Categories for Blog
May 13, 2016 7:43 am
Published by dylan
David Bowie and Prince both had much in common—an international career as talented musicians, performers and actors; and sadly, untimely deaths this year (January and April, respectively). But possibly the most significant thing they didn’t share were wills. While Bowie had an estate plan and a will, Prince reportedly died without one.
We understand that discussing financial matters for some people is difficult—and that contemplating what will happen when you’re gone can be even more unpleasant. However, without proper planning, you stand to lose a significant amount of the value of your estate to state and federal taxes, not to mention legal fees. It’s estimated that Prince’s $300 million estate will pay $120 million—or more—in taxes.
Consider this: without a directive after your death, a judge could award your spendthrift step brother (whom you never liked) an equal share of your hard-earned assets as those awarded your children. Or, your alma mater may not be able to help fund the scholarship that was so important to you.
A comprehensive wealth management plan will give you the power to live the life—and pass on the life—that you want.
Officially Intestate
The legal term for dying without a will is “intestate.” Depending on the situation, it can be a lengthy, difficult process to sort out if you are managing it for a family member or friend—or if they are managing it for you.
To save effort, it’s key to understand what assets are not passed through in a will. These are assets where beneficiary(ies) are assigned or where there is co-ownership, and can include:
-
Life insurance policy proceeds;
-
Retirement plan funds in IRAs, a 401(k) or other retirement plans;
-
Assets held in a living trust;
-
Joint tenancy or community property funds with right of survivorship, such as real estate or bank accounts;
-
Funds or property held in a transfer-on-death account.
States Rule Over the Feds
The federal government has a specific tax percentage they levy on the amount of an estate. But what every state requires for probate and levies for taxes is different.
Generally, spouses, registered domestic partners and blood relatives will inherit under a certain state’s intestate laws; unmarried partners, friends and charities are not eligible to receive an intestate distribution. If there is a surviving spouse, he or she usually receives the largest portion of the estate. And if no relatives can be found, without a will, the state becomes the heir and takes any remaining assets.
In the case of Prince, who was divorced and had no living children, his one full-blooded sibling and five half-blooded siblings will all share in his estate.
Special Considerations
If you have minor children or loved ones with special needs, it’s especially important to have a will and other estate planning instruments in place to care for them. You don’t want to leave important guardianship decisions up to a judge who knows nothing about you, your family nor your wishes.
The Bottom Line
A will for anyone at the minimum is essential. A comprehensive estate and financial plan is even better. Changes in life invariably happen so make sure your plan is up to date. If you don’t have one, talk to us today.
April 28, 2016 8:26 am
Published by dylan
Life After Professional Sports
It’s not unusual to hear about professional athletes losing all the money they made playing their sport only a few years after they retire. Sometimes they spend all their money on expensive homes, cars, jewelry, and clothes.
Other retired pros lose it all as an entrepreneur. Many athletes start businesses after they leave their sport. Others invest in someone else’s business or charity.
They are often flush with cash, surrounded by friends, family and managers, and full of good intentions. Starting a business is part of the American Dream. They seem to have everything in place to make that dream a reality. They are “retired” but young enough to still have another profession, helping others and helping them.
They have a desire to create a successful business and make some money.
Many things can go well along the way—but even more can go wrong. There’s a reason so many businesses fail in their first few years: Lack of planning.
Why Athletes?
Professional athletes have worked hard physically to get to the top of their game. Once they become successful in their sport, they earn large sums of money. This does not automatically prepare them to become successful business owners.
Just as they need a written plan to open their business, they need a written plan to manage their (sudden) wealth.
Marques Ogden played for four NFL teams. At the height of his career he was worth $4 million. He became a real estate developer in 2008. He took courses offered by the NFL to help players after their sports career. He declared bankruptcy in 2013.
Antoine Walker played in the NBA. He made more than $108 million during his professional basketball career. Not only did he spend his new wealth on cars, jewelry and homes, he started a real estate firm. Just two years after retirement, he filed for bankruptcy in 2010.
Starting Off Right
The NFL has programs in place to help their athletes. Not only do they offer classes like those Ogden took for retiring players, they also offer a rookie symposium. This four-day session is designed to teach players how to handle many aspects of their new life. Experts and retired players share advice and give tips.
Hall of famer Aeneas Williams told one group, “Begin with the end in mind.” They are urged to think about setting a plan for their career. There will be many steps along the way where they can lose their footing. The same will happen when they leave the league.
These NFL players have been given help along the way. When they began their sports career and when they retired and started a business. They got advice, so what went wrong? Getting the right assistance can make all the difference.
