KFS Keeling Financial Strategies, Inc.

June 9, 2015


 


 

Trick or Treat - In June?

 

 

 

"What a fool I was. Trick-or-treats come only once a year and I miss it by sitting in a pumpkin patch with a blockhead. YOU OWE ME RESTITUTION!"


 

                     - Sally, It's the Great Pumpkin Charlie Brown


 

 

It is typically a week or so between writing these articles and them being sent out. I have to clear everything through the Compliance Department at Commonwealth and then I like to time the distributions to go out on a Tuesday or Wednesday as statistically those are the days people are most likely to read an electronic newsletter. So whenever I talk about the markets, and the performance of the same, I write with some apprehension that things might change between writing and publishing the articles. So it's after throwing some salt over my left shoulder that I delve into our discussion of the markets. As of this writing, it's been over 1,400 days since the last stock correction in U.S. equities and the bull market has now run for over 2,270 days - a correction being a 10% drop and a bull market being a period of upward prices without a 20% drop - This time period puts this bull market in the top three longest of all time. I have written extensively about this phenomenon and I'm beginning to feel like Linus in the famous children's cartoon referenced above. I keep sitting in the pumpkin patch waiting for a correction while Sally goes from infatuated, to bored, to annoyed to downright livid that she wasted her holiday waiting for something that is never going to come.


 

Besides just the difference between fiction and reality, there are other aspects of this analogy that don't hold up. First, unlike the Great Pumpkin, corrections are real things that we've all seen and experienced before. Second, we haven't been waiting in the pumpkin patch for the correction to arrive, missing out on all the fun that is around us. Quite the contrary, what is so nice about the way we structure our investment portfolios is that you can get your treats and watch out for the scary monster in the pumpkin patch at the same time - as if Linus was born in the era of the webcam!  


 

What we typically stress with all the talk of overdue corrections is not that you change your investment portfolio in anticipation of them, but that you are psychologically ready if and when those corrections finally come so you don't respond out of panic and sell assets at their low points. What is starting to happen now as we move deep into the sixth year of this expansion is exactly the opposite. Instead of seeing people make panicky decisions out of fear as they often do during corrections, we are starting to see people make risky decisions out of greed - and that can be every bit as troubling. It stinks to get almost no return on savings and we get calls almost weekly about somebody wanting to find an alternative for the money they are going to use for some specific purpose a few months to a couple years down the line. I understand that impulse, especially when their longer-term assets have been going up, and up, and up without any real interruption over the past five or six years. But it's always good to be reminded of why you get the returns you get on equities. Everyone getting this newsletter has lived long enough to know that nothing in life is free. If somebody offers to pay you much more than you usually charge for something those suspicion bells start ringing in your head. Yet when people get a 10% return in the stock market - when their savings accounts are paying nothing - they never think to ask why they are getting such a great deal. For some reason those bells stop ringing and they just assume that's the way things are supposed to go. In reality that return over and above what you could get in a government backed bond is called a risk premium, and just as the name implies you get that extra return because you are going to expose your investments to extra risk. At some point those assets will see a correction, and those percentage downturns that everyone assumes they can handle with no problem - like say 20% - become dollar figures on a page. That $500,000 IRA suddenly has 100,000 less dollar in it - and you want to know what went wrong, when in reality nothing went wrong you just had to pay the risk premium that grew your $200,000 IRA to $500,000 in the first place.


 

Interest rates may be starting to rise and hopefully those fixed accounts you have that fund your short-term needs will begin to get a better rate of return in the future. But if the markets continue to go up at the rate they've averaged the last few years, those returns are still going to look bad by comparison. But don't get greedy and please keep in mind why your assets are where they are. There's a risk v. reward calculation done before every investment is made and sometimes the risk is worth the reward and sometimes it isn't. Like the old Wall Street saying goes, "Bulls make money, Bears make money, Pigs get slaughtered." I would add that chickens get slaughtered also and there's danger in both greed and fear - we just happen to have hit the part of the cycle where greed takes over. Part of what makes corrections happen in the first place is when people begin to let greed overtake their better judgment. That's when they start "gambling with the rent money" and put that savings for the new car or the kid's college tuition into the markets along with the longer-term investments. Since they don't have the time to make up losses in those assets once the market starts going down they feel like they have to withdraw that money immediately. Not only does that permanently lock in losses for them - but if this risk taking is widespread you have thousands of other people making the same decisions at the same time, selling holdings and compounding the sell-offs. I know there's a lot of people who have traded the low rates in fixed investments for equities that pay dividends in excess of the interest rates they were getting on more principal protected investments - I don't know how patient those people will be if the markets suddenly reverse course.


