Volatility Returns: The Markets’ Response to Change – Weekly Update for May 22, 2017

Early last week, both the S&P and NASDAQ recorded all time highs before tumbling along with the Dow as political concerns rose. By Friday, though, the markets had largely rebounded and steadied. The S&P 500 closed the week down 0.38%, the Dow saw a 0.44% loss, and the NASDAQ reported a 0.61% decline. The MSCI EAFE reported up 0.79% for the week.

The CBOE VIX is designed to measure market volatility by using S&P 500 put and call index option prices. For most of the year, volatility in the markets has been low. However, the CBOE Volatility Index (VIX) spiked 40% midweek before falling back by week’s end, indicating a possible increase in market volatility.

Through the week’s ups and downs, investors followed some other important economic developments.

LAST WEEK’S DEVELOPMENTS:

  • Solid Regional Business Index
    The Philadelphia Fed Business Outlook Survey again pointed to progress in the factory sector. While the consensus range was 16.0 – 25.0, the General Business Conditions Index-Level reported 38.8.
  • Mixed Housing Reports
    New home sales remained strong as the housing market index rose 2 points to 70. The data came out well ahead of the 65 – 69 consensus range. However, April housing starts were lower than expected. Housing starts are now at a 1.172 million annualized rate, after falling 2.6%.
  • Household Debt Rises
    Total household debt rose to a new high, reporting a $149 billion increase to come in at $12.73 trillion. Student loans and auto loans were major contributors to the rising debt:

WHAT’S AHEAD

Economy
Manufacturing output rose 1.0 percent in April, the strongest monthly result in over 3 years. As such, investors will track how the rest of the second quarter shakes out. In addition, we will be interested in this week’s housing reports, hoping for a better handle on where this up-and-down sector is heading.

Geopolitical
Financial markets could experience some headwinds as geopolitical situations fester. Concerns over North Korea and political opposition to globalization remain. In addition, Brazil is facing political disruption and a deep recession that could mean problems for companies with business interests in that country. Similarly, continuing political challenges for the Trump administration may adversely affect proposed tax reform, health-care legislation, and infrastructure initiatives.

As always, we will continue keeping abreast of market and economic updates. We encourage you to focus on your long-term financial outlook. Should you have any questions, we are happy to help.

ECONOMIC CALENDAR

Tuesday:  New Home Sales
Wednesday:  Existing Home Sales
Friday: Durable Goods Orders, Consumer Sentiment

15 Financial Resolutions for 2015

Image courtesy of FreeDigitalPhotos.net/noppasinw

Image courtesy of
FreeDigitalPhotos.net/noppasinw

As 2014 comes to a close, it’s time to start thinking about how to make 2015 a success for you and your loved ones. Though there’s little consensus about their origins, we know that Americans have been making New Year’s resolutions since at least the 1770s. In 2013, 54% of Americans made resolutions about their finances.

Here are 15 financial resolutions to help make 2015 healthy, happy, and successful:

  1. Set aside emergency savings

Emergencies are unpredictable, and a serious illness or sudden financial need can derail your finances. Prepare for unpredictable expenses by putting aside three to six months of expenses in an easily accessible cash-equivalent account.

  1. Make a budget and stick to it

Budgets may sound like a lot of unnecessary work, especially if you’re financially comfortable, but it’s quite easy to let your spending go off the rails if you’re not tracking it in some way. Contact us if you’d like some tips on making budgeting hassle-free.

  1. Spend less and save more for the future

Most Americans could stand to put more money away for the future. We recommend keeping separate “buckets” of savings for short-term and long-term goals and leveraging tax-advantaged accounts where possible. Let us know if you’d like help saving for specific goals so that we can help ensure you have the right strategy for your needs and timeline.

  1. Make retirement plan contributions regularly

We believe that “time in the market” is critical to long-term investing success. Instead of waiting until the last minute to make your annual contributions, give your money more time to grow by making automatic contributions to your accounts every month.

  1. Maximize your retirement plan contributions

Tax-advantaged retirement accounts are one of the most powerful tools in your financial arsenal. Make the most of them by contributing as much as you can each tax year. We usually recommend maxing out employer-sponsored plans first in order to take advantage of any matching contributions your employer may offer. Give us a call if you need help understanding your retirement account options.

  1. Pay down debt, especially high-interest credit card debt

High-interest debt can make it very hard to get ahead financially. If you’re carrying significant debt, make it a priority to pay down the debt and get out from underneath high interest payments.

