January 2016
        

 

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Jean Keener CFPGood morning, and happy new year!

If you've been following the investment markets' start to the year (and it's been hard not to!), you're probably concerned about the state of your investment portfolio.  As of the close on Friday, the S&P 500 is down almost 8% since January 1.  International developed markets stock are down almost 10% and emerging markets down more than 11%.  The broad US bond market is up just under 1%. * 

During these times, it's a good idea to take a longer term view.  So two articles are included in the newsletter: An overview of 2015, plus some additional context on the movements of the last two weeks. 

Also included in this newsletter are information on steps for filing the FAFSA -- if you have a college-age child, it's time to get started with this again if you haven't already.  Plus, we have highlights of the tax provisions congress extended at the end of 2015 to help you in filing your taxes this year.

As always, please let us know of any suggestions for newsletter topics or questions in your financial world.  Thanks for reading, and live well!
2015 Year in Review
2015 Year in Review
 Read the full article.

Tax Provisions

Filing the FAFSA
Get the details.
VolatilityPerspective on Market Volatility
mountain-scene.jpg The global stock markets are in panic mode right now.  In two weeks of trading, the U.S. S&P 500 index is down nearly 8% on the year*, which brings us close to correction territory (a 10% decline), and has some predicting a bear market (a 20% decline). 
 
On top of that, we've been hearing a widely-publicized, rather alarming prediction from Royal Bank of Scotland analyst Andrew Roberts, saying that the global markets "look similar to 2008."  Mr. Roberts is also predicting that technology and automation are set to wipe out half of all jobs in the developed world.  If you listen closely out the window, you can almost hear traders shouting "Sell!  Head for the exits!"
 
When you're in the middle of so much panic, when people are stampeding in all directions, it's hard to realize that there is no actual fire in the theater.  Yes, oil prices are down around $30 a barrel, and could go lower, which is bad news for oil companies and oil services concerns-particularly those who have invested in fracking production.  But cheaper energy IS good news for manufacturers and consumers, which is sometimes forgotten in the gloomy forecasts.  Chinese stocks and the Chinese economy are showing more signs of weakness, and there are legitimate concerns about the status of junk bonds-that is, high-yield bonds issued by riskier companies with high debt levels, and many developing nations.  These bonds have stabilized in the past few weeks, but another Fed rate hike could destabilize them all over again, leading to forced selling and investors taking losses in the dicier corners of the bond market.
 
If you can think above the shouting and jostling toward the exits, you might take a moment to wonder about some of these panic triggers.  Are oil prices going to continue going down forever, or are they near a logical bottom?  Is this a time to be selling stocks, or, with prices this low, a better time to be buying by rebalancing your portfolio?  Are China's recent struggles relevant to the health of your portfolio and the value of the stocks you own?
 
And what about the RBS analyst who is yelling "Fire!" in the crowded theater?  A closer look at Mr. Roberts' track record shows that he has been predicting disaster, with some regularity, for the past six years-rather incorrectly, as it turns out.  In June 2010, when the markets were about to embark on a remarkable five year boom, he wrote that "We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy.  Think the unthinkable," he added, ominously.    ("The unthinkable," whatever that meant, never happened.)
 
Again, in July 2012, his analyst report read, in part: "People talk about recovery, but to me we are in a much worse shape than the Great Depression."  Wow!  Wasn't it scary to have lived through, well, a 3.2% economic growth rate in the U.S. the following year?  What Great Depression was he talking about?   Taking his advice in the past would have put you on the sidelines for some of the nicest gains in recent stock market history.  And it's interesting to note that one thing Mr. Roberts did NOT predict was the 2008 market meltdown.
 
Since 1950, the U.S. markets have experienced a decline of between 5% and 10% (the territory we're in already) in 35.5% of all calendar years-which is another way of saying that this recent drawdown is entirely normal.  One in five years (22.6%) have experienced drawdowns of 10-15%, and 17.7% of our last 56 stock market years have seen downturns, at some point in the year, above 20%. 
 
Stocks periodically go on sale because people panic and sell them at just about any price they can get in their rush to the exits, and we are clearly experiencing one of those periods now.  Whether this will be one of those 5-10% years or a 20% year, only time will tell.  But it's worth noting that, in the past, every one of those draw-downs eventually ended with an even greater upturn and markets testing new record highs.  There's no reason this time would be different.
 
Some investors apparently believe this is going to be the first time in market history where a recovery isn't going to happen.  The rest of us can stay in our seats and decline to join the panic.  

