.  But investing in foreign markets can be risky because of the constant fluctuation of currency and exchange rates. The currency market never closes and is open twenty-four hours of everyday. For the average investor, constantly keeping up with the currencies to figure out the best times to sell and buy may not be worthwhile and result in a loss in money (as well as sleep).   ETF’s offer a more efficient opportunity to manage these risks of foreign investments.

Why bother?  Well, just look at the news headlines.  There continues to be debt crises in foreign and US markets.  This tends to lead to potentially higher interest rates as investors demand a higher return for attracting their money to a particular country.  Higher interest rates in turn will negatively impact the value of the currency and lead to a “weaker” currency. (The upside, on the other hand, is that a weak dollar, for example, will make our exports more competitively priced and help those business dealing overseas).

Investors may be interested in “safe haven” currencies during poor financial times. Countries with strong political stability, low inflation, and stable monetary and fiscal policies tend to be magnets for money in tough times. While that doesn’t necessarily describe the US right now, we are still considered the best option out there as a “safe haven.”

Hedging Examples

According to this article appearing on Investopedia, “a weakening currency can drag down positive returns or exacerbate negative returns in an investment portfolio. For example, Canadian investors who were invested in the S&P 500 from January 2000 to May 2009 had returns of -44.1% in Canadian dollar terms (compared with returns for -26% for the S&P 500 in U.S. dollar terms), because they were holding assets in a depreciating currency (the U.S. dollar, in this case).”

Disadvantages of ETF’s

No investment comes without risks and ETFs and currency ETFs in particular are no different. As is the case with many ETFs, there is always the issue of liquidity of the ETF.  (An ETF without a deep market or volume can produce exaggerated and volatile price changes). And in the case of currency ETFs there is the added issue of dealing with foreign taxes.

The Bottom Line

Whether or not a currency ETF makes sense for your particular situation is something that only you with the help of a qualified professional can determine.

But you should at least be aware of the tools available that may help you protect your portfolio. At the very least, it makes sense to hedge overseas investments especially during volatile times.

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When you’re on an airplane and hit turbulence or rough weather, the flight crew tells you to stay seated and buckled.  Unfortunately, when the markets hit bad weather, there is rarely such a warning.

You might want to call it “Black Thursday.”

Yesterday, the markets around the world went into a tailspin reacting almost violently to the ongoing drumbeat of dour economic news.

On the radar, we’ve seen the storm clouds moving in for a while now:

  • lower than expected GDP in the US last quarter,
  • downward revisions of the GDP to a negligible 0.4% for the first quarter,
  • lower business and consumer confidence surveys,
  • sharply lower than expected new jobs created,
  • higher unemployment,
  • foreign debt crises weighing down our Eurozone trading partners.

There was a temporary distraction over the last couple of weeks as we in the US focused on the debt ceiling debate to the exclusion of all else.  Self-congratulatory press remarks by politicians aside, nothing done in Washington really changed the fact that we are still flying into a stiff head wind and storm clouds that threaten recovery prospects.

Eventually, though, the accumulation of downbeat news over the past few weeks seems to have finally come to a head yesterday.  No one thing seems to have caused it.  It just seems that finally someone said “the Emperor has no clothes” and everyone finally noticed the obvious: global economies are weak and burdened by debt and political crises.

All of this has been creating doubt in the minds of investors about the ability to find and implement policies or actions by governments or private sector companies.  And doubt leads to uncertainty.  And if there’s one thing we know for certain, it is that markets abhor uncertainty.

While many commentators may have thought that the “resolution” of the debt ceiling debate in Washington would have calmed the markets, it seems that upon further review of the details the markets are not so sure.  And in an “abundance of caution” market analysts who once were so OK with exotic bond and mortgage investments are now reacting overly negatively to any and all news and evidence of weakness by governments or companies.

What’s An Investor to Do?

Don’t panic.  It may be cliché but it’s still true.  If you hadn’t already put in place a hedging strategy, then what is past is past and move forward.

So the Dow has erased on its gains for 2011 and has turned the time machine back to December 2008.

If you sell now — especially without a plan in place — you’re setting yourself up for failure.

