Conscientious Financial Planning and Retirement Income Management | 201-741-9528
from Lonier Financial Advisory LLC, Osprey, FL

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Beware the Head Fake

A jest if not a full-blown parody, and fun for that, Bespoke’s blog post “Is the Superbowl the Biggest Obstacle Now Facing the Market” also casts some sidelight on the weakness in much of what passes as serious technical and even some fundamental security analysis.

The short post strings together these nuggets of data mining:

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  • Both the Giants and the Pats have won the SB three times, so the winner will have four victories tying the Packers for fourth for total wins (is ‘four’ the Fibonacci number of football?)
  • Across the three years of previous Giants wins, the S&P declined an average 6.6% from SB day to year end, and for the Pats, declined an average 3.6% (there were 3 winning and 3 losing years in total for the S&P, but the losses won out, so to speak)
  • On the other hand, when the NFC wins, the S&P gained an average 10.64% with wins 19 out of 24 years, while for the AFC, it gained an average 3.44%, winning 13 out of 21 years the AFC triumphed

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Maybe this proves, at least for the heirs of the old National Football League, that you can win in the market over the long term! Or maybe it just shows you should be very careful drawing conclusions about how to invest your money based on interesting but causally unrelated coincidences, no matter how sophisticated the math or ‘logic’ appears. As in how the market behaves in presidential election years, or after a Democrat or Republican wins the office, or according to your favorite Dow Theorem or Elliot Wave pattern of choice.

Not that there isn’t some sort of contrarian logic available to counter the behavioral investing patterns of the mob. Just watch out for the quarterback’s head fake. You’re playing with your own money, after all.

Rate On, Rate Off

The S&P 500 has been on a steady up-swing since the beginning of the year. The Treasury yield curve has also been slanting up, the long rate back up over 3% from a record low in December, as Treasuries begin to fall in price with money moving into equities. (See this nifty interactive historic yield curve play toy.)

T-Bonds are still pricey, especially if you are an inflation hawk. The Fed today counseled that it intends to hold rates low through late 2014. This takes some of the risk off holding government bonds for now, but at just a notch or two above historically low rates, it’s still a bubble-like situation. If you’re trying to build a retirement income floor, it may pay not to lay too much of it just yet.

Corporate bonds, on the other hand, are surging with the market. LQD is nearing a 52-week high, and junk funds and preferreds are moving up, buoyed perhaps by generally positive news this earning season. And the continuing low rate forecast/Fed commitment.

For Fed watchers, Bernanke gave a wonky press conference today, as transparent and openly detailed about Fed deliberations and mechanics as any in memory for what has often been an opaque and mysterious institution.

The Euro-mess overhang is still out there, like a snow shelf high in the mountains over Davos threatening avalanche. It could sweep down the hillside at any moment, blanketing a good chunk of the global economy, some would warn. Or not, others would counter, it’s being managed.

The market wants to believe. So what do you do? Well, if you sold back in 2008 or 2009 during the collapse and you’re thinking of buying back in now, you may become one of the hapless classic market timer examples of the sell-low buy-high syndrome that afflicts fair weather investors.

At least wait for a pullback that isn’t the beginning of the avalanche.

Can’t tell whether the avalanche is coming or whether last year’s high is actually a good entry point for this year? Of course you can’t tell. Nobody can. That’s why you need a better strategy than trying to time the market!

Disclosure: The author is long LQD.

Retirement Fund Recovery

The Urban Institute, which hosts a site dedicated to non-partisan retirement policy research, posted a year-end update of retirement account balances. Total retirement account balances fell about 31% or $2.7 trillion in Q1 2009, the market bottom of the recent financial crisis, from the pre-cash peak total in Q3 2008 of $8.7 trillion.

The good news is that retirement accumulation has mostly rebounded from the crash, and at year end was calculated at $8.6 trillion. This represents a bounce of about $400 billion in Q4, from the lower total of $8.2 trillion during the Q3 correction, though still short of the $8.9 trillion peak in Q1-Q2 of 2011.

[imageeffect type=”frame” width=”500″ height=”271″ alt=”” url=”/wp-content/uploads/2012/01/RetirementAcctBalances.gif” ]
from www.urban.org

The market has moved steadily upward since mid-December. The S&P 500 is up almost 4.6% in the 13 trading days since January 1, just 3.5% off its April 29 high last year, so account balances, for those who hold equities, have improved even more this month.

