2015 401k Contribution Limits Announced

New 2015 401k contribution limits were announced today by the IRS!

      • Elective Deferrals for 401k/403b/457: $18,000 ($500 increase)
      • Catch-Up Contributions for 401k/403b/457: $6,000 ($500 increase)
      • Annual Compensation: $265,000 (increased from $260,000)
      • Annual Additions Limit for Defined Contribution Plans: $53,000 (increased from $52,000)
      • Highly Compensated Employees: $120,000 (increased from $115,000)
      • Key Employee: $170,000 (no change)

Summer 2014 Newsletter – Market Value of Stocks Now Exceeds GDP

Market Value of our Stocks Now Exceeds Total Value of our Production

Investors find themselves today in a climate of high and climbing stock prices. There are many potential causes. Individual companies may out-perform expectations and therefore justify a higher price, or the economic growth of the nation may create an environment where stock prices in general are pushed higher.

Summer 2014 US RecessionsThis stock market, however, has been climbing for several years at rates that are higher than the underlying economic and financial indicators can support. Despite an economic climate in which the national Gross Domestic Product (GDP) actually contracted in the first quarter of 2014, and in which individual companies show few signs of out-performing expectations, prices of stocks overall continue to rise.

Think of it as paying a premium for most stock purchased today. Think of it as paying $1.30 for $1 worth of stock. And then consider the likelihood of achieving meaningful growth on that inflated $1.30 in the short-to-mid-term. This is where we find ourselves today.

These differences in price and value cannot sustain themselves. Eventually the prices will return to their proper value, or even below, before they begin to grow again. What will cause the return to proper value, and when, nobody knows. It may be an external event, or some crisis within the financial system, but it will eventually occur.

Until then, we believe the prudent course is a cautious one. We believe that portfolios should be allocated conservatively, as difficult as that may be to do, as the markets may continue to increase for some time before the correction. Now is certainly not the time to take on more risk.

As Warren Buffet is credited with saying: “The markets are designed to transfer money from the active to the patient.” Now is the time for patience.

What About My Five-Year Retirement Plan?

Here is a continuation from our previous newsletter about when to start thinking about retirement. Visit our last newsletter for information that investors 3 years from retirement should be thinking about.

2 Years from Retirement

  1. Do I need or want to work in retirement? Part time or full time work can help to supplement retirement income needs. Make sure to take into account any additional skills that may be needed to pursue these opportunities.
  2. Does your work have a phased out retirement plan? If so now is a good time to talk to your boss and start that program. Make sure you also have a good feel for retirement benefits offered by your employer.
  3. Do you plan on retirement before becoming Medicare eligible? If your employer does not offer retiree coverage, arrange for interim coverage through a private insurer.

Being able to answer these questions will help you to piece together your retirement puzzle. Taking time to address these areas helps create a more comfortable transition into retirement. Next newsletter, we will take a look at what we should be doing 1 year out!

“Ready to Retire? Here’s a Five-Year Pre-Retirement Plan.” The Wall Street Journal. 29 May 2011

Real Gross Domestic Product!


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Draper, Inc. Wins 2014 PlanSponsor of the Year by PlanSponsor Magazine

2014 PSOY DraperBeManaged is honored to be the advice provider for the Draper, Inc. retirement plan, which won the 2014 PlanSponsor of the Year for plans <$50MM. Draper’s diligence and commitment to the success of their participants is impressive and it is great to see them recognized for their efforts. We would like to note that utilization numbers listed in the article are lower than actual results (143 enrollments, 32.8% utilization). We are humbled to serve Drapera and their employees as a part of their participant success strategy.