Here’s a simple plan to consider:

  1. Hold On:  You can’t lose anything if you sell.
  2. Hedge: As I’ve said before in this blog and in the ViewPoint Newsletter, you need to put in place a hedge.  There are lots of tools available to investors (and advisers) to help:  Exchange Traded Funds (ETFs) on the S&P 500, for instance, can be hedged with options or you can use “trailing stop-loss” instructions to limit the market downside; another option – inverse ETFs that move opposite the underlying index. These aren’t buy-hold types of ETFs but can be used to provide short-term (daily) hedges.
  3. Rebalance:  If you’re not already diversified among different asset classes, then now’s the time to look at that. You may be able to pick up on some great bargains right now that will position you better for the long-term.  Yes, every risky asset got hit in the downdraft but that’s still no reason to be bulked up on one company stock or mutual fund type.
  4. Keep Your Powder Dry and in Reserve:  Cash is king – an oft-repeated phrase still holds true now.  Take a page from my retirement planning advice and make sure you have cash to cover your fixed overhead for a good long time.  With cash in place, you won’t be forced to sell out at fire sale prices now or during other rough times. This is part of what I refer to as “Buy and Hold Out.”
  5. Seek Professional Help:  Research reported in the Financial Planning Association’s Journal of Financial Planning shows that those with financial advisers and a plan are more satisfied and overall have more wealth.  Avoiding emotional mistakes improves an investor’s bottom line.

As a side note:  The old stockbroker’s manual still says “Sell in May and Go Away.”  Probably for good reason.  Historically, the summer months are filled with languid or down markets and volatile ups and downs.

 

While it’s tempting to give in to the emotional “flight” survival response that you’re feeling right now, don’t give in.  Stand and fight instead.  But fight smart. Have a plan and consider a professional navigator.

If you are seeking a second opinion or need some help in implementing a personal money rescue plan, please consider the help of a qualified professional.

 

Let’s Make A Plan Together:  978-388-0020

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Bonds are not the stodgy, boring things that most investors think of even though there’s no army of talking heads on financial news shows talking about them.

They are a huge market (about double the value of stocks as noted in my last post). They are an essential part of our economy.  Most companies cannot function without easy access to credit.  In fact, the shock and uncertainty that followed the collapse of some of the largest banks pretty much brought the economy to a standstill and contributed mightily to the Great Recession.

But that doesn’t mean that there isn’t money to be made in this asset class. Savvy investors of all stripes need to consider the value of bonds in a well-diversified portfolio.  And how you build that portfolio will help lower risks and costs and ultimately mean more money in an investor’s personal bottom line.

Whether someone is retired or not, bonds can provide income and potential capital appreciation (and depreciation if not hedged properly).

Bonds are a key part of an income-producing strategy (dividend-paying stocks are another asset class useful for this as well).

What is a Bond Ladder?

Essentially, a bond ladder describes a strategy to manage fixed-income investments by staggering the maturity dates of the various investments.

Some may be familiar with CD ladders: You select a series of bank certificates of deposit and stagger their maturity dates so that every six months, for example, a CD matures and you can reinvest the proceeds.

The advantage of this is that in a rising interest rate environment the investor is not locked out  of getting a higher rate on new money.

As with any fixed income investment, the disadvantage is that in a falling rate environment money that matures gets reinvested at a lower rate.

To minimize this impact professionals focus on the concept of “duration” which is a measure of how sensitive a bond (or any fixed income investment) is to changes in interest rates:  The lower the duration, the less sensitive and vice versa.

Mutual funds may publish an implied “duration” measure but it is not accurate because the fund, unlike the bonds themselves, is perpetual.

So to minimize risk to a fixed income portfolio, an investor (with the help of a competent financial professional) can create a custom portfolio.  And unlike a passive index fund, this custom portfolio can be built using bank CDs of staggering maturities for the near-term money coupled with a variety of bonds (corporate, US Government and municipal issues) with their own staggered maturity dates.

To mitigate the risks posed by higher interest rates caused by inflation or other political influences, the mix can also include “floating rate” bank notes. These are essentially bank loans to companies that adjust. Think of them like adjustable rate mortgages but to fund company operations  instead of real estate.

To add diversification to the mix, one can add closed-end funds that can be bought at a discount. These funds are professionally managed and offer an opportunity for price appreciation but at an expense ratio that is typically far lower than a conventional open-ended bond mutual fund.

By combining these elements, an investor may be able to lower the overall risk from interest rate movements, from default risk of individual components and from the impact of a “run on the bank” when others are selling (NAV risk).

And the overall cost of putting this together is cheaper than many mutual funds.  The cost to buy or trade an individual bond is typically included in the yield offered without any additional charge.  CDs do not have any added cost.  And for US Treasurys there may be a nominal fee (less than $3 per bond or example).