Planning Is Imperative
Ogden did not plan long term for this business. A comprehensive wealth advisory firm can help business owners create written financial plans. Part of this process is to anticipate possible issues and to solve for the potential gaps in entrepreneurial endeavors.
Ogden didn’t blow his money on cars and houses. He started out with a background in finance. He launched his construction company in 2008. In 2012 he took on a huge project and lost $2 million in 90 days. He tried to save the business with his own savings. It was all over by 2013.
Opening a business is a lot more complicated than making sure you don’t blow your money while you build a career. It goes well beyond living within your means and not spending your paycheck on what might be considered frivolous trappings of fame.
Beginning a business is high risk and care needs to be taken in an overall wealth management plan. It’s important to recognize possible setbacks. It’s also vital to acknowledge when enough is enough and to protect and preserve levels of overall wealth for the longevity of a life-long plan.
Putting a Team Together
Create a written wealth management plan with a financial services team who can give you perspective on achieving your goals and preserving your wealth.
Sure taking risks is part of any overall plan, but keeping the long-term goal of overall preservation is key. Some business owners can go back to a previous profession, but a professional athlete is not going back to the NFL. For these entrepreneurs going backward is not an option.
Just as Williams hopes the rookies will keep their goal in mind of ending on a high note, business owners also need to think about the finish line. The team you put together can help determine your success as an entrepreneur. You’ve worked hard for that nest egg, now put it to work to help you build a future.
April 21, 2016 1:07 pm
Published by dylan
For most people, navigating all the complexities of Social Security can be confusing. Do you wait until you’re at full retirement age (FRA) to take your distributions? Or do you decide to postpone until age 70 to maximize your benefits?
On the other hand, do you file and suspend to allow you or your spouse to collect a larger benefit at a later time? It’s not a decision to be taken lightly. And it needs to be made as soon as April 29, 2016, when the Bipartisan Budget Act of 2015 will close this so-called Social Security loophole.
Married couples with at least one working spouse who has contributed to Social Security through payroll taxes—or those who were married for at least a decade and now divorced—generally choose to exercise the file and suspend option. The maximum amount the spouse will receive is 50% of the working spouse’s primary benefit amount—the monthly income he or she is eligible to receive at FRA.
Here’s How it Works
With file and suspend, the older spouse claims benefits at the current FRA of 66 and then immediately suspends his or her benefits. Then the younger spouse, who must be above age 62, can claim spousal benefits to defer his or her own benefits until FRA.
But wait…there’s more:
-
When the older spouse is 70, he or she can claim Social Security benefits that will have grown to the maximum amount, and the younger spouse can collect the larger of his or her own benefit or spousal benefit.
-
The advantage is that the spouse who suspends earns 8% each year as an additional Social Security benefit credit.
-
The downside is that if you file for a spousal benefit before your FRA, the Social Security Administration (SSA) can reduce your benefit by up to 30 percent, depending on how early you file a claim.
File and Suspend Example: Jim and Jane Banks
Let’s take a hypothetical situation of spouses Jane and Jim Banks. Jane worked before taking time off to raise their three kids and then re-entered the workforce on a part-time basis afterward. So Jane will receive at age 66 approximately $800 a month in Social Security benefits.
Jim, who has been working longer and has had a record of higher earnings, projects to receive $2,000 a month in Social Security benefits if he suspends and waits until age 70. According to SSA calculations, half of his benefit would be $1,000 a month in spousal distributions.
So if Jane claims a spousal benefit, she will receive $1,000 per month in income, based on Jim’s Social Security contributions. Had she filed based upon her own earning records she would have received only $800 per month.
Is File and Suspend Right for You?
It’s a complex decision and one that—like most financial planning strategies—is dependent upon your own situation and goals. Are both spouses still working, or have other sources of income? Or will they need to depend on receiving Social Security benefits earlier than their FRA?
The new law will only affect you if you file and suspend on or after April 30, 2016. If you’ve chosen to voluntarily suspend before that date, the new law will not affect you. Additionally, if you suspend before April 30, if your spouse or children become entitled to benefits, they will not be impacted by the new rules and will continue to receive their Social Security benefits.
Some people recommend acting right away, while others think it’s wise to take a wait-and-see approach.
At JJ Burns & Company, part of our planning process is to help you understand how to best maximize your Social Security options depending on your situation. Contact us today to see if the file and suspend strategy is right for you.
March 23, 2016 8:50 am
Published by dylan
For several years, the beloved PBS British drama series, Downton Abbey, followed the lives of the Crawley family and its servants in their classic Georgian country house. The series began with the 1912 sinking of the Titanic, which leaves Downton Abbey's future in jeopardy since the presumptive heirs of Robert Crawley, Earl of Grantham, perished in the accident. In the ensuing decade-plus since the initial tragedy, the Crawleys—as well as their household servants—experienced some key financial milestones.
