Investments

23
Mar

Bear Markets Come And Go

The longest bull market in history lasted almost 11 years before coronavirus fears and the realities of a seriously disrupted U.S. economy brought it to an end.

If you are losing sleep over volatility driven by a cascade of disheartening news, it may help to remember that the stock market is historically cyclical. There have been 10 bear markets (prior to this one) since 1950, and the market has recovered eventually every time.

Bear markets are typically defined as declines of 20% or more from the most recent high, and bull markets are increases of 20% or more from the bear market low. But there is no official declaration, so in some cases there are different interpretations regarding when these cycles begin and end.

On average, bull markets lasted longer (1,955 days) than bear markets (431 days) over this period, and the average bull market advance (172.0%) was greater than the average bear market decline (-34.2%).

Bear Markets Since 1950Calendar Days to BottomU.S. Stock Market Decline (S&P 500 Index)
August 1956 to October 1957446-21.5%
December 1961 to June 1962196-28.0%
February 1966 to October 1966240-22.2%
November 1968 to May 1970543-36.1%
January 1973 to October 1974630-48.2%
November 1980 to August 1982622-27.1%
August 1987 to December 1987101-33.5%
July 1990 to October 199087-19.9%*
March 2000 to October 2002929-49.1%
October 2007 to March 2009517-56.8%

*The intraday low marked a decline of -20.2%, so this cycle is often considered a bear market.

The bottom line is that neither the ups nor the downs last forever, even if they feel as though they will. During the worst downturns, there were short-term rallies and buying opportunities. And in some cases, people have profited over time by investing carefully just when things seemed bleakest.

If you’re reconsidering your current investment strategy, a volatile market is probably the worst time to turn your portfolio inside out. Dramatic price swings can magnify the impact of a wholesale restructuring if the timing of that move is a little off. A well-thought-out asset allocation and diversification strategy is still the fundamental basis of good investment planning. Changes in your portfolio don’t necessarily need to happen all at once. Try not to let fear derail your long-term goals.

The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Asset allocation and diversification are methods used to help manage investment risk; they do not guarantee a profit or protect against investment loss.

The S&P 500 is an unmanaged group of securities that is considered to be representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is not a guarantee of future results. Actual results will vary.
Source: Yahoo! Finance, 2020 (data for the period 6/13/1949 to 3/12/2020)

6
Sep

What Does An Inverted Yield Curve Suggest About Growth?

On August 14, 2019, the Dow Jones Industrial Average plunged 800 points, losing 3% of its value in its biggest drop of the year. The Nasdaq Composite also lost 3%, while the S&P 500 lost 2.9%.The slide started with bad economic news from Germany and China, which triggered a flight to the relative safety of U.S. Treasury securities. High demand briefly pushed the yield on the benchmark 10-year Treasury note below the two-year note for the first time since 2007.2 This is referred to as a Inverted Yield Curve, which has been a reliable predictor of past recessions. The short-lived inversion spooked the stock market, which recovered only to see the curve begin a series of inversions a week later.3

From short to long

Yield relates to the return on capital invested in a bond. When prices rise due to increased demand, yields fall and vice versa. The yield curve is a graph with the daily yields of U.S. Treasury securities plotted by maturity. The slope of the curve represents the difference between yields on short-dated bonds and long-dated bonds. Normally, it curves upward as investors demand higher yields to compensate for the risk of lending money over a longer period. This suggests that investors expect stronger growth in the future, with the prospect of rising inflation and higher interest rates.

The curve flattens when the rates converge because investors are willing to accept lower rates to keep their money invested in Treasuries for longer terms. A flat yield curve suggests that inflation and interest rates are expected to stay low for an extended period of time, signaling economic weakness.

Parts of the curve started inverting in late 2018, so the recent inversions were not completely unexpected. However, investors tend to focus on the spread between the broadly traded two-year and 10-year notes.4

Inverted Yield Curve Chart

 Inverted yield curve as an indicator

An inversion of the two-year and 10-year notes has occurred before each recession over the past 50 years, with only one “false positive” in that time. It does not indicate timing or severity but has reliably predicted a recession within the next one to two years. A recent Federal Reserve study suggested that an inversion of the three-month and 10-year Treasuries — which occurred in March and May 2019 — is an even more reliable indicator, predicting a recession in about 12 months.5

Is it different this time?

