Ups and Downs

Why does the stock market go up and down every business day?

Answer: I don’t know.  I guess you can stop reading here unless you think we will have a surprise ending.

It’s a 24/7 world and the real stock markets never close.  When I was with Bank of America in the old days (before the purchase by Nations Bank of Charlotte, NC) we had stock trading centers around the world.  We were always ready to buy and sell in large quantities to make money and protect our clients if we could.  Notice making money for the bank came first.  It still does.

Professional traders make money by buying, selling, borrowing, loaning, leveraging and creating securities.  Some of these securities represent ownership of companies, but more and more securities these days seem to be created to take advantage of some situation where an artificial ownership of some element is devised to “hedge” or “leverage” some potential or actual situation in the markets.

Confused? Me too.

All I know is that these traders (small and large) make millions in what is characterized as “providing liquidity and efficiency” in the marketplaces.  Taking advantage of mispriced securities in one market over another market is just one example I understand.  Lawyers and Accountants help traders structure and execute transactions to take advantage of situations.  Everybody wins.  Or so they say.

For you and me, the individual investor, whether we’re active or passive, the deck is stacked against us.  We’re losers.  Hard to beat the big boys and girls.

First they play mind games with us.  They mislabel, misrepresent, and hype whatever is the popular fear or greed, but more often fear. They predict the future.  They tell us where these markets are headed next.  They tell us what new securities to buy to protect us from that event or make money from that event. They are usually wrong, but they get good press unless they are really wrong.  Think of Meredith Whitney’s now famous prediction of a muni bond meltdown in 2011. 

How do she get good press? Well, once in awhile they get it right and the press features them frequently thereafter.  Ms. Whitney was a good case in point since she is acknowledged to have predicted the 2008-9-credit crunch.   Think broken clock is right twice a day.   There are hundreds of stories like this one. 

So how we win this loser’s game with the deck stacked against us?  Is there an easy answer?  No.  But I’m a planner, not a money manager or a trader.  I’m also a reader.  Over the years I’m read some really good books and recommended several to help ordinary investors to understand what is going on and do as well as they can given the game we’re required to play.  We don’t make the rules.

If you’re interested in my reading list designed to educate clients, just send me an email.  I’d be happy to send you a copy.

Now for the big surprise ending that contains the answer to the question as told to me by Ken Fisher, Forbes columnist, money manager, and my former boss:  More sellers than buyers the market goes down.  More buyers than sellers, the market goes up.  “It’s all supply and demand.”  And now you know the answer.

Why Don't People Take My Advice?

Why don’t some people take my advice especially when it comes to making a will?

Frequently I’m asked, or offer advice on my own initiative, about do-it-yourself wills and other estate planning documents.  Estate planning documents can mean a durable power of attorney (durable means it is still valid during incapacity or physical absence), advance health care directive (medical power of attorney), living will (how you want to be treated), revocable trust (living trust) and memorandum to your executor about your personal effects and funeral/burial arrangements.

OK, that’s a mouthful in the previous paragraph.  What’s my gripe this time, you ask?

You didn’t ask?  Well, here it is anyway.

When I worked in two different bank trust departments we loved it when people died without a will and left things in a mess because of it.  It was even better with lots of property or accounts without beneficiaries or unreachable beneficiaries. That meant our fees got paid (we didn’t take on cases where we couldn’t get our fees). 

Judges frequently sent this work our way because we were good at getting resolution no matter how long it took, or how much it cost.  Notice the bank was interested in how much it might cost the estate and where the money was to come from for our fees.

How bad can things be when someone dies without a will or maybe an advance health care directive and is incapacited?  Think Terry Schiavo of Florida.  Remember her plight?  Google her name to get the story in full, but I’ll tell you she went into a coma without much chance of recovery and her husband and her parents fought a battle (15 years) whether to pull the plug, or not.  Messy.

