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| 2009 - A Year of Recovery? |
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In this issue, Paragon's advisors share insights, strategies, and potential tax opportunities that exist during these turbulent market and economic times. |
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| PARAGON Perspectives:
1st Quarter 2009 |
Greetings!
Words cannot describe how pleased we are about entering a new year! After the enormous difficulties the global economy has suffered in 2008, we are pleased to share several items of good news. In our quarterly market update, Jon will discuss how how past recessions and recoveries have shaped up, and how this recession appears to be displaying similarities to recessions in the past. Michelle will share good news for those of you who, because you are over age 70 1/2, must take withdrawals from your IRA's, and Mike announces PARAGON's new alliance with College Funding Solutions, Inc., a national leader in college preparation and funding for high school students and their families. |
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2009 - A Year of Recovery? by Jon Castle, CFP, ChFC
 No one was happier than I to watch the ball drop in Times Square and send 2008 on its merry way!
2008 will no doubt go down in the history books as a year to remember. Following up on a negative 4th quarter from 2007, the US and International stock markets posted the worst losses that we have seen since 1932. The real challenge, unfortunately, from a money management point of view, was that assets that were previously considered "safe" (such as investment grade bonds and even US Government Agency bonds) did not hold their value in the latter half of 2008. So, textbook risk management measures simply did not work. In 2008, the only way to not have suffered losses for the average investor would have been to have the foresight to retreat entirely to Government Bonds, Cash, or to short the market. Even assets which have historically offset the prevailing market trends, such as gold or commodities, lost value during the market's crash in October and November, making account losses even more painful.
However, the good news is that (keeping fingers crossed) it appears that we may have seen the worst of it - as far as the stock and bond markets are concerned. This does not mean that the economy is in recovery yet, or that there will not be continued bad news - there will. Historically, recessions, and the steps that must be taken to recover from a recession, are not only painful, but also seem to take an unusually long time when everyone is waiting for the economy to recovery. However, because investments are purchased in anticipation of a future return, most investment markets begin to show signs of recovery long before the economy actually becomes healthy again.
Looking back, the timeline of recessions and their associated stock markets have tended to look like this:
11 Months prior to recession declared: Anticipatory Bear Market. For this cycle, this began in October of 2007.
1-2 Months prior to recession declared: Capitulation - Severe Bear Market (Surrender/Panic). This appears to have occurred in October and early November of 2007.
For 4-6 Months after recession declared: "Bottoming Process." Volatility. Flat, bumpy market. We believe this is where we are now. We will likely see at least one big "Bear Market Rally" which will not succeed. It is possible that we are in this rally now - typically a 20-25% rally on low volume (not a lot of institutional investors) followed by a 15% or more drop before the next phase of the cycle.
4-6 Months BEFORE recession ends: Powerful Stock Market recovery (Average 31%) followed by the expansion phase of the normal business/economic cycle.
It can be important to remember that a recession is a period of contraction. When the recession is over, the economy is not "all fixed." It has simply stopped contracting and can now begin to heal. Layoffs and high unemployment continue for some time after the recession. However, in anticipation of future economic health, the equity markets tend to perform quite well during the latter part of a recession, and well into the recovery phase. Historically, March, April, and May have been very good months for the stock market. These months also correspond to the timeline mentioned above, where we should be finished, or nearly finished, with the bottoming process of the stock markets.
It is our position that investors - especially those whose accounts have declined - must reevaluate their risk tolerance - and strongly consider taking heavier stock positions as soon as the indicators that a sustainable market recovery is under way. It is very likely that these indicators will present themselves soon; possibly as early as March. It is our intent to be VERY proactive on this issue, especially once we observe increasing volume in the market on strong up days - these are signs that heavy institutional investors are re-entering the market and the recovery rally has begun. The bond markets are already showing signs of a strong recovery, as shown on chart 1 below.
