The Ricks Report – January 22, 2013

The Ricks Report

January 22, 2013

The Markets

Investors appeared to be as optimistic as a newly-engaged couple last week. Strong housing data, a positive labor report, temporary easing of debt ceiling pressures, and some stronger-than-expected earnings results helped the Standard & Poor’s 500 and the Dow Jones Industrials indices close at five-year highs.

Commerce Department data showed housing starts climbed by 12.1 percent in December, on an annualized basis, exceeding economists’ expectations. Home construction is expected to continue to rebound, as long as mortgage rates remain low, and experts anticipate sales of new and existing homes will show improvement this week. This continued improvement in the housing market may have contributed to a more positive investor outlook.

The possibility of a debt ceiling compromise also encouraged markets higher. Unlike down-to-the-wire fiscal cliff negotiations, which caused investors to hold back at the end of 2012, discussions of temporary debt ceiling extensions by House Republicans soothed investors’ concerns.

Several companies, including several high-profile Wall Street banks, reported strong results last week, and several companies reported earnings that beat lowered expectations. This helped drive bank, transportation, and housing indices to historic or multi-year highs. Since the Transportation sector includes many highly cyclical and economically sensitive stocks, which tend to underperform when investors anticipate recession, this was seen as positive news for the economy.

According to Barron’s, a secular bull market begins when both transportation companies and the Dow Jones Industrial Average hit new highs. The Dow Jones Transportation Average reached a new high last week, but the Industrials index remains 4 percent below its highest close which was reached back in October 2007. Are we headed for a bull market? Only time will tell.

Data as of 1/18/13	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor’s 500 (Domestic Stocks)	0.9%	4.2%	13.6%	9.0%	2.3%	5.3%
10-year Treasury Note (Yield Only)	1.8	N/A	1.9	3.7	3.7	4.0
Gold (per ounce)	1.9	-0.3	2.5	14.2	13.9	16.8
DJ-UBS Commodity Index	2.1	1.7	0.2	0.7	-5.5	2.0
DJ Equity All REIT TR Index	1.2	3.6	20.7	18.6	8.9	12.6

Notes: S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable.

What’s the difference between America’s deficit and its debt, and how do they relate to the debt ceiling? The terms deficit, debt, and debt ceiling are likely to be bandied about by politicians and the media frequently in coming months. It’s important for all Americans to understand these terms.

The deficit

America’s deficit is its annual budget shortfall. Any year the government’s spending exceeds its revenue (the amount of money taken in through taxes and other means), it has a deficit. When the government spends less than it takes in, it is called a surplus. Deficits are controversial and have been for many years. Keynesian economics states deficits can be used to stimulate economies and help countries rise out of recession. Other experts argue governments should not incur deficits because the money paid in interest could be better spent elsewhere.

The debt

The national debt is the full amount the American government owes – all of its deficits and surpluses added together. If the government runs at a deficit of $10 million for five years, then its debt will be $50 million. Every year that a country runs at a deficit, its debt increases.

The debt ceiling

When a government runs at a deficit, it must borrow money to keep operating. The U.S. government generally borrows by selling securities such as Treasury bills, notes, bonds, and savings bonds. The amount it can borrow this way is limited by the debt ceiling, which was established under the Second Liberty Bond Act of 1917.

The United States hit its current debt ceiling, which is about $16.4 trillion, on December 31, 2012.  Before it can issue additional debt, Congress will need to raise the debt ceiling. This may make the debt ceiling a popular topic in political conversation during the next few months!

Weekly Focus – Think About It

Compromise:  n. Such an adjustment of conflicting interests as gives each adversary the satisfaction of thinking he has got what he ought not to have, and is deprived of nothing except what was justly his due.

–Ambrose Bierce, American journalist

Best regards,

Gregory Ricks

P.S.  Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added.

Gregory Ricks, LLC is a Registered Investment Advisor which offers services and charges fees as set forth in Form ADV, a copy of which you should obtain prior to investment.

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. The information presented is for informational and educational purposes only and not intended to be a solicitation for the purchase or sale of a security.

* Past performance does not guarantee future results.

* You cannot invest directly in an index.

* Consult your financial professional before making any investment decision.

