Tara Unverzagt January 3, 2017 No Comments

Safety First – Preventing Identity Theft

Keeping my information has been on the top of my mind in the last few months. I’ve made some changes in my business to help protect personal information. Over the coming year, I’ll be providing security tips to help you keep your information safe also.

Intuit, maker of TurboTax and Quicken software, found 60% of identity theft cases come from paper in trash cans. You can protect yourself by making sure you shred any paperwork you throw away that contains social security numbers, account numbers, or any other personal information. If you don’t have a shedder, simple tear up documents into small pieces. Even better, only have paper copies of documents that you need to keep in your files and reduce what goes in your garbage.

The information provided above is general in nature and is not intended to be applicable to everyone. If you have questions on how this might affect your situation, contact me.

Tara Unverzagt July 18, 2016 No Comments

Index funds are safe, right?

My last article showed how you could work towards a carefree retirement like my grandfather had by looking at your spending and saving choices today. Your spending and saving decisions are the number one behavior that affects your financial life. Once you have that under control, you hopefully have money to invest. What do you do now?

What Now?

Let’s look back to what happened before 1980. That’s more realistic going forward than to expect a return of the high flying 1980s. For those who survived the 1980-2010 roller coaster with savings intact, interest rates could go up long term, but “normal” pre-1980 interest rates were just a few percentage higher than current interest rates and the stock market is a bit high, but about where it should be.

Buying low and selling high is still the way to make your money work for you. Unfortunately, the way we’re wired, we love to buy high, when investments are exciting. Then we want to throw in the towel when prices are low. This is a formula for failure.

Stocks are often the investment to emphasize but sometimes more in bonds are called for. Sometimes cash is king, when interest rates are super low and the stock market is valued high (sound familiar?) Most people think this ratio depends on your age, but that’s not the only parameter to look at when deciding your “asset allocation,” or how much you invest in bonds vs stocks vs cash vs any other investment choice.

A huge portion of money today is being invested in basic, low fee investments, like index funds and ETFs (Exchange-Traded Funds). You won’t “beat the market” but you’ll do as well as the market, right? Maybe, maybe not. Not all index funds and ETFs are created equally. You still need to do your homework on the fees and what they invest in. And know that when you buy an index fund to “match the market”, you’re choosing to buy the big losers as well as the high flyers.

Sears was in the Dow until 1999 when it went from a high of over $60 in 1998 and tanked to below $40 in in 1999. If you were invested in the “index” you would have held Sears to the bottom before being rid of it. Individual stock holders could sell long before it hit bottom. Sears wasn’t removed from the S&P 500 until 2012 when its value was below the required threshold to be in the S&P 500.

The index funds have helped investors that buy individual stocks because the index funds have distorted the price of some stocks and created market inefficiencies. When a bunch of money goes into an index fund raising a particular stock price higher than it should be, it’s a great time for someone who owns that stock to sell and take a profit. The person with the index fund will just hold on to it while the price peaks and then sinks. On the other hand, if a stock is undervalued, the index doesn’t take advantage of the bargain and buy more shares. And, as in the case of Sears, the index may hold on to a tanking stock that should be sold.

In addition, asset allocation at any given point has been shown to be far more important to wealth accumulation than what particular stock or bond you buy. If you always keep the same asset allocation, you will sometimes be over invested in stocks and under invested in bonds (see below for a time when investing heavily in bonds made sense) or vice versa. While no one has a crystal ball telling them the highs and lows of a market, there are usually pretty good signs that an asset class is in the range of the bottom or the range of the top. Right now both stocks and bonds, overall, are overvalued. What will you do?

The answer to that question is not simple or straightforward. It depends on your individual situation. The internet will give you great generic advice, but I’ve never met a generic person. Talking to a professional can help you sort through your priorities and risk tolerances. For example, someone that has a million dollar income will deal with risk tolerances differently than someone who is living pay check to pay check. If you are planning for just retirement, you will plan differently than if you have to pay for your kids’ college before retirement.

What Happened?

Investing was far easier for my grandfather then for you or me. Interest rates were pretty steady, between 2% and 5% most of his life. In retirement, interest rates went soaring to a peak of 15% in 1980, the highest interest rates of all time. Having reliable, steady, high interest rates in retirement is so sweet!

The stock market was a roller coaster during his lifetime, as it has always been and always will be. The Dow Jones Index went from around 1350 to as high as 7000 before returning to below 3000 before he died in the early 1980s. If you were invested in stocks back then, utilities were where you found the best growth. The Dow Jones Utility Index went from just over 10 in the early 1940s to as high as 160 by the 1980s, or about a 7% annual return.

