Clearview Wealth Management http://www.clearviewwealthmgmt.com Providing financial guidance in an ever-changing landscape. Tue, 23 May 2017 20:40:27 +0000 en-US hourly 1 Buckets of Savings! http://www.clearviewwealthmgmt.com/buckets-of-savings/ Tue, 23 May 2017 20:39:35 +0000 http://www.clearviewwealthmgmt.com/?p=1987 When saving for retirement, most people save to their employer retirement plans, knowing they are reducing current taxable income, typically receiving an employer match on their contributions, and deferring taxation until retirement.  However, if this is the only place where retirement savings takes place, you can be in for a surprise when reaching retirement.  If all your usable savings resides in a tax-deferred bucket, every dollar you take out to meet expenses will be subject to income taxation at ordinary income rates, thereby forcing you to take additional money out to pay the taxes.  It can also be a shock to find that your retirement income tax bracket isn’t much different than your income tax bracket when you were working.  Additionally, higher taxable income levels in retirement will also impact the amount of your Social Security benefit which is subject to taxation and can also result in higher Medicare premiums. So what should you do differently to give yourself more flexibility and lower overall taxation in retirement?  There is great benefit in having multiple buckets of savings in retirement, each Read on! →

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When saving for retirement, most people save to their employer retirement plans, knowing they are reducing current taxable income, typically receiving an employer match on their contributions, and deferring taxation until retirement.  However, if this is the only place where retirement savings takes place, you can be in for a surprise when reaching retirement.  If all your usable savings resides in a tax-deferred bucket, every dollar you take out to meet expenses will be subject to income taxation at ordinary income rates, thereby forcing you to take additional money out to pay the taxes.  It can also be a shock to find that your retirement income tax bracket isn’t much different than your income tax bracket when you were working.  Additionally, higher taxable income levels in retirement will also impact the amount of your Social Security benefit which is subject to taxation and can also result in higher Medicare premiums.

So what should you do differently to give yourself more flexibility and lower overall taxation in retirement?  There is great benefit in having multiple buckets of savings in retirement, each of which is taxed differently, to allow greater flexibility year-to-year on overall taxation.

If you have a High Deductible Health Plan (Individual deductible >= $1,300 or Family deductible >= $2,600, you should be contributing to a Health Savings Account. Ideally, the way to use this account is to contribute the maximum allowable to it each year ($3,400 – Individual; $6,750 – Family). If you are over age 55, you can contribute an additional $1,000 annually. These contributions are pre-tax, which helps reduce your current taxable income.

While you are still working, try to pay any out-of-pocket medical expenses from regular cash flow, not from the HSA.  Use the HSA balances only if absolutely necessary.  Treat this account as a retirement health savings bucket. By using it as another savings mechanism, you will be able to accumulate a sizeable bucket of tax-free savings which can be used for qualified medical expenses in retirement.

Roth 401(k), Roth IRA contributions or conversions – Roths are a bucket of savings for the future which is funded with after-tax dollars and grows tax-free for retirement.

  • When you are starting out in your career and your earnings haven’t yet peaked, you should contribute to a Roth IRA to build tax-free savings for the future. You are contributing after-tax dollars when you do this, but over a long period of time, the tax-free earnings will really add up.  When you take distributions from a Roth IRA in retirement, they are tax-free to you.
  • This is also true for employer plans where the Roth 401(k) is available. This allows you to contribute after-tax dollars to the plan and built long-term tax-free savings, while still remaining eligible for employer match amounts to the regular 401(k).
  • Another good way to fill up a tax bracket in the early years of retirement, before required distributions begin, is to convert some or all of a regular 401(k) or IRA to a Roth IRA.  Such a conversion allows you to transfer pre-tax savings to a Roth, paying the tax at the time of conversion and then letting those deposits build tax-free earnings from that point forward.

Brokerage/Taxable Savings – Having a bucket of money in a non-IRA brokerage account gives you additional flexibility in funding your retirement. This bucket of savings uses after-tax contributions and you are taxed annually only on Interest, Dividends and any Capital Gains for holdings you sell.  One benefit of investments in this bucket is the ability to net gains against losses in any given year, which can reduce or eliminate capital gains taxation.

 

Just as you are taught that diversification is beneficial in your investments, diversity is also beneficial in your savings.  By saving to multiple, differently-taxed buckets throughout your earning years, you gain tremendous flexibility in how you fund your retirement.  These buckets allow your financial advisor and your tax preparer to help you make the best decisions about where your retirement income should come from and how best to manage overall taxation year-to-year.  Given that the federal tax code is ever-changing, it also keeps the portfolio more agile and able to handle any taxation changes which might occur.  Diversify your retirement savings and enable those “buckets of savings” to work better for you throughout retirement.