Attorneys make the rules and attorneys reap the rewards when people don’t follow the rules.  They like battling heirs.  Everyone makes money here except the heirs.  Why? No written instructions (will) or proper title (joint tenants with rights of survivorship, for example) or an identifiable beneficiary are typical ways to end up in court where the judge decides.  Everyone is sure what the decedent (dead person) intended, but never got around to completing in a written form.

So now we get to Do-It-Yourself.  I have several articles I hand out that make the case for or against this method of doing it on your own without an attorney.  My premise is just do something.  Don’t end up in the “Would, Coulda, Shoulda” category. It is a mess that you leave behind.  No one knows when our number is up. Think of your family or friends or organizations that will have to deal with the consequences of your inaction. 

Not motivated? Then think about the attorneys who might get a new boat because of your reluctance to put it in writing.  Now that should get you going.

Where's the "Relief"?

Why do they call it the “Taxpayer Relief Act of 2012” when it increases everybody’s income taxes and it was passed and signed into law in 2013?

In mimicking the Wendy’s ad of decades ago, “Where’s the beef?” our friends in Washington DC have decided to label a tax increase bill as relief.  OK, where’s the relief?  Surely, they jest.

This past week I sat in several hours of live presentations on federal income and estate taxes.  There was some good news on the federal estate tax side in that changes in the law were labeled “permanent” unlike previous changes that were subject to sunset provisions and therefore requiring frequent visits to attorneys by lots of taxpayers.

Well, guess what?  Looks like many of you will have to go back to your attorney and change your trusts again (or even create them) or at least make sure your old living trusts (may be called revocable) don’t need changing.   It’s all a matter of A, B and C, our speaker stated.   Sounded more to me like a continuation of the estate planning attorney full employment act.

Oh, by the way, the greatest laugh was from the audience when the speaker said the estate law changes were permanent, as permanent as any law that can be changed by a subsequent congress.  As a note, the President has already presented a budget that proposes to lower the limit of tax-free assets passing to other than a spouse.  Permanent, my foot.

Now to income taxes.  More Alternative Minimum Tax for the upper middle class is what I heard in the lecture I attended.  The congress took away more deductions and exemptions that you think you’re getting under the regular tax code and added a “permanent” fix to inflation creep that was frequently labeled a “patch” to protect middle class taxpayers. 

That creep began decades ago when 150 very rrhigh-income people didn’t pay any income tax.  Now AMT affect 5 million taxpayers.  Thanks congress.

So here’s my takeaway from meetings this week on income taxes.  The congress gives tax breaks in the regular tax code and takes them away in AMT.  You should see the chart I now have to look at to try and figure out how much clients might owe. 

Oh, by the way, we just ordered a thousand dollars worth of software to deal with “Relief”.  Bye, bye Turbo Tax.  What a relief.

Why are Soc. Sec. retirement benefits so confusing?

Why are social security retirement benefits so confusing? Don't say it's so financial advisors, financial journalists, financial educators and former Social Security Administration officials can write and sell books. You could say it's so I can write a blog. There, now we're even.

Now selling books, doing book signings, writing blogs, doing interviews, and giving speeches certainly sets you up as an "expert" in some circles.  Just check out social security retirement benefits on amazon.com to find out that it appears to be a growing book category probably because all of us baby boomers are staring retirement in the face.

The other day I was reading a question and answer on Fox Business News' website concerning ex-spouse benefits. I'm assuming if you're reading this blog you know about ex-spouse benefits.  I'd venture to say in my practice, more that half of eligible ex-spouses have no clue they might be entitled to this kind of benefit.
I was led to this story by Google Alerts "Social Security", which every couple of days sends me a summary of stories on social security.  It's a great help to someone like me who is busy giving advice and needs help to find all the stuff that's out there on a particular topic.
 
Anyway, I'm fusing about the answer which first focuses on the confusing rules that say before full retirement age you don't really get any choices when it comes to social security retirement benefits. I can't imagine most readers giving up after about the second paragraph of the response to the question. I would have answered the question differently.

