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Financial Security and the Three Bears

Financial Security and the Three Bears

Hard work can make you financially successful, but it won’t necessarily keep you there. Threats to your wealth lurk everywhere. They can strike at any moment and destroy the security you spent years building.

In working with hundreds of families over the years, I’ve noticed three main threats to financial security. I call them the Three Personal Bears, and they’re just waiting to tear your savings apart.

A little planning will keep the bears at a safe distance, but first you have to know how dangerous they can be.


Personal Bear #1: Bear Markets

Any financial advisor will tell you stocks have been a great long-term investment. That’s true as far as it goes, but there’s a devil in the details.

Experts who advocate long-term “buy & hold” stock market strategies make a very big assumption: that investors will patiently sit through the occasional bear market, watching their account values drop by 20%, 30%, or even 50% without running for cover.

I can tell you from experience that very few investors have that kind of patience. This is not a character flaw; it’s human nature. Moreover, avoiding losses actually makes sense. This is because making up a loss is harder than avoiding it in the first place.

If you lose 20% of your money one year and then gain 20% on it the following year, are you back where you started? No – you’re still in the red. You need a 25% gain to recover from a 20% loss.

Recovery is exponentially more difficult as losses deepen. This table has the numbers for you.

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It’s far better to avoid these kind of losses in the first place, but that’s not what most people do. Undisciplined investors tend to buy into the market after it goes up, and then give up and sell after it falls - a recipe for disaster.

All our smart devices make being a patient investor even harder. Our phones and tablets give us such quick access to news that many people feel they have to react and “do something,” even when the best move is to do nothing.

Severe losses can be catastrophic if you are already retired or near retirement age. It’s true that your investments might come back in time, but your age clock won’t stop ticking. You may not have time to recover.

The best strategy varies for everyone, based on your goals, situation and personality. Many investors tell me it helped just to talk to someone and think through the issues. This is what we always do at Republic Wealth. We help clients develop an investment strategy that matches their unique circumstances.


Personal Bear #2: Taxes

Taxes may be necessary, but no one should have to pay more than their fair share. Many people do pay more than they have to, though, simply because they don’t know any better.

This can be a serious problem. If you are in the top tax bracket and you realize a 10% short-term capital gain, it might be only 6% or less after you pay federal and state income tax. The drag from high tax rates and fees makes compound growth significantly harder to attain.

I can’t tell you how many people overlook very simple steps they can take to minimize their tax burden. They pay thousands of dollars a year more than the law requires. The government gladly takes it, too, and rarely gives it back.

It doesn’t have to be this way. Here are three ways to keep the tax bear out of your money.

First, the best way to control your tax liability is to work with an expert Certified Public Accountant. You want someone who does more than fill out forms for you. Your CPA should work with you long before tax filing time, helping you structure your affairs in the most tax-efficient way.

Having a good accountant is especially important if you are self-employed or own a business. Structuring your business in a tax-efficient way can reduce your tax liability in many ways. You should also get an estate-planning attorney involved if your assets are significant.

Second, grab every opportunity to stash your savings in tax-advantaged investment programs. A Traditional or Roth IRA, 401K, 403B or other retirement programs let you defer taxes until you reach retirement age and/or deduct your contributions from current income. If you’ve invested the maximum allowed in those accounts, consider contributing to a variable annuity for additional savings.

Don’t forget that taxpayers over age 50 can make additional “catch-up” IRA and 401K contributions. Non-working spouses can open IRAs as well, potentially taking advantage of a Back Door” Roth IRA contribution.

Third, work with your advisor to use tax-efficient strategies with your remaining investments. Simple moves like “harvesting” capital losses in the same year as you realize gains can reduce your tax liabilities significantly. You can also give yourself an advantage by using your tax-advantaged accounts for investments that generate short-term capital gains and current income, while holding long-term investments outside them.


Personal Bear #3: Inflation

Inflation is a silent thief. Year after year, it reduces your money’s purchasing power. Even if you manage to keep your dollars safe from bear markets and taxes, inflation can sap their value so they are worth less in the future. You might have more dollars, but each dollar will buy less than it used to.

Inflation’s impact on you depends on the way you spend your money. Prices rise and fall at different rates. Inflation is especially hard on retirees because they spend a bigger part of their income on health care and housing.

A recent government study found an alternative “elderly” inflation rate ran 6.5% over wage-earning citizen inflation after 29 years.

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The Federal Reserve Board is supposed to keep inflation under control, but even they think inflation at 2% a year is acceptable. They actually think the inflation rate is too low right now.

Suppose you do everything right and manage to grow your portfolio at 8% a year after taxes, and that the Fed gets its way and inflation runs at 2% annually. Your “real” return after inflation will be just 6%. Inflation stole 25% of your investment growth. Over 10-20 years, this can add up to a huge lost opportunity.

Read more about inflation from Mauldin Economics.

How do you stop inflation? You can’t stop it but you can try to keep pace with it. Many different strategies can help. I think the best “inflation hedge” is a well-managed stock portfolio. Because stocks represent ownership in businesses that must themselves outpace inflation, their value tends to grow in line with inflation and the broader economy.

Bear markets, taxes and inflation aren’t the only bears that can hurt you, but I think they are the three biggest threats to long-term financial success. Every family’s financial plan needs to consider these hazards and have ways to counteract them. If you don’t know if you are ready for them, Republic Wealth can help. Call on us anytime.



IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’s current written disclosure statement discussing our advisory services and fees is available upon request.


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Stock Market Update: A Rangebound Year Drags On

Stock Market Update: A Rangebound Year Drags On

Stocks fell today for the fifth straight session. Today’s loss puts the S&P 500 at its lowest point since February. After staying in a frustratingly tight range for months, the broad market indexes are roughly back where they were in November 2014.

Should investors be nervous? Whether they should be or not, many investors clearly are nervous. The Dow Jones Industrial Average has crossed the “unchanged” mark 21 times so far this year. Let’s look deeper and see what is happening.

We like to watch the CNN Fear & Greed Index for a quantified reading on market sentiment. Right now, the needle is deep in the red “Extreme Fear” category.

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These extreme bearish readings almost never last more than a few days. The last time we saw the index at this level was during last year’s October Ebola outbreak. That downturn didn’t last long. History suggests this one won’t, either.

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Still, something is making noise under the hood. What’s wrong in there? We can point to many culprits: interest rate uncertainty and coming Federal Reserve meetings, the Greek debt crisis, China’s unraveling stock market, lower crude oil and commodity prices and earnings season nervousness. They all play a role, but the bottom line is that the stock market is running out of leaders.

Even as most stocks trade well below their recent highs, a handful of large-cap leaders are keeping the indexes relatively stable. Within the S&P 500, only six of the 500 stocks account for this year’s entire gain in market capitalization: Amazon, Google, Apple, Facebook, Gilead Sciences and Walt Disney.

