Category: Investments

If a financial advisor ever recommends that you buy an annuity, you should immediately seek a second opinion. Nobody hates annuities more than Suze Orman.  Suze believes that annuity salespeople prey on fear, especially of the retired. Moreover, Suze thinks it is the worst investment that you can make.

In rare circumstances, I believe a small allocation into an annuity might fit into a financial plan. This buyer doesn’t care about leaving an inheritance and they could benefit from more discretionary income. Otherwise, I do not recommend annuities for the following reasons:

• They are complicated products that can be confusing to the buyer. Even the sellers of many of these annuities don’t understand the features. Last month, MetLife was levied a near-record $25 million fine for errors in understating the value of replacement contracts. According to the Wall Street Journal, MetLife said that the company’s registered representatives weren’t provided “adequate training or guidance on how to conduct a comparative analysis” of products and that “deficient systems and procedures” were evident. If the salesperson doesn’t understand the product, there is no way for the buyer to grasp how the product works.
• The surrender fees often start at 7% and there is no liquidity.
• The sales commissions for annuities are very high and range between 6% to 7%.  Most financial advisors wouldn’t sell many of these poorly designed products unless they received this huge commission.
• Annuities are terrible from a tax standpoint.  They are not subject to the long-term capital gains rate; rather, they are subject to ordinary income taxes.
• The time to lock into a fixed guaranteed income is not when interest rates are near historical lows and inflation could be on the rise.
• The guaranteed withdrawal benefit (GWB) that is sold as a benefit is really a gimmick. At the age of 65, a variable annuity offers a 5%-6% guaranteed lifetime income. This guaranteed withdrawal income is based on nothing less than a life expectancy calculation. If an annuity holder lives well beyond their average life expectancy, they can beat the annuity company but their heirs most likely will receive no inheritance. If the annuitant dies early in retirement, the annuity works in the favor of the annuity company.

I offer second opinions for anyone seeking advice before they make an annuity purchase. I will most likely tell you the reasons why not to buy it. There are many other investments that you can make that offer above average dividend yields with the potential for gains. Yes, the market risk will be higher, but a well balanced portfolio can help to diversify away some risk.  Diversification does not prevent losses, but it will help to hedge against inflation and can create a more stable income stream.

If you would like to speak with me about building a diversified portfolio through customized portfolio management that aligns your risk tolerance with your financial goals, feel free to send an email to mitch@cgfadvisor.com.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

Proper tax planning can help you save money in retirement. When you combine all sources of cash flow in retirement, some retirees find that they may owe more to the government. Your income for retirement may come from multiple types of accounts – trusts, pensions, IRA’s (Roth or traditional) Social Security, annuities, and taxable accounts.

There is a pecking order for which account you want to withdraw from first to minimize your taxes. Even in retirement, everything comes down to the correct timing. Creating a retirement income plan will help you minimize taxes by properly managing your cash flows. The information that I have read online on this topic is very general. There are many important personal considerations that you need to consider.

Here is a list of 10 questions that will help you with your retirement planning:

1. What will be your tax bracket in retirement vs. while working?
2. Will you be forced to take a large IRA withdrawal at any point in retirement?
3. Do you own a Roth IRA vs. a Traditional IRA? What are the benefits to converting to a Roth IRA?
4. How will an IRA withdrawal affect your Medicare premiums? What state do you plan on living in retirement and do they count IRAs as assets when applying for Medicaid?
5. How much money do you want to protect from Medicaid if you ever need long term care? How important is asset protection for your estate?
6. What are the after-tax cash flows required to maintain your lifestyle/budget in retirement?
7. How much money do you plan on leaving as a legacy? What types of accounts do you currently own and will you be passing down?
8. Will your IRA withdrawals increase your Social Security taxes?
9. How is your health and do expect to live long in retirement?
10. Are you going to be receiving any significant inheritances while in retirement?

After reading these questions, you may find that retirement planning can be complicated. Tax planning really comes down to your personal circumstances and goals. The general rule of thumb is that you will take money from taxable accounts first. These are the least tax efficient types of accounts.

