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February 29, 2008

Financial To Do List: Medicare Part D Open Enrollment

If 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.

Posted by MWBoone & Associates at 01:51 PM |

LPL Economic Update PowerPoint

Lincoln Anderson's PowerPoint on the current state of the economy. To view the powerpoint, please click on the link below:

http://www.mwboone.com/library/articles/Economic_Update_Feb_22_2008.ppt

Posted by MWBoone & Associates at 12:57 PM |

February 28, 2008

Stock Market Observations: Price to Earnings (P/E) Ratios -- Check Your Numbers

It is commonly accepted that the P/E (Price Earnings Ratio) is a key metric in evaluating the not only individual stocks but the valuation of the stock market as a whole.

P/E ratios for the US stock market are generally understood to reflect fair valuation when they range between 14 and 20.  Exactly where depends on many factors including interest rates and whether looking at current year, trailing 12-month or forward twelve months.


In checking the Wall Street Journal, I was surprised to see the market P/E, as measured by one widely followed index, to be 49.13.  That’s correct, the Dow Jones Index on Tuesday, February 8, 2008, reflected a P/E of 49.13 on the 30 Dow Jones average stocks.

Three quick generalizations:

-A single number in a headline may or may not be an accurate representation of the underlying structure it purports to measure.

-“Quant” or computer/mathematical investment models can yield unexpected results if an out of bounds measure affects a key statistic.  (Hypothetically, an automated investment program that took into account the P/E ration of the Dow Jones Average could yield unexpected results without adequate checks and balances.)

-Cross check unusual results for an explanation of apparently outlandish results.  (The P/E for the NASDAQ on the same date was 29.20; for the S&P 500 18.90.  These data are for “trailing 12 months” earnings.  The same ratios for “forward 12 months” earnings are 15.00 (Dow Jones Industrials; 21.45 (NASDAQ) and 14.60 (S&P500).

This statistical aberration also illustrates how unusual events in one part of the market can appear to affect thinking about valuation of the market as a whole.  Four of the 30 stocks in the Dow Jones Industrial Index are large bank, insurance and investment companies.  The multi-billion write-offs associated with the sub-prime mortgage crisis have an outsize effect on the value of the index itself.  The NASDAQ would show little effect from this as there are few banks in the index.  The S&P 500 would show the same general effect, but diluted as the banks posting these write-offs make up a smaller portion of overall index valuation.

Jack Carney

 

 

Copyright © 2008 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 LPL Financial Member FINRA/SIPC.

 

Posted by MWBoone & Associates at 11:02 AM |

February 27, 2008

Lincoln Anderson's Economic Update

  Financial markets continue to be roiled by sub-prime mortgage concerns. And a number of doom and gloom prognosticators are saying we are in a recession or predicting recession. I continue to disagree with these gloomy assessments of the U.S. economy. I am confident we are not in a recession, and I do not expect a recession this year.
Yes, housing construction and home prices are down, but other sectors of the economy are taking up the slack – notably U.S. exports which are rising at an 8% growth rate in real terms and are 3½ times the size of residential construction. The consumer is hanging in there, behaving rationally. Real consumer spending excluding energy (taking out gasoline, heating oil and the like) rose 2.6% last year, while spending on energy slowed to 0.3% (and fell outright in the fourth quarter). Makes sense to me given outrageously high energy prices. Business fixed investment is chugging along at a steady 7.5% growth rate in real terms. Inventory investment was soft all year and fell in Q4, but I consider that to be a positive this year – no inventory glut to clear out. And government spending is doing what it always does – rising – at a steady 2.5% rate in real terms.

Income and interest rates look okay. Real after-tax personal income is chugging along at a 2.1% growth rate. The personal saving rate, while low, is in positive territory. Outside of these sub-prime related write-offs at a bunch of big, dumb banks, company earnings look pretty good. With 439 of the S&P 500 companies having reported, non-financial company earnings are up about 14% over the last four quarters. There were big gains in Technology (good volume, better pricing), Energy (sky-high oil prices), Healthcare (demographic tailwind) and Industrials (exports). And the Federal Reserve is cutting, not hiking, interest rates.