If those are the leaders, who are the laggards? A new report today from Bespoke Investment Group has the answer.

Looking at the average distance that stocks are trading from their 52-week highs by sector, you can clearly see that Energy has been the major area of weakness, where stocks in the sector are currently trading down an average of 49.8% from their 52-week highs!  That is nearly twice the average decline of the next closest sector (Materials, -25.6%).  Outside of those two, every other sector is bunched around between a range of -10.9% (Financials) and -19.6% (Telecom Services).  Interestingly, while the Technology sector hit a 52-week high as recently as last week, stocks in the sector are down an average of -18.6% from their 52-week highs. That’s even more than the Industrials sector, which at the index level has seen much weaker returns than Technology.  The key difference is that some of the largest stocks in the Technology sector (Apple, Google, Facebook, etc.) are up significantly on the year, while some of the largest Industrials are down.

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Another challenge is that we are now in the height of quarterly earnings season. Results so far have been okay, considering how many analysts projected a weak first half of the year. Most companies are beating profit expectations. That’s the good news.

The bad news is that few companies are seeing higher revenue and profits, while better than expected, are still either flat or down slightly. According to FactSet Research, 2Q 2015 year-over-year blended earnings decline was 2.2% through last week. That figure includes the 187 S&P 500 stocks that have reported so far. We will learn much more this week as major names like Gilead and Facebook announce their quarterly results.

Another big data point will be this Wednesday’s Federal Reserve announcement. Economists are still split on whether the Fed will raise rates this year. No one expects them to take any action this week (and the market will be very upset if they do) but we might get some hints from the committee statement. This affects both bonds and rate-sensitive stock sectors like utilities.

As for Republic Wealth, recent action weakened our indicators enough to stop us from adding any new equity allocations, though as of today we have not yet reduced exposure. We are watching our health care and leisure stock positions but for now remain confident in them.

Summer or not, we are always watching out for your assets. Feel free to contact us any time if you have questions or concerns.



IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this commentary content should be construed as legal or accounting advice. If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’s current written disclosure statement discussing our advisory services and fees is available upon request.

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Time To Pay Off The Mortgage? Think Carefully

Time To Pay Off The Mortgage? Think Carefully

Owning your home is the American Dream. How many people really own one? Fewer than you think. Most of us own homes in partnership with our mortgage lenders – and they own a bigger share than we do.

Investors with substantial assets sometimes wonder if they should use part of their money to pay off the mortgage. Maybe you have $2 million in stocks and owe $400,000 on your home. Should you sell some stocks and pay off the mortgage?

Owning your home “free and clear” is an appealing idea in some ways. In the right circumstances, it can be a good financial move, too, but not always.

One key advantage to holding a mortgage is that it gives you leverage. For a relatively small investment (your down payment plus accumulated payments), you can control an asset worth much more than you spent. The profits can be very attractive if the home gains value and you sell at the right time. Some or all the gain could be tax-free, too, if the home was your primary residence for two of the last five years.

On the other hand, you can’t know in advance how much your home will be worth years in the future. The leverage can work against you if you have to sell in a weak market like we saw in 2008-2009. I usually advise against thinking of your home as an investment. If you derive enjoyment from living there, let that be your reward and view any gain as a bonus.

Mortgage or not, your home is an asset on your personal balance sheet. You want to stay diversified, so the home should not account for too much of your net worth. Yet that’s what may happen if you pay off your mortgage early. You’ll have a big part of your family’s capital tied up in that one asset.  If you ever want to sell, the process could take months and the price may not be as much you expect.

However, you can tap into your home’s value with a home equity loan or line of credit. This can be a good way to fund renovations or other improvements (states have varying restrictions) but don’t overdo it.

The mortgage interest deduction also plays a role. It is one of the main deductions in many joint tax returns and can let you itemize other deductible expenses like property taxes, charitable contributions, and tax preparation fees. Paying off the house will save you interest, but also make those other deductions less useful.

Your home can also play a role in your asset protection strategy. Depending on your state laws, your home may be off-limits to legal judgments against you. This is important for physicians and others with high litigation risk. Courts can take your money or stocks, but in most states, they can’t take your primary residence.

Perhaps the most important factor in deciding whether to pay off your mortgage is opportunity cost. What else are you doing with the money you will use to eliminate your mortgage debt?

This calculation was much easier when interest rates were higher. It is hard to imagine now, but just a couple of decades ago 30-year fixed rates were 7% or more. Paying off the mortgage early would “earn” you savings equivalent to that return.

If you could invest that money in the stock market at 12% then paying off the mortgage made little sense. But, the 7% return from mortgage payoff was guaranteed while the 12% stock return was highly uncertain.

Today’s calculation is similar, but mortgage rates are much lower. If you have a 3% fixed rate mortgage, paying it off may not be a good move if your diversified stock and bond portfolio can average 6%-8% over time. Again, however, no one knows for sure what the financial markets will do next week, much less years from now.

If you decide to invest extra cash rather than pay down your mortgage, you are taking real risk. Whatever you invest in could lose value at the very time an “investment” in your home would have gained value. Either decision has risks attached to it.

We know one thing for sure: Paying off the mortgage will give you certainty about one important aspect of your financial plan. If you can keep up with property taxes and maintenance, you can know that your home is yours for as long as you want to live there. Many people find this comforting.

How valuable is this peace of mind? This is an individual question, with no right or wrong answer. The important point is to be honest with yourself, consider all the factors and take the path that best matches your family’s goals.

Republic Wealth can help you think through the issues and make the best possible decision for your family’s future. Call on us any time to schedule a personal meeting.




IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’s current written disclosure statement discussing our advisory services and fees is available upon request.


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Finding Income in the 'Year of No Return'

Finding Income in the 'Year of No Return'

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Investing for income is harder than ever in 2015.  At the year’s halfway mark, few areas have generated positive total return in income-oriented investments.  Stocks have fared poorly as well, with the S&P 500 total return up slightly over 1% and the Dow Jones Industrial Average almost flat over the same period.

Rock-bottom interest rates and global market turmoil certainly make this a challenging environment in which to generate sustainable income.  Even so, at Republic Wealth we still see opportunity in carefully selected market niches.  This report discusses the challenging environment as well as some areas of opportunity today.


Challenging Times for Income Investors

U.S. investors are now in the seventh year of the Fed’s near-zero interest rate policy.  The Federal Reserve under Ben Bernanke and now Janet Yellen has obviously been in no hurry to change; they spent over two years making up their minds whether to “taper” off the quantitative easing program before actually doing it.

