Asset Planning, Inc Blog

The latest from the team.

ETFs VS. Mutual Funds: What Are They & Why Use Both?

A blend of using both ETFs and mutual funds is beneficial for many reasons as each provides its own special advantages.
Mutual Funds are managed by investors who use the invested cash to purchase the holdings in the fund. Often there are fees and expenses that must be paid and the capital gain distributions are passed down to the investors. This is called an "in cash transaction". With this, all taxable capital gains are spread amongst all investors in the fund. When you purchase a mutual fund you are transacting directly with the fund and those trade just once per day after market close with all investors getting the same share price. The uniform treatment of mutual funds is the reason you never see ETFs in company 401k plans as regulations deemed employees must get the same share price & costs.
When ETFs (Exchange Traded Funds) are purchased, the money goes to the market maker, not a fund manager. The market maker then buys the securities the ETF manager allocates for that ETF. This is called an "in kind transaction". This type transaction is advantageous tax-wise as the ETF manager can exchange shares to the market marker without creating capital gains. ETFs are traded like regular stocks during the market hours. Their prices change during the day based on the supply and demand. Buying an ETF intraday could be better if prices are lower than at the close of the market. As well, when purchasing ETFs there is no minimum investment amount, whereas with a mutual fund there may be a minimum monetary investment required.
As your advisors we determine in what scenario it is best to use a mutual fund or ETFs in your accounts. For example, we might use an ETF in a taxable account to mitigate capital gains and a mutual fund in an IRA. Conversely, we might choose to use a mutual fund when superior investment strategies or fund managers are not offered as an ETF. While both have tradeoffs, using both ETFs and mutual funds can be a useful long term strategy.
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Special Update: Coronavirus, Markets and What You Need to Know

Volatility has surged in financial markets, as investors react to the potential economic and earnings fallout from the rapid global spread of the coronavirus. Given what has been historic volatility, we wanted to provide you with a market update that helps to separate fact from fiction and put this market turmoil in the appropriate context.

Over the past month, equity markets have dropped sharply as new cases of the coronavirus burgeon around the world. That is the primary, but not the only, reason for the recent declines. As of this writing, there are just over 200,000 cases of coronavirus worldwide, 100,000 of which are still “active cases.” In the United States, there are approximately 7,000 coronavirus cases.

On March 9, U.S. markets and the economy were dealt another surprise blow, when Saudi Arabia effectively abandoned OPEC-mandated production levels and began to dramatically discount oil prices and increase oil production. The move was in direct response to Russia not agreeing to comply with proposed “OPEC+” production cuts, and essentially, an oil price war broke out between the two countries (Saudi Arabia and Russia) that saw oil futures collapse nearly 25% in a single day.

In the past, low oil and gasoline prices would have been a positive for the U.S. economy, but a lot has changed in the past few years. The U.S. is now the largest oil producer in the world, and the U.S. energy industry is valued at more than $340 billion. With oil prices so low, many U.S. energy firms will have to reduce production and payroll, which will hit both earnings and the economy. This oil price war directly contributed to the markets taking another leg lower during the week ended March 13.

Finally, in the days leading up to this writing (March 18), stocks have dropped even further in response to the extreme social distancing measures being implemented across the country. These measures, which include the cancellation of virtually every major sports season, travel bans from Europe and parts of Asia, the closing of bars and restaurants, the mass instituting of work-from-home practices, school closures, and curfews, are intended to stop the spread of the coronavirus. Yet they also will have a significant and negative economic impact on the travel, leisure, beverage and restaurant industries to name just a few of the segments that will be hardest hit. The cumulative impact of these measures materially increases the chances of a recession in 2020, which is something virtually no one thought possible just six weeks ago.

Positively, the U.S. government is acting to support the economy and that support has ramped up dramatically in the last few weeks. There are two economic supports bills that are currently making their way through Congress and a third has already become law. Each is designed to help a portion of our population bridge the economic gap until the spread of the virus peaks and begins to decline.

The Federal Reserve, meanwhile, has cut interest rates to zero percent to help the economy. The Fed also has implemented several important measures to provide short-term cash for corporations and to ensure there’s plenty of capital for the broader banking system. Those measures are working to help keep the banking and financial systems functioning in an orderly manner.

Yet despite this support, which is an important economic positive, the world understandably looks very scary to many people right now.

Across the nation, and the world, roads are mostly empty, office buildings are vacant, schools are closed and normal life as we have known it has largely shut down. Yet it’s important to remember that this historic market volatility, along with these societal disruptions, are temporary. At some point, the spread of the virus will peak and begin to recede.

Similarly, these social distancing measures, while unsettling, are also only temporary. Our children will once again return to school and adults will return to work. Air travel will resume, cruise ships will set sail again, and the U.S. economy, which is by far the most flexible and resilient in the world, will recover.

Over the past several weeks, we’ve witnessed near panic, both in regular society as well as financial markets. But as we all know, the worst thing to do during a panic is to panic. That’s because panic leads to hasty, short-term decisions that jeopardize your long-term best interests.  

Meanwhile, shares of some of the most-profitable, well-run companies in the world are now trading at substantial discounts to levels of just a month ago, and history has shown us that over the longer term, these tumultuous episodes can create fantastic investment opportunities, and some of the most ideal buying conditions the market can offer.

As has been said many times over the past few weeks, we are all in this together. That’s why we remain committed to helping you navigate this difficult environment—and always maintain the primary goal of ensuring you achieve your long-term financial objectives.

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Market Update

The coronavirus has returned volatility to the markets.  Last week the major stock indices were either up or down 2-3% daily. Price declines in oil over the weekend rattled the markets on Monday with a historic 2,000 point drop on the Dow but we recovered more than half those losses on Tuesday. We certainly empathize with our clients’ natural worry over this . As your advisors, our job is to remain objective and not panic in regards to making portfolio decisions.