Sources:

http://www.reuters.com/article/2013/01/19/us-usa-stocks-weekahead-idUSBRE90H1E020130119

http://www.reuters.com/article/2013/01/18/us-markets-stocks-idUSBRE90D0CG20130118

http://www.bloomberg.com/news/2013-01-18/u-s-stock-futures-little-changed-before-earnings-data.html

http://www.bloomberg.com/news/2013-01-17/housing-starts-in-u-s-jump-more-than-forecast-to-four-year-high.html

http://www.foxbusiness.com/personal-finance/2013/01/17/housing-market-in-2013-what-to-expect/

http://www.reuters.com/article/2013/01/18/us-markets-stocks-idUSBRE90D0CG20130118

http://online.barrons.com/article/SB50001424052748703596604578235570771013936.html?mod=BOL_twm_coll

http://www.investinganswers.com/financial-dictionary/economics/deficit-1077

http://www.investopedia.com/terms/f/federaldebt.asp#axzz2Iima3vBz

http://www.investopedia.com/terms/d/debt-ceiling.asp#axzz2Iima3vBz

http://thehill.com/blogs/on-the-money/economy/274591-us-to-hit-164t-debt-limit-on-dec-31

http://www.brainyquote.com/quotes/keywords/compromise.html

Read Full Post »

5 Reasons Why You Should Take Advantage of that 401(k)

When it comes to planning and saving for retirement, it’s not uncommon to feel overwhelmed by the mere thought of the notion. While we all want to bask in the glory of an eternally comfortable golden era, getting there does require an investment of time and, of course, money. But the road to retirement is long and paved with detours.

 
Fortunately, most working Americans already have access to an easy-to-understand and even easier to buy retirement product, the staple of almost every employer’s defined contribution plan — the 401(k). Appropriate at nearly every age and every point in your career, investing in a 401(k) is a smart way either to begin or supplement your retirement savings plan. Below are five simple reasons why you should absolutely take advantage of that company-offered 401(k).

 
It’s one of the easiest and fastest investments to purchase

 
Setting up your 401(k) is one of the easiest investment experiences you’re likely to have. This is because in most cases, you simply ask your company’s human resources guru to enroll you in the company’s defined contribution plan. Some companies require you to have worked for the organization for a certain period of time before you’re eligible to participate in the company 401(k), but once you’re ready to contribute, all you need to do is tell HR how much you’d like to contribute and how you’d like them to invest your funds — they handle all the details and take the contribution from your paycheck.

 
Your savings accrues tax deferred

 
One extraordinarily appealing aspect to 401(k)s is that all the money you invest grows at a compounded, tax-deferred rate. You continue to earn tax-advantaged benefits until you start withdrawing your funds, at which point you must pay taxes on that money. Furthermore, anything you contribute to your 401(k) in a given tax year can be taken as a deduction, lowering your taxable income. And because of its tax-deferred status, increasing your contributions even by a little bit can lead to dramatic 401(k) growth over time.

 
You can choose how much you want to invest, and how you’d like it invested

 
With a 401(k), you get to decide how much money you can contribute to your plan; not your employer or the company managing your funds. There is, however, a yearly maximum to what you can contribute, but it’s still more than how much you can put into an IRA. Your annual maximum contribution depends on your age: This year’s maximum is $17,000 if you are younger than age 50, and $22,500 if you’re age 50 or older. As for the investment itself, your employer uses either a brokerage firm, insurance or mutual fund company to manage your retirement plan, but you get to choose how that company invests your money based on your risk tolerance and investment preferences. Most 401(k) plans allow you to choose from at least five different mutual funds, bonds or money markets representing different market sectors and degrees of risk. A few organizations even allow their employees to add company stock to their 401(k)s.

 
If your company matches a portion of your contributions, it’s like a free bonus check

Many companies offer an incentive to encourage their employees to save for retirement by way of matching a portion of your own contribution to your 401(k) plan. The match can vary, but 50 cents to the dollar is a common employer contribution. Employers also have a set maximum of how much they’ll match your contribution, basing it either on a percentage of your annual salary, generally from three percent to six percent, or less commonly, on a predetermined dollar amount. This company match is like a bonus, for all intents and purposes, so make every attempt to contribute what’s necessary to get the highest match possible.

 
A simple way to make saving for retirement automatic

 
Once you’ve elected your contribution amount and investment options and communicated those choices to your HR department, that’s pretty much all you have to do. After that, your employer automatically deducts the percentage of income you’ve allocated to your 401(k) directly from your paycheck. You’ll most likely receive quarterly earnings statements from your employer’s plan manager, and some companies also make this information available to employees on a secure website.

 
When all is said and done, you’ll have a solidly structured and properly managed 401(k) working quietly yet constantly in the background, generating retirement savings.

