Rising Gas Prices and the Economic Recovery

As many of you have probably noticed this week, gas prices have risen substantially in just a few days. Here in Madison, I went to work on Wednesday with prices at $3.33 per gallon, and they had reached $3.59 by midday. We have since added another dime as of Thursday evening. This is the case nationally as well, with gas prices up eleven percent since the start of the year and six percent just this month. Oil prices continue to rise due to uncertainty and increasing concerns about the situation in Iran, who has recently stopped exporting to France and the United Kingdom.

Aside from our personal concerns about how this will affect our individual wallets, this trend is also deeply problematic for our economy. Gas prices have already reached $4 per gallon in some areas, and prices are widely expected to approach the $5 range this summer. This could be a serious detriment to an economy that is finally showing some signs of life after a lengthy and painful downturn. As consumers pay more at the pump, they have less money left for discretionary items like TV’s, entertainment, and vacations. Some families are already stretched thin; especially those that have had one or more earners lose their jobs or income.

If consumers stop spending, the economy is at risk for another slowdown. If people are not buying goods, industries have little reason to produce them- and consequently, no reason to hire people in order to produce them. If families can’t make their payments, defaults may again rise.

We have been fortunate enough to have some stability and signs of growth in both the U.S. Economy and in the markets over the past few months, with the S&P 500 up over eight percent so far in 2012 as of Thursday. The rapid increase in the price of oil and gas are something that could hinder our recovery and cause volatility going forward. It is definitely an item worth watching going forward in 2012.

As always, please feel free to contact us with any questions, concerns, or feedback.

Aging & Financial Decision Making

It is widespread knowledge that people are living longer and the U.S.population is getting older.  According to the Administration on Aging by 2030 there will be over 72.1 million people age 65 and older in the U.S.  This is twice the number from 2000 and the group will represent 19% of the population as opposed to 12.4% in 2000.

Making sure that one’s assets are sufficient to last a lifetime is hard enough without adding further complications due to aging.  According to Gregory W. Kasten, M.D., CFP® in the Journal of Financial Planning June, 2011 article “The Impact of Aging on Retirement Income Decision Making” analytic cognitive function has been found to decline dramatically over an investor’s lifespan, starting at age 20.  It is worth noting that age-driven declines in analytic function are partially offset by age-related experience (i.e. wisdom).  Around age 50 appears to be the sweet-spot where practical experience can offset any decline in cognitive function.  Beyond age 50 performance tends to fall.

Does this mean that you should give financial power of attorney to someone the day you hit the half-century mark?  Absolutely not.  However, it is important to recognize that we must take precautions when we get older to avoid making decisions that can adversely affect our financial future.

Here are some things to consider:

Get family or trusted individuals involved

This is easier said than done.  Talking about money with family members is often taboo, but at a certain point you should consider have interested party involved with your finances. 

For some this is simply is letting their children know where to go or who to contact in case of death or incapacity.  Others may want to consider bringing someone with them before financial decisions are made or review the plan they currently have in place.  Another set of eyes can often bring an objective view to the table and often help protect you from mistakes being made.

Protect yourself from financial predators

Get registered on the Do Not Call registry (www.donotcall.gov).  Too many trusting seniors fall prey to telemarketing scams.  This is one way to mitigate some of those phone calls.

Be careful of the “free lunch”.  There are many good seminars out there, but be cautious of sales pitches that are disguised as educational opportunities. The routine often is to talk about a subject to feed into your fears (e.g. running out of money in retirement) and then end the presentation with the perfect financial product to solve your problems.  The telling signs here are if you are pressured to set up an appointment afterward or given some type of “limited time only” offer. 

Be proactive

Having a contingency plan put in place now helps prepare and protect you for a time when your decision making may be impaired in the future.  A good estate planning attorney can guide you through this process.

Tap into resources to help you “maintain your brain”.  The Alzheimer’s & Dementia Alliance of Wisconsin is one organization that can be very helpful in this area.

