October 13, 2011Vol 4, Issue 10
DFW Financial Planning

Jean Keener, CFPGood morning.  We've had quite the nice recovery in the markets since the end of September.  The S&P 500, while still negative for the year, is up more than 6% so far this month.  By contrast, you can see the full third quarter market summary below which was anything but positive.


I am delighted to share that Keener Financial Planning was once again awarded the Best Financial Planner recognition by the readers of the Keller Citizen.  If you voted, thank you so much!  This is the third year in a row, and each time I find myself extremely grateful and humbled by your support.  Look for the printed "Best Of" section in the Keller Citizen on Wednesday, October 26.


The Sterling Center in Keller (where our main office is located) is hosting a Halloween mixer on Monday, October 31 from 4 - 6 pm.  Clients and friends of all the businesses in the building are invited to enjoy some refreshments, socialize, and participate in a costume contest if desired. If you're in the area and this sounds like fun, please feel free to stop by.  It would be great to see you.


In this month's newsletter, we have information on coordinating spousal social security benefits, medicare open enrollment, and more.  As always, feel free to e-mail me at jean@keenerfinancial.com with requests for newsletter topics you'd like to see covered or to discuss concerns or questions on anything in the financial world.  Thanks, and Live Well.

In This Issue
Quarterly Market Review
Coordinating Spousal Benefits for Social Security
Medicare Open Enrollment Early this Year
Effect of Debt Ratings on Markets
Social Security Workshop
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Third Quarter Market Review

 Third Quarter Market Review By any reasonable measure, the past three months have been among the gloomiest fiscal quarters on record for the investment markets. The debt ceiling debate, constant dithering in Europe over whether or not Eurozone members should be allowed to default on their sovereign debt, partisan bickering, the downgrade of U.S. government debt, continued unemployment and a general unsettled feeling about the economic recovery have all combined to put investors in a pessimistic mood. When people are pessimistic about the future, they sell--as they did, steadily and persistently, through what will be remembered as the gloomy summer of 2011.
It is hard to remember now that in the first quarter, just a few months ago, the markets were flirting with a full recovery from the 2008 debacle, or that before this quarter started the markets were in positive territory overall for 2011.
The Wilshire 5000 index, which most closely reflects the total U.S. stock inventory, dropped a remarkable 12.85% of its total value for the quarter. This wiped out the gains of the previous two quarters; the index is now down 7.54% for the year. The more widely-followed S&P 500 index of the largest companies domiciled in the U.S. was down 13.87% for the quarter, giving it a loss of 8.68% so far this year. 
The Russell 2000 small cap index fell 21.87% in the third quarter, placing it down 17.02% for the year.
Internationally, the results were much the same--only more so. The EAFE index, which represents large cap stocks across the developed world, plunged 19.60% for the quarter, and is down 17.18% for the year. Europe as a whole was down 23.00% for the quarter; the Far East dropped 9.64%, and the EAFE emerging markets index of developing nations fell 22.88%.
Investors with a portion of their portfolio allocated to bonds experienced the benefits of diversification with the Barclays Aggregate Bond Index up about 4% during the quarter.


What does all this mean to you?
It is usually more difficult to read the minds of the investing public than the cable financial programs and financial press makes it appear; the headlines one day will say that stocks fell after the Fed issued a warning about the economy, and the next day we will learn that stocks rose because the Fed was so worried about the economy that it might lower interest rates.


However, this summer there was a certain clarity about the cause of the malaise; the S&P 500 was routed to the tune of a 2.2% one-day loss on August 2, right after Congress finally agreed to a messy compromise on the debt ceiling. It was clear that many people were questioning whether our lawmakers have a clear grasp of the financial and economic challenges facing a nation that is still climbing out of the worst recession since the second world war. When they look overseas, they see that European governments are, if possible, even less functional in their approach to repairing the global economy. On August 4, the S&P 500 fell 4.3%; it fell 5.6% on August 6 and another 4.4% on August 8--and those four days represented nearly all of the damage for the quarter.
September, of course, was worse, and the handwriting was on the wall when the S&P 500 experienced its worst first week start in its five-decade history. (Yes, that includes the Fall of 2008.) A brief five-day rally gave us a 4% bump in value, but the end of the month was dismal, with a 2.9% drop on September 21, followed by a 3.2% fall the next trading day. Altogether, the index was down 6% for the month.
Is gloom and doom the real story about the economy, or is it a reflection of unfounded fear? The NumberNomics economic web site notes that the U.S. GDP (the broadest measure of economic activity) actually grew 2.3% for the past three months, a much faster growth rate that the anemic first quarter (0.4%) and only slightly-more-promising second quarter (1.3%). Do those numbers look like they are moving the economy toward a double-dip recession, as many investors seem to fear?
Another fear is that the Eurozone will collapse under the weight of Greek debt. But there is good news on that front as well; the German parliament voted on September 29 to support the expansion of the European Financial Stability Facility by a surprising 315-85 margin. Germany is the 10th--and most important--of the Eurozone members to ratify the bailout agreement
Meanwhile, supply shortages of oil have eased from the start of the year, causing oil prices to drop. Consumers have paid down enormous amounts of debt over the past three years, bringing them in line with where the consumer debt burden has been for the past 30 years. Corporate profits and cash levels remain at record high levels, and there are signs that the unemployment problem is starting to ease--although it will be years before we seen unemployment fall to levels seen in the early part of this century.
With all this good news hiding behind headlines about U.S. and European sovereign debt levels, it is hard to predict that the market rally of the past week and a half will continue. But it is also difficult to bet against it.  The wisest heads in the investment game tend to see the optimistic side of the situation when the markets are most gloomy, and see the dark clouds gathering when everyone else is enjoying a strong runup in stocks.


