« October 2007 | Main | December 2007 »

November 29, 2007

LPL's Economic Update

Below, LPL's Lincoln Anderson provides his in depth analysis of where the US economy has been and what recent changes have taken place.  The powerpoint version has additional comments but we have also provided an adobe (.pdf) version as well.

Powerpoint:

 http://www.mwboone.com/library/articles/lpl_economic_update_11_15_2007.ppt

 Adobe (.pdf):

http://www.mwboone.com/library/articles/lpl_economic_update_11_15_07.pdf

Posted by Joel Wildeboer at 02:23 PM |

November 28, 2007

Protecting Your Portfolio from Geopolitical Risk

LPL’s Chief Strategist has written a paper discussing what kinds of things can go wrong in the world and how to protect yourself from these things financially.

Click below for the full article:

http://www.mwboone.com/library/articles/lpl_geopolitical_risk.pdf

Posted by Joel Wildeboer at 01:18 PM |

November 27, 2007

LPL's Predictions for 2008

Click below for LPL's predictions for 2008:

http://www.mwboone.com/library/articles/lpl_weekly_research_predictions_for_2008.pdf

Posted by Joel Wildeboer at 03:06 PM |

A guide to withdrawing retirement assets

A lot is being written about how much money Americans can withdraw from their investments to fund their retirement years.  Now, a new research institute launched by Fidelity Investments has outlined the order in which money should be withdrawn from various tax-deferred and taxable investment accounts.  Described as the ‘withdrawal hierarchy,’ we have added to and expanded upon the Fidelity Research Institute recommendations. 1. Take your minimum required distributions (MRDs) from qualified accounts and IRAs.  If you are age 70½ or older, make sure you know which of your accounts require such distributions and how large those distributions need to be, and then meet the requirements and deadlines, avoiding the application of the 50 percent income tax penalty that will be assessed if you fail to make timely withdrawals of required distributions.
2. Liquidate loss positions in taxable accounts.  Some investments in your taxable accounts may be worth less than their tax basis.  In addition to offsetting realized losses against realized gains, at the federal level you can usually use up to $3,000 ($1,500 for married couples filing separately) of net losses each year to offset ordinary income including interest, salaries, and wages.  Unused losses can be carried forward for use in future years.
3. Sell assets in taxable accounts that will generate neither capital gains nor capital losses.  Such assets generally include cash and cash-equivalent investments as well as capital assets which have not increased in value.  If your withdrawals from this tier in the hierarchy largely come from cash-equivalent investments, sufficient liquid assets holdings should remain intact in order to cover short-term financial emergencies.  And be especially mindful of portfolio rebalancing issues. 
4. Withdraw money from taxable accounts in relative order of basis, and then qualified accounts or tax-deferred saving vehicles funded with at least some nondeductible (or after-tax) contributions, such as variable annuities and Traditional IRAs that contain non-deductible contributions.  The choice depends on the circumstances, and in some cases it might make more sense to tap the tax-deferred vehicle first, but for most retirees, capital gains rates are lower than ordinary income tax rates and generally liquidating capital assets first would be beneficial.   
Assuming there is a significant difference in the basis-to-value ratio of the assets to be liquidated in two accounts, the better tactic for choosing between these two types of withdrawals may be to liquidate the assets with the higher ratio.  That is, the assets that have generated the smallest gain or the largest loss as a percentage of their basis.  If the basis-to-value ratio of the assets to be liquidated in each account is relatively low due to significant investment gains, it often will be preferable to liquidate the assets in the taxable account.  Conversely, if the basis-to-value ratio of the assets to be liquidated in each account is relatively high, it may be preferable to liquidate assets in the tax-deferred account if portfolio demands require it.  Note that IRAs are generally subject to certain aggregation requirements when allocating basis.  When liquidating gain positions in taxable accounts, it usually makes sense to sell assets with long-term capital gains first, since they should be taxed at lower rates than short-term gains.
5. Withdraw money from tax-deferred accounts funded with deductible (or pre-tax) contributions such as 401(k)s and Traditional IRAs, or tax-exempt accounts such as Roth IRAs.  It may not make much difference which account you tap first within this category since all withdrawals from any tax-deferred accounts funded with fully deductible (or pre-tax) contributions are taxed at the same rate.  When withdrawing money from tax-deferred accounts funded with fully deductible (or pre-tax) contributions, you may wish to request that taxes be withheld.
An unusual exception to these general rules may be here today.  With a possibility of substantial changes in the political landscape possible in 2008, it is possible that tax rates could be considerably higher in the near future.  Some candidates have spoken openly about a move to a 50% maximum Federal bracket, which would be nearly a 50% increases in income taxes, and perhaps a 333% increase in Capital Gains taxes.  If this were to happen, deferral of taxes from our current brackets would be a very bad idea. Keep in touch with us on this regarding your specific situation.
If you believe that the withdrawals you make may be subject to different tax rates over the course of your retirement (whether due to  changes in tax law or to varying tax brackets as a result of fluctuations in income) you may be better off liquidating one type of account within all of these guidelines before another.  For example, it may make more sense to leave your Roth account intact if you thought your ordinary income tax rate was likely to rise in later years, increasing the value of the Roth’s tax exemption.

Estate planning considerations may also significantly impact the entire hierarchy.  Generally, qualified and tax-deferred assets may be given a higher order within the withdrawal hierarchy in the case of larger estates expected to hold “excess” assets which will pass to heirs or be subject to estate taxes.  Capital assets receive a step-up in basis at death, while qualified and tax deferred assets are considered to contain “income in respect of a decedent” and do not receive a step-up.  A number of other issues may also have an effect on the recommended order of withdrawal, like if the retiree’s income approaches the threshold of paying taxes on Social Security income.

This column is produced by the Financial Planning Association, the membership organization for the financial planning community.

 Copyright © 2007 MWBoone and Associates All Rights Reserved. MWBoone and Associates is a Registered Investment Advisor Investment Management services are not available through this blog site but are described at www.mwboone.com. Securities offered through Linsco/Private Ledger Member NASD/SIPC.

Posted by MWBoone & Associates at 08:47 AM | | TrackBacks (0)

November 26, 2007

Traditional or Roth: Which Retirement Account Is Right for You?

Because both Roth IRAs and traditional IRAs present compelling advantages, individual circumstances typically determine which choice is best for a given investor. The decision requires a careful analysis of eligibility rules, tax issues, distribution requirements, and regulations governing rollovers from employer-sponsored plans. Elements in Common
Before exploring the differences between Roth IRAs and traditional IRAs, it is worthwhile first to review the attributes they share, such as maximum annual contribution limits. For the 2007 tax year, the maximum annual contribution to either a traditional or Roth account is $4,000, with an additional $1,000 contribution permitted for investors aged 50 and older. If you have not already made a contribution for the 2007 tax year, you may do so any time until April 15, 2008. For the 2008 tax year, the maximum annual contribution increases to $5,000, with the catch-up contribution remaining at $1,000. Nonqualified withdrawals before age 59½ are subject to federal income taxes and, potentially, an additional 10% withdrawal penalty.

 

Regardless of which IRA you maintain, you are likely to have a wide range of investment choices. You may elect stocks, bonds, cash investments, or some combination of the three, depending on your risk tolerance and time horizon.

 

Who Is Eligible?
The IRS has established eligibility criteria depending on income and age. Anyone with earned income can establish or contribute to a traditional IRA up to age 70½. Investors are eligible for a Roth IRA only if they meet income thresholds described below.