The S&P fell almost 57% to its bottom in 2009. The 31% drawdown in retirement accounts surely shows the wisdom of strategic asset allocation including holding a significant percentage of risk-off assets, which cut the drawdown almost in half. And the rebound, in the 34 and half months since also shows the virtue of staying invested even in a deep crisis. If you had sold out near the bottom, perhaps fearing even further decline, and didn’t buy back in until early last year or maybe even back in April of 2010, your holdings might just beginning to move off of market bottom value.

For those fast approaching and just beginning retirement, if not for everyone, the message should be clear—it’s time to get strategic!

The Shifting Flow of Capital

A couple recent reports give some indication that the world of investing continues to change.

Investment News reports that while total assets under management in the advisory industry has recovered above re-2008 crash levels to $11.2 trillion, four big brokerages, Merrill Lynch, Morgan Stanley, UBS, and Wells Fargo, have lost a trillion dollars in client assets under management since then. The $300 billion BofA brought to Merrill Lynch during the 2009 acquisition softened the drop overall at the bank, but the drop at Merrill Lynch has been significant. Across the four, industry market share fell from 50% to 43%, with another 8% estimated drop by 2014 if the trend continues.

The erosion of high-worth clients at the big firms was even worse, an 11% drop from 56% to 45% market share, which suggests that Merrill-Lynch’s recently adopted strategy of focusing exclusively on large accounts may be running against a strong tide.

In the mutual fund world, Morningstar reports $85 billion flowed out of U.S. equity mutual funds in 2011, with $130 billion flowing into taxable bond mutual funds. Overall, including money market funds, the $7.9 trillion total value in mutual funds fell about $23 billion for the year.

Passively managed indexed mutual funds had $76 billion inflows while actively managed funds had $9.4 billion in outflows. Actively managed mutual funds still dominate with 85% of the funds invested.

This is the 6th consecutive year of net outflows from U.S. equity mutual funds. Over $350 billion has been redeemed from U.S. stock mutual funds since 2006. IndexUniverse.com estimates that ETFs (exchange traded as opposed to mutual funds) held $1 trillion in assets at year end, the majority passively indexed. Further, they report that U.S. equity ETFs had overall net inflows of $41 billion during 2011.

According to IndexUniverse.com, Vanguard, which pioneered indexed funds, had $29 billion in new mutual fund assets and $35 billion in new ETF investments in 2011. Over $500 million flowed into SPY on Tuesday this week, the ETF that tracks the S&P 500, and almost a billion into ETFs over all.

Watching this shifting river, what can you see in the fast-moving flow? A few things, but dangerous to generalize too much:

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  • Investors have been especially wary of U.S. stocks since the 2008 crash
  • Investors are drifting away from large brokerage houses
  • Investors are leaving traditional U.S. equity mutual funds
  • Investors are  beginning to favor passive over active mutual funds
  • ETFs are becoming a larger part of daily investor activity

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Are these long terms trends related to a move towards passive strategic asset allocation and lower cost investing methods? Or are they just market reactions stemming from the two market crashes in the past ten years that a big rally will push to the side? Or maybe a mix of both?

HSA’s and Taxes

One of the age-old myths of retirement planning is that your taxes will be so much less when you’re retired that they will not be as serious a planning issue as when you were working. This has certainly been part of the selling of 401k/403b and IRA tax-deferred accounts.

There are, however, a few tax-traps tailor-made for retirees. Consider that withdrawals from traditional IRAs and 401ks are taxed as regular income. But that withdrawals from HSA’s (Health Savings Account) are tax-free when spent at any age on qualified medical benefits. And, once you are 65, are simply taxed as regular income like an IRA if spent on other things like food, shelter, and clothing. So you have nothing to lose from funding an HSA, and plenty to gain.

Qualified medical expenses include Medicare premiums and long term care insurance and expenses. If you can pay big ticket items like long term care with tax free dollars, you could save 25% by not having to pay those taxes. A $60,000 HSA could save you $15,000 during retirement.

So you fund an HSA to the max! Probably not the biggest and most important move you should be making to prepare for retirement, but you will have medical expenses when you’re retired. Take the advantage where you can.

