Investments - Asset Protection
Derrick
Handwerk
Derrick received his MBA
from Lehigh University and is a Rauch Business Scholar. He received his
certification in Wealth Preservation and Asset Protection from the Wealth
Preservation Institute.
After college he spent 3
years in the pharmaceutical industry and then went on to run and own
several businesses including Handwerk Wealth Advisory.
Handwerk Wealth Advisory
works with small business owners who are accredited investors. Over 50%
of assets under management are from medical and dental practices.
www.handwerkwealthadvisory.com
Variables to Retirement Planning
Portfolio Window Dressing
Deceptive Titles
The Top 1% of Income Earners
Stocks, Bonds and….
Rose colored
glasses
What does diversification mean?
A Heavy Concentration in
Stocks
The 4% Solution
Investment Choices in a Retirement Plan
Politicians and the Deficit
What is a
financial planner?
An
overview of 401(k) Plans
Smooth Sailing Ahead
2011 New Year’s Resolutions
The
Federal Reserve and their impact on your investments
A
Comfortable Retirement (part 3)
A
Comfortable Retirement (part 2)
A
Comfortable Retirement
Providing the Best
Investment Choices
Retirement Plans, Part 2
Maximizing the Value of Your Retirement Plan
What does diversification mean?
Entitlement
Programs Effect on Interest Rates and Taxes
An Apology
What’s in your retirement plan?
2010 New
Year’s Resolution Part 2
2010 New Year’s Resolutions part 1
Section 79: A Powerful Wealth Planning Tool
Saving Money in a Tax-Favored Fashion
How diversified is your investment
portfolio?
A
Different Benchmark
A Taxing Situation
The Four Pillars of a Balanced
Platform
A Single Point
of Contact
Alternative Thinking
A Retirement Constraint on Doctors
2009
New Year’s Resolutions
A Flawed Model
Thoughts on Retirement
Don’t Let Your Emotions Cloud Investment Judgment
Increasing Profits
Bear Market Essentials
What has
your Advisor done for you lately?
A Short List
of Risks to Your Portfolio
Overview
of Investment Risk
Part 2
Overview
of Risk (Part 1)
Asset
Protection
Variables to Retirement Planning
This article will focus on factors which may impact the quality
of life in your retirement. Figuring out how much money you need to
retire is dependent on MANY factors. I have looked at many of the
financial planning software programs on the market and they aren’t
even close to accounting for all of the factors. In my opinion, many
of the programs are glorified cash flow analysis with a monte carlo
simulation of a myriad of possible outcomes based on historic
returns.
From what I see in the advertising in the various media, the
advertiser is trying to reduce the amount needed in retirement to a
number. If they can correctly respond to each of the follow factors,
then they might have a chance of having "the right number."
This simplistic approach to retirement can lead to a false sense
of security. People tend to take the past and apply it to the
future. The real issue is, what factors will change and by how much.
If several of these factors change, or in some cases just one factor
changes, your financial projections are of little value.
Generally speaking, most people are not saving enough money to last
them through retirement.
As the factors change, so should your strategies relating to
investing and wealth planning. I see my role as ongoing. The
planning opportunities now are significant since there will be so
many changes in tax policy next year. For example, I have worked
with estate attorneys to put together an estate plan because my
client’s plan was sub-optimal, outdated or non-existant.
Meeting and talking to clients as the economy, tax climate and
family circumstances change is going to be paramount in 2012 and
2013. If you set up your investments and financial plan and do
not revisit it at least once/year, you are doing yourself a
disservice.
Factors impacting retirement such as:
- Inflation
- Taxes – federal, state, local
- Loss of tax deductions
- Cost of medical care after age 65- which is not paid for by
Medicare
- Long term care costs
- The ability to work until 65. (Some studies have shown many
people stop working before 65)
- The amount of money you start with prior to retirement
- If you work during retirement
- Does social security exist, is it taxed or decreased when you
retire
- Your rates of return before and during retirement on your
investments.
- At what age you retire and how do you define your retirement.
- Life expectancy is one of the biggest factors impacting the
amount of money you will need in retirement. Living 25 years in
retirement is becoming more common.
- Is the money you have invested taxable when you spend it
- In a retirement account the money is taxed when you pull it
out
- Is in a taxable account you have been paying taxes all along
so using the money incurs no further tax liability
This list is just off the top of my head, so it is not even close
to being an exhaustive list of the factors which will impact your
standard of living in retirement and the draw-down of your
investments.
I believe each of us should save as much money as we can and
avoid taxes whenever possible (not evade) if we wish to have a
retirement that has a similar standard of living to what we have
grown accustom.
In my opinion the worst outcome for a person who is affluent, is
to run out of money and have to spend the last 10-20 years of their
life dependent on their children or on government aid.
Regards,
Derrick Handwerk MBA CWS® CWPP™ CAPP™
Portfolio Window Dressing
When I typed in the phrase ‘portfolio window dressing’ into the
search engine I found many entries. I think
www.investopedia.com
had the best explanation
Definition of 'Window Dressing’
A strategy used by
portfolio managers
near the year or quarter end to improve the appearance of the
portfolios performance before presenting it to clients. To window
dress, the portfolio manager will sell stocks with medium to large
losses and purchase high flying stocks near the end of the quarter.
These securities are then reported as part of the fund's holdings
for that quarter. (investopedia.com)
According to the December 2011 article in SmartMoney: A statement
of stocks in the portfolio doesn’t detail all of a investment
manager’s trading activity; the statement is just a snapshot of what
it owned on a single day and hence the performance of that
snapshot is the reported return.
According to the WSJ article printed on Dec 24, 2011 in section
B-1 entitled "Now that is Performance Art", they detail situations
of end-of-year trades. "Many stocks that won big for the first 50
weeks of the year levitate even higher the final week or two." In
short, managers are buying stocks that were winners for the year and
dumping their losers so the end-of-year statement will have a
decidedly better return.
You probably are thinking, that only happens on Wall Street stuff
and doesn’t happen to me. The investments managers with the big
investment companies may get involved with the window dressing
practice. But, also I would suggest so do the smaller investment
companies.
A Case Study
I went to meet with a potential client. It was a typical sort of
meeting until he said "I know I need planning but my broker has done
a great job with my stocks inside my IRA".
The potential client produced a typed sheet listing the
past 10 years of returns and every year was positive including 2000,
2001 and 2008. I said: "WOW" that is amazing. For a second I
thought, maybe I should see if the broker could handle my clients’
money. Being puzzled, I asked the gentleman if I could see his
quarterly statements. He produced the most recent investment
statement with all the trades.
I looked over the numerous pages in the statement. Then I saw a
lot of trades near the end of the quarter. Trying to understand the
situation I asked: "How much money did you give the broker initially
and about how long ago." The potential client said I gave him
over $600,000 about 8 years ago and I have not taken any money
out. I looked at the account total which was significantly less than $500,000. So I asked the obvious question. If
this broker never had a losing year, why do you have so much less
money in the account now than you did 8 years ago?
The potential client and I looked at the trades which were made
about a week before the close of the quarter. There were a bunch of
stocks sold and a bunch of stocks purchased. The settlement date was
before the end of the quarter. So all of the new purchases showed up
on his statement. He had many accounts and had only looked at the
returns for each account and not at the actual dollar amounts.
Unbelievably, portfolio window dressing is legal and can lead to
a differential between actual portfolio performance and reported
portfolio performance.
Reconcile the Reported Returns
You should be looking at your end-of-quarter statements to see if
there is a flurry of trades made just before the end of the quarter
and does the stated performance of the fund match with your account
value? You need to take the reported returns from each investment
company and compare that number to the dollar amount change in your
account.
Secondly, if your statements are typed I would suggest that is a
red flag. Typed statements are of concern to me and would cause me
to ask more questions.
At Handwerk Wealth Advisory, we use an outside and independent
computerized compilation service which reports investment
performance and actual holdings in one consolidated statement.
I suggest to my clients to pick a quarter periodically, and see
if the statement from the investment company matches the dollar
amount in the quarterly statement we provide.
See you next month…
Derrick Handwerk MBA CWS® CWPP™ CAPP™
Derrick
received his MBA from Lehigh University and is a Martindale-Rauch
Business Scholar. He received his certification in Wealth
Preservation and Asset Protection from the Wealth Preservation
Institute.
After college he spent 3 years in the pharmaceutical industry and
then went on to run and own several businesses including Handwerk
Wealth Advisory which is a multi-family private office.
Handwerk Wealth Advisory works with small business owners and
families who are affluent. Over 50% of his clients are from medical
and dental practices.
Derrick is available to speak at regional or national event and
many of the articles he publishes come from emails sent in by
readers. Please email financial questions or requests for speaking
engagements to
dhandwerk@1stallied.com.
www.handwerkwealthadvisory.com
Asset allocation seeks to maximize the performance of your
investment portfolio using diversification and disciplined
investing. However, using an asset allocation methodology does not
guarantee greater, or more consistent returns, or against loss:
rather it is a method used to manage risk. Your investment
objectives, time horizon and risk tolerances will drive your asset
allocation and help you determine the right balance for you.
The information presented is general in nature and should not be
considered legal or tax advice. The reader should consult their
legal or tax advisor for information concerning their own specific
tax situation.
"Securities offered through First Allied Securities, a Registered
Broker/Dealer, member FINRA/SIPC
Deceptive Titles
Every year I usually dedicate the first article of the New Year
to a list of behaviors or resolutions that I suggest affluent
clients may want to consider. This year, I am going to depart from
that format. In this brief article, I will try to clarify what
has taken me many years to realize.
What services does a person perform vs. what is their title?
When you go into to a physician’s office, what is your
expectation?
For example, if I had constant headaches and went to my general
family physician (GP) I would expect her to have graduated from a
medical school and be concerned for my health. The goal of the
office visit for both me and the physician would be to identify the
underlying ideology of my pain and seek resolution to the problem.
Instead, imagine this situation: I am sitting in the same exam
room and the physician walks in and says how are you doing? I
respond that I have been having severe headaches on a frequent
basis. He says, okay Derrick, let’s look at your health insurance
and see if I can get you a better deal. Hmmm, that would not be a
response I would expect. A physician, almost by definition, performs
services related to a person’s health and is not trying to sell his
patients something. If I develop another medical problem six months
later, my physician would again be there ready to help.
When sitting with a financial planner, what is your expectation?
High net worth clients (I define as having greater than 20 MM
in investible assets) expect a financial professional to help them
organize their financial life, find opportunities to reduce their
taxes, help them with their investments and offer advice as needed
on an ongoing basis. The financial professional should have the
capabilities to handle the complexities and opportunities faced by
the client’s affluence. Advising a client necessitates the ability
to interface with other professionals such as accountants and
lawyers. This type of client advisor relationship is what I call
financial planning. The vast majority of the population has
never seen this type of advisor.
Typically, when the average client looks back on the time they
have spent with their financial planner, they may realize "the
planning" consisted of buying some investments and/or insurance. If
there is a financial plan, it is maybe 100 pages in length and may
be in a binder. The plan is quite impressive by its volume but it
may offer little hope for implementation. Follow-up meetings,
frequent contact or ongoing planning which is required with
legislation changes, tax law changes or a major life event which
impacts the client does not necessitate meetings frequently enough.
How can the title of "Financial Planner" be detrimental to your
financial health?
Alright are you ready for my epiphany? From my
experience, the vast majority of financial planners aren’t financial
planners! Instead of having the title of Stock
Broker or Insurance Agent on their business card they use the job
title of Financial Planner. I believe the financial services
industry is trying to confuse the public on what constitutes
financial planning. Think about it for a second, would you rather
work with a financial planner vs. a stock broker or insurance agent?
The title "Financial Planner" looks a lot better on the card, but
may be to the client’s detriment.
If you want to find out in short order if the person sitting
across the table from you is actually a planner and should be able
to spend time on your needs on an ongoing basis, ask the following
three questions.
- Has the person been in the industry more than 5 years?
According to industry consultant Andre Cappon, president of the
CBM Group, 75% percent of new brokers who enroll in
training with broker dealers drop out in the 1st year.
Additionally, only 15% of the original training class typically
makes it through the fourth year at the broker dealers who provide
training.
- Ask them how many clients they have?
If you hear numbers
like 100 or more you probably have your answer. From my experience
and speaking to successful stock brokers who have been in business
for 10-20 years they have about 200-300 clients.
- What type of process do you have in place?
Unless they
talk about gathering tax returns, estate plans, insurance policies
and investments and request to interface with your accountant and
lawyer, I would suggest they are not a planner.
Finding a person to help you navigate financial challenges on an
ongoing basis is the challenge.
There are so many financial planners out there, how can you
figure out if the person you are speaking to is going to have the
ability and will take the time to help you? As I have outlined
above, identifying a person to help navigate your financial
challenges isn’t that difficult, the problem is the real financial
planners are outnumbered by the lookalikes and thus are very hard to
find.
Recommendations from your friends are a good start, but as one of
my newer physician clients has told me, most clients don’t know what
they don’t know. If you have found a planner, stick with them.
In my opinion, at the margin, financial planning has more value than
investing.
From my research it seems the seeds of financial planning started
with the single family office that works for a family like the
DuPont’s. More recently, similar services are being offered by
multi-family offices to 20-60 different high new worth families.
According to Financial Advisor magazine, a true multi-family office
that caters to ultra high net worth clients should have a
family to staff ratio of no more than 30 to 1.
In summary
Until recently true financial planning has been the purview of
the very wealthy which have the assets to justify their own family
office or a multi-family office. The services provided to the
wealthy, like most services, are slowly becoming more accessible to
the less wealthy.
Do you have a broker, an insurance agent, a financial planner or
are you the quarterback? The answer might significantly impact your
current financial situation and your future standard of living.
Happy New Year,
Derrick Handwerk MBA CWS® CWPP™ CAPP™
The Top 1% of Income Earners
I don’t know about you, but all I seem to be hearing on TV is the
top 1% of income earners are the reason our country is in such bad
shape. They don’t pay their taxes; they fly around in their private
jets and drive up to their fancy restaurants in their limos. I am
not so sure I believe what the people on TV are telling me. So, the
focus of this article is to find out more about this group.
According to the IRS records, to be in the top 1% in 2009, you
had to have an adjusted gross income of $343,927. Out of about 300M
people in the US, 1.4 million people constitute the top 1%.
According to Moody’s, this group earned 17% of the country’s
taxable income but paid 37% of all taxes.
Staying in the top 1%
What is not fully understood by most people, especially those in
this group, is that if you are part of this elite top 1%, the
chances are better than 50% that you will not be in the top 1% ten
years later. The Treasury department released figures, based on
tax returns, that tracked taxpayers from 1996-2005. Only 40.3% of
those in the top 1% in 1996 remained there nine years later.
During the 1990 and 2001 recessions, the richest 5% of Americans
(measured by net worth) experienced the largest percentage decline
in the wealth vs. the other 95% according to the Federal Reserve.
More recently, the super-high earners had the biggest crashes. The
number of Americans making $1 million or more fell 40% from
2007-2009, and their combined incomes fell 50%, according to the
IRS.
In short, it seems the top 1% are tied to the performance of the
economy and the performance of the stock market. From my research,
this connection seems logical since the top 1% own businesses, own
company stock or have a large concentration in stocks.
Did someone say plan ahead
It might be a mistake to assume that if you are presently making
>350K AGI, that you are going to be making that much or more 10 or
more years later. As a Wealth Advisor that works with affluent
clientele, I believe many people assume that their incomes will
continue at the current level or will grow. This leads to a high
current standard of living which is supported by the high income and
a low saving percentage which is in proportion to the high income.
Living below your means and investing money in tax advantaged
strategies is not what our consumption based society wants you to
do. But if you want to maintain your standard of living into
retirement it is probably what you have to do. From my experience
many people correlate their standard of living to their income. I
would suggest that less than 25% of the top 1% of income earners I
meet will be able to maintain their standard of living throughout
retirement.
From a financial perspective, I cannot think of many situations
worse than a family having a high standard of living up until
retirement and then after a few years into retirement they run out
of money.
Some thoughts the top 1% should consider.
The key concept is, most American’s are not saving enough
money for their retirement. Due to today’s longevity, it would
not be unusual to have a couple that is 65 have one spouse live to
age 90. That would be 25 years of retirement if they retired from
making an income at age 65. I will suggest two strategies to save
more money in a more effective manner.
- Retirement plan - I have analyzed many retirement plans. My
conclusion is that many have high costs, poor investments and
little diversification aside from stocks and bonds. Additionally,
many plans are prototypical plans and are not individualized to
the owners’ needs. Ergo, the owners could be putting more money
away in a tax deferred manner which would build their next egg
more quickly.
- Tax arbitrage – If truly affluent people are in their 50’s or
younger, they should have 4 groupings of money. Each grouping of
money has different tax consequences. This allows a choice of
which grouping to withdrawal money in retirement depending on what
the tax laws are in effect when the client retires.
- One category is taxable money.
- The second is qualified money such as an IRA or 401k.
- Another grouping is in a no load annuity.
- The last grouping is a life insurance policy with a cash
buildup component.
Stocks, Bonds and….
Over the years that I have been a wealth advisor, my experience
has been that many people with a net worth of under 10 million
dollars, have a large part of their investible assets in an
investment account holding stocks, bonds, cash and they probably own
some tangible real estate.
The word risk has a lot of meanings to me. In this article we
will discuss one aspect of risk which is the degree to which your
portfolio will go up or down with the stock market. This is called
portfolio beta or volatility.
A portfolio beta of 1 means that your portfolio will go up and
down about the same as the overall stock market. A beta of .5 means
your portfolio will move half as much as the stock market and a beta
of 2 means that you will move twice as much as the stock market. My
thought would be to construct a portolio with an acceptable amount
of risk depending on the age, suitability, ability to save money,
goals, personal risk tolerance and personality.
As I have written previously, there are about 15 asset classes,
however many people only have 3 or 4 asset classes represented in
their portfolio. The goal of having more than 4 asset classes in
your portfolio is to diversify your holdings so that your portfolio
does not go up or down with the stock market.*
Asset classes
Stocks
Bonds
Cash
Real estate
Options
Absolute return funds
Private partnerships
Futures
Annuities
Commodities
If you are in your 50s and you have a portfolio in which you want
to retire on in the next 10 years or so, why would you invest all of
your money in the stock market and take on the risk that the stock
market would go down just as you are getting ready to retire?
I recently watched a commercial on TV where the actor touted the
fact that he was diversifying his portfolio through the purchase of
various stocks. I thought to myself, how absurd. Any large grouping
of stocks tends to be correlated to the returns of the overall stock
market. Ergo, if the overall stock market takes a nose dive,
generally speaking, your stocks will also go down.
Do you know anyone that was 100% invested in stocks during 2008
and did not lose a lot of money? I wouldn’t think so.
Bonds as a diversifier
The traditional answer to reduce stock market volatility has been
to invest in bonds in order to provide a cushion and a dependable
stream of income. That worked 10 years ago, but in my opinion, will
not work as well now. Overall, bond rates have been dropping since
the late 1980’s. As rates dropped, this gave the owner of a long
term bond an increase in the value of their bond. This increase
in bond prices may have helped to cushion any type of stock market
volatility.
(As a point of clarification, bond investments are subject to
interest-rate risk. When interest rates rise, and thus the price of
most bonds, can decline. If this happens, the investor could lose
principal.)
Right now, in my opinion, we are near a generational low in
bonds. Adding long-term bonds to a portfolio will not reduce the
losses in a portfolio if the stock market falls and bond rates rise.
You will actually lose money in bond values and in stock values.
I also believe that if you put together a portfolio and look at
your retirement plan and all assets as pieces of the portfolio, the
more diversified you are with a balance of other asset classes, the
better your chances are of not having the same volatility (risk) of
the stock market.*
Rose colored
glasses
I subscribe to and read many professional newsletters and
publications related to planning, investing and taxation. In
addition, I enjoy reading the Wall Street Journal and BARRON’S.
Reading the September 5th BARRON’S, I turned the pages
to see an article entitled: Which Way UP? The three-page
article was interesting from several perspectives. What struck me as
significant was BARRON’S survey of 15 investment strategists at
brokerages and money management firms.
The Friday previous to the publication, the S&P 500 was at
1174. According to BARRON’S the average of the strategists’
expectation was for the S&P to hit 1300 or have a 11% gain for
the balance of the year.
Of the 12 strategists highlighted, only two thought the S&P index
would be below 1174 by year-end.
Maybe it is my macroeconomic and fundamental bias but I see:
- >9% unemployment
- Federal budget deficits of mammoth proportions
- A European solvency issue
- A European economic slow down
- The housing market in a "slump"
- China and the emerging markets slowing their economies due to
inflation
- Just to name a few negatives.
On the positive side:
- Large US corporations are in great fiscal shape
- Large US corporations are able to access credit at very low
rates
- Large US corporations have, in aggregate, near record levels
of profitability
Note: in the second list of 3 bulleted items I did not include
small corporations, since I could have added their challenges to the
first list.
How could 15 stock strategists suggest an 11% gain in less
than four months?
Maybe the strategists have on rose colored glasses. If they are
talking to the average person on Main Street who is concerned about
their job or may owe more if they sell their home then their
mortgage, I believe the stock strategists would see a
different story.
Could it be that they are just looking at large corporations who
can cut employees to reduce costs and use operational leverage to
increase profit disproportionate to increased sales? Also, with the
weak dollar, goods are much cheaper oversees aiding sales increases
for those able to export.
The 12 featured strategists
Looking over the pictures of the 12 featured strategists on page
27, nine are from the sell side of the business. Of that group, most
have large retail brokerage operations
Of the 12 featured strategists, only Doug Gliggott of Credit
Suisse and Jason Trennert of Strategas Research Advisors believe the
market will be below the 1174 benchmark.
So in short, ten of the 12 believe the stock market is going
higher. In the investment business, this type of behavior is
called talking your book. If stocks go higher than people would buy
stocks and your company would make more money. If stocks go lower
people might reduce their stock ownership or move their assets into
non-stock asset classes so your company might make less or lose
money.
I believe this perennial positive bias of STOCK
strategists is a disservice to the American Investor.
If you randomly choose 10 people and ask: Do you think the stock
market will be 10% higher four months from now, I would guess at
least three or four of the 10 would say no. Ask 10 large retail
brokerages the same question and I would guess you would not have
the same result.
My point, trying to predict where the stock market will be
in 4 months from now, is just short of sheer folly. You may not want
to hear that, but I believe it to be reality. There are too many
exogenous factors unrelated to what we anticipate and are aware of
which could derail the stock market beyond the factors which I
outlined above. Conversely, the stock market could also rise 25% by
the end of the year.
If you doubt my premise, in April of 2008 with the S&P around
1400. If I would have told you that in less than a year the S&P
would hit 666, would you have thought that possible? The stock
market crash was an exogenous black swan event related to a banking
calamity which was linked to the bursting of the housing bubble and
the related collateralized mortgage obligations.
In Summary
Adam Smith believed that the stock market might be a random walk.
People want certainty and want to believe the experts. Over the long
haul, the US stock market has proven to be a good investment. But
there is the possibility that we could have a 20- year period where
the stock market goes sideways or down. Just look at Japan over the
past 25 years.
I believe investment diversification beyond the stock market
makes sense.
I also believe that the large brokerage houses don’t want you to
invest in asset classes that they don’t sell.
See you next month………..