Despite what you hear on the cable financial news channels, nobody really knows how long stocks will remain on sale or how long it will take for the global economy to finally sort itself out. We DO know, from past experience, that eventually the economy recovers from even the most severe shocks, and (again, eventually) the markets return to health. History tells us that a recovery is inevitable, and it seems to be visibly underway somewhere behind the hubbub of the negative press, partisan bickering and occasional market panics.


When investors figure that out, there will be another bull run and (this we can predict with confidence), people in that happy time will forget all over again that stocks can go down as well as up. That's when you'll hear our lonely voices talking about the downside risks.

Coordinating Spousal Benefits for Social Security

Coordinating Spousal Benefits for Social SecurityCoordinating spousal benefits in filing for social security can make a big difference in your retirement income.  But many of the articles I've written on the subject have gone into great detail.  And sometimes I've gotten the feeling that you were perhaps skimming over the information and not really focusing on the decisions that need to be made for your situation.  (I'm right, aren't I?) 


So, here's a super quick summary of some of the most important concepts to understand with coordinating spousal social security benefit.   I hope this will prompt consideration and planning for your own situation if it's relevant to you.


Contrary to popular practice, it's not automatic that each spouse should just file for social security benefits as soon as he or she retires.  As a couple, you have the potential to increase your income over your whole retirement and maximize security for the surviving spouse through effective planning.
Social security offers some surprising options to help couples (including divorced couples married for at least 10 years) take full advantage of all benefits available to them.
Did you know that spousal benefits are not restricted to the low-earning spouse and can be claimed by the husband or wife?
A high-earning spouse who wants to wait until age 70 to file on his or her own record to receive maximum delayed retirement credits, can file for spousal benefits on the lower earning spouse's record at full retirement age.  This allows the high earning spouse to receive at least some social security without reducing his or her own maximum delayed retirement benefit.
Did you know that the primary worker has the option to file and suspend his or her own benefit and still allow the spouse to start receiving benefits?
This option allows the primary worker to continue earning delayed retirement credits while the lower earning spouse starts to receive a spousal benefit on the worker's record.
Did you know that by the higher earning spouse delaying benefits to age 70, both husband and wife enjoy longevity protection?
When the first spouse passes away, the surviving spouse gets to keep the higher of their two benefits - including delayed retirement credits.  These benefits are indexed for inflation, so even if the surviving spouse lives another 20 years after the first spouse's death, he or she will benefit from the delayed retirement credits growing with inflation over that entire time.
These considerations are just the tip of the iceberg in planning for social security!  For couples nearing age 62, the pay-off on the effort to fully analyze this decision is enormous.


For more on this topic, plan to attend my next social security workshop at the Keller Public Library.  See below for more details.

Medicare Open Enrollment Earlier This Year

Medicare Open EnrollmentThe Medicare open enrollment period is the time during which people with Medicare can make new choices and pick plans that work best for them. Each year Medicare plans typically change what they cost and cover. In addition, your health-care needs may have changed over the past year. The open enrollment period is your opportunity to switch Medicare health and prescription drug plans to better suit your needs.


When does the open enrollment period start?


This year, the Medicare open enrollment period begins earlier than in prior years. Open enrollment starts on October 15 and runs through December 7 (previously, open enrollment ran from November 15 through December 31). Any changes made during open enrollment are effective as of January 1, 2012.


What should you do?


Now is a good time to review your current Medicare plan. There are some factors you may want to consider as part of that evaluation.


For instance, are you satisfied with the coverage and level of care you're getting with your current plan? Are you able to see the medical professionals of your choice, or are you restricted as to the staff and facilities you're able to use?  Are your premium costs or out-of-pocket expenses too high? For example, Medicare Part B and Part D premiums can increase if your income exceeds a certain level. On the other hand, if you have a Medigap or Medicare Supplement plan, you may find that your out-of-pocket costs are increasing due to co-payments and deductibles. If you are enrolled in a Medicare Advantage or Part C plan, those benefits and costs may change as well.