What I worry about are rising oil prices and/or further dollar declines. Another big rise in oil prices might do enough damage to tip us into recession, and further dollar declines would erode international investment in U.S. financial markets. And oil prices have moved back up to $90-100 per barrel range. Unfortunately, energy policy has not helped. Starting last September, with oil prices around $75, the Energy Department began adding oil to the Strategic Petroleum Reserve! Over the same time the private sector reduced inventories and petroleum use fell. So, on the margin, it appears that the U.S. government was the big marginal buyer helping push prices from $75 to $100. Not smart… However, the Energy Information Administration is forecasting a deceleration in global demand for oil and a rise in supply. So there are some grounds to expect lower oil prices.

 

I will continue to watch the economy and these data closely and report back to you. For now, I remain optimistic that we will avoid recession and return to faster growth and rising financial markets. As always, please call me with any 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. To determine which investment(s) may be appropriate for you, consult MWBoone & Associates prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Copyright © 2008 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 LPL Financial Member FINRA/SIPC.

Posted by MWBoone & Associates at 09:05 AM |

February 26, 2008

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

“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)

The mortgage crisis meets the description of a “black swan”.  Recently, the Wall Street Journal published a description of how one trader (Mr. John Paulson) was able to profit handsomely from betting on this “black swan”.  (January 15, 2008, Trader Made Billions on Subprime).  How handsomely?  Profits of $15 billion in 2007, nearly equal to Citigroup write-offs reported in their December 31 quarterly earnings announcement. 


How did he accomplish this?

·         Seeing the opportunity, accepting that a longstanding economic assumption might be wrong
·         Thoroughly analyzing new, hybrid investment vehicles
·         Maintaining secrecy
·         Patience, waiting to invest, waiting through large losses
·         Taking on large banks, utilizing high paid public relations to maintain his strategy
·         Taking extreme risk

It is (was) a longstanding assumption that “house prices never go down on a national level”.  Since “you can’t short houses”, Mr. Paulson needed to find a tool to take an investment position opposite of Wall street banks.  This entailed researching new instruments called credit-default swaps, an arcane security holders of CDO’s (collateralized debt obligations made up of home mortgages) used as “insurance” against loan defaults.  He sold short the high risk segments of CDO’s, and purchased credit default swaps on those securities because he believed they were priced too cheaply.  In the process, he had to review the detailed information of thousands of mortgages held in individual CDO’s.  Later, Wall Street created an index fund for sub-prime mortgages, which he also sold short.

It is (was) a longstanding assumption that “house prices never go down on a national level”.Since “you can’t short houses”, Mr. Paulson needed to find a tool to take an investment position opposite of Wall street banks.This entailed researching new instruments called credit-default swaps, an arcane security holders of CDO’s (collateralized debt obligations made up of home mortgages) used as “insurance” against loan defaults.He sold short the high risk segments of CDO’s, and purchased credit default swaps on those securities because he believed they were priced too cheaply.In the process, he had to review the detailed information of thousands of mortgages held in individual CDO’s.Later, Wall Street created an index fund for sub-prime mortgages, which he also sold short.

In seeking investors, one prospect used the information to do his own trading (In Beverly Hills, A Meltdown Mogul is Living Large, Wall Street journal, January 15, 2008).  Mr. Paulson then initiated secrecy measures to limit knowledge of his strategy (like coding emails to investors so they could not be forwarded).

Other traders had tried similar schemes before, but lost their money when they invested too early and the bubble kept expanding.  Mr. Paulson waited until mid-2006; and, with about $150 million funded mostly by European investors started the first hedge fund.  He waited through heavy losses, but by the end of 2006 was up some 20%.  This enabled him to start a second fund, his firm attracting $6 billion of new investments in 2007.  (In this article, he discloses he has taken some profits, so some remain “paper” gains, which he may or may not fully realize.)

As mainstream banks began to look for a way out of their predicament, they proposed regulations that would allow them to purchase individual loans, in essence re-writing the contracts underlying the CDO’s.  Mr. Paulson hired the former head of the SEC chairman, Harvey Pitt, to publicize this tactic (thus keeping it from being implemented).           

Besides knowing the details of an historic Wall Street crash, what lessons can we take from this?

As Alan Greenspan has publically stated, hedge funds form an important “check and balance” function to keep markets honest and accountable.  It is unlikely banks will lose money again through CDO’s funded by sub-prime mortgages.

The risk and technical details of such an investment require large amounts of money and a small number of investors.

Question strategies that use the words “never” or “always” in the premise or rationale.

One relatively small investor can affect the global stock market.