If you own both a Roth IRA and a Traditional IRA, it’s best to withdraw from the Roth IRA last. These earnings are tax-free and there are no required mandatory distributions. Roth withdrawals do not increase your adjusted gross income (AGI), which keeps Social Security taxes lower. Your beneficiaries will also thank you, because they will not owe any federal income taxes. For IRA withdrawals, I find it’s best to spread them out over time to minimize any large withdrawals. Once you’re older than 70.5, you will be required to take out a minimum distribution.

You have worked hard to save for retirement and you do not want to make a mistake and give away money to the government. Proper tax planning and understanding how your personal circumstances impact your retirement plan will help you minimize your tax burden.

If you would like to speak with me about building a diversified portfolio through customized portfolio management that aligns your risk tolerance with your financial goals, feel free to send an email to mitch@cgfadvisor.com.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

According to Bank of America Merrill Lynch, the cumulative outflow from equity funds over the past five weeks was $44 billion. The “equity exodus,” saw the largest redemption over a 5-week period since August 2011. The economy is growing very slowly and this is causing alarm with many investors. I believe that investors might be confusing a slow growing economy with how our economy is being disrupted with new technologies. For compliance purposes, I would like to note that I am not making a buy or sell recommendation on any of these companies discussed in this article.

It is clear to investors that value is outperforming growth this year. The margin is close to 8%. I believe that the reason for the divergence has to do with a changing U.S. economy, and investors chasing dividends. Conservative investments have been the big winner over the past 12 months. Investors have been seeking higher dividends and focusing on the companies that are able to maintain their competitive advantages and keep higher barriers to entry. They are selling the companies that are being disrupted by technology.

The public companies which are disrupting the economy includes Facebook and Amazon. Both are trading near all-time highs. Amazon has single-handedly destroyed most retailers in the mall space. The retailers that you grew up shopping at such as Sears, Nordstrom, Macy’s, JCPenney, and Gap have lost a significant amount in value in the past few years. Facebook has had a similar effect on many of the large media conglomerates. On the private equity side, the two big winners are Airbnb, which is disrupting the lodging sector, and Uber, which is disrupting the transportation sector. Even the wealth management business is being disrupted with automated investment advice.

All of these disruptors have one thing in common, they are replacing middle-class jobs with machines. Wealth is now being concentrated into a smaller number of people at an alarming rate. Airbnb and Uber are a few examples of companies accelerating the changing business models of entire industries. This year investors have been buying boring businesses that are more insulated from these disruptors. These sectors include Utilities and Consumer Staples, which have outperformed the broader market. At some point, valuations will become too extreme for the disruptors and too cheap for the more capital intensive businesses. The defensive sectors that have the highest barriers to entry, such as Utilities, REIT’s, and consumer stocks, are beginning to look very pricey. There will come a time when investors begin to lose interest in the disruptors. The reversal of this trend could have major implications on your portfolio over the next year. A few years ago, I believed that Emerging Markets and commodities were going to become extremely volatile. The current trend that is worth watching is how these disruptors are impacting the economy and changing the valuations across sectors that were once thought of as defensive.

If you would like to speak with me about building a diversified portfolio through customized portfolio management that aligns your risk tolerance with your financial goals, feel free to send an email to mitch@cgfadvisor.com.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

Over the past 10 years, private companies have shifted the market risk to their employees. It is now very uncommon for a new employee at a private company to be offered a pension plan. In most cases, pension benefits have been cut or terminated. Now that the majority of savings are inside of IRA’s or 401k retirement plans, the question that many people are asking is how do I manage this money? The answer to this question is a personal one. Each individual has different goals, risk tolerances, time horizons, tax status, and values. They also have different market expectations, knowledge, and experiences.

My tip for investing your old 401k or IRA is to first create market assumptions and second, create your own investment philosophy. You need to start with these two key investment assumptions – what is the expected inflation rate and market return.  Vanguard founder Jack Bogle believes that stock returns will be as low as 4% before inflation over the next decade. If you believe these predictions, your old 401k or IRA is not going rise as fast as the historical average rate of 8%-9%. Having expectations will help you select the most appropriate investment strategy and asset allocation.