A knowledgeable financial professional can have access to hundreds of bond brokers.  By being independent and not beholden to any one broker’s inventory, an adviser can access offerings from multiple sources, find the best price and terms and lower an investor’s costs.

Depending on the total assets in the bond portfolio, the cost for professional management to monitor and make changes can typically run between 0.4% and 0.7% of the portfolio which is well under the cost of many mutual fund options.

For help putting your personal portfolio together, call Steve Stanganelli at Clear View at 978-388-0020 or 617-398-7494.

 

 

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Investors are always looking for the next big thing. By the amount of time and energy devoted to talking heads divining tea leaves and spouting stock tips on news programs, cable TV and the internet, you would think that the only market that counts is the US stock market.

In fact, the global bond market actually dwarfs the stock market by a factor of two to one. According to the December 2010 Asset Allocation Advisor, the amount of outstanding debt in the world tops $91 Trillion compared to the $52 Trillion market value of all stock markets around the globe. Of this all US stocks are valued at only $17 Trillion.

There is a mistaken belief among investors that bonds are only for “conservative” investors or those who are retired. Stocks are exciting.  Bonds are boring.  If we have learned anything from the financial collapse triggered by mortgage bonds in 2008, bonds are anything but boring.  The important lesson is knowing that bonds are not to be ignored and can play an important role in a diversified portfolio when done right.

What’s an investor to do?  Build a better mousetrap.

Most investors, if they have any bond exposure at all, will buy them through a mutual fund.  While mutual funds offer instant diversification and professional portfolio management, there are limitations.  In no particular order, these are: costs, inability to control for taxes, lack of customization and what is known as “NAV” risk.

For actively managed bond mutual funds, the average operating costs (or expense ratio) can exceed 1% per year.  For index or passive bond mutual funds, the costs can be less (sometimes as low as 0.2% per year) but you will only have access to a statistical sampling of bonds.  With either option you lack the ability to customize the holdings to match your specific needs for generating income or control the timing of sales which may be important from a tax perspective.

Another problem, NAV risk, is little understood by consumers.  Mutual funds are priced daily.  A value is determined for each of the mutual fund’s investments (closing price times number of shares or units owned).  And this total is divided among the total number of mutual fund units outstanding.  This Net Asset Value is the number you see in the charts and tables on line or in the newspaper.

With a mutual fund there is a constant flow of money coming in to buy more units or flowing out to cover redemptions made by other investors.  Sometimes there is a mismatch between these flows.  If there is a “run on the bank” and lots of redemptions occur, the mutual fund may be forced to sell holdings at “fire sale” prices intended for long-term investment to raise cash to meet the demands caused by redemptions.  For those investors who hold on, they can be punished in the near-term by seeing the NAV fall and dragging down the value of their holding. That’s the NAV risk.

In the next part of this blog, I’ll talk about the ways to help reduce the impact and costs of these problems by building your own portfolio of bonds.

For additional information or help with investing, call Clear View Wealth Advisors at 978-388-0020 or 617-398-7494.

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June 2011 ViewPoint Newsletter

The current issue of the ViewPoint Newsletter from Steve Stanganelli, CFP(R) and Clear View Wealth Advisors is available for download from the SlideShare.net website.  A copy can also be found at the Clear View website newsletter archive.

In this issue, I focus on the key themes of the newsletter:  Retirement, College, Investing Strategy and Taxes.

  1. Retirement:  Using an “endowment” strategy to sustain withdrawals in retirement
  2. Investing: The value of dividend investing strategies for a total return investor and a discussion of how dividend payouts may predict future stock prices
  3. Taxes:  Real estate owners and especially those going through divorce may find these tips useful.
  4. College Planning:  On Thursday, June 9 there will be another free webinar with this one focused on Paying for College – Debunking Financial Aid Myths.

CLICK BELOW to VIEW the NEWSLETTER

Make Sense of Your Money with the ViewPoint Newsletter

Click Here to Download June 2011 ViewPoint Newsletter

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We certainly don’t need another case to justify the mistrust that consumers have of all things financial.  There’s been no shortage of scams, lawsuits and perp walks over the past couple of years.

Here is a recent example of a slew of cases involving broker-dealers selling either private placements or other illiquid securities that have ended up burning investors.

As reported in the Wall Street Journal and Financial Advisor magazine earlier this week (June 1), an independent brokerage firm with representatives across the country, has been accused of misleading elderly and unsophisticated investors without proper consideration of whether the investments were suitable.