 

Roth IRA Modified Adjusted Gross Income (AGI) Thresholds

 

 

 

Partial Contribution
No Contribution Permitted
Single Taxpayer
$99,000-$114,000
$114,000 and above
Couple Filing Jointly
$156,000-$166,000
$166,000 and above

 

In addition, contributions to a Roth IRA may continue beyond age 70½ as long as an investor has taxable income.

 

Taxes and Distributions
Tax distinctions between traditional IRAs and Roth IRAs, as well as distribution rules, are important considerations when choosing between the two. Contributions to a traditional IRA may be tax deductible depending on an investor’s modified adjusted gross income (MAGI), filing status and whether he or she contributes to an employer-sponsored plan at work. Traditional IRAs are also subject to minimum distribution rules, whereby investors must begin required minimum distributions (RMDs) on an annual basis once they reach age 70½. The amount of the distribution is based on the value of the account, the life expectancy of the investor and, potentially, the investor’s beneficiary. RMDs are taxed as ordinary income, but not all of the distribution is taxable if nondeductible contributions were made.

 

With a Roth IRA, contributions are not deductible, regardless of an investor’s income. Qualified withdrawals are tax free as long as an investor has maintained the account for at least five years and is age 59½ or older, and RMD rules do not apply to Roth IRAs. For many people, a Roth IRA may result in more after-tax income during retirement because of the tax-free status of qualified withdrawals.

 

A Look at Rollovers
As the baby boomer generation approaches retirement and many workers continue to change jobs frequently, rolling over assets from an employer-sponsored plan to an IRA is likely to take on greater urgency. For 2007, tax laws permit direct rollovers from traditional employer-sponsored plans, such as a traditional 401(k), to a traditional rollover IRA. A direct rollover, in which an investor authorizes a plan sponsor to transfer funds directly to the financial institution acting as custodian of the rollover IRA, preserves the account’s tax-deferred status until an investor begins RMDs.

 

Currently, direct rollovers from employer-sponsored plans to a Roth IRA are only permitted when the plan is a Roth account, such as a Roth 401(k). Beginning in 2008, direct rollovers from non-Roth plans to Roth IRAs will be permitted. However, income taxes will be due on all proceeds because the rollover will be considered a conversion from a traditional account to a Roth account, which typically triggers tax payments. A qualified tax advisor can help you sort through the details.

 

Roth IRAs and Traditional IRAs: A Quick Comparison
Although there are additional rules, this table summarizes some of the most important distinctions between traditional IRAs and Roth IRAs.

 

 

 

Traditional IRA
Roth IRA
Maximum Annual Contribution
$4,000 for 2007 and $5,000 for 2008. For both years, investors age 50 and older may contribute an additional $1,000.
$4,000 for 2007 and $5,000 for 2008. For both years, investors age 50 and older may contribute an additional $1,000.
Eligibility
Anyone with earned income up to age 70½.
Income thresholds are imposed by the IRS. Investors with earned income may continue contributions beyond age 70½.
Taxes
Contributions may be tax deductible. Withdrawals subject to income taxes.
Contributions are never tax deductible. Qualified withdrawals are tax free.
Distributions
Required after age 70½.
Not required.
Rollovers From Employer-Sponsored Retirement Plans
(Restrictions, limitations and fees may apply)
Direct rollovers permitted from traditional plans to traditional rollover IRAs.
In 2007, direct rollovers permitted only from Roth plans such as a Roth 401(k). Beginning in 2008, direct rollovers will be permitted from traditional plans but proceeds will be taxable.

 

There are additional rules governing IRAs, including regulations that permit penalty-free withdrawals for qualified educational expenses and the purchase of a first home.

 

 

Copyright © 2007 MWBoone and Associates, LLC  All Rights Reserved. MWBoone and Associates is a Registered Investment Advisor. Further disclosures at  www.mwboone.com. Securities offered through Linsco/Private Ledger Member FINRA/SIPC.

 

Posted by MWBoone & Associates at 09:15 AM | | TrackBacks (0)

November 21, 2007

Giving Thanks for Capitalism and Plenty by Jeff Kleintop, Senior Strategist, LPL

Conditions were poor for the Pilgrims during the first few years at Plymouth Bay Colony. Crop yields were poor, and many went hungry. The Governor of Plymouth, William Bradford, wrote that the old English tradition of farming in common – where the harvest was pooled and rationed –

“was found to breed much confusion and discontent, and retard much imploymet that would have been to their benefite and comforte.”

It seems that the younger, healthier, and able-bodied colonists resented not receiving a share of the harvest proportional to their labors and often sat idle. Others were unwilling to work, citing their weak physical condition.

After three years of near starvation, Bradford decided to abandon farming in common in the spring of 1623 to set aside a plot of land for each family as their own private property to supply themselves with corn. The result was a bountiful harvest. Governor Bradford wrote that:

“This had very good success; for it made all hands very industrious, so as much more corne was planted then other waise would have bene by any means ye Govr or any other could use, and saved him a great deall of trouble, and gave farr better contente. The women now wente willingly into ye feild, and tooke their little-ons with them to set corne, which before would aledg weaknes, and inabilitie; whom to have compelled would have bene thought great tiranie and oppression.”

The colonists embraced the idea of enjoying the fruits of their individual labor, and became more productive. Years of abundance followed. Eventually the colony produced enough corn to spare and trade for furs and other comforts. The fledging economy was so successful that 24 years later, in 1647, Bradford wrote that:

“Any generall wante or famine hath not been amongst them since to this day”. The bountiful harvest in the fall of 1623 prompted them to “sett aparte a day of thanksgiving.”

We still have reason to celebrate the economic principles of that first Thanksgiving of nearly 400 years ago. The productive and efficient U.S. economy has absorbed some hits this year, but has posted solid growth, driving income gains and a rise in the stock and bond markets, and improving the financial well-being of Americans – definitely something to be thankful for.

Jeff Kleintop, CFA

Senior Vice President

Chief Market Strategist

Linsco Private Ledger

 

Posted by MWBoone & Associates at 05:17 PM | | TrackBacks (0)

The Economy keeps on Ticking by Lincoln Anderson, LPL Chief Economist

Well, despite all the doom and gloom out there in the media, the economy keeps on ticking.  The headlines are screaming about subprime mortgage loan problems, but the macroeconomic data continues to improve. 

Last week we got a trade report showing very strong net exports for August and September.  These data, along with stronger inventories, point to an upward revision to third quarter GDP growth from 3.9% to about 5%.  And the fourth quarter is off to a decent start.  Today’s report on retail sales for October shows a rise of 0.2% following a very strong 0.7% gain in September.  Retail sales are up 5.1% over the last 12 months; a pretty decent performance, given the housing woes and high energy prices.

Inflation fears continue to look unjustified.  Today’s Producer Price Index (PPI) report for October, shows a tiny 0.06% increase in the total PPI and no increase in the core (ex food and energy) PPI for October.  I expect some bigger increases in the total inflation rates due to the recent renewed surge in oil prices, but the core inflation rates look under control.  Some of you have asked – why look at core inflation, when we all use energy and eat food?  My answer is that core inflation gives useful information about the short-term trend in inflation and helps the Federal Reserve in setting interest rates.  I would not want OPEC oil price gouging or Midwest droughts to push around short-term U.S. monetary policy.  Total inflation is helpful in gauging the short-term impact of higher prices on consumer income and spending and long-term inflation trends. Right now, both measures are fairly close – the total Consumer Price Index (CPI) inflation rate is 2.8%, and the core CPI rate is 2.1%.  Again, the recent oil price rise will likely push total CPI inflation up again, but not a lot.