Has your health changed, or do you anticipate needing medical care or treatment? Now is the time to determine if your current plan will cover your treatment and what your potential out-of-pocket costs may be. If your current plan doesn't meet your health-care needs or fit within your budget, you can switch to a plan that may work better for you.


Where can you get more information?


Determining what coverage you have now and comparing it to other Medicare plans can be confusing and complicated. Pay attention to notices you receive from Medicare and from your plan, and take advantage of help available by calling 1-800-MEDICARE or by visiting the Medicare website, www.medicare.gov. Please feel free to call me for ideas on where to get information for your specific situation also.

Effect of debt ratings on the markets

Effect of Debt Ratings on MarketsIn early August, Standard & Poor's downgraded US government debt from a top-rated AAA to AA+.  In the weeks preceding the event, the "conventional wisdom" was that the downgrade would result in higher interest rates and lower stock returns. 


It's of course far too early to judge what the effect will be long-term in the U.S., but we can see the short-term outcome.   Since the downgrade, interest rates on US government securities have fallen -- not gone higher.   The stock market has experienced a very tough period, but the causes are too numerous to associate the negative performance solely with the ratings downgrade.


So that raises the question: what has actually happened in other countries where we have a longer history and more data to observe the effect of a ratings change?


Bond Market Impact


Let's look at 3 examples of major developed countries that experienced a credit downgrade more than a decade ago: Australia, Canada, and Japan.  They lost their top ratings in 1986, 1992, and 1998, respectively.  None of them experienced a significant rise in interest rates. 


Other research suggests that countries with high credit ratings may withstand a downgrade better than countries with lower ratings. One study looked at sovereign credit rating downgrades since 1990 and found that bond yields changed little among countries downgraded from the highest triple-A rating. However, countries with lower credit ratings (single A or below) experienced significant interest rate increases following their downgrade.


Stock Market Impact


Below is a chart that summarizes stock market performance of respective countries before and after a ratings change. It is based on analysis conducted by Dimensional Fund Advisors using sovereign bond rating data from Moody's Investors Services from 1983 to 2009. During the twenty-seven-year period, the ratings agency made seventy-one upgrades and twenty-five downgrades to governments in the developed and emerging markets tracked by MSCI.


The study identified the date of each change and logged each country's market performance in the twelve months before and twelve months after the event. Each country's market returns were compared to the respective market index and the excess return averaged for all events. (Excess return refers to performance above or below the respective market index, either MSCI EAFE or MSCI Emerging Markets, as appropriate.)

Equity market performance before and after Moody's ratings changes:1983-2009


Cumulative Return in Excess of Market

Sovereign Bond Rating Change

12 Months Before


12 Months After








The aggregate results show that stock markets of upgraded countries outperformed their respective market index in the twelve months before the rating change (13.83%), while stocks in downgraded countries aggregately underperformed the market index before the event.However, cumulative returns in the twelve months following a ratings change were almost the same for the upgraded and downgraded countries (3.87% vs. 3.73%).


These results suggest that market prices reflect all available information and expectations about a country's economic prospects-including the possibility of a ratings change. By the time a country's debt rating is upgraded or downgraded, the market has already integrated the news into prices. Stock markets reflected positive economic developments prior to a ratings upgrade and negative developments before a ratings downgrade. After the event, markets did not appear to perform much differently, in aggregate.




This research underscores the importance of looking to market prices for signals about the fiscal health and prospects of a country or a company. Markets appear to work faster and more accurately than ratings firms to assess a country's financial condition and evaluate the potential impact on its cost of capital and equity market.


If you'd like to study the sources/links behind the data sited in this article, please email me.

Social Security Workshop
Keller Public Library Free Financial Education Seminars

 This month's financial workshop is on maximizing social security benefits.  It's designed for baby boomers to help you maximize your retirement income. If you are 55 or older, have not yet filed for social security, and live in or around Keller, you should strongly consider attending this financial information session.


Attendees will learn:


  • 5 factors to consider when deciding when to apply for benefits
  • Why you should always check your earnings record for accuracy
  • How to coordinate benefits with your spouse
  • How to minimize taxes on Social Security benefits
  • How to coordinate Social Security with your other sources of retirement income


The workshop is at 6:30 pm on Tuesday, October 18.  Registration is encouraged for planning purposes to library@cityofkeller.com.


Topics for the rest of the year: 

  • November: The Long Term Care Insurance Decision: should you buy it, and if so when, what kind, how much?
  • December: Structuring your retirement income (designed for those in or very near retirement)

Workshops are usually on the 3rd Tuesday of the month at 6:30 pm.  Please mark your calendars and tell your friends about ones that interest you.  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.
Jean Keener, CFP, CRPC, CFDS
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 except where otherwsie credited Copyright 2011, Keener Financial Planning, LLC.