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Early to the Market Party? http://www.clearviewwealthmgmt.com/early-to-the-market-party/ Thu, 30 Mar 2017 18:08:42 +0000 http://www.clearviewwealthmgmt.com/?p=1970 It’s rare to find someone who likes to be early to a party.  It’s a unique person indeed who enjoys what most consider at best, an awkward situation with a host who silently wishes they had a few extra minutes to prepare.  At the other end of the etiquette spectrum are those who don’t know when to leave.  Most make their exit while still having fun, but there are always a few who overstay their welcome, fueled by the adrenaline of rich food and heavy handed cocktails.  Sound familiar?   Like most celebrations, the “market party” has an awkward beginning with a handful of guests making idle chatter while anxiously waiting for others to arrive.  Somewhere along the way, the early arrivers are joined by the validators.  The party then takes its legitimate place as a festive, burgeoning event where everyone seems happy and revels in good cheer.  Last but not least, the latecomers arrive.  Whether due to procrastination, an overbooked dance card or just plain forgetfulness, every party has them.  Whichever group the investor may belong to there is Read on! →

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It’s rare to find someone who likes to be early to a party.  It’s a unique person indeed who enjoys what most consider at best, an awkward situation with a host who silently wishes they had a few extra minutes to prepare.  At the other end of the etiquette spectrum are those who don’t know when to leave.  Most make their exit while still having fun, but there are always a few who overstay their welcome, fueled by the adrenaline of rich food and heavy handed cocktails.  Sound familiar?

 

Like most celebrations, the “market party” has an awkward beginning with a handful of guests making idle chatter while anxiously waiting for others to arrive.  Somewhere along the way, the early arrivers are joined by the validators.  The party then takes its legitimate place as a festive, burgeoning event where everyone seems happy and revels in good cheer.  Last but not least, the latecomers arrive.  Whether due to procrastination, an overbooked dance card or just plain forgetfulness, every party has them.  Whichever group the investor may belong to there is a strong chance that some from each will overstay their welcome.

 

In my last missive on the market, I elaborated on VUCA – Volatility, Uncertainty, Complexity and Ambiguity.  VUCA and party arrivals can be a bad combination and inevitably seem tied to one another.  Some market party participants (investors) would like to avoid or time VUCA so it works to their advantage and maximizes profits.  Savvy participants in the capitalist pig-pickin’ know this is not possible.  When it comes to investing, the anxiety of trying to foresee VUCA or the equally daunting task of deciding when to arrive or depart (the market party) can be reduced if the investor and his/her advisor;

1) uses a risk appropriate allocation strategy;

2) shows a willingness to remain invested and;

3) chooses investments that work well together but not necessarily in the same way.

 

While off a bit in the past few days, the Dow Jones Industrial Average (DJIA) recently pushed through 21,000 and did so in the style of a Usain Bolt sprint.  This rapid rise increased portfolio values but also created some concern over sustainability.  Fortunately, as allocators, active trimming (to targets) of select equity positions has occurred over the past several months.  Proceeds have been reinvested in either bonds, hybrids or held in cash.  Elaborating further on point 3) in the previous paragraph, steps were recently taken to add a new hybrid investment.  This holding, Credit Suisse Managed Futures Strategy Fund (Ticker CSAAX), historically shows a tendency of working against the grain.  If history repeats and equity markets continue to rise, CSAAX will likely see modest declines.  If markets fall, the position should see modest gains.  With a position size of approximately 2% relative to the entire portfolio, movement in this holding should not significantly impact total performance.  But if past behavior is an accurate indicator, CSAAX will serve as an effective counterweight in declining equity markets.

 

As disciplined investors know, despite its ups and downs, the market party is never really over.  However, when a majority of the equity revelry is over and the economic thunderclouds bring stormy weather, CSAAX should complement the other hybrid investments and along with bonds, help dampen declines for the party goers that always remain in style regardless of the current trend.

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Moving from “tax” prep to “life” prep http://www.clearviewwealthmgmt.com/moving-from-tax-prep-to-life-prep/ Thu, 30 Mar 2017 16:09:26 +0000 http://www.clearviewwealthmgmt.com/?p=1963 At this time of year, everyone becomes a master at document gathering.  There is a shoe box or a filing system or a folder on your laptop to hold all the tax-related documents which are needed to complete your income tax returns.  It requires a diligent attitude to ensure nothing has been neglected or omitted which is important to the outcome of the bottom line.  Once the taxes have been submitted for the year, there is always a sigh of relief in getting to completion. Before you pack everything up and put it away for another year, take a step beyond tax prep and begin your life prep.  What does life prep really mean?  Like tax preparation, the devil is in the details and it is critical to your financial success that you take the time to examine and shore up the other areas of your financial life. You can start with that recently completed tax return.  Did you save to your employer plan and thereby reduce your current income?  If eligible, did you contribute to a Roth or regular Read on! →

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At this time of year, everyone becomes a master at document gathering.  There is a shoe box or a filing system or a folder on your laptop to hold all the tax-related documents which are needed to complete your income tax returns.  It requires a diligent attitude to ensure nothing has been neglected or omitted which is important to the outcome of the bottom line.  Once the taxes have been submitted for the year, there is always a sigh of relief in getting to completion.

Before you pack everything up and put it away for another year, take a step beyond tax prep and begin your life prep.  What does life prep really mean?  Like tax preparation, the devil is in the details and it is critical to your financial success that you take the time to examine and shore up the other areas of your financial life.

You can start with that recently completed tax return.  Did you save to your employer plan and thereby reduce your current income?  If eligible, did you contribute to a Roth or regular IRA to increase savings for the future?  Did you contribute to your children’s 529 Plan?  Did you receive a large tax refund and change your exemptions to more accurately reflect appropriate withholding going forward?

Cash Flow Prep

Do you know where your money goes each month?  For some, there is a tendency to get to the end of the money before getting to the end of the month.  Resolve to identify leaky areas in your cash flow and plug those holes to more easily fill your savings buckets.

Protection Prep

Do you have a clear understanding of the benefits you already have through your employer?  Are they sufficient for your situation?  Although you may have disability coverage through your employer, will it provide adequate income to your family if you were unable to work?  If you experienced an early death, will your family be adequately protected?