Derrick Handwerk MBA CWS CWPP CAPP
What does diversification mean?
Over the years that I have been a wealth advisor, my experience
has been that many people with a net worth of under 10 million
dollars, have a large part of their investible assets in an
investment account holding stocks, bonds, cash and they probably own
some tangible real estate.
The word risk has a lot of meanings to me. In this article we
will discuss one aspect of risk which is the degree to which your
portfolio will go up or down with the stock market. This is called
portfolio beta or volatility.
A portfolio beta of 1 means that your portfolio will go up and
down about the same as the overall stock market. A beta of .5 means
your portfolio will move half as much as the stock market and a beta
of 2 means that you will move twice as much as the stock market. My
thought would be to construct a portolio with an acceptable amount
of risk depending on the age, suitability, ability to save money,
goals, personal risk tolerance and personality.
As I have written previously, there are about 15 asset classes,
however many people only have 3 or 4 asset classes represented in
their portfolio. The goal of having more than 4 asset classes in
your portfolio is to diversify your holdings so that your portfolio
does not go up or down with the stock market.*
Asset classes
- Stocks
- Bonds
- Cash
- Real estate
- Options
- Absolute return funds
- Private partnerships
- Futures
- Annuities
- Commodities
If you are in your 50s and you have a portfolio in which you want
to retire on in the next 10 years or so, why would you invest all of
your money in the stock market and take on the risk that the stock
market would go down just as you are getting ready to retire?
I recently watched a commercial on TV where the actor touted the
fact that he was diversifying his portfolio through the purchase of
various stocks. I thought to myself, how absurd. Any large grouping
of stocks tends to be correlated to the returns of the overall stock
market. Ergo, if the overall stock market takes a nose dive,
generally speaking, your stocks will also go down.
Do you know anyone that was 100% invested in stocks during 2008
and did not lose a lot of money? I wouldn’t think so.
The traditional answer to reduce stock market volatility has been
to invest in bonds in order to provide a cushion and a dependable
stream of income. That worked 10 years ago, but in my opinion, will
not work now. Overall, bond rates have been dropping since the late
1980’s. As rates dropped, this gave the owner of a long term bond an
increase in the value of their bond. This increase in bond prices
may have helped to cushion any type of stock market volatility.
(As a point of clarification, bond investments are subject to
interest-rate risk. When interest rates rise, and thus the price of
most bonds, can decline. If this happens, the investor could lose
principal.)
Right now, in my opinion, we are near a generational low in
bonds. Adding long term bonds to a portfolio will not reduce the
losses in a portfolio if the stock market falls and bond rates rise.
You will actually lose money in bond values and in stock values.
I also believe that if you put together a portfolio and look at
your retirement plan and all assets as pieces of the portfolio, the
more diversified you are with a balance of other asset classes, the
better your chances are of not having the same volatility (risk) of
the stock market.*
See you next month………..
Derrick Handwerk MBA CWS CWPP CAPP
Derrick
received his MBA from Lehigh University and is a Martindale-Rauch
Business Scholar. He received his certification in Wealth
Preservation and Asset Protection from the Wealth Preservation
Institute.
After college he spent 3 years in the pharmaceutical industry and
then went on to run and own several businesses including Handwerk
Wealth Advisory which is a multi-family private office.
Handwerk Wealth Advisory works with small business owners and
families who are affluent. Over 50% of his clients are from medical
and dental practices.
Derrick is available to speak at regional or national event and
many of the articles he publishes come from emails sent in by
readers. Please email financial questions or requests for speaking
engagements to
dhandwerk@1stallied.com.
www.handwerkwealthadvisory.com
Asset allocation seeks to maximize the performance of your
investment portfolio using diversification and disciplined
investing. However, using an asset allocation methodology does not
guarantee greater, or more consistent returns, or against loss:
rather it is a method used to manage risk. Your investment
objectives, time horizon and risk tolerances will drive your asset
allocation and help you determine the right balance for you.
The information presented is general in nature and should not be
considered legal or tax advice. The reader should consult their
legal or tax advisor for information concerning their own specific
tax situation.
A Heavy Concentration in
Stocks
This article will give a brief overview of one type of investment
risk which is a concentration of investments in one asset class.
Many investors do not fully understand the high level of risk which
they are engendering in the many different parts of their investment
life which if put together, yield a heavy concentration in stocks.
In this article we are focusing on a heavy stocks concentration.
But I see many investors being too concentrated in other asset
classes. Usually, they invest in what they have had past success in
or in an asset class they understand like real estate or a
certificate of deposit (CD) from a bank. The message which I am
sending to you is diversify your investments.
My investment philosophy is to invest in several different asset
classes and strategies in an effort to reduce asset price
fluctuations. Stocks are one asset class and should be part of
almost every portfolio. Remember, if you have worked hard and
amassed a significant nest egg, if you lose it after age 55 it will
be very difficult to replace due to a lack of time left in which you
can work.
I am not sure who came up with the investment tenet, which I call
my first goal of investing, the best way to make money is don’t
lose it. If you are a client you have heard the following
example. If you start with a dollar and lose 50% how much do you
have? The answer is 50 cents. Next, if you want to grow your money
back to a dollar, what percent increase do you need to achieve. The
answer is not 50%, you need a 100% gain.
How a heavy stock concentration is achieved
Many affluent investors in their forties or fifties have a 401k
at their place of employment, a college savings plan and may have an
annuity, stock options or investments which are taxable.
Many people who come into my office will show me their investment
portfolio. I take a few minutes and ask them if they think it is a
conservative portfolio or an aggressive portfolio. Most will say
they have a conservative portfolio.
It is a rare investor that comes into my office with a holistic
approach toward their assets. Most people really don’t understand
that their 401k may be mostly in stocks, their college savings plan
may be mostly in stocks, their variable annuity is mostly in stocks
and their taxable investments are mostly in stocks. Hmmmm…..that
looks like a lot of stock holdings to me. I have seen 70-year old
people with over 70% of their assets in stock.
Depending on whom you quote and which study, the average stock on
the New York Stock Exchange is about 70%-85% correlated with the
overall market. Ergo, if the stock market goes up, you do well. But
if the stock market goes down you are in trouble.
Because the above mentioned four or five investment accounts are
all invested in stock, the affluent investor has a big bet that the
stock market will go up during the time they need their assets to
grow. That is not a wager I am willing to make with my money or my
clients’ money.
Also, implicit in a heavy stock concentration is the hope that
the stock market will not go down while you are in retirement. If
the stock market goes down while you are in retirement then two
issues come to mind.
- If the stock market goes down 50% when the investor is 62
years old, then what does the investor do? Do they stick to their
strategy and stay in stocks or do they get out of the stock market
market?
- If you hold onto your stock investments then you are selling
twice as many shares after a 50% drop. An example, if ABC stock
was $100/share and you had 1000 shares. You have to sell 50
shares/month to have $5000/month. When the stock dropped to
$50/share, then you have to sell 100 shares/month to have the same
$5,000/month of spending power. So you are liquidating your shares
twice as fast as you had planned.
How can you overcome the problem of high stock concentrations?
Some thoughts you may want to consider:
- Realize that having 20 or 50 stocks is probably not going to
insulate you from a stock market meltdown.
- Bear markets in stocks, a drop of 20% or more, occur more
frequently than one might think.
- Diversification means buying strategies and asset classes
which do not go up or down in lock step with the stock market.
- Realize that you may have 4-5 investment accounts and they
should all be looked at as pieces of a pie. Each investment piece
needs to relate to the total investment allocation.
- Keep some money liquid so that you can get by if life throws
you a curve. Lack of liquidity can be deadly.
In summary, one of my clients told me that he sees other people
who are invested in only stocks and he feels badly for them. He
stated: "people just don’t know what they don’t know."
See you next month………..
Derrick Handwerk MBA CWS CWPP CAPP
Derrick Handwerk MBA CWS CWPP CAPP
Derrick
received his MBA from Lehigh University and is a Martindale-Rauch
Business Scholar. He received his certification in Wealth
Preservation and Asset Protection from the Wealth Preservation
Institute.
After college he spent 3 years in the pharmaceutical industry and
then went on to run and own several businesses including Handwerk
Wealth Advisory which is a multi-family private office.
Handwerk Wealth Advisory works with small business owners and
families who are affluent. Over 50% of his clients are from medical
and dental practices.
Derrick is available to speak at regional or national event and
many of the articles he publishes come from emails sent in by
readers. Please email financial questions or requests for speaking
engagements to
dhandwerk@1stallied.com.
www.handwerkwealthadvisory.com
The information presented is general in nature and should not be
considered legal or tax advice. The reader should consult their
legal or tax advisor for information concerning their own specific
tax situation.
"Securities offered through First Allied Securities, a Registered
Broker/Dealer, member FINRA/SIPC"
The 4% Solution
When I go out to a party and people ask me what I do for a
living, I tell them I own a multi-family office that advises
affluent families on growing and protecting their wealth. Then they
usually ask me what I think the stock market will do in the coming
months.
The question which most Americans should be asking is: Am I
saving enough money for my retirement in order to maintain my
standard of living? Without knowing how much a working person may
have saved, what their standard of living is or how long they plan
to work….I could say No and probably be right 90% of the time.
In my experience a person sees their retirement plan with
$100,000 or $1,000,000 in it and feels pretty good about themselves.
That could be a problem. Currently, law makers are looking to
change the format of how retirement plans report to the
participants. So aside from the gross dollar amount, there would
also be a dollar amount which would annuitize the gross dollar
amount. In short, the annuitized amount would be how much you could
expect to receive/year based on the amount in your account, present
interest rates and your age among other factors.
Next time you look at your retirement statement I suggest you
consider the 4% solution. The question is: How much money can I
take out of my retirement account at age 65 so that there is still a
balance when I die? The answer is around 4%/year.
Let’s take an example. If you have $100,000 in your retirement
plan at age 65, you can take out 4%/year and adjust for inflation
each year and the money should last you until you are 90. Though
that is only $4,000/yr. adjusting each year for inflation.
According to research published in 2005 by the Centers of Disease
Control and Prevention, a man that is now 65 has a 28% chance of
living to 90 while a woman who is 65 has a 40% chance of living
until 90. According to the Society of Actuaries if you are a
65-year-old married couple, there is a:
- 92% chance at least one spouse will live to age 80
- 57% chance one spouse will live to age 90
- 11% chance one spouse will live to age 100
So when you look at your retirement plan balance and see a "big
number", think about the above table and the 4% solution.
A National Crisis
According to Nielsen Claritas, the median net worth, based on the
2000 census, including real estate at age:
55= 180k
65 = 232k
If you want to have an indication of how you stack up against the
median for people of your same age and income click on the link:
http://cgi.money.cnn.com/tools/networth_ageincome/index.html
Let’s hazard a guess and say that on average a home has $100,000 of
net worth, depending on where you live this number could change
dramatically. Thus subtracting 100K from the above median net worth
and the numbers become even more concerning.
The Future
When I look at a couple who is planning on retiring in 5-10
years, I would speculate on the following factors adversely
impacting their standard of living during retirement.
- Higher taxes
- A larger share of the health care expense will be borne by the
individual
- A higher overall cost of living due to changes in the consumer
price index under Greenspan which masks true inflation to the
consumer.
- The increasing cost of long term care
Ergo, my guess is that a dollar in retirement down the road will
not go as far as it goes now.
Are you Depressed Yet?
I believe a depressed person cannot see other options and fails
to act. You now have a better understanding on how longevity will
impact the amount you need to retire.
You probably still have time to make changes and choices which
may help you plan better for a more comfortable and realistic
retirement.
See you next month….
Derrick Handwerk MBA CWS CWPP CAPP
Derrick
received his MBA from Lehigh University and is a Martindale-Rauch
Business Scholar. He received his certification in Wealth
Preservation and Asset Protection from the Wealth Preservation
Institute.
After college he spent 3 years in the pharmaceutical industry and
then went on to run and own several businesses including Handwerk
Wealth Advisory which is a multi-family private office.
Handwerk Wealth Advisory works with small business owners and
families who are affluent. Over 50% of his clients are from medical
and dental practices.
Derrick is available to speak at regional or national event and
many of the articles he publishes come from emails sent in by
readers. Please email financial questions or requests for speaking
engagements to
dhandwerk@1stallied.com.
www.handwerkwealthadvisory.com
The information presented is general in nature and should not be
considered legal or tax advice. The reader should consult their
legal or tax advisor for information concerning their own specific
tax situation.
"Securities offered through First Allied Securities, a Registered
Broker/Dealer, member FINRA/SIPC"
Investment Choices in a Retirement Plan
This article focuses on the types of investments which can reside
in retirement plans. I believe the importance of building up a
significant amount of money in a retirement plan cannot be
overstated.
There are many 401(k) providers, investment choices and types of
retirement plans. I have set up many plans for doctors and small
business owners and this series of articles highlight some of the
most common areas for improvement and give a glimpse into my thought
process. This article focuses on:
- The variety and importance of investment choices which may be
available in a retirement plan.
- How to integrate those investments into an overall investment
strategy.
What you may not realize
When setting up their retirement plans, business owners are often
faced with just a handful of investment choices which are mostly
limited to stocks and bonds. Most people do not realize that there
are many investments aside from stocks, bonds and cash. For many
small business owners, a 401(k) is a good vehicle for your
investments. It is a matter of what the business owner’s goals are,
which can then be reflected in the plan design. It is also critical
to integrate the investments inside the retirement plan with the
rest of your portfolio in a tax efficient manner.
The investment choices you make may not benefit you
Having a limited number of investment choices may increase
correlation to the non-retirement investments. Thus when the stock
market goes up or when interest rates rise, your entire spectrum of
investments may move in tandem.
Also of importance, from a tax perspective, having an integrated
retirement plan investment strategy may help you reduce your tax
bill. Conversely, not having an overall investment plan may
dramatically increase your tax bill.
How we can overcome the problem
A lack of choices may give poor diversification
When choosing a retirement plan, in my opinion, it is critical to
choose an investment provider which gives a wide variety of
investments from top quality companies. I make sure my clients have
the option to invest outside the investment platform so they can
diversify their investments in an effort to reduce correlation among
their investments and the resulting volatility which may arise.
If a client has a taxable portfolio of stocks and bonds, we would
look at investments other than stocks and bonds to help diversify
their 401(k) portfolio. Please remember that diversification and
asset allocation do not guarantee a profit nor protect against loss
in a declining market. They are methods used to help manage risk.
Having an overall investment strategy
I have seen many investors’ portfolios. It strikes me as
unfortunate that many times they nor their investment advisor
consider both their retirement accounts and their non-retirement
accounts as part of an overall investment strategy. Really, your
retirement accounts are pieces of the investment pie. If you own
investment real estate then you may not want to own real estate
stocks in your retirement portfolio. If you have a lot of municipal
bonds outside of your retirement plan, then you would want to take
that into consideration when picking investments for your retirement
plan.
The other aspect which is not always considered is the tax
aspects of a retirement plan. Most retirement plans offer tax
deferral. Ergo, investments which throw off a lot of income or are
tax inefficient should be held inside the retirement plan. While
accounts which are outside the retirement plan may be best to hold
stocks and other investments which do not cause a large tax
consequence. Holding tax inefficient investments inside your
retirement plan allows you to hold more tax efficient investments
outside your retirement plan.
Your choices of investments in your retirement plan may be the
difference between retiring in a comfortable manner at age 60 or 65
vs. working a few extra years to make up the investment short-fall.
See you next month……..
Derrick Handwerk MBA CWS CWPP CAPP
Derrick
received his MBA from Lehigh University and is a Martindale-Rauch
Business Scholar. He received his certification in Wealth
Preservation and Asset Protection from the Wealth Preservation
Institute.
After college he spent 3 years in the pharmaceutical industry and
then went on to run and own several businesses including Handwerk
Wealth Advisory which is a multi-family private office.
Handwerk Wealth Advisory works with small business owners and
families who are affluent. Over 50% of his clients are from medical
and dental practices.
Derrick is available to speak at regional or national event and
many of the articles he publishes come from emails sent in by
readers. Please email financial questions or requests for speaking
engagements to
dhandwerk@1stallied.com.
www.handwerkwealthadvisory.com
The information presented is general in nature and should not be
considered legal or tax advice. The reader should consult their
legal or tax advisor for information concerning their own specific
tax situation.
"Securities offered through First Allied Securities, a Registered
Broker/Dealer, member FINRA/SIPC"
Politicians and the Deficit
In mid-April a prominent bond rating service downgraded the
outlook for US debt to negative. Basically, what that means is,
there is a one in three chance that the agency may actually lower
the US credit rating from AAA to AA within the next 2 years. One
significant factor cited by the rating agency was lack of a
political solution.
The Debt Problem
As per my previous articles, and as documented in another recent
budget office analysis, the federal deficit is already expected to
exceed at least $700 billion every year over the next decade,
doubling the national debt to more than $20 trillion
To get a sense of the magnitude of the debt, you should visit the
website
http://www.usdebtclock.org/. According to the site, the debt per
citizen of just the unfunded liabilities equals $1,020,145. Add to
that number another $128,668 per taxpayer for the current US debt of
over $14 trillion and each person has liability for close to
1.2MM!!!!!!!
Raising Taxes Will Not Be Enough
The federal deficits for fiscal 2009 and 2010 were each about
1.3 trillion.
According to the most recent data available from the IRS, people
in the top income-tax bracket earned about $1.2 trillion in 2008.
If the people in the top tax bracket donate 100% of their
earned income to the federal government (pay tax) in an effort
to erase the current year’s federal deficit, we may still be short
of the goal.
An overview of who pays taxes
Looking more closely, according to the IRS:
Number of
taxpayers
- People in the 10% federal tax bracket paid $13.6 billion in
taxes - 26MM
- People in the 15% federal tax bracket paid $149 billion in
taxes - 42MM
- People in the 25% federal tax bracket paid $278 billion in
taxes- 25MM
- People in the 28% federal tax bracket paid $127 billion in
taxes- 4 MM
- People in the 33% federal tax bracket paid $109 billion in
taxes- 1 .6MM
Total number of US citizens paying federal income tax 98.6MM
Total amount of taxes paid by all taxpayers $677 billion
As a point of reference, if your taxable income was over $68,000
in 2010 and you filed as married you were in the 25% tax bracket.
Taxpayers in the 25% tax bracket and above total
about 30.6MM
people paying $514 billion in taxes or about 76% of all federal
taxes.
According to the 2010 U.S. Census (census.gov), there are about
227MM people over the age of 20. If about 98.6 million are paying
federal tax, which would mean over 100 MM Americans pay no
federal income tax.
The Political Solution
Both political parties have drawn lines in the sand and have a
proposal which they believe is a solution.
Currently the Republicans are proposing a solution which
primarily cuts federal expenses while the Democrats are proposing
their own solution which predominately raises taxes. I would suggest
that neither plan goes far enough and neither will solve the
problem. In my opinion, we need to:
- cut the current federal budget
- reduce future entitlements
- raise taxes
- have our economy grow which will help increase tax revenue
I hope some laws come to pass to remedy the situation, but I am
concerned that politicians lack the political will to do anything
before the next Presidential election. My guess is the next
Presidential election will be a referendum on how the American
public would like to handle the problem.
As a wealth planner, I am planning for higher taxes in the
future.
I would suggest that you keep your investments, your estate plan
and your entire wealth plan flexible. The planning challenge is;
what type of tax increases will we see in the future? Tax increases
may be in the form of increased marginal income tax rates, excise
taxes, additional types of taxes or reduced deductions. This is just
to name a few of the ways taxes will increase.
In my opinion, being able to make changes to your wealth plan, as
the laws change, will be of paramount importance.
See you next month………..
Derrick Handwerk MBA CWS CWPP CAPP
Derrick received his MBA from Lehigh
University and is a Martindale-Rauch Business Scholar. He received
his certification in Wealth Preservation and Asset Protection from
the Wealth Preservation Institute. He is also certified in Wealth
Strategies, CWS, which is a designation that focuses on the needs of
high net worth clients.
After college, he spent 3 years in the
pharmaceutical industry and then went on to run and own several
businesses including Handwerk Wealth Advisory.
Handwerk Wealth Advisory works with accredited
investors and small business owners. He also specializes in working
with medical and dental practitioners.
www.handwerkwealthadvisory.com
The information presented is general in nature
and should not be considered legal or tax advice. The reader should
consult their legal or tax advisor for information concerning their
own specific tax situation.
"Securities offered through First Allied
Securities, a Registered Broker/Dealer, member FINRA/SIPC"
What is a
financial planner?
This article will review the different approaches that a
financial planner can take when working with a client. From my
experience, many people do not realize the important factors in
working with a financial professional. This article will give a
brief overview of several factors to consider.
Suitability vs. Fiduciary
Many people do not realize the differences among financial
planners. I believe the single most important factor when evaluating
a financial planner should be that they are working in your best
interest. I think this factor is the difference between a
salesperson and an advisor.
The lowest level of client appropriateness is suitability. For
example, if you are 75 years old and you give $100,000 to a planner
and the planner puts you into 2 stocks, which is deemed
inappropriate for your age it could be determined to be unsuitable.
On the other hand, if the planner puts the same client into 5 stocks
and 5 bonds that may be suitable. But in the second case the broker
may be getting paid extra commission on the sales due to incentives
and the stocks and bonds may not be what is best for the client, but
the investments may still be suitable.
A person that acts as a fiduciary puts the client’s interest
first and must function in a manner which is in the client’s best
interest. The Frank Dodd bill which was passed via legislation
delves into this dichotomy and many planners are worried that
"fiduciary" status will be imposed. Many of the large financial
institutions and brokers are fighting to stop this ruling. I welcome
it.
Planning vs. a cash flow projection
I have seen many cash flow projections but very few plans. From
what I have seen many in the financial industry give their client a
nice binder with a lot of numbers in it. The numbers may be how much
money you will have at retirement if stocks increase 10%/year. Etc.
etc. This is not a financial plan. This is a way of sidestepping the
time consuming issue of really understanding a client’s situation
and spending time with the
client. This approach may be very damaging in that major issues
are not discussed or reviewed.
A financial plan requires the planner to read all the financial
documents involved in a person’s life. Work with the lawyer and
accountant when needed in order to watch over the client. A
financial plan is fluid, it changes as the client ages, tax laws
change or major life events occur. Knowing many financial
professionals, I see many of them have 300-500 clients. But yet they
promise to work closely with their clients and meet each quarter or
each year. When I do the math, I don’t see how you can see 300
clients on a quarterly basis.
A financial partner
I believe your financial planner should be able to save you time
and act as your "advisor" and "liaison" on your behalf by working
with your accountant and lawyer to make sure everyone is working
toward the same goal.
As a Wealth Advisor my goal is to save you time, assist you in
making better decisions and bring ideas to the table which are
potentially beneficial. I can’t even count the number of estate
plans that I have looked at over the years which were improperly
structured or out-of-date thus exposing clients to hundreds of
thousands of dollars in estate tax.
A model I use to explain my role is outlined below. I believe
this should be how your financial planner works with you and your
advisors.
In closing, a financial planner should do more than take your
money and give you a cash flow projection. You deserve better.
See you next month………..
Derrick Handwerk MBA CWS CWPP CAPP
Derrick received his MBA from Lehigh
University and is a Martindale-Rauch Business Scholar. He received
his certification in Wealth Preservation and Asset Protection from
the Wealth Preservation Institute. He is also certified in Wealth
Strategies, CWS, which is a designation that focuses on the needs of
high net worth clients.