Here’s what we can learn about finances from Downton Abbey:
-
Economies ebb and flow. The main source of income on the Downton Abbey estate was agriculture. Over a 13-year period, the estate saw declining revenues, while experiencing increasing employee costs. As a result, they downsized the business and their staff.
-
The take-away: Don’t put your head in the sand. Stay on top of changing economies, work with your financial team and take action. If that means re-adjusting your asset allocations or moving from a very large home where you really only live in a few rooms to something more realistic, then explore your options.
-
Diversify, diversify, diversify. After a decade, the Crawleys moved from the grain business into pig farming and then into real estate development because that’s where the opportunities were. The same philosophy still holds true in 2016. Don’t be afraid to diversify your investments.
-
The take away: While you may have had success in the past investing in one way, there are always other options—equally successful—that you may not be aware of. Talk to your financial team about other strategies to see if they are appropriate for your situation.
-
Succession planning is key. At Downtown Abbey, the long-term, day-to-day management of the estate took its toll on Lord Grantham in the form of serious health issues. His daughter, Lady Mary and son-in-law Tom Branson, decided to take over the estate to give Lord Grantham a break.
-
The take away: No matter what your personal situation is, you need to have succession and estate plans in place. If you run a business, who will step in when you retire, become incapacitated or die? Who in your family will inherit what? How will your assets be distributed? No one likes to think about these things, but they are necessary. A will, trust and various estate planning documents can help ensure that the hard work you’ve done to create a solid financial foundation remains secure.
-
Do your due diligence. Not all financial advisors are created equal. On Downton Abbey, Mrs. Patmore, the cook, asks Mr. Carson, the butler, for financial advice. He doesn’t have any experience in the area, but to save face he relays some advice about real estate development that he overheard Lord Grantham give. Mrs. Patmore decides to ignore Mr. Carson’s advice and go along with her original plan to open a bed and breakfast.
-
The take away: Always make sure any advisor you use is qualified to give you financial advice. Carefully consider his or her recommendations, years of experience and understand the rationale behind the strategies. Never be afraid to ask questions or to walk away. No matter what your financial acumen, your advisor should be able to communicate to you in a straightforward, informative manner.
-
Manage unrealistic expectations. In Downton Abbey, the butler Carson marries Mrs. Hughes, the head housekeeper. They both work long hours, yet he still expects her to have dinner on the table every night at six. Who can keep up with those expectations?
-
The take away: This is on par with doing due diligence. By understanding the investment process, you can learn how to balance your portfolio between risk and reward. The benefit of setting expectations upfront is that you can make sure that you are on track to achieving your financial goals.
“Adapt and survive.” That seems to have been the motto of the characters in Downton Abbey. Through wars, deaths, illnesses, behind-the-scenes scheming, and financial ups and downs, everyone adjusted to their situations. Some were successful; others were not.
When it comes to your own portfolio, being informed, flexible and realistic seem to be the keys to surviving any economic situation. Take these lessons from Downton Abbey and then talk to your wealth management team about how you can apply them to your portfolio.
January 14, 2016 10:12 am
Published by dylan
What lies ahead for the global economy in 2016?
As we enter the new year, the outlook for the global economy remains uncertain with a rise in interest rates and decelerating growth in China. How will key economic trends in 2016 affect your portfolio and business?
Join JJ Burns & Company on Thursday, January 21st at 1:00 pm EST for a free webinar to discuss the Q4 2015 Economic & Market Outlook. During this live presentation, CEO JJ Burns, Managing Director Anthony LaGiglia, and Chief Investment Officer Steven Mula will review our outlook for the coming year.
Bonus: All registrants will receive a link to the on-demand version of the webinar following its completion.
In this 30-minute webinar we'll talk about:
-
The 2015 markets and continuing U.S. recovery
-
Key economic trends to watch for in 2016
-
How investor behavior impacts long-term investment results
Plus we’ll also answer questions from attendees.
Don't miss this informative event! Reserve your spot today.
[Update: For those who couldn't attend, you can watch the webinar video here.]
December 28, 2015 7:02 am
Published by dylan
You’d like to make a major gift, and want to maximize the donation to help both you and the charitable organization. Maybe you own a piece of artwork or an item that would complement a collection. There are ways to make a donation that still allow you to enjoy the piece yourself.
Maybe you want to build or maintain a lasting legacy centered around your family values. You can involve your children and create a generational plan that will outlive you. When considering donations, there may be some options you might not have considered for your planned giving. Your assets can help more than charitable organizations and your taxes— they may also help your heirs now or later.