The article reports that the brokerage firm sold billions of dollars of non-traded Real Estate Investment Trusts (REITs) to individuals since 1992 and pocketed more than $600 million in fees. Sales of these investments generated more than 60% of the firm’s total revenues.

Now there is nothing wrong with a REIT per se. They are great ways to buy into a diversified portfolio of real estate. And there’s nothing wrong with illiquid investments either.  They serve a purpose and have a place in a portfolio assuming that it makes sense for the individual.

The problem comes from the way these investments are sold by some in the industry who do not have the best interests of the client at heart. When there is a profit motive involved, there is the potential for misbehavior arising from this basic conflict of interest.

Brokerage firms are held to a certain standard called “suitability” which is a sort of legal test to see if a particular investment makes sense for an investor.  Presumably, a broker working for a brokerage firm will ask a range of questions about the investor’s income, other assets, investment goals and time frame.  Then a brokerage firm’s compliance department will review the information and the application for the investment before the purchase.

Red flags would be if an investor has a large chunk of money to be tied up in any one type of investment or asset class.  Another might be if the investor indicates that they need the cash for some specific goal on a certain date but the investment is tied up longer than that and thus subject to an early redemption penalty.

Apparently in this case, the brokerage firm did not even do this type of “due diligence” on the investors buying into the REIT.  For many who were not knowledgeable of things like asset allocation or reading complex investment documents, they allegedly simply relied on marketing materials provided by the brokerage firm.

In previous cases, we have seen how there has been an incentive by brokerage firms to not complete any significant due diligence on an investment product that is sold by their representatives. Investors who think that they are protected by a firm’s “compliance department” have often found that no one was really checking on the investments being offered.  And like the fox guarding the hen-house, there is the potential for hanky-panky.

And the one who pays is the investor.  In many cases, the brokerage firm gets paid twice:  A 1 to 2% “due diligence” fee paid by the investment’s sponsor and then from the 5% to 10% commission paid by the investor. And in some cases the brokerage only pocketed the fee instead of hiring the team of due diligence analysts.

There is a battle going on in the financial industry especially since the passage of the Dodd-Frank financial regulation reform bill.  While not the greatest, it did offer change.  And one key change was to implement a universal “fiduciary” standard on those working with clients.

Right now, stand-alone registered investment advisers (RIAs) and specifically fee-only financial planner and advisers already subscribe to a “fiduciary” standard.  The standard is a higher legal duty to do what is “best” and “right” for the client and not what is the highest profit option for the adviser’s firm.

In the recent David Lerner Associates case as well as many others, the inherent conflict of interest between profit for the firm and the products sold to the consumer is glaring.

In all likelihood, consumers searching for higher yields heard the sales pitches from brokers.  And remember that when it comes to investing, the motivations are either fear or greed. In this case, the “greed” of the consumers looking for higher rates of return met the “greed” of the brokers looking to sell the product.  It should be no surprise that supply met demand.

But it also clearly shows how the most vulnerable need special help.  While they may go to a broker or agent thinking that the nice guy is going to do what’s right by them, they end up paying a price because they don’t realize who is representing them in the transaction.

As investors search for yield they need to do more due diligence.  And they should not be afraid to be working with a fiduciary who can help them with a second opinion.

Brokers are not all bad.  They serve a valuable role in our financial system.  But consumers really need to know that not all financial professionals are alike and the help of a fiduciary may keep them from getting burned by their fear or their greed.

Now’s as good a time as any to once again get back to basics:  Protect yourself from scams with this guide from the CFP Board of Standards.

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Consumers and homeowners in particular tend to think that financial planning is all about investing.  In reality, the key to proper financial planning is making smart moves with your money to protect your hard-earned wealth.  Too often consumers fret about the specific investment’s return and ignore the things that they can control such as how to not lose money.

One of the key parts of a good financial plan is proper estate planning.  And one element of an estate plan is controlling for risks that can wipe out your wealth such as from a lawsuit or a creditor.

To that end the revisions that became effective with the updated Massachusetts Homestead Law will help all homeowners.

New Law in Massachusetts Will Protect Homeowners and Vital for Seniors

As reported in the Boston Tax Institute newsletter of May 31, 2011, the Massachusetts Legislature has enacted a new law that will increase homestead protection for homeowners in Massachusetts. Homestead protects a person’s residence from most creditors. If a homeowner is sued by a creditor or files for bankruptcy, a portion of their equity in their home – the “homestead estate” – is deemed unavailable to their creditors. The new law was passed on December 16, 2010, and became effective on March 16, 2011.

