Archive for February, 2008
February 29th, 2008
Jerry S. Korabik, CFP®, AIFA®
I find myself in the same position now that I was in a couple of years ago when it comes to dodging the volatility in the stock market. Once more, I’m paddling upstream against all the negative press about how the sky is falling. Back in 2005, I worked at Ibbotson Associates in Chicago. Ibbotson is a firm specializing in providing data and market research on the capital markets. Some of the analysis done a few years ago focused on the negative short-term effect on the market from “bad news events” and what happens when the markets recover. The analysis of past data could be a good guide for investors that are now panicking about the current economic woes and the effect they are having on the stock market. Most of this negative feeling is fueled by what the media is reporting. Instead it’s important to look at what the markets tell us long term, after these negative events do occur.
Such uncertainty in the market isn’t unusual, but it typically doesn’t linger. Ibbotson analyzed the S&P 500 (large company US stocks) reaction short-term and long-term to national tragedies and economic recessions. Though the results differed for each “tragedy” or market event, the ending story was the same…stocks recover and continue to move higher long-term.
Some of the major market events studied were:
Event: Aug 2, 1990, Iraq invades Kuwait-after one month the market (S&P500) was down 4.9%, after 3 years it was up 57.7%
Event: 9/11/01-after one year, the market was down 20.5%, after 3 years it was up a cumulative 12.6%
Other historical examples included Hurricane Camille in 1969, a major drought in 1988, Hurricane Andrew in 1992 and Midwest flooding in 1993. On average, stocks in the S&P 500 index were off 1.3 percent one month after those disasters, but they had risen 4.4 percent six months later and stood 10.3 percent higher one year later.
Three years after the disasters, the S&P 500 stocks had posted an average 46.6% gain.
Ahh yes, but what about the “R” word? Even during periods of recession… the song remains the same. Since the stock market is driven by the performance of corporations, it is evident that a relationship exists between the performance of the stock market and the performance of the economy as a whole.
History reveals that stocks (both small cap and large cap) have been one of the strongest performers after recessions. Many investors fear the volatility of stocks. Their fears, however, may not justify overlooking the potential of these asset classes. There have been 10 economic recessions in the U.S. since the beginning of 1946. Following these recessions, large cap stocks were up on average a cumulative 19.1% after one year. Small cap stocks were up an average of 33.7%. 3years after a recession, large cap stocks averaged a cumulative 47.7% increase, 74% increase for small stocks.
These national tragedies and economic recessions often exert short-term impacts on the economy, but there are really no long-term effects. We get through these things. Stay the course, as long as your time horizon and your goals are still in check, there is no reason to panic short-term, let the market run its course.
Source: Ibbotson Associates, Chicago
February 27th, 2008
Jerry S. Korabik, CFP®, AIFA®
…401k, that is the question. Does your plan offer a Roth 401k feature, if not, it might soon. Congress gave Plan Sponsors the benefit of Roth 401k effective January 1, 2006 and though it started gaining popularity slowly, we see this feature really gaining some steam in the coming years. The Roth feature is a no brainer for most companies to add this to their current plan offerings. If your employer has a traditional 401k plan already established, it’s a simple “flipping the switch” to make this account feature available to you. A few extra forms to fill out and you now have another option to save effectively for retirement.
The Basics:
The Roth 401k is an additional bucket used to save for retirement. Traditional 401k allows for tax-deferred contributions and tax-deferred earnings. Roth 401k taxes your contributions now, but your earnings grow tax-free throughout your working years and during retirement and possibly beyond. Employee contribution limits for 401k plans in 2008 are set at $15,500. If your plan offers both Roth and traditional 401k, the combined limit is also $15,500 to both plans together (not including any employer match) which means if you contribute to both parts of the plan, you cannot exceed that dollar amount. For example in my plan, I may contribute $10,000 to my Roth 401k and $5,500 to my traditional 401k and I would meet the requirements. If you left your employer you can also rollover your traditional 401k to a traditional IRA and a Roth 401k to a Roth IRA to give you maximum control of your retirement dollars.