Donor-Advised Fund
One of the fastest-growing vehicles for donating to philanthropies is the donor-advised fund or DAF. This is an alternative to a foundation. Typically, you make contributions with appreciated property, like stock shares and receive an immediate tax benefit. You avoid capital gains tax and get a charitable deduction for the value. Over time, you recommend grants from the DAF account.
You can make contributions to the account as often as you like. The gifts to the donor-advised fund can be invested and they grow tax-free while they are in the DAF.
DAFs can be set up and personalized to reflect your interests and values. You can choose the name of your DAF to reflect your intention, such as “The Jones Family Fund for The Learning Disabled.” You can also choose a name that keeps you anonymous.
Want to make it a multigenerational family affair? Your children or family members can be involved as long as they are at least 18. Children or successors of your DAF may learn the importance of getting involved in a charity as well as the virtues of gratitude and humility.
Charity Lead Annuity Trust – “CLAT”
A charitable lead annuity trust or CLAT can give your charity regular donations and provide assets to your heirs. By shifting investment assets into a CLAT, a Trustee whom you choose, can make a series of annuity payments over a number of years to one or more charities. At the end of a fixed time period the remaining assets are distributed to your heirs. The amount you deposit into a CLAT could provide you a significant tax deduction in the current tax year.
An example could be a 20-year CLAT set up from a large stock distribution or business buy-out. You want the annuity payments to benefit a cancer clinic over the next twenty years, after which your heirs receive the remaining assets. The benefits you receive are a significant present value tax deduction on the day the CLAT is funded, minimizing the size of your current estate and facilitating the passage of assets to the next generation.
In times of lower interest rates, CLATs are more popular because the present-value tax benefits tend to be greater. Keep in mind there is flexibility and a fair amount of customization to fit your needs in charitable trust planning.
Tangible Property
An ever-popular donation is tangible property. But don’t think there’s only one way to donate, and that the donation ends when you deliver it to the organization.
By working with your financial team and the charity, you can make a mutually-beneficial arrangement. One example could be a piece of artwork, say a painting or sculpture. By working together, you could make the donation but still get to display the piece on certain dates each year at your home.
This “fractional interest” in the property may accommodate your schedule. The time frame can be established in increments. Let’s say you contribute a 75 percent fractional interest in your fully-restored classic luxury car to a motor museum. You could retain custody of the vehicle three months of the year, while they display it for nine months.
Evaluate the Charities
It’s a good idea to do some research when choosing a charity for your donation. Making a site visit to the location can give you a better understanding of their mission. Remember you can direct or restrict your donation to any part of the charity you feel it is important to help. You should also speak with employees, administrators, and other donors. Don’t be afraid to ask questions or get involved.
You can also get an outside view of the charity through a growing number of online organizations. They track a variety of non-profit information, including their IRS filings, revenue and expense data, boards of directors, balance sheets, and annual reports.
Some of the most popular charitable information services are GuideStar.org, the BBB Wise Giving Alliance (Give.org), and CharityNavigator.org. Some of these online guides supply access to data, while others rank charities according to standards listed by each group.
Discuss Your Options
Don’t get frustrated thinking there are limited options for planned giving. There are many ways to make a lasting major gift to the charities of your choice. These donations can help those organizations while also helping you and your heirs.
As with any estate planning techniques mentioned above, it is vital to consult with your wealth management team inclusive of a qualified estate/trust attorney and an accountant.
Contact us to see how you can reach your charitable goals while also receiving tax benefits and creating a lasting legacy.
December 24, 2015 9:22 am
Published by dylan
Famous miser Ebenezer Scrooge was introduced to readers in Dickens’ 1834 classic tale of redemption that takes place on Christmas Eve. Scrooge has lived a life focused on growing his financial wealth with little regard for life outside his counting house. In one remarkable evening, on a Christmas Eve seven years after the death of his partner Jacob Marley, he is visited by Marley’s Ghost and three other Spirits. Their visits offer Scrooge an opportunity to objectively look at himself and others from an abstract point of view, and revisit his past actions and beliefs. The now-famous result is well known, but we might ask, how does this apply to investors?
Seven years ago this very day, in the throes of the Financial Crisis, here’s where the markets sat compared to where they are today:
The global economy in 2008 was mired in slumping markets, broken banking systems, panic selling in every market segment and plagued with a lack of financial controls. More pain and dislocation in the job and securities markets were waiting for investors in 2009 and beyond. It was a very difficult period to navigate, from both an emotional and analytical perspective.