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Now the Fed may be near a decision to lift rates slightly above zero.  The timing of the rate increase, which at the beginning of 2015 was expected to take place in June, is now expected to occur in September if not later.  Even when the Fed does begin raising rates, any increases will likely be small and slow.  We are still years away from seeing bank deposit or Treasury bills above 1% yields.  As the following chart shows, the return on “risk-free” investments, represented by certificates of deposit (CD’s), has been minimal.  In 2006, $100,000 invested in a 6 month CD generated $5,240 in income.  Under current Fed policies, that same $100,000 has generated significantly less income (only $130 income in 2014).

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At the same time, positive economic signs have raised inflation expectations despite plunging oil prices.  Inflation serves to reduce the “real” yield on income-producing assets.  If inflation reaches the 2% target the Fed thinks possible, then even a 3% nominal bond yield would be only 1% in real terms.

In our past communications, we have made it clear that we believe that Barclays Aggregate Bond exposure should be avoided.  This includes many of the popular core or total return bond funds, including the Pimco Total Return fund.  The index, which has significant interest rate risk, posted a slightly negative return for the first half of the year (not even taking into consideration any inflation). 

Corporate and foreign bonds have offered little additional help.  Investment-grade corporate bonds delivered negative returns in the first half as businesses wrestled with lower energy prices and economic uncertainty.  Overseas, even long-term rates were close to zero in much of Europe even before the Greek crisis intensified in recent weeks.  Japanese rates are near zero, too. 

Some would say to look for income, or dividend, paying stocks including utilities and REITs.  However, given market expectations of higher interest rates, these have struggled as well.

Consider the year-to-date total returns as of 6/30/15 for some notable dividend oriented equity ETFs, all with yields over 3%:

•    -6.07% iShares Cohen & Steers REIT (ICF)
•    -10.70% SPDR Utilities (XLU)               
•    -3.82% iShares Select Dividend (DVY)  

Desperate for yield and price stability, some investors turned to other instruments that looked superficially attractive.  Tax-free municipal bonds looked safe (and many are), but some of the highest yielding muni funds padded their returns with bonds from Puerto Rico, Illinois and other troubled local governments.  The tax benefit of municipal bonds isn’t much help when their principal value is falling.

“Stretching for yield” can amplify your risk in unpredictable ways.  This makes the task of earning attractive income even more difficult.  Fortunately, a few niches exist that we believe offer good prospects even in this year’s difficult environment.


What’s Working in 2015

We currently identify a number of income-oriented investments, which deliver attractive yield with acceptable levels of volatility.

Structured Credit

Since fear of rising interest rates is behind much of this year’s income challenge, it makes sense to use income vehicles that are less rate-sensitive.  “Structured Credit” is one such category.  This group includes Agency and Non-Agency Residential Mortgage Backed Securities, Commercial Mortgage-Backed Securities, Collateralized Loan Obligations, and Asset-Backed Securities.

Many of these securities feature a “floating rate” design, meaning their interest rates adjust at regular intervals.  If you have an adjustable rate mortgage on your home, it may well be part of a mortgage-backed securities issue.  “RMBS” notes are simply big packages of mortgages like yours.  The lender has less risk because the mortgage rates will adjust upward if interest rates rise.

The returns in Structured Credit vehicles react to other factors, like supply and demand in the housing market or changes in consumer credit usage.  Their low correlation to traditional fixed income assets makes them very attractive in today’s environment.  One fund we currently own will earn positive returns if rates rise (based on 3/31/15 interest rate scenarios) and only a slightly negative return even if rates rise 2% (which we consider to be unlikely for some time).

Tactical High Yield Strategy

Our Republic Wealth tactical high yield strategy also has the ability to make money in periods of rising rates.  Overall, the high yield sector is one of the few fixed income sectors that has actually delivered positive returns over previous periods of rising rates.

Like structured credit, high yield is less sensitive to interest rate changes.  The key factor is default risk of the issuing companies.  We use high yield funds with diversified portfolios so occasional defaults will have minimal impact.
To further control risk, Republic Wealth utilizes a tactical overlay.  Our strategy remains invested when prices are rising, but can move to the sidelines and sit in cash if yields rise enough to generate negative price movement.

Spreads (compensation for risk) over Treasury yields are currently quite attractive.  As of June 30, the spread was +5.5% versus a current default rate of 1.9%.  The historical spread is +5.9% with a 3.9% default rate.

High yield has been one of 2015’s best-performing fixed income sectors.  Through June 30, the U.S. Corporate High Yield Index rose 2.5%.


Alternative Investments to Consider

At Republic Wealth, we’re not afraid to look “outside the box.”  While many advisors restrict themselves to some combination of stocks, bonds, and cash, we monitor and use “alternative investments” when appropriate. They are proving very helpful this year.

Alternative investments that currently look attractive include private real estate, privately traded business development companies, and absolute return funds, among others.

One distinguishing factor in alternatives is they don’t always have daily liquidity like mutual funds and ETFs.  If you aren’t actively trading and don’t need instant liquidity, you can many times earn higher returns in exchange for foregoing it.

Private Real Estate

Most investors are familiar with public Real Estate Investment Trusts, or REITs.  These pools of property trade on an exchange like company stocks.  They are often very useful but we find privately offered real estate is more attractive in the current environment.

Private real estate often holds similar types of assets to REITS you see listed on exchanges, but most are at an earlier stage of their lifecycle.  Others intend to stay private and offer liquidity in other avenues, such as quarterly redemptions.

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Opportunities in this space include both privately-traded REITs and multi-manager vehicles.  Multi-manager REITS offer diversified access to a portfolio of privately held real estate, most of which have very high barriers to entry by individual investors.  In this structure, the overall manager makes smaller investments in various private REITs and the pooled vehicle is offered to individual investors. 

Individual privately-traded REITs invest in more narrow opportunities, which typically bring greater risk but also the potential for greater return.  Examples include a healthcare REIT, a grocery store REIT, a REIT investing in hotels, and a multi-family REIT, to name a few. 

Private real estate is an excellent income alternative because it can generate higher returns with lower risk than public REITs, while also exhibiting an uncorrelated performance cycle.

Business Development Companies (BDC)

We see another very useful alternative investment in Business Development Companies, or BDCs.  These specialized investments combine high dividend payouts with potentially favorable tax treatment and reduced interest rate risk.  This combination makes them ideal in the current environment.

BDCs make loans to small and midsize businesses (the “middle market”) and pass the interest on to shareholders as income, similarly to real estate investment trusts (REITs) and master limited partnerships (MLPs).  Like those vehicles, BDCs are “flow-through” vehicles for tax purposes.  They pay no corporate taxes as long as they distribute at least 90% of annual income to shareholders as dividends. Many distribute an even higher percentage.  Distributions can be ordinary income, qualified or non-qualified dividends, return of capital, or a combination of these tax categories.