In addition to tax-free earnings, the Roth feature is also not subject to age 70 ½ Minimum Required Distribution rules as traditional 401k and IRAs are. So if you don’t need the money in your Roth bucket during retirement, you aren’t forced to take it out and you can pass it on to your heirs free of income tax.
Having the Roth gives you more flexibility in post-retirement years on how you may want to spend down your retirement portfolio. Consider an investor with a traditional tax-deferred 401k, a Roth 401k and a taxable account. As you accumulate wealth in those 3 different buckets, it gives you more flexibility in a post-retirement setting to spend down the assets and to an extent, limit your tax liability from year to year. Why? Because each of those buckets face different tax rates. Your traditional 401k which has never yet been taxed, will be taxed at your highest marginal income tax rate when the money comes out in retirement. Currently, that rate is 35%. Who knows what it will be when you retire. Your taxable accounts (like personal investments) will face capital gains taxes when sold. Current capital gains taxes are as low as 15% for most taxpayers, and even 10% for others. Of course, the Roth 401k will face no taxes when it comes out in retirement.
Who might consider the Roth 401 (k) feature? The typical answer is “it depends.” However, below are a few examples or who might benefit more from a Roth 401k today:
1) Participants that are now in a low tax bracket, but expect to be in a higher bracket in retirement. Makes sense to pay the taxes on the contributions now and take out tax free earnings later in life.
2) Participants that feel retirement savings will be taxed at a much higher rate than current contributions. If you are concerned about future higher tax rates overall on your retirement nest egg, it might make sense to do a Roth.
3) Participants unable to make “Roth IRA” contributions due to regulatory limits
If you don’t qualify for $5000 Roth IRA contributions because your income is too high, relax as there are no income limits for those in a Roth 401k plan, you can put up to $15,500.
Check with your Plan Sponsor if you aren’t sure whether your plan offers this feature. If your plan offers this feature, test drive it first, because your income taxes will go up initially as more of your income is being taxed now, and you will need to get used to a different sized paycheck than maybe what you had before. Over the long-term, the Roth feature could be a nice benefit for you.
February 25th, 2008
Jerry S. Korabik, CFP®, AIFA®
As many of you are aware, the days of defined benefit plans or “company pensions” have gone by the wayside for many companies and their employees over the last few decades. Every couple of weeks you read more and more about major companies closing their Defined Benefit plans, or converting them to Cash Balance plans, the new hot face in so-called “defined benefit” options. Since the late 80s, there has been a continual decline in the number of participants covered by these traditional pension plans. Couple that with the continual concerns of the Social Security system and you have created the need for a “do-it yourself” pension. This is not your father’s pension plan, call it the next generation of retirement income planning.
At this time of year, when taxpayers are scrambling to get statements and tax documents in order to file their returns, it may make sense to do a Retirement Plan checkup before April 15th as well. Why? Because April 15th is the cutoff to fund up last year’s IRA contributions to traditional IRAs and Roth IRAs. Also, it is still pretty early in the current calendar year, making it important to revisit your company’s 401(k) plan options as well. It’s important to look at all the options available to you and develop a plan to try to maximize your current contributions to these plans. You want to be able to maximize your contributions now, so that you can afford to live a long and financially secure retirement. Although, keep in mind you want to be able to do this without living in the poorhouse today.
“Do it yourself” means we are forced to take a more active role in providing for our own retirement future because odds are, no one else will. We are given many tools that enable our saving for the future, from company 401k plans to individual IRA accounts. The IRS adjusts what you can put into your IRAs and 401ks every year, usually for some cost of living adjustment. For 2008, you can contribute $5,000 to an IRA account, $6,000 if you are age 50 or over. Income restrictions do exist. So depending on your filing status and your Adjusted Gross Income, you may or may not qualify for a traditional tax-deferred IRA or a Roth IRA in 2008. See IRS Publication 590 for more information on the limits. www.irs.gov
For a 401k, the most you can put in for 2008 is $15,500 through your payroll contributions. This limit does not apply to any Profit Sharing contributions or matching contributions your employer may put into your account. If you are age 50 or over, there is also a “catch-up” provision allowing you to contribute an additional $5,000 to your plan to allow you to save more for retirement at a quicker pace. IRS Publication 575 covers a lot of the detail you need to know when it comes to company benefit plans, limits, and restrictions. www.irs.gov.