These events can have a major impact on your family’s ability to survive and thrive, especially if you are the sole or primary breadwinner in the family.

Investing Prep

Do you understand how much risk you are taking in your investments?  While it is nice to see your savings growing substantially in increasing market environments, are you protected if the markets turn? You should not ratchet up your risk, just because you are behind in saving for the future.  Work with an advisor who understands your goals and ability to save to ensure that your asset allocation is appropriately tailored to your risk profile.

Savings Prep

Do you know how much you will need to secure your retirement?  Retirement can last for decades and you will have a difficult time if relying solely on Social Security to provide for you.

If you are saving, is it taking place only in your employer 401(k)?  You can significantly improve your retirement situation by expanding where you save so that in retirement some of your savings will be taxed as ordinary income, some as capital gains and some may be entirely tax-free.  This can be accomplished by saving not only to your employer 401k plan, but building up savings in a taxable brokerage account, or by making Roth IRA contributions or conversions.  This gives you more flexibility in retirement to enable lower overall taxation during that time.

End of Life Decision Prep

Have you completed legal documents to specify who you prefer speak on your behalf regarding health care and financial decisions?  For health care decisions, this can be accomplished through your Health Care Power of Attorney form (HCPOA) or Living Will/Advance Directives.  For financial decisions you need a General or Durable Power of Attorney.  Will the person selected honor your wishes when faced with a decision?  These are important considerations to help ensure your wishes are followed for later life decisions and end-of-life care.

While this is not an exhaustive list of “life” prep areas, it does illustrate that there is much beyond “tax” prep each year which should be examined to better prepare you for a more successful financial journey.

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What is “VUCA” for Dow 20,000? – A Message from the Pulpit http://www.clearviewwealthmgmt.com/what-is-vuca-for-dow-20000-a-message-from-the-pulpit/ Tue, 07 Feb 2017 18:55:37 +0000 http://www.clearviewwealthmgmt.com/?p=1953 Being a fairly regular attendee at church, I enjoy the reflection that comes from listening to our Clergy explain the liturgy in ways that tie our lives, habits and values to what is happening in the world around us.  As with most large groups, I expect how the message is interpreted and acted on varies widely within the congregation.  As our democracy embarks on a new period of its long evolution, concerns are at a crescendo and opinions on the outcome of issues are not always positive or optimistic.  Under this backdrop, our Rector gave what I believe was a thoughtful sermon on how to put the current state of affairs in context while offering ways each of us could move forward in a caring, positive way as individuals.  That should not come as a surprise given the role Clergy play in our communities.  What might come as a surprise and at the risk of being accused of not paying attention, I couldn’t help but make a connection between the sermon’s foundation – VUCA – and what happens every day in Read on! →

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Being a fairly regular attendee at church, I enjoy the reflection that comes from listening to our Clergy explain the liturgy in ways that tie our lives, habits and values to what is happening in the world around us.  As with most large groups, I expect how the message is interpreted and acted on varies widely within the congregation.  As our democracy embarks on a new period of its long evolution, concerns are at a crescendo and opinions on the outcome of issues are not always positive or optimistic.  Under this backdrop, our Rector gave what I believe was a thoughtful sermon on how to put the current state of affairs in context while offering ways each of us could move forward in a caring, positive way as individuals.  That should not come as a surprise given the role Clergy play in our communities.  What might come as a surprise and at the risk of being accused of not paying attention, I couldn’t help but make a connection between the sermon’s foundation – VUCA – and what happens every day in the global equity and bond markets.

 

VUCA

Like me before the sermon, for those who don’t know, VUCA is an acronym for words we all know and occasionally use to describe a situation, something we have seen or maybe experienced.  During Sunday’s sermon, I learned the acronym originated at the United States Army War College.  Further research confirmed the acronym is used to describe various business conditions and serves as a basis for case studies at Business Schools around the country.  The latter is not surprising but it would seem a safe wager the War College scenarios are much more interesting.

 

Volatility

characterized by or subject to rapid or unexpected change

Uncertainty

not reliable, not clearly identified or defined

Complexity

a group of obviously related units of which the degree and nature of the relationship is imperfectly known

Ambiguity

doubtful or uncertain

 

At the United States Army War College, dealing with a geopolitical VUCA world is at the forefront of strategic planning and education. When listening to the sermon on Sunday, I couldn’t resist drawing similarities between navigating a geopolitical VUCA world and what investment managers do to chart an investment VUCA world.  Geopolitical and investment VUCA are similar in that both are unpredictable.  Unlike geopolitical VUCA, in the opinion of the writer, navigating investment VUCA is somewhat easier.  Business economic and sector cycles that exhibit reversion to the mean and companies that follow generally accepted accounting principles (GAAP) as defined by the Financial Accounting Standards Board can provide historical perspective and definition.  The general ebb and flow of economic cycles combined with data transparency can help make reasonable assumptions about what the long term may bring while facilitating decisions on the appropriate allocation strategy for clients with a certain tolerance for risk.