Some analysts believe that the yield curve may no longer be a reliable indicator due to the Federal Reserve’s unprecedented balance sheet of Treasury securities — originally built to increase the money supply as an antidote to the Great Recession. Although the Fed has trimmed the balance sheet, it continues to buy bonds in large quantities to replace maturing securities. This reduces the supply of Treasuries and increases pressure on yields when demand rises, as it has in recent months.6

At the same time, the Fed has consistently raised its benchmark federal funds rate over the last three years in response to a stronger U.S. economy, while other central banks have kept their policy rates near or below zero in an effort to stimulate their sluggish economies. This has raised yields on short-term Treasuries, which are more directly affected by the funds rate, while increasing global demand for longer-term Treasuries. Even at lower rates, U.S. Treasuries offer relatively safe yields that cannot be obtained elsewhere.7

The Fed lowered the federal funds rate by 0.25% in late July, the first drop in more than a decade. While this slightly reduced short-term Treasury yields, it contributed to the demand for long-term bonds as investors anticipated declining interest rates. When interest rates fall, prices on existing bonds rise and yields decline. So the potential for further action by the Fed led investors to lock in long-term yields at current prices.8

Economic headwinds

Even if these technical factors are distorting the yield curve, the high demand for longer-term Treasuries represents a flight to safety — a shift of investment dollars into low-risk government securities — and a pessimistic economic outlook. One day after the initial two-year/10-year inversion, the yield on the 30-year Treasury bond fell below 2% for the first time. This suggests that investors see decades of low inflation and tepid growth.9

The flight to safety is being driven by many factors, including the U.S.-China trade war and a global economic slowdown. Five of the world’s largest economies — Germany, Britain, Italy, Brazil, and Mexico — are at risk of a recession and others are struggling.10

Although the United States remains strong by comparison, there are concerns about weak business investment and a manufacturing slowdown, both weighed down by the uncertainty of the trade war and costs of the tariffs.11 Inflation has been persistently low since the last recession, generally staying below the 2% rate that the Fed considers optimal for economic growth. On the positive side, unemployment remains low and consumer spending continues to drive the economy, but it remains to be seen how long consumers can carry the economic weight.12

Market bounceback

Market Chart

Regardless of further movement of the yield curve, there are likely to be market ups and downs for many other reasons in the coming months. Historically, the stock market has rallied in the period between an inversion and the beginning of a recession, so investors who overreacted lost out on potential gains.13 Of course, past performance does not guarantee future results. While economic indicators can be helpful, it’s important to make investment decisions based on your own risk tolerance, financial goals, and time horizon.

U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities fluctuates with market conditions. If not held to maturity, they could be worth more or less than the original amount paid. The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. The performance of an unmanaged index is not indicative of the performance of any specific security. Individuals cannot invest directly in any index.

1-2, 13) The Wall Street Journal, August 14, 2019

3) CNBC.com, August 23, 2019

4-5) Reuters, August 13, 2019

6) Forbes.com, August 16, 2019

7-9) The Wall Street Journal, August 16, 2019

10, 12) CNN, August 14 and 18, 2019

11) Reuters, July 1, 2019

4
Mar

Stock Market Performance For First Two Months of 2019

The momentum stocks have enjoyed since the beginning of the year waned some last week as investors took time to consider economic and trade developments. The tech-heavy Nasdaq gained the most, up almost 1.0%. At the other end of the spectrum was the Global Dow, which fell 0.15%. In between, the Dow and the Russell 2000 almost broke even, while the S&P 500 pushed ahead by about 0.4%. For the year, the major indexes listed here are still doing quite well. The Dow and S&P 500 are off to their best start to a year in over 30 years, while the Nasdaq has enjoyed 10 straight weeks of positive returns.

Oil prices fell for the first time in several weeks, closing at $55.74 per barrel by late Friday, down from the prior week’s closing price of $57.16 per barrel. The price of gold (COMEX) dove last week, sinking to $1,294.20 by last Friday evening, down from the prior week’s price of $1,330.20. The national average retail regular gasoline price was $2.390 per gallon on February 25, 2019, $0.073 higher than the prior week’s price but $0.158 less than a year ago.