In order of priority, take advantage of your 401k plan first, especially if your employer matches your contribution. If there is a match, you’d hate to leave free money on the table. Then after you’ve maxed out your 401k, consider the IRA route if you qualify.
When it comes to planning a “do-it-yourself” pension, the more we can put away for retirement, and the earlier we can do this, the better. In addition to being forced into doing it ourselves, we also need to focus on the fact that we are living a lot longer than our parents and grandparents. Medical technology and research is keeping us alive a lot longer, and in order to survive the higher cost of healthcare, we need to take a more active role in saving now, while we can and not wait until it’s too late. We have a lot of tools available to make the “do it yourself” pension work for us. The time to start is now. In fact, it’s also a good time of year to do an overall financial planning checkup to see whether you are on path towards your retirement dreams.
One final tip, whether you are investing in your company 401k or an IRA, make sure your investment portfolio is invested wisely. A well-diversified portfolio of stocks, bonds, and cash is the best defense against loss—both market loss and inflation loss. For help, check with your plan administrator or consult an investment advisor.
February 22nd, 2008
Jessica L. Knudsen, CFP®
For young people entering the workforce, retirement may seem like a long way off. But the best thing that you can do is start saving as soon as possible. One of the best ways to start saving is through your company’s 401(k) plan. According to msn.com, if you saved $4,000 per year to your 401(k) starting at age 25, you would accumulate approximately $1,000,000 by age 65 assuming 8% average returns. If you waited to age 35 to start saving, the balance of your 401(k) at age 65 would only be $453,000!
A great motto is to “pay yourself first.” The savings to your 401(k) is taken right out of your paycheck so you don’t really see it coming out of your pocketbook. It won’t take long before you don’t even realize you are missing that amount out of your monthly budget.
A good savings target is 10% of your pay. If this amount seems too high at first, start with contributions to at least get your full company match. This way you are not leaving any free money on the table. As you get pay raises, increase your contribution amounts.
The Roth 401(k) option is a great new feature, especially for younger workers. The Roth 401(k) allows you to contribute after-tax money to the plan while the account grows tax-free. This is perfect if you are in a lower tax bracket now than you will be when you withdraw money from the account in retirement.
February 20th, 2008
Jessica L. Knudsen, CFP®
Many of you know that 529 plans are a great way to save for your children’s college education. What you may not know is that there are free programs available that can help you boost your savings amounts. These programs are free to use and reward you for things you already do - they are like frequent flyer miles for college savings.
UPromise and BabyMint are two programs available that allow you to earn rebates on your purchases that can be applied to your child’s 529 plan. Under the UPromise program, you can register your current credit and debit cards with their website and earn rewards for shopping at participating retailers and purchasing eligible products. Products range from local restaurants, life insurance, vacation planning, and home purchases. You can even register your grocery store discount cards to track purchases on certain grocery and household items. BabyMint has a similar program but you must log in to their website in order to track your transactions with their eligible online participating retailers.
Both programs allow you to roll the money directly to a 529 plan, apply the balance to eligible student loans, or have a check mailed to you to deposit in your 529 plan (if your plan is not automatically linked with these programs). They also encourage you to have family and friends enroll as well to increase your rewards. In addition, UPromise and BabyMint both offer their own credit card that allows you to earn additional rebates.
Illinois’ Bright Start 529 plan has recently partnered with Futuretrust Mastercard. This program gives cardholders a 1% rebate on all purchases and has special offers with partner companies to provide up to 15% rebates on certain purchases. Futuretrust gives you a one-time $25 contribution to your Bright Start account and automatically transfers your rebate balance quarterly when the account reaches $25.
Another program available is SAGE Scholars Tuition Rewards. This program is linked with BabyMint and Wisconsin’s EdVest 529 plan, among others. The SAGE Scholars program credits members with guaranteed tuition reductions at over 200 nationwide private colleges and universities. They give dollar for dollar matches on rebates through BabyMint and you can earn 5% credit annually based on the value of your EdVest account.