Follow simple rules

If something is too good to be true it probably is.  Financial products that promise the world with no risks are non-existent.  Everything has some level of risk.  Even a FDIC-insured bank certificate of deposit (CD) comes with liquidity risk (depending on the term) and especially now, inflation risk (dollars worth less in a real return context when taking inflation into consideration).

Any reputable financial planner/advisor will cover the pros and cons of all investment choices, if they don’t it is a huge red flag.

2012 Economic and Investment Forecast

Similar to last year, this is the forecast of what we expect may happen in the economy and the equity and fixed income markets this year. While we will rely on this forecast as we manage portfolios, it is subject to change as conditions warrant. Like 2011, we will offer a review and update mid-year and then an end of year summary.

Economic forecast

We expect modest growth that is in the middle of the range set by the Federal Reserve. The Fed’s estimate of 2.2% to 2.7% growth in GDP is substantially lower than last year. Our estimate for GDP growth is in the range of 2.0% to 3.0% but we are targeting 2.5% for the year. The World Bank has forecasted global growth of 2.5% with strong growth in emerging markets offsetting weakness in Europe. The World Bank has also warned that global growth could be derailed by a potential hard landing in China, an expansion of the fiscal crisis in Europe, or something like an oil shock. We share those concerns. As in 2011, if things do not unfold as we see them, investors would likely retreat to cash, treasuries (safe haven), and gold. We do need to see consumer spending continue to grow to offset a decline in government spending. Expectations are that the consumer will show slow, but steady progress and that businesses will likely show a positive increase in spending too. Throw in a soft landing in China, some positive news from Europe, and progress on U.S. budget deficit and overall debt picture and this could be a good year. However, because things seem to change on a daily basis, volatility is probably one thing that won’t change.

Summary of 2012 Economic Forecast

• GDP will grow around 2.5% for the year
• Europe likely in a recession and may become the “new” Japan with very slow growth and potential deflation
• Policy makers in the U.S. will likely not make significant progress on fiscal issues until after the fall elections
• The Federal Reserve has initiated a new “open door” policy on their discussions and have indicated that they will likely not adjust short term interest rates until late 2014
• Interest rates will likely hold steady due to little or no Fed action
• Unemployment will likely moderate in the 8.5% range
• Inflation will settle slightly to around 2.5% although food and energy prices could force adjustments to the expected rate
• The U.S. dollar will likely increase slightly due to U.S. growth and safe haven status which will impact exports negatively
• Consumer and business spending will pick up slightly

EQUITY MARKETS

Last year we were coming off a year in which domestic equity markets all posted double digit gains and so we expected a return to more average returns in 2011. While lower returns were forecast, no one really expected the level of volatility that we saw, nor the flat to negative returns that were experienced. Many of the same investment advisors are bullish on stocks again this year and look for the broader equity markets to show an approximate 9% gain, which, interestingly enough, is virtually the same as what the consensus said last year. Why? Several factors weigh in just like last year, including concerns over the bond market, a stronger economy, and stock valuations that are below long-term averages. Stocks should benefit from fund outflows in bond funds into equity funds as the economy heats up and fears over rising interest rates take hold. Our expectations are slightly more muted as we expect the broader markets to continue trading in a wide range but end the year approximately 8% higher on the S&P 500 while the mid and small cap indexes could finish slightly better.

Certainly this year will have its share of ups and downs and various sectors will be impacted at different times. As usual, this means that diversification will be very important element to portfolio management. Finally, we have seen the market move very strongly both upward and downward at times over the past couple of years but history tells us that we may still be in a trading range and not yet ready to break out and start a new bull market. If that is the case, we will likely see volatility in returns as well.