  1. Set goals for the future and work with a professional to create strategies to help you work towards them

In our experience, people who set goals for themselves and create strategies to pursue them are much more likely to see success. One study found that investors who leveraged specific financial strategies saw greater long-term financial success. Sit down with your loved ones to discuss your financial goals; when you’re ready to discuss your thoughts, call our office to schedule a no-obligation consultation.

  1. Create a legacy that makes a difference in the world

We believe that a rich life is about more than financial success and a comfortable lifestyle. Whether you want to leave something to your loved ones, or contribute to causes close to your heart, take time to think about the legacy you will leave for the future.

  1. Review your estate planning and legal documents

Your core legal documents should be reviewed regularly to make sure that they keep up with your life. If it’s been a few years since you took a look at your documents, dust them off and make sure that they still represent your wishes.

  1. Review the beneficiaries of your financial accounts and insurance policies

Most Americans have a significant number of financial accounts that they have accumulated over the course of their life. Take the time to gather up your account documents and make sure that the beneficiary information is still current; remember, beneficiary provisions are independent of your will or other estate provisions.

  1. Take care of your health

Healthcare is a major expense for many Americans, especially when serious illness strikes. Take steps to protect your health (and your wallet) by living a healthy lifestyle and being proactive about preventative care. 

  1. Protect your credit

Identity theft and financial fraud are serious threats that can compromise your financial wellbeing. Protect yourself by reviewing financial statements and bills carefully for unauthorized activity. Check your credit report for free at www.annualcreditreport.com.

  1. Review your tax strategies for potential savings

Recent changes to tax laws mean that you may be paying too much in taxes this year. Give us a call to discuss tax strategies that may help you reduce your tax burden.

  1. Involve your spouse and loved ones in your finances

If you (or your spouse) don’t get involved in the family finances, it’s time to start. Work together to make financial decisions and make sure that each of you understands the overall game plan for your finances. At a minimum, make sure that your loved ones know the location of financial accounts and understand your wishes.

  1. Keep your resolutions!

One study found that just 8% of New Year’s resolutions are actually kept. Improve the chances that you will keep your resolutions by making your goals simple, concrete, and actionable. Instead of saying: “I will save more for the future in 2015,” say: “I will contribute $4,500 to my retirement accounts by December 31, 2015” or “I will pay off $2,000 of credit card debt by April 15.”

As 2014 draws to a close, we would like to extend our thanks for the trust and confidence our clients have placed in our firm. Our clients made this year one to remember and we are sincerely grateful for the privilege and opportunity to serve. We look forward to serving you and yours for many years to come.

If you have questions about your future or would like some support in keeping your financial resolutions, please give us a call. Together, let’s make 2015 a success.

Is It Actually a Good Idea to Pay Off a Low-Interest Mortgage?

Home loans frequently make up significant amounts of household debt, and reducing as much debt as possible before entering retirement can seem like a good idea. A 2013 survey found that 40% of Americans age 55 and older believe that paying off their mortgage was the smartest financial move they ever made.1 There’s also a certain peace of mind that can come from having one less bill to pay in your later years.

However, given today’s low interest rates, your mortgage may be the cheapest form of debt to hold, and it may make sense to use the extra money in different ways. Given the choice, should you pay down your low-interest mortgage as soon as possible, or use the extra income to save more aggressively?

As with so many things, the answer is: it depends. Everyone’s personal financial situation is different, and there are many factors to consider before making a decision about your mortgage.

Here are some questions to help guide your decision-making:

Are you maxed out on contributions to tax-advantaged accounts?

If you have crunched the numbers on your retirement assets with a financial advisor and feel comfortable with your savings, you may be able to devote more income to extra mortgage payments.

However, if you haven’t maxed out your contributions or are concerned about your retirement preparation, you might be better off putting extra money into tax-advantaged saving accounts. The final years before retirement represent your last opportunity to add significantly to your nest egg, and it’s important to make sure you have enough put away.

How would your taxes be affected by paying down the mortgage?

For many people, mortgage interest payments are deductible on federal taxes, which reduces the effective interest rate paid on the loan. Since contributions to retirement accounts, health savings accounts, and other qualified accounts are frequently tax deductible, making extra contributions (instead of extra mortgage payments), may add more to your bottom line.

However, if you are no longer able to deduct the interest on your mortgage, and are already maxed out on your tax-advantaged contributions to retirement accounts, paying down your mortgage could make financial sense. Keep in mind that taxes are just one part of the overall picture, and it’s important to view your financial situation holistically.

Do you have adequate cash reserves?