The following is the article from PlanSponsor:

  • Total plan assets/participants: $24.5 million/516 participants
  • Participation rate: 93%
  • Average deferral rate: 8.25% for HCEs*, 5.22% for NHCEs**
  • Default deferral rate: 4%
  • Default investment: Fidelity Freedom Funds
  • Match: 25% of first 6% *Highly compensated employees; **non-highly compensated employee

Looking at employees’ health holistically is second nature for Draper, Inc., a manufacturer of projection screens, window shades and gymnasium equipment. Not only has the company been honored as the healthiest company in the state of Indiana by Healthiest Employers LLC last August, but in January it topped the list of 100 companies recognized by Healthiest Employers, a national organization dedicated to helping improve the wellness of American workers.

In the same vein, Danny Thomas, the human resources (HR) generalist in charge of the 401(k) plan at Draper, thinks about the financial health of the company’s retirement plan participants: “We have a great 401(k) plan design, but how do we help employees truly know if they are on the right path?”

Draper has had a solid participation rate of 93%. The firm offers a 25% match on the first 6% of salary an employee defers, matched on a weekly basis. But even through Draper utilizes automatic enrollment, when an employee is eligible to participate in the 401(k) plan, Thomas demonstrates the personal touch deeply rooted in the company culture. He has a one-on-one meeting with each employee, during which time he signs up almost everyone and talks with them about the features of the plan and how the website works. “Having me spend so much time with employees is very valued and important to the owners of the company,” he explains.

Of Draper’s 516 employees, 316 work in the plant. “We do a lot of hand-holding,” Thomas says. “If you look at our manufacturing side, quite a few of our employees don’t have computers, or if they do, they don’t use them much. They are just not comfortable making plan changes on their own, so they reach out to somebody. I’m the contact person and someone they seem to trust. ”

Early Adopter

Draper PSOY 2014

Tom Sartoris, Cincinnati-based managing director of relationship management at Fidelity Investments, and Draper’s recordkeeper contact, says one of the firm’s strengths is that the plan committee is very methodical. “We’re always reviewing industry trends and capabilities, and they’ve enabled quite a few of these services,” he says. For example, Draper added auto-enrollment to its plan design in 2007 and was an early adopter of managed accounts, beginning with Fidelity’s Portfolio Advisory Service (PAS) in 2007 and expanding managed account options with BeManaged, an independent adviser, last year.

One of the reasons Draper decided to add automatic enrollment to its plans was to help with the company’s failed attempts to pass nondiscrimination testing—something it has been concerned about and is working hard to address. In 2008, Draper hired adviser Jeff Prince, of ProCourse Fiduciary Advisors in Indianapolis, to assist with plan oversight: monitoring expense ratios, creating and maintaining a diversified investment lineup, and incurring the least expenses possible, in addition to helping address the discrimination-test issue.

Almost immediately, the company added auto-enrollment, Prince says. Although those design features have not solved the discrimination-test problems, they do make the deficiencies smaller, and Draper went from a failure rate of 1.26% in 2009 to a projected failure rate of 0.86% in 2013.

From Draper’s vantage point, testing has been used to fuel the fire, Sartoris says, as far as looking at ways to continue to enhance the plan and get to a point of mitigating—if not eliminating—any failure in its compliance testing.

“While [Draper] continues to struggle with it from a pass/fail perspective, the metrics are improving, which means it can still be failing, but it’s not failing as much. With some of the features it has enabled, such as auto-enrollment, it has put a big dent in it,” Sartoris says. “With its implementation of automatic increase in 2013, the benefits will be realized in 2014. [This] will provide a year-over-year benefit and, with that feature being in play, should provide additional dividends.”

New Resources to Help Employees

When reviewing the plan, Thomas says, he realized there was no way to answer questions participants had about investments or income replacement. “We knew there were a number of employees who had signed up initially in the plan but probably hadn’t looked at their accounts for a number of years,” he says. To address this, Draper sought out resources that would help participants examine their retirement projections as well as their overall financial health.