This is my last post on this subject.

Jack Carney

Copyright © 2008 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 LPL Financial Member FINRA/SIPC.

Posted by MWBoone & Associates at 10:42 AM |

February 22, 2008

Keep Investing: Bad Markets are Better for Investors

There are some very basic things about investing that few people ever seem to fully grasp.  The most obvious is that investing at low prices is better than investing at high prices.  I should be able to end this piece here and let you figure out the implications, but since they seem so little understood I feel compelled to explain some.


We go shopping at Costco not because we like walking on concrete floors or because pushing big carts is good exercise or even because the free food samples about dinner time are compelling enough to overcome the quarter mile walk in and out to the car.  It’s because the prices are low.  Wal Mart and Target have similarly grown into huge companies because, and I’m unveiling a special secret now, their prices are low.  It seems that we free market shoppers are really good at finding good values everywhere in our life except when it comes to investing.

When investments have had a  very strong run prices are necessarily much higher than they were at the beginning of the period.  And yet that is just when investors get so excited about buying them they can’t wait to get in line for more.  Like a kid in a Tiffany store.  In fact, the higher investment prices go the more investors want to buy!  Now imagine Costco marking up prices two or three fold.  How long would you keep shopping there?

On the other hand, imagine what it would be like if Costco promoted a 50% off sale on everything in the store.  There would be lines for miles outside of each location.  But when investments hold a 50% off sale everyone runs for the exits, hoping that someday the high prices will be back so they can get buying again!

It seems to me that we have a simple underlying belief that investments are either good or bad by how much money they made the previous owner.  When in fact, like with the retailer, it is possible that the relationship might even be the inverse of that.  A fat profit margin for the previous owner might be a good indicator of a bad purchase for us.

Remember that when you make an investment you are buying a series of cash flows; a fancy way of saying that you expect to get some more money back tomorrow.  The less you pay for that future sum of money the better off you are, right?  If that’s too complicated, remember the Costco analogy and celebrate lower prices as a great opportunity to get a good deal, instead of deciding that falling prices are a reason to be depressed and stop investing altogether as most people do.

 

 Copyright © 2008 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 LPL Financial Member FINRA/SIPC.

Posted by MWBoone & Associates at 09:15 AM |

February 21, 2008

Fears of the Falling US Dollar

 We all know that it is more expensive to fill our gas tanks – did you know that there is also a direct relationship to the lower dollar? Many commodities are priced in U.S. dollars (e.g., gold and oil), which makes these items cheaper for non-U.S. citizens to obtain and makes them more expensive for us to purchase.

All else equal, US citizens pay more when they purchase imported products or travel abroad (from cheese to BMWs to lodging abroad). China, our top import source, has not been badly impacted as the yuan trades relative to the US dollar. However, the net effect has been fairly muted, with the core U.S. Consumer Price Index (CPI) up only 2.4% in 2007 as foreign companies have elected to decrease margins instead of raise prices and risk losing market share. What receives very little media play is that US exports have become increasingly competitive. For many years the strong dollar has exacerbated our current account deficit, from 1.7% of GDP in 1997 to 6.2% in 2006. Whether it is California wines or Boeing jets, our products have effectively become cheaper to the rest of the world, which outweighs the impact of the negatives above.

The U.S. is also certainly benefitting from increased tourism and direct investment by foreigners. For example, there is an influx of Brits buying up real estate in Manhattan and in Seattle, WA, tourism has almost doubled over the past decade becoming a $6 billion industry and creating 60,000 jobs.

The strong dollar also led to a loss of U.S. manufacturing jobs and increased foreign debt to finance the budget deficit. With the weaker dollar, the motivation to exports jobs declines.

Finally, U.S. investors with foreign investments have also benefited from this change.

Where do we go from here? While it is possible that that dollar will continue to fall over time, it is unlikely to take a precipitous plunge. As the key global reserve currency, a coordinated central bank effort could manage any decline. Over time, the U.S. needs to take steps to reduce our current account deficit without protectionist trade mechanisms. The bottom line is that a weak U.S. dollar is actually a net positive to the U.S. economy – something few Americans and certainly our popular press seem wholly unaware of.

 

 

Posted by MWBoone & Associates at 01:23 PM |

February 19, 2008

You May Love Each Other, But Should You Invest Together?

It’s one of the most important questions a couple will face in their relationship but it so rarely gets asked until a relationship is well underway – should we pool or separate our money for investment?