Photo courtesy of: http://www.thetutorreport.com

Read Full Post »

Roth vs. Traditional 401ks

By now, most Americans understand that at the very least, they should be participating in their employer’s defined contribution plan, most commonly offered in the form of a 401(k). But some companies offer two forms of these plans: the traditional 401(k) and the Roth 401(k). You thought deciding how much to allocate to your plan and then researching and electing the investment funds to support it was confusing enough, but here you are, faced with yet another option for safeguarding some retirement funds. Let’s break it down just a bit more.

What’s the difference?
The primary difference between a traditional and a Roth 401(k) is simple but significant. With a traditional 401(k) plan, your contributions grow tax free, and you pay taxes on the withdrawals; Roth 401(k)s, on the other hand, work in precisely the opposite way, as you pay taxes on your contributions but not on your withdrawals.

Additionally, Roth 401(k)s tend to be seen as more of an estate planning tool, since they do not necessitate that you to take required minimum withdrawals (RMDs) once you reach age 70 ½, as you must do with traditional 401(k)s. This allows you to leave your funds untouched for as long as you want after retirement, letting your investment grow tax free all the while.

Which is right for you?
This is a conversation best held with your financial advisor, as you must determine whether the back-end payoff of a Roth 401(k) outweighs the benefits of traditional tax deferral on the front end, but generally speaking, it depends largely on where you are in life and into which tax bracket you fall.

If you’re relatively young with an eye toward saving for retirement and you don’t earn a great deal of money, a Roth 401(k) may be worth exploring, as the upfront tax-savings benefits wouldn’t be as significant to you as a tax-free payout in retirement. Conversely, if you’re an established earner in a higher tax bracket, getting up-front tax-advantaged treatment is probably best, making the traditional 401(k) your most likely option. This is especially true for individuals who expect to be in a significantly lower tax bracket when they retire.

You can even double-dip.
If your employer does offer both types of 401(k) plan, you can split your contributions between the two if you so choose, as long as your combined annual contributions do not exceed 2012’s annual limit of $17,000. If you’re 50 or older, that limit jumps to $22,500.

With so many options, there is a 401(k) plan, or a combination of the two, that is ideal for your current situation. But before you make your decisions, be sure to weigh these considerations carefully, especially if you don’t speak with a financial advisor regularly.

Photo courtesy of: sovereignman.com

Read Full Post »

Borrowing From Your 401(k): A Financial Sin

When we put money into our retirement accounts we do so for a specific purpose: retirement.  All the money you have funneled into your 401(k) is supposed to buy you that dream retirement lifestyle you spent your entire life working toward.  But unfortunately, more and more people are finding that life can throw them curveballs that, in turn, can throw off their financial plan.  Often times, when people find themselves in a financial bind, they find it hard to ignore that shiny apple hanging in front of them in the form of their 401(k).

Far too often people are reaching out to pick that apple and borrow money from their 401(k).  The reasons for their need varies from home purchases, to their kid’s college tuition, to a myriad of other financial emergencies.  Most people who make this move know that it’s a “forbidden” action, but what many people don’t understand is why.  What is the danger in picking that apple and borrowing money from your 401(k)?  If more people knew the consequences, it would be hard to believe that many of them would make the same decision.

So what’s the big deal about borrowing from your 401(k)?  What are those consequences that your financial advisor seems so concerned about?  Here are just a few.

• Paying back means you’re not paying in- After you borrow from your 401(k), what you would have contributed to add to your funds now will go towards simply trying to pay back what you took.  Anyone planning for retirement understands the power of time in terms of compounding your money.  That is what is driving your growth.  If you stop paying in and adding to your total, you lose out on all of that potential growth.
• Tax Trap- When you pay back a loan from your 401(k) you do so with after-tax money.  When you retire, and take this money out later, it gets taxed again like the rest of your 401(k) contributions.  Essential this means you are paying a tax twice for that single amount of money, both as your pay it back now and as you take it out later.
• Job Insecurity = Loan Insecurity-  When you borrow from your 401(k) you typically have a set time period to pay it back, usually within five years.  This may seem acceptable, but this changes if you leave your current employer.  If, for any reason you stop working for that company, you could be forced to pay back the loan much sooner, possibly in as little as 30 days.  If that new, incredibly abbreviated time frame isn’t possible for you, you will make up the difference in penalties and fees.
• Creditor Vulnerability- When your money is inside of your 401(k) it is in something of a safe-haven from creditors.  They are unable to touch it.  This changes as soon as you pull any money out of that plan.  At that point, whatever you took out is now fair game for any creditors to go after.
• Short Term Solution- In many cases, borrowing from your 401(k) is like using a band-aid to cover a bullet wound.  If you are in a position where you don’t have the funds to cover your bills, for example your mortgage payments, pulling money from your 401(k) will only stall the inevitable.  It isn’t a long term solution and it doesn’t give you plan to create a long term solution.  Not only does it delay the growth of your retirement finances, but it often times will leave you just as injured as you were before.