 

The Dow at 20000

In March of 2009, the Dow bottomed at around 6600.  A few days before Thanksgiving of last year, it closed at just over 19000 and last week has reached 20000.   The path to this threshold was filled with VUCA and its future course will be too.  Late last week the Wall Street Journal highlighted the ascension, noting it took only 42 days to climb the last 1,000 points.  This Hussein Bolt like Olympic dash was the second-fastest thousand-point gain in the index’s history, after its 24-day climb from 10000 to 11000 during the dot.com boom in 1999.  Some say relatively low interest rates, suggesting a sluggish global economy and expensive valuations relative to historical levels portend a market pullback.  Other data point to an acceleration in U.S. economic growth and an improvement in corporate earnings.  Are investors to believe the latter and the possibility that corporate tax reform and infrastructure spending will provide a base of support for more growth?  Or, should investors be cautious and anticipate a correction after a positive run of 8 years?  These are good questions and impossible to answer with any confidence or certainty regardless of business cycles and company data transparency because of VUCA.

 

Investment VUCA and Portfolios

With few exceptions, reviewing portfolios and 2016 performance has been a positive exercise.  More importantly, it has reinforced views on client behavior and how allocations drive performance.  Objectively, it is satisfying when investment choices meet and/or exceed their numerical benchmarks.  Not so much when they don’t.  Subjectively, because it validates our efforts to educate clients on the benefits of diversification, it is often more gratifying to hear them express an understanding that a diversified portfolio’s overall performance will rarely mirror that of a major equity market index like the DJIA or S&P 500.  This, despite what are strong and very real behavioral tendencies to the contrary.  This is where VUCA and discipline around allocation converge.  VUCA will always exist, so investors should be disciplined and not fall prey to the greed of seeking higher returns or, becoming too fearful when markets appear unsustainable or suffer substantial drops.

 

Because US equity markets had appreciated significantly after the November elections, the decision was made to trim selected positions at the end of 2016 and again in early January to spread gains over 2 tax years.  These included our banking positions as well as some large-cap and mid-cap investments, all of which had seen nice gains.  For the most part, proceeds were left in cash in anticipation of the usual 1st quarter IRA distributions and tax related transactions.  Like most years, as January comes to a close, we have more clarity around client cash needs and what might remain for reinvesting.  Unlike most years however, some US equities have seen more short term appreciation in last several weeks.  This appreciation and rapid rise to 20000 prompted debate about the merits of additional trimming and whether to reinvest or increase cash.  Fortunately, when US equity allocations increase there is an opposite and equal drop in other areas of a portfolio.  This makes the decision of whether to reinvest cash and how much a little easier, particularly when variances call for the proceeds of equity sales to be invested in the safety of bonds.

 

In the coming weeks, we will embark on an even more critical assessment of earnings and the economic landscape than we might otherwise conduct given the current political VUCA we are experiencing in the US.  We will continue to invest in those areas we believe hold value and/or act as buffers against market declines like bonds.  Rapid market appreciation may result in the accumulation of cash over the 1-2% usually seen and will also prompt an even higher level of prudence when increasing equity exposure.  As my Rector did last Sunday by encouraging each of us to find ways to make positive, individual contributions, we will strive to maintain a make sense out of the geopolitical and investment VUCA while providing personal attention to client portfolios as directed by their allocation strategies and individual tolerance for risk.

 

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A Hidden Gem in the Asheville Mountains http://www.clearviewwealthmgmt.com/hidden-gem-asheville-mountains/ Tue, 08 Nov 2016 15:07:09 +0000 http://www.clearviewwealthmgmt.com/?p=1950 Many have had the pleasure of visiting Asheville and the surrounding area.  You may have visited during fall foliage season or in the spring when Biltmore’s gardens were in full bloom.  However, there is a lesser known event which occurs in the Asheville area twice a year and may be perfect to explore as you contemplate an important time of your life, retirement.   The concept of lifelong learning is not a new one.  Many take advantage of learning opportunities throughout their lives, completing degree programs at all ages.  However, the Osher Lifelong Learning Institute (OLLI) located in the mountains of Asheville, takes that learning to new heights.  The topography of this small corner of the UNC Asheville campus helps and the offerings at the institute offer an amazing variety to please every sense.  One of their most unique offerings is a weekend adventure called, Paths to Creative Retirement.   The Institute hosts a 2 ½ day workshop focused on the many facets of retirement.  While your Financial Advisor typically helps you plan for the financial aspects of retirement, this workshop Read on! →

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Many have had the pleasure of visiting Asheville and the surrounding area.  You may have visited during fall foliage season or in the spring when Biltmore’s gardens were in full bloom.  However, there is a lesser known event which occurs in the Asheville area twice a year and may be perfect to explore as you contemplate an important time of your life, retirement.

 

The concept of lifelong learning is not a new one.  Many take advantage of learning opportunities throughout their lives, completing degree programs at all ages.  However, the Osher Lifelong Learning Institute (OLLI) located in the mountains of Asheville, takes that learning to new heights.  The topography of this small corner of the UNC Asheville campus helps and the offerings at the institute offer an amazing variety to please every sense.  One of their most unique offerings is a weekend adventure called, Paths to Creative Retirement.   The Institute hosts a 2 ½ day workshop focused on the many facets of retirement.  While your Financial Advisor typically helps you plan for the financial aspects of retirement, this workshop engages you in the non-financial aspects of retirement.  Consider the following questions from the OLLI website:

  • When should I retire?
  • How will I spend my time after I stop or reduce my work?
  • How will I find purpose and meaning after I retire?
  • How will my identity change in retirement?
  • How will retirement affect my relationships with family and friends?
  • How do I investigate work and volunteer opportunities?