NEWS MEDIA
It is also important, I believe, to keep much of the news in perspective. Very often, PARAGON advisors and I watch CNBC and Bloomberg; we like several of their shows and feel like we even know some of the hosts personally. This month, CNBC is celebrating a record year in 2008, with viewer ship up over 50% from last year - this observation based upon their own self-congratulatory commercials. This success, no doubt, translates into increased advertising revenue, bigger and better salaries and bonuses for the hosts of the financial television shows, and greater career opportunities for themselves and their producers. Some of the hosts are even being featured on late-night television, as they are now considered "celebrities." While they should be congratulated for their success, and most of them do have more brains than they typical Hollywood celebrity type, it is also important to remember that the increased viewer ship of the financial media is a direct result of the recession and terrible stock market we have suffered. It should also be remembered that it is possible that financial experts in the media just may have an incentive to portray the state of the economy and the financial markets in a worst light than they really are. Simply put - the scarier things seem, the more people tune in to the the financial media for guidance, and the more money they make. I'm not being accusatory here - just exploring a possibility and stating facts. It will likely be very important for successful investors to marshal their courage and return to balanced or equity-heavy portfolios before it really feels safe to do so.
At PARAGON, we have a vested interest in your success. Our revenues are driven by your success, as measured by your account growth - not by your fears, your losses, or the amount of your transactions. And speaking of success - here's to a SUCCESSFUL 2009!!
Footnotes:
This e-mail for informational purposes only. ALL investing involves the potential of loss - including invested principal. Indices quoted are general barometers of security price movement. You cannot invest directly in an index. Past performance is not a guarantee of future performance. This message is NOT personal investment advice and should not be taken as such, nor is it a recommendation to buy or sell any security.
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6 Month Bond Market Chart
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6 Month S&P 500 Chart
6 Month S&P 500 Index Chart
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College Funding Solutions by Mike Carignan, CRPC
 After the current season of Bowl games is done there will be a multitude of high school kids saying "I want to go to University of Texas" or "University of Florida" or "University of Southern California" because of the excitement generated for that school. If you're a parent, or in many cases a grandparent, you're probably thinking...How much will education there really cost?
The choice of college is the largest decision most children will make. Depending on what career they will want to pursue, the choice of institution can have a dramatic effect on their future. One major component of the decision for most families is how to pay for it. Using these three schools as examples, let's see how much it could cost for your high school age child to attend one of these universities.
If you are a Florida resident:
University of Florida Univ. of Texas Univ. of So. California
Tuition: $14,957 $37,160 $49,598
Four year Cost: $59,828 $148,640 $198,392
Anyone who has sent a child to college knows that tuition is not the full cost of an education. Once room and board, books and lab fees, and administrative charges are paid many families may be facing a price tag of low six figures to a quarter of a million dollars or more for a larger premier institution.
If your last name isn't Dupont or Vanderbilt you would probably like to reduce the cost as much as possible. What are the sources of additional funds other than out of mom or dad's, or grandparents', pockets? Scholarships, grants, and financial aid are just a few of the opportunities to reduce the cost to your family. How to get them and how to take full advantage of these opportunities is an additional challenge for most families. Did you know that through careful planning and coordination it may be possible for a student to attend a school similar to the University of Southern California for an out of pocket cost close to that of the University of Florida?
As you likely know, our practice's focus to this point has primarily been retirement planning and money management. However, after speaking with hundreds and hundreds of individuals and couples - either preparing for retirement, or actually in retirement - we have heard the same story over and over again. College costs had hurt their retirement preparations. Either they had spent more money educating their children than they had planned and, as a result, couldn't save as much for retirement as they had hoped, or they were helping their grandchildren pay for college and it was impacting their current retirement lifestyle. Even for grandparents financially able to assist grandchildren with college without impacting their own lifestyle, most hoped to minimize the costs, especially since there may be several grandchildren to help.
Lifetime, long-term relationships with financially successful clients are our goal at PARAGON. Since economical college funding is frequently one of the major obstacles to financial success in retirement it makes sense for us to enter into an exclusive alliance with the nation's leading provider of college funding solutions. We are pleased to introduce College Funding Solutions, Inc. (CFS), founded in 1993, which has helped over 17,000 students and families in all 50 states prepare and pay for college. Executive Director, Coy Howe, is author of the helpful guide, "Money for College".