So despite the fact that your 401(k) might look like the perfect solution to a financial shortage, the consequences might be harsher than you know.  If you layout all the effects of picking that forbidden fruit you might think twice before you take a bite out of the apple of your future.

Photo Courtesy of: mint.com

Read Full Post »

Retirement Planning: A Recipe For Success

Planning your investments to build a retirement fund can be a dizzying prospect.  The various questions and options and details and accounts and amounts are enough to make anyone’s head spin.  Wouldn’t it be nice if there was a generic recipe for success?  A nice neat list of step by step instructions on how to make the best decisions on where, when and how much when it comes to investing for your retirement.  Unfortunately, this list of steps is incredibly dependent upon each individual and their current situation and future plans, so a sure fire success route doesn’t exist.

But before you stop reading, there are a few broad steps that most financial professionals agree will most likely lead you down the right path.  By investing your money in retirement accounts by the priority of which will give you the most return, you can take advantage of what each has to offer.   Here’s the order that is suggested for the majority of people in terms of retirement accounts.

1. Fulfill Your Company’s Match Program:  The exact amount of this will differ for each individual depending on the company that they work with, but whether you have a 401K or a 403b, the best place for your money is in those accounts reaping the assistance of your employer.  Match programs offer a two for one that is too valuable to turn down.  Before you invest anywhere else, make sure you are investing enough in your 401k or 403b to get your full match.

2. Roth IRA to the Max:  There has been a long standing battle between the Traditional IRA’s and the Roth IRA’s.  When it comes to your retirement planning, your Roth IRA should win this battle.  There are a few different reasons why you should make this move.  With the current economy that we have all been hearing so much about, we can assume that taxes will go up in the future.  Investing in a Roth allows you to pay taxes on your income now, and avoid the higher tax rate as it grows and in your retirement.  Also, investing in an IRA gives you more choices and flexibility than is offered in many 401k plans.  You can decide where you want to open your account based on your personal preference or individual situation.  This step of maxing out a Roth IRA can change based on the individual though, as some people cannot open a Roth IRA because of their income level.

3. 401k or 403b to the Max:  After you have reached your company’s matching level and have maxed out your Roth IRA, turn your funds back to the 401k or 403b until they are maxed out as well.  Having both your Roth IRA and your 401k/403b maxed out gives you some variety in your portfolio in terms of how the investments are taxed.  This variety gives you something of a safety net in terms of how taxes and other investments change over time and the affect they will have on your funds.  As a side note, when you plan to max out your 401k or 403b, keep your eye on the ever changing contribution limits which vary each year.

4. Open Taxable Accounts:  If you have filled in the previous three steps, you will find yourself at the final, and most open ended step of the journey.  The options here are almost endless in terms of what kind of account to open and where to open it.  You can invest with a mutual fund, a brokerage account, or one of the many other options out there.  Your decision depends on the type of risk versus reward balance you are looking for, whether you are looking for the simplicity of joining a service or are looking for more of a hands-on approach, how much you are planning to invest and so on.  Because you have the foundation laid by maxing out your 401k/403b and your Roth IRA, you can afford to be a little creative with this last decision.

This plan is not something to jump into without doing your homework.  Like mentioned before, there is a reason that no one has created a perfect plan that fits everyone.  Depending on your personal income, you might not be eligible for certain funds, like a Roth IRA, or you might be eligible for some accounts that could take higher priority, such as a SEP IRA.  But, for most people, looking for a general order of priority for their retirement investments, these four steps are a great place to start.

Photo Courtesy of: humphreywealth.com

Read Full Post »

Shattering the “Glass Ceiling” of Retirement

We have all heard of the “glass ceiling,” and in recent decades, society as a whole has worked toward shattering it.  Though many will argue that the ceiling is still intact, there is no question that women continue to approach it, and many have been able to break through.  Despite the focus on that effort, women are finding themselves with a new problem on their hands once they find their financial success: how to prolong that success into their retirement.

Studies upon studies upon studies have proven that women lag behind men in their retirement planning.  It’s easy to point fingers at various causes of this.  Some say that it’s because the male dominance in the financial industry causes women to shy away.   Others say that women lose their financial momentum when they take time away from their careers to raise a family.  Still others blame the mother’s instinct to put their family before themselves as the cause, pushing their own financial future toward the back burner.  The truth probably lies somewhere in a combination of them all.