SUMMARY OF 2012 EQUITY MARKETS FORECAST

• Consensus bullish feeling on stocks forecasting 9% gains in the market
• Our outlook is somewhat more muted at an 8% gain on the S&P 500
• Corporate earnings will grow by approximately 10%
• Earnings comparisons will be more difficult than the past year or two
• Large, multinational dividend paying corporations will lead the way
• Small cap stocks will benefit from a growing economy
• Tech, consumer discretionary, and industrials will be leading industries
• Healthcare stocks will continue to show strength
• Emerging markets may present some opportunities
• Commodity prices may moderate
• Dividend paying stocks will outperform

FIXED INCOME MARKETS

The performance of the bond market was one of the shining stars in 2011 as interest rates generally remained low and the volatility in the equity markets caused investors to seek more stability. While we expected the bond market to show a reasonable return last year, we expected most of the return to come from the yield and only minimal return from a capital gain standpoint. The returns surprised to the upside as capital growth was strong again. We do not expect 2012 to show the same strength as in 2011 as the Fed has announced that they intend to keep short term rates down until late in 2014 at the earliest and we do not expect the same, extreme level of volatility this year. The bubble bursting scenario that has been talked about on and off again over the last few years seems to have subsided as well. Slow, steady economic growth should continue to minimize those concerns. Returns will be lower than the last couple of years, however, if the economy continues to improve, progress is made on the fiscal crisis in Europe, and inflation cools down as expected. Adding pressure will be the real possibility of market rates ticking higher in the second half of the year, especially on the ten year treasury.

Finally, because we do not expect rates to move dramatically higher, certificate of deposit and money market tools will not add value to portfolios in 2012. Seeking alternative tools to invest short term funds will again be a critical evil for portfolio managers. Short-term individual bonds, ultra-short bond funds, and other similar tools will be used to add some value in the short run. As rates begin to tick higher, dollars invested in these alternative investments will be moved back into more traditional vehicles for parking cash.

SUMMARY OF 2012 Fixed income MARKET FORECAST

• Interest rates not likely to move dramatically higher
• Interest rates likely to tick higher later in the year as the ten year treasury could hit 2.5% plus
• Fixed income return expectations should be lowered and returns will primarily be determined by yield
• Slowly growing economy should prevent a bond bubble bursting scenario
• Corporate bonds preferred over treasuries
• High yield securities will be main source of additional yield although less so than in the past
• Opportunities will be available in muni markets but budget problems do pose some risk
• Treasury Inflation Protected Securities may be under some pressure in the short run but long term prospects continue to show strength
• Floating rate securities provide some protection should rates slowly rise
• Alternative tools such as ultra-short bond funds and short-term individual bonds will be used to park short term cash not needed for distribution needs
• Economic and political turmoil may stress markets but likely less so than 2011
• Budget deficit concerns may force rates higher should no progress be made in Washington

Should be a fun year!  Let us know what you think.

Living Probate and You

Mention probate and most people automatically think of the court-supervised process of transferring property upon someone’s death.  Unfortunately, there’s another type of probate, known as living probate, that needs to be planned for and…avoided! 

Let’s take a few minutes to explore the fundamentals.

What is living probate?  Living probate is a court proceeding commonly known as a guardianship or conservatorship.   It occurs when a person becomes legally unable to manage his or her own affairs.  

How does it work?  As a general rule, a family member initiates the proceedings by formally petitioning the court, claiming that a parent or loved one is no longer competent and requesting the appointment of a guardian and conservator.  The court receives testimony and other evidence, often in a public forum, and makes a determination.  Typically, a conservator manages assets and handles financial matters while a guardian handles personal matters.  

What are the disadvantages of living probate?  Here are several: 

• Living probate is public which often means that anyone can attend court and examine personal records.  This can be a significant source of embarrassment for the subject of the hearing and the family as a whole. 
• Living probate is emotionally painful and difficult.  As noted above, a family member usually initiates a guardianship proceeding.  That, in and of itself, can be extremely difficult for the initiator;  moreover, it can lead to considerable resentment and conflict within the family. 
• Living probate is expensive, since it’s a court procedure.  It should be noted that annual reports to the court are required, thus often necessitating accountant’s fees and so forth. 
• Living probate is often frustrating and time consuming.  Although a conservator may have broad discretion in managing the ward’s assets, it may be necessary to secure court approval for certain actions or when dealing with other family members who strongly disagree and threaten litigation.  
• Living probate can be very uncertain.  As a general rule, the court, after hearing considerable testimony and in its infinite wisdom, generally selects the family member it believes best suited to the task.  Unfortunately, that individual may be the LAST person on your list.  In other words, you will have zero control in determining who cares for you.  