What a homestead exemption does is protect the property against attachment, levy on execution or a court-ordered forced sale to satisfy payment of a debt.

The new law essentially puts in place a minimum amount of coverage for all homeowners (now $125,000) and each homeowner can file the form to gain protection up to the extended amount ($500,000 or $1 million for an elder couple).

Cheap Protection Against Lawsuits or Creditors

This is cheap protection.  And vital for anyone.

Consider this: One lawsuit can not only ruin your day but force you to lose the equity in your home.

If you have teens at home and there is a severe car accident, you can be sued.  If you lose the lawsuit and are assessed a civil judgement by the court, the other party could put a lien on your home or even force the sale of the property to pay the claim.

An elder driver could drive through a wall or onto a sidewalk and cause property damage or personal injury that exceeds their insurance liability coverage.

These are only a couple of examples that could put someone’s home at risk.  This new law at least provides some basic protection and the extended coverage will provide more peace of mind.

Key Updates to the Law

Under the amended Massachusetts Homestead law (Estate of Homestead):

  • Massachusetts homeowners will receive automatic $125,000 protection against debt collectors (if they hold that much equity in their home) without having to do anything.
  • Homeowners can elect to file a homestead declaration with the Registry of Deeds, which will give homeowners up to $500,000 in equity protection from non-exempt creditors.  Homestead forms, or homestead deeds, are filed at the Registry of Deeds in the county in which the residence is located. The filing fee ranges from $35-$100.
  • For married couples, both spouses will now have to sign the form. Before only one spouse signed and protection was only afforded to the spouse who signed.  If a single person declares a homestead and subsequently gets married, the Homestead automatically protects the new spouse.
  • Homesteads now pass on to the surviving spouse and children who live in the home.  The protections also remain for transfers between relatives.
  • There is new protection for homeowners who receive insurance proceeds from fire or other damages.
  • There has always been confusion whether a homeowner had to re-file a homestead after a refinance.  The new law clarifies this issue – homeowners do NOT have to re-file a homestead after a refinance.  Under the new law, Homesteads are automatically subordinate to mortgages, and lenders are specifically prohibited from having borrowers waive or release a homestead.
  • Homesteads are now available for single families, condominiums, coops, manufactured homes and now for 2-4 unit homes; and also for homes that are held in a trust for estate planning or other reasons.
  • Closing attorneys in mortgage transactions must now provide borrowers with a notice of availability of a homestead.
  • There is no need to re-do/re-file an existing homestead under the new law.

The form itself is pretty easy to fill in and file with the registry where your primary residence is located and recorded.  For a $35 registry fee you could get $300,000 in protection from creditors (now up to $500,000).

Special note:  Attorney Ed Adamsky provided a clarification (thanks, Ed):

If you have already filed a homestead, you do not have to update it to get the benefits of the updated Massachusetts law. If you have not filed one, you should do so. In New Hampshire there is nothing to file

For specific guidance on legal issues, speak with a qualified attorney. For help in putting in place a financial plan or road map for your money that looks at all the pieces of your plan, then call a qualified financial planner who can help make sense of all the moving parts regarding your money.

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A key component of a diversified income-oriented portfolio is dividends. This is what I have noted in the past during my presentations, blogs and online musings. They are a key part of a solid retirement income strategy.

The total return from stocks is derived from two key components:  price appreciation and the cash flow from dividends.

Most investors are certainly familiar with the concept of price appreciation (or depreciation as was evident during the financial crisis and Flash Crash for instance).  This is what the media each night focuses on when they report on “The Market.”

But less noticed is the value of dividends to the longer-term success of an investor.

The Value of Dividends to An Investor

Below is a chart of various recent periods of stock market performance compiled by Thornburg Investment.

The “Dividend Aristocrats Index” refers to an index of companies that consistently lead the market in paying dividends and regularly increasing their dividends.

Annualized Total Return Period Dividend Aristocrats Index S&P 500
1990-94 12.58% 10.4%
1995-99 19.48% 28.54%
2000-04 9.79% -2.29%
2005 – 9/2009 2.32% -0.08%
1990 – 9/2009 10.97% 8.41%

Dividend-paying stocks have shown these positive attributes over this period:

  1. Historically higher yields than bonds
  2. Historically higher total returns compared to bonds because of the stock appreciation potential of the dividend-payers.
  3. Higher income, capital appreciation and total return compared to the S&P 500 Index in almost all of the periods noted above and a near 20-year annualized total return of nearly 11% versus 8.4.