Life changed in the 1970s when I was a kid and my parents were saving for the future. Interest rates went crazy, as did inflation. From the “bumping along” 2%-5% rates, interest rates shot up in the late 1970s to early 1980s. This turned all investing heavy into bonds and the stock market was flat 1965 to 1972. Life was uncertain and scary for most of us. Buying a house with a mortgage interest rate as high as 20% was daunting to many, prohibitive to most. Grandpa’s generation was happily retired invested in bonds at those high rates with a steady retirement income as a result.

Investing has always been complicated, but probably more so today than ever before. We think 1980-2010 was “normal”, but it’s no longer relevant. Our journey through our working and retirement life is nothing like Grandpa’s journey. So while he taught me a lot, I have to figure out this one myself.

The information given here is general in nature. If you would like to know how it pertains to your particular situation click “contact” above. If you found this or any of the other articles interesting, please subscribe at the bottom of this page.

photo by https://www.flickr.com/photos/ecotravols/

 

Tara Unverzagt June 30, 2016 No Comments

Transparency

Transparency is all the rage these days. People want complete information, no secrets held back. This is true in the finance industry as much as anywhere. The SEC is requiring the finance industry to be more transparent, such as recent changes to advisors who help manage your retirement plans. In the past, it wasn’t unusual for advisors/brokers to find creative ways to get paid without you knowing. ETFs are thought of as low cost, but know that some have fees higher than some mutual funds.

Originally there were upfront fees on mutual funds. Once people started saying “Hey, how come I’m paying so much just to give you money?” The front end fees started going down.

Then the “maintenance” fees paid every year were used to pay the money managers. You can now find out where the manager of your retirement account, mutual funds, or ETFs are getting paid. Beware “free” investments. Know that the advisor is getting paid somehow. No one, especially in the finance business, works for free. Often the more “free” someone is, the more they are actually getting paid, somewhere.

Do your homework. Ask your advisor all the ways they get paid: fees, commissions, incentives, bonuses, etc. If you’re investing in a mutual fund or ETF, read the material they provide. Everything now has to be disclosed, but it’s up to you to read it.

If you’d like help reviewing your investments, knowing what to ask or what to look for in a fund’s material, contact me at tara@southbayfinancialpartners.com

 

photo by https://www.flickr.com/photos/fdecomite/

Tara Unverzagt June 22, 2016 No Comments

What About RoboAdvisors?

RoboAdvisors have become popular recently. They provide a way for you to input what your goals are and the RoboAdvisor will come up with a plan just for you (and a million other people just like you). They are popular because they’re pretty easy to get started and their fees are very cheap, far cheaper than personal advisor. And they do a good job for what they do. I had a conversation with my hair stylist yesterday about why you might want a “person” to be your advisor.

In the middle of the conversation, another stylist came over to get advice on what color to use on her client. She said her client wanted highlights, but thought her ends (her last highlight color) were too light, she wanted darker highlights this time. The stylist was confused because the ends were the color that she would have picked for the client also.

My stylist said that perhaps the ends were the right color, but there was too much of that color. He pointed out that sometimes when clients say a color is too light, it’s really just that they want less of that color, not a darker color. My stylist pointed out a way to help the client get more information so she could make the right decision. The other stylist walked away to review the choices with her client.

After the other stylist left, I said “And THAT is why a RoboAdvisor isn’t the best solution for everyone. Sometimes, a client misunderstands what the issues are. A robot can’t have that discussion with you.”

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Tara Unverzagt March 22, 2016 No Comments

Why Are Interest Rates So Low?

Bond prices go up when interest goes down. If you read the Wall Street Journal, they mention this fact a lot, especially these days, but what does it mean? It takes just a moment to understand this, but longer to have it become ingrained.

Let’s start with an example:

If a bond has 3% interest (that is, you receive $3 for every $100 you invest in that bond every year), the bond starts out costing $1 for every $1 of bond. Therefore, a $10,000 bond would cost $10,000 and you receive $300 every year for holding the bond.

If interest rates went up to 3.5%, who would pay $10,000 for a 3% bond when you could invest $10,000 in a 3.5% bond now? You might be willing to buy that 3% bond for less. How much less? It would have to be enough less so that you get 3.5% for your investment.

The math requires algebra. Remember that class that you probably hated and wondered “when will I EVER use this?!” Well, here’s your opportunity. The math comes down to: if you can pay $1 for a bond with a 3.5% coupon, you would need to pay 3%/3.5% or .85 (i.e. 85 cents) to have a bond with a 3% coupon to be equivalent to a 3.5% payout.

What happened in the US from 2008 until recently? Interest rates came down so prices went up.