How can one plan to avoid living probate?  Very simply, an individual can significantly reduce the odds of living probate by preparing a comprehensive estate plan.  It should contain the following documents: 

• A funded revocable living trust:  This document normally defines what constitutes disability and allows your physician and a trusted family member to make that determination in private…without court intervention.  That same document identifies your ‘disability trustee’ who becomes responsible for managing your property.  If your property is in trust and managed by your disability trustee, there is no longer any need for a court proceeding.  
• Financial power of attorney:  This individual is authorized by you to manage property held outside of your living trust (i.e. 401(k) account, IRA, annuities, etc.) or…to transfer property to the trust on your behalf when appropriate. 
• Health care power of attorney:  Through this document you select and appoint a trusted individual to make medical decisions on your behalf when you are no longer able to do so. 

Disability and long-term-care insurances can and should be an important part of your ‘disability plan’.  In effect, they augment your planning documents and help ensure a more comfortable environment in the event of your disability. 

Remember…estate planning is an opportunity for you to take better control of your life by making important decisions in advance of any disability.  Take a few minutes to chat with your estate-planning attorney in order to ensure that your personal disability plan is adequate.

Health(y) Savings

By choice or by necessity you may be enrolled in a high deductible health insurance plan.  If you are I hope by now you have heard of health savings accounts (HSAs).  According to http://www.treasury.gov/resource-center/faqs/Taxes/Pages/Health-Savings-Accounts.aspx, the health savings account legislation was signed into law by President George W. Bush on December 8, 2003.  Although it has been around for more than 8 years, it has recently gained some traction the last couple years. 

The HSA is a tax-sheltered savings account similar to an IRA, but funded for future medical purposes as opposed to just retirement.

In order to be eligible for the new HSA, an individual must meet the following criteria:

1. Must have a high-deductible health plan policy  
2. Cannot be the dependent of another taxpayer
3. Cannot be enrolled in or eligible for Medicare or other health insurance
4. Must be under the age of 65

According to the US Treasury department website noted above, a high-deductible health plan is defined as a health plan with an annual deductible that is not LESS THAN $1,200.00 for single coverage or $2,400 for family coverage.

 Benefits –

1. Portability
   The new HSA has the flexibility to be under your control. Even if you change jobs, your HSA funds go with you.
2. Reduction of Insurance Premiums
   By selecting a high-deductible health insurance plan, you can reduce your annual premiums and then use the savings to fund your own HSA.
3. Tax Deduction
   Federally qualified HSA contributions can be deducted from gross income on your federal tax return, providing you with a nice tax break. Some states even allow the deduction on the state income tax return.
4. Long-Term Savings 
   You control the contributions and the investments in the plan. It’s a great way to save long term for unexpected medical costs, or you can use the funds for retirement after age 65.
5. Tax-Free Growth
   Contributions, investment growth and withdrawals for health-related expenses are all tax free.

Contribution Limits –

The amount of your annual HSA contribution cannot exceed the deductible on your high-deductible heath plan or the HSA plan limits, whichever is lower. In 2011, the limits are $3,050 if you have single coverage and $6,150 for a family. These amounts have increased for inflation and will continue to do so in future years.  However, if you have a health plan with a deductible of $1,500, you may not deposit more than $1,500 in your HSA plan for that year. 

The chart below details the HSA contribution limits:

Year	Single	Family	Catch-Up Contribution
2011	$3,050	$6,150	$1,000
2012	$3,100	$6,250	$1,000

Both you and your employer can make contributions to the HSA as long as they don’t exceed the maximum allowable amount. An additional “catch-up” provision is also available for individuals who are age 55 or older.