Market/Index2018 ClosePrior WeekAs of 3/1Weekly ChangeYTD Change
DJIA23327.4626031.8126026.32-0.02%11.57%
Nasdaq6635.287527.547595.350.90%14.47%
S&P 5002506.852792.672803.690.39%11.84%
Russell 20001348.561590.061589.64-0.03%17.88%
Global Dow2736.743010.943006.41-0.15%9.85%
Fed. Funds target rate2.25%-2.50%2.25%-2.50%2.25%-2.50%0 bps0 bps
10-year Treasuries2.68%2.65%2.75%10 bps7 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Economic Headlines

Note: Due to the government shutdown, some affected federal agencies are providing reports for December, while others have information available for January. These monthly reporting differences are noted below.

  • According to the initial estimate, the gross domestic product increased at an annual rate of 2.6% in the fourth quarter of 2018. The third-quarter GDP increased 3.4%. Pulling the GDP lower in the fourth quarter were decelerations in private inventory investment, personal consumption expenditures, and federal, state, and local government spending. On the plus side, exports and nonresidential (business) fixed investment increased from the third quarter. Imports, a negative in the calculation of GDP, fell in the fourth quarter, which helped push the GDP rate higher.
  • The personal income and outlays report is favored by the Federal Reserve as an inflation indicator. Due to the recent partial government shutdown, the current report combines estimates for income and outlays for December, but only income estimates for January. Consumer income rose 1.0% in December but fell 0.1% in January. Disposable, or after-tax, income dropped 0.2% in January after vaulting 1.1% in December. Wages and salaries climbed 0.5% in December and 0.3% in January. On the other hand, personal interest income advanced 0.6% in December but plummeted 1.3% in January. Dividend income rose 7.2% in December but fell 6.3% in January. Consumer spending decreased 0.5% in December. Consumers spent less on both goods and services in December. Within goods, recreational goods and vehicles was the leading contributor to the decrease. Within services, the largest contributor to the decrease was spending for household electricity and gas.
  • The latest report on new home construction from the Census Bureau is for December. Building permits were 0.3% higher over the last month of 2018 compared to November. However, single-family permits in December were 2.2% below the November figure. Home construction was also lagging in December. Housing starts for the month were 11.2% lower than November’s total. Single-family starts were 6.7% below November’s rate. Housing completions were 2.7% off in December, and single-family home completions were only 0.1% higher than in November.
  • To facilitate a faster return to the normal processing and release schedule following the lapse in funding, there will not be an advance report on international trade in goods issued for January or February 2019. The latest report is for December. The international trade deficit was $79.5 billion in December, up $9.0 billion from $70.5 billion in November. Exports of goods for December were $135.7 billion, $4.0 billion less than November exports. Imports of goods for December were $215.2 billion, $5.0 billion more than November imports.
  • Survey respondents to the IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) survey indicated that manufacturing slowed noticeably in February. The index was 53.0 for the month, down from 54.9 in January, slipping to the lowest rate since August 2017. While production remained steady, new orders fell to their lowest rate since last June.
  • Following the Markit report, the Institute for Supply Management® (ISM®) also noted activity slowed in the manufacturing sector in February with its PMI® falling 2.4 percentage points from the January reading. New orders, production, employment, and prices all decreased in February.
  • For the week ended February 23, there were 225,000 new claims for unemployment insurance, an increase of 8,000 from the previous week’s level, which was revised up by 1,000. According to the Department of Labor, the advance rate for insured unemployment claims rose 0.1% to 1.3% for the week ended February 16. The advance number of those receiving unemployment insurance benefits during the week ended February 16 was 1,805,000, an increase of 79,000 from the prior week’s level, which was revised up by 1,000.

Eye on the Week Ahead

The employment figures for February are out this week. Over 300,000 new jobs were added in January, so a reduction is expected for February. Wage inflation has been tepid for the most part, rising a little over 3.0% in 2018.