For more information, visit the following websites:
www.upromise.com
www.babymint.com
www.futuretrust.com
www.tuitionrewards.com
February 18th, 2008
Jessica L. Knudsen, CFP®
For many people, the thought of paying rising college education costs for your child seems staggering. Fortunately, there are many college funding options available to help save for your child’s college education. One of the more popular options available is the 529 plan. All fifty states offer their own version of a 529 plan and in most states you do not have to be a resident in order to contribute to their plan (though there may be tax incentives to contribute to your own state’s plan).
A 529 plan is a state sponsored plan that allows you to save money for college on a tax-deferred basis. Withdrawals from the plan are federal and state tax free when used to pay for qualified education expenses (including tuition, room and board). Assets not used for a child’s college education costs can be transferred to another beneficiary. If it is not used to pay for college, the money can be withdrawn but will incur a 10% penalty and ordinary income taxes on any earnings.Many 529 plans make it easy for you to start investing.
Many plans offer a low initial contribution and allow you to set up automatic monthly contributions from your bank account. States typically offer a variety of portfolios: age-based portfolios that adjust the allocation of the investment from aggressive to more conservative as the child nears college age, as well as static investments where the allocation remains constant.
Here are some other important facts about 529 plans:
- The asset remains in the parents’ name so they will retain control over the account.·
- High contribution limits (over $300,000 per beneficiary in many states)·
- The 10% penalty and income taxes due are waived if the beneficiary receives a scholarship or becomes disabled.·
- The account is treated as an asset of the parent for financial aid purposes (this is lower than if it is considered an asset of the student).
- In some states contributions can be deducted for state income tax purposes (in Illinois you can deduct $10,000 if filing singly and $20,000 if married filing jointly).·
- $12,000 per year ($24,000 for married couples) can be contributed without paying gift taxes.·
- You are allowed to front-load five years of contributions for a total of $60,000 if single or $120,000 for married couples (good for Grandma and Grandpa).
Visit www.savingforcollege.com for more information on 529 plans as well as helpful college funding calculators.
February 15th, 2008
Jody J. Jungerberg, MBA, CFS, ChFC, CFP®
My client has great comfort in his decision to invest in India’s growth because he sees it first hand. As advisors, we have also allocated a portion of our client’s assets to emerging markets, and more specifically, to India. It does not go without its challenges however.
Participating in the market should be done via mutual funds or exchange traded funds. It is difficult to purchase individual securities. There are index funds available (which we prefer) as well as exchange traded structured notes. (A little complex but think of a bond fund which will provide its return to investor based upon a basket of Indian stocks instead of direct ownership).
Until recently, we utilized such a structured fund offered through Barclay’s, the iPath India Index. However, late in October, the fund – while an index oriented vehicle – began trading at a premium of 14% of its fair market value. Certainly we started watching this. Why pay more for an investment than it is actually worth? This occurred because Indian regulators limited the broker/dealer community’s ability to issue structured notes based on the India stock market. The regulation was enacted to prevent market speculation from causing a market bubble. At this point in time we do not know if and when this decision might be reversed. This decision effectively placed a cap on Barclay’s ability to create new iPath notes. As such, existing shares began acting somewhat like a closed end fund when demand overwhelms supply.
We are now looking at new and upcoming vehicles for our exposure in India. There is no question that there is growth potential in India and many other emerging markets. The challenges for investors (and for us) are finding ways to participate within the guidelines we believe prudent: low cost, no load, no imbedded premium. Stay tuned.
February 13th, 2008
Jody J. Jungerberg, MBA, CFS, ChFC, CFP®
What are some of the more striking changes in India versus what it was like when you were growing up? Financially, everything!
From your own personal perspective, why does investing in Indian companies or an index fund that focuses on India important to you? I have been visiting almost every year and the economy just keeps getting bigger. I don’t want my portfolio to be achieving a 5% growth only when I can see an economy on the rise. I am not betting on one stock, but betting on an economy. I feel like some large portion of my portfolio should be allocated to this winning streak while it lasts. I’m realistic enough to realize that at some point it will lose steam, but unlike the dot com boom, I don’t think this is a bubble. I hope I have achieved enough growth by then.
