Some random thoughts from a quick trip with my two boys and my parents to Florida, primarily to visit the Tigers for the opening of Spring Training.
I flew Southwest Airlines. Amazing how efficient, friendly and terrific they operate. Absolute evidence of a happy staff translating into a more successful business. How they can land and take off so quickly (and safely), is unbelievable.
Southwest has created a great marketing strategy: 2 free bags included with their ticket price. Delta (formerly Northwest) charges approximately $25 per bag, each way. That's $50 roundtrip per person for one bag! So, make sure to factor in bag charges when you make plan reservations. And for those that know that I overpack, I only took one suitcase, not 2.
My boys flew Airtran (long story as to why). My younger son is very into technology. Airtran now offers wi-fi on all their flights. My son was able to use the internet, post Twitter updates, etc. for most of the flight, for approximately $10. That seems reasonable and a future trend many of us will be using in the near future. I'm now following him, and a few others on Twitter, to learn about Twitter.
The opening of spring training was fun and a positive sign of spring to come. Observing the great variance in how the Tigers' players interacted with fans to sign autographs was interesting. Some were overly gracious and signed for everyone in sight. Others would not give the fans, even little kids, the time of day. For what they are paid, no excuse. I really wanted to get Brandon Inge's autograph for my daughter, as he does so much charitable work, which we followed last summer. He never signed, although we waited and waited, as he stayed for hours after most other players had left for the day. A sign of his incredible work ethic and desire to rehab from last years' injuries. Can't fault him for that and a great lesson for my kids!
We went to the Kennedy Space Center, which I strongly recommend to anyone who goes to Orlando or departs from a cruise near there. Can easily spend an entire day, which is moving (particularly the Memorial for astronauts who have died in various space program efforts and the Shuttle explosions), awe inspiring and educational. You have to see the 1970s Saturn V rocket, which they built a building around to display, to truly appreciate how large the rocket is...and how small the ship carrying the astronauts in the Appolo missions were at the very top. A must see experience!!
The road outside the Tigers spring training facility is evidence of our health care system and Lakeland's population. For probably two miles, over 90% of the buildings appeared to be every type of health care related facility possible. My kids noticed before I did. Other than 1 sub shop and a car dealership, just health care and more health care.
Tuesday, February 23, 2010
Thursday, February 11, 2010
The Next Big Mistake: Don’t reach for it!
As we meet with clients, a common theme is investor frustration with the low yields that are available for high quality fixed income investments, such as CDs or short term government bonds.
We often say that we don’t have a crystal ball and we cannot predict the future. However, the implication for the eventual rise in interest rates and their impact on many investors is best stated as: “Not if, but when.”
Interest rates are at historically low levels, due to the economic crisis that we have endured since 2008. Eventually interest rates will rise. No one knows specifically when this rise will begin, how quickly it will happen or to what extent. But we know that eventually interest rates will rise from their current levels.
What will happen when rates rise? Who will be affected and will that affect be good or bad? Many people we meet with who are not currently clients, or clients who still hold some of their investments elsewhere, hold some of their fixed income investments in bond funds. When interest rates rise, bond values will fall. The longer the maturity of the bond, the larger the loss will be. This is an economic reality.
Investors in bond funds, who think they own a “safe investment,” are going to be facing losses, some of which will be very significant, when interest rates rise. We recommend that investors hold high quality individual fixed income investments, not bond funds. By holding these investments to maturity, our clients will avoid the losses that investors in bond funds may incur, when interest rates rise.
So investors may want to “reach” for the higher yield that tempt them by owning a bond fund (or lower quality or longer term bonds), but they will be better off in the long run to stick to short term, high quality individual bonds or CDs.
We can work with you to structure a fixed income portfolio that will maximize the interest rate return that is available today…and properly structure your fixed income portfolio for the eventual rise in interest rates. This will help you avoid what we predict will be one of the major financial stories of the next 5 years…the massive losses that will be incurred by investors in bond funds when interest rates rise. Don’t make that mistake!
We often say that we don’t have a crystal ball and we cannot predict the future. However, the implication for the eventual rise in interest rates and their impact on many investors is best stated as: “Not if, but when.”
Interest rates are at historically low levels, due to the economic crisis that we have endured since 2008. Eventually interest rates will rise. No one knows specifically when this rise will begin, how quickly it will happen or to what extent. But we know that eventually interest rates will rise from their current levels.