After college, he spent 3 years in the
pharmaceutical industry and then went on to run and own several
businesses including Handwerk Wealth Advisory.
Handwerk Wealth Advisory works with accredited
investors and small business owners. He also specializes in working
with medical and dental practitioners.
www.handwerkwealthadvisory.com
The information presented is general in nature
and should not be considered legal or tax advice. The reader should
consult their legal or tax advisor for information concerning their
own specific tax situation.
"Securities offered through First Allied
Securities, a Registered Broker/Dealer, member FINRA/SIPC"
An
overview of 401(k) Plans
Over the last decade, Congress, recognizing
the importance that small business has on new job growth, has given
support to numerous retirement plans tailored to the needs of small
businesses. Additionally, The Economic Growth and Tax Relief
Reconciliation Act of 2001 had a large positive impact on the
401(k).
A 401(k) plan is an ERISA (Employee Retirement
Income Security Act of 1974) based plan. Since the 401(k) is set up
under the auspices of the Federal Government, assets under the
401(k) plan are shielded from creditors. With few
exceptions, a 401(k) plan will protect assets from creditor
judgments arising from litigation and malpractice suits.
Up to $54,500 (2011) in salary deferral and
company contributions can be credited to an employee’s account and
the assets will grow tax deferred.
In my opinion, the 401(k) plan is one of the
most flexible retirement plans available. The trade off, a 401(k)
may require more administration than other qualified retirement
plans. However, during the past few years, plan administrative costs
have been dramatically reduced due to competitive pressures.
As an added incentive, the federal government
offers tax credits to businesses that start a 401(k) plan. The
employer can receive up to $500/year for start up costs, for a
period of up to three years. Additionally, workers with lower
incomes may be eligible for a tax credit of up to $1000 for
contributions made to the 401(k) plan.
What follows is a basic overview of the two
main types of 401(k) plans. The two plans are a 401(k) and a safe
harbor 401(k).
- 401(k)
Strengths
- Allow employees to defer up to $16,500 in
pretax, salary-deferred contributions + $5500 as a catch-up for
people over the age of 50.
- Employer-matching contributions are
optional but can be up to 25% of compensation.
- A vesting schedule is available.
- Part-time and non-payroll employees can be
excluded based on eligibility requirements.
Weaknesses
- Nondiscrimination and top heavy testing is
required. These tests are an additional cost in terms of the
employer’s time and money.
- Due to lack of employee participation,
highly compensated employees may have their contribution capped.
- 401(k) Safe Harbor
These plans are more suitable for companies
with highly compensated employees who are usually owners or key
level employees, whose contributions are limited due to lack of
employee participation in numbers or dollars contributed to the
plan.
Strengths
- The Safe Harbor plan allows the employer to
avoid nondiscrimination and top-heavy testing.
- Highly compensated employees can maximize
their contributions to the plan each year regardless of
participation of other employees in the plan.
- Enhanced matching contributions are allowed
Weaknesses
- Employer-matching contributions are
required for each employee in the form of 3% of salary and 50
cents on the dollar for salary deferrals between 3%-5%.
- All employer contributions are immediately
vested.
Obviously, this is a cursory overview of the
plans. But what I find in the market place is:
- If an employer has a SEP IRA in place and
has more than five employees, usually a 401(k) plan may be a
good alternative.
- Employers that have not used the 401(k)
plan because of issues in the past should re-evaluate their
plans.
- Many employers who have a 401(k) plan
have a one size fits all plan. I have found by tailoring the
plan to the individual company that hard and soft dollar
benefits can be realized.
See you next month……..
Derrick Handwerk MBA CWS CWPP CA
Derrick received his MBA from Lehigh
University and is a Martindale-Rauch Business Scholar. He received
his certification in Wealth Preservation and Asset Protection from
the Wealth Preservation Institute. He is also certified in Wealth
Strategies, CWS, which is a designation that focuses on the needs of
high net worth clients.
After college, he spent 3 years in the
pharmaceutical industry and then went on to run and own several
businesses including Handwerk Wealth Advisory.
Handwerk Wealth Advisory works with accredited
investors and small business owners. He also specializes in working
with medical and dental practitioners.
www.handwerkwealthadvisory.co
The information presented is general in nature
and should not be considered legal or tax advice. The reader should
consult their legal or tax advisor for information concerning their
own specific tax situation.
"Securities offered through First Allied
Securities, a Registered Broker/Dealer, member FINRA/SIPC"
Smooth Sailing Ahead
I have been reading a lot of financial
publications and listening to many people on TV making bold, and
often errant, predications on the economy and the stock market. Many
believe it is smooth sailing ahead.
Look at most publications or watch TV and you
will hear people giving you reasons to buy stock A over stock B, or
why a industry or sector will do well. The implicit assumption is
that by following their recommendations you will be able to
outperform the stock market.
A simple rule of math explains that an
equal proportion of investments in the stock market must
underperform in order to balance out those that outperform. In
essence, if the stock market is flat for a stipulated period of
time, during that period there is a sum zero net gain by all the
participants who invest in the stock market. The primary way you
make money in the stock market is when the primary trend of the
stock market is up.
A few weeks ago, Barrons had 10 prominent sage
investment strategists chronicled in their weekly publication. All
10 saw 2011 as an up year for the stock market. This past week,
(Jan. 17) Barrons again presented more optimism. In the weekly
survey of investment advisors by Investors Intelligence the
latest reading on the stock market was:
57.3% bulls
19% bears
FYI - At the end of October 2007, the bullish
rating was 62%.
Barron’s cites several other surveys which
report similar extreme bullish stock sentiment.
The reason that I relay this information is
the myopic reporting and predictions of future returns the stock
market may or may not produce. There is an entire industry and
ancillary industries that predict and promise to deliver stock
market performance. If you step back from the cacophony of
commentators, you will see my point.
My main thesis is that the investing public
has bought into a mindset which can cause financial pain.
If you have the risk tolerance AND you have enough time to ride out
a complete market cycle, than your percentage of investments in the
stock market could be a significant component of your portfolio.
However, if you are 10 years from retirement or in retirement then I
believe that percentage of your assets in stock should be less.
I don’t believe anyone should have all of
their money invested in only stocks or bonds.
I view the stock market as just one asset class of many. (You don’t
see any of the Ivy League school endowment funds investing only in
stocks and bonds.)
From my experience most people only invest in
stocks and bonds. I am not sure how you view your investments, but I
like to try and avoid my net worth rising and falling with the whims
of the stock market.
I am not a bull or a bear, I am just
skeptical. This stock market could easily make new all time highs in
2011. In fact some sectors of the stock market already have. But, if
a major financial shock, geopolitical shock or change in economic
policy by a country such as China or the US occurs, the impact on
stocks might be significant.
Happy sailing and I will touch base with you
next month…
Derrick Handwerk MBA CWPP CAPP
Derrick received his MBA from Lehigh
University and is a Martindale-Rauch Business Scholar. He received
his certification in Wealth Preservation and Asset Protection from
the Wealth Preservation Institute. He is also certified in Wealth
Strategies, CWS, which is a designation that focuses on the needs of
high net worth clients.
After college, he spent 3 years in the
pharmaceutical industry and then went on to run and own several
businesses including Handwerk Wealth Advisory.
Handwerk Wealth Advisory works with accredited
investors and small business owners. He also specializes in working
with medical and dental practitioners.
www.handwerkwealthadvisory.com
The information presented is general in nature
and should not be considered legal or tax advice. The reader should
consult their legal or tax advisor for information concerning their
own specific tax situation.
"Securities offered through First Allied
Securities, a Registered Broker/Dealer, member FINRA/SIPC"
Derrick Handwerk MBA CWPP CAPP
2011 New Year’s Resolutions
Every year when I sit down to write my annual
New Year’s Resolutions for the affluent investor, my goal is to
suggest behaviors which you may want to examine. I define affluent
as, people with less than 10 million in investable assets. Your
home, vacation home and the value of your business are excluded.
If one of your goals for 2011 is to be more
financially secure with more peace of mind then I believe this
article should prove helpful.
From my experience as an investment advisor
and a wealth advisor who sees many affluent people, I will share
with you the top 5 most pervasive behaviors that need to be
considered.
The first three items on the list relate to
investing and the last two relate to planning.
Investment behaviors to be addressed:
- Trying to beat the stock market-
This is a myth. When you look at net returns, the majority of the
managers and investment advisors cannot beat the market over a
20-year period unless they take on excess risk. While
history should speak for itself, modern studies confirm this
"terrible truth." In the book, Stocks for the Long Run,
Professor Jeremy Siegel reports that in the past 20 years, there
were only three years in which many investments beat the market
index (as measured by the S&P 500).
Solution:
Don’t pick an advisor based on their promise of beating an index
or giving you guaranteed returns. Aside from the primary market
trend, investing in stocks is a sum zero net gain. For every
person that beats the market someone else has to underperform.
- Investing only in stocks, bonds and cash-
They say variety is the spice of life. This axiom also may apply
to investments. Depending on definition, there are 10 asset
classes. The goal is to find non-correlated assets that may give
you a more steady return and have your returns not be tied to the
volatility of the stock market.
Solution:
Look at other asset classes that are suitable for your age and
risk tolerance. If appropriate, commodities, real estate and
alternative investments may be a consideration for your portfolio.
How would you feel if you were 5 years from retirement and the
stock market cratered 30% and you had the bulk of your assets in
stocks?
- Not matching risk tolerance to return-
Everyone would like to earn a 20% return. But with potentially
high returns comes high risk. Just look back to the 1999-2001
Internet craze. People were making 20%, 30% or 40%/year in the
stock market and didn’t realize with abnormal returns comes the
possibility of abnormal losses. Solution: Depending on your
age, risk tolerance, liquidity and goals set your expected return
target. Ask your advisor to show you a 5 and 10 year historical
average return for the asset allocation they advise. This info may
give you some sense of what you can expect.
Wealth planning behaviors to be addressed:
- Only investing and not planning
– I am
amazed with how the terms "investment advisor" and "financial
planning" are used interchangeably. The confusion may stem from
financial institutions giving financial planning advice, which is
incidental to the selling of investments or insurance.
I see very few financial plans. Though, I do see a lot of cash
flow analysis that are called financial plans. This "plan" shows
cash projections at various rates of return on your nest egg. The
moment the investment advisor hands the book to you, it is
becoming obsolete.
Solution: If
you’re net worth in above a million dollars, there may be many
wealth preservation tactics and strategies for potentially
increasing and preserving your wealth. If you are only
investing and not planning, I would suggest you are missing
potential opportunities. Also, as most people with a high-net
worth will tell you. Constant oversight and updating of strategies
is imperative.
I assert that good planning at the margin
can be more important than good investing. The problem is many
investors haven’t seen good financial planning.
If you work or have worked 50-80 hours/week to
amass your wealth, doesn’t it make sense to have a plan which is
constantly updated to set the direction for your financial life?
AND LAST BUT CERTAINLY NOT LEAST…………….
- Failing to save enough money for retirement- Most
people I talk with underestimate their life span and the amount of
money they will need in retirement. From my experience, less
than 10% of millionaires have enough money to retire on and keep
their present standard of living. I’d suggest that if you are
affluent, educated, exercise, and have good genes, the chance of
reaching the age of 90 increases significantly.
Having one spouse living to age 90 means
your assets must support your life style in retirement for 25
years or possibly longer. This realization may not occur until
someone has reached age 74 and the money is gone. Can you
think of many things worse than being 74 and out of money?
Instead of having a grand life you now may have to accept
Medicaid and see your lifestyle dramatically change.
Solution:
Save, save, save and if you think you are close to reaching that
magic number run some cash flow illustrations with various
inflation levels, investment returns and "end points" until you
feel comfortable that you should be "Okay".
Remember, it is better to have too much money
in retirement vs. too little.
These five behaviors come from over 25
years of investing and working with affluent clients.
I hope that 2011 is a prosperous
year for you and your loved ones. I wish you health,
wealth and happiness.
See you next month……..
Derrick Handwerk MBA CWPP CAPP
Derrick received his MBA from Lehigh
University and is a Martindale-Rauch Business Scholar. He received
his certification in Wealth Preservation and Asset Protection from
the Wealth Preservation Institute. He is also certified in Wealth
Strategies, CWS, which is a designation that focuses on the needs of
high net worth clients.
After college, he spent 3 years in the
pharmaceutical industry and then went on to run and own several
businesses including Handwerk Wealth Advisory.
Handwerk Wealth Advisory works with accredited
investors and small business owners. He also specializes in working
with medical and dental practitioners.
www.handwerkwealthadvisory.com
The information presented is general in nature and should not be
considered legal or tax advice. The reader should consult their
legal or tax advisor for information concerning their own specific
tax situation.
"Securities offered through First Allied Securities, a Registered
Broker/Dealer, member FINRA/SIPC"
The
Federal Reserve and their impact on your investments
Today is November 4th 2010 and the
mid-term elections have taken place and the Federal Reserve’s QE2
has set sail. (Quantitative easing round 2) Both will have a huge
impact of your investments and your standard of living.
This article will focus on the Federal Reserve
and their effort to increase the money supply and use that money to
artificially lower US treasury rates and all related interest rates
such as corporate bond rates and municipal bond rates.
The Federal Reserve also known as the central
bank of the United States; incorporates 12 Federal Reserve branch
banks, all national banks, state-chartered commercial banks and some
trust companies. It is important to note that The Federal Reserve is
independent of the political process.
"The Fed" seeks to control the United States
economy by their primary tools of raising and lowering short-term
interest rates and increasing or decreasing the money supply. Their
decisions can have a dramatic impact on the US financial system and
the US economy. Their dual mandate is to promote stable inflation
and maximum employment.
Ben Bernanke is the Federal Reserve chairman
and has been called one of the most powerful people in the world by
virtue of his ability to impact the economy of the United States.
His committee has many tools to impact the US economy. The Fed has
decided to take rates down near zero and this group has caused your
money market to pay very little interest on your money.
The Federal Reserve is doing what we all wish
we could do and that is to print money. (Increasing the money
supply) Not only can they print money they can buy various assets in
order to impact the economy in an effort to meet their dual mandate.
They announced in early November that they
will buy over $600,000,000,000 (600 billion dollars) of treasury
notes and bonds over the next 6 months. They may also extend this
program or cut it short. The purchase of treasury notes and bonds is
being done in an effort to reduce US interest rates. I believe the
Fed is buying our own government’s debt for three main reasons.
- The Fed is trying to cause inflation
which will lead people to get out of money markets into riskier
assets and thus increase asset prices especially stocks and
commodities. Also, by virtue of the wealth effect, hopefully
increase housing prices.
- The Fed is trying to buy time
in order to give banks time to heal. Allowing them to make money
on a steep yield curve and give US consumers time to pay down
their debt and refinance their homes in order to reduce their
indebtedness.
- The Fed is trying to force China to remove
their currency’s peg to the dollar
,
thus making the US exports more competitive via a depreciated
dollar.
The Federal Reserve is trying to avoid the US
becoming like Japan after their real estate bubble burst in the
early 90’s. Japan has endured nearly 20 years of deflation. A
feedback loop in which prices continue to fall in inflation adjusted
terms.
Just one example of deflation is the Japanese
stock market, the Nikkei 225. The Nikkei has not increased in value
for nearly 20 years. In fact, a quick click on Yahoo Finance shows
the peak of the market was close to 39,000 in December of 1989.
Currently, the Nikkei trades at below
10,000.
A country’s stock market is only one measure
of the country’s economic health. There are other factors which need
to be discussed when evaluating a country’s prosperity.
Unfortunately, the current space does not permit such a discussion.
By putting trillions of dollars into the
banking system, the Fed is trying to increase all asset prices, buy
more time and trying to gain a competitive advantage in global
business via a weaker dollar.
Will they be successful? I wonder, what will
be the unintended consequences? When will they stop inflating asset
prices and pushing down interest rates and what will happen to asset
prices and interest rates once they stop or retract money from the
system?
Time will tell.
See you next month………..
Derrick Handwerk MBA CWPP CAPP
Derrick received his MBA from Lehigh
University and is a Martindale-Rauch Business Scholar. He received
his certification in Wealth Preservation and Asset Protection from
the Wealth Preservation Institute. He is also certified in Wealth
Strategies, CWS, which is a designation that focuses on the needs of
high net worth clients.
After college, he spent 3 years in the
pharmaceutical industry and then went on to run and own several
businesses including Handwerk Wealth Advisory.
Handwerk Wealth Advisory works with accredited
investors and small business owners. He also specializes in working
with medical and dental practitioners.
www.handwerkwealthadvisory.com
The information presented is general in nature
and should not be considered legal or tax advice. The reader should
consult their legal or tax advisor for information concerning their
own specific tax situation.
"Securities offered through First Allied
Securities, a Registered Broker/Dealer, member FINRA/SIPC"
A
Comfortable Retirement (part 3)
This is the last in a series of 3 articles
discussing the underestimation by many Americans of how much
money they will need to retire on. The first article laid out
the current situation and the simple math behind why most people
have underestimated that amount of money they need to save for
retirement. The second article examined six reasons why
Americans, even wealthy Americans, have not saved enough money
for their retirement. The current reduced savings rate by
Americans and the large amount of federal government debt may
lead to a reduced standard of living for those who are looking
to retire beyond 2020.
There are solutions to the problem of not
having enough money to retire on. Some of the answers are
partial answers and some solutions are easier than others.
- Save more sooner
- Reduce your expenses – live on less
- Be realistic about your needs vs. wants
- After you retire, work in an occupation
that you enjoy so you keep yourself vibrant and bring in
additional income.
- Downsize your home and lifestyle before you
retire so you can save additional money and see if the new
lifestyle is what you envision for your retirement years.
- Take long term care and health costs into
consideration in your retirement budget
- Assume higher taxes due to structural debt
issues by the various levels of government
- Take advantage of tax advantaged
investments
- Diversify your portfolio beyond just stocks
and bonds
- Assume that you will actually need more
assets to live on in retirement that your projections would
estimate.
Many of the above solutions are self
evident. I would like to delve into numbers 8, 9 and 10.
I hear many people tell me they are maxing
out their retirement plan. In my experience less than 50% of the
people actually are taking full advantage of tax advantaged
investment plans available. You need to find a retirement
plan specialist and discuss this topic.
I am not sure about you, but I want to
diversify my portfolio beyond just stocks and bonds. The
major reason many planners suggest for bonds being a major part
of a retirement portfolio was the steady cash flow. Besides a
dependable cash stream the bonds would help cushion any stock
market fluctuation. Currently, the 10 year Treasury bond
interest rate is under 3 %. Not much of a return and not much of
a cushion. Additionally, with bonds at historic lows, if bond
rates increase you may lose the principal value of the bond. If
the stock market goes down dramatically during your retirement,
you would be looking at a significant loss in value just at the
time when you do not have an income to make up the deficiency. I
would rather diversify into many asset classes in an effort to
mitigate the large variations in the stock market.
I would rather have too much money
saved at age 65 considering my spending needs than too
little. I tell my clients you do not want to get a call from me
when you are 85….during the phone conversation I would say I
have good news and bad news. The bad news is unfortunately you
have run out of money but the good news is the local supermarket
has openings for full-time positions with a benefit package.
This series of articles was my effort to
make people aware of a looming problem which they may feel the
impact for many years. I hope you were able to glean a point or
two from these articles which helps put you in a better position
for your golden years.
See you next month…
Derrick Handwerk MBA CWPP CAPP
Derrick received his MBA from Lehigh
University and is a Martindale-Rauch Business Scholar. He received
his certification in Wealth Preservation and Asset Protection from
the Wealth Preservation Institute. He is also certified in Wealth
Strategies, CWS, which is a designation that focuses on the needs of
high net worth clients.
A Comfortable Retirement
(part 2)
In my previous article I identified the
problem that most people are not saving enough for retirement. In
this article I identified six factors which I find are common among
the middle class and upper middle class working millionaires.
The six factors which may cause many people
not to have enough money to retire are:
- A longer life span
According to the US Social Security
Administration 2006 actuarial publication, life spans have
increased over the past few decades. Currently, if you are 65 you
can expect to live until you are almost 85. In 2001 a study
illustrated that a person who was 70 years old lived 5.2 years
longer than if they had been born a bit over 3 decades before.
Thus over a period of 30 years the average life span increased by
over 5 years. Additionally, some studies have shown that
education, income and exercise have increased the survival rate
even further. With continued technology advances in medicine, I
believe that this trend may accelerate.
What this means is that if you are in your
50’s or 60’s, you may have a good chance to live until you are 90.
Nothing could be worse than being 90 years old and running out of
money.
- Global competition for labor and goods
Currently the US is in a slow growth
environment. However emerging markets like China are growing at
rates of 6-8%/year or more depending on the year. India has a
billion people and many are educated and speak English.
My point is the world is getting smaller and
somebody competing for your job or competing against your business
doesn’t have to be down the block or even in the next state. They
can now be in another country. The reason I bring this up is that
the income stream of future earnings from your chosen profession
may not be as rock solid as it once was.
- Consumerism
We are programmed by the advertisers, from
the time we can watch TV, on how we are supposed to behave and
spend money. According to the advertisers and many TV shows, fancy
cars and the "millionaire lifestyle" seem to be the norm and our
right to pursue as Americans. Our homes are much larger than our
parents homes were. A "regular" color TV won’t due. Now we need
a HD 40" flat screen plasma. I just bought one a few months ago
and I was probably the last one on the block. Now the advertisers
inform me I need to be buying a 3D TV.
People who earn a good income generally
spend more as their incomes increase. This behavior flies in the
face of many economic theories such as Engel’s law. Engel’s law
states that people will consume less on a percentage basis as
income rises.
- Taxes
The top marginal federal tax rates during
the Kennedy administration were 90%. Those rates have been
dropping to the current levels of 15% long term capital gains
and the top marginal rate on wages being 35%.
Due to structural deficits at the local,
state and federal level, I believe taxes rates will be going up
over time. In addition there are many less overt "stealth" tax
hikes coming. For example, not indexing the federal tax on wages
or capital gains to take into account inflation. In my opinion,
the taxes which we will be paying will be increasing, which will
make it even harder to save money.
I see the TV commercial for a financial
services company asking what is your "number". Simplistically
implying that there is a singular number which you will need to
save in order to have a great retirement and the innuendo is
they can magically help you get there.
First, there is no one number.
If you tell me:
- On a yearly basis what the future tax
rates will be at the federal, state, county, local level in
addition to any consumption taxes, or increased fees for
services the government provides
- On a yearly basis what inflation will be
- What the cost of those one-time expenses
such as weddings and colleges will be
- That you will not divorce
- On a yearly basis what your yearly rates
of return will be in retirement
- When you expect to no longer need your
money. The year when both you and your spouse will pass
Then I can model what your number is. However,
if just one of those variables change in one just one year, "the
number" you will need to comfortably retire will change.
- Inflation
It is my belief that inflation is under
estimated by the government as illustrated by the consumer price
index. This assertion could be a PhD thesis in and of itself.
Let’s just keep it short and say that changes to the calculation
of CPI were made under Greenspan and it is in the US government’s
best interest to underestimate inflation. As inflation rises, the
government would have to pay more interest on its (our) debt and
would have to increase cost of living adjustments for all those
people who receive checks from the federal government.