In 2012, for instance, Draper sent out a request for proposals (RFP) for participant education programs, reviewed the results with the committee and brought in BeManaged, a participant advice fiduciary, to discuss the managed account and advice program offered through its Do-It-For-You Portfolio Management service. Once employees got to the point that they could save, Draper wanted to help answer their question of where to put that money. “We wanted to use BeManaged as another part of the process and have an actively managed account with participants on the right path,” Thomas says.

Draper hired BeManaged early last year. The adviser is able to access participants’ accounts at Fidelity Investments and rebalance their portfolios. Participants interested in a managed account solution can still choose between the new adviser or the legacy Fidelity PAS option. Twenty-one percent of the employee population—106 people—enrolled in the BeManaged rollout. Eighty-six increased their deferrals; 78 activated annual automatic increase.

Although participants were saving in the 401(k) plan, Thomas notes that many also used their savings to take hardship withdrawals because they lacked sufficient emergency funds and the plan has no loan provision. “Over the years, our education programs have been focused on the retirement side of the world, so I looked into a program that [considers] overall financial stress on employees, as part of our company wellness initiative,” he explains.

After finding one, Thomas took it to the owners and explained how he thought it could help lower stress levels. The safety and wellness director and chief financial officer (CFO) approved it, and Draper introduced the Dave Ramsey CORE financial wellness program to employees; about 20% of participants have now completed it.

The eight video lessons give participants steps for building a strong financial foundation. Employees could take the program through classes Thomas offered at their offices or could access it online with licenses purchased by Draper.

“It was a way to help employees get over their stress and make sure they are on a path to financial freedom,” Thomas says. It helps identify where they need to save and what steps they need to take, but it does not offer retirement planning.

“Once employees get to the point where they can save, BeManaged is another part of the process that they have access to,” he adds. “Ultimately, this gives them the ability to be better prepared for retirement.”

—Judy Faust Hartnett

December Newsletter – Tis the Season for Chasing Returns

How Investment Bubbles Work

“Keep in mind how investment bubbles work. A bubble always starts with some real factor that takes on increasingly exaggerated importance in the eyes of investors. The bubble expands not on facts but on untethered imagination. People imagine that X will result in ever-increasing prices, and assume that an endless crowd of buyers is still behind them – dot-com stocks, technology, housing, “tronics” stocks in the 60’s, the Nifty Fifty in the 70’s, quantitative easing, tulip bulbs. Regardless of whether the mechanism underlying that concept is fictional, and regardless of how tenuously it is linked to reality, a bubble advances as long as the adherents it gains are more eager than those it loses.” -Bill Bonner, The Daily Reckoning, June 25 2007

Hussman, John P., Ph.D. “The Elephant in the Room.” Weekly Market Comment (n.d.): n. pag. Web. 2 Dec. 2013.

When to Buy and When to Sell

Test Your Stock Market Skills

12.13 Price-Earnings RatioFigure A displays the prices we pay for $1 worth of earnings for the S&P 500 over an unidentified three year period. At which of the five numbered arrows would you think it best to own more stock funds in your account, and at which would it be better to hold a smaller portion of your assets in stock funds?

Without knowing where the line will take us in the future, most investors will say to own more at points “2” and “4” and own less at points “1” and “3. In fact, it is much harder to make a choice at point “5” because we do not know where the line will head from there.

Yet, the natural behavior of the typical investor is a response of “fear and greed”, wanting to BUY more at points like “1” and “3” (after watching market prices rise) and SELL after we reach points like “2” and “4” (when a market sell-off has occurred). “Hindsight bias” leads us to extrapolate from the recent past and assume those trends will continue. It is why most investors choose to buy mutual funds with the best 1-, 3- and 5-year performance and sell those with the worst 1-, 3- and 5-year performance, no matter the type of asset class, style of fund, etc.!

Now, we will let you in on a little secret – Number 5 is where we are today. From point “4” to point “5”, inflation-adjusted earnings have risen less than 2%, while the price we pay for those earnings has risen over 22%. We are paying over $25 for every share of corporate earnings today, far higher than the $18.77 we have paid on average since 1950 and the $16.51 average dating back to 1881. In fact, the price we pay today is identical to the price we were paying in December, 2007 – and we all remember where the line headed from there.