Speaking of oil, our “friends” who run the OPEC oil cartel, colluding with impunity to set oil prices, are meeting again over the weekend in Riyadh, Saudi Arabia.  I think they are worried.  We are seeing a rise in non-OPEC oil supply, surging alternative energy supplies, and some signs that global demand is flattening and may be falling.  The last thing OPEC wants is a major increase in competitive energy sources and a sustained shift to conservation.  They may decide that it is time to push prices back down again to head off the competition.  On the other hand, it could be just wishful thinking; I certainly am tired of paying sky-high prices for gasoline and other oil-based products. The U.S. equity market is once again showing signs of life.  After a fall back to near the mid-August low, the Dow and other broad equity indexes recovered sharply yesterday.  The Dow was up 2.5%, the S&P 500 was up 2.9%, and the NASDAQ was up 3.5%.  While short-term stock market forecasting is usually silly, I think the recovery is justified by strong economic and company earnings fundamentals and therefore a rebound is more likely than not. As always, please call me with questions or concerns.

 

 

 

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

 

Copyright © 2007 MWBoone and Associates All Rights Reserved. MWBoone and Associates is a Registered Investment Advisor Investment Management services are not available through this web site but are described at www.mwboone.com. Securities offered through Linsco/Private Ledger Member NASD/SIPC.

 

Posted by MWBoone & Associates at 02:15 PM | | TrackBacks (0)

How Your Personality Affects Your Financial Decision-making

The recent volatility in the stock market has everyone a little jumpy – especially clients who have just started with us. That is why it is important to periodically update your risk tolerance questionnaire. Let us know if you want to update your forms. Why is risk analysis important before you make decisions with your money? Risk tolerance is an important part of investing – everyone knows that. But the real value of answering a lot of questions about your risk tolerance is to tell you what you don’t know – how the sources of your money, the way you made it, how outside forces have shaped your view of it and how you’re handling it now will inform every decision you make about it in the future.
The most important thing a risk questionnaire can tell is what’s important about money to you. Trained financial advisers can determine your money personality through a process of questioning discovery. Planners can then guide investors within their money personality. Do you want certainty, are you willing to take a little risk or let it roll because “you can always make more of it?”
We try to see through the static to find out what you really need to create a solid financial life. But it might make sense to ask yourself a few questions before you and your planner sit down:
  1. What’s important about money?
  2. What do I do with my money?
  3. If money was absolutely not an issue, what would I do with my life?
  4. Has the way I’ve made my money – through work, marriage or inheritance – affected the way I think about it in a particular way?
  5. How much debt do I have and how do I feel about it?
  6. Am I more concerned about maintaining the value of my initial investment or making a profit from it?
  7. Am I willing to give up that stability for the chance at long-term growth?
  8. What am I most likely to enjoy spending money on?
  9. How would I feel if the value of my investment dropped for several months?
  10.  How would I feel if the value of my investment dropped for several years?
  11. If I had to list three things I really wanted to do with my money, what would they be?
  12. What does retirement mean to me? Does it mean quitting work entirely and doing whatever I want to do or working in a new career full- or part-time?
  13. Do I want kids? Do I understand the financial commitment?
  14.  If I have kids, do I expect them to pay their own way through college or will I pay all or part of it? What kind of shape am I in to afford their college education?
  15.  How’s my health and my health insurance coverage?
  16.  What kind of physical and financial shape are my parents in?

One of the toughest aspects of getting a financial plan going is recognizing how your personal style, mindset, and life situation might affect your investment decisions. We understand this challenge and can help you think through your choices. Your resulting portfolio should feel like a perfect fit for you!

This column is produced by the Financial Planning Association, the membership organization for the financial planning community.

 Copyright © 2007 MWBoone and Associates All Rights Reserved. MWBoone and Associates is a Registered Investment Advisor Investment Management services are not available through this web site but are described at www.mwboone.com. Securities offered through Linsco/Private Ledger Member NASD/SIPC.

Posted by MWBoone & Associates at 12:46 PM | | TrackBacks (0)

November 20, 2007

Investing in Fine Art

Art represents different things to different people. To some, it is "an adventure of the mind."1 To others, it’s "a signature of civilization"2 or "a lie that makes us realize the truth."3 And still to others it is "an instrument of moral propaganda."4 Art may be any of these, but when you consider it a bit more pragmatically, it is also a potentially profitable investment opportunity.

In fact, research shows that long-term investments in fine art — as represented in this report by the paintings sold by the top auction houses in New York and London — produced returns that are, on average, roughly comparable to investments in broad portfolios of U.S. equities. What’s more, price appreciation for fine art has tended to have a different rhythm than price appreciation for stocks, so values for each asset class have tended to appreciate most strongly at different times. That suggests portfolios that combine average-performing stocks with average-performing fine art could be less volatile than portfolios of either asset alone.

Another aspect of the financial performance of fine art is that values tend to hold up well during periods of economic difficulty. For example, consider the price performance of fine art during the 27 recessions recorded between 1875 and 2000. During those downturns, the average fine art price decline observed at auction was just 0.7%, according to Jianping Mei and Michael Moses of New York University’s Stern School of Business. Their index is constructed from auction house records and takes account of all auction sales of paintings that have come to market more than once at major auction houses between 1875 and the present.

During periods of world turmoil and recovery, fine art prices tend to be relatively durable. For example, World War I depressed stock prices in New York and London. By 1920, stock prices in both cities recovered to 94% of their prewar levels. In contrast, fine art in 1920 was selling on average for 125% of its prewar value, according to the Mei/Moses index. There were similar patterns during World War II and its aftermath and the Korean War and its aftermath. During the Vietnam War (1966 to 1975), the S&P 500 declined 27%. The categories of art that were indexed by Mei and Moses, however, climbed 256%.

A How-to Primer
While any investment requires homework, investors in fine art are presented with some unique challenges. High on your list of considerations should be your decorative and aesthetic tastes. You are likely to be looking at your investment relatively frequently in the course of time, so you’ll want to feel comfortable that your holdings fit well with the home or office environment in which they will be displayed. Also, you may want to develop specialized expertise in one particular type of fine art in order to help select and evaluate potential investment opportunities. If you do specialize, you’ll not only want to focus on items you like and know about, but those that are priced within the range of your investment allocation.

One of the primary areas for novice investors is currently active artists. Prices may be relatively low and the field of selection may be broad. What might you look for to decide whether an artist is a potential investment opportunity? You can determine whether the artist is represented by an agent, which would suggest that his or her work might receive more exposure and higher-level sales. You should also look at the record of places in which the artist’s work was — or is — appearing. A record of increasing prestige in the past can be a solid signal of future growth as well. Other potentially strong signals are a pattern of favorable reviews in reputable publications and frequent exhibitions in major galleries. Many investors track these indications by attending shows as often as possible.

Consider the Risks
Art works may require special handling and maintenance, as well as relatively tight control over the temperature, humidity, and ambient light levels in their exhibition spaces. You may also be required to make special provisions for insurance and physical security for your holdings.

On a financial level, prices for individual works may be unpredictable, which could make it as easy to lose as to profit. Investment horizons typically run for years or even decades, and it is not uncommon for holdings to become part of one’s financial estate. And the market generally is illiquid, which significantly limits an investor’s ability to convert a holding into cash if necessary.

When it does come time to sell a holding, keep in mind that galleries may offer limited exposure, and major auctions are relatively infrequent. As with real estate, it may take a considerable period of time to identify a buyer and negotiate the terms of the sale. Except for major auctions, pricing can be opaque, which means that it may be difficult to determine what comparable items might be selling for at any given time. Additionally, transaction costs may be high — sales commissions, appraisal fees, and storage and shipping costs all tend to be greater for fine art than for other asset classes.