Article adapted with permission of financial columnist Bob Veres.
Lastyear2015 Year in Review
2015 year in review
In 2015, we experienced many things-a prelude to a Presidential election, a renewal of terrorist concerns, a trip to Pluto-but in the investment markets, we will look back and yawn.  Despite some ups and downs, particularly in the third quarter of the year, the markets ended pretty much where they began, eking out small gains and losses across the board.
 
Large cap US stocks (as measured by the S&P 500 index) came out positive with a 1.38% gain for the year when we consider dividends from the index. 
 
In our portfolios, we overweight small and value companies because of the data reflecting higher rates of return for these market segments over the long term.  We use this strategy not because it produces higher returns every year, but because of its expected benefits over the long term.  2015 was a year where it did not benefit us.  Small US companies (as measured by the Russell 2000) lost 4.41%.  Value companies also did not fare as well as growth with a 3.83% loss in the Russell 1000 Value index compared to a 5.67% gain in the Russell 1000 Growth index.
 
International investments also contributed to a decline to overall portfolio returns.   The broad-based MSCI EAFE index of companies in developed foreign economies finished the year down 0.81% in dollar terms.  Emerging markets stocks of less developed countries, as represented by the MSCI EAFE EM index, lost 14.92% for the year.
 
Meanwhile, bond investors started the year, as in years past, expecting that 2015 would finally see interest rates rise across the board.  But those increases largely have not yet materialized.  The Barclays US Aggregate Bond index returned 0.55% for the year.  10-year Treasuries currently yield 2.25%. 
 
Among asset classes we consider as diversifiers, real estate was the bright spot for the year.  The Wilshire US REIT index was up 4.23% for the year.  Commodities, on the other hand, had another tough year.  They were down 32.86% as measured by the S&P GSCI index.  Precious metals were also down.  Gold prices were off 10% in 2015, and gold investments actually outperformed silver, copper, platinum and palladium-the latter losing more than 30% in the past 12 months.
 
What's going to happen in 2016?  Of course, nobody knows with any degree of certainty.  There are many reasons for caution that we mentioned above - like oil prices, China, and high-yield bond illiquidity.  In addition, we've finally seen the Federal Reserve Board's first tentative effort to let the short-term fixed income markets find their natural level.  Nobody knows if or when the Fed will raise rates again this year, or what the impact would be, but the fact that it's an election year, and the economy is still not exactly robust, suggests that the central bank's policymakers will proceed very cautiously. 
 
None of this is a traditional recipe for a powerful bull run in 2016, but the truth is, we have no idea what returns will be in the coming year.  We do, however, have confidence that any future bear market will be followed by a subsequent recovery, and eventually (who knows when?) the U.S. and European markets will again be testing and surpassing their previous record highs.
 
Will that happen in the next 12 months?   All we can say is that the markets often punish those who try to outsmart them.  If the market goes down in the coming year, it will mean that we all will be able to buy stocks at cheaper prices in anticipation of the next rise-whenever and however it arrives.

Source of investment returns is Morningstar for the 12 months ending December 31, 2015.  S&P 500 TR USD for the S&P 500.  MSCI EAFE NR USD for developed international markets.  MSCI EM NR USD for emerging markets stock.  Barclays US Agg Bond TR USD for the US Aggregate bond index.  Russell 1000 Growth TR USD for Russell 1000 Growth Index.  Russell 1000 Value TR USD for Russell 1000 Value Index.   S&P GSCI TR USD for S&P GSCI.  Treasury yield source is Bloomberg.com.

TaxTax Provisions Extended
In one of its final actions for calendar year 2015, Congress passed the Consolidated Appropriations Act, 2016.  It addressed a host of popular but temporary tax provisions that had expired at the end of 2014.  The Act made many of these provisions permanent. 

The major provisions addressed are listed below.  Among others, for Texans (and other states without an income tax), we got our sales tax deduction permanently extended.