The middle market that BDCs serve is huge, comprising approximately 200,000 businesses with $10 trillion in gross revenue.  If this market were a country, it would be one of the world’s largest economies.

We typically utilize non-traded BDCs which bring liquidity restrictions but also help minimize volatility. We rely primarily on investments who partner with large private-equity firms including Apollo, GSO Blackstone, and KKR. 

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Most BDCs take advantage of a floating rate structure that, like structured credit, protects against rising interest rates.  The effect of rising rates on both floating rate and fixed rate investments is shown on the chart above.  They also tend to invest on the highest end of the capital structure, which helps enhance recovery prospects if a borrower defaults. 


Absolute Return Funds

Most traditional stock and bond funds tie themselves to a benchmark index, like the S&P 500 or Russell 2000 Small Cap Index.  Their goal is to beat the index, not necessarily earn positive returns.  If the benchmark drops 20% and a fund loses only 15%, the fund manager will consider it a victory because the index did even worse.

Absolute Return Funds target positive returns without regard to benchmarks.  The goal is to deliver a reliable, consistent return in all market environments.  To do this, they combine the conventional asset classes with others like currencies and commodities.  They may also use “non-directional” methods that involve short-selling and other active trading strategies.

Adding one or more absolute return funds to an overall portfolio can have real, measurable benefits over traditional strategies alone.  They tend to perform best when stocks and bonds are at their worst. This low correlation helps cushion losses in bear markets and deliver more stable performance over time.


Other Alternative Investments

Republic Wealth also looks to other alternative investments we won’t detail at this time.  These include private equity investments that take equity stakes in non-public companies.  These investments have the opportunity to generate attractive income and / or capital appreciation depending on the specific investment.

Another investment vehicle we utilize is “life settlements” or life insurance contracts.  By investing in a large enough pool, the investment attempts to take advantage of actuarial statistics to generate uncorrelated returns.


Conclusion

As you can see, while today’s environment is challenging, opportunities exist to investing outside of core or total return fixed income, which we believe to be risky and offer flat or negative real returns over the coming years.

If you want to learn more about any of these opportunities and whether they may be appropriate for your financial situation, please contact us at any time by phone at 512-506-9395 or e-mail at This email address is being protected from spambots. You need JavaScript enabled to view it. .



IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this commentary content should be construed as legal or accounting advice. If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’s current written disclosure statement discussing our advisory services and fees is available upon request.

 

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Annuity Income in the 'Year of No Return'

Annuity Income in the 'Year of No Return'

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Investing for income is harder than ever in 2015.  At the year’s halfway mark, few areas have generated positive total return in income-oriented investments.  Stocks have fared poorly as well, with the S&P 500 total return up slightly over 1% and the Dow Jones Industrial Average almost flat over the same period.

Rock-bottom interest rates and global market turmoil certainly make this a challenging environment in which to generate sustainable income.  Even so, at Republic Wealth we still see opportunity in carefully selected market niches.  This report discusses the challenging environment as well as some areas of opportunity today.


Challenging Times for Income Investors

U.S. investors are now in the seventh year of the Fed’s near-zero interest rate policy.  The Federal Reserve under Ben Bernanke and now Janet Yellen has obviously been in no hurry to change; they spent over two years making up their minds whether to “taper” off the quantitative easing program before actually doing it.

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Now the Fed may be near a decision to lift rates slightly above zero.  The timing of the rate increase, which at the beginning of 2015 was expected to take place in June, is now expected to occur in September if not later.  Even when the Fed does begin raising rates, any increases will likely be small and slow.  We are still years away from seeing bank deposit or Treasury bills above 1% yields.  As the following chart shows, the return on “risk-free” investments, represented by certificates of deposit (CD’s), has been minimal.  In 2006, $100,000 invested in a 6 month CD generated $5,240 in income.  Under current Fed policies, that same $100,000 has generated significantly less income (only $130 income in 2014).

b2ap3_thumbnail_150716-CD-income.png

At the same time, positive economic signs have raised inflation expectations despite plunging oil prices.  Inflation serves to reduce the “real” yield on income-producing assets.  If inflation reaches the 2% target the Fed thinks possible, then even a 3% nominal bond yield would be only 1% in real terms.

In our past communications, we have made it clear that we believe that Barclays Aggregate Bond exposure should be avoided.  This includes many of the popular core or total return bond funds, including the Pimco Total Return fund.  The index, which has significant interest rate risk, posted a slightly negative return for the first half of the year (not even taking into consideration any inflation). 

Corporate and foreign bonds have offered little additional help.  Investment-grade corporate bonds delivered negative returns in the first half as businesses wrestled with lower energy prices and economic uncertainty.  Overseas, even long-term rates were close to zero in much of Europe even before the Greek crisis intensified in recent weeks.  Japanese rates are near zero, too. 

Some would say to look for income, or dividend, paying stocks including utilities and REITs.  However, given market expectations of higher interest rates, these have struggled as well.

Consider the year-to-date total returns as of 6/30/15 for some notable dividend oriented equity ETFs, all with yields over 3%:

•    -6.07% iShares Cohen & Steers REIT (ICF)
•   -10.70% SPDR Utilities (XLU)
•    -3.82% iShares Select Dividend (DVY)

Desperate for yield and price stability, some investors turned to other instruments that looked superficially attractive.  Tax-free municipal bonds looked safe (and many are), but some of the highest yielding muni funds padded their returns with bonds from Puerto Rico, Illinois and other troubled local governments.  The tax benefit of municipal bonds isn’t much help when their principal value is falling.

“Stretching for yield” can amplify your risk in unpredictable ways.  This makes the task of earning attractive income even more difficult.  Fortunately, a few niches exist that we believe offer good prospects even in this year’s difficult environment.


Income Opportunities in an Annuity Structure

While annuity products bring many benefits, including the potential for tax-deferral and a death benefit, investing for income in today’s environment is no small challenge.

Fixed-rate annuities offer consistent returns, but in many cases, rates today are not high enough to meet investor’s needs.  Some variable annuity products have limited investment lineups, and in many cases their only bond investment is an intermediate-term bond fund whose return has close ties to interest rates.

However, not all variable annuity products are created equal.   Some companies like Jefferson National and Security Benefit offer well-diversified fixed income lineups.  So, even though some alternative income investments are not available, we believe it is possible to generate acceptable income within their variable annuity products. 

Before getting into what we believe to be a viable opportunity, we’d first like to cover the landscape of investment choices available in one specific variable annuity product.

Jefferson National, which offers a low cost product with a diverse investment lineup, had only three bond funds that delivered over a 5% rate of return in the year ended June 30, 2015.  All three are long-dated Treasury funds and all are down measurably in 2015 as rates have risen.