The next step to answering this question, is creating an investment philosophy. If you don’t have a philosophy, I highly recommend you either find an advisor who makes you feel comfortable, or start reading some investment books written by Jack Bogle or other legendary investors. Similar to ideologies and political beliefs, many investors feel strongly one way or another about investing.

I believe that the secret ingredient to investment success is having an investment philosophy. An investment philosophy is a set of core beliefs that is applied to how one invests and thinks about markets. My investment philosophy has been born from my own personal experiences and what I have learned from very successful investors. My core beliefs start with what not to do. Below is my philosophy for investing my clients’ wealth.

• Do not invest in a company without a recurring positive free cash flow.
• Do not invest in something you don’t understand.
• Do not invest in complex mutual funds and ETFs.
• Do not invest if you don’t understand downside risk.
• Do not invest if there is no possibility for a future income/dividends.
• Do not invest if you don’t understand the costs.
• Do not invest if you are promised abnormal returns.
• Do not invest in individual international and emerging market companies.
• Do not invest in a new company that sells only one product.
• Do not invest in to concentrated positions.

A well-defined investment philosophy could help you become a less emotional investor and give you more control in volatile markets. There is no way to predict what the market will do tomorrow, but you may become more prepared to take advantage of new investment opportunities. If you prefer to work with a financial advisor, be sure that they follow similar core beliefs that align to your own convictions.

If you would like to speak with me about building a diversified portfolio through customized portfolio management that aligns your risk tolerance with your financial goals, feel free to send an email to mitch@cgfadvisor.com.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

The way that you have managed your investments during the asset accumulation phase really should not be that different when you retire. This advice might contrast what you may have previously learned. The textbook advice is that in retirement, you need to focus on income and keeping pace with the increasing cost of living. Your investments in retirement should be liquid and conservative. In the earlier accumulation years, your portfolio should be aggressive and be overweighed towards growth companies. Young investors should buy growth stocks and older investors should buy value stocks. Many large investment companies, mutual fund companies, and financial planners have built their entire businesses providing this lousy advice. Their solution is to put you in a model portfolio based on your age or invest you in a particular market style.

I believe that better advice can best be summarized by what Warren Buffett wrote in his letter to Berkshire Hathaway shareholders in 2000:

Market commentators and investment managers who glibly refer to “growth” and “value” styles as contrasting approaches to investment are displaying their ignorance, not their sophistication. Growth is simply a component – usually a plus, sometimes a minus – in the value equation.

Buffett also wrote about this argument back in his letter to the Berkshire Hathaway shareholders in 1992,

We view that as fuzzy thinking (in which, it must be confessed, I myself engaged some years ago). In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive.

Buffett’s advice is that you need to understand the value of the investment that you are buying. It doesn’t matter if you are entering retirement or saving for retirement. In just the past 10 years, many retirees have been burned twice chasing yield. Many nest eggs have been destroyed chasing dividends. In 2008-2009, the market sectors known for paying the highest dividend yields fell the most. Banks and REITs where among the worst performing sectors dropping well over 70%. In 2014-2015, many retirees got caught again buying energy MLPs. These high dividend paying energy companies fell over 80%. All you need to do is search for MLPs and arbitration awards and you can see the amount of pending litigation.

The companies that pay the highest dividends are often the most leveraged companies. They have a combination of high amounts of debt on the balance sheet and very low growth rates. These businesses are viewed as more conservation because they generate their profits in highly regulated industries.

This week many analysts began to warn about the high valuations in the Utility Sector. Historically, this sector has done very well when interest rates fall, but struggles when rates begin to rise. It may be no coincidence that the Utilities Select Sector ETF fell 3% this week as the 10-year Treasury began to move higher. Time will tell whether Utilities will appreciate in value if interest rates continue to move higher.