There are some provisos (see IRS Publication 969 for the whole story):

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  • You must be covered by an eligible High Deductible Health Plan ($2,400 family deductible, $11,900 max out-of-pocket)
  • You can’t contribute beyond age 65, so act now before April 12, 2012 to make a 2011 contribution
  • Your employer’s contributions reduce your annual contribution limit (but thank them anyway!)
  • Total contributions for 2011 if you have HDHP family coverage is $6,150 plus $1,000 per spouse over 55

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If you don’t have an HSA account, you can start one if you qualify, much like you would open an IRA account. Health Savings Administrators, for example, allows you to invest your account funds in low-cost Vanguard index funds.

 

 

 

The Investment Answer Book

There are a number of straightforward, short books about investing that I recommend as good reads for the layman or average investor. Short as in well-written, clear, with understandable explanations of complex concepts, while not thick enough to use for flattening fall leaves.

Working your way through 600 pages on finance and investing, you’ll be nagged at some point by the sense that this experience is probably not going to really help you. Who has read the entirety of Ben Graham’s Intelligent Investor? You wonder if even Warren Buffet, his most successful student, made it all the way through.

My latest recommendation in the best-of-short category is The Investment Answer, by Daniel Goldie and Gordon Murray, Business Plus/Hachette, 2011. Sadly, Gordon died during the past year—this was a joint, last project to summarize a career’s learning in the market. Goldie is an independent adviser connected with Dimensional Funds, a topic for another day.

The book takes you through five essential decisions in the space of 70 pages:

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  • Do-it-yourself vrs brokers or advisors
  • The allocation of risk-on and risk-off assets in a portfolio
  • Diversifying among asset classes
  • Active (stock picking and timing) vrs passive (indexing) management
  • When and how to rebalance

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The book is a bit too portfolio theory orthodox for my taste. The battle between alpha and beta, between the inefficient market and the random walk, hasn’t been settled yet. And you shouldn’t hold your breath waiting for the decision from the booth. But you can ignore the logic of these very different approaches only at some, possibly great, risk to your capital.

So here is a clear and succinct (and modestly priced!) book that lays out the terrain. It should give you an idea where some of the ditches are and even a few hidden mines. It could help you make better choices. Not bad for ten bucks.

 

My fiduciary responsibility to you

As an independent Registered Investment Adviser (RIA), Lonier Financial Advisory LLC has a unique relationship of trust with you, our clients.

LFA LCC is a fiduciary who puts your best interests ahead of our own. We are a fee-only advisor. We don’t sell anything to you but our services. LFA LLC works hard to keep our fees and your cost of investing as low as we can so you enjoy higher returns, while providing you impartial financial planning and investment management services. We help you make better choices. That’s the value-add we contribute to your financial well-being.

I’m Michael Lonier, the owner and investment adviser representative of LFA LLC. This fiduciary duty—as set forth by the federal Investment Advisers Act of 1940—makes me different from many other financial services professionals you will meet.

Most stock brokers and insurance agents now call themselves financial advisors or financial planners. Regardless of title, if they earn commissions, they are securities sales agents regulated under different federal laws, and do not have a fiduciary obligation to place your interests ahead of their own or their firm’s.

Some Registered Investment Adviser firms work under a hybrid ‘fee-based’ model. This means they offer advisory services for fees, but they also earn commissions as agents for selling financial products they recommend to you. They may be affiliated with broker/dealers, banks, or insurance companies and offer securities through that relationship. Though this practice inherently conflicts with your best interests, it is legal under the Act as long as they disclose their conflict of interest and all sales fees and commissions to you. Hybrid RIAs are still required to uphold a fiduciary standard even as they acknowledge their conflict with your interests.

How I differ from financial advisors, commissioned financial planners, and hybrid RIA reps is that they are commissioned salespeople, and I am not.

[blockquote type=”blockquote_line” align=”left”]As your trusted fiduciary advisor, I offer a value-add service, providing clarity, impartial advice, expert planning and investment management. I help you make better choices.[/blockquote]

As sales agents, they may have incentives to make certain sales levels or sell certain products their firms have identified as highly profitable, even if there are alternatives that are better suited to you. Legally, what they sell must only be ‘suitable.’ Financial advisors and commissioned financial planners are not required to ensure that you fully understand all the factors affecting their sales recommendation. Whether what they are selling is right or best for you is left for you to decide. That’s the way the buyer-seller relationship works.

Further, the sizable cost of these commissions comes out of your investable capital. The generally undisclosed sales fees and commissions that you pay to your financial advisor or commissioned planner when you buy their products can range from a low of 1-3% to upwards of 15-20% for some higher priced insurance products, significantly cutting into your returns. That’s also how the buyer-seller relationship works.