What will happen when rates rise? Who will be affected and will that affect be good or bad? Many people we meet with who are not currently clients, or clients who still hold some of their investments elsewhere, hold some of their fixed income investments in bond funds. When interest rates rise, bond values will fall. The longer the maturity of the bond, the larger the loss will be. This is an economic reality.
Investors in bond funds, who think they own a “safe investment,” are going to be facing losses, some of which will be very significant, when interest rates rise. We recommend that investors hold high quality individual fixed income investments, not bond funds. By holding these investments to maturity, our clients will avoid the losses that investors in bond funds may incur, when interest rates rise.
So investors may want to “reach” for the higher yield that tempt them by owning a bond fund (or lower quality or longer term bonds), but they will be better off in the long run to stick to short term, high quality individual bonds or CDs.
We can work with you to structure a fixed income portfolio that will maximize the interest rate return that is available today…and properly structure your fixed income portfolio for the eventual rise in interest rates. This will help you avoid what we predict will be one of the major financial stories of the next 5 years…the massive losses that will be incurred by investors in bond funds when interest rates rise. Don’t make that mistake!
Teaching and Learning
On Thursday February 4th, Brad spoke about Roth IRA conversions for the Institute of Continuing Legal Education (ICLE), before approximately 200 attorneys and another 100 who watched via a live webcast. ICLE, an affiliate of law schools in Michigan, primarily the University of Michigan Law School, provides continuing legal education to attorneys throughout Michigan. The seminar will be rebroadcast throughout the State during February and March.
Based on our background as investment advisors and CPAs, we are uniquely qualified to provide guidance and creative planning opportunities for Roth IRA conversions. See our separate blog post regarding Roth IRA conversions or contact us for more information.
Keith recently attended a 2 day seminar in Arizona with advisors that we are affiliated with on a national basis, as part of our affiliation with BAM Advisor Services, our “back office” firm which supports approximately 120 wealth management firms, which together manage approximately $10 billion.
Keith’s seminar focused on estate planning with a nationally recognized estate planning attorney, as well as sessions with top executives from Dimensional Fund Advisors (DFA) and economists.
Both Brad and Keith participate in these peer groups throughout the year, which focus on exchanging best practices and advice with advisors who share our investment and wealth management philosophy. These peer groups also talk bi-weekly or monthly throughout the year, to discuss various topics and ideas, and meet in person at least twice a year.
Based on our background as investment advisors and CPAs, we are uniquely qualified to provide guidance and creative planning opportunities for Roth IRA conversions. See our separate blog post regarding Roth IRA conversions or contact us for more information.
Keith recently attended a 2 day seminar in Arizona with advisors that we are affiliated with on a national basis, as part of our affiliation with BAM Advisor Services, our “back office” firm which supports approximately 120 wealth management firms, which together manage approximately $10 billion.
Keith’s seminar focused on estate planning with a nationally recognized estate planning attorney, as well as sessions with top executives from Dimensional Fund Advisors (DFA) and economists.
Both Brad and Keith participate in these peer groups throughout the year, which focus on exchanging best practices and advice with advisors who share our investment and wealth management philosophy. These peer groups also talk bi-weekly or monthly throughout the year, to discuss various topics and ideas, and meet in person at least twice a year.
Sunday, January 24, 2010
2009: Facts and Figures Perspective
With all the volatility we have experienced in the financial markets during the past few years, a little perspective is sometimes helpful. While we usually focus on the long-term, this one year perspective is also insightful.
Format below: 12/31/08, 12/31/09, Change
S & P 500: 903, 1115 +23.5%
Dow Jones Indus: 8,776, 10,428 +18.9%
30 yr. Treas Bond Yld 2.68%, 4.63% huge relative increase
10 yr. Treas Bond Yld 2.21% 3.83% significant increase
90 day T bill rate .07%, .06% no change; historically low
30 yr. mortgage rate 5.10%, 5.14% no change
Crude oil, spot price $38.95, $78.87 increase $39.92/barrel
increase 102%
Price per gallon of gas: $1.90, $2.60
While this post is full of figures, what are some thoughts about what they mean?
Though the first part of 2009 was horrendous for the stock market, as was 2008, investors who remained disciplined were very well rewarded, particularly if they had a globally diversified portfolio.