While the causes for the lack of financial planning in women are still in the air, the effects are pretty obvious.  Women are living longer than men, but are saving less.  A recent report from the ING Retirement Research Institute found that women who are 50 to 69 have about 20% less in retirement savings than men in that age group.  This increase in life expectancy and lack of savings has left 9% of all women over the age of 65 living in poverty.  It’s a growing problem that needs to be addressed early and often if women are to shift the trend.  There are a few things that women can do now, in their working years, to prepare for their upcoming retirement.

Take advantage of your benefits-  All women, whether they are married, single, or divorced, need to take advantage of the benefits available to them through their employers.  Despite the fact that more and more women are becoming either the sole or leading breadwinner in the family, many of them are not focusing on the financial benefits that come with their careers.  It’s important that women are getting the full benefit of employer retirement programs, such as 401(k) matches, and invest all that they can.  In many households where both the man and women are working, the women’s income is often used for more discretionary purposes while the income from the men is used for their investments.  In the long run, women need to make sure that they are making the most of their money and their future.

Increase Survivor Benefits-  With the life expectancy of women continuing to rise past that of men, it’s important that women make note of the survivor benefits they will receive if their spouse is to pass away.  The most obvious of these situations is in defined-benefit pensions and Social Security payments.  In defined-benefit pensions, it can be tempting to take the single life offer that brings higher payments, but to help protect the future of the surviving spouse, the joint survivor benefit allows for partial payments to continue after the death of the retiree.  Also, applying for Social Security early will leave the surviving spouse with much lower payments later, so it’s important to delay application for Social Security benefits for as long as possible to ensure the largest payments later.

Learn About Your Finances Now, Not Later-  61% of men say they are most responsible for retirement and financial planning decisions in the household, while only 34% of women claim that responsibility.  It’s important for women to understand these decisions and learn the lessons of their financial planning now, so they can make more informed decisions later.  Because of increases in divorce, women remaining single, and life expectancy, the majority of females will, at some point, find themselves on their own, which means they need to be able to make critical decisions about their financial future for themselves.  Whether this means seeking out a financial professional for advice, or making smart decisions on their own, it’s critical that women learn the ins and outs of their financial portfolio now, or they will suffer the consequences later.

Women are continuing to make strides in terms of their professional and financial independence, and it’s important that as they reach those goals, they understand what to do when they get there.  By planning for their future, taking advantage of the opportunities around them, and taking the time to educate themselves, women can continue to make strides in their retirement as well.

Photo Courtesy of: coursepark.com

Read Full Post »

How To Take Advantage of Your 401(k)

So, you’ve been saving for retirement for years, spending your entire career penny pinching and saving every morsel you can, hoping to live out your years in a stress-free, fully-funded lifestyle.  You started young and have been saving ever since.  Most importantly, you have invested in the magical program people call a 401(k) at your company and have gritted your teeth as you watched a bit of every paycheck funnel into it.  Good for you!  You have taken an initiative that many people avoid.  As a reward for your planning and diligence, you will be granted, no, not three wishes, but three tips to using your 401(k) in the most productive way.

Many people go through the effort of investing in their 401(k) plans, but make critical errors in how they invest into it.  There are few ways to make sure that the money you pay in now, will give you the best payout in the future.

Tip 1:  Make significant contributions.  Many people think that their 401(k)’s future is mainly dependent upon the performance of the investments, but these people are mistaken.  If you invest a small percentage of your income in well performing funds, you won’t find the success that investing a higher percentage in lower performing funds will afford you.  Of course, this means a bigger chunk of your valuable paycheck, but if you can cut back and live frugally now, you will have more wiggle room later.  Also, it’s critical that you invest enough to take full advantage of any match programs from your employer.  That match offers you tax-free money on a shiny silver platter.  Investing only a small percentage of your income into your 401(k) leaves this platter sitting on the table, out of your reach.

Tip 2:  Invest for growth.  You are cutting back, buying the generic cereals and stepping away from the gator skin shoes so that you can put all you can into your 401(k).  If you are making those sacrifices, you owe it to yourself to get the most from that money.  This can be done by making smart decisions inside of your funds.  Like with any investment, this means taking on a bit of risk.  This doesn’t mean playing Russian roulette with your funds, but being too conservative can almost negate the extra effort you are making.  One way to do this is to invest more of your 401(k) money in stocks.  If your investments face average market performance, putting a higher percentage of your investment in stocks, over bonds or cash, you will find yourself in a better position in the long run.  Of course, this involves balancing your risk with the reward you are looking for, but if you consider getting a little riskier with your investments, you could find yourself with a lot more money later.