- Investment returns
Many of us who are older than 45 remember
the incredible stock market returns during the 80’s and 90’s.
From 1980 -2000, according to 1stock1.com, there were only 4
years of losses on the Dow Jones Industrial Average, the largest
being 9.23% in 1981. Many people continue to believe the stock
market will dramatically increase their retirement investments.
Dow Jones Industrial Average on the first
day of:
1980 964
2000 11,497
Source:
www.nyse.tv
A survey done by ING Direct in March of
2010 found that more than 25% of Americans expect annual returns
in the stock market to average 10%-20%. The long run average
according to many investment professionals is about 8%/yr above
inflation. However, recently, Allison Schrager who writes for
The Economist’s website states that private pension funds assume
the equity premium "is often assumed to be between 5% and 8%. In
my experience, risk managers go silent when asked exactly where
this number comes from."
What if future stock market returns turn out
to be lower as Megan McArdle suggests in the September edition of
The Atlantic magazine. Then the hope for bail out of American’s
retirement savings would not occur. Not a pleasant thought.
See you next month…
Derrick Handwerk MBA CWPP CAPP
Derrick received his MBA from Lehigh
University and is a Martindale-Rauch Business Scholar. He received
his certification in Wealth Preservation and Asset Protection from
the Wealth Preservation Institute. He is also certified in Wealth
Strategies, CWS, which is a designation that focuses on the needs of
high net worth clients.
After college, he spent 3 years in the
pharmaceutical industry and then went on to run and own several
businesses including Handwerk Wealth Advisory.
Handwerk Wealth Advisory works with accredited
investors and small business owners. He also specializes in working
with medical and dental practitioners.
www.handwerkwealthadvisory.com
A
Comfortable Retirement
I talk with many people in their 40’s and 50’s
who tell me they are looking forward to their golden years, basking
away in the sun, playing golf and taking time to travel and do all
the things they didn’t have time to do when they were working.
As a Wealth Advisor I am in an unusual
situation. I work with people with net worth in excess of a million
dollars. I also get to talk with people who are "millionaires" or
multi-millionaires and listen to their thoughts and concerns.
What I have seen with all too much alacrity is
that retiring at age 65, with a million dollars may not allow for a
very high standard of living by the standards set by the working
wealthy. I can’t even fathom how the other 98% of the population, as
defined by income, will have much of a chance of living on their
nest egg. Depending on which source you cite, the average person who
is 55 years old has about $60,000 in retirement savings. In my
opinion, living with the same standard of living in retirement as
during your working life is a myth for most of the baby boomers.
How could this happen? According to Van Derhei,
some 59% of people age 56-72 will be at risk of not having enough
money to cover basic living and health-care costs in retirement.
Note, he did not say at risk to maintain their standard of living at
pre-retirement levels.
The Wall Street Journal reports that in 2008,
people aged 65-74 were spending 12.3% less than they did ten years
earlier, in inflation-adjusted terms.
I started researching various sources to
prepare to write this article in an effort to understand and explain
why so many people that make a large income have so little saved for
retirement. What I found was there are numerous reasons for the
current lack of an adequate retirement savings for most people. The
reasons apply to all socio-economic groups.
First, let’s look at some simple math. If you
are 65 and want to have your retirement savings last 25 years then
you can take out 1/25th of the retirement amount each
year. The 4% reduction in principal plus any capital appreciation or
interest can then be used to live on in retirement. We won’t even
factor in inflation and its impact on purchasing power or the
reduction of principal which would reduce future investment gains
over time.
AN EXAMPLE
You are 65 and have a million dollars of
assets. You take out 4% or $40,000 plus any gains on the million.
Let’s say you are earning a "safe" 4% on your investments. That
would give you a total of $80,000. (4% of principal on
1 MM and 4% interest on the million) Depending on your
taxable basis and type of taxation on your gains you may end up with
$55,000-$65,000 after the current tax rate. If tax rates
increase in the future, your after tax return may even be less.
Do the math on how much you have saved. If you assume Social Security will not be
available when you retire in 15 years or so, and you have no other
source of income, could you live on the
number you calculated?
Imagine having an income that allowed you to
have a million dollars when you retire. Do you think that 50k/year
in retirement, not adjusted for inflation, is enough for you to live
on?
What is causing the lack of enough retirement
savings for so many people? I have come up with six reasons which
have caused so many people in the US to save so little for those
golden years.
I will briefly describe each of these factors
and how they impact our savings for retirement in my next article.
See you next month…
Derrick Handwerk MBA CWPP CAPP
Derrick received his MBA from Lehigh
University and is a Martindale-Rauch Business Scholar. He received
his certification in Wealth Preservation and Asset Protection from
the Wealth Preservation Institute. He is also certified in Wealth
Strategies, CWS, which is a designation that focuses on the needs of
high net worth clients.
After college, he spent 3 years in the
pharmaceutical industry and then went on to run and own several
businesses including Handwerk Wealth Advisory.
Handwerk Wealth Advisory works with accredited
investors and small business owners. He also specializes in working
with medical and dental practitioners.
www.handwerkwealthadvisory.com
The information presented is general in nature
and should not be considered legal or tax advice. The reader should
consult their legal or tax advisor for information concerning their
own specific tax situation.
"Securities offered through First Allied
Securities, a Registered Broker/Dealer, member FINRA/SIPC"
Providing the Best
Investment Choices
This article is one in a series which focuses on retirement
plans. I believe the importance of building up a significant
amount of money in a retirement plan cannot be overstated.
There are many 401(k) providers, investment choices and types of
retirement plans. I have set up many plans for doctors and small
business owners and this series of articles highlight some of the
most common areas for improvement and give a glimpse into my thought
process. This article focuses on:
- The variety and importance of investment choices which may be
available in a retirement plan
- How to integrate those investments into an overall investment
strategy.
What you may not realize
When setting up their retirement plans, business owners are often
faced with just a handful of investment choices which are mostly
limited to stocks and bonds. Most people do not realize that there
are many asset classes aside from stocks, bonds and cash. For many
small business owners, a 401(k) is a good investment choice. It is a
matter of what the business owner’s goals are, which can then
reflected in the plan design. (See Retirement plans, part 2) It is
also critical to integrate the investments inside the retirement
plan with the rest of your portfolio in a tax efficient manner.
The investment choices you make may not benefit you
Having a limited number of investment choices may increase
correlation to the non-retirement investments. Thus when the stock
market goes up or when interest rates rise, your entire spectrum of
investments may move in tandem.
Also of importance, from a tax perspective, having an integrated
retirement plan investment strategy may help you reduce your tax
bill. Conversely, not having an overall investment plan may
dramatically increase your tax bill.
How we can potentially overcome the problem
A lack of choices may give poor diversification
When choosing a retirement plan, in my opinion, it is critical to
choose an investment provider which gives a wide variety of
investments from top quality companies. I make sure my clients have
the option to invest outside the investment platform so they can
diversify their investments in an effort to reduce correlation among
their investments and the resulting volatility which may arise.
If a client has a taxable portfolio of stocks and bonds, we would
look to investments other than stocks and bonds which would
diversify their 401(k) portfolio.
Having an overall investment strategy
I have seen many investors’ portfolios. It strikes me as
unfortunate that many times they, nor their investment advisor,
consider both their retirement accounts and their non-retirement
accounts as part of an overall investment strategy. Really, your
retirement accounts are pieces of the investment pie. If you own
investment real estate then you may not want to own real estate
stocks in your retirement portfolio. If you have a lot of municipal
bonds outside of your retirement plan, then you would want to take
that into consideration when picking investments for your retirement
plan.
The other aspect which is not always considered is the tax
aspects of a retirement plan. Most retirement plans offer tax
deferral. Ergo, investments which throw off a lot of income or are
tax inefficient should be held inside the retirement plan. While
accounts which are outside the retirement plan may be best to hold
stocks and other investments which do not cause a large tax
consequence. Holding tax inefficient investments inside your
retirement plan allows you to hold more tax efficient investments
outside your retirement plan.
Your choices of investments in your retirement plan may be the
difference between retiring in a comfortable manner at age 60 or 65
vs. working a few extra years to make up the investment short-fall.
See you next month……..
Derrick Handwerk MBA CWPP CAPP
Derrick received his MBA from Lehigh University and is a
Martindale-Rauch Business Scholar. He received his certification in
Wealth Preservation and Asset Protection from the Wealth
Preservation Institute. He is also certified in Wealth Strategies,
CWS, which is a designation that focuses on the needs of high net
worth clients.
After college, he spent 3 years in the pharmaceutical industry
and then went on to run and own several businesses including
Handwerk Wealth Advisory.
Handwerk Wealth Advisory works with accredited investors and
small business owners. He also specializes in working with medical
and dental practitioners.
www.handwerkwealthadvisory.com
The information presented is general in nature and should not be
considered legal or tax advice. The reader should consult their
legal or tax advisor for information concerning their own specific
tax situation.
"Securities offered through First Allied Securities, a Registered
Broker/Dealer, member FINRA/SIPC"
Retirement Plans, Part 2
This article is part of a series which focuses on retirement
plans. As a business owner, I believe the importance of building
up a significant amount of money in a retirement plan cannot be
overstated. There are many aspects of retirement plans which
offer potential opportunities.
There are many providers, investment choices and types of
retirement plans. I have set up many plans for doctors and small
business owners and these articles distill some of the most common
areas for improvement and shine a light on my thought process and my
logic employed in order to judge if changes were warranted. This
article attempts to focus on some areas that business owners don’t
always address when setting up and maintaining their retirement
plan.
What you may not realize about retirement plans:
Plan Design
Many business owners don’t realized the importance of reviewing
their retirement plan design periodically to maintain compliance
with IRS changes as well as to make certain the plan you have
continues to track intended objectives.
There are more options in making the plan design more efficient
in terms of owners and key employees allocation than most business
owners assume. Many smaller businesses choose SEP IRA's because they
are made to believe they are efficient retirement vehicles that
don't require admin reporting to the government or the participants.
However, while this is true, the owner may be missing out on more
efficient contribution allocation options, stricter eligibility,
vesting options, and participant loan availability among other
things. For small businesses maximzing contribution efficiency while
still affording the owner(s) non-taxable options to access
retirement savings to possibly invest in the business is in my
opinion, important.
401(k) salary deferral features are less onerous than most
employers mistakenly believe. Most payroll services handle the heavy
lifting for the employer in terms of managing and manipultating tax
withholding. The addition of a 401(k) feature to any stand alone
profit sharing design may make the design more efficient in terms of
owner/employee contribution efficiency. Plus, for an owner over age
fifty, the catch-up 2010 contribution limit for a 401 (k) plan
allows an additional $5,500 retirement savings.
Most owners don’t realize that with a better plan design they may
be able to maximize the benefit for the owner(s) or other key
employees at an accompanying cost for the staff that is less. For a
medical practice with falling reimbursements and rising malpractice
insurance costs, maximizing contribution efficiency may never have
been more important.
Plan sponsors often don't understand fiduciary liability
issues.
This past spring, the IRS began mailing questionnaires to
employers who sponsor 401(k) plans. The IRS uses the answers from
the questionnaires to find noncompliant plans and to design
enforcement strategies.
Many plan sponsors (the business owner) mistaken believe that if
they allow participants to make their own investment decisions that
they are insulated against liability. This couldn't be further from
the truth where the issue of the available investment menu, extent
of available investment education and understanding of risk
tolerance, and fees all contribute to a plan sponsor's potential
liability. The courts are full of cases of employees filing law
suits against former employers for insufficient handling of some or
all of these items. A prudent fiduciary process both in selecting
and on-going evaluation of an investment advisor and investment
platform may be very important to limiting liability.
If a plan is deemed non-compliant by the IRS, the worst case
scenario is:
- All assets are ejected from the 401 (k) plan which causes them
to be penalized at a 10% federal tax AND are then deemed to be
ordinary income and taxed as such.
- The employees may end up suing the plan trustee (you) for
breach of fiduciary obligations which led to their 401(k)
investments being taxed twice.
- You may have many very unhappy employees.
How to potentially mitigate the risks and enhance the
opportunities
What I have found in my many years of working with business
owners is that many plans are obsolete or ill conceived. What I have
also discovered is that some "financial planners" may just want to
set up a plan as quickly as possible and then move onto the next
client. Analyzing a plan takes time and knowledge.
Overcoming obstacles
I summarized the two areas where I find clients may benefit the
most. These areas are:
- plan design
- understanding their fiduciary obligations.
My goal is to help my clients with design analysis comparing what
they have (or might
be considering) against other options in the retirement plan
universe.
I also help my client understand their fiduciary obligations. I
believe the choices on the investment as well as the record keeping
functions by the client are critical.
In closing, having the right investment advisor who is willing to
take the time to work with you and install a plan is critical. Also,
having the right 401(k) third party administrator (TPA) is crucial.
The TPA is the 401 (k) plan’s accountant. Their ability to perform
advanced case studies and their familiarity with the most complex
plans cannot be over emphasized.
I would like to thank Robert McNulty who is a Certified Pension
Consultant and a partner at Dunbar, Bender & Zapf for his
contributions to this article.
See you next month……..
Derrick Handwerk MBA CWPP CAPP
Derrick received his MBA from Lehigh University and is a
Martindale-Rauch Business Scholar. He received his certification in
Wealth Preservation and Asset Protection from the Wealth
Preservation Institute. He is also certified in Wealth Strategies,
CWS, which is a designation that focuses on the needs of high net
worth clients.
After college, he spent 3 years in the pharmaceutical industry
and then went on to run and own several businesses including
Handwerk Wealth Advisory.
Handwerk Wealth Advisory works with accredited investors and
small business owners. He also specializes in working with medical
and dental practitioners.
www.handwerkwealthadvisory.com
The information presented is general in nature and should not be
considered legal or tax advice. The reader should consult their
legal or tax advisor for information concerning their own specific
tax situation.
"Securities offered through First Allied Securities, a Registered
Broker/Dealer, member FINRA/SIPC"
The information presented is general in nature
and should not be considered legal or tax advice. The reader should
consult their legal or tax advisor for information concerning their
own specific tax situation.
"Securities offered through First Allied
Securities, a Registered Broker/Dealer, member FINRA/SIPC"
Maximizing the Value of Your Retirement Plan
This article is one in a series which focuses
on retirement plans. As a business owner, the importance of
building up a significant amount of money in a retirement plan
cannot be overstated. There are many aspects of retirement plans
which small business owners may not realize offer potential
opportunities.
There are many providers, investment choices
and types of retirement plans. I have set up many plans for doctors
and small business owners and these articles distill some of the
most common areas for improvement and shine a light on my thought
process and my logic employed in order to judge if changes to the
present plan may be needed. This article will focus on some of the
areas of importance in your retirement plan.
Business owners set up retirement plans for
many reasons. Some reasons are:
- To fund their own retirement
- To provide benefits that will enable them
to hire and retain key people
- To save money on taxes
As the business owner you are very busy
running your business. You need to be able to delegate to a person
who has the ability and time to analyze the strengths, weaknesses
and the pitfalls of each type of retirement plan and analyze various
retirement plan designs. What this means, is that you may not
be getting the plan which is optimized to fit your needs and you may
have liability as the trustee.
I will give a brief overview of my process
regarding some of the issues with plans I have seen with regard to
maximizing the value of your retirement plan. Some of the
issues are:
- Improper funding by the owner
- Excessive plan costs
- Limited investment choices
- A plan does not allow the owner to maximize
their contributions or meet the owner’s goals
- Reduced protection from creditors
Improper Funding by the Owner
As a business owner you have a choice on
contributing to the plan or not contributing to the plan. Having the
company match or contribute profit sharing can be based on many
criteria.
One metric I use to evaluate if an owner
should make a contribution to the employees is I take the cost to
the business of contributing money vs. the owner’s tax savings. If
you look at the total dollar outlay by the company vs. the tax
savings you can get a rough gauge if the contribution by the company
makes sense from a purely short-term economic perspective.
You may be contributing no money to the
employees and still be in the wrong type of plan. Another plan which
allows you to contribute money to the employee may be more
advantageous, since it allows you to save more money in the plan and
possibly allows you may save more in tax then if you make no
contributions to the employees.
Excessive Plan Costs
A plan can have increased costs in a variety
of areas and some expenses are very opaque. For example, a plan that
is an annuity may have costs which are not readily discernable to a
business owner. Other examples are high expense ratios for the
investments, high advisor expenses, high platform fees and high
administration fees.
I sit down and look at all of the expenses in
a plan. Each cost is looked at from the perspective of what is the
value vs. the cost.
Limited Investment Choices
When you look at your plan you need to ask
yourself, how were the investments chosen for inclusion into the
retirement plan? I look at the investments and discern is there a
good mix of asset classes and strategies. I see too many plans that
have choices of only stocks and bonds. I also look for the track
records of the investments and their cost. Additionally, I believe
interest rates are moving higher over the long term so I suggest
investment vehicles to minimize the impact of this trend.
You may not realize that you may be able to
move your 401k contributions to other types of investments not
offered on the platform in order to increase your diversification.
Considering that you may have a significant amount of money in your
retirement plans, I believe the more diversified you are the better.
A Plan Does Not Allow the Owner to Maximize
Their Contributions or Meet the Owner’s Goals
Each type of retirement plan, qualified plan,
non-qualified plan or profit sharing plan has limitations on the
amount of money that can be contributed by an employee, including
the owner. A Simple IRA allows $11,500 as the maximum
elective deferral in 2010 for people under the age of 50. The annual
limit under a defined benefit plan for 2010 is $195,000. So
when I hear someone tell me they are "maxing out" their retirement
plan two thoughts come to mind. Are you really maxing out the plan
that you have in place and do you have the right plan in place?
Reduced protection from creditors
As a business owner you should want to make
sure that your money invested in a retirement plan is safe.
Especially if you are a doctor, lawyer or accountant, since you have
personal liability related to your business as a service provider.
Some non-qualified retirement plans are subject to the creditors of
the company. One the other end of the scale, some retirement plans
have protection from creditors. My thought process looks at the cost
in dollars and the amount of time required of the owner vs. the
amount of protection the owner desires in their retirement plan.
There is definitely a trade off.
In this short article, my goal was to make
you, the business owner, aware of items that you may not have
considered and which may either be a benefit to you or cause you
issues. The topic of designing and then installing a retirement plan
is very complex. If done without a process to analyze the various
types of plans, you may not be "maxing out your plan" or meeting
your overall goals.
See you next month……..
Derrick Handwerk MBA CWPP CAPP
Derrick received his MBA from Lehigh
University and is a Martindale-Rauch Business Scholar. He received
his certification in Wealth Preservation and Asset Protection from
the Wealth Preservation Institute. He is also certified in Wealth
Strategies, CWS, which is a designation that focuses on the needs of
high net worth clients.
After college, he spent 3 years in the
pharmaceutical industry and then went on to run and own several
businesses including Handwerk Wealth Advisory.
Handwerk Wealth Advisory works with accredited
investors and small business owners. He also specializes in working
with medical and dental practitioners.
www.handwerkwealthadvisory.com
What does diversification mean?
Over the years that I have been a wealth
advisor, my experience has been that many people with a net worth of
under 10 million dollars, have a large part of their investible
assets in an investment account holding stocks, bonds, cash and they
probably own some tangible real estate.
The word risk has a lot of meanings to me. In
this article we will discuss one aspect of risk which is the degree
to which your portfolio will go up or down with the stock market.
This is called portfolio beta or volatility.
A portfolio beta of 1 means that your
portfolio will go up and down about the same as the overall stock
market. A beta of .5 means your portfolio will move half as much as
the stock market and a beta of 2 means that you will move twice as
much as the stock market. My thought would be to construct a
portolio with an acceptable amount of risk depending on the age,
suitability, ability to save money, goals, personal risk tolerance
and personality.
As I have written previously, there are about
15 asset classes, however many people only have 3 or 4 asset classes
represented in their portfolio. The goal of having more than 4 asset
classes in your portfolio is to diversify your holdings so that your
portfolio does not go up or down with the stock market.*
Asset classes
- Stocks
- Bonds
- Cash
- Real estate
- Options
- Absolute return funds
- Private partnerships
- Futures
- Annuities
- Commodities
If you are in your 50s and you have a
portfolio in which you want to retire on in the next 10 years or so,
why would you invest all of your money in the stock market and take
on the risk that the stock market would go down just as you are
getting ready to retire?
I recently watched a commercial on TV where
the actor touted the fact that he was diversifying his portfolio
through the purchase of various stocks. I thought to myself, how
absurd. Any large grouping of stocks tends to be correlated to the
returns of the overall stock market. Ergo, if the overall stock
market takes a nose dive, generally speaking, your stocks will also
go down.
Do you know anyone that was 100% invested in
stocks during 2008 and did not lose a lot of money? I wouldn’t think
so.
The traditional answer to reduce stock market
volatility has been to invest in bonds in order to provide a cushion
and a dependable stream of income. That worked 10 years ago, but in
my opinion, will not work now. Overall, bond rates have been
dropping since the late 1980’s. As rates dropped, this gave the
owner of a long term bond an increase in the value of their bond.
This increase in bond prices may have helped to cushion any type of
stock market volatility.
(As a point of clarification, bond investments
are subject to interest-rate risk. When interest rates rise, and
thus the price of most bonds, can decline. If this happens, the
investor could lose principal.)
Right now, in my opinion, we are near a
generational low in bonds. Adding long term bonds to a portfolio
will not reduce the losses in a portfolio if the stock market falls
and bond rates rise. You will actually lose money in bond values and
in stock values.
I also believe that if you put together a
portfolio and look at your retirement plan and all assets as pieces
of the portfolio, the more diversified you are with a balance of
other asset classes, the better your chances are of not having the
same volatility (risk) of the stock market.*
See you next month……..
Derrick Handwerk MBA CWPP CAPP
Derrick received his MBA from Lehigh
University and is a Rauch Business Scholar. He received his
certification in Wealth Preservation and Asset Protection from the
Wealth Preservation Institute.
After college, he spent 3 years in the
pharmaceutical industry and then went on to run and own several
businesses including Handwerk Wealth Advisory.
Handwerk Wealth Advisory works with accredited
investors and small business owners. He also specializes in working
with medical and dental practitioners.
www.handwerkwealthadvisory.com
The information presented is general in nature
and should not be considered legal or tax advice. The reader should
consult their legal or tax advisor for information concerning their
own specific tax situation.
"Securities offered through First Allied
Securities, a Registered Broker/Dealer, member FINRA/SIPC"
* Although diversification may
not eliminate risk, it seeks to maximize the performance of
investment portfolios but does not guarantee greater or more
consistent returns or against losses.
Entitlement
Programs Effect on Interest Rates and Taxes
Today is March 22nd, 2010. The day after congress
deems the healthcare bill to pass.
The bill has too many aspects to cover in this article. This
article’s goal is to discuss how entitlement programs are increasing
the debt which in turn may lead to higher tax rates and higher
interest rates.
Let’s do some simple math. The bill would:
- expand coverage to 32 million Americans who are currently
uninsured.
- cut the deficit by $130 billion over the next ten years.
WOW! That is GREAT news!!!!! Cover more people and lower the
deficit.
