Notes from Sandy
LA Times Money Makeover
I just completed another Money Makeover for the LA Times and it was published on Sunday, April 3. This was not a person drowning in debt, but instead was a 4th grade teacher who owns five properties with no mortgages, and has 1.6 million in net worth by the age of 44. I would call David an extreme saver who is consumed with amassing his fortune and retiring by the age of 50 or 55. He will not join friends or family for a meal out in a restaurant. Instead, he will eat off the dollar menu at a fast food restaurant prior to dinner and then join his friends and order an iced tea. He will never go to the movies; he sees no reason to spend the money. He bought his five condos for cash and really wants to buy 10 more if prices continue to decline. While I would like to see more balance in his spending and saving, it was refreshing to find a makeover client with no debt. He certainly is an example of being able to cut all excess out of his life to achieve his goals. I would applaud clients cutting back in some areas until all credit card debt is gone and their saving for retirement is more secure. I do however, want clients to have more balance in their life and I did say there was more to life than money. So, instead of putting your next vacation or large purchase on a credit card, is there an area in your expenses that you can cut back on and save the money first?
“Our life is not determined by what happens to us but by how we react to what happens; not by what life brings us, but by the attitude we bring to life. A positive attitude causes a change reaction of positive thoughts, events and outcomes. It is a catalyst, a spark that creates extraordinary results." Anonymous
My heart aches over the horrible disaster in Japan following the earthquake and tsunami. While only 4% of Japan was affected by the damage, the area did account for 5-6% of their GDP. The radioactive water leaking into the ocean may bring a new round of problems to the area, the sea life and hinder more efforts in the area until the leaks can be stopped. While the stock market did sell off on the news, it has rebounded to higher levels than before the quake. We are closely monitoring the progress of the area and any impact it may have on our stocks or mutual fund holdings.
“Optimism is the one quality more associated with success and happiness than any other.” Brian Tracy
Summer is around the corner
Aside from my normal local triathlons and ocean swim races, I will be returning to Santa Rosa to do the Aquabike race in July. Swimming 1.2 miles and biking 56 miles through the winding vineyards and hills somehow seems normal now. I will be riding around the Palos Verdes Peninsula on the Diabetes Tour Ride for a Cure on May 1. I look forward to hearing about your vacation and summer trips when I see you.
Notes from Carol:
Inflation – the next bubble?
Over the past 85 years the average annualized inflation rate has been 3%. The last few years have seen a lower than average inflation rate; 1.5% for 2010. Even though we are all paying more for gas and groceries, the Fed isn’t overly concerned about inflation – just yet. But there will be increased pressure for the Fed to tighten monetary policy. Our goal is to generate enough growth in your portfolios to stay ahead of the increases in the cost of living. This is done by maintaining diversification in your portfolio holdings. Stocks and equity mutual funds have a distinct advantage over other asset classes in producing long-term growth. That said it is also very important to hold bonds in the portfolio. Bonds offer greater return potential than cash and greater stability than stocks, which is important if you have a short-term financial goal. Commodity exposure is also a way to counter inflation. We use mutual funds and/or ETFs to expose your portfolio to commodities.
New ADV Part II requirements
One of the new regulations in the Dodd-Frank Wall Street Reform Act passed last year required all Registered Investment Advisors to update their brochure disclosure form (ADV part 2). This was a 2 page general disclosure form that you were given and signed when you became clients. The new form is required to be written in “plain English” so that the client (consumer) understands how the advisor operates and is compensated. While the way we operate has not changed, the new disclosure form is now 15 pages. We will be sending you this via email or mail within the next 2 months.
Notes from Erin:
With Japan’s earthquake fresh in our minds, we should be motivated to think about the impact an earthquake could have on our individual financial situations. We often get asked if ‘earthquake insurance is worth it?’ It’s not a clear cut answer. As a general rule of thumb if you can’t afford the premiums, I would advise against stretching your budget if you have very little equity, assets, and or inexpensive belongings. However, if you are in the reverse position, earthquake insurance might make sense. Currently, in California there are two types of insurance providers. The main difference is in the scope of the coverage offered and the size of assets an insurer has saved for possible claims. Coverage obtained through a private insurer backed by the California Earthquake Authority (CEA) offers lower cost lower coverage insurance but their ability to cover substantial claims is great. Companies not backed by the CEA tend to offer policies with less exclusions and higher coverage amounts; however you run the risk that your insurer might not be able to pay your entire claim in the event losses exceed their reserves. It’s important when shopping for insurance to have the agent go through the entire policy with you and understand exactly what you are getting for your money. There is a wealth of information to be found on www.earthquakeauthority.com including free online quotes for earthquake coverage. We recommended, at a minimum, reviewing quotes and policies from one CEA insurer and one independent insurer.