At this time the technical data is pointing to this being a correction as the strength of current economic data shows no sign of a recessionary bear market. There will be some economic fallout from the virus, but we must keep in mind that our economy is robust and diverse.  Some sectors were hit very hard by the virus such as travel while other areas are benefiting due to the stock piling of consumer goods.  Over the coming days and weeks we will be monitoring the economic data very closely and we will make changes to the portfolio if risks increase or buying opportunities emerge.

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Deadline for 2017 IRA Contributions

The deadline for getting your 2017 IRA contributions to us is Wednesday, April 11th. Tax season is an extremely busy time so the sooner you get these in the better. Feel free to stop by the office anytime from 8am-4pm to drop them off.

Have a great weekend!

Melani

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Market Moves

The Dow Jones and S&P 500 posted a loss of 7.92% and 7.17%, respectively, in the last 5 days, however this is not a reason to panic.  The market has been steadily increasing without a significant market move or correction and we have enjoyed 15 consecutive months with positive returns.  The headlines can be misleading, but this is just volatility returning to markets.  Some of the loss today was likely due to computerized algorithms that were triggered to start selling as the market reached certain levels.  This increased selling intensifies the loss, but will normalize when those same algorithms buy back in to the market.

We have been anticipating this correction and will take advantage of this opportunity.

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Bitcoin Mania

There is no denying it, Bitcoin is all anyone is talking about right now. We know that a lot of you have questions as to what it is, how it works, the risks etc. I came across an article this morning on Seeking Alpha written by Victor Dergunov that I feel has been the most comprehensive in explaining exactly what Bitcoin is and the risks involved when investing in it. I thought I'd share it with you to give you some insights on the mysterious cryptocurrency that is taking over the headlines. Follow the link below to read the article.

https://seekingalpha.com/article/4132006-bitcoin-big-short-coming?lift_email_rec=false&utoken=896c83f5aaeb6c09476c6308df1c6ef8

Have a great weekend!

Samantha

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Reasons Why People Put Off Saving for Retirement

Retiring comfortably is a dream for most people. Unfortunately a lot of people are not adequately saving for their retirement or, even scarier; they are not saving at all. What is preventing them from saving? Usually it’s a mind block that gets in the way. Retirement seems too far off to think of or it’s uncomfortable to talk about. Here are a few reasons that most people delay saving and some tips to overcome these excuses.

Paying off debt and paying for current living expenses - With a lot of people burdened with a mound of student debt after college and paying for current living expenses, the idea of putting anything extra towards retirement savings can seem daunting. While it is important to pay off your debt it is also important to save for your future. Even the smallest amount that you can spare is better than nothing at all.

Instant Gratification- Spending money on items or trips that you want to go on now is highly more satisfying then putting money into a retirement account that you can’t touch for a long time. Sure everyone loves a new purse or a shiny new set of golf clubs. But one thing to ask yourself; are these items worth my future financial security?

Unsure of where to start- A big reason people put off saving for retirement is that they do not know how to get started. There are also many online resources that offer retirement calculators and tips to guide you through the process. You can also contact a financial advisor to help you assess your retirement needs and set up a customized plan to get you started on the right track to a successful retirement.

Procrastination- The mindset of “I’ll do it tomorrow” and then never actually doing it can be one of the biggest disadvantages off all to your retirement savings. Most people do not understand the concept of compounding interest when it comes to savings. Basically, the sooner you start saving, your principal will not only earn interest but over time you’ll earn interest on top of previous years interest and therefore the compounding effect can be huge. If you put off starting to save until you are in your 30s instead of starting in your 20s your money will miss a decade of compounding. The end result is you will have to save significantly more money every month to get to your desired retirement goals then if you had started earlier. The easiest way to get started is through your company if they offer a 401k plan or by setting up an IRA account. With both of these options you can have contributions set up to automatically come out of your paycheck or account. The less you have to think about it the more likely it is that you will do it.

The bottom line is that there are a lot of excuses that people make as to why they can’t save for retirement. The sooner you get started, no matter how much you start with, the better. When you get ready to retire you will not regret taking those first steps you made to invest in yourself and your future.

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Reminder: 2016 IRA Contributions

We wanted to send out a reminder that it's not too late to contribute to your IRA accounts for 2016 as long as you are still working and have not yet met your contribution limit. The IRS deadline for contributions is April 18, 2017. Please give us a call if you would like to make a contribution or have any questions.

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Brexit

 

It’s been a hectic day, but we wanted to give you a few notes on the Brexit vote and its impact:

  • The UK makes up only 4% of the overall global economy
  • Nothing will change overnight; the process of the UK leaving the Eurozone will take approximately 2 years based on current estimates.
  • The economic impact will be felt like a ripple or earthquake, those closest to the epicenter will feel the effects more than those farther away.
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Market Correction not Crisis

As many of you know, the markets have been turbulent, to say the least, followed by a sharp decline yesterday and a sharp rebound today. Though we understand such volatility is unsettling to all of us, we are seeing many indicators that this is an emotional panic driven sell off and not the beginning of a new bear market.

Probably the biggest indicator that the markets are acting irrational is yesterday's market movements where in wake of a US Debt downgrade people sold out of stocks and US treasuries rallied. The exact opposite should have happened, especially given reports of robust corporations earnings and cash surpluses.

Though there is some concern with our less than expected GDP numbers, true recession signs are nonexistent. Furthermore, while the European Union's debt problems are a big one, we must not lose sight of the fact that the growth economies of the world are becoming more significant to global GDP than Europe. We are not in the double dip recession camp and feel the S&P will end positive for the year.

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