What are some of our more common misperceptions of life in India? There are elephants in the streets and kids play with camels !!! There is the stray elephant on a street, but there are millions of automobiles alongside. Kids play with computers, and chat on the internet. Yes, 50% of the population is devastatingly poor, but the other 50% (1 billion people) are getting better off everyday.
Are we, as investment advisors, early or late in the game in looking toward India and Indian companies to invest in? In my opinion, still way too conservative. How can one advise that only 10% of a portfolio should be invested internationally? It’s fiscally irresponsible to pay so little attention to all emerging markets. India is no exception.
You told me that you and your wife came to the US for graduate school. Did you consider returning to India when you were done? What was higher education like there versus here? No. We came here 25 years ago. The picture in India wasn’t so rosy then. In fact it has turned seriously only in the last 5 years. However, many Indian graduates who come today definitely consider going back - and many do. Grad schools here are still better than in India, but early education is far broader in India - all the way through undergrad school. Of course, you have to be able to afford it.
February 11th, 2008
Jody J. Jungerberg, MBA, CFS, ChFC, CFP®
Most investors have been reading about the explosive growth potential of investing in emerging market countries. This includes
India. It is the second fastest growing economy on the planet. McKinsey Global Institute predicts that the average Indian’s income will triple by the year 2035 – and Goldman Sachs predicts that
India will rise to be the third largest economy in the world by 2035.
I wanted to get additional insight into this incredible phenomenon and was fortunate enough to get some perspective from a client. He and his wife were born and raised in India. They left their native country to attend graduate school here in the US, and are both career professionals in Rockford. He shared some of his perspective with me after coming home late summer from his annual trip back home: I’ll be sharing this interview in 2 parts.
When you were in India over the summer, what changes in the economy were the most profound in your opinion? How about the overall standard of living?The biggest change was the level of investment going on. Folks that were conservative in their thinking had changed to thinking they must invest in this wildly successful market. Huge swings did not seem to bother the investors since they could see future potential.
Do you believe that India is looking more and more towards trade with the rest of the world? Has this historically been hampered or difficult? More than trade, India sees itself as a huge power house for manufacturing and software. Its English-based higher-education system is a large pool of resources that it feels it can offer the rest of the world - the opposite of our “outsourcing” frenzy. India wants more of that going on.
Are the young people influenced by what the American young people are doing? No change in this attitude at least among the middle and upper classes. They’ve always tried to copy the West. The difference is that the middle class is increasing by leaps and bounds so more and more people want to do what the West does.
Can you tell me more about the significance of more and more individuals getting mortgages there? What was the impetus for this trend and what was it like before? Were your parents home owners? Does this imply that – years ago – if young people went to college and “out to the real world”, they would move back to their parent’s home? In the old days (about 20 years ago !!!) folks lived in their family’s ancestral homes until they were able to rent an apartment. Then most stayed in apartments until they had saved enough to buy an apartment. This was normally in their 50s or older. My family lived in “company subsidized housing” until they retired. My mom then bought her first home. My sisters did the same. However, one of my sister’s children works for Citibank, assesses people’s ability to pay on a loan and is himself thinking of buying his first home with a mortgage. He is about 30. The “American dream” will soon be the “Indian dream.”
Real estate is going wild in the big cities. Homes (apartments - or flats, as they are known) double in value in a year or two. And, they’re not cheap. Housing in Mumbai can run into the $1M range for an ordinary flat.
February 6th, 2008
Brent R. Brodeski, MBA, CPA, CFP®, CFA, AIFA®
Below is an interesting read borrowed from Weston Wellington’s blog on the Dimensional Fund Advisor’s website. It references the fact that just 10 years ago; convincing people to invest overseas was an uphill battle. I can personally attest to this. I recall many tough conversations convincing clients that it made sense to invest globally. While it was a hard sell, it has since paid off in spades.
Ten year’s later the message is much the same. Invest Globally. And while it is no longer difficult to convince people to invest overseas, people are now actually beginning to question the wisdom of investing in the good ‘ole USA. I mean, why invest in America when China doubles every 12 months?