Expenses Covered –

When needed, the HSA provides for a broad range of tax-free withdrawals for services, including the following:

• Nursing home costs
• Physical therapy
• Doctor, dentist and hospital visits
• X-rays
• Drugs
• Eyeglasses and contact lenses
• Chiropractic care
• Artificial limbs
• Laboratory expenses

Risks –

An HSA holder who uses the money for non-health expenditures must pay tax on the withdrawal, plus a 10% penalty.  After age 65, a withdrawal used for a non-health purpose will be fully taxable, but not penalized. 

In Wisconsin, 2011 was the first year residents who use health savings accounts are able to take advantage of tax breaks for HSAs at a state level, making them even more appealing for us.  Here is a recent article written in the Wisconsin State Journal on Sunday, February 5, 2012: http://host.madison.com/wsj/business/wisconsin-offers-new-health-care-day-care-deductions/article_30aa09c0-4f5b-11e1-be89-001871e3ce6c.html

 Have you considered a Health Savings Account and are the rising costs in health care affecting you??  We look forward to hearing from you.

The Next Lesson: ROTH 401(k) Rollovers

Financial publications, mainstream media, bloggers, etc. have done a pretty good job covering ROTH contributions (both IRA and 401(k)) and related topics the past few years.  By now the average investor can at least tell you that ROTH contributions are treated on an after-tax basis and their withdrawals are tax-free in retirement.

Just when we think we have it all figured out, it’s on to the next lesson…..ROTH 401(k) Rollovers

The Economic Growth and Tax Relief Reconciliation Act of 2001 allowed for ROTH contributions in 401(k) plans, but the first contributions were not allowed until January 1^st, 2006.  Just because these contributions were allowed it doesn’t mean that every company plan adopted the provision.  Right now around one-third of companies allow for ROTH contributions inside of their 401(k) plan, but the number is growing every day. 

Because of the young nature of this provision there haven’t been a large number of rollover transactions involving ROTH 401(k) dollars and very few articles, posts, etc. written on the subject.

Here are a few of bits of information to get us started:

Earnings vs. Contributions

Traditional 401(k) salary deferrals, matching contributions, profit sharing contributions and earnings associated with any of these are all treated the same when it comes to taxes.  These dollars are all considered pre-tax and are subject to ordinary income taxes when withdrawn.  On the flip side, ROTH 401(k) salary deferrals are tracked and treated separately than the earnings associated with those deferrals. 

Because of this separate treatment you are not allowed to rollover assets to a ROTH IRA and then back into a new employer‘s 401(k).  You can however move ROTH 401(k) dollars directly from one employer’s plan to the next (assuming your new employer’s plan allows for ROTH dollars and rollovers).

5-year rule

A qualified distribution from a ROTH 401(k) is one where the full distribution, including earnings, is free from taxes and penalties.  If a distribution is not qualified then the earnings may be subject to taxes and penalties.  A distribution of ROTH dollars from a 401(k) are considered qualified if it has been five years since the first ROTH contribution and you are age 59.5.  Death and disability are notable exceptions to the 59.5 rule.

If you rollover ROTH dollars to a ROTH IRA you take on that IRA’s characteristics for the purpose of the 5-year rule.  If your ROTH IRA had been opened for more than five years then any rollover dollars are considered to have met the 5-year rule once they are comingled in the IRA.  If a new ROTH IRA is opened with ROTH 401(k) dollars then a new 5-year period starts with the date of the rollover, regardless of how long you were making ROTH contributions in the 401(k) Plan.

60-day rollover option

This is best explained by an example:

Your 401(k) balance is $50,000 and consists of:

                -$25,000 in pre-tax dollars from employer matching contributions and earnings

                -$20,000 is from ROTH deferrals you made into the plan

                -$5,000 is from earnings on your ROTH deferrals

You leave your job and decide you will rollover your pre-tax dollars to an IRA but take the ROTH dollars out as a distribution.  Your check with be for $24,000.  Taxes of 20% ($1,000) will be automatically withheld on the earnings part of your distribution ($5,000).