Annual Returns on Stocks, Bonds, and Fine Art, 1971-2005*
Investments in stocks, bonds, and fine art have each produced top returns in different years over the past several decades. The returns on fine art and stocks also have an exceptionally low correlation (0.13), as do the returns of fine art and bonds (-0.11). This suggests that a portfolio combining all three asset classes could be less volatile than any one asset type alone.
* Latest data available.
Sources: Standard & Poors; www.meimosesfineartindex.org. Stocks are represented by the annual total returns of the S&P 500, bonds by the annual total returns of long-term Treasuries (maturities of 10+ years), and fine art by the Mei/Moses All Art Index for the period January 1, 1970, to December 31, 2005. Index returns are not representative of any particular investment and do not reflect the impact of transaction costs. Investors cannot invest directly in any index. Past performance does not guarantee future results.

When evaluating individual purchases, there are many things to watch out for that may not arise in the course of investing in financial securities. For example, there is no official registration office or certification authority that can authenticate the ownership of individual works of art. Reputable sellers will offer a document called a provenance that is intended to provide verifiable proof of ownership, but paintings may sometimes be offered without clear title. Other transaction risks include forgery, mislabeling, and auction fraud.

Ultimately, all of these risks have been shown to be manageable. Successful investors have been surmounting them for decades, if not centuries, taking not only economic reward but a deep sense of enjoyment and satisfaction from their investment in fine art.

Measuring the Risk and Reward of Fine Art and Other Investments
The Sharpe ratio is a single statistic that reflects both risk and return of a given investment — the larger the Sharpe ratio of an asset, the greater return an investor might earn for each unit of risk, based on that asset’s historical return and volatility. Thus, for the period 1926 to 2005*, a diversified portfolio without fine art would have provided a higher Sharpe ratio than any of its individual asset classes. Adding fine art to the diversified portfolio would have provided an even higher Sharpe ratio.
* Latest data available.
Sources: Standard & Poors; www.meimosesfineartindex.org. Stocks are represented by the annual total returns of the S&P 500, bonds by the annual total returns of long-term Treasuries (maturities of 10+ years), cash by the annual total returns of 3-month T-bills, and fine art by the Mei/Moses All Art Index for the period 1926 to 2005. Index returns are not representative of any particular investment and do not reflect the impact of transaction costs. Investors cannot invest directly in any index. Past performance does not guarantee future results. Allocations including fine art: 50% stocks, 25% bonds, 10% cash, and 15% fine art. Allocations excluding fine art: 55% stocks, 30% bonds, and 15% cash.

1Eugene Ionesco, French playwright.

2Beverly Sills, American singer.

3Pablo Picasso, Spanish painter and sculptor.

4George Bernard Shaw, Anglo-Irish playwright.

 

Points to Remember

  1. Fine art may offer long-term investors a solid opportunity for price appreciation.
  2. As an asset class, fine art has very low correlation to stocks and bonds, potentially making it an effective diversification tool in a wealth portfolio.
  3. An investor can acquire the specialized knowledge needed to evaluate potential holdings.
  4. A portfolio of fine art can require specialized control for environmental and security needs and may also have maintenance requirements much greater than generally provided to securities investments.
Copyright © 2007 MWBoone and Associates All Rights Reserved. MWBoone and Associates is a Registered Investment Advisor Investment Management services are not available through this web site but are described at www.mwboone.com. Securities offered through Linsco/Private Ledger Member NASD/SIPC.

Posted by MWBoone & Associates at 09:47 AM | | TrackBacks (0)

November 19, 2007

Net Worth: It’s Your Most Important Number

Many investors can quickly recall their annual income, the value of their home and other measures of how they are doing financially. But when it comes to knowing their net worth, the same investors may be scratching their heads. It’s important to know your net worth — and monitor it periodically — because net worth is the most important gauge of whether you are building wealth over time.

A Quick Tally

Your net worth is what’s left over when you add up your financial assets and subtract your financial liabilities. Your assets may include money in bank accounts, stocks, bonds, mutual fund shares, retirement accounts and the value of any real estate you own. Your liabilities should include all of your debt, such as your mortgage, credit card debt, student loans or auto loans. You may need to include assets and liabilities of your spouse or partner to get a complete picture of your family’s finances.
 

Net Worth Worksheet

The worksheet found at the end of this article will help you tally up your net worth. The result may help you put your affairs in perspective when you consult your financial advisor about a strategy to increase your net worth over time.

Measuring Your Progress

When monitoring your net worth, it’s important to remember that there is no magic number. What is important is taking steps — such as investing as much as you can afford and limiting debt — that are likely to increase your net worth over time.

If you have discretionary income to invest, there are many types of accounts where you can put these funds to good use. Qualified retirement accounts, such as an IRA, may permit you to build wealth over time and also provide significant tax advantages.[1] For 2007, the maximum annual contribution to an IRA is $4,000 plus a $1,000 catch-up amount for investors aged 50 and older.

There are also numerous opportunities to invest in stocks and bonds in a taxable brokerage account. Regardless of how your funds are invested, the more you have in the way of financial assets, the more you are able to benefit from the power of compounding — when your earnings are reinvested and potentially earn even more over time. Your LPL Financial Advisor can help you create a mix of investments that is suitable for your risk tolerance and time horizon.

Debt: A Drag on Your Net Worth

Of course, it’s difficult to find the money to invest if you are making significant payments on car loans, credit cards and other forms of debt. If you have revolving debt, paying more than the minimum each month may permit you to pay off the debt early and potentially save thousands of dollars in interest. You may want to consider a similar strategy to retire your mortgage if you own a home.

Net Worth and Estate Planning

Your net worth can also help you determine whether your estate may be subject to federal estate taxes upon your death as well as shed light on the potential wealth you may be able to pass on to your beneficiaries. Your estate typically includes the value of your assets, minus your liabilities, at the time of your death. Your estate also includes the death benefit of any life insurance coverage you may have, so be sure to include life insurance as an asset to get the most complete picture of any potential estate tax liability and the wealth you may be able to pass along.

Federal estate tax rules are particularly confusing in the coming years. In 2007 and 2008, the first $2 million of an estate is generally excluded from federal estate taxes. In 2009, that exclusion rises to $3.5 million. Then, in 2010 only, federal estate taxes are repealed entirely. Beginning in 2011, the exclusion goes back down to $1 million. Also worth noting is that many states impose their own estate and inheritance taxes. With that in mind, it may be prudent to enlist the help of an attorney specializing in estate planning to ensure that your overall estate plan is in concert with various tax rules and your goals.

Keeping Tabs on Your Net Worth

You may want to consider tallying your net worth at least once a year to stay focused on your most important number. Your financial advisor can help you analyze your net worth and develop a long-term strategy for building wealth.

Net Worth Worksheet
As of mm/dd/yy

Your Financial Assets:
Bank accounts (savings and checking, money markets, CDs)............. $_________________
Retirement accounts (employer plans, IRAs, pensions)...................... $_________________
Primary residence............................................................................... $_________________
Life insurance cash values.................................................................. $_________________
Other (stocks, bonds, nonresidential real estate, business interests).... $_________________
Total Assets....................................................................................... $_________________
Your Financial Liabilities:
Loans (car, student)............................................................................ $_________________
Credit card balances........................................................................... $_________________
Mortgage............................................................................................. $_________________
Other.................................................................................................. $_________________
Total Liabilities................................................................................. $_________________
Your Net Worth................................................................................ $_________________
(Subtract liabilities from assets)

[1]  Early withdrawals before age 59½ may be subject to a penalty tax. Net Worth: It’s Your Most Important Number

Copyright © 2007 MWBoone and Associates, LLC  All Rights Reserved. MWBoone and Associates is a Registered Investment Advisor. Further disclosures at  www.mwboone.com. Securities offered through Linsco/Private Ledger Member FINRA/SIPC.

