January 17, 2012Vol 5, Issue 1
DFW Financial Planning

Jean Keener, CFPGood morning and happy January!


A few beginning of the year reminders: 

  • 401k/403b/TSP max contribution is $17,000 this year, with a $5,500 catch-up if you're turning 50 or older this year. Review your contribution percentages to do as much as possible.
  • Review your employer's matching -- understand whether it's per paycheck matching or based on overall compensation for the year. If it's per paycheck, plan to max out on the last check of the year so you don't miss out on any "free money."
  • As you begin to prepare your 2011 taxes, if you're getting a large refund, update your withholding or quarterly payments to avoid the interest-free loan to the government for next year. Plan how to use this extra cash flow for saving or debt reduction.
  • If you need to take required minimum distributions from your IRAs this year, you can now determine the amount based on your account balance on 12/31/2011. You don't have to take the distribution until later in the year, but it's a good idea to calculate it now for planning purposes.

In this month's newsletter, we're mostly focused on investments with a 2011 overview provided by Dimensional Fund Advisors and a comparison of current stock dividend rates with bonds.  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.  

In This Issue
2011 Market Overview
Dividend Stocks vs. Bonds
FAQ on Filing the FAFSA
Your Retirement Savings Game Plan
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2011 Market Overview

Most global equity investors experienced negative returns in 2011. After a strong first-quarter start, developed equity markets grew more volatile in response to discouraging news on the economy and sovereign debt crisis. Despite a brief rebound in July and during the fourth quarter, most equity markets logged negative performance for the year.


The US stock market was one of the few developed markets to2011 Stock Market Returns experience positive returns. The S&P 500 logged a 2.11% gain (dividends reinvested), and the Russell 3000 returned 1.03% for the year. Despite strong returns in the fourth quarter, developed and emerging markets logged negative returns, with forty of the forty-five countries that MSCI tracks posting losses. The MSCI World ex USA Index returned -12.2% and the MSCI Emerging Markets Index returned -18.4% for the year. Ireland and New Zealand were the only developed markets besides the US to end the year in positive territory, and Greece was by far the worst performer. Indonesia and Malaysia were the only emerging markets that ended the year with positive returns, and Egypt was the worst performer.


The US dollar fluctuated but finished about 3% above where it started against most developed-market currencies. It sharply appreciated against the main emerging market currencies, especially against the Indian rupee and the Brazilian real. This relative strength negatively impacted dollar-denominated returns of emerging market equities. The euro remained stable during the year even as analysts began predicting the dissolution of the currency zone, and the Japanese yen and the Australian dollar both gained against the US dollar.


In terms of size, large caps outperformed small caps in the US, non-US developed, and emerging markets. Value stocks underperformed growth stocks in the US, but mostly outperformed growth among emerging markets and had mixed results in developed markets.


In the fixed income arena, US intermediate-term government securities and TIPS performed exceptionally well, returning over 9.4% and 13.5%, respectively. Real estate securities in the US had strong positive returns and excellent performance relative to other US asset classes; in other developed markets, REITs had sharply negative returns but still managed to have good performance relative to other asset classes. 


Themes of 2011 


In 2011, global diversification proved as important as ever. Although diversification may not have prevented losses, investors with broadly diversified portfolios were better equipped to endure the uncertainty.  Major themes during the year included:


European Debt Problems


The sovereign debt crisis intensified as European authorities struggled to avert a Greek debt default and alleviate fiscal pressures in Italy and France. But these restructuring attempts fell short of market expectations, which spooked investors and raised concerns of additional sovereign debt downgrades and a possible breakup of the Eurozone. The crisis also hurt European banks holding large positions in sovereign debt. To avoid losses, leading institutions reduced lending and dumped assets, which depressed asset values. Higher borrowing costs in the most indebted countries, combined with reduced government spending and revenues, raised more concerns that the Eurozone was entering a recession in late 2011.


Economic Uncertainty


Since the global financial crisis in 2008, central banks and governments have taken bold measures to fuel business activity and stabilize financial markets-and investors have eagerly awaited signs that economic recovery has taken hold. The economic signals continued to be mixed in 2011. Favorable US news included strong corporate profits and dividends, substantial levels of cash on corporate balance sheets, low interest rates and inflation, a booming domestic energy sector, continuing strength in auto sales, record-high share prices for some multinationals, and improved fourth-quarter numbers in manufacturing, exports, consumer confidence, and employment. Pessimists could point to the longstanding jobless trend, slumping home prices, tepid growth in retail sales, worrisome levels of government debt, and political gridlock at both the national and state levels.


Although emerging economies showed resilience, investors were concerned that another recession in Europe would impact its trading partners in emerging economies-and particularly in China, where high inflation and a manufacturing slowdown threatened to send its previously fast-growing economy into recession.


Rising Volatility


Investors in US equities had to endure a heavy dose of uncertainty for their moderate gains. The S&P 500 Index reflected this volatility by closing up or down over 2% on thirty-five days in 2011, compared to twenty-two days in 2010. By contrast, before the global financial crisis, the index did not have a single day with a 2% or more movement in 2005, and only two days in 2006.