Tip 3: Avoid undoing all your hard work.  Borrowing from your 401(k) can be one of the most costly loans you can find.  By taking your money out of the fund, you will be costing yourself the growth that money would have given you.  Life brings about surprises and emergencies that may force you to borrow from your 401(k), if this happens, make sure you plan for the company to take the loan payments from your check.  If you find yourself wanting money for expenses, such as a new car, look into a personal loan or home equity line of credit for financing.  Competitive rates on these options will leave you in a better long term position.  The second part of this tip is to avoid cashing out your 401(k) when you leave a company.  Much of your hard earned money will be whisked away by penalties, fees, and growth loss.  There are a few different ways to avoid simply cashing out when you switch jobs.  Many companies allow you to roll over your balance into their plans, which means your investments and growth will hardly skip a beat with the changeover.   You can also roll your plan into an IRA, which offers a broad range of investments not offered with many other retirement plans.  The easiest option may be for you to simply leave your money in the current employer’s plan if you have a significant amount already saved.  The bottom line is that borrowing from your 401(k) or cashing out early can wipe away a lot of the money that you have been so painstakingly saving.

 

Photo courtesy of bemanaged.com

If you have been planning for your retirement and investing with your 401(k) you have put yourself on a path to success.   By doing these few simple things you can make your path smoother and that success brighter.  You are already going through the effort to save for your future, keep these tips in mind and your effort will be much more worthwhile.

Read Full Post »

The Ricks Report – July 16, 2012

The Ricks Report

July 16, 2012

The Markets

Should the Federal Reserve raise interest rates to fire up the economy?

For the past few years, the Fed has been on a mission to lower rates as much as possible. The thinking is lower rates will spur economic growth by making it less costly for businesses and consumers to borrow money.

Unfortunately, it hasn’t quite worked as planned.

Short-term interest rates are near zero and 30-year mortgages are at a record low, yet the economy is still just muddling along, according to Barron’s. Now, some investment managers are saying the Fed should reverse course and raise interest rates.

Last week, prominent money manager David Einhorn went on CNBC and said, “I think having very low zero rates is depressing to people. I think it deprives savers of reasonable incomes, the ability to forecast a reasonable income, and it cuts down on consumption.” He went on to say low rates drive up food and oil prices and lower standards of living.

Folks relying on a stream of income from their fixed investments can probably relate very well to what Einhorn is talking about. As recently as July 2007, $100,000 worth of 1-year Treasuries would have generated about $5,000 of annual income (a 5 percent yield), according to data from the Federal Reserve. Now, it would generate only about $200 (a 0.2 percent yield).

The Fed may be in a classic Catch-22, according to CNBC. With sluggish economic growth, it’s certainly hard to justify a rate hike, yet, low rates are increasingly ineffective. CNBC says a growing number of analysts suggest the best course of action is to allow “the cash-rich private sector to sort out its own problems without the government’s interference.” However, they acknowledge it “likely would be painful, but could be the only sustainable path to recovery.”

With the Fed on the record as saying they plan “to keep interest rates at their historically low range of 0 to 0.25 percent through late 2014,” investors shouldn’t expect the Fed to raise rates any time soon, according to Fox Business. Only time will tell if this low rate strategy is the right medicine for the economy.

Data as of 7/13/12	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor’s 500 (Domestic Stocks)	0.2%	7.9%	3.1%	14.6%	-2.7%	4.0%
DJ Global ex US (Foreign Stocks)	-1.1	-0.2	-17.4	5.7	-7.9	5.2
10-year Treasury Note (Yield Only)	1.5	N/A	2.9	3.4	5.1	4.6
Gold (per ounce)	0.5	1.3	1.1	20.7	19.1	17.5
DJ-UBS Commodity Index	2.5	-0.2	-14.8	7.2	-4.3	3.5
DJ Equity All REIT TR Index	0.9	17.3	12.7	34.8	2.3	11.6

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.  Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable.

HOW DO YOU TURN A PENNY INTO 1.25 BILLION DOLLARS? Sounds like a magic trick, right? Well, there’s really no magic other than the law of large numbers.

Here’s how it works and how it may benefit our economy.