We think it makes common sense to wait for more of the “2”s and “4”s to show up before we entertain becoming more aggressive with client accounts.

What About My Five-Year Retirement Plan?

Here is a continuation from last month’s newsletter about when to start thinking about retirement. Visit last month’s newsletter for information that investors 5 years from retirement should be thinking about.

4 Years from Retirement

  1. Where are you planning to spend your retirement? Look into different communities where you may want to settle. Think about the expenses for moving to those communities.
  2. Do I want to volunteer for an organization in retirement? There are a number of great organizations that need volunteers. If you plan to volunteer, now is a great time to start volunteering to find an organization that fits you!
  3. When should I start taking my Social Security? Social Security can be taken between the ages of 62 to 70. The longer you wait the larger your payout will be. Remember to keep in mind life expectancy, income taxes and spousal benefits.

Being able to answer these questions will help you to piece together your retirement puzzle. Taking time to address these areas helps create a more comfortable transition into retirement. Next month, we will take a look at what we should be doing 3 years out!

Tergesen, Anne. “Ready to Retire? Here’s a Five-Year Pre-Retirement Plan.” The Wall Street Journal. 29 May 2011

Cost of Gifts in “12 Days of Christmas” Increase

Led by double-digit increases in Ladies Dancing and Lords-a-Leaping, the cost of the gifts in the song, “The Twelve Days of Christmas,” have risen 7.7% this year – far outpacing the Consumer Price Index’s measure of inflation, which was measured at 1% in September.

The “Christmas Price Index,” which tracks the cost of the gifts, is compiled by PNC Wealth management each year since 1984.

2013 Gift Price IndexSource:

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November Newsletter – Your Willingness, Ability and Need to Accept Risk

Your Willingness, Ability and NEED to Take Risk

For our best savers, risk can and should be reduced

Risk.When enrolling in our service, our clients are asked a short series of questions designed to help us understand the level of risk appropriate for their investment portfolio. Our goal is to best understand (at least initially), two important characteristics:

  • The investor’s willingness to take risk. Behavioral and personality factors play an important role in this discussion, often a much more important role than their age and/or years to retirement.
  • The investor’s ability to take risk. “Even if an investor is eager to bear risk, practical or financial limitations often limit the amount that can be prudently assumed.”1.

It is the establishment of a risk objective that largely dictates the portfolio’s return objective. Sometimes, though, it is important to work from the other direction – establish a return objective that dictates how much (or how little) risk is appropriate for the participant. In other words, we also want to address our client’s need to take risk.

Let’s look at two examples:

  • Spending Sammy has spent more time living for the moment rather than focusing on a savings approach for retirement. At age 55, Sammy has managed to accumulate $400,000 in his 401(k), and now wants to save $20,000 per year for the next ten years.
  • Saver Sandra started early in her career with a savings strategy, and at age 55, she has accumulated $800,000 in her 401(k) and can still dedicate $20,000 per year in additional contributions.

Sammy and Sandra have both heard they should save at least one million dollars by the time they are age 65 to enjoy their retirement. So they ask their adviser to calculate the rate of return needed to successfully get to $1 million.

For Sammy, a rate of return over the next ten years of 6% compounded will get him there. Certainly an achievable goal. Over ten year historical periods, however, a balanced portfolio of 60% stocks and 40% bonds have failed to meet that objective just about 10% of the time. So Sammy needs to take at least a moderate level of portfolio risk to achieve his objectives.

Sandra is in an entirely different situation. Her $20,000 yearly contributions will get her to $1 million even if her investments earn nothing for the next ten years. Sandra may be willing and able to take risk, but has no need. A more conservative level of risk certainly makes the most sense for Sandra.