Happy New Year and Welcome to 2011
Notes from Sandy
“I’ve got a feeling” (Black Eyed Peas) this is going to be a good year. 2010 turned out to be a good year for returns in the markets but it certainly had the ups and downs of an amusement ride, from start to finish. I began New Year’s Day with a Polar Bear Plunge in the Huntington Beach Ocean. I kept yelling “my feet hurt!” until they went numb. It was a crazy, exhilarating and a bold way to start the New Year!
In the final two weeks of 2010, President Obama and former President Clinton worked with the Senate and Congress to get the Bush tax cuts extended for two more years. We were all on hold for trading until we knew for sure the income tax rate brackets would not be raised in 2011. I was very busy trading in the portfolios and accounts after we had a better vision of the next two years, in terms of capital gains taxes and income tax. Estate taxes were also clarified and a choice was given to those families that lost a family member in 2010 with regard to step up in basis.
Republicans in the house have vowed to repeal the Obama health care overhaul and bring it to vote before the State of the Union to be held later this month. Another item under attack is the proposed limits on emissions of greenhouse gases from oil refineries and power plants. Even as the federal government plan is under pressure, California has vowed to uphold it. Jerry Brown is our new governor and will try to guide California away from the brink of budget crisis.
I still believe the key to the recovery is in job creation and lowering the unemployment problem facing all states. I think real estate will still have problems and I have seen values soften and fall in the past month. Mortgage interest rates rose in November and December and that will be enough to choke any recovery in the housing market for the short term.
Set new goals for 2011! Set them high and dream big. Chase your dreams, and live your life bold.
Life is too short to wake up with regrets. ♥So love the people who treat you right. ♥ Forget about the ones who don't. Believe everything happens for a reason. If you get a second chance, grab it with both hands. If it changes your life, let it. Nobody said life would be easy, they just promised it would be worth it. Catherine Yen
Notes from Carol:
How the bond and equity markets fared in 2010
It was a solid middle-of-the-road performance for the stock market. Barclays U.S. Aggregate Bond Index closed up 6.24%. The S&P 500 stock index closed up 12.8% for the year and the Dow Jones industrial average closed up 11%. The majority of the gains came in the last quarter of the year. The stock market is still well short of its pre-crisis high: The S&P 500 would need to rise another 24%. The threat of a double dip recession appears to have passed. The wild swings in the market have calmed down. The VIX index, which measures investors’ expectations for future volatility in stock prices, reached its lowest level in 3 years in December.
You will find an additional report in your year-end report package. It is the Portfolio Performance Summary. It shows you the total amount your portfolio gained in dollars and percent for 2010.
IRA and 401K:
The maximum 401K, 403B and 457 contribution stays at $16,500 and anyone born in 1961 or earlier can contribute another $5,500, for a total of $22,000. IRA limits remain at $5,000 plus $1,000 if you are born in 1961 or earlier.
There is no income limit if you want to convert all or part of your IRA to a Roth IRA. Congress left this alone for 2 years. There is still an income limit for contributing to a Roth. The Roth contribution limit phase out for couples is when AGI (adjusted gross income) is $169,000 to $179,000 and for singles it is $107,000 to $122,000.
Realized Losses and Gains for 2010
I will be mailing out the 2010 realized Capital Gains and Loss reports the last week of January. This will have the cost basis and net proceeds for any sales. It will also have the capital gains and dividends paid for the year. You will need this in addition to the 1099s that you will receive from Schwab or TD Ameritrade to give to your tax preparer.