In addition to long-term bonds, other fixed income investment categories within the Jefferson National annuity product (as an example) are bank loans, emerging market debt, foreign bond, government bonds, high yield bond, inflation protected bond, intermediate-term bonds, mortgage-backed bonds, multisector bonds, nontraditional bonds, and short-term bonds.

These offer a variety of ways to generate income in different market conditions.  We monitor all of them but currently we see the most opportunity in high yield bonds.


Tactical High Yield Strategy

Our Republic Wealth tactical high yield strategy also has the ability to make money in periods of rising rates.  The high yield sector is one of the few fixed income niches to deliver positive returns over previous periods of rising rates.

High yield has historically proven itself less sensitive to interest rate changes.  The key factor is default risk of the issuing companies.  We use high yield funds with diversified portfolios so occasional defaults will have minimal impact.

To further control risk, Republic Wealth utilizes a tactical overlay.  Our strategy remains invested when prices are rising, but can move to the sidelines and sit in cash if yields rise enough to generate negative price movement.

Spreads (compensation for risk) over Treasury yields are currently quite attractive.  As of June 30th, the spread was +5.5% versus a current default rate of 1.9%.  The historical spread is +5.9% with a 3.9% default rate.

High yield has been one of 2015’s best-performing fixed income sectors.  Through June 30th, the U.S. Corporate High Yield Index rose 2.5%.

Within our tactical high yield strategy, we also consider multisector bonds, which tend to have a predominant allocation to high yield but also allocations to other fixed income categories, as well as bank loans, which are below-investment grade bonds that offer floating-rate interest exposure.  Floating rate exposure is beneficial when rates rise, as the yield on the loans adjusts higher.


Conclusion

As you can see, while today’s environment is challenging, opportunities exist to investing outside of core or total return fixed income, which we believe to be risky and offer flat or negative real returns over the coming years.

If you would like to discuss today’s challenges and potential opportunities further, please contact us at any time by phone at 512-506-9395 or e-mail at This email address is being protected from spambots. You need JavaScript enabled to view it. .



IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this commentary content should be construed as legal or accounting advice. If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’s current written disclosure statement discussing our advisory services and fees is available upon request.

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Draft Your Financial Pro Team

Draft Your Financial Pro Team

Financial success doesn’t mean you can stop working, even if you want to. In fact, it can mean even more work. Managing your finances grows steadily more complicated as the numbers grow larger.

Trying to “go it alone” is usually a bad move as the stakes get higher. It’s much better to find specialists with expertise in handling your kind of needs. They can often save you enough money to recover their fees – and give you confidence you are making wise choices for your situation.

Your financial team will be unique because your situation and needs are unique. Here are some of the players it might include.

Wealth Manager. Sometimes called a financial planner or advisor, your wealth manager is the “Captain” of your financial team. This is how we work at Republic Wealth. Our job is to understand you and your situation and help you make smart decisions for your financial needs. We call or recommend other professionals as needed, like Fidelity to hold your assets in safe custody, or third-party money managers with specialized investment programs.


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Tax Accountant. I’m constantly amazed how many high-income people still prepare their own income tax returns. Some are very privacy-sensitive and others don’t want to pay a fee every year. I think both those objections may be misguided.

The cost concern is understandable. Why pay an accountant $1,000 or more when you can use a software program that costs a fraction of that amount? Well, think about how complicated the tax code is. If a CPA’s expertise can get you one relatively small deduction that you would have missed on your own, you could make up the fee several times over.

As for privacy, the IRS certainly knows everything. The agency will not hesitate to use that knowledge to extract more taxes from you, too. Would you rather trust a computer – which can be hacked – or have a real human expert on your side? I use a CPA and I think you should, too.

A CPA will do far more than prepare your tax returns, too. He or she should give you proactive advice long before tax time and help keep your tax bill down.  If you ever get an audit notice and have to face the IRS more directly, you’ll be glad to have an expert by your side.

Business Accountant. If you own a small business, you probably need help with bookkeeping and payroll. Many owners use the same accountant who prepares their taxes. That’s fine in some cases, but your business might benefit from specialized financial advice.

For instance, if your business is in a highly regulated field (and what isn’t these days?) or you aren’t the sole owner, it might make sense to have a different accountant advising you on business matters and your personal tax matters. You want each facet of your affairs to get the best possible help.

Private Client Lawyer: We all joke about lawyers, but nothing is better than having a good one on your side. Your personal attorney should be someone you trust and rely on for routine advice. Make sure he or she has a wide network and can refer you to specialists in areas like estate planning, tax strategies, business valuation and other complex legal matters.

Estate Planning Attorney. I explained a few months ago why you need an estate plan. You also need an expert to prepare and maintain it. That person should be a board-certified estate-planning attorney. This is a very specialized field and missing just one small element can be costly.

Make sure your estate-planning attorney is licensed in your home state and any other states where you own property, too. State laws rule many important details that can make a big difference. You want someone who is familiar with the local laws and practices.

Insurance Agent(s). I think about insurance as “risk management.” It is how we defend our assets from potentially adverse events or the event of your own death. Here again, an expert’s specialized knowledge can really pay off. You’ll need to insure your car, your home, your health and your life. Some estate planning strategies use life insurance products. Depending on your occupation, you might also need liability, umbrella or errors & omissions insurance.

Whatever your needs, you need to make sure the policy you buy really protects you from the risks you are taking. For instance, does your homeowner’s policy cover the full cost of replacing your home, or just the amount you paid for it? The difference can be huge. You want an agent who will ask you the right questions so you get the right coverage.

Others: You might also need other specialized help at certain points in your life. A good example would be when you move to a new home. You’ll need a real estate agent who knows the area and possibly a mortgage broker to get you a loan on good terms.

As noted above, our role at Republic Wealth is to “captain” your financial team. We help with recruiting, too. After working with hundreds of high net worth clients over the years, we have a wide network of financial professionals. We’ve seen them in action and can help you find the particular expertise you need.

Some financial advisors try to be “jack of all trades,” but David and I gladly admit we don’t know everything. We believe bringing in other professionals will give you the best chance to reach your financial goals. Teamwork is always the best strategy.


IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’s current written disclosure statement discussing our advisory services and fees is available upon request.



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Republic Wealth Summer Update

Republic Wealth Summer Update

View this Commentary in PDF format

Greetings,

We hope you are doing well as the calendar rolls into summer.  We wanted to take a brief moment to comment on the market before we reach the Fourth of July holiday.

Major U.S. markets have been mostly range bound over the last several months with both the Dow Jones Industrial Average and the broader S&P 500 trading within unusually narrow ranges since late December 2014. 

The chart below shows the two major large-cap stock benchmarks – the Dow Jones Industrial Average and the S&P 500 – for the last twelve months:
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The two benchmarks tracked very closely for the entire period.  Both suffered a mid-month decline in October 2014 followed by a rally into year-end.  They again fell to begin 2015 only to recover those losses and make a new high in the first few days of March.  Since then, large-cap stocks have been chopping up and down within a narrower range.  The Dow reached an intraday peak of 18,351.36 on May 19 before falling back again toward the bottom of this range.  Both benchmarks are now at roughly the same level as early December.