American Opportunity Tax CreditThe American Opportunity Tax Credit (a modified version of the original Hope Credit) and the credit rules--including maximum credit amount, number of years of education covered, income phaseout ranges, and refundability provisions--are made permanent.
Child tax creditThe lower $3,000 earned income threshold for determining the refundable portion of the tax credit is made permanent (if the credit exceeds tax liability, an amount equal to 15% of earned income over $3,000 may be refunded).
Credit for nonbusiness energy propertyThe credit is extended for two additional years (through 2016); lifetime cap of $500 remains.
Deduction for classroom expenses paid by educatorsThe $250 above-the-line deduction is made permanent--the rules that applied in 2014 are retroactively extended for 2015; starting in 2016, the limit will be indexed for inflation, and qualifying professional development expenses will be considered eligible expenses for purposes of the deduction.
Deduction for qualified higher-education expensesThe above-the-line deduction, worth up to $4,000, is reinstated for 2015 and extended through 2016.
Deduction for state and local general sales taxesIndividuals who itemize deductions on Schedule A of IRS Form 1040 can elect to deduct state and local general sales taxes in lieu of the deduction for state and local income taxes--this is made permanent.
Discharge of qualified personal residence debtThe exclusion from gross income of the discharge of debt associated with a qualified principal residence is reinstated for 2015 and extended through 2016.
Earned income tax creditThe increased credit percentage for families with three or more qualifying children and the increased threshold phaseout range for married couples filing joint returns are made permanent.
Employer-provided mass transit benefitsThe monthly exclusion for employer-provided transit pass and vanpool benefits will be permanently set to the same level as the exclusion for employer-provided parking (applies retroactively to 2015, increasing the exclusion from $130 to $250 monthly).
Mortgage insurance premiumsThe provision allowing premiums paid for qualified mortgage insurance to be treated as deductible qualified residence interest on Schedule A of IRS Form 1040 (subject to phaseout based on income) is extended for two additional years, through 2016.
Qualified charitable distributions (QCDs)The provision allowing individuals age 70½ or older to make qualified charitable distributions (QCDs) from their IRAs, and exclude the distribution from gross income (up to $100,000 in a year), is made permanent.
Qualified conservation contributions of capital gain real propertySpecial rules for qualified conservation contributions of capital gain real property are made permanent; new rules for qualified contributions by certain Alaska Native Corporations are added for years after 2015.

For the business provisions and others extended, visit our website.


Article adapted with permission of Broadridge Forefield Investor Communications.
FAFSAFiling the FAFSA in 2016
College Financial Planning The FAFSA, which stands for Free Application for Federal Student Aid, is the federal government's financial aid application. Though the thought of completing it may inspire a collective groan from parents each year, this form is the prerequisite for many different types of federal and college financial aid, including loans, grants, scholarships, and work-study. So filling it out should be one of the first things on your list if your son or daughter will need some type of financial aid to attend college.

Even if you don't think your child will qualify for aid, you should still consider submitting the FAFSA for a couple of reasons.
  • The first is when you want your child to have some "skin in the game" by taking on a small loan. In this case, filing the FAFSA will make your child eligible for an unsubsidized Stafford Loan each year--up to $5,500 for freshmen, $6,500 for sophomores, and $7,500 for juniors and seniors. Unsubsidized Stafford Loans aren't based on financial need and are available to any student attending college at least half-time.
  • The second situation for which you might file the FAFSA is when you want your child to be considered for college financial aid. Colleges generally require the FAFSA, along with the CSS Profile form, before they'll determine whether your child is eligible for any school-based grants and scholarships.
The FAFSA is available online at fafsa.ed.gov. A new sign-in method (as of May 2015) requires creating an FSA ID, which consists of a username and password. The FSA ID replaces the prior PIN sign-in method and is meant to be more secure.

The FAFSA should be filed as soon as possible after January 1 for both new and returning students because some aid programs operate on a first-come, first-served basis. Practically speaking, many families wait to submit the FAFSA until after they have completed their tax returns, but you don't have to wait. The FAFSA can be submitted with estimated tax numbers and then updated later with final tax numbers by simply adding the final numbers manually or using the government's online IRS Retrieval Tool. Regarding the filing timeline, look for a change on the horizon. Starting with the 2017/2018 school year, families will be able to file the FAFSA as early as October 2016 using their 2015 tax information.


Article adapted with permission of Broadridge Forefield Investor Communications.
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 info@keenerfinancial.com.
 
Sincerely,

 

Jean Keener, CFP®, CRPC®
Keener Financial Planning

Keener Financial Planning provides as-needed, fee-only financial planning and investment management services.

*Source for investment returns is Morningstar as of January 15, 2016.  S&P 500 TR USD for the S&P 500.  MSCI EAFE NR USD for developed international markets.  MSCI EM NR USD for emerging markets stock.  Barclays US Agg Bond TR USD for the US Aggregate bond index.
     
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