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Bonds turning negative. Real Estate closely watched.

By Posted on In Trend Updates, Uncategorized

During our last trend update, we wrote about trends starting to change in bonds. While US bonds have not maintained a clear direction for the past few months, we were pleased with the performance of emerging market debt and many actively managed funds. In a rather sudden series of events, many of the trends changed direction and turned negative resulting in several funds being sold off early last week.

We attribute this turnaround to a few factors:

1) Rising US Treasury yields.

2) Speculation that the Fed will reduce bond purchases.

3) Fed indications that it will raise rates if the economy continues to improve.

Real Estate has experienced a strong pullback over the last few weeks. Looking over the course of the last 10 months, it is still a positive trend. But this trend could be changing soon, like bonds have.

 

Why is my portfolio lagging the stock market?

By Posted on In Economy, Finding Confidence, Investment Behavior, Uncategorized

We’ve fielded a few phone calls from clients in the past few weeks confused about why their statements are not reflecting the same rate of return of the S&P 500 which they’re hearing about in the news.

We’re not surprised by the observation.

The S&P 500 has been having a banner year so far! US equities have been our best performing asset class. Actually, it’s one of the few asset classes that has maintained a positive trend over the last few months. While almost all other asset classes have been struggling to show any gains, such as commodities, bonds, real estate, and some foreign holdings, the US equity market has been surging ahead.

It’s as if the US equities were the last ones at the party and didn’t notice that everyone else left the room until the music was shut off!

You are correct. Your portfolio is not reflective of what you see in the headlines, and has not surged ahead like the US equities as measured by the S&P 500. But, then again would you want a portfolio consisting only of US stocks? What if the Fed raised interest rates or stopped buying up bonds? Would you be fearful that a market correction could occur, wiping away all of your gains (or most of them)?

In effect, a portfolio consisting too much of any asset class would be, as a result, taking on excess risk. We work with our clients to diversify their portfolios to lower risk and volatility. In case some asset class declines, the other asset classes can support the ones in declines. We are maintaining diverse portfolios for our clients in order to spread risk out and try to minimize volatility.

Three Retirement Strategies I Forgot to Tell My Client.

By Posted on In Investment Strategies, Retirement, Saving, Uncategorized

I recently met with prospective clients who needed a lot of guidance. They were entering retirement with substantial assets and sources of income, but there were important health issues to consider. It was complicated.

They had not been well served in the past. They had outlived all their previous advisors as two of them in succession had retired from the business. They had been left with several accounts of investments, IRAs and annuities, and they have to deal with multiple organizations to get the answers to their questions.

No one is helping them coordinate their planning. Nobody else knows all the pieces of the puzzle.

We spoke for a while about their situation and how I could help them. After the meeting, I thought about three other strategies that I wish I had shared with them.

1) Check to make sure the entire portfolio is working well together. Consolidation of accounts can help keep paperwork organized and simplifying tax preparation, but doesn’t help the performance of the investments. All too often, we see client’s combined portfolios inadvertently skewed too aggressive or too conservative because they never stepped back and looked at the whole portfolio. There are even cases, were a client owns several mutual funds only to realize that about 10% of their underlying investments are invested in just three stocks. While they thought they were diversified, they never took the time to review the overlap that existed between the funds.

2) As a rule of thumb, we recommend that clients spend down their accounts in the following order to minimize tax consequences: Cash, Individual and joint accounts, 401(k)s and IRAs, ROTH IRAs. There are, of course, exceptions and we don’t recommend spending an account down to zero before moving on. As a client transitions into retirement, this rule of thumb may help in planning the order of tapping each account.

3) A client should go into retirement having a good idea of what their expenses have been for the last few years so we can develop an income stream to meet their expenses without taking on unnecessary risk. If a client has yearly expenses of $50k pre-tax and $30k coming in from a pension and Social Security, we know that we need a portfolio that can generate $20k plus extra for inflation. If a client has a portfolio of $600k, then a $20k withdrawal represents about 3.5% – That’s acceptable. Now, if the client had a portfolio of $200k, then a withdrawal of $20k would be 10% and would warrant some further discussion about how to bring that down to a more reasonable rate of withdrawal.