Taking social security benefits whether on your own work record or your ex-spouse's (or even your current spouse's work record) is a bad decision if you plan to continue working at a modest income or higher job which is a fact stated in the question.  I would have started out answering the question by saying you stated you are continuing to work until age 66 your full retirement age.  Then forget about any kind of spousal benefits and figure out how your son can do things on his own. Then I would have laid out the rules and the readers could fall asleep before the got to the end of my response.

I know that sounds harsh and cruel to answer the question this way, but social security is an insurance program to partially support needs in retirement and is structured to accomplish just that. The writer of the question wasn't retiring, she was looking for money as a single parent to support what appears to be an able bodied adult child who is unemployed and is going to college.
 
My opinion is not going to change how social security is structured. I leave that up to the congress.  Ok, stop laughing, but that's how we got to this point in the first place.  What I can argue for, is more direct answers to these kinds of questions.  Secondly, all of us in this arena of educating and giving advice need to do a better job and drop the ignorance and misunderstanding factor much lower that it currently appears.

Why Don't Some Retiring Feds Get It?

Why don’t some federal workers nearing retirement in today’s interest rate environment, get it?  It’s all about the G Fund and bond allocation in a time period approaching increases (ok, I have no crystal ball) in interest rates after having been kept artificially low by the Federal Reserve in an effort to simulate the economy.   This is called interest rate risk.

Recently I was counseling a newly retired federal worker as he approached his 70^th birthday and faced his first required minimum distribution, having received an announcement from TSP officials of his need to make some decisions.

Versus an IRA, the TSP is much more limited in taking withdrawals in retirement.  You can take up to two partial withdrawals and you can take a fixed amount monthly or annually or just your Required Minimum Distribution (RMD) of about 3.6% of last year’s balance.  IRAs are a lot more flexible and give retirees a lot of options beyond the same percentage withdrawal requirement beginning at age 70.5.

But let’s stick with our retired federal worker for the moment.  Faced with blunt demands from TSP, most workers opt for a rollover to a traditional IRA.  Folks who sell products (mutual funds, stocks, bonds, annuities) like this.  It’s an opportunity to make some money, sometimes at the consumer’s expense (another story).

We frequently encourage our clients to take a partial withdrawal from the TSP and leave the remainder in the G Fund.  Why?  Because its magic.  How is it magic, you ask? Well, it doesn’t go down in value like normal bond funds when interest rates rise.  Why not?

The G Fund, for federal workers and the military, is special.  It’s based upon an index of various maturities of Treasuries and that is what depositors in the G Fund receive each year.  It is not subject to the supply/demand fluctuations like other securities in the rest of the TSP and in the real world of securities transactions.

Most retirees become more conservative in the allocation to stocks (equities) as they grow older for two reasons: 1) they don’t want so much volatility opportunities and 2) they want more assured income that bonds or cash instruments like CDs or immediate annuities offer to depositors or owners.

With that assured income stream comes the risk of early redemption.  The market re-prices bonds and bond funds just like appraisers re-price houses based on previous sales.  CDs suffer an interest penalty for early withdrawal. So if interest rates have risen since you purchased your bond or bond fund, then those higher paying bonds are more attractive to new purchasers.  Your bond or bond fund will have to sell at a discount (read: loss) to meet the same income stream for a potential purchaser.

The G Fund does not operate the way we just described.  It never goes down due to supply/demand.  It’s not publically traded.  It is a true fixed (annually) income stream.

So Federal workers, after you’ve determined your comfort level and/or need of exposure to equities, consider using your TSP as your “fixed income-holding bank” up to the percentage of fixed income you need in your family asset allocation.  If you’ve been a diligent TSP saver, you’ll have more than enough in your TSP to have your bond percentage in the G Fund and either retain the rest in equities, or for more flexibility send the equities to a rollover IRA.