Emergency savings are a critical part of your long-term financial plan. Unexpected life events like the loss of a job, a sudden illness, or expensive repairs can put a strain on your household finances. Having several months of income saved in cash can help you cover major expenses without being forced to liquidate investments or go into debt. If you don’t already have an emergency reserve – or don’t have enough money set aside – you should consider saving those extra mortgage payments for a rainy day.

Have you weighed risk against potential return?

Paying off high-interest credit card debt or personal loans is a no brainer. The average variable credit card APR was 15.61% at the end of April 2014.2 This means you’re essentially ‘earning’ that much back on every dollar you pay off. You’re not likely to find investments paying that much consistently, so your priority should be to pay off that debt as quickly as possible.

However, given how low mortgage rates are – especially if you’re getting a tax break on the interest – you’ll want to carefully weigh the possibility of earning market returns higher than your interest rate. Market returns are not guaranteed, so it’s a good idea to have a financial representative walk you through these calculations and help you understand your own attitude about risk and return.

How would paying off your mortgage affect your peace of mind?

Most financial decisions have emotional components, which is why it’s so important to develop an understanding of your long-term goals. For many folks, knowing that they own their home free and clear outweighs most financial considerations. If being able to pay off your mortgage early helps you sleep better at night, it might be the best decision for you.

Conclusions

As you can see, there are many important variables that must be factored into a decision about paying off your mortgage. If you have any questions about the benefits and drawbacks of holding a mortgage or any other loan, please give us a call. We frequently help our clients evaluate their personal financial situations and help them determine the right strategy for their needs and goals.

 

Are Student Loans The Next Bubble?

As graduating students look to build their resume they might want to leave out one accomplishment: most indebted class ever to graduate.  According to National Center for Education Statistics, the average student graduating in 2014 will have $33,000 in student loans.1

Capture

Not only is the average debt rising faster than inflation, the number of students needing to take out loans has risen from less than half in 1994 to just over 70% this year.1 The total debt is closing in on $1 trillion according to Federal Reserve Bank of New York, Bloomberg.2

Capture2

According to the Consumer Financial Protection Bureau, CFPB, more than 7 million borrowers of federal or private student loans were more than 270 days late on payments which puts them in the default category.  This means that from the $1 trillion of federal student loans about $90 billion has been defaulted on.3  Could this lead to a crisis similar to the subprime loan crisis of 2008? Although student loan debt is second in ranking on consumer debt it is dwarfed by mortgage debt.2  This chart should help put the two into perspective when it comes to the impact on our economy.

Capture3

Also, on average 90% of student loans are Federal student loans which are backed by the government.2   Having such a large amount backed by the federal government would reduce the amount of pressure put on the lending industry.  In 2006 leading up to the subprime crisis, 84% of those loans were from private lending companies.4  This means that the smaller size of the student loans and the minority being held privately would keep the student “bubble” from impacting the overall market in the same way that the subprime loans did.

So if there isn’t a risk of repeating the subprime crisis why all the talk about student loans lately?  One of the biggest concerns is the trend of both the student debt and the earnings the students are getting out of college.1   If this trend continues we could see more students in default as well as a drag on the growth of the Gross Domestic Product.

Capture4

There is some relief, Federal loans can sign up for the “Income Based Plan” or the “Pay As You Earn”.  These plans keep the payments below a certain percent of the income of the borrower and forgives any debt after 25 years (10 years for public service employees).5  Allow qualifying and the annual reporting can be a hassle.

You might be asking; “I have young kids that I hope will attend college one day, what can I do?”

  1. Start planning in advance for your children, look into opening a college saving plan that can grow tax free to increase your savings for college.
  2. Encourage your teenagers to consider the cost of college compared to the average salary for the career they plan on pursuing.  Some careers are better achieved by apprenticeship or an internship.
  3. Apply for all scholarships that are available for your children.
  4. Consider the costs of dipping into your retirement account.  It may be better for your kids to take out some student loans if it will keep you from putting your retirement in jeopardy.

Always seek advice from your financial advisor when making these decisions.

 

 

Resources

  1. http://blogs.wsj.com/numbersguy/congatulations-to-class-of-2014-the-most-indebted-ever-1368/
  2. http://us.milliman.com/insight/insurance/The-student-loan-debt-crisis-in-perspective/#2
  3. http://www.usnews.com/news/articles/2013/08/06/half-of-outstanding-student-loan-debt-isnt-being-repaid
  4. http://www.forbes.com/sites/stevedenning/2011/11/22/5086/
  5. https://studentaid.ed.gov/repay-loans/understand/plans/pay-as-you-earn