You decide that you don’t need all of the money and decide to put $10,000 back into a ROTH IRA.  This is allowed within 60 days of the original distribution.   If a partial rollover occurs such as this, the portion that is rolled over is treated as consisting first of the amount of the distribution that would otherwise be taxable income.  In this case the rollover would consist of $5,000 of earnings and $5,000 of contribution.  The remaining $14,000 that you kept is not subject to taxes or penalties. 

The only drawback in this case is that 20% was withheld and sent to the IRS.  You can get this money back on your taxes assuming no other tax liability is owed.

Divorce and Financial Planning

Divorce can be one of the most stressful events in a person’s life.  Both spouses inevitably feel the pull of powerful emotions.

In addition, spouses typically experience a sense of insecurity that is largely driven by the prospect of future financial uncertainty.  Such insecurity may be exacerbated by advice from well-meaning family, friends, and legal counsel that unintentionally results in a more hostile and costly environment. 

Good news!  One way to minimize stress and uncertainty is to engage in the financial planning process before, during, and after a divorce.  Both parties will benefit by an equitable solution that is based on facts…rather than emotions.

Where does one start?  Here’s a simple approach.

First.  Make a complete list of all assets, liabilities, and responsibilities…such as children and parents.  Include assets of all types, business and personal.

Second.  Keeping in mind that not all assets are created equal, evaluate each asset in light of its potential benefit to both parties and their individual needs.  Consider liquidity, tax implications, income potential, and possible emotional ties to certain assets.  For example, it may make sense for the spouse with the lower tax bracket to receive assets that generate higher taxable income.

Third.  Assess the liabilities of both spouses and obtain credit reports.  It may be beneficial to close joint lines of credit and refinance mortgages (lock in low rates) prior to formal proceedings.

Fourth.  Carefully analyze the cash flow implications of spousal and/or child support for both parties after the divorce.  This analysis should be undertaken in a way that accounts for income tax consequences. 

Fifth.  Prepare post-divorce financial plans for both spouses.  These plans should contain the essential elements of any good financial plan with the goals of properly addressing estate planning, investment (income), retirement, tax, and risk management needs. 

Make sure all documents, including wills, trusts, powers of attorney, and beneficiary designations, are up to date.  If you plan to remarry, revisit this process in detail as that date approaches. 

Last but Not Least.  Add a financial planning professional to your team.  Remember that decisions based on a rational and solid plan are preferable to those driven by emotion and without the facts.

Off to a Great Start

The markets have treated investors well so far in 2012. Entering Friday, the Dow has increased over three percent, and the S&P 500 is up nearly five percent. Even the foreign markets are up so far, despite being the worst performer in 2011.

So why has January been so positive thus far? There are continued signs of a strengthening economy here in the United States. While we’re certainly not back to running on all cylinders yet, economic indicators are trending in the right direction. Even the long-battered housing markets are showing signs of life. Along with these positive trends domestically, we haven’t seen significant negative news out of Europe so far this year. Much of the market volatility at the end of 2011 was driven by declining economic situations abroad. While this is still one of the primary reasons for concern in 2012, there has yet to be a significant issue or problem that has rattled investors.

It is obviously too early to draw any conclusions from January’s performance, but the consistent upward movement this month is certainly a welcome respite from the volatility of 2011, even if only temporary. There are still serious issues in the European zone that will be a concern going forward, and we certainly would like to see the positive economic news continue in the U.S. before drawing any long-term conclusions about our domestic situation.

January is also a great time to review your financial situation and plan for the New Year if you have yet to do so. As always, your Wealth Manager/Financial Advisor will be happy to assist.