What’s happening now? The Federal Reserve has been trying to raise rates, but the demand for US bonds has also gone up. And the old rule “when demand goes up, prices go up” trumps the interest rule “when interest rates go up, price comes down.” The demand forces the price up which actually causes the interest rate to go down, despite the Fed’s desires.

We are living in interesting times.

 

Check out other articles on bonds and interest rates

 

Tara Unverzagt February 21, 2016 No Comments

The Bond Case

I recently had a conversation about buying individual bonds versus a bond mutual fund. I’m always amazed that investment advisors believe that buying individual bonds is a bad idea. The most cited reason for not holding individual bonds is that you get a terrible price compared to the “Big Boys” at a mutual fund. But the difference in price is less than the 1% that the Big Boys are charging you annually to manage your bond fund (and some funds have much higher annual management fees).

Another argument is that the Big Boys get a much better price when selling. I argue that the Big Boys are probably selling far too often. I’m a big believer in buy and hold, especially with bonds. Get a bond ladder in place and hold the bonds until maturity. You don’t have a selling commission and you get full face value for the bond. Why sell and potentially lose money?

Some say that “you never know when you’re going to need the money NOW!” My first response to that is, “If you have a plan in place with a proper Emergency and Set Aside Fund, you won’t need to liquidate your bonds NOW.” And my second response is, “Does that mean you’re not going to invest in stocks? Because being forced to sell at a bad price is far more likely with equities than bonds.”

I’ve also heard it said that you can’t diversify and will have larger holdings in each bond. This argument implies that if a company defaults on a bond you own, you’ll be out a lot of money. I only recommend buying investment grade bonds which are highly unlikely to default. That’s not to say that investment grade bonds never default, investing your money always carries risk, but an investment grade bond defaulting is not as likely as stock prices falling.

Some will argue that your principal in the bond isn’t protected against inflation. Is any investment “protected” against inflation? Inflation exists and we are always trying to beat inflation. The cash you put in any investment is going to devalue at the same rate, you aim to have the return (growth and income) outpace that devaluation. Money used to buy bonds in a bond fund will be affected by inflation the same as money used to buy an individual bond.

Another concern with bond funds is that it’s not always obvious what you are buying. The Big Boys might appear to “beat the market”, but this is achieved by taking on increased risk with lower grade bonds (which have high yields due to high risk) or by using derivatives (futures and options) that can definitely raise yields in good times, but can also go very badly in bad times.

It seems to me that the Big Boys have done a wonderful job marketing and selling to the masses that you can only invest in bonds if you go through them. I argue, individuals can do just as well or better at a given risk level by investing in individual bonds.

All information provided is general in nature and not meant to be advice for you in particular. I can’t predict the future, the discussion above is my best guess given the current data that’s available to me. If you’d like to know more about how this topic relates to your situation or are looking for a financial planner, contact me.

Tara Unverzagt February 19, 2016 No Comments

What’s up with 529 plans?

Let’s explore college planning for your children or grandchildren. There are so many great questions about the “best way” to get ready financially for college, but the answers are very complicated. There’s no way to cover this vast topic in one shot, so let’s look at one college saving method: the 529 plan.

If you haven’t heard of 529 plans, they are college saving accounts that are run by states. You can invest in the state where you are a resident or most any other state’s plan. Most people only look at their state, but if you are considering a 529 plan, it’s a good idea to look at what plan fits your needs best. That may be your state’s plan or another state’s plan.

I’ll use Illinois and California as examples of the differences between states. California has one 529 plan which is a savings plan. Illinois has four different plans which include saving plans and pre-paid tuition plans. I’ll just be addressing the Illinois Bright Start program here which is a savings plan similar to the California 529 plan.

What are the advantages of saving for college in a 529 plan?

  • On the state level, there are often tax advantages on contributions.
  1. California does not have a tax advantage for California residents.
  2. Illinois has a deduction of up to $20,000 of Illinois income for a married couple. Illinois businesses can also get a tax break for matching contributions. And there’s a tax break for rolling over another state’s program into Illinois.
  • On the federal level, 529 accounts are somewhat like a Roth IRAs. Contributions are after-tax dollars while the account’s earnings and growth are tax free.
  • The accounts are professionally managed. If you don’t have an investment advisor or you aren’t comfortable managing your own investments, 529 plans can help you with investment decisions.

Are there disadvantages to investing in a 529 account verses other investment accounts?