Now let’s fast forward to 2015. Many investors are disappointed by market returns this year. There are no global tailwinds at play (other than low oil prices), and different regions and countries are executing different monetary and fiscal policies. We are truly in a state of global flux. But we also think that as U.S. investors take stock of the year, there is certainly more to be thankful for in 2015 than during the Crisis. We don’t mean to imply that everything related to the U.S. markets and economy has been rosy during the recovery, but the U.S. is certainly in a better place than many other areas of the world. We can also confidently predict that we don’t know what will happen next year or the year after, but at this writing, we expect continued modest recovery in global growth and in modest returns for stocks and bonds.
We can also use Dickens’ three ‘spirits’ to help set our behavior and our expectations going forward:
PAST
-
DON’T focus on GREED (at any price) and FEAR (panic selling) due to lack of planning
-
DO focus on long-term results that are right for you, NOT the short term noise
PRESENT
-
DON’T tinker and chase returns based on “feelings” and avoid short term opportunism
-
DO be aware and rebalance to your correct allocation as your plan calls for
FUTURE
-
DON’T ignore the lessons of the past and what the real data says
-
DO focus on what can be controlled – allocations, investments and EMOTIONS
Scrooge’s transformation occurred on many levels; most of us have a lot to be thankful for, too, and we hope that Dickens’ message of charity and forbearance resonates at this time of year.
We offer best wishes for a peaceful and grateful holiday, and a Happy New Year!
October 27, 2015 6:26 am
Published by dylan
You’ve worked hard to build your business to where it is today. Whether you are selling your business to move on to other things, or it’s simply time, it’s important to think ahead. As with most things in life, a good plan is very important to have in place.
Strategically look at the sale of your business. Even if you’re not ready to sell just yet, you should be building it with the intention of selling or the possibility of creating a strategic merger. Whether you sell or merge, you want your organization to look appealing to any potential growth opportunity. Many owners don’t prepare in advance for their business to be sold so they miss the opportunity to leverage the sale for themselves, their family, and their employees.
As part of your planning process, consider these five common mistakes many business owners make – so you can avoid them.
Mistake #1. Not planning with the end in mind. It can be hard to think beyond the day-to-day running of your business. Making the decision to sell may happen one day, or over time, but having your plan ready will be important either way. Think about what you can do to fetch the highest value for your business and “who” would likely be a purchaser. Ask yourself these questions:
-
What is the value of your brand in the market place?
-
What is the tenure of the people on your executive team
-
How vested is your team to stay on after you’ve sold?
-
What are the most important intangibles of your business that are difficult to replace making it appealing for the purchaser?
Remember, your business is, well, business. As hard is it may seem, you need to keep that in mind. It may feel like your child, but there comes a time when you let the child grow up and move on. Selling your business can give you a means to fulfill other goals you may have on your “bucket list”, whether it’s seed money to start something new, the opportunity to concentrate on something else, or living the life you only dreamed of.
Mistake #2. Not using the right advisors or accessing the right guidance. Selling your business is an important step in your life. Make sure you get good advice as you make your plan.
Get unbiased advice from your financial, accounting and legal advisers. A solid team often yields significant results. Clients often tell us that they did their due diligence when they started their business, but did not do the same in choosing the wealth planning team to plan and manage the life they want to live.
Try to avoid “emotional” biased advice. Because you’ve been strategic, you have the opportunity to weigh opinions and options and can time the sale, prepare your documents, and consider alternatives.
Your team of advisers can help you prepare a strategic, thoughtful financial plan for your business so it thrives after the sale, just as it has thrived under your leadership. Continued performance may be part of the installment sale plan.
Mistake #3. Not knowing what happens after the sale. You’ve made it! The sale has gone through. There will be that first day you do not go to the office. What will you do?
You may have reached this point in your life through a variety of paths. You may have more than one business or want to start a new venture. Maybe your health has changed. It might be time to retire. No matter the reason for changing ownership, after you sell, your life will be different. Be prepared for this change.
How you fulfill your dreams may take many different forms. If you plan to volunteer, check out some of the organizations that interest you to see how you can help. Many people travel. Research the destinations you’d like to visit. Maybe you’d like to work part time for a business or cause that is dear to you. Evaluate those opportunities as well.
Practice what an average day will look like in your new life. Create an agenda and live by it. Make sure you write it down! Our clients have found the gaps in their lives and filled it with many more things they were never able to complete when they had the responsibility of running their business. Don’t let the new time on your hands come as a surprise to you or your family.
Mistake #4. Not thinking about financial implications. Time will be exhausted. Will your finances too?
Just as you have an asset allocation for your investment portfolio, you will also want one for your wealth. All your capital should not be placed in the business. Create “diversifiers” for your money. For instance, you can consider placing assets in real estate and your portfolio.
If you plan to retire when you sell your business you will no longer pay for expenses through the business. Expenses that were once part of your business are now your own personal expenses. You will have to think twice before going to the office supply store, buying the extra service package for your cell phone, or getting those box seats to a show/game. These and other expenses will need to be provided for by your portfolio or other sources of income.