If you have done a great job of savings over the years, make sure you think about your need to take risk. The lower returns that may result from lower levels of risk taking may be entirely appropriate for you.

1. John L. Maginn, CFA, Donald L. Tuttle, CFA, Jerald E. Pinto, CFA, Dennis W. McLeavey, CFA, Managing Investment Portfolios, A Dynamic Process, Third Edition, 2007

What About My Five-Year Retirement Plan?

So often we are approached by clients with this question: When do I need to start thinking about my retirement? What they are really asking is how will I know that I am able to retire. The Wall Street Journal, a few years back, published a 5 year pre-retirement plan. Over the next several months, we will be relaying the steps they outlined so investors close to retirement can begin answering this question.

5 Years from Retirement

  1. Start to think about what your lifestyle choices will be in retirement. Talk with your spouse and make sure you are both on the same page.
  2. This is a great time to take a look at the BIG question: Will I have enough to retire? This will be a two-step process of determining what you will need to spend in retirement and what your projected income stream will be from your retirement savings
  3. Make sure you have taken care of the legal questions: Do I have a will? Have I appointed a power of attorney? Have I set up health care directives? How will my estate be handled?

Being able to answer these questions will help get your retirement plan in motion. It will allow you to address problem areas and gain confidence in your overall retirement strategies. Next month, we will take a look at what we should be doing 4 years out!

Looking Forward

  1. The online health care exchange for the Affordable Care Act has been opened; however, it has seen several problems arise. This month the website will have maintenance to help fix these problems.
  2. The advanced estimate for 3rd quarter GDP will be released. This allows for an inside glance at how the US economy is continuing to grow.

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2014 401k Contribution Limits Announced

Unfortunately, there is nothing exciting to report regarding the 2014 401k contribution limits that were announced today by the IRS.

      • Elective Deferrals for 401k/403b/457: $17,500 (no change)
      • Catch-Up Contributions for 401k/403b/457: $5,500 (no change)
      • Annual Compensation: $260,000 (increased from $255,000 in 2013)
      • Annual Additions Limit for Defined Contribution Plans: $52,000 (increased from $51,000)
      • Highly Compensated Employees: $115,000 (no change)
      • Key Employee: $170,000 (increased from $165,000)
      • Social Security Wage Base: $117,000 (increased from $113,700)

October Newsletter – Bond Panic Subsides While the Fed’s Message is Ignored

Bond Panic Subsides, Quietly Says “Nevermind”

And the Fed’s Message Goes Largely Ignored

In May, a rumor that the Fed might be considering reducing their bond purchasing (coined “Tapering”), instigated the worst losses in recent bond market history, as discussed in the September newsletter.

GDP Growth RateIn mid-September, in what was widely described as “a surprise move,” the Fed simply dispelled the rumor, and bond markets responded by returning toward pre-May levels. The May rumors caused massive sell-offs in the bond markets, and much worry on the part of remaining bond investors. Four months later, all that was deemed totally unnecessary, and emotional, short-term investing practices once again were proven to be unwise.

Lost in the noise of the Fed’s decision to not taper is the reason why they are not tapering. The Fed’s bond-purchasing program was originally launched ostensibly to repair the economy and return unemployment to fuller levels. The Fed has decided not to begin tapering because the economy has not responded and unemployment is not improving. In fact, they issued another downward adjustment to their GDP growth forecast for the remainder of this year and into 2014.

Their “no taper” policy is an admission that the zero interest rate policies, intended to improve the economy and reduce unemployment, are not working. Yet they have chosen to double down on their bet and throw more good money after the bad. Do they really believe that after five years of ineffectiveness, a few more months will do the job?

In times such as these, we believe patience is the best investment policy. Your retirement portfolio is a long-term investment. Over time, stock prices are driven by GDP growth, which drives corporate sales and earnings. Lower long-run GDP growth, as we are now seeing, will inevitably lead to lower (we think much lower) stock prices. Moving from bonds into stocks, either out of fear or to chase returns, adds portfolio risk in what is already a high risk environment. Minimizing that risk and protecting client portfolios, remains our top priority.

