June 11, 2010
Vol 3, Issue 6
Jean Keener
Greetings!
Jean Keener
Happy Friday morning.  I hope your summer is off to a good start. 
 
The stock market has continued to see wild swings, and unfortunately more down than up in May.  As we experience this volatility, we need to continue to focus on our long-term goals.  Discipline in staying the course during periods of volatility is so important to receiving the long-term benefits of a diversified portfolio.
 
For the month, all classes of stocks were down sharply. Large-cap U.S. stocks fell 8% and year to date are now in negative territory (-1.6%).  Mid- and small-cap benchmarks remain solidly positive (4.4% and 6.3%, respectively) for the year so far. International stocks are down more than U.S., partly as a result of the dollar strengthening against the euro.
 
High-yield bonds (which have stock-like characteristics) were down 3.4% for May, but after their strong performance in the first four months of the year, remain up 3.4% year to date. High-quality bonds generally had a better month, with the Vanguard Total Bond Market Index up 0.9% in May, and 3.7% so far this year.
 
A graph showing how recent market returns fit into the big picture is included in the newsletter, along with
 information on deciding if you should pay off your mortgage, new access to DFA funds, and an invitation to a free budgeting workshop at the library next week.  As always, feel free to e-mail me at jean@keenerfinancial.com with requests for newsletter topics you'd like to see covered. Thank you, and live well.
In This Issue
Should you pay off the mortgage?
Market Volatility Graph & Perspective
Access to Dimensional Funds (DFA)
Keller Public Library free budgeting workshop next Tuesday
Join Our E-Mail List!
Quick Links
Our Services
Should you pay off the mortgage?
paying off the mortgageOne of the best financially freeing moments in life is the day you compare your savings and mortgage principal balances and realize that you could pay off your mortgage if you wanted to.  If you're at that point, congratulations!  If you're not there yet, keep saving; it can come sooner than you think.

Of course, immediately following the discovery of being able to pay off the mortgage comes a question: should I?  Here's how you decide:
 
First, consider what you would do with the money if you didn't pay off the mortgage. 

Would it sit in savings, be invested for long-term retirement goals, or something else?  Based on your plans if you didn't pay off the mortgage, you can estimate a rate of return you expect to receive.  From this rate of return, you'll need to subtract taxes paid on the earnings (15% if capital gains, your income tax rate if regular interest).
 
Second, figure out what your mortgage is costing you. 

Look at your interest rate, calculate the annual interest expense, and subtract any income tax savings you're receiving.  Be sure to avoid over-estimating the benefits of tax savings.  For example, if your mortgage interest is $5,000 and you have another $8,000 of itemized deductions, your total itemized deductions are $13,000.  If you're married filing jointly, the standard deduction is $11,400 this year.  So the mortgage interest is only increasing your deductions by $1,600.  If you're in the 28% tax bracket, this equates to a $448 tax savings.
 
Third, compare your answer in step 1 with your answer in step 2. 

If it's costing you more to keep your mortgage than you would earn with the money invested or in the bank, then you should generally pay off the mortgage.  If you can get a greater return on your investments than what your mortgage is costing you, then you should generally keep the money invested and wait to pay off the mortgage.
 
Of course there are exceptions and other considerations including:

If you would be taking the pay-off money out of a pre-tax IRA or deferred compensation in a lump sum, take a really close look at the tax consequences of that lump sum withdrawal!  They can often totally cancel out any savings on the mortgage interest.

If you would be using "retirement" savings funds to pay off the mortgage, you really need to look at your retirement projections and ensure that they still work with the funds withdrawn.  If your projections rely on you beginning to save what you're currently paying on the mortgage, know yourself.  Will you stick with this savings program?  If not, probably best to just keep your retirement funds intact and continue paying the mortgage.

If paying off the mortgage would take your emergency funds dangerously low or short-change funds for other important goals, it's likely not a good idea.
 
Making your decision

While it seems like a fairly straight-forward question, when you think about the whole picture, you realize there are lots of what-ifs and options to consider.  The important thing is to take time to do your homework, complete the analysis, and seek professional assistance if needed.   

Even if the process reveals you're better off with the mortgage, you might still want to go ahead and pay it off because of the peace-of-mind benefit that comes from not having any debt.  If that's the case, by going through the process thoughtfully and thoroughly, you will know what you're giving up financially for that peace of mind so you can make an informed decision about whether it's worth it to you.

And if the process does show that you would be better off getting rid of that mortgage, you can move forward with confidence. 

Of course, everyone's situation is different.  While the process described above addresses many considerations, you may have some issues not addressed here or that are unique to you.  Make sure you fully consider your own situation before making any decision.
A little long-term perspective on market volatility
The US stock market has taken us on a bumpy ride in recent years. This volatility has tested investor discipline and prompted some people to question their commitment to stocks. While no one knows the future, looking at the past helps provide a better view of long-term market performance and puts the recent market volatility in perspective. 
Investing market volatility in perspective 
The above chart shows the historical distribution of US market returns since 1926. The performance years are stacked in ascending order by return range. This chart illustrates that: 

Market performance over the past two years has been extreme by historical standards. In 2008, US stocks experienced their second-worst calendar return in eighty-four years. Then, in 2009, stocks rebounded strongly to deliver a return in the top quartile of the historical distribution. 

Over the long term, the market's positive return years have outnumbered the negative return years. Since 1926, the market has experienced a positive return in almost three-quarters of the calendar years. 
 
Not only are the positive years more numerous, the chart shows a larger concentration of performance in the higher ranges of returns. 

The sequence of calendar returns appears random, suggesting that accurately predicting future performance is a difficult task for any investor or professional manager. 

Over time, the market has rewarded investors who can bear the risk of stocks and stay committed through various periods of performance.
Access to Dimensional Funds  (DFA)
I have recently received approval from Dimensional Fund Advisors (DFA) to include their mutual funds in investment management clients' portfolios.  DFA funds provide no-load, low-cost, passively managed funds and are available through select financial advisors and to institutional investors.   
 
DFA has a strong tie to academia and I am impressed with how scientific research drives their approach -- including providing increased diversification in many asset classes and incorporating trading flexibility to reduce costs.  DFA has been written about in numerous investing books including William Bernstein's latest Investor's Manifesto and the Four Pillars of Investing.
 
These funds complement the low-cost ETFs, Vanguard, Fidelity, and other funds we're already using.  If you have any questions on Dimensional funds, please feel free to give me a call.
Free Budgeting Workshop Tuesday June 15
Keller Public Library Free Financial Education SeminarsI am providing a free budgeting workshop on Tuesday, June 15 at 6:30 pm at the Keller Public Library. We will cover some tips on figuring out where your money goes and how to design a budgeting system that works for you so that you can achieve your financial goals. 
 
 
Space is limited and registration is encouraged to ensure your space. RSVP to library@cityofkeller.com or on Facebook Find us on Facebook.
 
Future months topics include (always the third Tuesday of the month):
July: Saving for College in Texas
August: Maximizing social security benefits
 
The Keller Public Library is located at 640 Johnson Road.
I hope you found this newsletter informative.  KFP offers a free, no-obligation initial consultation to start the financial planning process for new clients.  To learn more or schedule a time, call 817-993-0401 or e-mail jean@keenerfinancial.com.
 
Sincerely,
 
Jean Keener, CRPC, CFDP
Keener Financial Planning

Keener Financial Planning is an hourly, as-needed financial planning and investment advisory firm working with individuals at all financial levels.
 
All newsletter content Copyright 2010, Keener Financial Planning, LLC.