So far this year, while the market has lacked broad leadership, we have seen strength in both the Nasdaq Composite and the Russell 2000 (note the Russell 2000 was a market laggard in 2014).

One sector exhibiting notable weakness is transportation, with the Dow Jones Transportation Index lagging noticeably since peaking back in December.  According to Dow Theory, the Dow Jones Industrials can’t sustain a move higher unless the Dow Transports also move up.  This theory dates back to a time when economic growth was evident in the number of rail cars in motion.  It may be less relevant in today’s information-based economy.

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Nevertheless, there is reason for concern with the Dow Industrials going sideways and the transports falling.  Transports are officially in “correction” territory after falling more than 10% from their most recent high.

Sailing with No Wind

To sum up the year for anyone trying to navigate the market, investing this year has been like sailing with no wind.  Several factors have contributed to this impression.

CNN runs a daily “Fear & Greed Index” that uses seven factors to measure market sentiment.  You can review it for yourself at this link

As of today, the market is full of fear, with their index reading 14 out of a possible 100.  One month ago, the index was only slightly fearful at 43, and 1 year ago it was in Extreme Greed territory at 76.

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The Fear & Greed Index, which CNN updates daily, turned considerably more bearish over the weekend.  On Friday, it stood at 33, still on the fear side but not nearly so much as today.

One of the indicators – Safe haven Demand – was actually in Greed territory last week.  That changed just today as stocks weakened compared to bonds.  Bond are not such a safe haven when interest rates move higher, as they have done lately.  On the other hand, higher rates are a sign of a good economy in which stocks would likely outpace bonds. 

Three other indicators – Put & Call Options, Market Volatility, and Junk Bond Demand – shifted from neutral to either Fear or Extreme Fear over the weekend.  Volume in put options had been lagging volume in call options by 37% as investors made bullish bets in their portfolios. 

In terms of market volatility, the CBOE Volatility Index (VIX) jumped today, indicating that market risks are climbing.  Finally, the yield on low quality junk bonds over safer investment grade corporate bonds rose, indicating corporate bond investors are turning cautious.

Market Momentum, Stock Price Breadth, Stock Price Strength were all in “Extreme Fear” mode last week and became even more so today.  The S&P 500 crossed slightly below its 125-day moving average.  The index has typically been further above this average recently, so this suggests investors are less confident in market returns going forward.

Stock Price Breadth measures advancing and declining NYSE volume.  Over the last month, more of each day’s volume has traded in declining issues than in advancing issues, pushing this indicator towards the lower end of its two-year range.  Finally, Stock Price Strength, which measures the number of stocks hitting 52-week lows, is slightly greater than the number hitting highs and is at the lower end of its range.  This indicates extreme fear.

Looking at Extremes

Considering the Fear & Greed Index over time provides some useful insight.  The best market gains often come when the market is most fearful.  Conversely, when the market is greedy it is usually time for caution.  With a current reading of 14, the market is extremely fearful. 

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We suspect the market may remain fearful over the coming weeks for the following reasons:

Seasonality.  The seasonal period when stocks make most of their gains ended in April.  Stocks historically tend to not make much progress from April / May through September / October.  So far, 2015 is holding true to form.

Corporate Earnings.  There is little corporate news right now, but quarterly earnings reports will resume in mid-July.  Meanwhile, many companies are in an SEC-mandated quiet period and have slowed buyback activity ahead of their earnings announcements.

Greece.  Greece’s problems within the Eurozone have been ongoing for five years now.  Their situation finally appears near a resolution one way or another in the coming days.  In terms of total economic impact, though, Greece’s economic impact is comparable to that of Detroit.  Will Greece default, exit the Eurozone and destroy its economy for the next few decades?  In the latest development, the Greek government has called for a referendum vote on whether to accept austerity measures demanded by the country’s creditor.  If they vote “yes”, the current leadership will probably exit and a new government will accept a compromise.  And, if they vote “no”, Greece will likely default and exit the Eurozone. 

No one knows the outcome today, and the uncertainty has played world markets like a yo-yo.  Yet for the last five years, ignoring the Greece news and just sticking to your investment strategy would have been better than trying to jump in and out of the market.  Institutions have had a long time to reduce their exposure to Greece in the event of a default.  While there may be a negative knee-jerk reaction, long-term implications for global markets should be minimal. 

The Federal Reserve.  As expected, interest rates remained at zero at their June meeting, with the consensus belief that the Fed will raise rates 0.25% in September.  They will pause to see how the market reacts before potentially moving another 0.25% by year-end.  Time will tell what happens, but the anticipation of higher rates sent the ten-year Treasury yield from below 2% early in the year to nearly 2.5% (before falling again, at least temporarily, as a safe-haven with the Greek situation continuing to develop).  Rising rates puts negative pressure on anything yield-sensitive, including bonds, real estate, and utilities. 

Experts have talked about the impact of rising rates for many years – when rates move up, yield investments lose value as they acclimate to the new rate environment.  While you might believe bonds are a safe haven, they can actually be dangerous depending on their interest rate sensitivity.

Stock Valuations

In addition to the aforementioned market drivers, it is also important to look at market valuations.  The current 12-month forward price-to-earnings (P/E) ratio for the S&P 500 is 16.7, above the 5-year average (13.8) and the 10-year average (14.1).  The graph below compares the S&P 500 price chart to the forward P/E ratio. 

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The market has traded higher over the last year while earnings moved sideways.  As such, the market is now expensive on a historical basis.  However, valuations are not close to extremes seen at typical market peaks, and it is not common belief that the market is significantly overvalued.   Instead, markets have gotten ahead of themselves and are taking a breather while earnings “catch-up”.

One big reason for the higher earnings multiple is the negative drag from the energy sector.  Energy prices fell 40%, smashing energy earnings.  That’s the bad news.  The good news is energy companies have done a good job of managing the slowdown and have actually performed better than many analysts’ expectations.

Republic Wealth Outlook

Given our belief that the market will remain fearful, our expectation is the rest of the summer will be choppy.  We don’t foresee any major catalysts to drive markets higher and any significant risks to move markets lower; as such, our expectation for a range-bound market until the fall.  For now, the strongest market sectors are technology, healthcare, financials, and small caps.

In the very near-term, headline risk out of Greece is increasing volatility even though their economy is small.  Beyond Greece, in the second half of year we will likely see the Federal Reserve raise interest rates for the first time in a decade. This could also increase volatility.  However, stocks typically perform well in rising interest rate periods, especially when an improving economy is behind the higher rates.  