Data sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

30
Nov

Market Week: November 26

The Markets (as of market close November 23, 2018)

Trading volume may have been slower than usual during the Thanksgiving holiday week, but that didn’t stop the downward spiral for stocks. Tumbling oil prices, which fell to their lowest levels in over a year, pulled energy shares downward and raised fears of an economic slowdown. Each of the benchmark indexes listed here fell sharply last week, headed by the Dow, followed closely by the Nasdaq. As stocks regularly hit new highs earlier in the year, pushing values higher than their 2017 closing marks, all of those gains have frittered away these past few months. Of the indexes listed here, only the Nasdaq is still ahead of its 2017 year-end price — but only barely. Each of the other indexes have fallen notably below last year’s respective values.

Oil prices continued to fall, plummeting to $50.39 per barrel by late Friday, down from the prior week’s closing price of $56.77 per barrel. The price of gold (COMEX) gained for the second week in a row, climbing to $1,223.40 by Friday evening, up from the prior week’s price of $1,221.70. The national average retail regular gasoline price was $2.611 per gallon on November 19, 2018, $0.075 lower than the prior week’s price but $0.043 higher than a year ago.

Market/Index
2017 Close
Prior Week
As of 11/23
Weekly Change
YTD Change
DJIA
24719.22
25413.22
24285.95
-4.44%
-1.75%
Nasdaq
6903.39
7247.87
6938.98
-4.26%
0.52%
S&P 500
2673.61
2736.27
2632.56
-3.79%
-1.54%
Russell 2000
1535.51
1527.53
1488.68
-2.54%
-3.05%
Global Dow
3085.41
2925.22
2852.37
-2.49%
-7.55%
Fed. Funds target rate
1.25%-1.50%
2.00%-2.25%
2.00%-2.25%
0 bps
75 bps
10-year Treasuries
2.41%
3.06%
3.03%
-3 bps
62 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Economic Headlines

  • The pace of home building picked up in October, but applications for building permits and home completions each fell below their respective September rates. Applications for building permits were 0.6% below their September pace, while home completions dropped 3.3% from their September estimate. On the other hand, housing starts were 1.5% above their September figures, which should add to new home inventory for November. A comparison of year-on-year rates shows how much the housing sector has slowed. Building permits are down 6.0% from October 2017, housing starts are off by 2.9%, and housing completions are 6.5% below last year’s pace.
  • For the first time in seven months, sales of existing homes expanded. Total existing home sales increased 1.4% in October from September, yet are still down 5.1% compared to a year ago. The median existing-home price in October was $255,400, which is down from September’s price of $256,900 but up from the October 2017 price ($246,000). Total housing inventory at the end of October decreased from 1.88 million in September to 1.85 million existing homes available for sale, representing a 4.3-month supply at the current sales pace.
  • New orders for durable goods fell for the third time in the last four months in October. New orders dropped 4.4% from September. Transportation equipment, down 12.2% following two consecutive monthly increases, drove the decrease. Excluding transportation, new orders increased 0.1%. Shipments of durable goods decreased 0.6% in October, while unfilled orders declined 0.2% following eight consecutive monthly increases. Inventories, down two of the last three months, were virtually unchanged from September.
  • For the week ended November 17, the advance figure for seasonally adjusted initial claims for unemployment insurance was 224,000, an increase of 3,000 from the previous week’s level, which was revised up by 5,000. According to the Department of Labor, the advance rate for insured unemployment claims remained at 1.2% for the week ended November 10. The advance number of those receiving unemployment insurance benefits during the week ended November 10 was 1,668,000, a decrease of 2,000 from the prior week’s level, which was revised down by 6,000.

Eye on the Week Ahead

The last week of the month offers several important economic reports, including the second report on gross domestic product for the third quarter. The initial report showed the economy grew at an annual rate of 3.5%. With consumer spending continuing to show strength, the GDP is not expected to vary significantly from last month’s growth rate.

Data sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

16
Oct

The Benefits of Tax-Advantaged Savings Vehicles

Taxes can take a big bite out of your total investment returns, so it’s helpful to look for tax-advantaged strategies when building a portfolio. But keep in mind that investment decisions shouldn’t be driven solely by tax considerations; other factors to consider include the potential risk, the expected rate of return, and the quality of the investment.