Dividend-paying stocks are probably not as sexy as most aspects of the stock market.  They are part of “value investing.” They are the stuff of “conservative” portfolios built for “widows and orphans.”  They are the basic building blocks used by Benjamin Graham, the author of Intelligent Investing and the principles on which Warren Buffet built Berkshire-Hathaway.

But for an income-oriented investor (such as a retiree) looking at ways to manage income in retirement, they should not be overlooked.  In fact, recent research reveals that those companies that pay out higher dividends also tend to have higher stock prices because they also have higher earnings growth. And earnings growth is another key component in valuing stocks.  This research indicates this as a global tendency.

Searching for Yield

Unfortunately, seeking out high dividend-paying companies in the US is not so easy.  Unlike managements of Euro-based companies where paying dividends is a sort of badge of honor, US companies tend to be much more stingy in paying back earnings to owners of the company (the stockholders).

And the trend in dividend yields is one that continues to decline. A research note by Vanguard (May 2011) shows this trend.  From 1928 through 1945, the average dividend yield was around 5.6% and dividends represented about 67% of company earnings (aka dividend payout ratio). From 1945 to 1982 the average yields dropped to 4.2% and the payout ratio to 53%.  In the more recent period from 1983 through 2010, the average dividend yield has dropped to 2.5% with a payout ratio of about 46%.

As you can see finding “Aristocrats” that pay out higher than these averages makes a big difference.  And the higher payouts may also portend higher future earnings as well as stock price appreciation.

But even those companies which are “stingier” will still help out a portfolio.

Do Lower Dividends Mean Lower Stock Prices?

The question that investors may be asking themselves now is “will these lower dividend yields (historically and compared to Europe for instance) be an indicator of lower stock prices?” Because the market’s dividend yield is below its historical norm, is that an indicator of lower total returns in the future?

While the stock market is certainly not without bubbles and crashes, it is unlikely that this is a factor in possible future stock price levels. Lower dividend yields are not necessarily an indicator of lower total returns.

There are other reasons that are more likely the cause of this trend toward lower yield payouts.  Part of this is based on US tax policy.  Another is the culture of US corporate management that has opted toward share repurchases instead.

In the US, there is a bias in favor of long-term capital gains over receiving dividends and paying income taxes.

When dividends are paid out all stock holders receive the income and are subject to tax. When management opts for a “share repurchase” program, only those who tender their shares are paid out.  So this may be more agreeable to investors who are trying to manage their tax bill from investing. For those who are longer-term stock holders, they may receive more favorable capital gains treatment by holding the stock and waiting simply for appreciation.

Admittedly, there may also be an incentive by management not to declare dividends so that they can hold onto the capital to “reinvest” in the business – which may or may not be a good thing.  (The same argument can also be seen in political terms in Washington when both parties are arguing about whether or not to have tax cuts).

And management may also have an incentive to repurchase stock because such programs provide the company with flexibility to change the terms – something that is frowned upon if management were to lower or cancel a declared dividend.

How to Use Dividends in Your Portfolio

In any event, using dividend-paying stock is something that makes sense in retirement portfolios.  To provide tax efficiency, it makes sense to include these in your qualified accounts (like IRAs).  And to boost income, it makes sense to add global dividend-paying stocks which tend to have higher yields and payouts.  Nothing in these current research notes indicates that the lower US yields and payouts are an indicator for lower future stock prices.  There are enough other things going on in the economy locally and globally that can impact do that.

To Build a Better Mousetrap or Get More Information

For more ways to build a retirement income portfolio, please feel free to give me a call directly at 978-388-0020 and stay tuned to the company website for upcoming webinars that will cover this topic too.

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This is a common question from many folks.

There are many valid reasons to consider a 401k rollover.

While changing jobs can be stressful and life can otherwise get in the way, you really should not neglect this.  Oftentimes, out of sight is out of mind and you could be losing money and not even know it.

Costs

While it may not seem like it, you are paying for your funds to stay with your old employer’s sponsored plan.  You just don’t see it.  Fees for employer plans are not very transparent.  While you may not see an actual bill, your employer is probably paying for the administration of the plan through hidden fees assessed on the balances held in it.

I have seen sponsored plans that had these back-end hidden fees and charged the participant a piece for each contribution.  A little here, a little there all adds up.  And the more it is, the less there is to compound for your retirement.

While there are few things that you can control in life and investing, fees are one of them.

In a rollover IRA, you’ll have more choices of platforms which may offer low loads and costs so you can keep more in your pocket.  So control what you can when you can for successful investing.