The answer is as unique as the both of you. But there are some critical facts and some questions to consider as you develop a financial strategy for a lifetime.

Pooling can be a great idea after a marriage because the both of you are legally bound together, so why not bind your finances for potential maximum return? Many financial experts believe it’s a good idea for the simplest of reasons: The bigger the pile of money you two can gather, the greater the potential for financial gain with the right advice.

But there’s more to it than simply combining your assets.  Pooling your investment dollars should produce not only shared decision-making, but shared awareness of everything going on with your finances for a lifetime. It’s the kind of cooperation that will not only benefit you all the years of your marriage, but also provide a surviving spouse the knowledge to function if the other dies suddenly or is incapacitated.

It’s a move that woman need to consider in particular – it’s to their advantage to maximize the total investment pie because chances are they will be the lower-earning spouse, as they may go years without income if they stay home to raise children. And if the marriage breaks up – as roughly 40 percent of them do these days – she’ll need extensive assets to prepare for a retirement that will be statistically longer than her husband’s.

But how about a couple that wants to plan separately? The first question is: Why? There may be compelling reasons – for instance, one spouse has assets he or she wishes to protect from another spouse engaged in a high-risk business proposition. Others may have significant inherited family assets that need to be protected for heirs from potential loss in a divorce. And of course, this is the least attractive reason, but it happens: One spouse doesn’t simply trust the other.

These questions and more are a good reason for a couple planning to marry to sit down with a trained financial expert like a Certified Financial Planner™ professional to go over their respective and combined goals for home ownership, retirement, kids’ college savings and various other lifestyle goals. A visit to tax and relevant legal professionals makes sense before the wedding as well.

Things to consider:

What approach will get you to your goal faster? Young people starting out literally need to save every nickel to save for a first home. It makes sense to figure out how much you can jointly put aside and where to invest that money based on your risk tolerance.

How can your employer help? Obviously max out on your 401(k) and other retirement savings options – particularly if there’s significant company matching involved, but check to see if your other benefits will do more for you and your spouse. See if joining on one or the other health plan might be a better value than going it alone on your respective plans. If you have a health savings account that your spouse hasn’t, see how you can make that a part of your overall joint investment strategy. Also, don’t forget employee discounts that might cut your overall household spending. 

Let your competing investment styles…compete: There are plenty of studies on this, but they seem to hold steady: Men tend to take more investment risks, women seem to be risk-averse. One of the advantages to working with a trained financial expert is not only their ability to make solid investment suggestions for you, but to identify the differences in your investment approaches and find compromises that work best for the both of you. 
 
Talk: Talk about your financial expectations and what goals you’d like to achieve. Talk about what you’re afraid of. And most important, talk about your money history – your credit rating and score, any troubles with credit in the past, including bankruptcy. Oh, and if you survive these initial discussions, make a promise to talk about money once a month.g

Posted by MWBoone & Associates at 11:18 AM |

February 15, 2008

When Recession Fears Surface, Check Your Plan – Or Make One

It’s been a wild few weeks on Wall Street. When trading reopened on Tuesday after the Martin Luther King holiday, the Federal Reserve Board responded to world pressure and swooped in with a rate cut to put a floor on Dow losses that were approaching 20 percent since last October. By today, things seemed to be stabilizing. But what about tomorrow? And then next week, and the weeks after that?

If this question fills you with worry, then it’s pretty clear you’re operating without a plan, or at least one you haven’t recently checked. That’s OK. When worldwide market worries surface, it’s easy to get scared. It’s particularly easy when we’ve had such major market calamities as the U.S. mortgage debacle and the lingering disarray in the banking and investment industries. 

But sudden action is usually a mistake. In the late 1980s, Harvard psychologist Paul Andreassen made news with a research project that found that people who listened to market news actually made lower returns. Why? Because those who sold – or bought – during a market swing probably found a day later that the market was really running on hype, not fundamentals.

You pay a financial planner to devise a financial strategy that matches your risk tolerance and long-term financial goals. No, there is absolutely no way to guarantee that you’ll never lose money. But if a plan truly matches you, the noise shouldn’t make a difference, particularly if you don’t need the money today.