Another Perspective on Returns

Your retirement portfolio generates investment gains that are comprised of basically two components:

  1. Realized Returns in the form of dividends and interest (the vast majority of those dollars coming from interest payments made by the bond funds)
  2. Unrealized Returns in the form of changes in market value (price, or NAV) of all the funds in your portfolio

Realized interest and dividend payments are cash payments made by the mutual funds to your account; those cash payments are then reinvested into the funds through additional share purchases.

Unrealized returns can easily become losses should the risks we see in the markets materialize to even a small extent. In times like these, one of our portfolio management objectives is to reduce your exposure to unrealized losses, and provide overall account growth through the capture of realized gains available from bond and money market investments.

Contributing to Your Retirement Success

There are many variables that help you achieve your retirement goals. Unfortunately, we as investors are not able to control our entire investing fate. With this in mind, we believe that now is a great time to look at one of the variables that we as investors do have control over- Our deferral rates!

The chart below looks at someone 45 years old and planning to retire at age 65. It shows the impact that saving a little extra money per month could have on retirement income. This person could have an extra $50 dollars a month for 22 years by saving an extra $28 per month now. Increasing contributions by an extra $56 dollars per month could result in $1200 dollars a year in retirement.

take some baby steps

Looking Forward

With the fiscal year 2014 beginning Oct. 1st, the month of September concluded with legislative maneuvers that eventually ended in partial shutdown of the government. Here are a few other things to look forward to this month:

  1. The National debt limit debate will once again be in the forefront of investors’ minds. A similar debate in 2011 led to the first downgrade of US debt.
  2. The implementation of the Affordable Care Act has begun. People are now able to enroll for Health Insurance on the exchanges set up by the federal government and states.

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September Newsletter – Should You Move Your Money Out of Bonds?

Should You Move Your Money Out of Bonds?

9.13 US Bond IndexIn the last four months we have seen some of the worst bond performance in history, and the volatility and potential downside has been a cause for concern for many of our clients.

Figure 1 shows the performance of a typical US Bond Index Fund used in many portfolios, and the unusual downward sloping, saw-tooth line is to blame for the heightened anxiety of late.
There are a couple of very important things we want to emphasize with respect to the bonds that are in your portfolio:

  1. You do not own bonds directly; you own shares in a bond mutual fund. Shares purchased in May have gone down in value, but no money is lost money unless the shares are sold. If you still own them, they have the potential to increase in value in the future. So, when you hear the “experts” discuss bonds, if they are not talking specifically about bond funds, then their discussion probably doesn’t apply to your portfolio.
  2. A retirement portfolio must be viewed as a long-term investment. Reacting to market volatility with short-term solutions will usually hurt long-term gains. Figure 1 represents three months of this fund’s performance. Now look at Figure 2, which shows the same fund over the last three years. When we take a longer perspective, short-term volatility can be less stressful.

9.13 US Bond Fund


Valuation Based Equity Market Forecasts

Selected Charts from Adam Butler, Mike Philbrick and Rodrigo Gordillo: Source Link

 9.13 Rolling 15 Yr Predicted vs Actual Real Total Returns

9.13 Comparing Long term average forecasts with model forecasts

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August Newsletter – U.S. Equity Funds See Highest-Ever Inflows in July

U.S. Equity Funds See Highest-Ever Inflows in July

Bubbles, Bubbles, Bubbles

8.13 Historical PE Rations on 10yr Avg ReturnsStock valuations (the price you pay to own a share of a company stock) have reached silly extremes with July’s market gains. Meanwhile, bond prices fell during the summer, with some bond funds suffering their worst three month period in recent history. How do investors react? – Well, based on the way they are behaving, they want more of the stuff that is overpriced and less of the stuff that is cheaper than in the spring.