2011 Forecast – Year End Results

What a year it was.  Consider all that the markets dealt with in 2011 and are still dealing with:  Trouble in the Middle East, domestic political issues especially on the state level, Europe and domestic fiscal issues, and on and on and on.  On the whole, however, the year didn’t turn out as bad as it could have given all of the above, but it also didn’t turn out as hoped for.  While the 2011 results are presented here, watch for our 2012 forecast soon.

 

Economic forecast

 

Expecting slower growth than what the Federal Reserve was forecasting, we felt that GDP would grow around 3.0% for the year but due to a slower start to the year we revised that number even lower.  Listed below are our original expectations for 2011, any relevant updates to that forecast (original and adjusted forecasts are italicized) and the results as we have them: 

 

• GDP will grow around 3.0% for the year; revised downward to 2.25% to 2.75%.  At this point, the year end number is expected to be around 1.8%.  We were closer to the mark than many others.
• Policy makers will continue to deal with the current economic situation for the first half of the year and then, if the economy is continuing to grow, will begin to focus on long-term fiscal issues in the second half of the year – The process of dealing with fiscal issues actually began sooner than expected.  While there has been some work in this area, perhaps the biggest effect has been a dramatic decline in the confidence that Americans have in their lawmaker’s ability to make significant and appropriate changes that will revive and sustain the economy.
• The economy may face some headwinds should policy makers focus too much, too soon on long-term fiscal issues – Because so little has been accomplished, there is a high level of uncertainty as to what can be done.  The markets have been very volatile this year partly due to the lack of direction from Washington.
• Unemployment will likely drift lower to 9.25% to 9.5% – The unemployment rate has declined further and faster than anyone predicted and it now stands at 8.5%.  Unfortunately, part of the reduction is due to those who have given up looking for a job and are now not officially counted as unemployed.  
• Interest rates will hold relatively steady due to little or no Fed action – In fact, the thought process now is that rates may not rise until 2013 at the earliest.
• Core inflation will increase slightly, to around 1.5% while food and energy prices will see more significant changes – Food and energy prices did see significant swings in 2011 although they declined slightly at the end of the year.  Core inflation outpaced expectations and currently stands at 2.2% which is the highest level since October, 2008.
• The U.S. dollar will decline slightly against foreign currencies but the threat of a currency war will help soften the decline – The general direction has been downward although there were times when a rush to safety has caused the dollar to rally.  The decline in the dollar helped increase exports – which was one of 2011’s bright spots.
• Consumer and business spending will pick up slightly – Generally, this has been true although it is also industry specific.  Consumer spending outpaced expectations over the holiday season bringing both hope and concern for 2012.

 

EQUITY MARKETS

 

Heading into 2011, we were somewhat optimistic, suggesting that the S&P 500 could show a 9% plus gain on its way to a level of 1,373.  Even with the turmoil in the markets, the S&P 500 was at 1,320.64 at the end of June.  However, trouble was brewing and ultimately the Index finished a hair below breakeven.  Our forecast for 2011 and the results:

 

• Most financial planners and investment managers bullish on stocks – optimism faded and an extreme level of volatility took over making it increasingly hard to hold onto a bullish outlook.
• S&P 500 end of year target of 1373 which is approximately a 9.2% gain – we finished at 1257 basically breaking even although showing a very slight loss for the year.
• Corporate earnings will grow by approximately 10% – Forecasted earnings are likely to be on the low side as expectations for full year 2011 should be around 15%.  
• Earnings comparisons will be difficult – As noted above, earnings came in better than expected.
• Large, multinational corporations will lead the way – This held true as investors sought safety in financially strong, multinational companies.  The fact that the Dow Jones Industrial Average led domestic indexes is strong evidence of this. 
• Tech, energy, and industrials will be leading industries – Results are a mixed bag here.  While these sectors did reasonably well, they were overshadowed by health care, consumer staples, and utilities all areas expected to do well in an uncertain economy.
• Commodity prices, including oil, will increase – Another mixed bag as certain commodities soared only to fall flat including gold and copper.  Oil has been up and down but has generally stayed in the $90 to $100 a barrel level.
• Dividend paying stocks will outperform – As noted above, financially fit corporations, especially those paying a reasonable dividend, did well in 2011.