If you’ve never considered these types of questions, or never discussed them with your spouse/partner, they can provide a great deal of contemplation and conversation.  Having delved into the details of the sessions myself, I see great benefit in the sharing of perspectives among the classmates, the introduction of the non-financial considerations of retirement and the completion of some eye-opening exercises.  The goal of this weekend is to get your ideas flowing to allow you to look at your future through different lenses and then to draw upon all the information shared and begin developing your own priorities, plans and paths.

 

A recent attendee shared that they benefited from having the time away from their normal routine to focus just on these topics and to be prompted throughout the sessions to consider what they want their priorities to be in retirement.  They were also encouraged by panel discussions during the workshop which highlighted executive and professional retirees and the paths their retirement have taken.

 

During a recent educational conference I attended, one of the speakers discussed the difference between AGE (a chronological factor) and OLD (an attitudinal factor) and concluded that we each need enough purpose to wake up in the morning and enough money to sleep at night.  For some retirees, there is a significant loss of purpose when their career ends and they don’t have an obvious path for meaningful engagements going forward.  As a planner, I encourage my clients to be proactive in exploring what is on the horizon, to consider the challenges, chart their path and then work toward those goals.  The same is true of having a purpose in retirement.  Consider whether attending the Paths to Creative Retirement workshop might be right for you, or contact your advisor to begin to have these discussions about your own future.

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A “Value” Bias in Investing http://www.clearviewwealthmgmt.com/a-value-bias-in-investing/ Tue, 08 Nov 2016 14:59:56 +0000 http://www.clearviewwealthmgmt.com/?p=1943 Broadly speaking, value investments are those that are often acquired at a discount to their fair market price and that pay dividends.  They also tend to be perceived as “steady” and less inclined to volatility relative to their more growth oriented counterparts.  Our portfolios have a mix of U.S. and International equity investments classified as growth, but are more heavily weighted to value.  Only the smallest portfolios, limited to broad market, passive index investments with roughly equal weightings of value and growth, may lack this lean to value.   A closer look at portfolios will confirm this preference.  In the large cap space, value investments like PowerShares Large Cap Value (ticker, PWV) and FMI International (ticker, FMIJX) generally represent a larger percentage of the overall portfolio than their growth counterparts, Schwab U.S. Large Cap Growth (ticker, SCHG) and WisdomTree Emerging Market Consumer ETF (ticker, EMCG).  Berkshire Hathaway and IBM, which were added to larger portfolios almost a year ago, are two more examples of “value” companies.  A close inspection of mid cap, small cap and emerging market investments will turn Read on! →

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value

Broadly speaking, value investments are those that are often acquired at a discount to their fair market price and that pay dividends.  They also tend to be perceived as “steady” and less inclined to volatility relative to their more growth oriented counterparts.  Our portfolios have a mix of U.S. and International equity investments classified as growth, but are more heavily weighted to value.  Only the smallest portfolios, limited to broad market, passive index investments with roughly equal weightings of value and growth, may lack this lean to value.

 

A closer look at portfolios will confirm this preference.  In the large cap space, value investments like PowerShares Large Cap Value (ticker, PWV) and FMI International (ticker, FMIJX) generally represent a larger percentage of the overall portfolio than their growth counterparts, Schwab U.S. Large Cap Growth (ticker, SCHG) and WisdomTree Emerging Market Consumer ETF (ticker, EMCG).  Berkshire Hathaway and IBM, which were added to larger portfolios almost a year ago, are two more examples of “value” companies.  A close inspection of mid cap, small cap and emerging market investments will turn up similar evidence of higher value weightings.

 

The Case for Value

 

Statistical research shows stocks with low price-to-book-value ratios (value stocks) outperform their growth counterparts by approximately 4.8% a year.  Value stocks have also offered a partial hedge against market risk.  Since 1980, value stocks have outperformed growth stocks by an average of 1.3% per month during months when the stock market was down.  The flip side is value underperformed growth stocks by 0.4% during months when the market was up.  However, we believe this slight underperformance in rising markets is acceptable given the almost 1% outperformance in declining markets.

 

Adding to the case that value tends to outperform is the tendency of investors to overpay for growth.  Despite the existence of sophisticated analysis tools, statistical studies suggest accurate forecasting of long-term earnings growth beyond one year is difficult at best.  Outside the 12-month projection, there also seems to be little correlation between earnings growth forecasts and what companies actually earn in future years.  Overconfidence, a behavioral bias, is also at work.  Investors tend to overstate or be overconfident in the likelihood that a high flying company will be able to continue producing better than expected earnings.

 

Conviction to Value

 

On the surface, a conviction to value seems obvious when considering an attractive price point for purchase and a history of dividends.  Numerous other criteria must be considered before picking an investment but the final decision is made somewhat easier knowing the empirical evidence supports value outperforming growth over the long term.  Asset class allocation, and a diverse basket of investments within each, will always be core tenets of our investment style.  Complimenting this with a bias to value goes a step further in support of the belief that the historical outperformance (by value) in down markets outweighs chasing returns by overweighting growth in accelerating markets.

 

[1] Content for this investment commentary was sourced from the article, “Why Value Beats Growth: A Brief Explanation”, September 2016 edition of the American Association of Individual Investors (AAII) Journal.