So the next time world markets spike or slide, ask yourself:
 
What’s my plan? If you’ve worked with us, you should be able to articulate those goals all by yourself or refer to an investment policy statement you made together. Much of the riskiest investing, overbuying and panic selling during the late 1990s and early 2000s could have been avoided if individual investors had sought advice for achieving long-term specific goals such as retirement or a college education.

What’s my risk tolerance? At your first meeting, you should have discussed a number of questions about how you handle risk and what your expectations were about investment returns. You might have had to do this more than once if your risk tolerance was low but your investment expectations were high – low-risk investors can’t expect the highest returns.  That’s part of the education process.

Am I prepared to stay invested – no matter what? We all remember the “Tech Wreck” of 2000. At the worst of that downturn, investors bailed out of the stock market or drastically cut back, only to get back in after they were “convinced” that the market was rebounding.  In reality, they missed out on stock market gains during the early stages of recovery, and that’s costly in the long run.   Of course, some investors looking for that late 20th century investment high also got into the real estate market, and they perhaps learned a similar lesson when that market started heading south two years ago.

In 2004, SEI Investments studied 12 bear markets since World War II. Investors who either stayed in the market through its bottom, or were fortunate to enter at the bottom, saw the S&P 500 gain an average of 32.5 percent (not counting dividends) during the first year of recovery. Investors who missed even just the first week of recovery saw their gains that first year slide to 24.3 percent. Those who waited three months before getting back in gained only 14.8 percent.

Am I diversified? The NASDAQ lost 39 percent of its value just in 2001 and another 21 percent in 2002. Meanwhile, real estate investment trusts, which performed poorly in 1998 and 1999 when stocks were booming, had banner years in 2000 and 2001, performed so-so in 2002 and had an excellent 2003. Bonds also returned well during the bear market.  Based on your risk profile, you should be in diversified investments that fit your goals.

Do I still feel the same way I used to about returns?  Having a long-term investment plan doesn’t mean make the plan and leave it to gather dust. We are a team. Both of us should talk and decide when it’s time for a detailed review of your investment goals and whether or not they should change. An annual conversation makes sense if nothing’s going on, but life events like death, divorce, kids moving out, and illness are good reasons to do a head-to-toe review of a financial plan. 

If you’re worried this week, there’s no reason why you shouldn’t call us to calm your nerves and confirm what you’re doing. And if you’ve never talked to a planner before, now might be a pretty good time to start. 




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

 Copyright © 2008 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 LPL Financial Member FINRA/SIPC.

Posted by MWBoone & Associates at 09:03 AM |

February 14, 2008

When is a Prenup a Great Valentine’s Day Gift? When it’s Time to Remarry

No, it’s not exactly candy and flowers. But for couples attempting another try at marriage, a prenuptial agreement can either set the groundwork for a new and trusting relationship, or a good reason to call it a day.

It’s actually not the agreement by itself that makes the difference – it’s the process. When two parties sit down to formalize a prenuptial agreement with their respective attorneys or mediator, it requires both sides to make full disclosure of their current financial situation and long-term money goals.

Prenuptial agreements can be considerably more complex for couples making a repeat trip down the aisle. Money issues are not just a matter of full disclosure between two people – in remarriage, they can affect a much wider audience including parents, siblings, children from previous marriages. In some cases, there are sizable business and personal assets gathered before the upcoming wedding day that must be protected.

It is important to contact us, to set the ground rules for this process, though legal documents that hold up in court generally need review by respective family law and estate attorneys.
Here are the primary issues any remarrying couple should discuss:

What about our families? Note we’re not just talking about kids, though they’re typically the center of the discussion. Indeed, if couples are bringing children from previous marriages into a blended family, it’s necessary to establish not only how they will be supported and educated, but also what percentage of the family assets they will be entitled to in case their biological parent dies. There may be alimony and other support arrangements already in place for ex-spouses and children from earlier marriages as well as elderly parents to support. All of these financial requirements need to be spelled out beforehand.

Is there debt? And if so, how much? The first money conversation should take place at a table with both sides showing their savings, investments and debt figures – every dime. Both should start the process of talking about how that debt should be paid off – by the person who accrued it or by both potential spouses. Couples also need to decide how they will handle debt going forward – jointly or separately.

Are there investments? If so, how will they be handled once the couple is married? Will they be held after the marriage in joint tenancy, and what will the process be to effect that? From a tax perspective, does it make sense to do anything specific with those assets before the wedding? And after the wedding –assuming debt is being dealt with – how will you maximize those investments?