 

FIXED INCOME MARKETS

 

Like many others, we were wary of the fixed income markets as we entered 2011.  With a growing economy we expected the perception of rising rates to impact the markets in a negative way.  Some felt a bond bubble was building and if it burst would cause significant harm to fixed income investors.  Muni’s were under the gun as state and local governments struggled to meet budget demands.  The only way to garner income was through higher yielding securities.  The year turned out better than expected.  Our expectations for 2011 and related notes including year-end results:

 

• Interest rates not likely to move dramatically higher – We hit the mark here.
• Upward ticks in inflation and interest rates will occur later than earlier- While rates did tick up early in the year, they settled back down.  Inflation began to tick higher but wasn’t a significant issue due to slowly growing economy.
• Fixed income return expectations should be lowered and returns will primarily be determined by yield – Generally this held true.
• Slowly growing economy should prevent a bond bubble bursting scenario – This held true.
• Corporate bonds preferred over treasuries – This was a mixed bag as treasuries rallied due to safe haven status.  Corporate bonds had a nice run due to strong balance sheets.  Treasuries returned 9.81% and corporate bonds returned 8.15% as measured by aggregate indexes.
•  High yield securities will be main source of additional yield – for greater yield this was certainly true but high yields also were under pressure at times due to risk concerns.
• Opportunities will be available in muni markets but budget problems do pose some risk – This held true and will continue to be true as we enter 2012.
• Extending duration may be more valuable than taking on more risk – This certainly held true as rates didn’t move and concerns over risk were the primary concern.
• Use of alternative tools such as TIP’s and floating rate securities provide some protection – held true to some degree.  Floating rate securities finished the year slightly positive while TIP’s had a solid year.  Fixed income as a whole provided some protection against the volatility experienced in the equity markets.

 

While forecasting is just that – a forecast or prediction of things to come, we did reasonably well.  The stock markets did not do as well as expected or as well as they should have given the strength in earnings.  Fundamentals took a backseat to volatility and left investors struggling to make sense of things.  The fixed income markets were, if anything, more stable than expected and provided some relief.  Concerns over fiscal issues in Washington and (especially) in Europe caused almost daily swings in the markets that pushed many investors to the sidelines.  Those that stayed in the game took refuge in financially strong large cap companies that paid dividends and/or were in defensive industries such as health care, consumer staples, and utilities.

 

Watch for our 2012 Forecast soon.

Are You “Maxing Out” Your 401(k)?

In talking to participants in 401(k) Plans in and out of my purview over the years I often hear the comment that one is maxing out contributions to their 401(k) Plan.  I’ve found that this term can mean different things and some people may be short-changing themselves when it comes to saving for their retirement.

 For 2012 the maximum contribution an individual can contribute to a qualified retirement plan such as a 401(k) is $17,000 (up from $16,500 in 2011).  If you are over the age of 50 you can contribute another $5,500.  Contributing $17,000 is the true definition of contributing the maximum allowable amount to your 401(k).

 The more commonly used definition of “maxing out” is contributing up to the percentage that your employer will contribute on your behalf.  According to the Profit Sharing Council of America the average employer contribution is 3% of pay with the most commonly used matching formula of $0.50 of each $1.00 deferred up to a limit of 6% of compensation.  While an employee in this case will no longer receive employer contributions on deferrals above 6% of their pay, they are certainly not restricted from contributing more.

 Many financial planners will use the 10-15% of pay as a target range of what one should save each year to increase your chances for a secure retirement.  In the above example an employee that stops contributions at 6% would be saving 9% when including the employer’s match.  For reference, the State ofWisconsin’s Retirement System, one of the more highly-touted public pensions, uses a contribution formula that is around 11-12% of an employee’s annual pay.

 When evaluating your retirement savings you should pay extra close attention to not only what your employer is contributing, but also what you are allowed to do.