  • At the state level, some of the advantages mentioned above can come back to haunt you.
  1.  If you rollover your Illinois account to another state, it will be included in your Illinois income.
  2. Since California doesn’t allow deduction on contributions, there is no recapture if you move the funds to another state.
  • Most 529 plans have low fees, but each plan is unique. Illinois has the same plan via advisors and direct with the state. The Advisor version can have almost 1% higher fees than the direct plan. If your account has $100,000, that’s almost $1,000 per year going to fees!
  • Most plans are with a particular investment company (for example, TIAA-CREF or Fidelity) and you will be limited to the investment options they allow. This doesn’t always represent the best choices for you.
  • On the federal and state level, if you don’t take the funds out to pay for qualified expenses, you may pay taxes on the earning and a penalty. I’ll discuss this further later.

What if my child doesn’t go to college or goes to a cheaper college than we expected?

  • Non-qualified distributions (distributions not used for tuition or fees) will be taxable and have a 10% penalty on the earnings if withdrawn.
  • You can use the funds if your child wants to go to graduate school or take vocational/advance skills classes.
  • You can change the beneficiary and use it for someone else’s educational expenses. Haven’t you always wanted to go to culinary school?
  • You can save it for the next generation’s education.
  • There are exceptions that can eliminate the penalty (but you will still pay taxes on the earnings), including: the beneficiary dies or becomes disabled, goes to a US Military Academy, or receives a scholarship.

How does a 529 account affect federal financial aid?

  • A 529 account is counted as an asset of the parent. Federal financial aid considers 5.64% of parents’ assets and 30% of their income “available” to pay for college and 20% of a student’s assets and all their income over $6,260.
  • A grandparent can also start their own 529 account for a grandchild. That account is not included in financial aid reporting.
  • The catch with a grandparent’s account is that the distribution is included in the child’s income the following year.
  • If a grandparent plans to have a 529 account with one year of tuition and fees, your grandchild could save it for their senior year. The funds would never be counted as assets or income for financial aid.

What are the advantages of using a retirement account to pay for college instead of a 529 account?

  • A Roth IRA or Roth 401(k) makes a good college saving tool. You don’t pay taxes or penalty on Roth distributions for principal that has been in the plan at least 5 years.
  • Retirement accounts aren’t counted toward assets for financial aid.
  • If you distributed the taxable earnings from a Roth IRA or Roth 401(k) or from a traditional IRA or 401(k), the funds distributed won’t be penalized (they will be taxed though)

What are the disadvantages of using a retirement account to pay for college instead of a 529 account?

  • The limit for a Roth IRA or Roth 401(k) contribution is $5,500 ($6,500 if you’re over 50) in 2016 and phased out for higher incomes.
  • Each 529 plan has its own limits, but many will let you contribute $300,000 or more at one time.
  • Grandparents should remember you will have to pay gift tax for contributions over $14,000 ($28,000 for married couples) to each beneficiary or up to $70,000 each using a special 5 year exemption, but requires a Form 709, Estate & Gift Tax form, to be filed for each grandparent.
  • Distributions will count as income towards financial aid the next year.

Whether you should use a 529, a Roth IRA/401(k) or other saving plan depends on your needs and expectations. You also need to think about everyone’s tax situation, likelihood of wanting financial aid or need based scholarships, and flexibility. There’s not one right answer for everyone.

admin January 11, 2016 No Comments

Have you been paying attention?

Interest rates have gotten REALLY Interesting

Interest rates continue to be a mystery. The Federal Reserve Board (The Fed) is trying hard to raise interest rates on government securities. They are meeting headwinds for two reasons.

First, the economic mandates that The Fed is tasked to use as guidance, inflation and unemployment, aren’t helping them raise rates. The Fed is struggling to get to the targeted 2% inflation rate. A large part of the problem is that oil prices are at historic lows. But there are other areas where prices are also not hitting the 2% mark (consumer goods, food). Unfortunately, there’s a good chance inflation will be like a clog in a pipe, water will resist getting through until suddenly the clog works it way out with a gush.

Unemployment, while in its target range doesn’t feel like it. This is partly due to many people who would like to be in the market have given up and aren’t counted. And people who would like full time work are struggling with part time jobs. There has been improvements but the progress is very slow.

The other reason for headwinds against interest rates increases is the world continues to pour money into US bonds. The US seems to be one of the few stable countries in the world and the world’s perennial favorite “safe haven” is the 10 year US Treasury Bond. Even if the Fed raises rates, with demand for US bonds going up, the price goes up pushing the rate down since bond rates go down when prices go up.

While The Fed raised rates in December and have said they plan to continue raising rates, they will struggle to actually make that a reality.

I explored interest rates and the effect on the bond market in two previous posts:Interesting Thoughts about Interest Rates and The Bond Case .

 

All information provided is general in nature and not meant to be advice for you in particular. If you’d like to know more about how this topic relates to your situation, contact me at tara@southbayfinancialpartners.com.