What about our businesses? If one or both spouses run their own companies or partnerships, that’s an urgent call for prenuptial planning since it may relate to a large asset that affects the future of many family members. Depending on the size and complexity of the operation, some advisors might encourage couples to go through a formal valuation process of those assets to establish a base of wealth going into the marriage. A prenup could spell out who will get future percentages of those assets if the couple splits – this is particularly necessary if the goal is to keep the company in the hands of the founding family.

How will we handle daily expenses? This is a universal question in any marriage, the first or the sixth. Couples need to agree on how they’ll share accounts and pay bills. The most common option is to create one joint account. Others work with three accounts – one joint and then one for each individual.

What about insurance? Life, health, home, and disability – all coverage that singles hold separately needs to be reviewed and consolidated to make sure the couples and their families have adequate coverage after the wedding.

What about our estates? There should be separate wills and supporting documents on who will get what investment, personal and business assets with updated beneficiaries – particularly when children from first marriages are involved. Particularly in blended families, it’s necessary to spell out who gets Grandma’s jewelry or Grandpa’s business.  And no matter how young or old the couple, health directives need to be made.

What about retirement? Retirement discussions go beyond money. Couples should decide how they want to live in retirement, whether they’ll continue to work and what will happen if one or both get sick. This is a particularly important discussion if one spouse is significantly older than the other and may retire years ahead.

What about our tax status? It makes sense for couples to consider their tax status before they marry, particularly if there are sizable business or personal assets being brought into the marriage or past tax liabilities. In any event, remarrying couples should involve a tax expert in all pre-marital financial planning.

 

February 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community. Copyright © 2008 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 LPL Financial FINRA/SIPC

Posted by MWBoone & Associates at 08:39 AM |

February 12, 2008

The Next Bubble

LPL's Jeff Kleintop has put out a new market update. To see the article, please click on the link below:

http://www.mwboone.com/library/articles/lpl_thenextbubble_2_12_08.pdf

Posted by MWBoone & Associates at 10:12 AM |

February 08, 2008

Lincoln Anderson Update for February 8th

Another wild week on Wall Street.  After staging a solid rebound beginning January 23, the Dow and other stock price indexes took a pounding again on Monday and Tuesday of this week.  We are still above the January 22 lows, but not by much.  Rereading this last sentence, I see that my focus has shortened a lot, which tends to happen when stock markets become highly volatile. In my experience, that is when about half of investment mistakes are made.  The other half usually happen when jumping on bandwagons at market peaks with eyes closed.  As one of the great investment gurus, Sir John Templeton, put it – “To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude and pays the greatest reward.”


I have always considered that to be great advice.  With bearish sentiment high and psychology on another downswing, I think this is not the time to be selling the market.  But it is a good time to review the portfolio and look for opportunities being created by what I view as indiscriminant selling.  Also, I think we are in the midst of a change in economic and market leadership.  Obviously housing and easy credit are out.  But on the other side, rising exports and lower interest rates are in.  Also, it looks to me (and may be wishful thinking) that we are finally getting lower oil prices and a rising dollar exchange rate.

I think these developments, if sustained, will really help the U.S. economy and financial markets over 2008.  The rise in exports and the fall in interest rates should mitigate the hit from housing and tighter credit.  Lower oil prices help everybody.  Compared with 2000 when crude oil prices averaged about $30 a barrel, we are spending about $200 billion more per year for the same amount of imported oil.  If we could stop sending that extra $200 billion overseas, then we would have a real stimulus package for the economy!  The dollar exchange rate index (against a major currency basket) hit a record low back in early November and has staged a ragged recovery.  While a low dollar benefits U.S. exports, I think a flat to rising dollar would help shift international investment to U.S. equity markets.

Finally, with the fourth quarter earnings “season” drawing to a close, it’s time to check on company earnings.  Amazingly, given all the angst in equity markets, earnings are generally good outside of financials.  With 340 of the S&P 500 companies having reported, 225 are reporting higher earnings averaging 26.6% gains, with 99 reporting lower earnings, but the average change there is a whopping 128% decline (mostly due to financial sector write-downs).  For the ten economic sectors, only three are reporting earnings declines (consumer discretionary, financials and materials).  The other seven are up, so the earnings hit is concentrated, not reflecting a broad based decline associated with an economy in recession.  Consequently, I remain optimistic that we can avoid recession this year, or if we do get one, it will be mild.  I also think we can avoid a sustained slide in U.S. equity markets.   As always, please call me with any 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 © 2008 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 LPL Financial Member FINRA/SIPC.