Tax-deferred and tax-free investments

Tax deferral is the process of delaying (but not necessarily eliminating) until a future year the payment of income taxes on income you earn in the current year. For example, the money you put into your traditional 401(k) retirement account isn’t taxed until you withdraw it, which might be 30 or 40 years down the road!

Tax deferral can be beneficial because:

  • The money you would have spent on taxes remains invested
  • You may be in a lower tax bracket when you make withdrawals from your accounts (for example, when you’re retired)
  • You can accumulate more dollars in your accounts due to compounding

Compounding means that your earnings become part of your underlying investment, and they in turn earn interest. In the early years of an investment, the benefit of compounding may not be that significant. But as the years go by, the long-term boost to your total return can be dramatic.

Taxes make a big difference

Let’s assume two people have $5,000 to invest every year for a period of 30 years. One person invests in a tax-free account like a Roth 401(k) that earns 6% per year, and the other person invests in a taxable account that also earns 6% each year. Assuming a tax rate of 28%, in 30 years the tax-free account will be worth $395,291, while the taxable account will be worth $295,896. That’s a difference of $99,395.

Envision Wealth Management

This hypothetical example is for illustrative purposes only, and its results are not representative of any specific investment or mix of investments. Actual results will vary. The taxable account balance assumes that earnings are taxed as ordinary income and does not reflect possible lower maximum tax rates on capital gains and dividends, as well as the tax treatment of investment losses, which would make the taxable investment return more favorable, thereby reducing the difference in performance between the accounts shown. Investment fees and expenses have not been deducted. If they had been, the results would have been lower. You should consider your personal investment horizon and income tax brackets, both current and anticipated, when making an investment decision as these may further impact the results of the comparison. This illustration assumes a fixed annual rate of return; the rate of return on your actual investment portfolio will be different, and will vary over time, according to actual market performance. This is particularly true for long-term investments. It is important to note that investments offering the potential for higher rates of return also involve a higher degree of risk to principal.

Tax-advantaged savings vehicles for retirement

One of the best ways to accumulate funds for retirement or any other investment objective is to use tax-advantaged (i.e., tax-deferred or tax-free) savings vehicles when appropriate.

  • Traditional IRAs — Anyone under age 70½ who earns income or is married to someone with earned income can contribute to an IRA. Depending upon your income and whether you’re covered by an employer-sponsored retirement plan, you may or may not be able to deduct your contributions to a traditional IRA, but your contributions always grow tax deferred. However, you’ll owe income taxes when you make a withdrawal.* You can contribute up to $5,500 (for 2017 and 2018) to an IRA, and individuals age 50 and older can contribute an additional $1,000 (for 2017 and 2018).
  • Roth IRAs — Roth IRAs are open only to individuals with incomes below certain limits. Your contributions are made with after-tax dollars but will grow tax deferred, and qualified distributions will be tax free when you withdraw them. The amount you can contribute is the same as for traditional IRAs. Total combined contributions to Roth and traditional IRAs can’t exceed $5,500 (for 2017 and 2018) for individuals under age 50.
  • SIMPLE IRAs and SIMPLE 401(k)s — These plans are generally associated with small businesses. As with traditional IRAs, your contributions grow tax deferred, but you’ll owe income taxes when you make a withdrawal.* You can contribute up to $12,500 (for 2017 and 2018) to one of these plans; individuals age 50 and older can contribute an additional $3,000 (for 2017 and 2018). (SIMPLE 401(k) plans can also allow Roth contributions.)
  • Employer-sponsored plans (401(k)s, 403(b)s, 457 plans) — Contributions to these types of plans grow tax deferred, but you’ll owe income taxes when you make a withdrawal.* You can contribute up to $18,500 (for 2018, $18,000 for 2017) to one of these plans; individuals age 50 and older can contribute an additional $6,000 (for 2017 and 2018). Employers can generally allow employees to make after-tax Roth contributions, in which case qualifying distributions will be tax free.
  • Annuities — You pay money to an annuity issuer (an insurance company), and the issuer promises to pay principal and earnings back to you or your named beneficiary in the future (you’ll be subject to fees and expenses that you’ll need to understand and consider). Most annuities have surrender charges that are assessed if the contract owner surrenders the annuity. Annuities generally allow you to elect to receive an income stream for life (subject to the financial strength and claims-paying ability of the issuer). There’s no limit to how much you can invest, and your contributions grow tax deferred. However, you’ll owe income taxes on the earnings when you start receiving distributions.*