Notes from Erin:
The beginning of the New Year is always a good time to reflect, reorganize and try to scratch a few things off the to-do list. An important and often overlooked task is preparing for unforeseen life events. In 2010 we had a number of families come to us in crisis after a death of a close loved one. Transitions like these are never easy but I offer three items to add to your 2011 checklist to help you and your family be more prepared and avoid a family crisis.
- Create a detailed contact list for everything and anyone your loved ones would need to know in your absence. Organize all your bank accounts, investments, debts, insurance policies, annuities, recurring bills, advisors, etc. in one document and store it in a secure place your beneficiaries can access. You should include account numbers, contact numbers, online log in information along with any other pertinent information.
- Review all your account titles & beneficiaries. Trusts are ineffective unless you titled your property in the name of the trust. Typically, you want all your taxable accounts and real estate in the name of the trust. IRAs can be titled in your name and list beneficiaries. If you would like to change the beneficiaries on your accounts with us, please contact the office.
- Do your loved ones know who your regular doctors are and current medications? I recently listened to another advisor’s story of losing his wife prematurely. The emergency room doctors urgently needed to know his wife’s medications and the husband had rush back home to find out. Keep a card in your wallet of your immediate family members’ current medications and doctors’ phone numbers. Sometimes having your medical history readily available makes all the difference.
Wishing you a Happy, Healthy and Prosperous New Year! Sandy, Carol, and Erin
I have so much news to share this quarter. Last quarter was the first time that I did not write comments in my quarterly newsletter. I was in France and stayed in a wonderful house in the countryside. Of course, while I was in France, I had to continue to train with biking, walking and swimming for my big triathlon on July 31, 2010. That was the day I finished my Half Ironman Triathlon. 1.2 miles swimming, 56 miles of hills on the bike and a very hot and hilly 13.1 mile run at the end. We call it 70.3 since I covered 70.3 miles by self propulsion.
The race began in Guerneville (Sonoma) and finished in Windsor. We biked past beautiful wineries and miles of vineyards. It was the hardest thing I have ever done in my life and I finished in just under nine hours. It was so hot and hilly, in the main heat of the day, I was so happy to see the finish line!
The markets recovered from the June end lows and have provided good gains, year to date. My expected rate of return, good and bad years averaged, is 7% per year. We are on track to exceed the average this year, barring a market melt-down. I am still concerned over high unemployment, foreclosures and home values, but lenders across the nation are re-working mortgages rather than proceed with foreclosures. I have heard of rewrites at 2% interest rates and the national averages on mortgage rates may soon fall again. It is still a good time to refinance a mortgage with fixed low fees.
Asset Planning hosted a Memorial Golf Tournament for Breast Cancer Month
On September 25th, we held a golf tournament in the honor and memory of my best friend, Gail Moreno. Gail was a well known breast cancer mentor to newly diagnosed women. BMW honored her with their Drive Across America and she was involved with many other groups as well, and the entire time, she continued to battle cancer herself. She lost her fight after 11 years but she touched the lives of so many people. We had a roster of 52 golfers who had a fun time golfing the 9 hole course at Little Rec in Long Beach. The food was incredible and catered by Olives Gourmet Grocer in Belmont Shore. Several mutual fund sponsors stepped forward with golf balls and gifts including TD Ameritrade, American Century, Ariel, Payden & Rygel. After all expenses were covered, we raised $3,000 for the Breast Cancer Angels charity. Thank you to so many clients that came out to support this tournament. Next year, it will be all scramble teams so think about putting together a team of friends. Date will be approximately the same.
Notes from Carol:
It was amazing to see Sandy reach her Ironman goal this summer. Her dedication is inspiring. I celebrated my own momentous occasion in September- my 25th wedding anniversary. Time goes by so fast!
On Saturday, October 23, I will be participating in the Orange County Financial Planning Day. This is a free event sponsored by the Orange County Financial Planning Association. It will be held at the Huntington Beach Central Library from 10 am – 3pm. There will be various educational workshops on credit counseling, social security, medicare, estate planning and more. There will also be private consultations with a planner and I will be one of the planners providing advice one-on-one. There is more information at www.financialplanningdays.org. It is the first time the FPA is holding this and we expect a big turnout.
Sandy is on vacation, enjoying the beauty of
France and the lower Euro. She left me with the task of writing this quarter’s commentary.