Whether you still own another business or have retired, your taxes will also be impacted. Talk with your financial and tax advisers to discuss the possible tax implications of the sale. This is important when setting up your plan ahead of time.
Another change could be to your income. Hopefully business was good and the sale left you sitting pretty for this next chapter. But you may have less income now. Either way, think about making the most of your sale so it lasts as long as possible to give you the lifestyle you want.
Mistake #5. Not considering alternative approaches to selling your business. Just because you want to sell your business doesn’t mean you have to sell it to some stranger. You could make it part of your legacy planning. When creating your succession plan, you could include the business as part of an inheritance. This way, if you were to die before you retire or sell it yourself, you could still keep it in your family or with key owners.
You can also consider an alternative that keeps you working in the business but lets the ownership get divided. In this case, you could implement an employee stock ownership plan (ESOP). ESOPs provide employees with an ownership interest in the company, giving workers stock ownership, often at no up-front cost to the employees.
Evaluate options and start your plan
You may hope to stay in your business for years or you may be looking at potential buyers or a merger soon. Either way, creating a plan ahead of time can help you make your business attractive when the time comes. By seeking professional guidance and doing some research, you can make these positive changes in your business – and your life – less stressful and more beneficial to all involved.
September 29, 2015 11:05 am
Published by dylan
What does the recent market correction say about where the economy is headed?
U.S. stocks experienced sharp sell-offs in the third quarter of 2015, stoked by global fears about China’s slowdown and falling commodity prices. How will this volatility impact your portfolio?
Join JJ Burns & Company on Wednesday, October 7th at 1:00 pm EST for a free webinar to discuss the Q3 2015 Economic & Market Outlook. During this live presentation, CEO JJ Burns, Managing Director Anthony LaGiglia, and Chief Investment Officer Steven Mula will review our outlook for today’s markets.
Bonus: All registrants will receive a link to the on-demand version of the webinar following its completion.
In this 30-minute webinar we'll talk about:
-
The recent market volatility and what might lie ahead
-
China’s slowdown and declining energy prices
-
When the Federal Reserve might raise interest rates
Plus we’ll also answer questions from attendees.
Don't miss this informative event! Reserve your spot today.
[Update: For those who couldn't attend, you can watch the webinar video here.]
September 16, 2015 7:09 am
Published by dylan
World stock prices have been volatile lately, and China’s crashing stock market has been in the front seat of the roller coaster. Many investors are worried that China’s economy is slowing down significantly faster than reported, and that a hard landing in the world’s second-largest economy will pull the global economy into recession with it.
For years, China has been the main economic-growth engine for many developed and emerging markets around the world. Latin America, most of Asia, parts of Africa and beyond have supplied the raw materials needed to fuel the economic boom in China. Mega-cap multi-national companies from developed economies have also prospered by tapping into China’s industrial revolution. Despite China’s impressive economic growth over the years and its impact on countries around the world, investing in China has been unconventional and guarded.
With the support of the central government, local investors swiftly bid the market up this year. The Shanghai market was up nearly 60% during the first six months of 2015 alone. Yet, the explosive growth had almost no impact on U.S. stocks. The S&P 500 traded sideways during the period. Moreover, when the Shanghai market tanked in July, U.S. stocks continued to be flat. The chart below is a terrific pictorial on what a classic bubble looks like; happily, it didn’t involve U.S. stocks.
Source: CNNMoney, For Informational Purposes Only
U.S. stocks didn’t react to China’s news and markets until recently. We believe the recent correlation to China’s stock market is temporary, and that U.S. investors have become more sensitive to other risks as we approach a key Federal Reserve meeting on interest rates. The Fed has indicated that it plans to raise rates at some point this year, and the September meeting has been targeted by many analysts as the date of the first increase in over a decade.
The potential of raising interest rates in the U.S., while China is retrenching and pulling many emerging markets down with it, has become a reason to take profits for many investors. However, the recent volatility has also spurred a wave of new money entering the markets. U.S. stocks have avoided a correction (a drop of at least 10%) since 2011. A four-year run without a correction is unusual for the U.S., and there seems to be pent up demand on the sidelines that has been waiting for entry points.
The Chinese Transition Redux
The points below are a few basic elements to summarize the ongoing dialogue we will see about China over the coming year. The media will likely focus on these issues:
-
Chinese economy moving from export based economy to a balanced economy – “a consumer driven economy.”
-
The transitional changes will be challenging and investments in China will be volatile.
-
China’s attempts to stabilize markets have not been as effective as hoped.
-
Reduced appetite for commodities and thus lower worldwide inflation is likely.