Why? Because diversification still makes as much sense as ever. Furthermore, the typical American still spends over 80% of their money with domestics companies using U.S. dollars. And just as domestic investing has been kind of a bummer in recent years, foreign stocks will certainly stub their toe at some point. So having domestic stocks will help mitigate the risk of a downturn in overseas markets and/or a strong U.S. dollar.
So as you read Weston’s entry, keep in mind that is it very likely that 10 years from now we might instead have the opportunity to poke fun at those pundits who are currently advocating abandoning US stocks to invest exclusively overseas.
Excerpted from the Dimensional Fund Advisors Website:
December 19, 2007
Global Investing “Bunk”
Weston J. Wellington, Vice President, Dimensional Fund Advisors
Ten years ago today an opinion piece appearing in the Wall Street Journal by a prominent financial writer claimed that the notion of broad-based international diversification of equity investments for US investors had been convincingly revealed to be little more than faddish “nonwisdom.” He described a strategy of accepting market rates of return across a broad universe of countries as being little more than gambling since “speculators in 86 foreign markets apportion my funds.” He had resisted suggestions from financial professionals to diversify globally, he said, smugly confiding that he had “no money in the former Yugoslavia, none in the present Argentina, none in the future Republic of Antarctica, none in Zambia,
Belgium or Kazakstan.” (Even if he had, it might be hard to tell. The aggregate weight of these countries would have represented about 1% of a globally diversified capitalization-weighted portfolio.)
At the time, the case for international diversification appeared questionable based on recent performance. For the period ending November 1997, the S&P 500® Index had outperformed benchmarks of developed country and emerging country stock markets by a wide margin over one, three, five, and seven-year periods. For the three-year period, annualized return was 31.05% for the S&P 500® Index compared to 6.19% for the MSCI EAFE Index (net dividends) and -7.24% for the MSCI Emerging Markets Index (gross dividends). Why bother investing in L’Oreal, Heineken, or Samsung when General Electric and Microsoft are showering shareholders with such impressive returns? In the author’s view, “the notion that the
US offers insufficient opportunity to diversify is absurd.” A prominent mutual fund executive made a similar observation the following year, comparing investment opportunities in the US market to a prospector standing in “acres of diamonds.
“The article went on to cite a prominent fee-only financial advisor who applied a globally diversified passive strategy for his clients, poking fun at his allocation strategy that “a robot could figure.” The thinly veiled suggestion was that investors were ill-served by such advice.
The author cited poor disclosure, risky currencies, and weak legal protection of shareholders as reasons why US residents “can lead a happy investment life without leaving home.” Perhaps so, but he was silent on the merits of this advice for citizens of other countries. Should Dutch grandmothers or
Hong Kong physicians boycott their local securities markets and limit their holdings to US securities? If they did so, would their decision cause prices to fall in non-US equity markets, raising the cost of capital for local firms and hence investment returns for the remaining shareholders? It sure seems plausible to us.
Since the article appeared in December 1997, global markets have had their share of ups and downs, but results suggest that excluding non-US securities from consideration may have unappealing consequences. For the ten-year period ending November 2007, annualized return for the S&P 500® was 6.16% compared to 9.00% for the MSCI EAFE Index and 14.76% for the MSCI Emerging Markets Index. Among nineteen major markets (EAFE constituents plus Canada), only one (Japan) has underperformed the S&P 500® in US dollar terms over the last ten years. And while US investors are currently fretting over losses related to the mortgage market fiasco, markets such as India roll on to record highs (the Bombay Sensex hit 20,290.89 on December 11, up from 3329.14 ten years earlier) and some observers are explaining the continued strong performance of emerging markets as a “flight to quality.“
Can any of us predict with confidence what the next ten years will hold?
Roger Lowenstein, “‘97 Moral: Drop Global-Investing Bunk,” Intrinsic Value, Wall Street Journal, December 18, 1997.
John Waggoner, “Send Your Savings Abroad? Conventional Wisdom Says Yes, Many Experts Say No,”
USA Today, July 6, 1998.
The S&P data are provided by Standard & Poor’s Index Services Group.
MSCI data copyright MSCI 2007, all rights reserved.
Previous Posts
Jerry S. Korabik, CFP®, AIFA® 