Tax-advantaged savings vehicles for college

Envision Wealth Management

For college, tax-advantaged savings vehicles include:

  • 529 plans — College savings plans and prepaid tuition plans let you set aside money for college that will grow tax deferred and be tax free at withdrawal at the federal level if the funds are used for qualified education expenses. These plans are open to anyone regardless of income level. Contribution limits are high — typically over $300,000 — but vary by plan.
  • Coverdell education savings accounts — Coverdell accounts are open only to individuals with incomes below certain limits, but if you qualify, you can contribute up to $2,000 per year, per beneficiary. Your contributions will grow tax deferred and be tax free at withdrawal at the federal level if the funds are used for qualified education expenses.
  • Series EE bonds — The interest earned on Series EE savings bonds grows tax deferred. But if you meet income limits (and a few other requirements) at the time you redeem the bonds for college, the interest will be free from federal income tax too (it’s always exempt from state tax).

Tax deferred is not the same as tax free. “Tax deferred” means that the payment of taxes is delayed, while “tax free” means that no income taxes are due at all. For example, with a Roth IRA, after-tax dollars are contributed, but qualified distributions (those satisfying a five-year holding period and made after age 59½ or after becoming disabled) are free from federal income tax.

Though tax considerations shouldn’t be your only investing concern, by putting your money in tax-advantaged savings vehicles and investments when appropriate, you’ll keep more money in your own pocket and put less in Uncle Sam’s.

*Withdrawals prior to age 59½ may be subject to a 10% federal income tax penalty unless an exception applies.

Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans. More information about specific 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing consider whether your state offers a 529 plan that provides residents with favorable state tax benefits. The availability of tax and other benefits may be conditioned on meeting certain requirements. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated. For withdrawals not used for qualified higher-education expenses, earnings may be subject to taxation as ordinary income and possibly a 10% federal income tax penalty.

28
Sep

Is Your Mutual Fund Manager Worth It

According to S&P Dow Jones Indices SPIVA® U.S. Mid-Year 2016 Report, 9 out of 10 mutual fund managers who invest in large U.S. companies failed to beat the S&P 500 index over the last 5 years.  This under-performance is directly linked to the fees that these managers charge.  The statistics from S&P Dow Jones show that lower-cost managers on average perform much better.

I have a confession: Years ago I recommended some of these expensive fund managers to my clients.  Quite often it was a result of my interactions with polished sales professionals who met with me to explain why their managers are better than everybody else. I would enjoy at least 2-3 free lunches per week listening to their pitches and nodding my head in agreement. Clearly the sales professionals are much better at their jobs than the money managers.

But the past few years have been different. My lunches are usually eaten with a current client, a potential new client, a colleague, or a friend so I can learn about what is going on in their lives.  I must admit that the lunches are not quite as fancy, but are certainly more rewarding.

As a CERTIFIED FINANCIAL PLANNER® practitioner, I have a fiduciary duty to do what I believe is in the best interest of clients. If 9 out of 10 mutual fund managers are underperforming due to their costs, then I have the responsibility to fire many of them and replace with low-cost funds. And that’s exactly what I have been doing these past few years. I feel much better now that my client’s fees are lower (and my waistline certainly doesn’t miss all those fancy meals).

To determine if your mutual fund managers underperform, take a look at Morningstar.com, which provides free information on every fund sold in America.  Type in the symbol of the fund in question and then look at the “Performance” tab. There you will find how this fund performs against benchmark as well as its peers.

If you are not happy with the results, consider working with a CERTIFIED FINANCIAL PLANNER® professional. Then you can determine if you should hire a different manager or go with a lower-cost option instead.

Jonathan Muhlendorf is a registered representative of Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor. Envision Wealth Management is not an affiliate of Lincoln Financial Advisors Corp.  CRN-1602843-092616