The U.S. Federal Reserve may be on hold for a while longer. Low inflation is good, but deflation is not. If the Fed raises rates in September, it could be taking a big risk of tipping prices into a deflationary zone and strengthening the U.S. dollar. If the Fed leaves interest rates unchanged, Fed members will have more time to analyze data and let the economy further develop some employment and price trends.
We know volatility can be unsettling; regardless, our long-term outlook is still positive. We believe investors who have sufficient diversification and flexibility in their portfolios should be able to successfully navigate these choppy waters. To see if your portfolio is properly balanced based on your long-term goals, contact our team to assess your needs. Now is the time to review your situation and make adjustments accordingly to help mitigate your downside risks.
August 19, 2015 12:40 pm
Published by dylan
Everyone remembers the Financial Crisis. The passage of time makes it seem like a bad dream now, but its lessons should still resonate with all of us. Since the markets and the economy have substantially recovered from this terrible time, we’ve shifted our focus to following U.S. stocks for the past few years, and this shift has lulled many investors into complacency about double-digit returns.
We focus on the S&P 500 Index because it is a very popular market barometer. However, it is a benchmark for ONLY U.S. stocks, which are just one component of a properly diversified portfolio. The S&P 500 should not be the sole index that we follow. Non-U.S. stocks, bonds and real estate are a few of the asset classes we invest in, and they have decidedly different characteristics and performance compared to the S&P 500. That said, what’s ahead for prospective returns for the S&P 500?
The S&P 500 has grown an average of 16.24% per year for the past 5 years, according to Morningstar data (through 7/31/2015, including dividends). At that rate, the S&P is doubling every 4.4 years. That’s unusually fast. Since 1926, the S&P 500 has doubled every 7.1 years, with an average return of about 10.09% per year (including dividends but not adjusted for inflation). It’s unlikely that an investor has his/her entire portfolio invested in an S&P 500-like investment, but it is a good proxy for what the large-cap sleeve of a diversified portfolio might have done.
At this point in the recovery, a 16% annual growth rate is most likely not sustainable for the S&P 500 index, but many investors are now expecting at least that. Some are also thinking they should be able to beat the index regularly even if it’s growing at 15%. This expectation can produce complacency or excessive risk-taking, more commonly called greed. Both mindsets typically lead to disappointment and costly lessons.
We firmly believe that investor behavior, not analysis, is what drives markets. Yes, short-term decisions are based on some data review, but look at the recent market volatility around earnings releases. We’ve seen some sharp sell-offs in individual U.S. stocks because they didn’t meet already lowered expectations for quarterly earnings. Markets are being driven by bad news and fear. In this uncertain environment with so much going on in the global financial world, we urge everyone to remember what happened in 2008-09 and prepare for more realistic returns in the years ahead, including some potential down years. As a refresher, here’s a brief market review ‘by the numbers’:
-
-53%: That’s the amount the S&P 500 declined during the heart of the crisis. It’s measured by the drop in prices (without dividends) in the index value from its high on May 19, 2008 to its low on March 9, 2009. It was one of the worst declines in market history.
-
3.2 years: Based on the S&P price index, that’s how long it took to recover from that gut-wrenching drop in value. The S&P price index exceeded its pre-crash high on May 12, 2012.
-
+211%: The growth in prices from the low to the end of July 2015. If we include reinvested dividends, the return jumps to +256%. On an annualized basis, the S&P 500 grew at a 19.42% rate for prices, and 21.96% with dividends. That’s a very strong bull.
To put all this in perspective, here’s a brief table with S&P 500 returns across three different periods:
We’re happy U.S. stocks have done so well over the past few years, but we need to remember that stocks don’t just go straight up. Without the periodic ups and downs in the market, prices and values would be meaningless. Let’s add a little more perspective and review the types of declines the S&P 500 has had since the end of World War II.
-
There have been 75 declines in the 5%-10% range since 12/31/1945. That’s an average of about one per year since 1946. These types of declines are common and typically speed bumps in the market.
-
There have been 25 declines in the 10%-20% range, or about one every 2.75 years. These declines are more serious, but manageable for investors who are prepared and appropriately positioned for long-term targets.
-
There have been 8 declines in the 20%-40% range and 3 declines over 40%. These big drops mean that you shouldn’t be surprised to see a decline of at least 20% in the S&P 500 every 6.27 years. Realistically, you should be prepared for a 30% drop in the S&P at some point as a long-term investor.