Wait at second. How can we cover more people and reduce the
deficit? Yep, tax increases. The primary way congress has chosen to
fund the healthcare program is via a Medicare payroll tax on
investment income. Starting in 2012, the Medicare Payroll Tax will
be expanded to include unearned income. That will be a 3.8 percent
tax on investment income for families making more than $250,000 per
year. (NY Times March 20, 2010)
I encourage you to read Douglas Holtz-Bakin’s article "The Real
Arithmetic on Health Care Reform".
http://www.nytimes.com/2010/03/21/opinion/21holtz-eakin.html
As per my previous article, and as documented in another recent
budget office analysis, the federal deficit is already expected to
exceed at least $700 billion every year over the next decade,
doubling the national debt to more than $20 trillion. By 2020, the
federal deficit, the amount the government must borrow
to meet its expenses, is projected to be $1.2 trillion, $900 billion
of which represents interest on previous debt.
The United States cannot afford another entitlement program. We
currently are near $13 trillion in US debt and have unfunded
liabilities for Medicare/Medicaid, Social Security and many other
entitlements.
To get a sense of the magnitude of the debt, you should visit the
website
http://www.usdebtclock.org/.
According to the site, the total debt per citizen which includes the
outstanding debt, interest on the debt, structural deficits and
unfunded liabilities equals over $55 trillion dollars. To put that
into perspective that is $690,000 of total debt/US family.
Besides being a scary and absurd number what does this mean? In
my opinion, the Medicare payroll taxes are just the start of higher
taxes and higher borrowing costs for the US which may lead to higher
interest rates.
Higher Interest Rates
We are near 40-year lows in interest rates paid by the government
on 10-year US bonds and I don’t remember the discount rate ever
being around .25% -.50%.
As you know, the 10-year US Treasury bond is used as a benchmark
for all other bond prices. The 10-year is supposed to be the
riskless rate one could earn by lending money to the US treasury.
(we won’t get into the inverse relationship between bonds value and
interest rates)
The last time the 10-year Treasury bond paid less than 4%, on
average for the year, was 1962. The average yearly rate of 3.26 for
2009 was the lowest rate that the federalreserve.gov site has listed
which dates back to 1962. Currently, the 10 year rate hovers around
3.7%.
My thesis is that I believe interest rates are headed higher
because the US government is going to have to raise a lot of money
to finance the deficits and this supply will push up rates for not
only US debt but all debt instruments.
This has impact not only on bonds you may already own, but the
stock market and the ability for our economy to grow. For example,
would you rather borrow money for your home or to grow a business at
6% or 10%? Would you buy that home or expand that business if the
rates were 10%?
There are many economic ramifications due to higher rates. There
are also many financial and wealth strategies which can benefit from
a trend of increasing rates.
Higher Marginal Federal Tax Rates
In the early 60’s, tax rates were as high as 91% on marginal
income of over $400,000 for people that were married and filed
jointly. (tax foundation.org) For all of the 1950s and half way into
the 1960s, tax rates stayed at these levels. From 1965 to 1981 the
tax rates were slashed to 70%. Since 1981 the top marginal rates
have been on a downward trend. My guess, we are now going to see
the trend reverse.
Wealth Planning
I would suggest investors hedge their investments by using
multiple tax strategies now and when looking to draw on their
retirement savings. If you earned 100K/in investment income in 2009
you may only have paid 15% capital gains. Going forward, that will
no longer be the case. I would also guess that there will be many
new and creative ways to tax the wealthy, so plan and strategize for
the new reality.
Regarding rising interest rates, there are many asset
classes and bond ladder strategies which can minimize the impact of
rising rates or can actually make money in a rising interest rate
environment.
See you next month……..
Derrick Handwerk MBA CWPP CAPP
Derrick received his MBA from Lehigh University and is a Rauch
Business Scholar. He received his certification in Wealth
Preservation and Asset Protection from the Wealth Preservation
Institute.
After college, he spent 3 years in the pharmaceutical industry
and then went on to run and own several businesses including
Handwerk Wealth Advisory.
Handwerk Wealth Advisory works with accredited investors and
small business owners. He also specializes in working with medical
and dental practitioners.
www.handwerkwealthadvisory.com
The information presented is general in nature and should not be
considered legal or tax advice. The reader should consult their
legal or tax advisor for information concerning their own specific
tax situation.
"Securities offered through First Allied Securities, a Registered
Broker/Dealer, member FINRA/SIPC"
An Apology
A little over a year ago, October 2008, we entered a period in
our economic history in which the outcome is still unsure.
As an advisor that works with affluent families to help them grow
and protect their wealth, I have been accused of seeing the glass
half-full. My goal is to protect, as much as possible, against the
multitude of issues which could negatively impact my clients’
financial lives and ultimately their standard of living. My
strategy is to hope for the best but plan for the worst.
People may call me unpatriotic but the older I get the more
frustrated I am with our government and their representation of
The People. I am a fiscal conservative and a political agnostic.
I do not believe in either the Democrat or Republican parties'
ability to serve The People. My belief is that both parties
seem more interested in their own self-preservation than doing what
is right and best for Americans.
Let me be clear, I am not commenting on any party or politician
but rather on the current system and the strategies and possible
outcomes which may occur.
A Crises = a Political Opportunity
The crisis of 2008-2009, where the stock market reflected the
crisis, is a faint memory to most people. But the "banking crises",
someone has to take the blame, has led to fiscal and monetary fixes
to the economy which will have unintended consequences down the
road. These problems may have dramatic impact on our standard of
living in the years to come.
One "fix" has been to throw billions of dollars, some would say
trillions of dollars, at various programs to help the housing
market, help the unemployed, help the banks, reduce the value of the
dollar and it seems, help most everyone but the affluent and hard
working small business owner. In fact the affluent income earner is
now the solution via tax increases, to pay for all of the "fixes".
From my perspective, I see the current environment to be
anti-small business and anti-wealth creation. If you are highly
intelligent, went to school and have the drive and personality to
own and build a business and/or earn a high income,
you are the
reason this country is great.
Income re-engineering
In my opinion, what is currently occurring and will continue to
occur is the economic depolarization of incomes. Let me call
it what it is, but few journalists will write, "class warfare". The
United States was built by small business owners that had an idea or
vision and grew their business with single minded intent. Deferring
gratification and working hard was how people built a business.
These small business owners create many new jobs and
technologies. These risk takers give up the safety of having a job
with a big company and in many cases engender the possibility of
financial ruin. So the upside potential to earn an outsized profit
has to be present to balance off the risk. In my opinion, this
delicate balance is currently no longer present.
Generally speaking, my perspective of the policies coming out of
Washington reward failure, reward not working and reward low income
earners. So where does that leave my clients and all affluent
people? Prepare for more taxes in many forms. We are not just
talking federal income tax rates increasing, but a whole variety of
new taxes. Additionally, there will be increases in the cost of
doing business and a reduction of tax incentives currently available
to high-income earners.
An Apology
I need to apologize as a fellow citizen of the United States--to
all of the Physicians, Dentists, small business owners and people
that earn substantially more than an average income. I am ashamed of
all the half-baked and ill conceived ideas spewing from Washington.
You are not bad people but rather are a hard working group that will
be penalized for your efforts because the rules are being changed
(legislative risk and employment risk) while the game is still being
played.
I especially want to apologize to the Physicians who are losing
income through no fault of their own. As a group, you possess the IQ
and have demonstrated the drive to build your own business. You
could have gone into most any career, but you choose medicine.
Dentists beware, what is happening now to most Physicians, is the
writing on the wall for most small dental practices at some time in
the future.
My advice
To all those people who earn a "high-income", be nimble and take
advantage of all of the opportunities afforded to you in the tax
code. Investing in stocks and bonds in a taxable account will not be
as effective as in the past. It is all about after-tax income,
after-tax investment return and trying to reduce the various types
of risk.
I hope that our country can get through this turbulent period and
come out the other side a stronger and better nation. But, I have my
concerns……………
See you next month……..
Derrick Handwerk MBA CWPP CAPP
Derrick received his MBA from Lehigh University and is a Rauch
Business Scholar. He received his certification in Wealth
Preservation and Asset Protection from the Wealth Preservation
Institute.
After college, he spent 3 years in the pharmaceutical industry
and then went on to run and own several businesses including
Handwerk Wealth Advisory.
Handwerk Wealth Advisory works with accredited investors and
small business owners. He also specializes in working with medical
and dental practitioners.
What’s in your retirement plan?
Over the years that I have been a wealth advisor, my experience
is that many people with a net worth of under 5 million dollars,
have a large part of their investible assets inside their retirement
plan or in an investment account holding stocks or bonds.
If you are like many people that I meet, you have stocks, bonds,
cash and maybe real estate as choices inside your retirement plan.
As I have written previously, there are about 15 asset classes,
however many people only have 3 or 4 asset classes represented in
their 401 (k) or retirement plan.
Additionally, each asset class can have a multitude of
sub-categories. Probably most familiar to investors are the various
types (sub-categories) of bonds. A short list of bond types would
be: government guaranteed, quasi-government sponsored, corporate and
municipal. The above categories can be in various lengths from a
short to a long duration. The corporate and municipal bonds also
have varying degrees of credit quality. All of those types of bonds
represent one asset class.
According to Hewitt Associates LLC 57% of 401(k) plans offer just
one bond fund. Compounding this potential problem is the trend over
past year of the retail investor investing more money in bonds. And
now the trifecta, limited choice, investing more in a limited
variety of bonds without the realization that if interest rates
rise, bonds could lose money.
As a point of clarification, bond investments are subject to
interest-rate risk. When interest rates rise, and thus the price of
most bonds, can decline. If this happens, the investor could lose
principal.
The goal of most portfolios should be to strive to hit a
predetermined metric with the least amount of risk. I like to make a
horse race as an investment metaphor. If you have a high percentage
of bonds in your portfolio you are betting on bonds to win the race.
If you add stocks now you have chosen two horses to win the race.
If you look at a horse race such as the Derby, the winning horse
runs 1.25 miles in about 2 minutes. We can look at this metaphor
from the perspective of the field of horses running in a race. The
difference between the top 5 horses (1st place to 5th
place) is less than 5 seconds for the past 20 years according to the
Kentucky Derby. A very small margin of variance between 1st
place and 5th place. To continue the metaphor, would you
rather pick one horse to win the race or pick the field to increase
your chances of winning?
Let’s jump back to investing. The problem with owning a lot of
bonds in your portfolio is that in my opinion, we are near the
bottom of interest rates. What if you need to start withdrawing your
money as rates increase?
The same logic holds for stocks. Depending on whom you cite, many
people have called this past decade the lost stock decade due to the
horrid return for stocks during the decade. You understand what I
mean if you know someone that started retirement after 2008 and was
invested in stocks.
When you are investing, would you rather bet on one asset class
or on several asset classes. In any one year, stocks or bonds may
win the race but by betting on several more asset classes, your
chances of winning may go up and the chance of your horse coming in
last may go down.*
I work with providers that allow investments outside of the
typical stock bond and cash 401(k) platform. Most people don’t know
this is possible. Again, you need to consider that "alternative"
investments may not be suitable for all investors.
I also believe that if you put together a portfolio and look at
your retirement plan and all assets as pieces of the portfolio, the
more diversified you are the better your chances are of not coming
in last.
See you next month……..
Derrick Handwerk MBA CWPP CAPP
2010 New Year’s
Resolutions
Part 2
I don’t know about you, but near the end of every year I reflect
on the year gone by and take stock of my life. (Sorry for the pun) I
write these goals down on a piece of paper along with current
behaviors that I need to examine for the possibility of
self-improvement.
If one of your goals for 2010 is to be more financially secure
with more peace of mind then this article may prove helpful.
My suggestions for your financial New Year’s Resolutions was in
two parts. The first segment dealt with your portfolio. The second
segment deals with wealth planning. Notice these are two separate
topics and my belief is for the investor with a net worth in excess
of a million dollars, a good wealth plan may yield more results
than a good investment plan.
From my experience as an investor and an investment advisor, I
will share with you the most pervasive behaviors that need to be
addressed.
Portfolio Behaviors to be addressed:
- Paying too much in fees
- Many people who let somebody else
manage their money do not know the fees they are being charged
because they are hidden in layers. Many people are paying 2.5% to
3.75% when you add up all the fees.
Solution: Ask your investment advisor to give you a
complete print out of your portfolio. Then have him or her write
down all of the expenses involved in the portfolio and sign it. If
he/she refuses to disclose all fees, find another advisor.
- Trying to beat the stock market
- This is a myth. When you
look at net returns, the majority of the funds and investment
advisors cannot beat the market over a 20-year period unless they
take on excess risk. While mutual fund history should
speak for itself, modern studies confirm this "terrible truth." In
the book, Stocks for the Long Run, Professor Jeremy
Siegel reports that in the past 20 years, there were only three
years in which the majority of funds beat the market index (as
measured by the S&P 500).
Solution: Don’t try and time the stock market and have a
lot of turnover in your portfolio. Have the portfolio rebalanced
every 2 years as per the allocation goals.
- Investing only in stocks, bonds and cash
- They say variety
is the spice of life. This axiom also applies to investments.
Depending on definition, there are 10 asset classes. The goal is
to find non-correlated assets that will give you a more steady
return and not be tied to the volatility of the stock market.
Solution: Look at other asset classes that are suitable for
your age and risk tolerance. Commodities, real estate and
alternative investments may make sense to be in your portfolio.
- Not matching risk tolerance to return
- Everyone would like
to earn a 20% return. But with potentially high returns comes high
risk. Return on a stock portfolio is based on Beta. Beta
refers to the change in a stock or portfolio in relation to the
overall stock market.
Solution: Depending on your age, risk tolerance, liquidity
and goals set your expected return target. Ask your advisor to
show you a 5 and 10 year historical average return for the asset
allocation they advise. Also, look at the returns for the
allocation for each of the past 10 years. This will give you some
sense of what you can expect. If you are aggressive, some years
will show losses.
- Realizing that risk is associated with your time frame.
Solution: If you are 10 years or less from retirement, you
should consider reducing you stock allocation and diversifying
your portfolio further to reduce the chance of going into
retirement just after a stock bear market.
If you are 50-55 years old, in my opinion, it may be too late
to have a portfolio assembled to give you double digit returns
because with those abnormal returns comes abnormally high amounts
of risk.
These five behaviors are gleaned from over 25 years of
investing. If you have any questions, send me an email and I will
give you the back-up data including literature citations.
I hope that 2010 is a prosperous year for you and your loved
ones. I wish you health and wealth.
See you next month……..
Derrick Handwerk MBA CWPP CAPP
Derrick received his MBA from Lehigh University and is a Rauch
Business Scholar. He received his certification in Wealth
Preservation and Asset Protection from the Wealth Preservation
Institute.
After college, he spent 3 years in the pharmaceutical industry
and then went on to run and own several businesses including
Handwerk Wealth Advisory.
Handwerk Wealth Advisory works with accredited investors and
small business owners. He also specializes in working with medical
and dental practitioners.
www.handwerkwealthadvisory.com
The information presented is general in nature and should not be
considered legal or tax advice. The reader should consult their
legal or tax advisor for information concerning their own specific
tax situation.
"Securities offered through First Allied Securities, a Registered
Broker/Dealer, member FINRA/SIPC"
2010 New Year’s
Resolutions
Part 1
My advice for your financial New Year’s Resolutions is in two
parts. This article deals with financial planning. The second
segment will deal with your portfolio and investments. Notice that
these are two separate topics and my belief is for the investor with
a net worth in excess of a million dollars,
a good wealth plan
may yield more results than a good investment plan.
My belief is when your financial life is aligned with your
financial goals you can derive more peace of mind.
If one of your goals for 2010 is to be more financially secure
with peace of mind, then this article may prove helpful.
From my experience as an investor and an investment advisor, I
will share with you the most pervasive behaviors that I see most
high-net worth clients need to be examine.
Financial Planning Behaviors to be addressed:
- Not having a comprehensive yet usable financial plan –
Most people do not feel comfortable with how their money will
impact their retirement or their financial life.
Solution: A written wealth plan should include all aspects
of your financial life. It is a financial roadmap to make sure you
stay on course. I examine all aspects of my client’s financial
life and come back with a strategy which we modify over time.
- Only investing and not planning –
This comes in two
varieties.
- Using only an investment broker -
I am amazed at the way
the terms broker and planner are used interchangeably. The
confusion stems from large brokerage houses giving financial
planning advice, which is incidental to the selling of
investments. As of October 2007, the Merrill Lynch Rule was
overturned by the federal government. The rule allowed brokers
to give investment planning advice (an advisory capacity) that
was connected to their role as a broker.
Solution: A financial planner should be a broker (series 7)
and be a fiduciary (an Investment Advisor Representative).
Currently, the Obama administration and the SEC are again
examining the "financial advisor" industry to try and ensure that
people understand what role their advisor is playing when a client
is given advice on various topics.
B. Investing on your own - If you are investing on your
own, you are only investing. If you are an astute investor that is
dispassionate about investing, I have no problem with this
solution. But you may be missing over half of the equation and may
have limited access to alternative investments.
Solution: By using a planner, you can look at investments
that might help you achieve your goals, which may not be possible
by buying stocks or bonds alone. If your net worth is above a
million, there may be wealth preservation strategies for
increasing and preserving your wealth. I feel if you are not and
can find a Wealth Advisor seek one that charges less than 1.0% for
his or her fee.
- Waiting for the right or best time to work on your financial
plan.
This is the number one reason I hear people tell myself
and other wealth advisors why they don’t want to put together a
plan. There is never a good time, your life is busy, and it is
a matter of your priorities.
Solution: My advice is just do it. If you spend 2-3
hours/month for 6 months, you can probably get a good plan put
together. Be aware, your advisor is probably going to need to put
in 2-4 times the amount of time you put in. The more complex your
financial life and amount of assets the more time both you and the
advisor will have to put in.
Getting back to my assertion that good planning may be more
important than good investing. The problem is many investors
haven’t seen good financial planning.
If you have worked
50-80 hours/week for 20 years to amass your wealth, a few
hours/month working on a wealth plan may be worthwhile.
- Investing and constructing a financial plan without Asset
Protection
– I strongly believe people that have personal
liability such as doctors, accountants and lawyers need to look at
their exposure to professional liability judgments.
Solution
: There are basic, low cost, asset protection
tools that can be used as a first line of defense. If your assets
are significant, there are also may be more complex strategies to
provide insulation against a variety of civil attacks. I work in
tandem with other professionals to suggest the appropriate
solutions.
- Failing to save enough money for retirement
- Most people
that I talk with underestimate their life span. According to the
Social Security Administration, if you are 65, your life
expectancy is in excess of age 80. I’d suggest that if you are
affluent, educated and exercise, the chance of reaching 90
increases significantly.
Solution: Base your planning on living to age 100. If a
conservative investment portfolio can handle that scenario, you
may be prepared. If not you need to do some more planning and
relax some of the constraints.
I hope that 2010 brings you health, wealth and happiness.
See you next month……..
Derrick Handwerk MBA CWPP CAPP
Derrick received his MBA from Lehigh University and is a Rauch
Business Scholar. He received his certification in Wealth
Preservation and Asset Protection from the Wealth Preservation
Institute.
After college, he spent 3 years in the pharmaceutical industry
and then went on to run and own several businesses including
Handwerk Wealth Advisory.
Handwerk Wealth Advisory works with accredited investors and
small business owners. He also specializes in working with medical
and dental practitioners.
www.handwerkwealthadvisory.com
The information presented is general in nature and should not be
considered legal or tax advice. The reader should consult their
legal or tax advisor for information concerning their own specific
tax situation.
"Securities offered through First Allied Securities, a Registered
Broker/Dealer, member FINRA/SIPC"
Section 79: A Powerful Wealth Planning Tool
When I work with business owners, I perform a cost-benefit
analysis of various tools to help them save money in a tax-favored
manner. The progression starts with a 401k analysis versus their
current retirement plan, at the same time we assess the viability of
adding on profit sharing. If excess cash is still available, the
next strategy to consider is a Defined Benefit plan. If a Defined
Benefit plan does not work or does not make economic sense, the
viability of a section 79 plan should be considered.
The progression outlined above is building a foundation from
least complex to the most complex. As a business owner, if your
earnings are significant and assuming you have ample liquidity, you
should stash away as much money as you can afford, into tax-favored
invest vehicles.
I have written at length about the 401k, profit sharing and
defined benefit plans. This article will be dedicated to a review of
the pros and cons of a section 79 plan.
Plans allowed under Section 79 of the tax code allow you to offer
group life insurance to all employees. This benefit will have allure
to your employees and if set up correctly may be tax deductible. As
you already know from my previous columns, I am not a "fan" of using
insurance as an investment mechanism. There are VERY few situations
where insurance makes economic sense as a means to accumulate
wealth. In my opinion, in the right situation the options allowed
under the section 79 plan are one of those few situations.
Overview of a Section 79 Plan
Strategy: As the owner, you purchase a life insurance policy,
which could be deducted by the corporation over a 5-year period. You
let the money grow in the policy and at some point down the road,
take out your initial investment (basis) tax-free and then borrow
any accrued gains and thus not trigger taxable income.
In order to take advantage of the benefits under a 79 plan you
must be a C corp. In the plan all employees are offered $50,000 of
group term insurance or they may opt for cash value coverage, which
will have some reported taxable income.
A hypothetical example:
An owner has 5 employees, is a C Corporation and has looked at
the 401k and DB plan and utilized them to their fullest potential.
The owner then offers $50,000 of term insurance to each employee
with the option of permanent insurance. Due to phantom income most
if not all the employees decline the permanent insurance. The owner
then contributes $50,000-$1,000,000/year for 5 years into the 79
plan. If the plan is set up correctly, the contribution is
tax-deductible but the owner must pick up some "phantom income" on
the value of the life insurance since it is a benefit offered by the
company.
Benefits
If the business owner contributed $100,000/year, depending on
their age, they may have a death benefit of $2,000,000 or
substantially more. This can provide protection for the owner’s
beneficiaries or be used as part of a buy-sell agreement.
Hopefully the owner ages, versus dies, and the cash value can
continue to grow on a tax-favored basis. At some point in the
future, if loans and withdrawals are taken in moderation, income tax
can be minimized and the policy will remain in force. If excessive
loans or withdrawals are taken or the policy is not fully funded as
initially agreed to as per the parameters of the contract, the tax
ramifications can get VERY ugly.
Summary
With the economic climate we are in today with ballooning
deficits and likelihood of taxes increasing, strategies which allow
a person to invest money in a tax-favored fashion, should be a
priority. Each of the strategies outlined are very complex, make
sure you work with an experienced advisor on these strategies as a
part of a holistic wealth plan.
Derrick Handwerk MBA CWPP CAPP
Derrick received his MBA from Lehigh University and is a Rauch
Business Scholar. He received his certification in Wealth
Preservation and Asset Protection from the Wealth Preservation
Institute.
After college he spent 3 years in the pharmaceutical industry and
then went on to run and own several businesses including Handwerk
Wealth Advisory.
Handwerk Wealth Advisory works with accredited investors and
small business owners. He also specializes in working with medical
and dental practitioners.
www.handwerkwealthadvisory.com
The information presented is general in nature and should not be
considered legal or tax advice. The reader should consult their
legal or tax advisor for information concerning their own specific
tax situation.
"Securities offered through First Allied Securities, a Registered
Broker/Dealer, member FINRA/SIPC"
Saving Money in a Tax-Favored Fashion
I have a few truisms that I share with
clients. One statement is: It’s not what you make but what you keep.
This thought speaks to earning an income (X) but then seeing that
income potentially cut in half, or more, by federal, state, local
and FICA taxes.