Looking at the calendar, in the fall we will enter a strong seasonal period, the best six months of the year.  In addition, 2015 is a pre-election year, typically the strongest of the 4-year presidential cycle.  The Dow has not fallen in the third year of a presidential term since war-torn 1939. 

Given these factors and barring any major economic hiccups, we believe reasonable earnings growth with drive stocks moderately higher into year-end.

We have turned slightly more defensive in our Republic Wealth strategies. Balancing the known risk factors with the near-zero returns we would earn in cash, we think the best course is to remain bullish in carefully selected market segments.

Conclusion

As we near the third quarter of 2015, we encourage you to consider your asset allocation to ensure you are best positioned for the current investment landscape. If you would like to discuss your personal financial situation in more detail, please do not hesitate to contact us to schedule a review.

Wishing you a Happy 4th of July!

Best Regards,

Kenny Landgraf & David Levy



IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this commentary content should be construed as legal or accounting advice. If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’s current written disclosure statement discussing our advisory services and fees is available upon request.

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What's Your Retirement Magic Number?

What's Your Retirement Magic Number?

Almost everyone plans to retire eventually. Whether you want yours to be active or leisurely, you will likely rely on your investments for income at some point. How much money will you need to retire the way you want?

This question is both complex and simple. It’s complex because it involves some factors most people don’t consider. Once you ask the right questions, though, finding the “magic number” is simple math. 

The first step is to estimate the annual income you’ll need in retirement. In most cases, this will be less than you spend while working, but not always. Think through all your expenses and estimate on the high end so you have a good safety margin. If you are many years from retirement, be sure to consider inflation. Even 2% yearly inflation can make a big difference over 20-30 years.

Next, estimate the retirement income you will receive from other sources. This should include your Social Security benefits, any defined benefit pensions, earnings from part-time work, and rental/royalty income.

How much will you get from Social Security? It depends on your work history. The Social Security Administration sends periodic estimated benefit statements based on your income history. You can also request one on the SSA web site.

Be wary of depending too much on Social Security estimates, however. Congress could always change the program. By design, the program tries to replace only 40% of the average worker’s pre-retirement earnings. It should supplement your retirement savings, not replace them.

Now, subtract your estimated non-investment retirement income from your annual income estimate. Your investment portfolio will need to generate that much income for you on an annual basis.

Here is an example to illustrate.

$100,000  Annual income needed in retirement
-$40,000   Social Security income
-$20,000   Part-time work income

$40,000    Additional income needed

Investors often have trouble understanding how a pile of assets equates to a future income stream. A good rule of thumb is to build a retirement portfolio valued at 25x your desired annual income.

Remember this 25x multiplier because it is critical.  Following it will let you withdraw 4% of your portfolio value each year without touching your principle.

In the example above, you would just multiply the $40,000 additional income needed by 25. The answer is this retiree should have a $1,000,000 investment portfolio, at a minimum, upon reaching retirement age.

From there, just look at your current portfolio size and assess where you stand.

•    If you have $600,000 and want to retire in ten years, you need to come up with another $400,000 through additional savings and/or investment growth. Using the “Rule of 72,” annual gains of 7.2% would make your $600,000 double to $1.2 million in ten years.

•    If you are already retired and have $1 million or more, you are in good shape. Your priority should be to make sure you don’t fall below that number.

•    If you’re already retired and don’t have at least $1 million, you are in jeopardy of eating your seed corn. You need to take immediate action by either cutting expenses or generating more income. Consider some part-time work or a different investment strategy.

In any case, you should have a magic number in mind at this point. The next task is finding ways to hit it. The right strategy will depend on your personal situation, so this is where Republic Wealth would sit down with you and consider all the factors.

You can also use your magic number in reverse to convert your current assets into an annual income stream. For example, assuming 4% annual growth and 4% withdrawn each year,

•    $500,000 / 25 = $20,000 annual income
•    $1,000,000 / 25 = $40,000 annual income
•    $1,500,000 / 25 = $60,000 annual income
•    $2,000,000 / 25 = $80,000 annual income

Some investors, and even some professional advisors, might say the 4% withdrawal and growth assumption is too conservative. The truth is none of us knows the future. Whatever rate we use will probably be high in some years and low in others. I always advise Republic Wealth clients against depending on optimistic assumptions. I would much rather see you have a pleasant surprise than find out you can’t afford your dreams.

b2ap3_thumbnail_150624-seeds.pngI mentioned above the possibility of “eating your seed corn.” For those who never lived on a farm, that means you aren’t saving the seeds necessary to grow next year’s crop. Spending your principal is the financial equivalent of that bad choice.

If you go through the planning process to learn your magic number, and you have that much or are at least on track to get there, it’s critical to make sure you don’t dip below your number. For those ages 50 and older, you may not have the time to recover.

How do you do this? You have to balance two competing priorities. First, you don’t want to invest so aggressively that your balance might drop below your magic number in a poor period. However, you also can’t afford to be too conservative. Withdrawing 4% yearly while earning only 1-2% in Treasury bonds is simply another way of eating your seed corn.

Having it both ways is tough but not impossible. A detailed, comprehensive financial plan combined with a prudent investment mix can put the odds in your favor. This is what we try to do at Republic Wealth.

Our goal is actually simple. We want you to sleep well at night. We enjoy helping people identify their magic number, and then watching them reach it.



IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’s current written disclosure statement discussing our advisory services and fees is available upon request.



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When to Rollover That 401K - And When Not To

When to Rollover That 401K - And When Not To

If you work in the private sector, your 401K plan likely holds most of your retirement savings. Congratulations if you are socking away as much as possible. It will come in handy when you reach retirement age.

The days of staying with the same company for decades are long gone, however. Each time you change jobs, you also need to make some decisions about your 401K account. Your choices now can make a huge difference down the road.

When you leave an employer – voluntarily or not – you can pick from four options for your 401k or other qualified plan balance. You don’t have to act the same day you leave, but you should decide soon after. You can either:

1.    Stay in your old employer’s plan,
2.    Rollover your 401K balance to your new employer’s plan,
3.    Transfer the 401K balance into an IRA, or
4.    Cash out the 401K money and pay tax on it.

For more on these choices, read our Career Change and Your 401K article. You’ll also find a short video on that page. In most cases, transferring the balance into an IRA is the best choice.

Cashing out your 401K money before retirement age is almost never a good idea. A startlingly high number of people do it, though. This graph from AON Hewitt shows what job-changers did with their 401K money in 2011 (the latest data available).

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The 42% who cash out their 401K money have to pay regular income tax on it plus a 10% penalty in most cases (penalty applies if you are under 59 ½ in the year the withdrawal is made). The data doesn’t show, but we suspect most of these are low-wage workers with small balances. They need to save for retirement as much as anyone but may have more immediate needs. The 29% who leave their 401K balance with their ex-employer made a better choice, but it still isn’t optimal in most cases.