A report from the Federal Highway Administration shows Americans traveled approximately 2.94 trillion miles in motor vehicles for the 12 months ending April 2012. Now, when you figure how many gallons of gas that burns up, you get a really big number! Moody’s Economy.com chief economist Mark Zandi has done the math and, by his reckoning, each penny change in the price of a gallon of gas equates to, you guessed it, about $1.25 billion over the course of a year, as reported by CNBC.

With the wild swings we’ve seen in the price of gas, the savings – or cost – can add up quickly. A recent check with AAA showed the average price for a gallon of regular gas dropped by about $.25 over the past year. So, multiply $1.25 billion by 25 and you get, to quote Carl Sagan, “billions upon billions” of additional coin in consumer’s pockets. And, that coin could fuel further growth in consumer spending.

You’ve heard the old saying, “A penny saved is a penny earned.” Today, a few pennies saved on gas can add up to billions!

Weekly Focus – Did You Know…

There’s about $1.1 trillion of US dollars in circulation today – an all-time record high. However, most of it is not “floating” around in everyday transactions. About 75 percent of the $1.1 trillion is in $100 bills which don’t circulate much. On top of that, about 50 to 66 percent of U.S. cash is held abroad. Despite the proliferation of credit cards and debit cards, we still seem a long way away from a cashless society.

Source: CNNMoney

Best regards,

Gregory Ricks

Read Full Post »

The Why, When and How of Consolidating Your Retirement Accounts

Consolidate: to combine separate items or scattered material into a single whole or mass.  The definition makes consolidation seem tidy, productive and even a bit powerful.  With all those good vibes, it’s a wonder why more people hesitate to use consolidation tactics in their lives, especially in terms of their retirement.  Many people have multiple retirement accounts through multiple different custodians with multiple different terms.  That is a lot of “separate items or scattered material” that can be combined into the “single whole or mass” that consolidation affords its users.

So if you are one of those people, it’s time you look into simplifying your retirement plans and consolidating those accounts. But you might ask yourself, why consolidate?  Or when is the best time to consolidate?  Or how do you actually go about consolidating?  Well, since you asked…

Why: The essential of why you should consolidate is best described by a demonstration.  Take a piece of paper at your desk, and now rip it in half (make sure it’s not your paycheck before you start the ripping stage).   Now grab a stack of 15-20 papers and try to tear that in half.  More difficult, right?  Materials are stronger when grouped together, we know that.  What most people don’t know is that when it comes to retirement accounts, grouping them works in essentially the same way.  Your financial position is much stronger when each investment isn’t standing individually.  Having multiple accounts leaves you at the risk of portfolio duplications in which similar investments have similar objectives and they overlap, wasting your assets with unnecessary risk.  Fees can be avoided and paperwork is simplified.  Also, by combining into one account, you are better able to adjust your investments in reaction to market changes by simply accessing one account.

When: The question of when is less about timing, and more about in what situations it should be used.  Consolidation is an advantage to almost anyone who is looking for a simple and productive retirement plan, but there are certain instances in which it is a good strategy to apply.  For example, when many people leave a company, they leave their retirement funds in that company’s 401(k) or pension plan.  This is a great opportunity for consolidation as you can roll those funds into your IRA to increase your existing investment selection while also minimizing the number of accounts you have to manage.  It’s also important to understand the investment options available for different types of investments.  For example, Rollover IRAs have nearly unlimited investment choices, while 401(k) plans are limited to usually a maximum of 25 choices.  The more options you have, the more flexible your plans are, and the better off you are.  You also must understand which accounts are available for consolidation.  All traditional IRA’s can be combined, both deductible and non-deductible, but a Roth IRA cannot be combined with a traditional IRA.  Make sure you understand these stipulations before you make your decisions.

How: Here is the meat of the issue, how to go about this consolidation process.  With this there is good news, and better news.  The good news is that most of work involves information you already have.  The better news is that all you have to do is take that information and follow these simple, step by step directions and you will be well on your way. The first step is to make a list of each of your individual accounts that you hold currently.  In this list, include details on each account such as the type of account it is, the current balance, its recent and long-term performance, as well as any fees associated with it.  Next you need to think about and plan your retirement goals and investment philosophy.  The third step is to determine the plan or institution that best fits those goals.  After that, you start to combine your accounts into the institution and plan that you chose.  This should begin with you smaller accounts, followed by the non-performing accounts and accounts with high fees.  Continue this until all your accounts have been rolled into one.  Then take all of your funds and determine the specific investments needed to reach the goals that you set earlier in the process, all in one tidy account.  Then bake at 375 degrees until golden brown.  Just kidding, but in all seriousness if you follow these steps, consolidating your retirement accounts can be as easy as baking a cake, probably easier for most of you.