If you are either saving for retirement or already in retirement, I recommend that you pay more attention to the price of what you are buying rather than whether it pays you a large dividend or has a high growth rate. Many of the portfolios that I manage for clients whether young or old, have similar allocations. There does tend to be more bonds and conservative investments in my retirees’ portfolios, but the equity positions are the same. If I believe an investment is undervalued, the only difference is the size of the position that I will hold. Retirees have less time to recover from difficult markets. The market risk can be somewhat managed by taking smaller positions and through diversification.

The next time a wealth advisor or financial planner tries to put you in a model portfolio or tells you to buy only dividend sectors, your next questions should be: is this at a good price and what is the interest rate risk?

If you would like to speak with me about building a diversified portfolio through customized portfolio management that aligns your risk tolerance with your financial goals, feel free to send an email to mitch@cgfadvisor.com.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

Presidential candidates see bubbles everywhere. If you took investment advice from them you would hide your money in the safe. Political biases and investing don’t mix well. I don’t pick favorites and I put little weight behind what the candidates say.  A popular sales technique that is used in the insurance business is to create fear to make a sale. The product pusher will warn that an event is about to happen, and the economy is going into recession, so you better buy this product to protect your wealth. Many annuity sales have been made this way. This is really no different from a candidate saying that the economy is going into a black hole, you better vote for me. We all know that once a candidate gains office, they will do what is in their best interest to remain in office.

Policies and taxes do shape the economy and there are some very strong arguments for which candidate will do better a job. However, market forces are now global and central banks control the money supply and the level of interest rates. Liquidity has the biggest influence on the markets. After 2008, governments no longer have the political capital to stimulate the economy through fiscal policy.  The easy Federal Reserve monetary policy has been a big part of the reasons why markets rallied.  It could be no coincidence that the markets stopped going up when the Federal Reserve ended its liquidity program in 2014.

I spent a large part of my career working alongside portfolio managers for the largest mutual funds. In 2009, while I was at Pioneer Investments, a manager with a 30-year track record hit a rough performance stretch. The lesson he learned was to keep a closer eye on what was happening in Washington. Monitoring policy decisions matter much more if you are buying individual stocks.  For instance, just last week, Pfizer and Allergen ended a $160 billion merger because the Treasury changed the rule on making it impossible for US companies to merge with an overseas company just to save on taxes. If you held a well-diversified portfolio, this rule change had little impact on the change in your wealth.

Making investment predictions based on which candidate will do a better job for economy is a difficult game to play. Each candidate has their own way of saying one thing and then doing another.  I believe that monitoring corporate earnings, valuation levels, and market sentiment, are better ways to draw investment conclusions.

If you would like to speak with me about building a diversified portfolio through customized portfolio management that aligns your risk tolerance with your financial goals, feel free to send an email to mitch@cgfadvisor.com.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

This week the Department of Labor (DOL) issued a landmark new ruling that will raise investment advice standards for retirement accounts. By January 1, 2018, all financial advisors will be held to a fiduciary standard. All advisors will have to do what is in the best interest of their clients. However, brokers will still be held to a suitability standard for taxable accounts.

The final rule that was released was watered down after lobbyists prevailed on a number of key points. Brokers can still sell their own proprietary funds and charge a commission, if their client signs a waiver. Even though the new ruling is not perfect, it is a step in the right direction.

As a Registered Investment Advisor (RIA), I’m already a fiduciary for my clients. I chose to be an independent advisor because I wanted to give advice that was in the best interest of my clients. The only way to do this was, by minimizing conflicts of interest and not selling products. If I chose the career as a broker, I would only be held to a suitability standard. This means that I could sell products and services if they were “suitable” to the client. As a fiduciary, my interests are aligned with my clients.

So why is this new “fiduciary” rule so important for consumers?

The new rule will lower costs for advice and limit commissionable product sales. The best way to explain the difference between these standards is through a real example. To protect the identify of this individual, I will refer to him as “Maxx”, after my son.