 

Posted by MWBoone & Associates at 09:11 AM | | TrackBacks (0)

November 16, 2007

Financial Meltdown?

The news has certainly been bleak. Investors are left dazed and confused, trying to determine whether the worst is behind us or yet to come.


Recent selected headlines include . . .

 

 

*Mario Cuomo (NY Attorney General) subpoenaed Fannie Mae (FNM) & Freddie Mac (FRE) seeking info on every mortgage purchased from Washington Mutual (WM). This follows his lawsuit of First American (FAF) last week, accAIVSX used of inflating house values under pressure from WaMu. The risk is that mortgages written based on inflated appraisals could be required to be bought back by the lender. Non-performing loans have more than doubled in the past year.

* In its 3Q report, WaMu said expenses for the year may exceed forecasts, but currently believes the $1.3B set aside for bad loans for each of the next two quarters (4Q07 & 1Q08) is sufficient. When asked about the dividend, the CEO said it was 'hard to speculate' about the future market environment.

* Citigroup (C) has drawn around $10B to bail out 7 Structured Investment Vehicles (SIVs) held off-balance sheet that were unable to repay maturing debt. They have put Richard Stuckey in charge of its $43B sub-prime mortgage business (he helped unwind Long Term Capital Management in 1998).

* SIVs continue to face a crisis in liquidity. Moody's is reviewing for possible downgrade another $33 billion in SIV debt, about 10% of the total, and said "the situation has not yet stabilized." Last month, JPMorgan (JPM), Citi, and BofA (BAC) agreed last month to start an $80 billion fund to help $320 billion of SIVs holdings.

* Morgan Stanley is speculated to be the next firm to write down Collateralized Debt Obligations (CDOs) - the method sub-prime mortgages were packaged and resold to banks and investors. Mike Mayo, an analyst for Deutsche Bank stated, "Anything that touches CDOs is showing more pain than we thought."

* Another research firm, CreditSights, estimated that CDO losses for 4Q07 could be $9.4 billion for Merrill Lynch (MER), $5.1 billion for Goldman Sachs (GS), $3.9 billion for Lehman Brothers (LEH), $3.8 billion for Morgan Stanley (MS), and $3.2 billion for Bear Stearns (BS).

* Sales of CDOs have been increasingly popular in recent years, peaking in 2006 at $503 billion (source: Bloomberg).

* Dozens of mortgage lenders nationwide have declared bankruptcy and gone out of business in the past year; the leading bond rating agencies, Moody's, Standard and Poor's, and Fitch are also under investigation

* As of June, the FDIC reported only one insured bank out of 8,615 had failed in 2007, with 61 'problem institutions' holding $23 billion in assets. More may fall, but it is far from the thousands that failed during the 1930s and 1980s (with a $151 billion S&L bailout).

* NetBank went into FDIC receivership on 9/28/07 with $2.5 billion in assets, primarily due to their mortgage operations; $109 million was held in 1,500 customer accounts exceeding the federal deposit insurance limits (source: FDIC).

* The Mortgage Bankers Association forecast for total mortgage originations dropping in 2008 is $1.66 trillion vs. $2.73 trillion written in 2006.

* IndyMac cut their dividend by 50% from the prior year, increased their credit reserve by 47% to $1.4 billion, - they said delinquency trends were up sharply in September over August, "loans to home builders that are 'nonperforming' could rise to around 30% by the end of this year from about 10% as of Sept. 30 " (from WSJ article). The CEO singled out 'piggy back' loans as being a big issue, with many proving worthless - "we are writing them off" (source: The Wall Street Journal).

* According to a First American study from March 2007, $2.2 trillion in adjustable-rate mortgages (ARMs) were written between 2004 and 2006. They forecast 13%, or 1.1 million homes, will be foreclosed upon over 6-7 years, totaling $326 billion in debt. They estimate $112 billion will be lost to lenders and investors. In 2007, $370 billion in ARMs are scheduled to reset, another $250 billion in 2008 and 2009.

* RBC estimates that for non-performing bank assets to reach historical mean levels, they would still need to double from the current level.

Should we sell? Is the horse already out of the barn? Should we be buying at this level?

First, realize that at times stock valuations and company fundamentals can diverge sharply (a good company is not the same as a good investment). Second, it is important realize that while projected mortgage defaults is a large absolute number, relative to the total amount written each year, it is a very manageable figure. So far.

The question is how long and how deep this crisis continues. The sell-off of financial stocks has mainly been emotionally driven. Investor sentiment is extremely negative (although not as bad as 1991 at the height of the S&L failures). What we are witnessing is a classic loss of confidence, not driven so much by reported financial results and information that has been made public to date, but instead by fear. It does not appear that the companies in question have a solid handle on the situation (as evidenced by continued write-downs, reserves, and earnings warnings), so investors cannot possibly have clarity either. The market HATES uncertainly. WaMu has lost nearly $25 billion in market value year-to-date, around $3.7B on 11/7 alone. Citigroup has lost +$110B and the Wall Street brokerage companies are down sharply as well.

Investors rightly fear a spiraling contagion of further weakening in housing prices, exacerbated liquidity crisis (where even highly solvent borrowers cannot obtain financing), further corporate failures (of even strong banks), government investigations, class action lawsuits, the list goes on. Cycles like this have a way of feeding on themselves based on investor emotion. Clearly, a variety of factors led to this real estate bubble - bank were willing to provide financing to anyone with a pulse, homeowners treated their homes as ATM machines, speculators bought homes in overheated markets to 'flip,' a lax regulatory environment spawned predatory lenders, etc.

The economy has proven to be amazingly resilient. At the moment, we are not expecting a recession in 2008. Overall, the data remains encouraging with the exception of the housing sector. Historically, housing recessions are not well linked to consumer recessions. Consumers are likely to slow down, however, employment is a much more important factor and the growth in that area has continued. Corporations are also in very strong financial shape. Recent data shows that foreign trade growth is offsetting housing weakness.

If home prices continue to fall sharply nationwide, the pain could indeed become much worse, especially in certain over-heated markets. At least the two recent Fed rate cuts ease the pain to some degree. The bottom line is that we just do not know precisely where we are in the cycle. The First American study estimates that for each 1% drop in housing prices nationwide, an additional 70,000 mortgages will go into rate-driven foreclosure. Yes, the financial stocks are cheap and yields are extremely attractive, but compared to trough valuations during prior banking crisis (1930s and 1980s), there could be further to fall. For long-term risk tolerant investors, this could be an interesting opportunity. However, it is definitely not for those with a weak stomach or faint of heart. There is very likely further bad news to come over the coming months, possibly longer - loan loss reserves are sure to rise and we will undoubtedly see increased regulatory action. Fourth quarter may be a 'kitchen sink' quarter for many companies, so at the moment we are on the sidelines watching the situation very closely and looking for a good buying opportunity.

One final lesson - watch your FDIC-limits! Only $100,000 per person ($200,000 per couple) is insured between all accounts at any individual bank. We heard from two people who lost money in the NetBank failure. Don't let that happen to you!!

As always, give us a call if you want specific advice for your situation.

 

 Copyright © 2007 MWBoone and Associates All Rights Reserved. MWBoone and Associates is a Registered Investment Advisor Investment Management services are not available through this web site but are described at www.mwboone.com. Securities offered through Linsco/Private Ledger Member NASD/SIPC.