According to a CNBC report, “U.S. equity funds saw a record inflow of $40.3 billion in July, according to data from TrimTabs, as the S&P 500 and Dow Jones Industrial Average scale new heights in what some are calling an “invincible summer” for the country’s stocks.”

“Fund investors ended their “love affair” with bonds this summer, pulling $21.1 billion out of debt mutual funds and exchange-traded funds (ETFs) in July, after record outflows of $69.1 billion in June. The outflows in June and July brought an end to 21 straight months of inflows.”

When headlines like “Fund Flows Surge as Stocks Party Like It’s New Years” become the norm and not the exception, red flags should fly everywhere! Stock prices have risen nearly 20% since August, 2011, while corporate earnings continue to languish behind the long-term trend. We’ve seen these excessive behaviors before; June, 1972, December, 1976, September, 1987 and October, 1999. In each of those four circumstances, outsized increases in the value of the S&P 500 were not supported by the earnings those 500 companies were generating. Market declines followed shortly – a 40% decline starting in mid-1972, a 28% decline in just two months starting in October, 1987, a 12% decline in 1976, and the 38% drop most of us remember in 2000. (The 2008 disaster was different; S&P earnings fell from $84.92 per share to just $6.86 per share in just 21 months, and stock prices rationally followed.)

Are we predicting that market declines are imminent? Well, no – it is impossible to tell when irrational behavior turns to rational behavior. But the odds are certainly not on the investor’s side, so chasing additional returns makes little sense.

We will continue to help our clients understand the consequences of reacting to the basic human instincts of greed and fear, as well as all of the biases long identified in the investment community.

Digging Deeper

Challenging you to deeper understanding

For those interested in a deeper understanding of the issues surrounding investing and the economy, we suggest the following links:

    • David Stockman, author of The Great Deformation, on the Federal Reserve and unemployment http://goo.gl/tDWPq
    • Bill Gross, head of PIMCO bond funds, on bond prices, growth rates, and the Fed. Video. http://goo.gl/5wrklg
    • Rob Williams, Director of Income Planning, Schwab, on bond funds in the climate of rising interest rates. http://goo.gl/5Vx3Jp
    • The Numbers Game With Russ Roberts: A Novel Perspective From Ed Leamer. http://goo.gl/09bJBz

Calculating Your Returns

How to find your rate of return

If you are interested in a rough estimate of how your investments are performing over any given period of time, you will need three pieces of information:

  • Your beginning balance
  • The net contributions during the period
  • Your ending balance

To approximate your return, use the following equation:

Rate of Return Equation

Unless you have made big contributions or withdrawals during your measurement period, this calculation will provide you with a very good estimate of your return. Try it out sometime!

Remember When They Said…

“Overall, equities remain attractively valued for investors with a longer-term horizon as forecasts for sustained global economic growth bodes well for equities.” (First Trust Advisors, Weekly Market Update, Week Ending September 21, 2007)

“A “modestly elevated” P/E on record earnings at record profit margins is an exorbitant multiple on normalized earnings. Investors will learn this over the complete cycle.” (The Fed: Magical Fairies and Pixie Dust, Hussman Funds Weekly Market Comment, September 17, 2007)


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July Newsletter – Second Quarter Ends with a Whimper

Second Quarter Ends with a Whimper

Balanced Portfolio Returns Hindered by Rising Interest Rates, Poor Foreign Stock Performance

Stock markets around the world took a turn for the worse after Ben Bernanke’s May 22nd testimony to Congress gave very subtle hints that the Federal Reserve might consider a gradual slowing of the $85 billion dollar per month money printing spree that has driven the markets in 2013.

U.S. company stocks have fallen 3.3% since that time. Foreign stocks have fared worse, declining almost 8%. The Dow Jones Moderate Portfolio Index, a measure of market returns for accounts that accept the risk of 60% of the world equity markets, dropped by 3.8%, losing just short of half of the gains enjoyed earlier this year.