 

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“Fall” into your Employer Benefits Package http://www.clearviewwealthmgmt.com/fall-employer-benefits-package/ Tue, 13 Sep 2016 14:41:05 +0000 http://www.clearviewwealthmgmt.com/?p=1936   Although it may not yet feel like fall outside, we are approaching the last quarter of 2016 and the time when employer benefits open enrollment occurs for the coming year.  Before that benefits package hits your mail/email, here are a few things to consider in advance and discuss with your advisor.   Are you covered by a High Deductible Health Plan (HDHP)? An HDHP is defined as having a deductible of at least $1,300 for Singles or $2,600 for families.  If your health plan qualifies, you are eligible to contribute pre-tax money to a Health Savings Account (HSA), up to $3,400 for Singles in 2017, or $6,750 for families per year.  By contributing pre-tax money, you reduce your current taxable income, but more importantly, when the money is withdrawn from the HSA for qualified medical expenses, it comes out tax-free.   There is currently no other investment vehicle in which pre-tax money goes in and tax-free money comes out. The ideal situation is to maximize contributions to the HSA each year you are eligible (by having a high deductible health Read on! →

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rendering of a compass with a benefits icon

rendering of a compass with a benefits icon

Although it may not yet feel like fall outside, we are approaching the last quarter of 2016 and the time when employer benefits open enrollment occurs for the coming year.  Before that benefits package hits your mail/email, here are a few things to consider in advance and discuss with your advisor.

 

Are you covered by a High Deductible Health Plan (HDHP)? An HDHP is defined as having a deductible of at least $1,300 for Singles or $2,600 for families.  If your health plan qualifies, you are eligible to contribute pre-tax money to a Health Savings Account (HSA), up to $3,400 for Singles in 2017, or $6,750 for families per year.  By contributing pre-tax money, you reduce your current taxable income, but more importantly, when the money is withdrawn from the HSA for qualified medical expenses, it comes out tax-free.   There is currently no other investment vehicle in which pre-tax money goes in and tax-free money comes out.

  1. The ideal situation is to maximize contributions to the HSA each year you are eligible (by having a high deductible health plan) prior to age 65. During that time, you pay your medical costs from cash flow and leave the HSA alone.  Once you retire, that account stays with you and is then used in retirement to pay qualified medical expenses, free of taxation.
  2. Even if you need to tap this account during a year while you are still working, you still benefit by having the withdrawals come out tax-free for qualified medical expenses.
  3. The cash in the HSA can be invested to help it grow for the future. Investing is typically allowed once the account balance reaches $1,000.
  4. Remember that HSA account balances carry over from year to year. There is no “use it or lose it” aspect to these types of accounts.
  5. Use of an HSA can also be a great way to save for the medical insurance costs incurred by a pre-65 retirement.
  6. You can typically change your deferrals to an HSA throughout the year, so this doesn’t need to wait for benefits open enrollment.

 

Long-Term Disability – Many employers offer long term disability as a part of their benefits package for employees. However, it is important to understand what you are getting with their offering and if that is sufficient to cover you in the event of a disability.

  1. Most LTD offered by employers is paid by the employer. While this may sound like a great deal, it makes any disability benefits you receive taxable income to you, thereby reducing the value of that benefit amount.
  2. Most LTD offered by employers has a relatively short benefit period for payment of benefits. In the case of a disability where you can’t perform your job, it typically provides benefits for 18-24 months.  At the end of that period, many group LTD policies change over to the “Any Occupation” definition, which means if you are able to work at “any” job, your benefits will cease.
  3. Most LTD offered by employers covers only a percentage of your base salary. For those who earn a substantial portion of their annual income via bonuses or commissions, this can represent a severe reduction in monthly income in the event of a disability.
  4. As an example, assume your annual income is $150,000, where your base salary is $75,000, your annual bonus is $75,000 and you have an employer-paid LTD that states it covers 50%. If this 50% is calculated on just your base salary, then the most your benefit would be is 50% of $75,000, or $37,500. This is before income taxes are taken into account.  This benefit is vastly different from the $150,000 you have been earning and may not be sufficient to even cover the basics.
  5. Check with your employer to see if they offer an additional level of LTD coverage that allows you to pay the premiums, so that any benefit received is tax-free to you. If they don’t have an additional level of coverage, you should consider adding a private disability policy to supplement what you would receive through work.

 

Life Insurance – group life insurance can be a great way to adjust your total insurance coverages from year to year. Ideally, you don’t want all your life insurance through your employer, to protect against a lapse in coverage if you change employers or retire.  Additionally, a private, level-term policy will typically cost less than group coverage as you age.  If you don’t know how much life insurance you need to protect your family, contact your advisor to perform a needs analysis prior to benefits open enrollment.

If you are still employed, open enrollment for your annual benefits is an important time.  Make the most of it this fall by being educated and prepared to choose wisely among the benefits offered by your employer.

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Cheryl Sherrard quoted in recent online article http://www.clearviewwealthmgmt.com/cheryl-sherrard-quoted-recent-online-article/ Fri, 02 Sep 2016 18:03:29 +0000 http://www.clearviewwealthmgmt.com/?p=1933 Cheryl Sherrard was recently quoted in an article entitled “Here’s Why It’s Taking so Long to Hit your Money Goals”, in Grow Magazine.  She offered advice regarding employee deferrals to 401(k) plans, reminding readers that contributing only up to your employer match amount is not likely to be enough for your eventual retirement.  This is an area where employees can make changes to save more quickly for the future. To see the article in it’s entirety, click here.

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Cheryl Sherrard was recently quoted in an article entitled “Here’s Why It’s Taking so Long to Hit your Money Goals”, in Grow Magazine.  She offered advice regarding employee deferrals to 401(k) plans, reminding readers that contributing only up to your employer match amount is not likely to be enough for your eventual retirement.  This is an area where employees can make changes to save more quickly for the future. To see the article in it’s entirety, click here.