Thus X (salary) -50% = Y (your after tax
income)
I have written many articles about asset
allocation. One area that I have not spent enough time on is
asset location. Simply stated, what type of investments are you
placing in what type of accounts? Are mutual funds in a taxable
account and stocks in your tax-advantaged accounts? You might be
better served having the stocks in a taxable account.
The choices you make on where to place your
assets can make a difference on how quickly they grow.
If you have a limited amount of money to put
away, an IRA, SIMPLE IRA or SEP may be good choices. Assets in a
tax-favored account should be investments, which generate a lot of
taxable income such as a taxable bond, which are normally taxed at
wage rates. Whereas a stock which is held for the greater than 1
year may be best held in a taxable account because it is taxed at a
long term capital gains rate which currently is 15%.
One way to maximize your yearly returns is to
use tax-advantaged accounts, which defer taxes and allow you to grow
your assets without the yearly drain of taxes.
In my approach to asset management, I use a
progression approach. I use the most flexible strategies first.
Below is my progression for retirement savings for a small business
owner. These plans may allow an attractive amount of money to be
saved inside the plan.
I like to use 401k plans for their Federal
Government protection against civil suits and malpractice
litigation. Except for marital litigation, the 401(k) may be a major
roadblock to stop creditors from seizing your money.
One aspect that not enough investors
understand are that the words "technology" (in the form of
plan design) and investment strategies belong in the same
sentence.
Most of the retirement plans that I look at
have been in place for more than three years. What I find is that
some 401k-plan designs that are in place may not be designed to
benefit owners.
Also, if the plan has been in place more than
5 years, the technology (plan design) capabilities with software
where not available to run the "what if" scenarios to allow the
business owner to make informed decisions.
I have briefly summarized two different types
of plans, which allow tax-advantaged investing.
Retirement plans
401 (k) plan
In my experience less than 20% of the business
owners are truly maxing out their retirement plan. Did you know the
yearly maximum a person over 50 can save in a 401k plan is $49,000?
This maximum amount is a combination of the total employer and
employee contributions. To hit the 49,000-dollar maximum the inputs
are your contribution, the employer’s safe harbor matches and the
employer’s profit sharing matches.
If you have the cash flow and are not "maxing"
out your plan you may need to have the plan reviewed because you
may not have optimized the 401(k) plan design for your business
and for you.
Defined Benefit Plan
If a person maximizes their 401k plan and they
have excess cash flow, the next plan to consider may be a Defined
Benefit plan. There are a lot more challenges with this type of
plan. The amount of money an owner can put away depends on their
age, the employee’s ages and each person’s occupation. However, this
may be a plan to consider in which an owner can put up to
$195,000/year into a Defined Benefit plan on a pre-tax basis.
One thesis of this article is to choose the
correct type of account in which you grow your assets carefully. The
other main point is there are a variety of retirement plans and plan
design is critical. The right choice may end up reducing your tax
bill and thus in a tax-favored account possibly increase return.
See you next month…
Derrick Handwerk MBA CWPP CAPP
Derrick received his MBA from Lehigh
University and is a Rauch Business Scholar. He received his
certification in Wealth Preservation and Asset Protection from the
Wealth Preservation Institute.
After college he spent 3 years in the
pharmaceutical industry and then went on to run and own several
businesses including Handwerk Wealth Advisory.
Handwerk Wealth Advisory works with accredited
investors and small business owners. He also specializes in working
with medical and dental practitioners.
www.handwerkwealthadvisory.com
Withdrawals from retirement accounts are
subject to ordinary income tax and if taken prior to age 52 ½ a 10%
tax penalty may apply.
The information presented is general in nature and should not be
considered legal or tax advice. The reader should consult their
legal or tax advisor for information concerning their own specific
tax situation.
"Securities offered through First Allied Securities, a Registered
Broker/Dealer, member FINRA/SIPC"
How
diversified is your investment portfolio?
What have we learned about stocks over the
past year or for that matter, over the past 10 years? We have all
learned that the stock market can go up and down.
To tie your retirement savings and lifestyle
on the hope that the stock market will be near a high when you
retire and continue to go higher over the 10 to 30 years that you
are in retirement, is not a bet I am willing to take.
I have been counseling investors for years
about true diversification across many asset classes and strategies,
not just stocks, bonds, cash and real estate.
One strategy most investors may not be
familiar with is the strategy of Absolute Return. A
definition or Absolute return is: a return not correlated to any
benchmark. Absolute return differs from relative return because it
does not compare itself to any other measure or benchmark.
For example, many brokers invest their
clients’ money and then compare the investment return to the S&P
500. This may or may not be a relevant comparison. Also, if the S&P
500 lost 25% in 6 months and you only lost 20% you are, relatively
speaking, doing better than the S&P.
Whenever I see one of my clients he asks to
me; I don’t care how the S&P is doing, are you making me money? That
is his definition of absolute return.
Recently a large Investment Company launched
an entire suite of absolute return products. Looking at their
investment holdings they can invest in:
List 1
- Bonds
- Stocks
- Cash
- Commodities
- REITS. (Real Estate Investment Trusts)
Only the passage of time will show if they can
generate an acceptable return being restricted to 5 asset classes.
What would happen if you put together a mix
of?
List 2
- Absolute Return Trading Strategies
- Emerging Markets Equities
- Non-correlated Investments
- Proprietary Trading Strategies
- Fixed Income
- Foreign and Emerging Market Equities
- Real Assets
- Commodities
- Real Estate
- Domestic Equities
Then you would be using some of the asset
classes and strategies that several Ivy League trusts use to manage
the Universities endowments, pension assets etc.
The How….
The universities use a broad array of
investment choices to generate added value. Another way of saying
this is to say they seek to generate Alpha (a return above that
which would be expected with a certain amount of risk). They use a
macro analysis of the upcoming trends in all of the investment
markets and then rebalance their investments by increasing several
asset classes’ percentage in their portfolio while reducing others.
The result is a diversified investment portfolio, which is
tactically allocated and backed by effective risk management.
True Investment Diversification
My goal of sharing this information with you
is for you to see how some managers achieve diversification.
Diversification is not
having small cap vs. large cap stocks or value vs. growth stocks.
Etc. etc. Oh yea, in recent years foreign stock markets have been
highly correlated to the US stock market and many types of bonds
went down just like stocks in 2008.
Look at the above two lists and compare them
to the diversification of your portfolio. Every asset class or
strategy you add, which is not tied to the return of the S&P index,
potentially reduces your reliance on the stock market going up, just
before you are ready to retire and hoping that it continues to go
higher while you are retired.
How diversified is your investment portfolio?
See you next month........
Derrick Handwerk MBA CWPP CAPP
Past performance is not a guarantee of future
results. Diversification does not eliminate risk. Although asset
allocation among different asset classes generally limits risk
exposure to any one class, the risk remains that an asset class may
perform poorly relative to other asset classes. For example:
Investments in foreign securities may be affected by currency
fluctuations, differences in accounting standards, and political
instability. These risks are more significant in emerging market.
Commodities may not be suitable for all investors and risks can be
substantial. Real Estate Investment Trusts involve special risk,
such as limited liquidity; changes in supply and demand; changes in
tax law; tenant turnover or defaults; loss of investment; casualty
losses, use of leverage. REITs are offered through prospectus only.
The prospectus explains the fees and costs of investing and
discussion of specific risks. You can obtain a copy of the
prospectus from your financial advisor-please review the prospectus
carefully before investing
Derrick received his MBA from Lehigh
University and is a Rauch Business Scholar. He received his
certification in Wealth Preservation and Asset Protection from the
Wealth Preservation Institute.
After college he spent 3 years in the
pharmaceutical industry and then went on to run and own several
businesses including Handwerk Wealth Advisory.
Handwerk Wealth Advisory works with small
business owners and specializes in working with medical practices
and small business owners.
www.handwerkwealthadvisory.com
The S&P 500 is an unmanaged group of
securities considered to be representative of the stock market in
general. Investors cannot directly invest in an index.
Investors should choose asset classes based on
their suitability, age, risk tolerance and goals.
The information presented is general in nature
and should not be considered legal or tax advice. The reader should
consult their legal or tax advisor for information concerning their
own specific tax situation.
"Securities offered through First Allied
Securities, a Registered Broker/Dealer, member FINRA/SIPC"
A
Different Benchmark
For many small business owners, your taxes may
be going higher while your incomes may be going lower. What can you
do to combat this situation?
It is difficult for me to comment and make
suggestions on what each of you could do to increase your business
income in a monthly column. But, in this space I can make
suggestions on how you may be able to keep more of your business
income and investment gains. When it comes to business income, it is
not what you make but rather, it is what you keep. When it comes to
investing, I would suggest that you need to focus on after-tax
return vs. beating a stock benchmark.
Beating a Stock Index
In his Book A Random Walk Down Wall Street,
Burton Malkiel suggests that stock prices are unpredictable and most
retail investors are better off investing in index funds rather than
actively managed funds.
Mr. Malkiel has been studying stock investment
returns for over 35 years. What he has found is that less than 30%
of active managers beat their index. Those managers that do beat the
index in one year are not necessarily the ones who beat it in the
next year. Overall a small fraction of
managers actively trading stocks beat the index and that is before
you figure in the tax impact.
Most investment managers and financial
advisors have a benchmark that they compare their investments
returns. There are dozens and dozens of benchmarks. There are
benchmarks that give you a broad view of how various stocks are
performing by geography, valuation or by type of industry. A very
often-used Benchmark is the S&P 500.
It is also my long held belief that a manager
picking stocks is probably not going to beat the stock market
indexes over a long period of time. So it would make sense to have
the limited exposure to stocks, which is very tax efficient.
Investing in a tax inefficient manner
What I mean by tax efficient is that it is not
what your gross returns are but what you net in your investment
account? If you make $10,000 in your investment portfolio you may
only net $8000 dollars or maybe even only $6400 depending on what
type of gains make up the $10,000.
A few thoughts on after-tax returns
- When somebody tells you their stocks were
up 10% in a year, think to yourself, what were their real
after-tax returns.
- When you have a positive year in your
investment portfolio, look at your federal tax return for that
year. Look at the tax paid on your investments, which is listed on
you federal tax return, and subtract it from the gross return and
that will give you a general sense of your after tax return.
A few investments strategies that may give you
a better after-tax return
- Match your highly taxable investments with
your tax deferred accounts
- Buy investments that you can hold, not buy
and sell, and thus not trigger a taxable event.
- Consider holding municipal bonds in taxable
accounts, if you are in a high federal tax bracket and taxable
bonds in tax-deferred accounts.
When it comes to keeping more of what you
make, what follows are a few Wealth Planning strategies that you may
want to consider.
- Switch from using a benchmark to assess how
your investments are doing and use to a numeric return which you
and your advisor arrive at depending on your risk tolerance,
time-frame and suitability.
- Move into several asset classes in order to
diversify your investments beyond stocks and bonds.
- If you have liquidity and if possible,
maximize your retirement plan. Consider a review of your 401k plan
to make sure it is achieving your goals and it takes advantages of
all the new plan designs. In 2009, a 401k-plan participant
can add up to $49,000 to the plan and if they are over 50, can
contribute an extra $5,500.
The two main points of this article are:
- It is not only what you make but rather
what you keep.
- Focus on after-tax investment return.
As I have stated countless times before in
print, investment analysis is how you invest, but wealth
planning focuses on the above two objectives. Making a 10%
investment return on your stock and bond portfolio is good. Making a
10% return after tax is much better.
See you next month........
Derrick Handwerk MBA CWPP CAPP
Derrick received his MBA from Lehigh
University and is a Rauch Business Scholar. He received his
certification in Wealth Preservation and Asset Protection
from the Wealth Preservation Institute.
After college he spent 3 years in the pharmaceutical industry and
then went on to run and own several businesses including Handwerk
Wealth Advisory.
Handwerk Wealth Advisory works with small
business owners and specializes in working with medical and dental
practices.
www.handwerkwealthadvisory.com
A Taxing Situation
In April 2009, for the first time in 25 years
tax receipts collected by the US government during the month of
April, were outpaced by federal outlays by $20.9 billion. (Source:
Treasury Department) Think about that statement for a second. If the
government cannot run a surplus during the month of April, when most
people pay their federal taxes, the other 11 months of the year
offer the government no chance at tax receipts exceeding government
expenditures. This is deficit spending in the extreme.
Unfortunately, this is just the start of increased deficits that
could reach 80% of GDP.
The Top 20% of Income Earners
According to a report issued by the
Congressional Budget Office (CBO), in 2006 the top 20% of income
earners paid 86.3% of all federal taxes.
This is a 6% increase from 2000 when the top 20%
of earners paid 81.2%.
During the same period, according to the CBO,
the bottom four quartiles all saw their respective percentage of
federal income tax fall sharply to an all time low.
Between 2000 and 2006 the lowest 40% of income
earners (People who do not earn a taxable income are not included,
which makes the percentages worse.) not only paid no tax but also
received income in the form of refundable tax credits. (Source: CBO
"Historical Effective Federal Tax Rates: 1979 to 2006) So the bottom
40% actually made money and paid no taxes.
Taxes Will Increase On the top 20%
The current policies and financial rescue plan
from the Obama administration and Congress would cause the federal
income taxes paid by the top 20% to increase, as the percentage
share of the remaining 80% decreases further.
The budge resolution, which congress passed
for fiscal year 2010, sets broad guidelines from which specific
policies will be formulated. Here are a few highlights:
- The top income tax rates will increase from
35 to 39.6%.
- Tax rates on capital gains will increase
from 15% to 20%.
- A "Making Work Pay Credit" is a refundable
$400 credit for singles and $800 for couples and applies to earned
income. So taxpayers who derive their income from Investments or
Social Security cannot claim the credit.
- People in the 33% and 35% tax bracket would
only be able to claim deductions at the 28% tax rate. This
includes charitable donations and the popular mortgage interest
tax deduction.
I would speculate that this is only the
beginning of increasing the taxes on the "rich". The 2010 Budget
Blueprint averages just shy of $1,000 billion deficit each year over
the next 10 years. This deficit does not include the Social
Security Trust fund problem, which will be exhausted by 2037.
(Source SSA) or the Medicare mess. The problems facing Medicare are
even worse than those facing Social Security. The Medicare trust
fund is projected to be depleted by 2017, which is 8 years from now.
(Source SSA)
A Dangerous Feedback Loop
Shifting the tax burden onto the high-income
earners creates a dangerous situation. Those who pay little or no
taxes will vote for more of the same. Since 80% of the population
paid less tax in 2006 vs. 2000 (see above) it would follow that 80%
of the population would be inclined to continue this situation as
less tax begets less tax. Since the lower 80% do not feel the pain
as much as the top 20% they are also more likely to be in favor of a
bigger governmental role in providing services which will increase
federal expenditures.
Federal Tax Rates in the Future
It isn’t too much of a stretch to see that
effective tax rates will be increasing in the years ahead. But I
would speculate that the definition of "wealthy" would have to be
revised downward. The tax base will have to increase in order to
finance the massive deficits.
As I have noted, the marginal federal tax rate
is not the only way to effectively increase taxes. I suggest that
there will be many other lost deductions and added excise taxes,
which will increase the effective tax rate on wage earners and the
amount of tax collected by the US government.
Planning Opportunities
I have written many articles regarding the
value of effective planning and the point is underlined in the
second paragraph on the homepage of my website. The Wealth Plan
is as important as the investments themselves. It is not what
you make, it is what you keep.
There are many tax-advantaged strategies to
reduce how much the federal government is able to get out of your
wallet or purse. You have three choices regarding the increases in
the effective tax rates.
- Find an Accountant that will consult with
you on your taxes vs. prepare your tax return.
- Find an Advisor who can interact with your
Accountant and Lawyer to help you keep more of the money you make.
- Pay more tax.
A good financial plan is not an
examination of how much money you have now and at what rate of
return it needs to grow in order to retire at a certain age. This
plan is an investment analysis and is the extent of what many
Investment Advisors call "Planning" A good financial plan is
an overview of your financial situation that includes an analysis of
risk, estate planning and tax planning.
Derrick Handwerk MBA CWPP CAPP
Derrick received his MBA from Lehigh
University and is a Rauch Business Scholar. He received his
certification in Wealth Preservation and Asset Protection from the
Wealth Preservation Institute.
After college he spent 3 years in the
pharmaceutical industry and then went on to run and own several
businesses including Handwerk Wealth Advisory.
Handwerk Wealth Advisory works with small
business owners and specializes in working with medical and dental
practices.
www.handwerkwealthadvisory.com
The information presented is general in nature
and should not be considered legal or tax advice. The reader should
consult their legal or tax advisor for information concerning their
own specific tax situation.
"Securities offered through First Allied
Securities, a Registered Broker/Dealer, member FINRA/SIPC"
Handwerk Wealth Advisory & First Allied
Securities are not affiliated.
The Four Pillars of a Balanced
Platform
I have written extensively on the
subject of Wealth Planning. I believe a good planner should do far
more than throw you into five investments and call you in a year.
Maybe that is why people are leaving their planners and moving their
accounts to a discount broker.
For the business owner the Four
Pillars to a wealth planning approach are like the legs of a table.
Leave out one of the legs and you may lack some stability. Leave out
two of the legs and you have lost all stability. Focus only on
Portfolio Design and you are missing three quarters of the benefit
of a plan!
The Four Pillars to a Balanced
Approach to Wealth Planning are:
-
Practice Structure
Risk Management
Portfolio Design
Asset Protection
In my experience what I have found
over the years is:
-
From the client side – Most clients
do not fully appreciate the value of an integrated plan as
outlined above or listed below.
From the advisor side – Most
advisors do not take the time to analyze the aspects necessary to
put together a cohesive financial (not just investment) plan.
The list of the services outlined
below comes right from my website. From the client side, most
clients believe that a financial advisor should only look at their
investments. I believe some advisors do not have the time or the
expertise to look into the other eight areas I have outlined. But I
feel you need to find a planner who can add value beyond investing.
Take notice, Portfolio
Analysis is only one of the nine areas that I investigate.
1. Portfolio Analysis-
Aligning your risk tolerance and goals to your investment
strategy. I strive to provide a customized set of investments, which
will be in sync with your stated goals.
2. Tax Planning- Review of your Tax Returns with
recommendations on potential savings opportunities.
3. Retirement Planning- Perform financial
simulations based on retirement horizons and risk tolerance.
4. Asset Protection - Analyzing your ability to
potentially protect your assets from litigation. I believe in low
cost asset protection tools as well as the more complex strategies.
I work in tandem with attorneys to suggest solutions.
5. Wealth Preservation - Consideration of
strategies for potentially increasing and preserving your wealth.
6. Leverage Analysis - Analysis of your current
Debt Structure and Liquidity Needs.
7. Risk Assessment- Risk analysis as related to
your needs for insurance, disability and long-term care.
8. Educational Funding- Evaluation of educational
funding alternatives via college savings plans, UGMA or Educational
IRAs.
9. Estate Planning- Planning for the distribution
of assets to your family or charity.
I can’t tell you how many of the
forgotten eight areas of Wealth Planning have turned out to be
as important as the investable assets.
Just to take a minute on Estate
Planning. Over 25% of the people I talk to do not have a current
Estate Plan. Before you say that is not me, have you had your plan
updated in the past three years? If not then there is a good chance
your Medical Power of Attorney will not be accepted by the hospital
due to new HIPPA regulations. Do you have?
-
A durable Power of Attorney
-
A medical Power of Attorney
-
A basic will
-
A Irrevocable Life Insurance Trust
(ILIT) set up to keep life insurance proceeds out of your estate.
-
An asset protection plan with
Revocable trusts
If you have investable assets of more
than $500,000 you should consider having an experienced financial
advisor. A good advisor should be able to give advice on a variety
of topics, which will impact your financial future.
I would suggest that you have your
lawyer and accountant interview your financial advisor, assuming
there are no conflicts of interest. Also, make sure your financial
advisor specializes in working with clients like you and will take
the time needed to analyze and put together a plan.
As I have stated previously, in my
opinion a good Wealth Plan is as important as the investments
themselves.
Derrick Handwerk MBA CWPP CAPP
Derrick received his MBA from Lehigh
University and is a Rauch Business Scholar. He received his
certification in Wealth Preservation and Asset Protection from the
Wealth Preservation Institute.
After college he spent 3 years in the
pharmaceutical industry and then went on to run and own several
businesses including Handwerk Wealth Advisory.
Handwerk
Wealth Advisory works with small business owners and specializes in
working with medical and dental practices.
www.handwerkwealthadvisory.com
A Single Point
of Contact
What I have seen occur in the United States over the past 20
years is that most professionals have to work harder, longer and
smarter to make a decent living. Having spare time on your hands is
a luxury.
What your financial planner should be able to do is to save you
time and act as your "advisor" and "liaison" on your behalf by
working with your accountant and lawyer to maker sure everyone is
working toward the same goal.
As a Wealth Advisor my goal is to save you time, assist you in
making better decisions and bring ideas to the table, which are for
your benefit. I can’t even count the number of estate plans that I
have looked at over the years which were wrong or out-of-date thus
exposing my clients to hundreds of thousands if not millions of
dollars in estate tax.
A model I use to explain my role is outlined below. This should
be how your financial planner works with you and your advisors.
There are hundreds of areas unrelated to investing where I add
value to my clients.
Practice structure is just one area where I have worked with
Lawyers and Accountants on my client’s behalf and I would like to
spend a few minutes reviewing this topic.
Practice Structure
Practice structure is important in two respects. What type of
corporate entity do you have? The common corporate entities are C,
S, and LLC. In addition you can be a sole-proprietor, but as such
you have no corporate protection or a corporate veil to be more
specific.
Also, once you select a corporate structure you may have choices
on how to be taxed. Some clients have an S corporation and a C
corporation. Lots of choices.
When was the last time you thought about what type of practice
structure you should have. Is a C Corp better for you than an S Corp
or should you be an LLC.
A corporate structure should be chosen based on the risk and tax
needs of the business and the business owner.
After speaking with my clients’ Accountants and Lawyers we make
changes if necessary. Though in my experience in working with over
20 Doctors, changes in practice structure are beneficial about 40%
of the time.
In the past 3 months, I had 3 Doctors each with their own
practice, where I suggested they talk to their lawyer about setting
up a business structure. Two of the Doctors where registered as Sole
Proprietorships. This type of entity does not provide any protection
from civil suits associated with the business. Slip and fall on the
business premises, employee issues, (wrongful termination, sexual
harassment, age discrimination) or any other civil suit could
potentially come back to the Doctor and expose the Doctor’s assets
to seizure. Both Doctors spoke with their lawyers and each set up an
LLC.
Another Doctor had a side business where he bought, fixed up and
then sold homes. This type of business exposed him and his family’s
assets to significant liability. If there were any law suits arising
from an accident on the job site, employee issues (as noted above),
a dispute arising from faulty workmanship of the sub-contractors or
any disputes with the sub-contractors or buyers, his assets could
potentially be seized.
Corporate Structures can be helpful in risk management. Many
Doctors are contacted or know an insurance agent and the agent is
all to glad to sell you as much insurance as you are willing to buy.
There is not a silver bullet for risk. There are many types of risk,
the right corporate structure can help mitigate some risks.