Market observers also documented higher correlations among individual stocks and between asset classes. In 2011, there were sixty-nine days in which 90% of the S&P 500 stocks moved in the same direction, which is more than the combined total for 2008 and 2009. Higher correlations are common during periods of uncertainty, as macroeconomic forces overshadow the impact of a company's business fundamentals on its stock price.


Falling Commodity Prices


In early 2011, commodities soared with expectations of improving economic growth around the world. Copper, cotton, and corn hit all-time highs in the first half of the year. Crude oil experienced double-digit returns in response to anticipated higher demand and threats of supply disruptions tied to political unrest in the Middle East. The Dow Jones-UBS Commodity Index peaked in April, then fell 20% as the global economic outlook faded. The index returned -13% for the year-its first negative return since 2008. The most notable exception was gold, which set more records in 2011 and peaked at $1,888.70 per ounce in August before declining in the fourth quarter to return about 10% for the year.


Investor Risk Aversion


The fragile world economy made markets particularly vulnerable to shifting investor sentiment. During the year, investors reacted to uncertainty by moving to asset classes they deemed more stable, including large cap stocks and government bonds. Despite the Standard & Poor's downgrade of the US credit rating in early August, investors fled to US government securities as concerns mounted over the sovereign debt crisis in Europe and political stalemate over the US debt ceiling.

Dividend Stocks Vs. Bonds

Normally, investors buy bonds for income, and don't expect to get a whole lot of growth from that part of their portfolio. And they buy stocks primarily for their growth potential. Right?


But recently, as stock prices have crawled sideways and Treasury rates have dropped, the U.S. markets have given us something that experienced investors haven't seen since the 1950s. The average dividend yield on stocks in the Standard & Poors 500 index (1.95%) has moved up past the yield on 10-year Treasury bonds (currently hovering around 1.93% a year).


In other words, investors can get the growth potential of a stock investment, but be paid more, in current income, than they would get from plain vanilla government bonds.


In days of yore--before roughly 1955--it was accepted wisdom that since stocks were risky, investors should receive higher dividends to own them. As you can see from the chart below, where the blue line is Treasury rates and the red line is large cap stock dividends, there have been times when stock investors were paid a LOT more, in part because of depressed share prices during the Great Depression, but overall because investors were willing to accept less market risk than they have been for the past half century.


The chart also shows the opposite extreme. In the 1980s, when inflation drove bond rates through the roof, companies focused on providing capital gains rather than current income at the period's high tax rates. Why pay dividends when you can plow earnings back into operations and turn ordinary income into capital gains?


S&P 500 Dividends and Treasury Interest Rates
Red = S&P 500 Dividends / Blue = Treasury Interest Rate


It is hard to know how long we'll be able to buy stocks that pay us higher yields than we're getting on our Treasury investments. As you can see from the chart, dividends are still fairly low by historical standards, and any uptick in stock prices would drive that red line correspondingly downward. Similarly, analysts keep telling us that Treasury rates can't keep dropping forever.


This phenomonen doesn't mean we should trade in all of our treasury bond funds for large company stocks.  Stocks still carry more risk and bonds still provide a greater measure of safety -- and the combination of these characteristics is still key to a diversified portfolio.  But the knowledge can perhaps give you a bit more ease as you experience the extreme fluctuations of the stock part of your portfolio -- as compensation for the risk of investing in stocks, you have access to both higher potential long-term upside and greater current income.

FAQ on Filing the FAFSA

Financial Aid FAQIf you have a child who's attending college in the fall, it's time fill out the federal government's Free Application for Federal Student Aid, the FAFSA. The FAFSA, should be filed as soon after January 1 as possible in the year your child will be attending college. The reason is that some federal aid programs operate on a first-come, first-served basis, so filing the application early ensures your child has the best chance of receiving the most favorable aid package.


Even if you don't expect your child to qualify for federal aid, you should still consider filing the FAFSA because colleges often require it as a prerequisite for students to be eligible for the college's own institutional aid.


For answers to some of the most common questions on filing the FAFSA, link to KeenerFinancial.com. 

  • What documents will I need to fill out the FAFSA?
  • How do I file the FAFSA?
  • What happens after I file the FAFSA?
Your Retirement Savings Game Plan
Keller Public Library Free Financial Education Seminars

This month's workshop focuses on Your Retirement Savings Game Plan.  It's designed for those more than 5 years away from retirement and will cover tax-efficient savings methods and how to know if you're on track.


The workshop is at 6:30 pm this evening, Tuesday, January 17.  Registration is encouraged for planning purposes to library@cityofkeller.com.



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.   

  • February: Social Security Planning for baby boomers
  • March: Getting the most of your 401k - how to select investments that are right for you and maximize employer matching
  • April: Couples and Money: Harmonize your Finances and your Relationship - jointly presented with Marriage and Family Therapist, Maryellen Dabal
  • May: Structuring your Retirement Income (designed for those in retirement or within 5 years)
  • June: Social Security Planning for baby boomers


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 provides as-needed financial planning and investment services on an hourly and flat-fee basis.

All newsletter content except where otherwise credited Copyright 2012, Keener Financial Planning, LLC.