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Why you should get to know your insurance agent! http://www.clearviewwealthmgmt.com/why-you-should-get-to-know-your-insurance-agent/ Mon, 08 Aug 2016 21:19:21 +0000 http://www.clearviewwealthmgmt.com/?p=1930 When was the last time you met with your Property & Casualty Insurance agent? Here’s why you should get to know them. For many of us, our insurance agent is a name on an insurance card, the person we would call if we were ever involved in an accident or if we had a claim to file. The reason we need to get to know our agent is so that they can get to know us and therefore ensure that we are insured appropriately. I recently spent about an hour in my insurance agent’s office to complete a thorough review of my insurance coverage. A higher than anticipated homeowner’s invoice is what prompted me to initiate this session. The agent’s office was more than willing to meet and discuss the policy in detail. We reviewed all the details of our home, including square footage, floor coverings (hardwood, carpet, tile), upgrades to kitchens and bathrooms, outdoor improvements (screened porches, outdoor kitchens), as well as the basics of how many bedrooms, bathrooms, etc. were in the house.  After about 50 detailed questions, Read on! →

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P&Cinsurancesmaller

When was the last time you met with your Property & Casualty Insurance agent? Here’s why you should get to know them.

For many of us, our insurance agent is a name on an insurance card, the person we would call if we were ever involved in an accident or if we had a claim to file. The reason we need to get to know our agent is so that they can get to know us and therefore ensure that we are insured appropriately.

I recently spent about an hour in my insurance agent’s office to complete a thorough review of my insurance coverage. A higher than anticipated homeowner’s invoice is what prompted me to initiate this session.

The agent’s office was more than willing to meet and discuss the policy in detail. We reviewed all the details of our home, including square footage, floor coverings (hardwood, carpet, tile), upgrades to kitchens and bathrooms, outdoor improvements (screened porches, outdoor kitchens), as well as the basics of how many bedrooms, bathrooms, etc. were in the house.  After about 50 detailed questions, I felt that my insurer had a much more accurate picture of our home and could therefore tailor our coverage to these specifics.  My goal in all of this was to have the correct coverage in place to fully protect our family if a serious claim were made.  I also wanted to ensure I wasn’t paying for coverage that wasn’t appropriate.

A few other items to consider as you review your policies with your agent.

  1. Make sure you understand the specific coverage you hold to understand if it covers full replacement or actual value of an item.
  2. Review all vehicles as well as the drivers associated with them, to make sure that these are correct to tie the right driver to the right vehicle and purpose.
  3. Understand if there is a need for flood insurance on your property. Just because you don’t live by a river doesn’t mean you couldn’t be flooded.
  4. Add septic backup coverage to your homeowner’s policy. This is an insignificant additional cost and a godsend if ever needed.
  5. Review the contents of your home for any jewelry, artwork, or antiques which might require an additional rider to fully cover these in the event of loss. General homeowner’s policies are limited in their coverage for these items.
  6. Don’t skimp on coverage to save a few dollars. Make sure you adequately insure to protect your family in the event of loss.
  7. Consider your deductibles and at what level you would actually file a claim. Then talk with your agent to see if a higher deductible results in significant savings. Sometimes the savings are not worth the higher deductible, so it is wise to explore this item.
  8. If you don’t have an umbrella liability policy in place, talk to your agent about adding at least $1 million. This policy covers above and beyond the underlying liability limits on your individual policies and can act to protect your assets in the event of a large liability settlement against you.

Instead of simply paying the increasing premium the next time your insurance policy comes due for renewal, make an appointment to speak with your agent and delve into the details. A little time spent in discussion with them can go a long way toward making the insurance coverage you hold both appropriate for your situation and very valuable as a risk reduction tool for your family.

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Will Brexit Breakit? http://www.clearviewwealthmgmt.com/will-brexit-breakit/ Fri, 01 Jul 2016 14:05:17 +0000 http://www.clearviewwealthmgmt.com/?p=1925 The last few months have been filled with debate over how the Brexit vote would end.  The markets have parroted this debate throughout the month of June with positive and negative swings leading up to last week’s vote.  On Thursday, words turned to action and the argument reached a crescendo when 52% of the British citizens participating in the historic referendum, cast their vote to leave the European Union (EU).  Much has been written and spoken since, about what this will mean to Britain and the world.  Which countries will remain in the European Union, what it will mean to global markets and more broadly, what is the long term future of economic globalization?  No one knows for sure how the next few weeks, months or years will evolve.  What history suggests are world equity and bond markets will be volatile as news on the economic impact sorts itself out. They (markets) will steady as facts become clearer.  Eventually, global markets will resume a more predictable pattern influenced more by traditional financial valuations and less by what seems to be Read on! →

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British FlagThe last few months have been filled with debate over how the Brexit vote would end.  The markets have parroted this debate throughout the month of June with positive and negative swings leading up to last week’s vote.  On Thursday, words turned to action and the argument reached a crescendo when 52% of the British citizens participating in the historic referendum, cast their vote to leave the European Union (EU).  Much has been written and spoken since, about what this will mean to Britain and the world.  Which countries will remain in the European Union, what it will mean to global markets and more broadly, what is the long term future of economic globalization?  No one knows for sure how the next few weeks, months or years will evolve.  What history suggests are world equity and bond markets will be volatile as news on the economic impact sorts itself out. They (markets) will steady as facts become clearer.  Eventually, global markets will resume a more predictable pattern influenced more by traditional financial valuations and less by what seems to be a political statement made by the working middle class who are not necessarily benefiting from economic globalization.