In summary, there are many types of risk to your assets and
income stream. I have superficially delved into the benefits of
assessing corporate structures and how they can be used to mitigate
several types of risk. Some risks can be mitigated by insurance,
others types of risk can be mitigated by Corporate structure and
some risk needs to be mitigated through other types of Wealth
Planning. Take a second to review your corporate structure and talk
with your lawyer or financial advisor to see if there is a better
solution.
See you next month……..
Derrick Handwerk MBA CWPP CAPP
Derrick received his MBA from Lehigh University and is a Rauch
Business Scholar. He received his certification in Wealth
Preservation and Asset Protection from the Wealth Preservation
Institute.
After college he spent 3 years in the pharmaceutical industry and
then went on to run and own several businesses including Handwerk
Wealth Advisory.
Handwerk Wealth Advisory works with small business owners and
specializes in working with medical and dental practices.
www.handwerkwealthadvisory.com
The information presented is general in nature and should not be
considered legal or tax advice. The reader should consult their
legal or tax advisor for information concerning their own specific
tax situation.
"Securities offered through First Allied Securities, a Registered
Broker/Dealer, member FINRA/SIPC"
Alternative Thinking
I have written at least 10 articles that discuss diversification
beyond stocks, bonds and cash. I remember sitting in my office in
early 2006 and meeting with a couple who were in their mid 50s. They
had several million dollars of investments in their 401k, IRA and
taxable accounts. I asked to see their account statements and was
amazed that their investments were over 70% in stocks. When I
suggested that they should diversify into other asset classes they
informed me that their broker thought this allocation was
reasonable.
After they left, I felt sad. I knew it was just a matter of time
before the next stock bear market arrived and I had let the couple
down because they would probably never change their allocation. I
was not successful in communicating my point and for that failure;
they probably paid a heavy price.
For years I been efforting to educate and inform Doctors and
Business Owners about the multitude of investments and strategies
that do not include stocks. Only of recent has a chorus of financial
types on TV begun to echo my chorus.
Creating Demand
Anytime I see an advertisement or hear a pitch by a salesperson,
I recall the adage: Believe half of what you read and none of what
you hear. So let me share with you a perspective I have about Wall
Street and stocks. Large Wall Street brokers have been advertising
for over 20 years and have spent billions of dollars to convince us
that stocks are your best investment vehicle in order to make money
over the long run.
Aside from branding their company, a main goal of the advertising
was to embed into the investor psyche that stocks = investing.
Pavlov would be proud. By making this connection they have
created a demand for their supply. Supply of what you ask. Many
major Wall Street brokers underwrite, or bring to market, companies
that want to go public and the brokers make a lot of money in doing
so. In order to make huge fees for underwriting stocks, the
underwriters of the initial public offerings (IPO) need to be
confident that there is demand for the stocks that they bring
to the market. So they create a demand for their supply.
If you bought stocks 10 years ago you have not done very well.
Stocks are one asset class of many. But some say, the next bull
market is just around the corner and the stock market will come
roaring back to give us those returns we have come to expect. I say
maybe, but maybe not.
Japan has been in a deflationary environment for over 25 years
and their stock market (Topix Index) is close to a 25 year low. What
were some of the primary reasons for this deflationary episode that
has led to stock prices going nowhere in over two decades? In Japan,
their real estate bubble burst and the banks did not want to
recognize the bad loans on their balance sheets. Sound familiar?
Today there are sophisticated strategies and enough alternative
investment vehicles which were not available to the average investor
10 years ago. You can achieve a reasonable return based on your risk
tolerance and suitability without exposing a large chunk of your
portfolio to all the down side of the stock market or HOPE the stock
market goes up year after year in order for you to retire.
If you have more than 50% of your net worth in any one-investment
class you are too concentrated and are taking on risk, which you may
not be fully aware.
If you are invested in stocks, bonds and cash get another
opinion, because there are investment alternatives.
See you next month……..
Derrick Handwerk MBA CWPP CAPP
Derrick received his MBA from Lehigh University and is a Rauch
Business Scholar. He received his certification in Wealth
Preservation and Asset Protection from the Wealth Preservation
Institute.
After college he spent 3 years in the pharmaceutical industry and
then went on to run and own several businesses including Handwerk
Wealth Advisory.
Handwerk Wealth Advisory works with small business owners and
specializes in working with medical and dental practices.
www.handwerkwealthadvisory.com
The information presented is general in nature and should not be
considered legal or tax advice. The reader should consult their
legal or tax advisor for information concerning their own specific
tax situation.
"Securities offered through First Allied Securities, a Registered
Broker/Dealer, member FINRA/SIPC"
A Retirement Constraint on Doctors
As a Doctor, you ability to practice medicine or dentistry and
make a living is being constrained on many fronts. You may have to
deal with the insurance companies and have "their input" on how to
practice medicine. You may have to buy a building or buy out another
partner which constrains your excess net income. You may have
competition in your geographic area or the recession may be hurting
your business You may have to repay college, dent or med school
loans, which again constrains your net income. You income is needed
for living expenses, a mortgage, and college education among many
other large and smaller costs. Oh yea, I almost forgot, you also
have to save for your retirement.
I work with a lot of Doctors. What most Doctors don’t realize is
their window to save for retirement is much smaller than most
people.
Let’s take a tangible example and make some assumptions. You are
a Doctor and your Brother is an Architect. Both you and your brother
understand that for every dollar you put into your retirement plan
on a pre-tax basis you could save up to 39.5% on taxes. (Or more if
Mr. Obama raises federal income tax rates)
You brother gets out of top-notch school and starts contributing
the $45,000 to his retirement plan at age 30. Mean while, you are
finishing up dent/med school, paying off your loans and buying a
practice. You start contributing$45,000 at age 40. Both of your
investments return 6% over the life of this hypothetical example.
Let’s step back and look at reality for a second. Though the
above assumptions are simplistic, from my experience, it takes quite
a while for a Doctor to have excess cash flow. What I see, is a
Doctor is usually in their 40’s when they start contributing a
significant amount of money to a retirement plan. Also, in reality,
very few architects start contributing 45k to their retirement plan
by age 30.
Back to the example……
Your brother contributed to his retirement plan at the same rate
with the same returns from age 30 to age 65. At age 65 he has
over 5 million dollars.
Because you are a Doctor and have additional time spent in
schooling/ clinical training and bought a practice, you didn’t start
contributing to the retirement plan until age 40. You were
constrained in your ability because you chose to be a Doctor with
your own practice. From age 40 to age 65 you contributed the
same amount as he does. If we look at the table, at age 65 you
have less than 2.5 million dollars.
Hmmm, let’s think about this. You
are a Doctor, with you own practice, but your brother has more than
twice as much in his retirement plan as you do. Maybe I am
missing something? I went to college with a lot of people who became
Dentists and Physicians and they studied hard and they were some of
the most intelligent people at the school,
but as a Doctor they are financially constrained in saving money for
retirement.
So what can we do to correct this
situation? Since you own your own practice you have many options
to you in the tax code! One option is to set up a 10 year
defined benefit plan during your peak years of earnings and
contribute an extra 156k/year. You don’t have to put that much money
in, but you can. Again, every dollar that you put into the plan is
on a pre-tax basis. As I say, a dollar in a pretax plan really
doesn’t really cost you a dollar.
If you contribute and extra $156,462/year for a 10 year period
and then drop down to your normal contribution, by age 65 you have
actually passed your brother.
For those who are competitive and into sibling rivalry, this is a
good thing. For those who are not into sibling rivalry or don’t have
a sibling, you have almost $6,000,000 in your retirement plan at age
65, which isn’t a bad thing.
Ok, I understand not every Doctor can contribute over 200K/year
for 10 years to their retirement plan. As I stated before, since
you own your own practice you have many options available to you in
the tax code.
As a Wealth Advisor, I work with lawyers and accountants to
explore your options under the current tax laws. It is not only how
much you make, but as important, it is how much you keep.
See you next month……..
Derrick Handwerk MBA CWPP CAPP
Derrick received
his MBA from Lehigh University and is a Rauch Business Scholar.
He received his certification in Wealth Preservation and Asset
Protection from the Wealth Preservation Institute.
After college he
spent 3 years in the pharmaceutical industry and then went on to run
and own several businesses including Handwerk Wealth Advisory.
Handwerk Wealth
Advisory works with small business owners and specializes in working
with medical and dental practices.
www.handwerkwealthadvisory.com
The information
presented is general in nature and should not be considered legal or
tax advice. The reader should consult their legal or tax advisor for
information concerning their own specific tax situation.
"Securities
offered through First Allied Securities, a Registered Broker/Dealer,
member F
2009
New Year’s Resolutions
If one
of your goals for 2009 is to be more financially secure with more
peace of mind then this article should prove helpful.
My advice for
your financial New Year’s Resolutions looks at two aspects of your
financial life. Investing is one aspect and Wealth Planning is the
other. Investing deals with your portfolio. Wealth Planning deals
with strategies appropriate to your situation. Notice these are two
separate topics and my belief is for the investor with a net worth
in excess of a million dollars, a good Wealth Plan can yield
significant results.
From my
experience as an investor and a Wealth Advisor, I will share with
you:
The Top
5 most pervasive behaviors that need to be addressed by the high net
worth client:
-
Trying to beat the stock market- When you look at
net returns, the majority of the funds and investment advisors
cannot beat the market over a 20-year period unless they take on
excess risk. While mutual fund
history should speak for itself, modern
studies confirm this "terrible truth." In the book,
Stocks for the Long Run, Professor
Jeremy Siegel reports that in the past 20 years, there were only
three years in which the majority of funds beat the market index
(as measured by the S&P 500).
-
Investing only in stocks, bonds and cash- They say
variety is the spice of life. This axiom also applies to
investments. Depending on definition, there are at least 10 asset
classes. The goal is to find non-correlated assets that will give
you a more steady return and not be tied to the volatility of the
stock market. If you invested in assets with a low correlation to
the stock market, you may have suffered substantially smaller
loses in 2008 than other investors.
Over the years I have seen many investors who were in their
fifties and had a portfolio invested over 70% in stocks. I
suggested that their risk tolerance did not match their investment
allocations. It was tough to advise a potential client two or
three years ago that they were not diversified. Many of these
people did not come on board with me because I was to
“conservative”.
-
Investing and constructing a
financial plan without Asset Protection – Professionals that
have personal liability such as doctors, accountants and lawyers
need to look at their exposure to professional liability
judgments. You may have worked for 20 years or more and to not put
up roadblocks in an effort to protect your assets is
short-sighted. There are basic, low cost, asset protection tools
that can be used as a first line of defense. If your assets are
significant there are also more complex strategies to provide
insulation against a variety of civil attacks. I work in tandem
with attorneys to suggest the appropriate solutions.
- Only investing and not
planning – I am amazed with how the terms asset advisory
and financial planning are used interchangeably. The confusion
stems from large brokerage houses giving financial planning
advice, which is incidental to the selling of investments.
As of October 2007, the Merrill Lynch Rule was overturned by the
federal government.
If your net worth in above a
million dollars, there are many wealth preservation tactics and
strategies for potentially increasing and preserving your wealth.
If you are only investing and not planning, I would suggest you
are missing potentially huge opportunities.
I assert that good planning can be
more important than good investing. The problem is many investors
haven’t seen good financial planning. If you have worked 50-80
hours/week for 15 years to amass your wealth, doesn’t it make
sense to have a plan to set the direction for your financial
life?
AND
LAST BUT CERTAINLY NOT LEAST…………….
- Failing to save enough
money for retirement- Most people I talk with
underestimate their life span. I’d suggest that if you are
affluent, educated and exercise, the chance of reaching the age of
90 increases significantly. Additionally, as a Doctor you have a
constrained time period to accumulate your wealth due to added
schooling, residency and possibly added training. I would suggest
you use wealth planning techniques to save as much pretax money as
possible for retirement while keeping an appropriate amount of
liquidity.
These five behaviors come from over
25 years of investing. If you have any questions, send me an email
and I will give you the back-up data including citations.
I hope that 2009 is a prosperous year
for you and your loved ones. I wish you health, wealth and
happiness.
See you next month……..
Derrick Handwerk MBA CWPP CAPP
Derrick received
his MBA from Lehigh University and is a Rauch Business Scholar. He
received his certification in Wealth Preservation and Asset
Protection from the Wealth Preservation Institute.
After college he
spent 3 years in the pharmaceutical industry and then went on to run
and own several businesses including Handwerk Wealth Advisory.
Handwerk Wealth
Advisory works with small business owners and specializes in working
with medical and dental practices.
www.handwerkwealthadvisory.com
The information
presented is general in nature and should not be considered legal or
tax advice. The reader should consult their legal or tax advisor for
information concerning their own specific tax situation.
"Securities
offered through First Allied Securities, a Registered Broker/Dealer,
member F
A Flawed Model
Recently Alan Greespan was on Capital Hill testifying in front of
Congress and he admitted that his basic premise for how the banking system
worked was flawed and he had been working under this flawed assumption for
over 20 years. I think that only great people admit when they are wrong
and I put Mr. Greenspan in that category.
In my initial meeting I sit down with prospective high net worth
clients and look over their portfolio (asset management) and ask for their
wealth plan. Over time, two concerns struck me.
First, most of these people were in only a few asset classes such as
stocks, real estate and bonds. So they were not very diversified. The
other concern was maybe half of the people had a financial plan. To delve
more deeply, I believe many of the plans were of little value to their
owners due to a variety of reasons.
In my opinion, when put together, a diversified portfolio and a
customized wealth plan are very synergistic.
Portfolio Diversification
A generally accepted model on Wall Street is to buy stocks, bonds and
cash, and maybe some real estate. In different proportions based on age,
risk and suitability this should diversify your investments. Well, as we
all know, this model may not have been as diversified as you had hoped.
When looking in a rear view mirror these asset classes may have done
well over time. As they say, past performance is no indication of future
returns.
There are many risks to your investments. One type of risk is
Legislative risk. With one swipe of a pen Congress and the President can
change everything and the asset class that you are heavily concentrated
in, could be the target of a new law.
An example – Real Estate
There have been many examples of how changes (risks) have negatively
impacted different asset classes. In this case let’s look at legislative
risk.
The tax reform act of 1986 to see the effect of a change in law had on
an asset class over the subsequent years. In this case one major
casualty of the 1986 change in law was the real estate market. This
act impacted real estate in 3 ways.
- The capital gains rate was increased from 20% to 33%.
- The depreciation schedule was increased from 19 years to 27.5 years
and the law changed how depreciation was calculated. (From double
declining balance to straight-line method.)
- The law limited the deductions of passive investment losses.
In the current environment of overspending to stimulate the economy and
a new President, I believe we are in for many legislative changes. This
last sentence could easily be an article or two.
There is an art and science to putting together a group of asset
classes which fit the macroeconomic forecast, investor suitability,
investor time frame and desired return vs. volatility.
I have identified over 15 asset classes which are available to the high
net worth client. If you are in less than 5 asset classes, in my opinion,
you are in a flawed model.
A Customized Wealth Plan
If you do not have a Financial Plan I suggest you put one together. If
you do have a plan, make sure that the planner has talked with your
accountant and estate planner. Also make sure the person has sat down with
you several times to understand your financial situation, corporate
structure, risks, and investment needs. The challenge is to then
incorporate all of this information into a plan and then distill it down
to as few pages as possible so you "the client" can understand your plan
and make sure it meets your objectives, goals and answers those questions
you have about your financial future.
A good Wealth plan looks at your situation and analyzes all aspects of
your financial life. I make the analogy that when you see my process,
investments and plans you are seeing an endangered species. As we all
know, by definition, there are not many of them around so that is why most
people do not know what a customized wealth plan looks like.
Many of the current plans being produced are lots of pages generated
with a small amount of inputs. The financial model of your future depends
on the person taking the time to understand your needs and putting in the
time to produce a plan that is unique to you.
Believe me, you do not want a few inputs and a canned plan laying out
your path to financial independence.
See you next month........
Derrick Handwerk MBA CWPP CAPP
Derrick received his MBA from Lehigh University and is a Rauch Business
Scholar. He received his certification in Wealth Preservation and Asset
Protection from the Wealth Preservation Institute.
After college he spent 3 years in the pharmaceutical industry and then
went on to run and own several businesses including Handwerk Wealth
Advisory.
Handwerk Wealth Advisory works with small business owners and
specializes in working with medical practices.
www.handwerkwealthadvisory.com
The information presented is general in nature and should not be
considered legal or tax advice. The reader should consult their legal or
tax advisor for information concerning their own specific tax situation.
"Securities offered through First Allied Securities, a Registered
Broker/Dealer, member FINRA/SIPC"
Thoughts on Retirement
A comfortable and confident retirement is on most people’s list of
reasons to invest. The financial services industry has done a pretty good
job of educating investors about the growth phase. But little has been
done in preparing investors—or even advisors—to adequately handle the
retirement income phase. And the rules are different. As you think toward
retirement, what should you do to prepare yourself for the income phase of
investing – where your money pays you?
If you make a mistake early in the growth phase, it can be relatively
easy to recover. Let’s say you don’t contribute the legal limit to your
401(k), IRAs or other retirement plans, or you take some wild risks, or
even cash out of the market at the wrong time—you may still have years to
decades to make up for lost time. Early mistakes are easier to fix. A
mistake in the income phase is different: It could jeopardize your
lifestyle for the rest of your life, as well as your legacy. An income
phase mistake can have an impact on your income every month for the rest
of your days.
What is a Market Average?
One way to misunderstand raw information is to confuse abstractions
with reality. Market averages are such an abstraction. Averages do not
actually exist. Market results exist—and nothing compels actual market
results to obey averages.
Let’s look at an example. Looking back from 1926 through the end of
2006, the S&P 500 stock index averaged about 10.4 percent annually
according to Ibbottson Associates. But out of all those 81 years, how many
times did it actually provide a calendar year return between 10 percent
and 11 percent? Did you guess 20? 30? 10? Try one. Just one. Is that too
narrow of a band? Then let’s find out how many times the market’s return
was between 8 percent and 12 percent. Surely 30 or 40 of those 81 years,
right? Actually, the market’s return was in the 8 to 12 percent range just
four times. In fact, the market’s loss was greater than 20 percent more
times than it returned a gain of 8 to 12 percent. But that’s only part of
the story. The market’s gain has been 20 percent or greater 31 times out
of those 81 years.
The stock market’s returns don’t go in a straight line—they never have.
Expecting a return of 10 to 11 percent each year would have left you
feeling a little off course in 80 of those 81 years. Making sure your plan
is up to task requires planning for the inevitable times investments will
under-perform their historical averages.
See you next month........
Derrick Handwerk MBA CWPP CAPP
Derrick received his MBA from Lehigh University and is a Rauch Business
Scholar. He received his certification in Wealth Preservation and Asset
Protection from the Wealth Preservation Institute.
After college he spent 3 years in the pharmaceutical industry and then
went on to run and own several businesses including Handwerk Wealth
Advisory.
Handwerk Wealth Advisory works with small business owners and
specializes in working with medical practices.
www.handwerkwealthadvisory.com
The information presented is general in nature and should not be
considered legal or tax advice. The reader should consult their legal or
tax advisor for information concerning their own specific tax situation.
"Securities offered through First Allied Securities, a Registered
Broker/Dealer, member FINRA/SIPC"
Don’t Let Your Emotions Cloud
Investment Judgment
Ah … the good old days when an investor would pay anything for a
pre-construction condo in Boca Raton. Why? When finished, the condo would
presumably be worth a quarter of a million dollars more and you’d carry it
with borrowed money until you made the sale.
Initially, this may have worked but, when the music stopped if you
owned a highly leveraged asset, there may not have been a seat. This has
been a painful lesson for many people. I believe people got caught up in
the easy money and lost sight of their investment strategy.
Some of the more common behavioral mistakes that investors make involve
euphoria and panic. Nick Murray, author of Simple Wealth,
Inevitable Wealth, says euphoria is more than greed – people get
completely blissed out and lose all sense of danger.
A definition of risk is the chance that an investment will lose value.
When you reach out for higher and higher returns because someone else is
getting them – you forget that higher returns mean taking more risk – you
have entered the euphoria zone. You may have been blinded to the fact that
risk rises along with price.
According to Murray, panic – another behavioral mistake – follows, and
sometimes accompanies, the euphoria stage. The higher the euphoria, the
deeper the panic or capitulation. When prices start to fall, you lose
composure and believe your investment price will never come back. You have
to get out at any price. You sell at the bottom of the market.
In today’s economic environment, if panic overtakes you, you’ll need to
make two decisions:
- First, you must decide when to sell.
- Second, you must decide when to get back into the market.
Your odds of being right on both decisions are very low.
Murray sees investors making other behavioral mistakes that include:
- Under-diversification – This involves the often costly narrowing of
a portfolio to essentially one idea. This can be a sector (i.e. stocks
or real estate) or a company. If you worked for a company that went
bankrupt and invested the majority of your assets in that company’s
stock, you found out the hard way about under-diversification.
- Making portfolio decisions based on your cost basis – This means you
let your cost basis dictate an investment decision just to avoid paying
capital gains taxes. Or you try to get back to even. This is seldom
prudent. Seldom should you let taxes drive the decision making process.
Also, you keep a stock or investment on what you think it will be worth
in the future, not what the price was when you bought it.
- Investing for yield instead of total return – In Murray’s opinion,
this is the great behavioral mistake of the American retiree. Many go
into retirement mistaking current yield as the only source of income.
They end up buying a lot of bonds and not a lot of equities. First they
find out that bonds can lose value if interest rates increase and then
they realize the tax called inflation can have its effect over a 10 or
20-year period.
During the current Bear Market in Stocks and the concurrent
de-leveraging of investment portfolios resulting in the decline of many
asset classes, many people have gone from euphoria to panic.
As an investment advisor I suggest people stick to their investment
strategy. In my years as a Wealth Advisor what I have found is most people
don’t have an investment strategy and/or are under-diversified. I believe
investing only in stocks, bonds and cash is the old paradigm.
If your investments have not been diversified beyond stocks, bonds,
cash and your home, now may be a good time to reassess the way you
approach investing.
See you next month........
Derrick Handwerk MBA CWPP CAPP
Derrick received his MBA from Lehigh University and is a Rauch Business
Scholar. He received his certification in Wealth Preservation and Asset
Protection from the Wealth Preservation Institute.
After college he spent 3 years in the pharmaceutical industry and then
went on to run and own several businesses including Handwerk Wealth
Advisory.
Handwerk Wealth Advisory works with small business owners and
specializes in working with medical practices.
www.handwerkwealthadvisory.com
The information presented is general in nature and should not be
considered legal or tax advice. The reader should consult their legal or
tax advisor for information concerning their own specific tax situation.
"Securities offered through First Allied Securities, a Registered Broker
Dealer, member FINRA/SIPC"
Increasing Profits
As a wealth advisor that specializes in working with
Physician owned practices, I am concerned with the overall financial well
being of my clients.
Many "financial
planners" look only at a client’s investments. They may put you in a few
stock mutual funds. (See my previous article on why they are missing the
boat)
A few planners will
look at several aspects of a client’s financial life. I list 9 aspects of
Wealth Planning on my website. Portfolio analysis is only one area of
Wealth Planning.
Another aspect of my value proposition is Management
Consulting. Specializing in working with doctors has allowed me to not
only focus on their needs as applied to Wealth Planning and investing but
also to work with them on practice management
issues.
When was the last time you analyzed your practice
from a tactical and strategic business perspective?