1st Half of 2010
After 2008's sharp decline and last year's recovery in stock markets, many had hoped that 2010 would see a return to relative normalcy and stability. And certainly, the year started on a positive note, but volatility returned in May and June. Here is a partial rundown of what occurred this past quarter:
v The intensification of the budget crisis in
Greece in February and the fear it would spread to other European countries.
v Concerns that European budget cuts would slow down economies, with spill-over effects globally; this is especially problematic in light of the need to compete with a devalued Euro
v The sinking of a BP oil drilling rig that had exploded in the
Gulf of Mexico
v The May 6th "flash crash" in which
U.S. markets plummeted in a matter of minutes without explanation
Looking at these events, it's tempting to be negative, but there were positive events that also occurred:
v While businesses are hesitant to expand their workforce, they continue to make capital investments in equipment and software. Business spending is leading the slow recovery.
v Personal incomes rose for 6 out of the last 7 months, and so did personal savings
China announced that it will let its currency – the yuan appreciate against the dollar. Because the yuan is currently undervalued, it unfairly affects our trade deficit. Currently, the deficit with
China is $231 billion. If this were to be cut in ½, it could create roughly 800,000 jobs (assuming $1 billion in exports creates 7,000 jobs).
Sandy and I both subscribe to financial newsletters that concentrate on technical and fundamental indicators. Also, this past quarter, we both attended different conferences to get an overall perspective of the economy and factors affecting the market. While we did expect a pullback – a bull market cyclical correction, we are still undecided if this will lead to a double dip recession. This is why we are limiting new purchases in the portfolios to income producing holdings with good dividends and yields.
Let us learn to appreciate there will be times when the trees will be bare, and look forward to the time when we may pick the fruit." Peter Seller
Long-term goals demand long-term thinking
Warren Buffett has said that it only takes two things to make money—having a sound plan and sticking to it—and of those two, it's the sticking to it part that most investors struggle with.
Markets like we've seen of late create understandable stress and can lead to short-term decisions. Hard as it can be at times we've found the only approach to investing that works over time is to keep that long-term view, modifying portfolios as circumstances warrant but never losing sight of the fact that long-term goals demand long-term thinking.
New LA Times Money Makeover (a copy of the article is enclosed)
Sandy and Asset Planning were featured in a Los Angeles Times Money Makeover article on
5/16/2010. This makeover involved helping a young couple, who were quickly spending through a large inheritance, develop a budget and preserve what was left of their windfall.
Financial Reform Bill
There is nothing new to report on the health care reform, but Congress has made progress on the financial-reform overhaul. It has not been officially voted in as of this writing, but passage seems likely. It gives regulators a mandate to monitor the biggest financial institutions and clear authority to shut down failing institutions. It promises that the multi-trillion-dollar market in over-the-counter derivatives, will be better regulated through open exchanges. And it gives regulators the authority to impose high capital requirements, forcing banks to hold more equity and thus assume less risk.
One area where I wish Congress had stood firmer was the issue of “fiduciary duty.” The idea here was that a financial adviser or broker would have to act in your best interests—that’s what fiduciary is all about—when making investment recommendations. Right now the standard is simply one of suitability, which stops far short of requiring the broker/adviser to act in your best interests. Unfortunately, the fiduciary rule got kicked down the road in the new bill. All that is going to happen is that the
SEC will study the issue. That’s a lost opportunity for
Washington to really do something that protects investors. Asset Planning Inc. is a
SEC regulated investment advisor and therefore we already operate under the fiduciary duty.
It’s also frustrating that the
SEC lost its ability to oversee the world of Equity Indexed Annuities. The
SEC had already issued a rule—not yet enacted—that would have tagged these investments as securities, thus making them regulated by the
SEC. But the new legislation undoes all of that, and like all insurance, it falls onto each state to regulate.
We are planning to have a client education seminar in the fall. We welcome any suggestions and input you may have on topics that you would like us to cover.
I will be going on vacation to
National Park a few days after
Sandy returns. Last time I was there was about 17 years ago, just after the big fire. I am excited to see how things have grown back since then. Have a great summer!
Carol Somoano, CFP, MBA
Look for Asset Planning on Facebook!