Now this is just a general discussion and not investment advice.  For that you have to pay me. This concept, however, comes to you courtesy of the TSP.  Don’t forget after you bail out of the TSP as a retiree, you can’t get back in.

Jim Ludwick is the President and founder of MainStreet Financial Planning, Inc., an hourly fee-only provider of advice on many financial issues.  This is just an educational story and not individual advice, says my attorney.

Andy Made Me Do It

You have probably enjoyed listening to and watching Andy Rooney.  Me too. I’ve read a couple of his books.

Andy didn’t always understand what was going on, and neither did I.   His introductory sentence, “How come….” always got my attention. I sensed a fuss was coming.  Andy was a person I could identify with as I ended watching an hour of investigative reporting on 60 minutes.  Yes, I miss him.

In my daily life, mostly involving financial services, I come across a fair amount of products and actions that I just don’t understand.  Human behavior probably fits in this category too; in fact it either is producing some consequence or is a reaction to some event or product pitch.  You know what I mean.

I find myself frequently asking myself the question in my mind, “Why would they do that?”  It could be about someone’s purchase of a financial product or a news report about an SEC investigation.  I suspect others like me have a similar reaction because of your personal observation or reading the financial news.

So I’ve decided to change the direction of my blog, Advice Only Musings, in a fussing sort of direction, much in the style that Andy Rooney might have done if he was a financial advisor/observer.  You may now switch the dial if this does not appeal to you.  However, you do this at your own risk of missing some important and useful fussing.

I’m not going to fuss in this first edition other than announce the change of focus as I observe the comings and goings of products, promotions, styles, and behaviors as reported in the press or other medium including my personal observation.

If you too ponder these seemingly strange occurrences in our daily financial lives, I’d appreciate your input and feedback.   I appreciate the interaction with clients, colleagues, acquaintances, and general correspondents as we travel this road of making our dreams come true, or seeing them dashed on occasion.  Maybe a fuss or two will help you avoid the later.

Until our next engagement, here’s to greater understanding, as Andy would have it.

Jim 

Overcoming Obstacles to Achieving Financial Goals

We are in the goal business. Helping people define, refine and achieve their financial goals.

What does it take to achieve and surpass financial goals?

1.     It takes willpower.  Remember the “protestant work ethic” of delayed gratification?  Starting early and staying with a plan is a key component to attaining financial success.

2.     It takes resources.  Income in excess of expenses is the primary means of developing resources to put towards goals like retirement, housing, education and travel.

3.     It takes knowledge of knowing where you’re going and if you’re on track to get there.  That’s called feedback.  You need a mechanism to keep you informed of your progress and to alert you to altering your actions to stay on track or ahead of schedule.

Now what are the most frequent obstacles we see that prevent goal achievement?

1.     Procrastination.  Lower priorities take over disposable income and not enough resources are directed to higher priority, but longer-term goals.  Parties, video games, you name it. In our society it’s easy to become diverted by slick marketing, peer pressure, and poor habits.

2.     Lack of resources.  Decisions that affect expenses whether they are day-to-day living expense decisions or long term debt decisions like student loans lead to an inability to save adequately for long term financial goals.

3.     No goals in the first place.  We call this the “seat of the pants” plan.  Without a roadmap any highway will take you there.  The majority of baby boomers might fit into this category.  For most of them it’s too late and they are going to work many more years and retire at a much lower standard of living than they otherwise might of because they never planned ahead.

So what can we take away from this discussion?

1.     It’s never too late to plan although the longer you wait the harder it is.

2.     It takes discipline and a denial of other counterproductive opportunities.

3.     It takes a feedback mechanism, including coaching in some cases, to stay on track and know when to hold ‘em and when to fold them (thanks to Kenny Rogers).

As this year comes to an end.  We want you to be thinking of goals and what you will be doing next year to achieve them.  Good Luck.