I have seen many tax returns of Physicians. When
looking at total compensation over the past few years the trend I see is a
reduction in profit for the majority of Physicians. Especially susceptible
to decreased operating margins are General Practitioners, though they have
one of the greatest opportunities to turn their situation around.
Most Doctors I talk to tell me they are being
squeezed by both higher costs and lower reimbursements. They also tell me
that they really don’t know how to respond to this trend.
Doctors need to run their practice as a business. As
a small business owner for over 20 years, my MBA mentality sees
opportunity for many Doctors to increase revenues, to increase market
share and to reduce overhead as a percentage of revenues with the result
being an increase in profits.
As a business owner, here are a few questions that
you should consider.
- How does your practice compare to other similar
practices in operating cost as a percent of total medical revenue,
billings/professional and total compensation?
- What has your revenue trend been over the past 3
years?
- What percent of revenue comes from fee increases
vs. patient volume?
- What is your payer mix?
- How are you coding vs. others in the practice and
others in similar practices?
- Has pay for performance hit your area?
- What revenue increasing opportunities have you
considered?
- Do you have an EHR system in place?
- Do you have a monthly budget and analyze actual
vs. projected variances?
- What is your corporate structure for the building
and for the practice?
- What type of benefit plans are in place and how
could they be improved?
- What is your exit strategy?
Each of these questions may uncover problems and
opportunities. The answer to any one of these
questions could give you the needed insight to significantly increase the
profit from your business.
There is a metamorphosis that needs to occur for
some Doctors. It is a process of transitioning from a clinician to a
clinician and business owner.
Some doctors and dentists have already made the
transition or have always looked at their practice as a business. For
others it may be a bit uncomfortable to see their income going down
through no fault of their own.
Not everyone will adapt. You can embrace the
situation and make the most of your business.
The question is: Are you going to respond to the
present environment?
See you next month........
Derrick Handwerk MBA CWPP CAPP
Derrick received his MBA from Lehigh University and
is a Rauch Business Scholar. He received his certification in Wealth
Preservation and Asset Protection from the Wealth Preservation Institute.
After college he spent 3 years in the pharmaceutical
industry and then went on to run and own several businesses including
Handwerk Wealth Advisory.
Handwerk Wealth Advisory works with small business
owners who are accredited investors. Over 50% of assets under management
are from medical practices.
www.handwerkwealthadvisory.com
The information presented is general in nature and
should not be considered legal or tax advice. The reader should consult
their legal or tax advisor for information concerning their own specific
tax situation.
Bear Market Essentials
It’s official: The bear market in stocks has arrived. A widely
accepted definition of a bear market is a 20% drop of the Dow Jones
Industrial Average from it’s high.
I’d like to discuss this recent event from two perspectives. First, by
taking a look at past bear markets and their characteristics. This may
enable you to gain a better perspective of what may occur. Conversely, I
would suggest that if you have a diversified portfolio with an
appropriately mapped out strategy which is suitable to your risk, age and
goals; a bear market in stocks should not devastate your
investments.
According to data compiled by Bespoke Investment Group:
- The post-1940 average bear market (using the S&P 500) produced a
decline of 30.4% and took 386 days to reach its trough from the market
peak.
- The longest bear market in stocks (1973-1974) took 630 days and
produced a 48.2% decline off the S&P 500 Index.
The following table of indexes was compiled from the Wall Street
Journal and represents year-to-date returns as if July 1st
2008.
YTD
S&P 500 -15.8
US Dollar Index -5.50
DJ-AIG Commodity 25.99
US Corp Intermediate Bonds 0
The following table of indexes was compiled from Lipper Indexes and
represent year-to-date returns as of July 3, 2008
YTD
Money Market Fd IX 1.25
Hi Cur Yield Bond IX -3.20
Let’s look at two hypothetical examples of how a portfolio invested in
different asset classes would perform.
Example 1
Many Wall Street pundits would suggest a portfolio of stocks, bonds and
cash. If you had divided your portfolio equally among the S&P 500, US
Corp Intermediate bonds and a money market fund you would have received a
–4.85% return YTD.
FYI - As I have stated in previous articles, we are near a 40-year
low on the 10-year Treasury Bond. As interest rates rise the value of
bonds fall.
Example 2
If you had divided your portfolio equally among the 6 asset classes
listed above your return would have been a positive 5.72% YTD
In the hypothetical example #2, the S&P 500 only constitutes 1/6th of
the portfolio, a major move down (bear market) in the stock market has
less impact than if you had been advised to place 65% of your money in
"stocks".
The Power of Diversification
In the September 2007 issue of Journal of Financial Planning,
William Coaker II, made a comparison between 3 equity portfolios*
for the time period of 1972-2004
Portfolio 1 = 100% US Equities
Portfolio 2= 85% US Equities and 15% International Equities
Portfolio 3= 35% US Equities, 30% international Equities, 35%
Alternative Investments
The next table gives the amount of variance (Standard Deviation) and
return of each portfolio.
Standard Annualized
Deviation Return
Portfolio 1 17.2 12.25%
Portfolio 2 16.2 12.17%
Portfolio 3 12.1 13.70%
By adding low correlated asset classes to the portfolio, he found
Portfolio 3 had 25% less volatility and better returns.
Coaker goes on to state that " over 30 years this resulted in 53%
more wealth than Portfolio 1 and 56% more than Portfolio 2".
Conclusion
Simply put, there are more asset classes in the world besides stocks,
bonds and cash. To only invest in these three asset classes increases your
volatility but not necessary increases your returns.
See you next month........
Derrick Handwerk MBA CWPP CAPP
Derrick received his MBA from Lehigh University and is a Rauch Business
Scholar. He received his certification in Wealth Preservation and Asset
Protection from the Wealth Preservation Institute.
After college he spent 3 years in the pharmaceutical industry and then
went on to run and own several businesses including Handwerk Wealth
Advisory.
Handwerk Wealth Advisory works with small business owners who are
accredited investors. Over 50% of assets under management are from medical
practices.
www.handwerkwealthadvisory.com
*An index is unmanaged list of securities designed to track a specific
market category or asset class. Indexes assume reinvestment of all
distributions and do not take into account brokerage commissions or other
costs. It is not possible to invest directly in an index.
The information presented is general in nature and should not be
considered legal or tax advice. The reader should consult their legal or
tax advisor for information concerning their own specific tax situation.
"Securities offered through Cadaret, Grant & Co., Inc., member FINRA
and SIPC"
What has
your Advisor done for you lately?
As a Wealth Advisor I have many roles and aspects to
my position. Aside from being an advisor I am also an educator. One area
where investor education could be of benefit is in the area of
understanding what type of relationship you have with your Advisor.
Many people cannot explain the differences in
responsibilities between a Stock Broker, Account Executive, Insurance
Agent, Financial Planner, Retirement Specialist, Insurance Specialist and
a Wealth Advisor. The number of titles is diverse and daunting.
Bottom line, what is that person going to do for you?
From my experience, most people that hire an
"Advisor" are looking for an Investment Advisor. Not realizing that they
are selling themselves short. From your perspective, if you are going to
pay 1%, or more, of your assets to work with an Advisor, why not have
your Advisor help you with your investments and your Wealth
Planning?
A well-written and customized Wealth Plan is as
important as the investments themselves. I
am not talking about not a generic plan that takes an hour to construct,
but rather an individualized, comprehensive and usable plan.
The goal of the Wealth Plan is to give you a better
understanding of your financial life, address your goals and point out
financial opportunities as well as consider risks. Many times, the
investment strategies suggested are tax-advantaged and allow you to keep
more money in your pocket.
According to a recent survey of 2094 Financial
Advisors (nearly half called themselves Wealth Managers) conducted by CEG
WORLDWIDE in 2007, only 6.6% were judged to be Wealth Managers.
In order to be considered a Wealth Manager the researchers did not rely on
self-descriptions but rather on whether the Financial Advisor’s business
adhered to three business practices.
Wealth Managers use the following business
practices:
- Use a consultative process to establish close
client relationships
- Develop customized solutions designed to fit
individual needs
- Deliver those solutions in close consultation
with clients
Further examination found these elite managers
differed from investment generalists in their client focus. The researches
states: " We found that wealth managers are much more likely to employ
practices designed to ensure that they serve only high-quality clients and
that they serve them well."
One telling statistic from the research was the
number of clients the Wealth Manager worked with.
Number of Clients
Wealth Mangers 101 Clients
Investment Generalists 269 Clients
It seems logical that the fewer clients an Advisor
has the more time, service and value they should be able to provide. In
fact the study concluded, "It stands to reason that a smaller client base
allows for closer, stronger relationships with (and better service for)
those customers they have."
The study also reviewed the Client interview process
and the assembly of a customized plan. Consider the following findings
from the study:
Formal interview process
- 85.5% of Wealth Managers engage in a formal
interview process
- 58.7 of the Investment Generalists engaged in a
formal process
Formal Plan
- 81.9% of Wealth Managers provide the client with
a formal plan
- 37% of Investment Generalists provide a formal
plan
If I were looking for a Financial Advisor, Wealth
Manager or Wealth Advisor, I would want an Advisor:
- That specializes in Clients similar to me in
occupation and investable assets.
- That is familiar with Asset Protection
Strategies.
- To follow the three business practices outlined
above.
- To have less than 100 clients.
- That had a formal interview process leading to a
customized plan.
- To help with the implementation of the plan and
work with both my accountant and lawyer.
Derrick received his MBA from Lehigh University and is a Rauch Business
Scholar. He received his certification in Wealth Preservation and Asset
Protection from the Wealth Preservation Institute.
*An index is unmanaged list of
securities designed to track a specific market category or asset class.
Indexes assume reinvestment of all distributions and do not take into
account brokerage commissions or other costs. It is not possible to
invest directly in an index.
What are you looking for in an Advisor, what type of
relationship do you have with your Advisor and what has your Advisor done
for you lately?
See you next month........
Derrick Handwerk MBA CWPP CAPP
Derrick received his MBA from Lehigh University and
is a Rauch Business Scholar. He received his certification in Wealth
Preservation and Asset Protection from the Wealth Preservation Institute.
After college he spent 3 years in the pharmaceutical
industry and then went on to run and own several businesses including
Handwerk Wealth Advisory.
Handwerk Wealth Advisory works with small business
owners who are accredited investors. Over 50% of assets under management
are from medical practices.
www.handwerkwealthadvisory.com
The information presented is general in nature and
should not be considered legal or tax advice. The reader should consult
their legal or tax advisor for information concerning their own specific
tax situation.
"Securities offered through Cadaret, Grant & Co.,
Inc., member FINRA and SIPC"
A Short List of Risks to Your
Portfolio
As I have written previously, most
investors see investment risk as the risk of losing their money when their
stocks go down. While valid, there are many ways to mitigate this risk
(diversification). Of additional interest, I maintain a list of over 20
risk factors solely related to investments. I have chosen some of the
most important and created a short list that follows.
Inflation – Many have
called inflation the cruelest tax of all. Its regressive and stealth
nature undermines purchasing power. For example, if a gallon of milk
cost $3 today @ 4% inflation in 30 years the gallon of milk would
cost $9.73. In short, your investments would have to more than
triple to have the same purchasing power in 30 years as they have today.
As an investor you are taking on
investment risk to yield varying returns. However inflation is a
constant. On an after tax basis, subtract 4% from your investment return
and you will have your real inflation adjusted return.
Solution: Realize that if
you are investing for a time horizon of 20-30 years, you may want to take
on more risk for more potential return. A bond, money market, checking
account or other similar investment is potentially not going to grow your
money significantly above the inflation rate.
Credit – Bonds (of all
varieties) carry a credit rating. Treasury bonds are backed by the US
Government and are judged to be the safest. The S&P investment grade
rating, from highest rating to lowest rating in declining order are; AAA,
AA, A and BBB. Below investment grade are BB, B, CCC, CC, C and payment
in default is D rated. Typically speaking the higher the yield the more
risky the bond. I have seen people buy bonds paying 11% yields only to
see the company go out of business and subsequently the investor lose all
of their money.
Solution: Consider an
index fund and understand the quality of the portfolio.*
Interest Rate – Generally,
as interest rates rise the value of bonds fall. The longer the maturity
of the bond the more likely this is to occur. A common misunderstanding
among investors is that bonds are not volatile and do not lose their
value.
The 10-year Treasury bond is now
close to 4%. According to the Federal Reserve Statistical Release, the
last time we had 10-year treasury rates this low was in 1962.
Looking at a risk reward scenario,
we are at the lowest rate in 45 years and rates probably will rise
sometime over the next 10 years. Looking at history, rates could also go
as high at 13.92 (1981) Remember, as yields go up a bond’s value goes
down.
Solution: Stay on the
shorter-end of the yield curve.
Taxes - According to a
study done by the National Taxpayers Union Foundation, the current US top
marginal individual tax rate is in the lower half of individual rates
during the past 50 years. Currently top marginal rates are 39.6%. Tax
rates have been as high as 77% in 1969.
Solution: One could argue
that tax rates will be higher in the future than they currently are and
planning for such a scenario would be prudent.
Legislative – Tied in with
taxation is the change of law. Legislative risk is one of the biggest
risks and the one risk that few people fully appreciate. With a
signature of a pen (change in the law) your assets accumulated over a
lifetime can be devastated.
There have been many examples that
impacted different asset classes. The current Supreme Court Ruling was one
averted disaster. Let’s look at the tax reform act of 1986 to see the
effect of a change in law over the subsequent years. In this case one
major casualty of the 1986 change in law was the real estate market.
This act affected residential real estate in 3 ways.
- The capital gains rate was
increased from 20% to 33%.
- The depreciation schedule was
increased from 19 years to 27.5 years and the law changed how
depreciation was calculated. (From double declining balance to
straight-line method.)
- The law limited the deductions
of passive investment losses.
Looking forward, the 15% capital
gains rate is slated to expire in 2010. If you sell a house in 2011,
there may be a new tax rate, which most likely, will be higher than the
current rate.
With many challenges facing the US
economy (weak dollar, under funding of Medicaid and Social Security) and
many presidential candidates proposing tax increases, a signature of a
pen can change the value of an asset class instantaneously.
Solution: DO NOT put
more than a few eggs in any one basket. The old adage of diversify your
assets is one of the most spoken but least understood statements of
investment sage.
In closing, when you invest,
understand all of the risks, which may have little to do with the investment choice itself.
See
you next month........
Derrick Handwerk MBA CWPP CAPP
Derrick received his MBA from Lehigh University and is a Rauch Business
Scholar. He received his certification in Wealth Preservation and Asset
Protection from the Wealth Preservation Institute.
*An index is unmanaged list of
securities designed to track a specific market category or asset class.
Indexes assume reinvestment of all distributions and do not take into
account brokerage commissions or other costs. It is not possible to
invest directly in an index.
The information presented is general in
nature and should not be considered legal or tax advice. The reader should
consult their legal or tax advisor for information concerning their own
specific tax situation.
"Securities offered through Cadaret, Grant
& Co., Inc., member FINRA and SIPC"
Overview of Risk (Part 1)
Recently, I was speaking with a partner, at a very large law firm, who
specializes in working with doctors. He explained that one of the least
understood areas, among physicians, as well as investors, is the extent of
risk to which they are exposed. I agreed with him, and thought how
necessary, important and unusual it would be to write a series of
articles on identifying, analyzing, and protecting against risk.
Wall
Street firms are, for the most part, more concerned with investing your
assets than with protecting them. It is easy and quick for them to place
your assets in a few mutual funds. It is not so easy for them to also
engage in risk management, and spend the time and do the things
needed to mitigate you exposure to risk, and help you construct an asset
protection plan.
As an
Independent Wealth Advisor, one of my most important contributions is to
help educate my clients about their investment risks, and how they might
be able to mitigate them. While this is helpful in areas of risks that
are common, or easily identifiable, I have found that I can be
particularly helpful in areas in which my clients do not see, or do not
fully appreciate, the implications of the number and level of risks that
may be present in their particular personal, business and/or financial
situation.
In
this series of articles, I will provide several examples from my
practice where I have helped my physician clients look at the big risk
picture, and ways I have suggested for my clients to protect their
personal and business assets.
Tangible vs.
Intangible Risk
When
it comes to tangible assets at risk, most people understand that they
need to address, and do, insure their homes, jewelry, cars, boats and
other tangible assets against the risks of destruction, theft or other
loss. On the other hand, most professionals and business owners, as
well as investors, are less knowledgeable about, and therefore less
likely to hedge the risks associated with, their intangible assets
(probability and liability).
Filial Support
Risk - One Type of Lurking Intangible Risk
I
recently had lunch with Bill Wanger, a partner at Fox Rothschild LLP, a law
firm with offices in and around Philadelphia. Bill is a partner in
the firm, with a Masters Degree in Tax Law, and specializes in
succession planning, and representing all types of business owners, and
particularly physicians and other professionals. In the course of our lunch
discussion, Bill brought up the topic of the legal responsibility of
adult children to care for, help maintain and provide financial
assistance to, their parents and other family members - the so-called
"filial support" obligation. He noted that while Pennsylvania had only
passed its filial support obligation law in July, 2007, 21 other states
also had similar statutes on the books.
What
makes these filial responsibility laws of particular concern, to
attorneys, insurance professionals and financial planners, is that a
majority of the filial responsibility laws impose both criminal as well as civil responsibility on the
adult child.
What is Filial Support and Who is at Risk?
Filial support or filial support risk, is the obligation of children to pay
for their parents' Medicaid bills. The
Federal Deficit Reduction Act of 2005 created a 5-year "look back" for
gifts and created tougher penalties for people trying to shift
assets out of the reach of Medicaid's ability to seize assets from the
recipient's estate to repay Medicaid.
According to Bill's interpretation of the new Pennsylvania law, if you are
the child, spouse or parent of a person receiving long-term care paid
by Medicaid, you are potentially legally responsible, to the
hospital, facility or home, for the expenses of daily living, health care
and support of a parent, if the parent is deemed "indigent" and has
failed to or was unable to pay for the care. Wanger added that, under the
laws of Pennsylvania and many other states, indigency is not clearly
defined, but is subject to a "facts and circumstances" test; and he
cautioned that someone need not be destitute, or on public assistance, in
order to be deemed by law to be destitute.
Attorney Wanger noted that, under Pennsylvania's newly-enacted filial
responsibility law, unpaid institutions, such as hospitals and nursing
homes, are now provided with a strong creditor tool:
threatening the family member with imprisonment for non-payment of a
deceased parent's
bills.
As
our country continues to age, Medicaid will continue to look for ways to
reduce governmental expenditures and deficits; and keep pushing more of
the financial burden onto the states and public and private health care
providers. From my discussion with Attorney Wanger, and with
people in the healthcare industry, there is a growing realization, by
hospitals and nursing homes, that by billing family members of a
patient, hiring collections agencies and even suing the children of
patients, believed to have sufficient financial resources, hospitals,
nursing homes and other facilities may be able to recoup much if not all of
the money due from the cared-for parent upon his or her death.
Overview
Are
you asking yourself why a Wealth Advisor is concerned with the risk to
your assets of seizure by healthcare creditors? I would suggest that a
financial plan, that doesn't include asset protection tools and
techniques, unnecessarily exposes your assets to a host of creditor
actions - and that the creditors about which you need to be concerned may
be those of your parents, rather than solely your own creditors. As an
accredited investor, you probably have the means to pay for (in whole
or part) your parents' Medicaid, hospital and nursing home
expenses. Because you have substantial assets (liquid, but also
non-liquid - such as homes, expectancies and business interests), a host of
other creditors, via civil suits (and sometimes even with the added
support of criminal statutes), or via malpractice claims, can also
attack your assets.
Filial support risk is real and growing. If you financial assets are
considerable, you may want to self-insure the risk. Conversely, you
may
want to consider Long Term Care insurance for your parents (not to
mention for yourself) to reduce your risk of a protracted illness.
Next
month we will continue to explore various other types of risks, and how
you might be able to mitigate their potential impact.
See
you next month........
Derrick received his MBA from Lehigh University and is a Rauch Business
Scholar. He received his certification in Wealth Preservation and Asset
Protection from the Wealth Preservation Institute.
Derrick Handwerk MBA CWPP CAPP
The information presented is general in
nature and should not be considered legal or tax advice. The reader
should consult their legal or tax advisor for information concerning
their own specific tax situation. "Securities offered through Cadaret, Grant
& Co., Inc., member FINRA and SIPC".
www.handwerkwealthadvisory.com
Overview of Investment Risk
Part 2
Of the many types of investment risk, most investors
worry about only one: the risk of losing money.
Not losing money in the long run is critical, making
money is better. Most investors I meet do not have a comprehensive Wealth
Plan or an investment strategy with 5-10 asset classes. Having a plan and
diversifying investments would reduce the possibility of losing money.
The current paradigm promoted by many brokers is to
invest in stocks, bonds and cash. With this asset mix comes a significant
amount of volatility.
Stocks and bonds are promoted by Wall Street as the
primary candidates for your investment portfolio. I would suggest part of
the reason is because they make massive amounts of money from fees for
underwriting (bring to market) stocks and bonds?
I would suggest an alternative paradigm. I propose
that you invest in asset classes with consistently low correlations that
meet your risk tolerance, suitability, time frame and needed return.
Diversifying beyond stocks and bonds
My guess is that you have heard the phrase diversify
your assets before. It may be an investment cliché but few investors
fully understand its power and rationale.
In meeting with many investors, it has been my
experience that about:
·
70% of investors invest in stocks, bonds
and cash. (3 asset classes)
·
20% of the investors are in one or two
investments classes. Usually their investments of choice are CDs, bonds
or real estate. The first two investments are held because the investor
is conservative and doesn’t want to lose money. Though inflation will
erode their buying power. The group holding real estate, has a perception
biased by a long bull market in real estate that is now correcting and/or
likes owning a tangible asset.
·
5% of the investors have 5-6 assets
classes
·
<5% of the investors have more than 7
asset classes.
Asset Classes
I have identified
over 15 distinct asset classes. Since the asset classes and choices within
those asset classes are part of my proprietary investment philosophy, I
will list 10 basic asset classes.
-
Stocks
-
Bonds
-
Cash
-
Commercial Real Estate
-
Residential Real Estate
-
Commodities
-
Annuities
-
Options
-
Inverse Index Funds
-
TIPS
The Power of
Diversification
In the September 2007 issue of Journal of Financial
Planning, William Coaker II, made a comparison between 3 equity
portfolios* for the time period of 1972-2004
Portfolio 1 = 100% US Equities
Portfolio 2= 85% US Equities and 15% International
Equities
Portfolio 3= 35% US Equities, 30%
international Equities, 35% Alternative Investments
The next table gives the amount of variance (SD) and
return of each portfolio.
Standard
Annualized
Deviation
Return
Portfolio 1 17.2
12.25%
Portfolio 2 16.2
12.17%
Portfolio 3 12.1
13.70%
By adding low correlated asset classes to the
portfolio, he found Portfolio 3 had 25% less volatility and better
returns.
Coaker goes on to state that “ over 30 years this
resulted in 53% more wealth than Portfolio 1 and 56% more than Portfolio
2”.
2008
The following table shows correlation
coefficients among various asset classes. The goal of a
well-constructed portfolio is to use as many asset classes as
possible in your portfolio in order to reduce
volatility while increasing return. Again, subject to your risk tolerance, suitability, time frame and needed return.