Choice and Access

While some employer plans may offer a variety of funds which may be top of the line, you’re still limited to the menu selected by your employer.  More often than not this is influenced by the broker associated with the plan.  And this can be influenced by the restrictions placed on the choices by the broker’s company or administrator because there may be an incentive to fill the menu with one fund family.

I’ve seen plans offered through national payroll companies that required more than 50% of the fund choices to be from one particular fund family.  Not every choice in a management company’s fund line up may be stellar so you’re limiting yourself by staying with the old plan.

When you rollover you’ll have a much larger universe to choose from.  (Like most independent fee-based advisers, my registered investment adviser company has access to more than 14,000 non-proprietary mutual funds with no loads or loads waived).  You’ll typically even have access to individual stocks, bonds, Unit Investment Trusts, Exchange Traded Funds and bank CDs.

The Self-Directed IRA Option – Not Available in Your 401(k)

Have you ever considered investing in something besides stocks, bonds or mutual funds? Maybe you might want to invest in real estate or buy judgments or invest in a business by being its lender or providing a friend with start-up capital.

Well, you can’t do that with a typical 401k plan.  But you can with a self-directed IRA.  And such an IRA can’t be done through the Big Box financial firms.  There are specialized bank and non-bank custodians who handle such transactions and work through independent financial planners to help their clients learn more about such options.

Risk Controls & Broader Choice of Investment Strategies

While you may have online access to your company-sponsored plan so you can make trades or switches of your funds periodically, there really are no risk controls that you can use given the limitations of the platform the 401k is using.

Let’s put it this way:  Investors make money when they don’t lose it.  At least that’s my working philosophy.  Having options and systems in place means that you stand a better chance of protecting your retirement nest egg.

It’s always easier to not lose money in the first place than it is to try to make up for lost ground.  Your money has to work harder to get back to breakeven — much less get ahead for your retirement goals.

Consider this:  If you think that Treasurys or munis are in their own bond bubbles, what can you do to protect yourself through your 401k?  Probably, not much.

But in your own IRA you’ll be able to build a more all-weather portfolio that includes inflation hedges like convertible bonds, foreign dividend-paying stocks, master limited partnerships or even managed futures.   All come in mutual funds or ETFs which offer the advantages of diversification without the tax and cost structures of direct investment options.

Want to lower costs and control your investments more? You can even buy individual corporate or taxable municipal bonds and build an income ladder with the help of a professional financial planner.

Or maybe you want to minimize the impact of another downdraft in the market.  Using ETFs and trailing stop-loss orders you may help protect your gains.  Not an option in your old 401k.

So when you roll your account over, you’ll also have access to professional help, tools and direct management options tailored to your specific needs that you just can’t get within your old 401k.

Actionable Suggestions – Things to Consider:

iMonitor Portfolio Program: We prepare the allocations, select the funds or other investments and monitor.  We will make changes and rebalancing decisions as needed for you.

Money Tools DIY Program: We prepare the allocations and select the funds.  We will offer recommendations on Exchange Traded Funds as well. Periodically, we send you updates for rotating funds or rebalancing. You manage the funds directly on whatever custodian or trading platform you choose.

For more information, please call Steve Stanganelli, CFP® at 978-388-0020 or 617-398-7494.

Check out the website and newsletter archives for more on this and similar topics:  www.ClearViewWealthAdvisors.com

Adapted from ViewPoint Newsletter Archive (January 20, 2011)

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No doubt about it.  This has been a very rough winter that we lived through here in the Boston area.

While the calendar has turned to spring, many of us are still trying to fix the damage left behind by snow and ice from so many winter storms.

As I write this it still seems like we have imported the weather that Seattle or Portland, Oregon might be know for (even if it is true that Seattle has more sunny days than Boston). It is cold, overcast and wet.  Not the best days for cycling (my other passion besides Spencer and Kristin hanging out on the side panel here).  Nor is it good weather to hang out on the back deck which is something that I like to do during my lunch breaks.

But even if the weather were cooperating, I would not be able to use my deck. Why?  Well, let’s just say that Mother Nature left me a souvenir and a reminder about her power.

With all the snow and ice that we got, it was hard to keep up and one too many snowstorms (coupled with a builder who decided to save money on lag bolts) finally collapsed the deck sometime in February.

I came home to a note from my neighbor – Don’t go out on your deck.  Not that I was planning to go out in the middle of a dark night. But that is where the gas grill was located and I guess if I was a grilling fool I might go out and it would have been a long way down after that first step.