 

Meanwhile, the "real" U.S. economy seems to be accelerating its recovery. By that I mean employment, wages, credit availability, manufacturing, business start-up and all those things Main Street v. Wall Street things. While on the surface that doesn't seem to affect your investment accounts - it does affect your lives in other ways that can be just as important. If you are still working, there's a greater likelihood of getting a raise or a better, higher paying job somewhere else. If you're retired but have adult children it's going to be easier for them to pay their bills - lessening the possibility that you have to use your money to help them out. It means the charities, churches or civic organizations you might belong to should have an easier time raising money - taking the pressure off you to donate more - but also allowing them to expand their missions. Finally a community with more jobs and more opportunity is also one with less crime and drug use - both of which have been in sharp increase on Cape Cod over the past decade. The recovery is finally starting to feel tangible and established but the markets can still be a fickle beast and decline or rise in the face of this reality based on entirely different factors. Let us know if we can do anything for any of you, or for your friends, family or colleagues. I'll see you in the pumpkin patch.

 

 

 

 

 

 

It's Complicated

 

 

When it comes to trying to preserve, grow and pass on our assets in retirement several competing factors come into play. We all want to avoid the Probate system, avoid estate taxes, preserve our assets if we or our spouse ends up in a nursing home - and protect ourselves from liability at the same time. Unfortunately many of the things we do with the ownership of our assets that help in one area end up hurting us in other areas. For example, often people will put their children on investment account or on the house deed to try and avoid the Probate courts on those assets. This move does solve that probate problem, but unfortunately it causes lots of others. First it doesn't protect the assets from Medicaid if the parent needs nursing home care, secondly it may cause at least half those assets that would have gotten a step-up in cost basis at death and thus be tax-free to your heirs to suddenly lose that status, and lastly if your child gets sued or divorced suddenly half of your assets can be seen as their assets.

 

There are other DIY ownership solutions that bring with them similar problems. To qualify for Medicaid any assets you gave away five years or more ago are not countable - but once again if you gave those assets to your children the likelihood of them going through a lawsuit or divorce is just as high as you needing nursing home care. We've also seen people considering converting their IRA's to Roth IRA's so when they pass away their children or grandchildren can get those assets tax-free - not realizing that they are putting themselves in such a high tax bracket to do so that they end up paying 30-40% in taxes on assets their heirs could have withdrawn at 15-20% rates. There is no one type of ownership, or one type of trust that solves all these problems without creating other issues; loss of control, lack of liquidity etc. We live in a complicated, overly bureaucratic world where the rules that govern different agencies; the IRS, Medicaid, Probate courts, don't coordinate and many times directly contradict each other. That doesn't mean you can't set yourself up properly based on likelihoods and have contingencies in place for the other possibilities - but it does mean you want to get professional help when setting up those plans. Not just from a Financial Planner like us - but also from an experienced Estate Planning Attorney and probably a CPA or tax preparer as well. If you are looking for professionals in those areas, give us a call as we work with a select handful of Attorneys and Accountants that we have grown to admire and trust over the years and we'd be happy to refer you.

 

 

 

 

 

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Matthew H. Keeling, CFP�
Keeling Financial Strategies

759 Falmouth Road, Unit 2
Mashpee, MA  02649
508-539-0900

 

Securities and Advisory Services offered through Commonwealth Financial Network, Member FINRA / SIPC, A Registered Investment Advisor 

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