I met with Maxx at my office just last week. He had lost his job 1 year ago. Maxx met with his broker to take control of his dire financial condition. Maxx had been invested in a Fidelity 401k plan and had saved around $150,000 for retirement. This “broker” advised Maxx to rollover his 401k into an IRA. On the surface, this is not bad advice. However, Maxx purchased an “A” share mutual fund and paid a 4.7% front–end sales charge. Not only did Maxx pay the commission, he moved from his Fidelity fund into another fund with a higher expense. To make matters worse, the funds he bought were a proprietary mutual fund sold by the broker. The funds that he purchased were clearly inferior to that of the Fidelity funds. The Fidelity funds ranked higher in each of the respective categories. The DOL issued this fiduciary ruling to put an end to this abuse. This was a textbook example of the importance of the DOL ruling for consumers.

What will be the biggest impacts of this ruling?

The new rule will ultimately lower expenses on all mutual funds. More advisors will sell low expense exchange-traded funds (ETFs). Mutual funds with poor results will be under pressure if they continue to lag. The big winners will be low cost fund families such as Vanguard and Fidelity. ETF companies and robo-advisors will also benefit. I expect even more companies to begin to offer their own robo-advisor platforms. There is the “dark side” to this ruling. Many portfolios will be moved into a black-box asset allocation model. These brokers leverage technology to over-diversify their clients’ portfolios. They simplify risk and misjudge valuations. In my estimation, it was bad financial modeling that helped pave the way to the Great Recession in 2008. Those same flawed models based on antiquated statistics are now being applied by these robo-advisor platforms. If a robo-advisor is using standard deviation to calculate investment risk, it is gauging a statistic with many flaws. I believe those financial advisors that are actively managing market risks, properly judging values, and showing investment acumen will be the true fiduciaries for their clients.

If you would like to speak with me about building a diversified portfolio through customized portfolio management that aligns your risk tolerance with your financial goals, feel free to send an email to mitch@cgfadvisor.com.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.

My grandmother just had her 105 birthday! She has now been in the decumulation phase of retirement for over 45 years. Back when she retired in 1970, $1 of buying power had the same purchasing power as $6.11 today.  As she has aged, her investment goals have changed from focusing on total returns to maintaining a comfortable lifestyle in retirement.

The most difficult part of planning for retirement is that you never know how long you will live. There is a gentle balance between controlling your spending or facing a budget shortfall. My grandmother never thought she would live to be 105. Over time, her risks changed as the quality of her life changed.

In the 1970’s, her major investment risks included out of control inflation and a bear market. In 1983, tax laws also changed when Social Security was taxed. An increase in her longevity also gave her more of a chance of potentially facing a significant financial crisis. This commentary is too short to list all of the 20% market drops that she has experienced.

A major disadvantage for retirees today, is investing in a low interest rate environment. It is much more difficult to retire with a high income portfolio of investments that can help maintain a high standard of living during retirement. More retirees have been forced to invest with a focus on total returns. Those that have not saved enough for retirement or hold too much cash, increase their odds of facing a budget shortfall.

As longevity increases, so does the probability that you will no longer be able to take care of yourself.  The cost of nursing home care is now significantly higher.  My grandmother had the benefit of lower nursing home care beginning in her 80’s.   Long-term care insurance premiums are now significantly higher than they were 5-10 years ago. Many insurance companies did such a poor job estimating coverage, that they no longer offer this type of insurance. Only a few companies now offer this insurance. The result is that many people can’t afford the premiums and will need to start saving more for retirement.

We all hope to face longevity risk. Preparing a retirement income plan is essential to minimizing this risk. Your plan needs to begin with a budget and include how this budget will change over time. Determining how to fund this budget in a low rate environment is your challenge. Those that prepare a plan earlier may have a better chance of living a comfortable lifestyle much like my grandmother has over her 45+ years in retirement.

If you would like to speak with me about building a diversified portfolio through customized portfolio management that aligns your risk tolerance with your financial goals, feel free to send an email to mitch@cgfadvisor.com.

Please read our disclosure statement regarding the contents of this post and our website as a whole.

Advisory services offered through Constant Guidance Financial LLC, a registered investment adviser.