The decision isn’t always so clear in some special situations. Think twice if you fall in any of these groups. 

If you are between ages 55 and 59: Special rules apply if you lose or leave a job at age 55 or older. In this case, you can take withdrawals from your 401K with your last employer and not have to pay the usual 10% penalty. You’ll lose this protection if you rollover the money to a new employer’s 401K.

If you plan to work past 70½ and are not self-employed: Normally you have to start mandatory withdrawals from your 401K and IRA accounts at age 70½. You can delay them indefinitely as long as you remain employed and you don’t own 5% or more of the company.

Note that this applies only to the 401K account tied to your current job. You will have to make mandatory withdrawals for 401K and IRA accounts from previous jobs once you reach age 70½.

If you have company stock in your 401K plan: If you have company stock in your 401K that has appreciated in price, it may qualify for long-term capital gains treatment. This could be more favorable than the ordinary income rate you would pay if you move the company stock to an IRA and eventually withdraw from there.

What should you do in this situation? The best bet is to withdraw from the 401K but split the assets into two accounts. Transfer the company stock to a regular, taxable brokerage account, while moving the remainder of your 401K assets into an IRA. This preserves the company stock’s favorable tax treatment while letting you keep your other retirement assets growing.

If you do this, note that you must realize the gain in your company stock and roll over the non-stock assets at the same time. You can’t wait for the stock to go higher, unless you leave it in the employer’s 401K.

(For more on company stock in a 401K, see my previous article: Charge Up Your Retirement with Little-Known NUA Rule. NUA stands for “Net Unrealized Appreciation.”)
 
If your 401K plan has low fees or uniquely attractive features: If the company you left had particularly low fees or investment options that aren’t available through your new employer’s plan, it might make sense to leave your balance there. Just keep in mind that transferring the balance to an IRA might be less expensive and give you more choices than either 401K plan does.

Other reasons to leave your 401K balance with the employer might be to take advantage of the plan’s 401K loan feature or to take advantage of the “backdoor Roth” strategy.

Another important consideration is asset protection. 401K plan assets are legally separate from both the sponsoring employer and the workers. Under federal law, creditors will have no claim on them if the company goes bankrupt – or if you go bankrupt individually.

However, if you move the money from a 401K into an IRA, it loses that federal protection and becomes subject to state law. Some states protect IRA accounts from seizure, some protect it under certain conditions, and others don’t protect it at all.

All these factors can be confusing. If you anticipate a career change or have 401K assets still with former employers, talking to an expert is a good way to learn what is best in your situation. Feel free to call on us at Republic Wealth. We’ll help you evaluate the options.
 

IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’s current written disclosure statement discussing our advisory services and fees is available upon request.



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Uncertain Summer Ahead for Stocks

Uncertain Summer Ahead for Stocks

Summertime is typically a slow period in the stock market, so much so that traders have a slogan for it: “Sell in May and go away.” Historical patterns suggest buying interest won’t pick up again until around Halloween.

However, we have to remember that “typically” is not the same as “always.” Any given year can be an exception to the rule, and 2015 is proving it. We see several important differences in this year’s action.

First, the calendar patterns like “Sell in May” don’t show the expected correlation so far. May 2015 was actually a good month, with the Dow Jones Industrial Average and S&P 500 both gaining about 1% and the Nasdaq Composite almost 3%. We’ve seen some strong days in June so far, too, even though the benchmarks are up only slightly for the year.

Anyone who moved to the sidelines in early May missed some gains, but could still prove to have made the right call.  Summer could yet bring a downturn that makes exiting a month ago look like a good move in hindsight.

The presidential cycle is also deviating from its historical averages this year. I explained back in December how “pre-election” years are a calendar sweet spot. Based on history, the Dow and S&P 500 should both have shown strong gains in the first quarter. Instead, the Dow notched a fractional loss and the S&P 500 gained only about 1%.

Presidential cycle underperformance was even more striking in the Nasdaq Composite Index. Looking at all pre-election years since 1971, the Nasdaq had a 13.8% average first quarter gain but gained only 3.5% in that period this year.

The second quarter looks a little better for all three indexes, but they are still nowhere near the kind of gains normally seen in a Pre-Election year. In fact, 2015 so far looks more like a Post-Election or Midterm year.

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While the historical data shows strong gains in pre-election years, most of the gains have been concentrated in the first and second quarters. With 2015 almost halfway gone, all three major benchmarks need to get moving quickly if they are to match the historical pattern.

When previously reliable patterns fail, it is usually because some unusual factors intervened. What are they this time?

Interest rates are definitely having an influence. The Federal Reserve ended its quantitative easing program last year and is now looking for a chance to “normalize” policy – which means higher interest rates.

The problem is timing. Janet Yellen and other officials say they intend to tighten rates as soon as incoming data convinces them the economy is strong enough. That means expectations change with each new employment, inflation and economic growth report.

The guessing game is taking a toll on yield-sensitive asset classes. If Treasury bond rates rise, then other income-generating categories like corporate bonds, utilities stocks, preferred stocks and REITs lose some of their attraction. This process is already well underway; the utilities sector went virtually nowhere since this time last year.

Changing energy prices are another important factor. When crude oil started falling last summer, economists talked of a “fuel dividend” that would boost retail sales as consumers spent less money on gasoline.

As it turned out, consumers were in no hurry to spend their savings. They either banked the money or used it to pay down debt for the first few months. Spending is picking up this quarter, though. Retail chain store executives certainly must hope so.

Investors also feared crashing oil prices would cut into corporate profits, but the latest data shows an “earnings recession” averted. We will get more data when second-quarter earnings reports start coming out in mid-July.

Summer rallies can and do happen in the stock market. We may get additional clarity on Fed policy after its June 16-17 meeting. Positive second quarter earnings news could also kick the indexes into gear quickly.

Up to now, 2015 has actually been a quiet year. The S&P 500 has yet to show a year-to-date change in either direction of more than about 3.5%. This is very unusual, especially with the year almost halfway finished. I think the calm will likely last through the July 4th holiday.

At Republic Wealth, we monitor a wide variety of trend and relative strength indicators as well as seasonal patterns. Past performance doesn’t necessarily indicate the future, but we try to capture gains in market strength and reduce volatility in weak conditions. We’re optimistic 2015 will turn into another great pre-election year.



IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Republic Wealth Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Republic Wealth Advisors.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Republic Wealth Advisors is neither a law firm nor a certified public accounting firm and no portion of this blog content should be construed as legal or accounting advice.  If you are a Republic Wealth Advisors client, please remember to contact Republic Wealth Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Republic Wealth Advisors’s current written disclosure statement discussing our advisory services and fees is available upon request.

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