Posted by Aimee Huff at 08:52 AM | | TrackBacks (0)

Reverse mortgages and America’s debt problems

"We were comfortably well off, and we wanted to release some of the funds we had tied up in our home." - Mrs. Carolann Prast explaining why she and her husband took out a reverse mortgage on their home. - The Wall Street Journal 11/13/2007

I have become somewhat of an expert on reverse mortgages, not by any deep knowledge I have of the products but because so few people understand them at all.  I recently told the Los Angeles Times: "In the future we'll see new vehicles, new pricing, new ways of pulling out just the amount of money that you need. I fully expect a reverse mortgage to be as normal as a 30-year fixed."

There is a time and place for just about every imaginable financial product.  But in the case of Mrs. Prast and countless other victims of their own appetites, there are many places reverse mortgages shouldn’t be used.

Mr. and Mrs. Prast “freed up…an extra $21,000 a year formerly used to make mortgage payments for travel and indulgences like paying for a granddaughter's semester in Australia.”  I wish I had a day off for every time someone told me they wanted to “free up” some of the equity in their home, or “put some of that money to work for me”.

You do not “free up” money by borrowing it.  You encumber assets to borrow cash.  Financial freedom comes from having no debt or obligation, no claim on your assets or earning power.  You cannot borrow your way to financial freedom.

You do not “put your equity to work for you” by borrowing money from the bank.  Your equity is already invested in an asset; it is “working” in your property.  You do not make your property “work harder for you” by borrowing the bank’s money to invest it elsewhere.  Your property is still just your property.  Your likely uncertain investment will be weighed against the likely certain cost of the debt. 

Consider this, when you borrow money from the bank to invest it you are betting against them.  They could put their money in the same investment you are making, but they chose instead to lend it to you and get their interest payments.  Not that you can’t win that bet, but understand that you are betting against the bank and they are not usually fools.

For most people, borrowing out the value of their home to buy luxuries like travel and to spoil their granddaughter is really a questionable tradeoff against guaranteed interest expenses that retirees have no earned income to pay off.  One client recently called us for advice on a loan offer they received that had $16,000 in upfront fees alone!  Sure, you can’t be kicked out of your home and the total debt allowed is capped.  But if that is all the security you seek in your Golden Years, to die broke in the bank’s house, you are aiming too low.

Don’t blame the banks.  There are situations that work perfectly for these products and they are an increasingly flexible and useful tool in the hands of responsible consumers.  As competition increases costs will come down.  But we live in a time of flagrant financial irresponsibility and greedy people who have been bailed out by low interest rates, high economic growth and historically record low unemployment.  Despite what the media says, it doesn’t get any better than this.  If any of these three should stumble, there will unfortunately be many who are insolvent.  If all three tumble, things could get ugly.  Fortunately, you are our client and you are forewarned.

 

Copyright © 2007 MWBoone and Associates, LLC  All Rights Reserved. MWBoone and Associates is a Registered Investment Advisor. Further disclosures at  www.mwboone.com. Securities offered through Linsco/Private Ledger Member FINRA/SIPC.

Posted by Michael W Boone, CFP, CFA at 08:39 AM | | TrackBacks (0)

November 15, 2007

Gearing Up for Life on the RV Road

More than 30 million Americans are RVing these days.  But as romantic as it may appear, would-be buyers or renters of recreational vehicles need to do more than test drive a “home on wheels” before joining the avid community of those who live life on the road.
 Would-be RVers should examine all aspects of RV living, including how to choose the right RV, how to negotiate with dealers, how to buy the right insurance, and how to drive an RV before chasing such an idyllic life.
Of course, would-be RVers should first examine whether to RV or not.  An RV is defined as a vehicle that combines transportation and temporary living quarters for travel, recreation and camping.  According to “The Complete Idiot’s Guide to RVing,” the typical RVer enjoys: the ability to travel where and when they want; the chance to spend time with loved ones; a way to travel relatively inexpensively; the ability to avoid the hassles of commercial travel; and the opportunity for those who have special needs to travel in comfort.
RVers, contrary to popular opinion, are not just retirees.  They come from all walks of life, according to a University of Michigan study commissioned by the Recreational Vehicle Industry Association (RVIA).  The typical RVer is 49 years old, married, with an annual household income of $68,000.  RV owners are likely to own their homes and spend their disposable income on traveling – an average of 4,500 miles and 26 days annually, according to RVIA.  Would-be buyers and renters should note that many dealers, in light of rising fuel costs, are now offering discounts, including gas cards and loyalty programs.
Getting a handle on the various types of RVs for sale is another necessary step.  RVs come in all shapes and sizes, the two major types being motor homes (motorized) and towable (towed behind the family car, van or pickup).  According to RVIA, Type A motor homes are generally the largest; Type B motor homes or van campers are the smallest and Type C motor homes generally fall in between.  Types of towable RVs are folding camping trailers, truck campers, conventional travel trailers and fifth-wheel travel trailers.
No matter which type you choose, your RV should have a place to sleep, a place to cook, and a place to live.  After that, choosing an RV that’s right for you is a function of budget and preference.  According to RVIA, prices for new RVs are typically $4,000-$13,000 for folding camping trailers; $4,000-$26,000 for truck campers; $8,000-$65,000 for conventional travel trailers; $48,000-$140,000 for Type C motor homes and $58,000-$400,000 for Type A motor homes.
Doing one’s homework before purchasing an RV is essential.  RVIA and others suggests the following: Attend an RV show or visit an RV dealer to comparison shop; examine different models, vehicle types and floor plans; learn about RV financing and insurance options; and check out other resources and Web sites including those of www.rv.net, www.rv.org,  Recreation Vehicle Dealer Association, Escapees, Family Motor Coach Association, and Trailer Life magazine.  Renting an RV can be an ideal way to “try before you buy.”

Would-be RVers need also to examine driving or towing abilities, how many passengers will be in the RV, and how they plan to use the RV – for recreational use or as a place to live.  At a minimum, would-be RVers should examine how livable the RV is.  That means testing the beds, showers, and living spaces.  What’s more, those buying a used RV should inspect inside and out for signs of previous repairs, rusts and leaks.  And would-be RVers should take the vehicle for a rigorous road test, listening for signs of engine trouble.  If you plan on buying a towable RV, check its weight.  Would-be RVers don’t want to find out after the fact that they have to buy a new car or truck to tow their new RV.
Other homework is required.  Lemon laws, which guarantee consumers replacement motor vehicles or refunds after a certain number of problems or days in the shop, vary by state and often don't apply to RVs, The Wall Street Journal recently reported.  Thus, RV owners, stuck awaiting repairs, often have little legal recourse.  RVs tend to have more problems than other vehicles because they are made in much smaller quantities than cars and without the same sophisticated manufacturing methods.
Buying an RV requires special skills and tactics, according to “The Complete Idiot’s Guide to RVing” and other resources.  Private sellers offer lower prices but no warranties or returns.  If you buy from a dealer, be sure to “audition” them with respect to price, knowledge of staff, service facilities and reputation.  If you learn the invoice price, you will likely reap the best deal.  Also, negotiate slowly and don’t sway from the price you want to pay.  If you want peace of mind, buy an extended warranty.  If not, choose the warranty that covers the full vehicle for the longest period of time.
Other tips to consider:
  • Check whether the dealer and manufacturer you plan to work with have any complaints against them with the Better Business Bureau or regulators.
  • Make sure your dealer has service department with RV-certified mechanics.
  • If you are buying a used RV, get as much history as you can, especially repair records.
  • Make sure the RV has a RVIA seal.

And no matter your final decision in the process, get out there and enjoy the open road!