I’m independent. I work only for you. I don’t have a sales quota to meet or a new product to push or concerns I’ll be pushed out if I don’t produce. Neither I nor my company is affiliated with any other entity, or is a broker, agent, or referer for any other financial services firms or other third parties. LFA LLC and I do not receive any income or compensation from anyone except you.You know exactly what my fees are, and what they are for, because you approve them and pay them directly.

Acting in your best interest with a high duty for prudence and care, openly without personally profiting from the advisory service I provide to you, except for the fees you pay for the service, is my fiduciary obligation to you as your trusted advisor.

I think this is vitally important to you. Now that most corporations have dropped expensive professionally managed pension plans, millions of Americans are now in charge of their own pension and retirement planning through 401k/403b plans and IRAs they must manage themselves. Similarly, the increasing number of small businesses that are rising up as corporate America downsizes have to figure out how to go it alone.

The financial services industry is enormous, and enormously complex. Where once the pension plans were their customers, now they are coming directly to you. The big players spend billions on advertising, marketing, and sales training—targeting your dollars.

This can make it difficult to clearly understand your options and unfortunately relatively easy for those who are selling to take some persuasive advantage during the sales process. How do you sort through this tangle and make the best choices for you?

It is more difficult than ever to find a trustworthy advisory relationship. I believe independent, fee-only fiduciary advisors (RIAs) are the right place to find that help. You should choose your advisor carefully based on fit and a sense of trust.

As your trusted advisor, I offer a valuable service that focuses only on serving you, providing you with clarity, impartial advice, total financial resource planning, and prudent investment management. By organizing and simplifying your financial life, my goal is that you enjoy the confidence, peace of mind, and resources to reach your goals and live your life more fully. I help you make better choices.

Contact me now, via email, the contact form, or phone (201-741-9528). We can talk about your goals and your concerns and how I might help. There is no charge or obligation for these initial discussions.

Prudent Investment Management

Once your personal balance sheet and goals are well understood and you have a financial plan, you’re ready to become a Prudent Investor. Prudent Investors take the least amount of risk necessary to safely achieve their goals. Investing is largely about managing risk to gain reasonable rates of return.

Too often investors begin by focusing on maximum returns and growth, often by looking at recent market high performers, blind to the volatility risk inherent in high beta risk assets.

Higher risk—volatility—doesn’t necessarily mean higher gains. If you’re lucky, you may catch a big up swing. But you could just as well get pulled way down. The law of compounding makes it harder to recover from a deeper loss than a smaller one.

That is why portfolios with lower overall risk often out perform risky growth strategies over the long term. Higher risk ultimately means, quite simply, higher risk, not investment success.

So how does a Prudent Investor invest?

Your investment portfolio doesn’t stand by itself. It’s part of your full personal balance sheet, including current and future income, home and real estate equity, employer-provided benefits, government benefits (social security), your mortgage, loans, and debts, and large expense goals like college tuition. Your investments need to be risk-managed in the context of all the risks and resources bearing on your total economic situation.

If you’re in a volatile industry or feel your job is at risk, then your investment portfolio should shift towards risk-off—not the other way! If you don’t anticipate having a large government annuity (Social Security) or corporate pension, then you should build income into your portfolio, again, a risk-off strategy.

As a Prudent Investor, you want to support your lifestyle and reach your goals with as little overall risk as possible.

I’m Michael Lonier, the owner of Lonier Financial Advisory LLC. I start with understanding your resources and your goals, and create a total financial resources plan so you can see how all the pieces of your financial life fit together.

How best to structure your savings and investments? How much will you have, will you need, for a retirement that might last 35 years? How much is enough?

Once we’ve worked through these questions together, we are ready to build a Prudent Investment Portfolio that is well-suited to you. One that aligns risk-adjusted return with your goals, your plan, and your level of comfort.

Studies have shown that managing risk within a portfolio through strategic asset allocation is the most significant factor affecting investment returns over the long-term, far outweighing individual security selection and market timing. The balance between risky growth asset classes and less-volatile income asset classes in your portfolio is crucial to achieving the returns your goals require while managing risk consistent with your profile. This is Prudent Investment Management.

Long-term growth through efficient, low-cost investment in equities protects your purchasing power. Even retirees, with today’s longer life expectancies, may need a growth component in their portfolio, though pre- and early retirement is an important time to guard against losses (it’s never a good time to lose money!). Owning equities exposes you to market and business risk, so risk management is crucial.