Interest rates remain very low, particularly for very short term investments. Note the rise in the long term bonds. One of the biggest risks, and stories of the future, will be the eventual rise in interest rates and investors who lose significant amounts of money by holding their "safe" investments in bond funds. As interest rates rise, investors in bond funds will lose significant dollars as the value of their funds decline. This is why we do not recommend bond funds for our clients and prefer holding individual fixed income securities, like CDs, individual bonds, etc.
It is also interesting, and I can't explain why, that the price of oil per barrel more than doubled, but the price of gasoline rose 37%. While they increased in correlation, they did not rise by the same percentage.
Format below: 12/31/08, 12/31/09, Change
S & P 500: 903, 1115 +23.5%
Dow Jones Indus: 8,776, 10,428 +18.9%
30 yr. Treas Bond Yld 2.68%, 4.63% huge relative increase
10 yr. Treas Bond Yld 2.21% 3.83% significant increase
90 day T bill rate .07%, .06% no change; historically low
30 yr. mortgage rate 5.10%, 5.14% no change
Crude oil, spot price $38.95, $78.87 increase $39.92/barrel
increase 102%
Price per gallon of gas: $1.90, $2.60
While this post is full of figures, what are some thoughts about what they mean?
Though the first part of 2009 was horrendous for the stock market, as was 2008, investors who remained disciplined were very well rewarded, particularly if they had a globally diversified portfolio.
Interest rates remain very low, particularly for very short term investments. Note the rise in the long term bonds. One of the biggest risks, and stories of the future, will be the eventual rise in interest rates and investors who lose significant amounts of money by holding their "safe" investments in bond funds. As interest rates rise, investors in bond funds will lose significant dollars as the value of their funds decline. This is why we do not recommend bond funds for our clients and prefer holding individual fixed income securities, like CDs, individual bonds, etc.
It is also interesting, and I can't explain why, that the price of oil per barrel more than doubled, but the price of gasoline rose 37%. While they increased in correlation, they did not rise by the same percentage.
Good Decision. Good News. Now What?
In a previous post in August, when President Barack Obama re-nominated Fed Chairman Ben Bernanke to a new term as Federal Reserve Chairman, I wrote positive comments about this decision by the President. (see Blog posting dated 8/24/09)
While Bernanke could be questioned for certain decisions, he was the right person to have been at the helm during the peak of the financial crisis during 2007-2009. He made touch decisions, acted quickly and decisively, when action was desperately needed to avoid a worsening of the crisis. His academic background as an expert on the Great Depression was instrumental in the design of many of the Feds actions and programs that have been initiated since 2008.
His term as Chairman expires at the end of January (in the next week). Congress has still not voted for confirmation and a number of Senators are backing away from supporting his re-nomination. This uncertainty was a part of the stock market's volatility and significant decline late this week. The markets do not like uncertainty. More uncertainty would certainly result if Bernanke was not approved by the Senate, as there is no logical next choice for Obama to select to succeed Bernanke. And even if he had to pick a successor, the Senate confirmation process would take months.
Regardless of one's politics, the confirmation of Bernanke is needed and the proper step for the Senate to take. For a few Senators to block this nomination, for their own political reasons or concerns, would unnecessarily be doing great harm to the financial markets.
While Bernanke could be questioned for certain decisions, he was the right person to have been at the helm during the peak of the financial crisis during 2007-2009. He made touch decisions, acted quickly and decisively, when action was desperately needed to avoid a worsening of the crisis. His academic background as an expert on the Great Depression was instrumental in the design of many of the Feds actions and programs that have been initiated since 2008.
His term as Chairman expires at the end of January (in the next week). Congress has still not voted for confirmation and a number of Senators are backing away from supporting his re-nomination. This uncertainty was a part of the stock market's volatility and significant decline late this week. The markets do not like uncertainty. More uncertainty would certainly result if Bernanke was not approved by the Senate, as there is no logical next choice for Obama to select to succeed Bernanke. And even if he had to pick a successor, the Senate confirmation process would take months.
Regardless of one's politics, the confirmation of Bernanke is needed and the proper step for the Senate to take. For a few Senators to block this nomination, for their own political reasons or concerns, would unnecessarily be doing great harm to the financial markets.
Tuesday, October 6, 2009
Interest Rates and the Fed
Due to the financial crisis that began in 2008, interest rates are at extremely low levels. The Federal Reserve has currently set the fed funds rate at between 0 -.25% and this level is expected to be maintained for "an extended period."
This low-level of interest rates, along with current and future levels of government expenditures, has led many investors to question or consider the impact this will have on future inflation rates.