Copyright © 2007 MWBoone and Associates, LLC  All Rights Reserved. MWBoone and Associates is a Registered Investment Advisor. Further disclosures at  www.mwboone.com. Securities offered through Linsco/Private Ledger Member FINRA/SIPC.

Posted by MWBoone & Associates at 02:20 PM | | TrackBacks (0)

November 14, 2007

Welcome!

Michael W. Boone, CFP, CFAWelcome!  As the first independent Wealth Manager in the US with a web site we are pleased to be one of very few with a blog. It is our intent to use this page to communicate with you what is on our minds in a timely manner by adding articles on a weekly basis, so please check back often. I hope you find the site enjoyable and educational.  Thanks for stopping by!

Posted by Michael W Boone, CFP, CFA at 08:58 AM | | TrackBacks (0)

November 13, 2007

Preparing for the Cost of Higher Education

One of the best investments you can make for a loved one — whether a child, grandchild, niece or nephew — is an investment in his or her educational future. College graduates with a bachelor’s degree typically earn twice as much, over a lifetime, as those with a high school diploma.1

Given escalating college costs, you may need more than a bank savings account to fund the college of your loved one’s choice. According to 2006 data from The College Board and Standard & Poor’s, the projected average cost for a newborn’s four-year degree at a public college could total almost $125,000. You would have to save $4,232 per year in a savings account earning 5% per year to equal that amount by the newborn’s freshman year. And should the newborn ultimately decide to attend a private college, you would need to add approximately $175,000 to your savings goal, bringing your annual contribution to $10,156.2

But don’t despair. A sound investment strategy, coupled with knowledge of other college financing options, may put your loved one on the road to a valuable four-year degree. Your financial advisor can help you determine how much you will need to save for each child based on his or her age. Outlined below are a few general guidelines to consider.

Final Tuition Bill Due in 12 to 22 Years

With time on your side, your portfolio can potentially withstand a bit of volatility in your quest for higher returns. You may want to consider investing the majority of your college savings assets in stocks, as these investments have historically provided the greatest long-term growth potential based on the S&P 500. For example, a $1,000 investment in a vehicle that mirrored the Standard & Poor’s Composite Index of 500 Stocks at the end of 1986 would have grown to $9,310 by year-end 2006. By comparison, an equal amount invested in lower-risk, lower-returning money market instruments over the same period of time would have grown to only $2,550.3 Of course, past performance does not guarantee future results. Consider the volatility and possible loss of income involved in stock investing and your ability to wait out potential fluctuations in the value of your college savings.

Final Tuition Bill Due in 8 to 11 Years

As your future scholar gets older, you may want to complement a stock portfolio with a fixed-income element to balance risk. Also, consider encouraging your loved one to save a portion of dollars earned through paper routes, babysitting and other jobs in a college account.

Final Tuition Bill Due in Less Than 8 Years

You may start allocating more of your portfolio to fixed-income and money market instruments. If you have only a small amount saved, you have a challenge ahead of you, but some cost cutting in other areas of your life may allow you to make substantial monthly investments.

Whatever the age of your future scholar, remember that any investment plan needs a fresh look every year or so to determine whether adjustments need to be made. As the day nears when your loved one goes off to college, preservation of your principal becomes a primary concern, and you may need to adjust your investment strategy accordingly.

Consider All Your Options

Reviewing the time frame available to you is probably your best strategy in seeking to meet college costs, but there are other options to consider as well.

Explore Section 529 Plans. These state-sponsored plans allow individuals to invest in a predetermined investment pool and offer some flexibility in how much you can contribute. But if you invest in a 529 Plan outside of the state in which you pay taxes, you may lose tax benefits offered by the state’s plan. Tax treatment at the state level may vary.

Encourage Savings Gifts. For birthdays or holidays, consider giving Series EE Savings Bonds that will mature close to the time you will need the money for college expenses. These bonds are sold at a 50% discount to face value at maturity. For example, a Series EE paper bond issued today with a face amount of $1,000 costs $500 and will be worth $1,000 in 17 years.

In addition, you may contribute up to $2,000 annually (per beneficiary) to a Coverdell Education Savings Account where earnings can accumulate tax free and withdrawals can be made tax free for qualified education expenses. You may also make annual gifts of up to $12,000, free of federal gift taxes, to a minor. And you can pay any amount directly to a loved one’s college for tuition and fees, with no gift tax consequences. Remember to brief yourself on the tax considerations of each of these gifts so you’re not caught off guard by Uncle Sam.

Together, time and a smart investment strategy are likely to be your best options for meeting the rising costs of higher education.

 

1Source: The College Board.
2Sources: Standard & Poor’s; The College Board. Data assumes current average college costs for one year of higher education ($30,367 for a four-year private college and $12,796 for a four-year public college) will increase at an average annual rate of 5% per year. Figures include tuition, fees and room and board.
3Performance is for the period December 31, 1986 to December 31, 2006. Stocks are represented by the total return of the S&P 500 Index and money market accounts by 3-month Treasury bills. Past performance cannot guarantee future results. Individuals cannot invest directly in any index. Results include reinvested dividends. Keep in mind that unlike investments, which involve risk and possible loss of principal, bank savings accounts are FDIC-insured.

 

 

Copyright © 2007 MWBoone and Associates, LLC  All Rights Reserved. MWBoone and Associates is a Registered Investment Advisor. Further disclosures at  www.mwboone.com. Securities offered through Linsco/Private Ledger Member FINRA/SIPC.

Posted by MWBoone & Associates at 09:08 PM | | TrackBacks (0)

The Dismal Science -- Economics:Black Swans and the Mortgage Crisis

Jack Carney“A single observation can invalidate a general statement derived from millennia of confirmatory sightings of millions of white swans.  All you need is a single black [one].”

From “The Black Swan”

By Nassim Taleb (2007)


Mr. Taleb’s book focuses on being fooled by randomness, a concept more recently referred to as [sic] ..separating signal from noise.  A timely question would be ‘ Is the current crisis in banking and mortgages a “black swan”?

According to Mr. Taleb, a “black swan” event is (1) unexpected, (2) has extreme impact, and (3) is rationalized as predictable and explainable after the fact.

Certainly (1) and (2) apply to the present banking and mortgage crisis.  I reviewed my newspaper clipping file back to 2004.  Alan Greenspan in 2005 stated ‘… banks should take more care with home equity loans’, noting that such loans are  …”subject to increased risk if interest rates rise and home values decline.”  Later that year,   …”They are exhibiting a seeming willingness to project stability and commit over an ever more extended time horizon”, meaning they (investors) have bid up stock and housing prices and accepted unusually low yields on long term bonds.  The OFHEO (Office of Federal Housing Enterprise Oversight) noted in early 2006 …..”the increasing divergence between these two data points (the housing purchase price index rising at an annual rate of 6.98% while the housing refinance appraisal price index is rising at 11.40%) suggest that the most recent appraisals may have been significantly overstated (by as much as 5%-10%)”  Wall Street Journal, September 2006 comments Merrill’s acquisition of  … the nations No. 9 subprime lender … is the latest indication of Wall Street’s efforts to beef up in the mortgage space.    …  The deal comes as many observers think the mortgage market is peaking”. 

Sounds like a “black swan”.

What are investment strategies for dealing with “black swans”?  The author suggest 5 strategies:

- Make room for unanticipated contingencies in your decision making process

- Rank beliefs about the financial future not by their plausibility but by the harm they might cause if your are wrong.

- “Barbell” investment strategies, include some riskier investments with a conservative portfolio; or, insure investments in a riskier portfolio against losses in excess of some level.