When it comes to your retirement, it’s important to find ways to work smarter, not harder.  Consolidating your accounts is one of the simplest ways to do that.  Combine your accounts, limit your paperwork and strengthen your investments.  Aristotle once said, “The whole is greater than the sum of its parts.”  It’s pretty unlikely he was speaking specifically about your retirement accounts, but you get where he was going.

 

Photo courtesy of prlog.org.

Read Full Post »

The Ricks Report – July 9, 2012

The Ricks Report

July 9, 2012

The Markets

Where is the recovery in jobs?

In the 10 recessions between World War II and 2001, the jobs lost during the recession were fully recovered within 4 years of the previous peak in employment, according to the blog, Calculated Risk. In fact, with the exception of the 2001 recession, the previous 9 recessions had recovered all their lost jobs within a relatively short 2½ years.

The 2007 recession, however, is a different story.

At its nadir in February 2010, the U.S. economy had shed nearly 9 million jobs from its prior peak, according to the Bureau of Labor Statistics (BLS). As of last week’s June employment report, the U.S. economy had recovered less than half of those lost jobs – and we’re more than 4 years removed from the peak employment level of late 2007, according to the BLS.

Why has the jobs recovery from this recession been so painfully slow? Here are several reasons:

(1)   Recoveries from recessions caused by financial crises – like this one – are notoriously slow.

(2)   Extremely high economic policy uncertainty emanating from Washington made corporations cautious in hiring.

(3)   The extension of unemployment benefits to 99 weeks reduced some people’s desire to find new work.

(4)   Uncertainty from events related to the euro crisis dampened business demand and the need for more workers.

Sources: Gary Becker, Nobel Prize Winner and Richard Posner blog; The Wall Street Journal

There is some good news, though, that could eventually provide a spark for new hiring.

Corporate profits as a percentage of gross domestic product (the value of all goods and services produced in the U.S.) recently hit an all-time high, according to Business Insider. This means corporate profits are at record levels. On top of that, corporate cash levels have reached historic highs which suggest corporations have plenty of money to reinvest for growth, according to Yahoo! Finance. With corporate profits and balance sheets looking solid, all we have to do is get these companies to start spending some of that cash on new hires. If that happens on a large scale, it could be a huge boost to the economy and the financial markets.

Data as of 7/6/12	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor’s 500 (Domestic Stocks)	-0.6%	7.7%	0.8%	14.7%	-2.4%	3.3%
DJ Global ex US (Foreign Stocks)	-0.1	1.0	-17.8	5.4	-7.4	4.6
10-year Treasury Note (Yield Only)	1.5	N/A	3.1	3.5	5.2	4.8
Gold (per ounce)	-0.7	0.8	3.9	19.7	19.6	17.7
DJ-UBS Commodity Index	1.1	-2.7	-13.8	5.0	-4.4	3.4
DJ Equity All REIT TR Index	1.2	16.3	10.2	33.2	2.0	10.9

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable.

INVESTORS HAVE GROWN VERY FICKLE in recent years as measured by how long they hold on to a stock. There was a time when investors were really investors and bought a stock for the long run. In fact, between 1940 and 1975, the average length of time a New York Stock Exchange stock was held before it was sold was almost 7 years, according to data from the New York Stock Exchange as reported by a September 2010 Top Foreign Stocks blog post. By 1987, it had dropped to less than 2 years. And, in the highly volatile year of 2008, the average holding period was less than 9 months, according to The New York Stock Exchange.

So, does this fast trading result in better returns?

A highly quoted study by Brad Barber and Terrance Odean of University of California-Davis published in April 2000 analyzed the results of nearly 2 million trades from a discount brokerage firm between 1991 and 1996. The study concluded that the 20 percent of investors who traded the most frequently underperformed the 20 percent of investors who traded the least frequently by a whopping 7.1 percentage points on an annualized basis after expenses.

The main conclusion of the study was, “Trading is hazardous to your wealth.”

One very interesting tidbit from the study was the gross returns between the frequent and infrequent traders were basically the same. In other words, stock selection was not a problem for the fast traders; rather, it was the expenses of the frequent trading that caused their net returns to lag far behind the infrequent traders.

From a practical standpoint, selling a stock is necessary from time to time. The study simply drives home the point that keeping trading costs as low as possible is critical to having net returns come close to gross returns.

Weekly Focus – Think About It…

“Learn every day, but especially from the experiences of others. It’s cheaper!”

—John Bogle, founder of The Vanguard Group

Best regards,

Gregory Ricks

Read Full Post »