What a difference in your portfolio statement values from last March 2009 to this March quarter end. On March 31, 2009, the Dow closed at 7608.92 and the S&P closed at 797.83. On March 31st of this year, the Dow closed at 10,857 and the S&P 500 closed at 1169.43. The S&P 500 gained 46% over that rolling one year. The markets seem to have moved up in a linear line from that point.
Real Estate Still Worries Me
Real estate prices showed improvement, but some areas are again showing a decline in values. This seems to occur on a city by city basis. I met with many new financial planning clients that cannot make their mortgage payments, and have tried and tried to work something out with their bank or lender. They either had no response or the process goes on for months with no help from the banks. The banks will not talk to the borrower until they are in default. I know people are living in their homes without paying a mortgage payment for up to 16 months and the bank has not written them a letter, nor made a phone call or sent a foreclosure letter. If the banks acknowledge the house as a foreclosure or a short sale, it will appear on the liability half of their balance sheet. If they do nothing, the bad loan does not appear and the lender appears to have more good assets or capital on the balance sheet. Banks are required to keep a certain ratio of capital to liabilities. Is this creative accounting for the banks or are they simply so swamped with upside down mortgage holders and properties they do not want. They are not in the business of selling properties. Maybe Bank of America should buy Century 21 to deal with all the foreclosures and short sales. That could be a better purchase than Merrill Lynch.
New Health Care Bill
A client emailed to ask me what I thought of the health care bill. I have close friends who have been unable to obtain health insurance due to pre-existing conditions so I am very happy for them. My response to any proposed legislation is how it will affect my clients and their investments. For those taxpayers making over $200,000 as an individual or a couple making more than $250,000, a new Medicare tax of 0.9% will be added so the percentage paid to Medicare will be 2.35% of their wages. I do not have a problem with this and actually wrote about this more than a year ago. This begins in 2013.
The next part of the Medicare tax is a new 3.8% tax on investment income. Investment income is capital gains, dividends, interest, royalties, rental income and are all known as “unearned income”. This also begins in 2013 and this impacts my clients. This may mean a restructuring of portfolios for those clients that will be impacted by this new tax. With the capital gains tax already slated to increase to 20%, from the current 15%, all of these new taxes will impact the cash flow and investment returns of my clients.
"Keep your dreams alive.
Understand to achieve anything requires faith and belief in yourself, vision, hard work, determination, and dedication. Remember all things are possible for those who believe." Gail Devers
My big fitness goal this year is a Half Ironman Triathlon. I put it in caps because it is a goal that I have wanted to accomplish for years. The Barb’s Half Ironman Triathlon is 70.3 miles of self propulsion in one day. It begins with a 1.2 mile swim in a river, followed by 56 miles on the bike through rolling vineyard hills and ends with a 13.1 mile run. The run portion will be a jog/walk for me. This will be in Santa Rosa on July 31st. I have already begun to walk or bike to and from work at least one time a week.
Notes from Carol:
Ways to Improve Your Credit Score
Your credit score is a very important number that lenders use in order to determine whether or not to extend credit to you, and what the interest rate and terms are. Your credit score can be broken down into five categories:
Payment History – 35%
Total Amounts Owed – 30%
Length of Credit History – 15%
New Credit – 10%
Type of Credit in Use – 10%
The single most important thing that you can do to improve your credit score is to make your payments on-time. If a lender reports late payments then that negative mark can stay on your report for seven years. The next thing you need to do is to keep your borrowing under control and to utilize your credit better. For example, having credit cards that are maxed out or very close to their limits will negatively impact your score. Two credit cards with a $5,000 limit and a $1,000 balance on each will look much better than a single card with a $2,500 limit and a $2,000 balance. Many credit cards are lowering credit limits. If you have a good credit history then I would recommend that you challenge them if they lower your limits. Closing old accounts is ok if your credit score dings you for too many accounts, otherwise keep the accounts open.
Tax Season IRA Contribution Deadlines
Tax season is almost over! Please send all of your IRA and SEP IRA contributions by April
to have them posted to your accounts. They need to be at the custodian (TD or Schwab) before the deadline.
Spring is here - Enjoy the extra daylight!