- Turn “black swans” into grey swans, by replacing usual normal (mean and standard deviation statistics) decision making with “black swan” distributions that recognize outsize positive or negative return possibilities.

- Ask yourself “what impact do extreme return outliers (positive or negative) have on total returns.”

In everyday language, this means owning a variety of investments and investment approaches, keeping focus on performance of the overall portfolio (not on each single investment), and trying to change our hard wired tendency to focus on what we know while ignoring what we do not know.

Next week, a personal observation on how difficult it is to account for a “black swan” even if you know about it ahead of time.

 

Copyright © 2007 MWBoone and Associates, LLC  All Rights Reserved. MWBoone and Associates is a Registered Investment Advisor. Further disclosures at  www.mwboone.com. Securities offered through Linsco/Private Ledger Member FINRA/SIPC.

Posted by Jack Carney at 02:58 PM | | TrackBacks (0)

November 07, 2007

When Real Estate’s in Trouble, Spruce up Your Home and Finances

As the subprime lending mess sorts itself out, there will be plenty of conflicting signals in weeks ahead on what you should do with real estate and your investment picture as a whole. Most of the advice will be knee-jerk. Your response shouldn’t be.
If you’ve been working with a financial adviser you trust, you should already have a plan that insulates you from the worst the market is dishing up now.  When it comes to real estate those with spotless credit, ready cash and absolutely perfect properties are the ones who will be in the best position to successfully cope with this challenging market.
If that doesn’t describe you, you should consider doing some spruce-up work around the house, strengthening your credit report, and taking a hard look at your long-term plans. Some ideas:
Should you sell? Do you have a job opportunity in another city or country you can’t refuse? If the answer’s a yes, then it’s probably unavoidable that you need to be in the market. Of course, that job opportunity should pay you well enough or give you a moving allowance to blunt your hardship level while you’re trying to sell. However, if it’s just a matter of wanting to take advantage of a relatively good price on another piece of property and you need to put your current residence on the market, definitely think twice – in certain markets, homes prices have begun to fall.
Should you buy? Many economists and financial professionals believe that the pain isn’t over in the housing market. The enormous price increases of the last few years went unmatched by increases in personal income and were fueled by rampant speculation, historically low interest rates and lenient lending standards. If you plan to live in the new house for at least 4-5 years and have established a solid financial foundation then you’re probably in the best position to make your investment work long-term.
Is your property in good shape? If you’re not in an immediate position to make a move, then consider improvements. When the market does recover, buyers won’t revert to the mentality of late 2004 when people wanted property in virtually any condition at any cost. Buyers will want property in clean, move-in condition when you decide to put it on the market, so make sensible investments in landscaping and cosmetic repairs inside and outside the house.
Should you renovate? Be really careful here. People always expect renovations to pay off big, and rarely does that happen – it may take years to recoup your money, much less show a profit. For a reality check, go to Remodeling magazine’s annual Cost vs. Value report online (http://www.remodeling.hw.net/content/CvsV/CostvsValue-project.asp?articleID=381305&sectionID=173) and check 2006 project cost averages for your region of the country. In any event, never believe that in a good or bad market a renovation is going to buy you immediate profits on a home.

Know how you’re going to handle capital gains: When you sell, remember that married couples can exclude from their taxable income up to $500,000 of gain and individuals filing separately can exclude up to $250,000. It’s required that you must have owned and used your home as your principal residence for two out of five years before the sale. The exclusion is generally applicable once every two years. However, if you are unable to meet the two-year ownership and use requirements because of a change in employment, health reasons or unforeseen circumstances, then your exclusion may be prorated.

Clean up your credit report: If you’re not planning to borrow now, make sure you’re in good shape to borrow later. Start with your credit report -- you have the right to get all three of your credit reports – from Experian, TransUnion and Equifax – once a year for free. You can do so by ordering them at www.annualcreditreport.com, but do so at staggered times throughout the year so you can catch potential errors in your report as they happen. Also, if you need to clean up any bad behavior – late bills, heavy credit card debt, clean it up before you wander back into the real estate market. Also, a bad credit score can raise the total cost of your mortgage.

This column is produced by the Financial Planning Association, the membership organization for the financial planning community.

 Copyright © 2007 MWBoone and Associates All Rights Reserved. MWBoone and Associates is a Registered Investment Advisor Investment Management services are not available through this e-store web site but are described at www.mwboone.com. Securities offered through Linsco/Private Ledger Member NASD/SIPC.

Posted by MWBoone & Associates at 11:52 AM | | TrackBacks (0)

Financial To Do List: Medicare Part D election

Jack CarneyIf you are over 65 and enrolled in Medicare, or if your parents (or grandparents) are over 65 and enrolled in Medicare, check on coverage for prescription drugs and make any changes during the Medicare Part D open enrollment period, November 15-December 31, 2007. 

(NOTE: if you are over 65, enrolled in Medicare, AND have prescription drug coverage through a Medicare Advantage plan OR are receiving prescription drug coverage through an employer sponsored retiree health plan, enrolling in Part D may cancel some of your insurance coverage and generally should NOT be done without consulting your current insurance plan.)

This insurance program is nationwide, authorized by the federal government and managed through Medicare.  However, specific health plans are offered in each state, governed by that state’s insurance regulatory authority.  Accordingly, a nationwide comparison of cost and benefits is difficult to formulate.  Choice among 50 or more plans in each state is not unusual.

In one sample of plans, monthly cost ranges from $22.00 per month to $94.00 per month.  Half are increasing rates for 2008, half are decreasing.  The plan that offered the lowest cost in 2007 ($1.67 per month) is increasing rates to $24.80 per month.  Other plans are changing deductibles and/or co-pays.  (For comparison, in Minnesota, the Medicare baseline premium will be $30.61 per month for low income residents eligible for subsidized enrollment.)  Changes in rates and coverage, not to mention changes in health, make it prudent to review your personal situation regarding current or potential Rx usage, recommendation of your  physician regarding generics, trade-offs between insuring and self paying, and the monthly cost.

Part D coverage is unique among health insurance plans in its “doughnut hole” coverage gap.  After annual retail drug costs reach $2,520 in one calendar year, Medicare offers zero coverage for the next $3,206 in drug costs.  After that amount, coverage by Medicare is 95%.

Coverage for the “doughnut hole” is one big factor in monthly cost for plans.  Many insurance plans offer no coverage for this gap.  The ones that do are generally the most expensive.  For people who do not have chronic health conditions and have adequate emergency savings to cover the “doughnut hole”, the cheaper plans may make sense.

The other big issue to consider is what drugs are covered (aka, the “formulary”), either in baseline coverage or the “doughnut hole” gap.   Many plans cover only generic drugs or require higher co-pays for brand name drugs.  This suggests a review of your current prescriptions and/or consulting with your physician regarding substitution of generics before deciding on a drug plan based solely on the monthly premium.

We (at MWBoone and Associates, LLC) do not offer Medicare related health insurance though we recommend retirees over 65 consider coverage as part of overall retirement planning.  Some information for this post used an Article Launched October 8, 2007 by Pioneer Press (TwinCities.com-Pioneer Press), a comparison of Minnesota Part D programs that illustrates the general issues to think about.  Also see http://www.cms.hhs.gov/PrescriptionDrugCovGenIn/ , the Medicare website for Part D prescription drug benefit.

 

 

Copyright © 2007 MWBoone and Associates, LLC  All Rights Reserved. MWBoone and Associates is a Registered Investment Advisor. Further disclosures at  www.mwboone.com. Securities offered through Linsco/Private Ledger Member FINRA/SIPC.

Posted by Jack Carney at 11:50 AM |