Mother Nature is still flexing her muscles especially along the Mississippi River.  Now my deck is a small thing compared to the devastation left behind in the wake of multiple mega-tornadoes that crossed through the South sort of like General Sherman’s March to the Sea and swollen rivers now drowning hundreds of acres of farmland and threatening homes along the Mississippi.

But it is instructive.

A Teachable Moment

Let’s just say that you shouldn’t leave anything to chance.  Sure, you may have a homeowner’s policy and you renew it each year.  But don’t assume that the coverage that you had last year is going to help you this year.  And you really need to review your policies with a qualified agent (or a good financial adviser) regularly.

Do you really have the right coverage?  After you file a claim is not when you want to find out that you’re not covered.

I’m reminded of my neighbor – the same one who left me the note – who had his basement flooded after an ice storm and the power and his generator both went out.  He ended up with an indoor pool in his basement when the sump pump stopped working.  He didn’t know that he could have had a rider on his policy to cover sump pumps.  That was probably a $5,000 mistake for a $50 to $100 rider on his policy.

The Insurance Claims Process

So after my little incident, I called my agent to file a claim.  The insurance company had been very prompt in sending out paperwork and an adjuster.

Because it was tax season, I was unable to get way from the office to meet with the adjuster.  I described the damage to him including the generator located under the deck and the gas grill that was on it. He took his notes but pretty much did his thing when he inspected the property.

In the end, the insurance company adjuster filed his estimate with the insurer and I received a copy.  The insurer quickly cut a check for the amount shown on the estimate.

But I reviewed the estimate and noticed discrepancies.  The dimensions of the deck on his estimate were smaller than the actual size.  There was no note about the higher cost composite decking material that I had.  Instead the estimate covered replacement with regular wood. There was no notation about the damages to the generator and electrical work needed to reinstall it.  Nor was there any allowance for the damages to the items on the deck.

Now I understand that trying to inspect damage when snowbanks are four feet high around the deck and the deck itself is covered makes it really difficult to get a proper view of the damage. Nothing nefarious is going on here. And to their credit, the insurer did note that they would send out the adjuster again.

But there is no incentive on the part of the insurer or their adjuster to come back out.  As far as they are concerned the property damage claim is settled.

This is why it is all the more important for you as a homeowner and policyholder to protect yourself.

How?  Get professional help on your side.

Enter the Public Insurance Adjuster

OK.  You like your insurance company. I’ve seen the ads.  They offer great service and rates. The ads are cute sometimes. And in most cases, the insurance company estimate is more than fair.

But you owe it to yourself to get a second opinion. (Heck, that’s good advice on most things in life especially those concerning money).

This is where you call in the help of a Public Insurance Adjuster.

In my case, I called on the help of  Matthew Alphen of Lynnfield, Massachusetts.  I first met Matt years ago at a Kiwanis event and stay connected to him through BNI connections we shared.

Like other Public Insurance Adjusters, Matt is licensed by the state’s Division of Insurance. He represents consumers with claims.

He came out and did his inspection and his cost estimate is higher.

Granted the deck wasn’t covered in snow by that time so he didn’t have to trudge through the snowbanks that once surrounded it.

Granted he and other public adjusters have an incentive to provide an estimate that may be higher than the first because of the way that he gets compensated. Like most public adjusters he receives ten percent (10%) of the amount a homeowner collects from the insurance proceeds.

But that also means he has an incentive to do a thorough job when representing a homeowner.

Reasons for the higher estimate:

  • He used correct dimensions
  • He noted the materials used
  • He researched the city building code and noted changes that would require upgrades needed once the deck is rebuilt

What You Can Do to Protect Yourself

Like I said: This is a teachable moment.

So here is a short list of actionable items to consider when dealing with insurance for your home. It can also be applicable for other types of insurance claims as well such as autos, rental property and business.

  • Review your policies regularly with your agent.  (While I do not sell insurance, I do help clients review their policy terms and coverages as part of my financial planning services). This is especially important to make sure that the agent has a correct description of the property and any changes or additions made are properly covered.
  • Make sure your coverage includes a rider for inflation protection.  Without it you may out-of-pocket to cover more of the repair costs yourself.
  • Make sure your coverage also provides for updated building code protection so that any repairs that need to be done to meet the new rules are covered.  Otherwise, it’s going to be out of your pocket.
  • When you have a damage claim call a public insurance adjuster for a second opinion.
  • Get a financial plan in place.  A good fee-based or fee-only financial planner can provide a second set of eyes to help you review and find the right kinds of insurance coverage.

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