The Vote

A 52% to 48% victory by those in favor of leaving the European Union is not what many would consider a resounding victory.  More telling is what happened within the percentages and the demographics of who voted to remain and leave.  London and Scotland voted to remain in the EU, Wales and the English shires voted to get out.  Approximately 70% of university graduates were in favor of the EU; an equally disproportionate 68% of those who hadn’t finished high school were against it.  Londoners and those under 30 were strongly for Remain; the northern English and those over 60 were strongly Leave.  70% of the skilled working class supported Brexit.[1]  While the 52% to 48% may be relatively narrow, the internal divide among the British citizenry is much wider.  The demographics seem to support what many acknowledge as the widening socioeconomic gap between the winners of globalization and its losers.

The Markets

Given the potential Britain’s exit from the EU had to create significant disruption, the global markets are behaving in a somewhat orderly fashion.  On Friday, the Dow Jones Industrial Average fell 3.4% while the S&P 500 dropped 3.6%.  Overseas, Britain’s FTSE 100 fell 3.1%, the Stoxx Europe 600 Index fell 7% and Japan’s Nikkei Stock Average declined 7.9%.  On Monday, except in Asia where most of the major indices were up, markets continued their slide.  The Dow dropped approximately 1.5%, the S&P 500 another 1.8%.  Britain’s FTSE 100 was off 2.5% and the Stoxx Europe 600 shed 4%.  Volatility will likely be the norm and investors should brace for the possibility of further declines.  Despite the drubbing, the markets remain higher than they were in February and some believe (Friday’s) declines may have been exacerbated by the expectation that Britain would remain.  Recognizing that volatility and declines are unsettling but in the spirit of maintaining perspective, consider whether the actual companies that make up the equity markets have done something to merit a drop of 5% or more.  Are the products of Procter & Gamble, GlaxoSmithKline or Nestle somehow less desirable than they were last Wednesday?  Assuming the answer is no, then it might be reasonable to expect that declines will be relatively short in duration and values will recover over time.

What’s on the Horizon?

Most believe the decision will have negative consequences for the British economy.  In relation to the US dollar, the Pound Sterling dropped just over 7.6% last Thursday and Friday.  The Bank of England will very likely keep liquidity high and interest rates low to offset anticipated inflation.  Average citizens however will likely pay more for goods and services.  This same drop in currency value may prove advantageous to British exporters because their goods will be less expensive in the global trade markets.

It is very unlikely that Britain will receive favorable exit terms from the remaining EU countries.  The EU’s immediate demand that England invoke Article 50 of the bloc’s governing treaty and withdraw quickly does not reconcile with the voids created by ruling Conservative Party resignations in key positions and squabbling within the opposition Labour Party and will make ongoing negotiations tense.  Exit terms will no doubt be a priority for the EU and will be used to motivate the populist parties in other European Union countries to reconsider any thoughts of exiting.  While possible, until exit terms are known, the domino effect is not highly probable.

In the United States, the UK’s decision to withdraw from the EU will likely cause the Federal Reserve to defer any planned summer rate hikes.  2nd quarter growth is predicted to be around 2.5% with a slight rise in inflation and represent steady signs of (slow) growth and improvement.  However, with little understanding about Brexit and its impact on global economies, look for the Fed to remain cautious and accommodative as they seek and study future economic data.  With respect to direct trade, British exporters will have a more competitive footing thanks to the Pound Sterling drop.  But imports and exports to the U.K. account for less than 5% of America’s total trade in goods and services so any drag on the trade balance should be slight.

The Bigger Picture

Jim Tankersley of the Washington Post wrote an informative article suggesting Brexit was part of a larger anti-globalization sentiment.  Among the many points he covered, he wrote, “The developments come at the hands of an anxious working class across the West, who feel left in the cold by many developments of the rapid integration of foreign products and people into their lives”.[2]  The driving forces of these populist uprisings in Europe and the U.S. (i.e. Trump supporters) are complex but the underlying thread seems to be a decline in the income share held by the broad middle class.  Global trade seems to have boosted incomes only for the poorest and the very richest workers in the world.  Outsourcing jobs and immigrants willing to work for significantly lower wages contributes to the anxiety.  What is becoming more clear and being voiced in political arenas is the realization that globalization comes with trade-offs.  Said differently, it is difficult to balance what is in the best interest of your electorate with the shared interests of the global community.

Markets and Portfolios

If Brexit is more populist uprising than economic meltdown, then markets should respond as they have historically and return to normalcy.  As mentioned earlier, have companies actually done anything to merit the loss of their underlying value?  The world will continue to require goods and services and companies will be there to fill these needs.  Trade alliances and global commerce may slow as politicians and trade representatives respond to current political influences but rest assured, Britain and countries all over the world want to do business with each other.  As typical with most geopolitical events and with the unexpected victory of the proponents to Leave, there are winners and losers.  Most portfolios, given heavier allocations to equities, will experience declines in times like these but the drops will be buoyed by fixed income.  Over time, a broadly diversified portfolio will show resilience in the face of future surprises and more immediately, temper the expected volatility that will ripple across markets as Britain and Europe come to terms and the rest of the global community learns what Brexit will mean.

[1] Wall Street Journal Saturday/Sunday, June 25-26, 2016

[2] Britain Just Killed Globalization as We Know It; Jim Tankersley, Washington Post

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