A member of the Federal Reserve Board of Governors, Kevin Warsh, wrote an Opinion column that was published in the Wall Street Journal on September 25, 2009. He stated that long-term inflation expectations are stable and an economic conditions are likely to warrant exceptionally low level of interest rates for an extended period of time.
He then focused on the future. He stated that "we are at a critical transition period," of an unknown duration and that "we must prepare diligently for an uneven road race ahead." What he was beginning to address was how the Federal Reserve would increase interest rates in the future, to avoid inflation rates to rise to levels higher than desired.
In the past, when the Federal Reserve would increase interest rates, it has at times done this in .25% increments every few months. His comments indicate that once the Federal Reserve anticipates that it is the appropriate time for such an increase in interest rates, this may not be the pattern that they implement. He stated "that prudent risk management indicates that policy likely will need to begin normalization before it is obvious it is necessary, possibly with greater force than is customary..."
While the raising of interest rates may not occur for a while, we view these comments as positive. As the Federal Reserve had to act creatively during the inception of this crisis, the implication of these comments is that they will attempt to be proactive and take action to avoid much higher than normal levels of inflation in future years.
We cannot anticipate or predict future interest rates. In the structuring our fixed income portfolios, we purchase what is referred to as a laddered portfolio, which means that we will buy securities over a somewhat even period of time, rather than placing a significant bet as to how and when interest rates will change. Further, as appropriate to a specific client, we have been investing for a number of years in both TIPS (Treasury Inflation Protected Securities) and commodity mutual funds, both of which provide hedges against significant rises in inflation. We have been investing in both of these asset classes for a number of years and feel that they should be included in most investors portfolios.
This low-level of interest rates, along with current and future levels of government expenditures, has led many investors to question or consider the impact this will have on future inflation rates.
A member of the Federal Reserve Board of Governors, Kevin Warsh, wrote an Opinion column that was published in the Wall Street Journal on September 25, 2009. He stated that long-term inflation expectations are stable and an economic conditions are likely to warrant exceptionally low level of interest rates for an extended period of time.
He then focused on the future. He stated that "we are at a critical transition period," of an unknown duration and that "we must prepare diligently for an uneven road race ahead." What he was beginning to address was how the Federal Reserve would increase interest rates in the future, to avoid inflation rates to rise to levels higher than desired.
In the past, when the Federal Reserve would increase interest rates, it has at times done this in .25% increments every few months. His comments indicate that once the Federal Reserve anticipates that it is the appropriate time for such an increase in interest rates, this may not be the pattern that they implement. He stated "that prudent risk management indicates that policy likely will need to begin normalization before it is obvious it is necessary, possibly with greater force than is customary..."
While the raising of interest rates may not occur for a while, we view these comments as positive. As the Federal Reserve had to act creatively during the inception of this crisis, the implication of these comments is that they will attempt to be proactive and take action to avoid much higher than normal levels of inflation in future years.
We cannot anticipate or predict future interest rates. In the structuring our fixed income portfolios, we purchase what is referred to as a laddered portfolio, which means that we will buy securities over a somewhat even period of time, rather than placing a significant bet as to how and when interest rates will change. Further, as appropriate to a specific client, we have been investing for a number of years in both TIPS (Treasury Inflation Protected Securities) and commodity mutual funds, both of which provide hedges against significant rises in inflation. We have been investing in both of these asset classes for a number of years and feel that they should be included in most investors portfolios.
Friday, September 4, 2009
Social Security: No 2010 Increase?
Preliminary estimates indicate that Social Security recipients may not receive an annual increase, when payment figures are released for 2010.
Social Security payment increases are based on annual inflation. Currently, the federal formula for inflation reflects negative inflation for 2009, so there would not be an increase when the government decides on the 2010 change. It is possible that the government may evaluate this situation and make a change in the rules, as many of the real costs that recipients incur have increased. The major reason that the 2009 inflation factor is negative is the significant decline in the price of oil from 2008 to 2009.
This is a further update to a June, 2009 post, which predicted the same trend.
Social Security payment increases are based on annual inflation. Currently, the federal formula for inflation reflects negative inflation for 2009, so there would not be an increase when the government decides on the 2010 change. It is possible that the government may evaluate this situation and make a change in the rules, as many of the real costs that recipients incur have increased. The major reason that the 2009 inflation factor is negative is the significant decline in the price of oil from 2008 to 2009.
This is a further update to a June, 2009 post, which predicted the same trend.
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