It shouldn’t be a surprise that the U.S. equity market is volatile and sometimes drops in value. The good news is long-term investors have recovered from most of these declines in a relatively short period of time. The 5%-10% declines took an average of just one month to recover; 10%-20% declines took just 3 months to recover; 20%-40% declines took a little more than a year to recover, and 40%+ declines needed almost 5 years to recover. The key concern we have is that investors might be getting a little ‘fat and happy.’ Recent returns have promoted this mindset and are skewing decisions by causing people to don rose-colored glasses. At this point, assuming that this level of returns will continue, or that ‘taking risk’ and investing in the market now will provide immediate growth, is a dangerous fallacy.
At JJ Burns & Company, we believe that a well-managed portfolio mitigates risk while also recognizing that risk and volatility are not synonymous. A single index is NOT an appropriate portfolio benchmark; your long-term goals are, and one year is a small time period in your investing life. Properly managed portfolios are diversified and help clients avoid behavioral-finance traps that have been proven to produce unappealing returns.
If you’re concerned about risk in your portfolio, feel free to schedule an appointment with our team. Investors who review their long-term goals now and make adjustments for increasing volatility are more likely to reach their benchmarks and sleep better at night.
Unless otherwise stated, performance numbers refer to indexes, which cannot be invested in directly and have no fees or trading expenses associated with them. All index data provided by Morningstar, Inc. S&P data provided by Standard & Poor’s Index Services Group. © Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio.
Past performance is no guarantee of future results. This information is provided for educational purposes only and should not be considered investment advice or a solicitation to buy or sell securities. Investing risks include loss of principal and fluctuating value. Small cap securities are subject to greater volatility than those in other asset categories. International investing involves special risks such as currency fluctuation and political instability. Investing in emerging markets may accentuate these risks. Sector-specific investments can also increase these risks.
July 29, 2015 9:58 am
Published by dylan
We’ve all heard of the celebrity divorces—and payouts. Remember Tiger Woods’ massive divorce settlement from Elin Nordegren that was reportedly between $200 to $500 million dollars? Years ago, Amy Irving negotiated her prenup with director Steven Spielberg and also walked away with a substantial sum.
Over many years of experience, we’ve found that prenuptials have been a positive planning vehicle to help create a happy and healthy marriage.
A Prenup Makes All the Difference
You don’t have to be a celebrity, athlete or a business mogul to benefit from the financial protections of a prenup. They’re recommended for everyone.
If you’re like most people, you’ve worked hard to save for retirement, invest wisely and perhaps own a property or two. When you think about it collectively, your assets can be worth quite a bit. And you also may not want to take on your spouse’s existing debts or other financial issues if your marriage dissolves. This is where a prenup can help protect your assets.
Now, if you live in any of the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), if you should divorce, you will be required to divide equally all the assets that you acquired during the marriage. In non-community property states, a judge will decide how to divide the property equitably.
Protecting Your Finances
A prenuptial agreement, where properly negotiated, can protect you:
-
If you have greater assets than your spouse. A prenuptial agreement can protect your savings and investments in case of divorce. Many people may have accumulated retirement or education funds, or life insurance policies before marriage. They may also independently own property or have an inheritance that they wish to keep intact. A prenup can help give you peace of mind that these funds stay where you have intended.
-
If you are less affluent than your spouse. Prenups are not just for the wealthy. If you happen to have a smaller portfolio than your potential spouse, then you will want to ensure that you are financially protected in case of divorce. The same applies if one spouse plans to stay at home and raise any children. This time out of the workforce impacts the spouse’s earning ability and Social Security contributions for several years. A prenup can compensate the stay-at-home spouse for lost earnings.
-
If you are remarrying. If you have children from a previous marriage, you may have child support payments, college funding, a home, business or other obligations that you wish to keep within your “first” family. You may also want to include your new spouse and any children in your wishes. Like a will, a prenup can help ensure that you are able to provide for your families in the manner you intend.
-
If your potential spouse has a lot of debt. Marriage merges many financial obligations. So if you do not want to be responsible for your spouse’s student loans, credit card or car loan debt if your marriage should end, then a prenuptial agreement can help protect your individual assets.
-
If you are a business owner. Your business may be a significant asset. Without a prenuptial agreement, if your marriage ends, your spouse may end up owning a part of the business. If you have business partners, they may not be too pleased to have the ex as part of the deal. A prenup can ensure that your spouse stays out of the business equation.
What a Prenuptial Agreement Can’t Do
While prenuptial agreements are very useful for financial planning, they cannot be used to resolve general divorce issues such as:
-
Determining child support and custodial arrangements.
-
Determining who has the right to live or sell the marital home.
Helping You Navigate the Financial Waters
Getting married—or remarried—is an exciting, happy time. We want to help take the financial stress out of the equation. Some may not see a prenup as the most romantic step toward their future union, however, it can be a useful tool to protect everyone.
Contact us to learn more about how we can advise you with a range of financial planning situations and help you plan for a new life together.