If this situation sounds familiar or if you think you can benefit from any of these strategies, we’d be happy to offer you a complimentary consultation. Please email me to get started.

 

What to do if you forgot your RMD

By Posted on In Retirement, Rule of Thumb, Uncategorized

While there are a couple of exceptions, you’re required to take distributions from an IRA or a 401k under two circumstances. These are known as the Required Minimum Distributions, or “RMDs”, and they generally apply to:

a. Your own IRA, in the year you’ve reached age 70-1/2; and

b. An IRA you inherited, from someone other than your spouse, in the year following that person’s death.

Failure to take the RMD results in one of the most severe penalties you can imagine: the penalty is 50% of the missed distribution amount. So if your IRA is worth $100,000, and the RMD calculation is, say, $4500, the penalty for not taking that distribution is $2250. Ouch!

Luckily that penalty can be waived if you have a good excuse and you correct your oversight. The details are in the IRS guide to IRAs, Publication 590. But Boston area attorney Natalie Choate, a specialist in retirement distribution planning, summarized the process for me when I attended a seminar sponsored by the Boston Tax Institute a couple of weeks ago.

It appears that the IRS will generally waive the penalty when there is both a “reasonable cause” and “remedial action”. Reasonable cause can be an error by the IRA custodian, or bad advice from an advisor, or your illness, military service, or, surprisingly, your incarceration! The remedial action is usually your making up for the distributions that you had previously missed.

You also have to file IRS Form 5329 as follows:

·On line 50, enter the amount of the RMD that you missed

·On line 51, enter the amount of the RMD that you took, usually $0

·On line 52, enter the difference as $0, and mark “RC” in the margin to indicate “reasonable cause”

·Attach a statement on the “reasonable cause”, and provide evidence of the remedy or corrective action.

Form 5329 can be filed as a stand-alone form for the tax year in question, and no amendment of your prior return is needed.

If you find yourself in this situation, you should contact a tax accountant to guide you through the process.

If you have specific questions about your RMDs, please email me at ron@ol-advisors.com

 

A Case for Emerging Market Debt

By Posted on In Asset Allocation, Uncategorized

Emerging market debt has recently become a more-widely accepted asset class for income investors looking to diversify their portfolio. It consist primarily of bonds issued by countries with emerging economies (Australia, Brazil, Taiwan, China to name a few) backed by taxes.

It was not long ago, however, that this asset class was basically off limits, frowned upon, or just impossible to access. And there wasn’t much demand, either, since this had been a volatile asset class. But as demand for this asset class has increased, so have the number of investment vehicles that can access it.

In the 1990’s and early 2000’s, many emerging economies experienced a significant fiscal crisis, similar to what the U.S., Europe, Japan and several other developed countries are experiencing today. These emerging economies have rebuilt their fiscal houses and are much further down the road to recovery than many developed countries.

With their fiscal issues “solved”, they are now reaping the benefits. Their credit rating is improving. Once, thought of as default prone, they are becoming much more stable. There are a few standout results, such as Russia which went from a C rating to BBB+ in about two decades. South Korea went from BB to AA- in the same time frame. And now, the average for all emerging market debt is almost BBB+.

Specifically, the issues they “solved” that resulted in higher credit rating can be summarized:

1) Emerging economies have reduced spending and are more fiscally prudent than before.

2) With spending limited, more funding can be directed to pay down debts which improves their balance sheets and debt ratios.

3) Long term issues have been addressed. The Social Security debate we are having in the U.S. was addressed years ago in emerging markets. Their solution: compulsory self-funded private retirement system. This clarity means it will be more likely for developing countries to pay down other debt.

4) A more stable local currency and better access for investors has opened them up to foreign investment.