 

 

 

Posted by MWBoone & Associates at 10:08 AM |

February 07, 2008

Raging Bull

LPL's Newest Raging Bull on equity market trends. To see this article, please click on the link below:

http://www.mwboone.com/library/articles/RB_Feb06_2008.pdf

Posted by MWBoone & Associates at 10:14 AM |

February 06, 2008

LPL Market Update

LPL has put out a new market update for this current week of February 4th. Please click on the link below to see the article:

http://www.mwboone.com/library/articles/MarketUpdate_Feb_4_2008.pdf

Posted by MWBoone & Associates at 10:54 AM |

February 01, 2008

Pay Close Attention to So-Called “Default” Investments

One of the provisions of the Pension Protection Act of 2006 was to allow companies to automatically enroll their employees in their companies’ 401(k) plans, but it wasn’t until last October that companies got guidance on the categories of investments they had to choose for their workers’ contributions. The decision contained a controversial provision. The Labor Department decided to prohibit stable-value funds or guaranteed investment contracts (GICs) from the choices, because many experts find them too conservative for younger investors.

Instead, companies can now offer balanced mutual funds among their QDIAs (Qualified Default Investment Alternatives) as well as target and lifecycle funds. Balanced funds create an assortment of investments that fit the group of employees as a whole, while target or lifecycle funds contain specific mixtures of investments targeted to an investor’s age or retirement date.
What’s also important to know is that employers won’t be liable for employees’ money lost while invested in a QDIA, but they’ll be responsible for doing the due diligence to select the investments, for monitoring the investments’ performance and for deciding whether to keep or jettison those investments.

So does that mean that you can comfortably rely on default investments for your entire retirement strategy? No.

Target investments specifically have become very popular. Money has been gushing into these funds, according to the Investment Company Institute. By yearend 2006, this particular category of funds held $114.3 billion in assets, up from only $12.3 billion in 2001. Why the demand? In part such funds have been positioned as “no-brainer” investments for individuals without the time, inclination or knowledge to choose investments for themselves. 401(k) plan architect Ted Benna was quoted earlier this year as saying that within 5-10 years, more than 75 percent of 401(k) plan assets could be invested in target funds.

A trained financial expert such as a Certified Financial Planner™ professional can help individuals meet specific goals in retirement that aren’t addressed by these one-size-fits-all plans. For instance, some critics say life-expectancy issues are not adequately addressed in target-date plans, and they definitely don’t address scenarios in which you plan to work in retirement or spend your assets in unconventional ways. Also, some critics offer that many people may underfund such plans without realizing the correct amounts they should invest to meet their goal. A planner’s job is to help advise individuals on an ongoing basis about meeting such goals. 

That said, how should you evaluate a target-date fund? Here are some questions you should ask:

Do you know how much money you’ll need to retire? This is one of the questions you should start with based on your age and the vision of retirement you have. It is one thing to invest in a fund that promises consistent growth until your retirement date, but what if you need more growth? What if there are specific tax and spending issues that might interfere with putting the right amount of money into such funds each year? This is why individual advice makes sense. A mutual fund can’t ask you what your goals are, nor can it make sure you’re investing enough.

How did your employer select the funds it’s offering? Obviously, most employers want to make the right fund choices for employees, but just because they’re offering target funds doesn’t mean they’re offering the right target funds for you and your needs. Keep in mind that most fund choices offered to companies are heavily marketed and might not be the cheapest or most efficient investment choices out there. Always check the Morningstar rating of any fund your 401(k) invests in.

What if you leave your job and take your 401(k) with you? What happens to your targeted investment plan then? Obviously you’ll roll over these assets into another tax-advantaged retirement plan, but what will happen to your annual retirement savings strategy at that point? Always ask.

What are you paying for a targeted fund? Granted, the investment choices are being made for you, but what are you paying for those choices? Often, these funds are constructed based on a fund-of-funds structure that layers a fee on top of the fees incurred by the individual funds. Always understand the fee structure of any fund you invest in. 

 

January 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community. Copyright © 2008 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 LPL Financial FINRA/SIPC.

Posted by MWBoone & Associates at 08:41 AM |