PARAGON is excited to begin offering this additional service starting in January 2009. If you or your family members have a child who is in grades 8 through 11, we welcome you to give us a call to discuss more about the programs available for a more affordable college experience. |
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IRA Required Distributions Waived in 2009 by Michelle Ash, CFP, CDFA 
Those of you who have reached the age of 70-1/2 often dread the end of the year because the tax laws make you take your IRA required minimum distributions (RMD's) regardless of whether you need the money or not. This past year proved particularly frustrating for many because of the "triple-whammy" of 1) having to take the distributions, 2) being required to take them based on December 2007 account values, and 3) having to take them out at a time when the accounts most likely have dropped significantly. Some of you caught wind of proposed legislation to suspend the requirement to take RMD's. I received several emails asking if such rules had gone into effect as relief for 2008. Unfortunately such a ruling didn't take place for last year, but it has been passed for 2009. On December 23rd, President Bush signed into law the Worker, Retiree and Employer Recovery Act of 2008 (WRERA) which contains a provision suspending RMD requirements for the 2009 calendar year.
Potential Benefits and Planning Opportunities
The immediate benefit of this Act is probably obvious: you can allow 2009 to be a fully invested year to take advantage of potential growth without being forced to withdraw dollars you may not need. In fact, you'll have almost two full years before mandatory withdrawals are required again; as the next required withdrawal deadline will be December 31, 2010.
For individuals reaching age 70-1/2 in 2009 and facing RMD's for the first time - good news! You can wait an additional year before having to take withdrawals. An individual turning 70-1/2 in 2009 has no required withdrawal for the 2009 year; and would simply need to meet their age 71 distribution by December 31, 2010.
There are other planning opportunities as well. These may include Roth conversions, Roth contributions, and lower taxation on social security benefits.
Roth Conversions - Many individuals like the potential opportunities that Roth IRA's offer: mainly tax-free growth on assets until withdrawal and no RMD requirements for the IRA owner. However, once an individual reaches the age of 70-1/2, conversions can only be conducted for dollars in excess of your RMD. The RMD itself may not be converted. For many, the tax implications of both RMD's and a Roth conversion is just too high. However, in 2009, since no RMD's are required, an individual could convert dollars to a Roth without having to overcome the taxes on RMD's. Income limitations of $100,000 Modified AGI for conversion eligibility still apply.
Roth Contributions - Another consideration because of the waiver of RMD's are Roth IRA contributions - new dollars contributed to this type of IRA. Normally RMD dollars cannot be used to contribute to a Roth IRA. Because of the waiver, however, a non-required withdrawal can be executed to fund a Roth IRA for 2009. Individuals or their spouse must still have earned income in the amount to be contributed in order to qualify; IRA contribution limits for 2009 are $5000 "regular" contributions, and $1,000 "catch-up contribution for individuals over age 50.
Social Security Lower Taxation - We often hear the complaint - "why do I have to pay taxes on social security, which is a return of my former taxes?" The WRERA law may help you to pay less taxes on social security for 2009. How? Well, if in the past you only took out RMD's because they were required and you won't be taking money out in 2009, then your overall income will be lower. Depending on your overall income amount, you may find that you now no longer reach the maximum taxation limit of $44,000 ($34,000 if single) to cause your social security to be 85% taxable.
As with any tax or investment planning, individual circumstances need to be considered and so we suggest consultation with both your advisor and your tax professional so that you may be aware of all impacts of any strategies before execution. Should you have further questions about any of the information or strategies mentioned here, please do not hesitate to give our office a call.
A Roth IRA distribution is qualified (tax free) if you have had a Roth account for at least five years and the distribution is made after you've reached age 59 1/2, because of your total and permanent disability, in the event of your death, or for first time homebuyer expenses. Distributions that are not qualified may be subject to a federal income tax penalty. If converting a traditional IRA to a Roth IRA, you will owe ordinary income taxes on any previously deducted traditional IRA contributions and on all earnings.
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Investment advisory services provided by Paragon Wealth Strategies, LLC, a registered investment advisor.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements. | |
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