We believe there is much more to this decline than just the nervous reactions of the casino-style investors who are betting on continued money printing. The prices we are paying for stocks cannot be justified by the long-term stream of earnings and dividends companies can generate. Analysts covering the companies that make up the S&P 500 are barking out expected earnings growth rates of 12% or more for the next two years, despite the fact that sales growth for these firms remain in the very low single digits and real economic growth remains well below long term levels.

Remember, investment markets can be driven well above their fundamental value by factors such as money printing, excess investor enthusiasm, or market wide technical momentum. In fact, those are the factors that brought us to today’s high market prices.

Those charged with the prudent investment of client funds, and, who take the challenge seriously, never forget the fundamental nature of the deal – and manage the risk levels of our portfolios appropriately. This investment environment continues to be one where a reduced level of risk makes the most sense.

Interest Rate Spikes and Bond Returns

Interest rates rose rapidly over the last two months, driven by comments from various Federal Reserve officials about the state of our economy. Money market and stable value funds retain their value during periods of rising rates, but bond funds that hold longer term obligations drop in value – during this period, 3% or more.

7.13 Treasury Yield CurveBond funds saw record absolute redemptions of $23 billion in the latest week. In percent of asset terms, the rate of redemptions is second only to those witnessed in the third and fourth quarters of 2008.

We need to keep in mind that the 2008 decline in bond fund prices through the end of October was followed by a 7.8% positive return over the next ten weeks, through mid-January, 2009. So, those who made the decision abandon their bond investments at that time missed out on the subsequent increase.

Our focus for the bond fund portion of client portfolios remains as follows:

  • Primary emphasis on higher quality funds that have demonstrated some measure of downside protection in the past
  • Limited exposure to funds that emphasize longer-term maturities
  • Avoidance of the use of low quality, high yield funds

Does This Inspire Confidence in the Financial Markets?

Punch Bowls and Liquor Holding up Asset Prices?

Below are comments from Federal Reserve Bank of Richmond President Jeffrey Lacker. Presented without comment….

“[O]ver the course of the next 12 months, the Committee will be reducing only the pace at which it is adding accommodation. In other words, the Federal Reserve is not only leaving the punch bowl in place, we’re continuing to spike the punch, though at a decreasing rate over the next year….

I seriously doubt additional monetary stimulus can provide much impetus to real growth right now. But further stimulus does increase the size of our balance sheet and correspondingly increases the risks associated with the “exit process” when it becomes time to withdraw stimulus. That is why I have not supported the current asset purchase program…

Bond and stock markets fell sharply in response, but that should not be too surprising. The Chairman’s statement forced financial market participants to re-evaluate the likely total amount of securities the Fed would buy under this open-ended purchase plan — in other words, how much liquor would ultimately be poured into the punch bowl.

Market participants also had to reconsider their estimate of when the Federal Reserve would begin to remove the punch bowl by raising interest rates. These reassessments appear to have warranted price changes across an array of financial assets. As market participants gain additional insight from the words of Federal Reserve officials or by policy actions in coming quarters, further asset price volatility seems likely.

“Are Your Current Investment Choices Appropriate for Your Age?”

Age Is Only One of Many Factors in Managing Your Portfolio

Many of you have heard from your 401k platform provider warning you that your portfolio’s asset allocation does not match that which is needed for your age. This may have come in the form of an email, a phone call, a letter, or a blurb in your online account.

If you are a BeManaged client, you can be confident that your asset allocation has been set according to your personal risk tolerance, which includes much more than simply calculating your age and assuming your planned retirement date.

We also focus on your tolerance for risk over the short and long term and current market conditions. We have many “older” clients who prefer aggressive portfolios, and “younger” participants who are content with slow and steady progress.

Additionally, we make strategic adjustments to the risk in your portfolio depending upon the current market environment, such as you see in your portfolio now.

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