Income investments provide a steady, lower-risk flow of current income. They balance the market and business risk of owning equities, protecting some part of your portfolio principal while providing current income and improving overall return. Over time, the value of that income stream will decline from the effects of inflation, providing less buying power for food, gas, and other necessities, hence the need to balance with growth assets.

[blockquote type=”blockquote_line” align=”left”] Studies show portfolios with a mix of asset classes produce higher returns over the long-term than portfolios that are heavily weighted in one or two assets or asset classes.[/blockquote]

Throughout your lifetime, the balance of risk and income assets in your investment portfolio will change, reflecting both the portfolio’s growing value and changing risks bearing on your personal balance sheet as your life circumstances change.

This lifetime risk rebalancing is part of your full lifecycle financial plan and is a key part of prudent investment management.

A large industry has grown up around financial services, one that imposes high costs and fees on investing that reduce your returns. I provide smart, full lifecycle financial planning and prudent investment management at a low cost to you—a fraction of the fees of typical large-firm financial advisors. This low cost reflects the efficient and prudent methods I use to build and manage portfolios.

I use low-cost exchange-traded equity index funds to construct the growth component of your portfolio, following the investment policy statement we agree on as part of your financial plan. The income allocation within your portfolio is a long-term stable platform for current income. Once invested, the income stream remains steady, regardless of price changes in the underlying securities. This approach minimizes your trading and carrying costs.

I use software tools to model statistically probable outcomes in your full lifecycle financial plan and in the design of your investment policy statement and portfolio. These help ensure that your plan is both efficient and prudent.

Although my strategies manage risk across your full personal balance sheet, I cannot eliminate risk or the possibility that some or all of your investments will lose value. No one can guarantee the performance of your investments. Which is why as a Prudent Investor, you should never take on more risk than a prudent plan to achieve your goals requires!

Contact me now, via email, the contact form, or phone (201-741-9528). We can talk about your financial plan, your concerns and goals, and how I can help you make better choices. There is no charge or obligation for these initial discussions.

Max your 401k/403b!

Is your 401k on autopilot, but you’re not sure where it’s going? I can help you make better choices. I can review your plan and tune-up the allocation of your savings and contributions across your plan’s fund options. Small tweaks now can compound to make significant differences later on. Your 401k/403b is your pension plan. Make sure it’s working as hard as you are!

The menu of choices in your plan probably looks impressive in the slick brochures and web pages from the plan service provider, which for 77% of sponsored plans recently surveyed by Deloitte, is a mutual fund company like giants Fidelity and T. Rowe Price.

The descriptions they provide of their funds and past performance are re-assuring. But it isn’t easy to see what’s going on inside their funds. How do the securities in one fund overlap with another and correlate with market risk? How risky is your current allocation? Does it align with you goals? Are you overexposed in some areas and under allocated in others? How do you know?

With new disclosure regulations for plan expenses going into effect this spring, you may be surprised to find out how much these mutual funds actually cost you—lowering your returns and taking money out of your pocket. Worse, surprisingly few of these expensive, actively managed funds are able to match their own benchmarks—not surprising considering that the expenses of active management, sales, and marketing all undercut a fund’s returns. How much are the funds you’ve chosen costing you? Is there a better performing, lower-expense allocation more suited to you?

[blockquote type=”blockquote_line” align=”left”]A few percentage points difference compounding over the years makes a big difference when it comes time to begin drawing income from your account[/blockquote]

These questions matter. Small percentage differences in returns and expenses compound over the years, making a big difference to you later on when it comes time to start drawing off your investments. It might make the difference between a comfortable retirement and one where you feel pinched all the time.

I’m Michael Lonier, the owner and investment adviser representative of Lonier Financial Advisory LLC. Our 401k/403b Max Plan is for investors who are building accounts in employer-sponsored plans.  It’s simple and straightforward. For one low fee, I will review your plan options and develop a low cost efficient asset allocation that aligns with your goals and risk tolerance. That gives you a risk adjusted return appropriate for your situation, not a generalization from a brochure. I’ll rebalance it for you regularly. And I’m always here to answer your money questions. My 401k/403b Max Plan can help ensure you don’t miss your target by a mile a few years down the road.

Contact me now, via email, the contact form, or phone (201-741-9528). We can talk about how to get the most from your 401k/403b, your concerns, and how I might help. There is no charge or obligation for these initial discussions.