Stock Markets

The chart to the right shows what we have had to put up with recently:  all but REITs were down for the quarter (all were down since the beginning of the year), and emerging markets were downbig, showing variability over the trailing twelve months.  These periods remind us that markets do go down, but this is what it means to accept risk.

equity market returns 093015

Stock markets reflect the uncertainty of today’s economic environment, which includes the slowdown in China’s economy, the short-term impact as well as the longer-term sustainability of the sharp fall-off in the prices of energy and other commodities, and the effects of the Fed unwinding its easy monetary policy of the last seven years.  The impact of all of these factors on emerging market economies is especially worrisome and helps explain the sharp fall-off in those markets.

Perhaps the sharp fall-off in markets is a repricing of uncertainty.  Yet, all of these things have been pretty well known for some time.  The upheaval in just the last couple of months is somewhat a mystery, but is oftentimes how markets work.  Diversification has not been helpful in recent periods – most everything is down.  All that having commitments to bonds got us was avoiding losses, which, I suspect, is the best we can expect for a while.  Yet, I don’t know a better alternative than remaining committed across the board based on established tolerances for risk.  It is the best way to deal with market volatility and the unknowable future.

Bond Markets

Bond markets were about flat for the quarter but up a bit year-to-date.  While providing some respite from recent losses from stocks, this is about what we can expect.

Interest rate increases – feels like we’re “Waiting for Godot”!  The Fed seems to be poised to raise interest rates, which has been the case for a long time now.  This is beginning to take on some of the characteristics of the play “Waiting for Godot”, by Samuel Beckett.  I can’t help but wonder if “Godot” will ever get here, although I’m sure the Fed will eventually raise rates.  While many blame this uncertainty on what’s happening in today’s markets, it’s hard to imagine a 0.25% increase will cause much of an upheaval once it is digested.  But, it does reflect a change in policy that could result in dislocations.  We’ll see.

Emerging Markets   

Emerging markets were off more than 17% in the quarter and year-to-date.  A diversified emerging market portfolio includes allocations to over fifteen countries ranging from China (16%) to Chile (2%).  Using Exchange Traded Funds as proxies, the accompanying table shows the quarter and year-to-date returns in the countries that dominate (86%) the portfolio.  Note the evidence of contagion among emerging market economies as all experience a sharp fall-off in the September quarter.  And, in most instances, it was these results that dragged the year-to-date returns into negative territory. emerging market sept 2015

It seems clear that investors in stocks of emerging market countries have adjusted to the uncertainty of today’s global economy.  We will have to wait and see whether they have gone too far.  In the meantime, participation in the risks and returns of this asset class – which makes up about 14% of worldwide stock markets – is important to a well-diversified stock portfolio.

Predictions and Descriptions

At times such as these, everyone seems to be telling us to get ready for tough times ahead.  Maybe, but market prices anticipate the future about which uncertainty always abounds.  Price changes are driven by surprises.  You can’t predict surprises!

While the causes are constantly changing, if we accept that how market participants deal with an unknown future is consistent, then we can use past behavior to describe the future in terms of both what’s expected and, importantly, a well-defined range of possible outcomes.  The range for most stock markets is quite large – exceeding an annual rate of plus or minus 16% two-thirds of the time.

Stock market participants always expect positive outcomes.  Prices are established from arm’s length transactions by traders satisfied to buy from traders equally satisfied to sell.  Neither would trade unless they expected a positive result.  Of course, in the short run there will be winners and losers.  But, for them to continue to play, the ups and downs will even out and over the long haul markets will produce what traders, on average, expect.  How long must we wait for this to happen?  It could be a while. But, the alternative is to make moves based on someone’s prediction of a surprise!

Yale Beats Harvard – Again

So trumpeted a recent WSJ headline. Yale’s endowment, managed by David Swenson, earned 11.5% for the year ending June 30th.  His acolytes at Bowdoin and MIT earned 14.6% and 13.2%, respectively.  This compares to about 1% that benchmark proxies for a well-diversified portfolio would have earned.  How do these endowments do it?  They hold assets, generally under a category called “Alternatives,” that are not valued from arm’s length transactions – the returns can be whatever they want them to be!

College endowments don’t need to worry about needing cash – when they need money they go to the alumni.  So, the ability to readily turn investments into cash (liquidity) isn’t important.  Endowments can assume this liquidity risk, which can be large and should provide a significant premium.

Now it just may be that David Swenson has special gifts that allow him to identify assets and managers who will provide extraordinary results through time consistently.  And, these gifts can be passed on to whoever will listen.  However, the true value of the endowment’s nonmarketable assets will not be known until there is a need for cash, which is apt to be never.  In the meantime, they have latitude in reporting values and returns that are based on someone’s estimate.  Take with a grain of salt results posted from assets, the values of which are not determined from arm’s length transactions.

Most Americans are overwhelmed with the array of options when searching for health insurance coverage in addition to Medicare Part A and B.   Before answering a common question people ask regarding Medicare, it probably makes sense to explain the different components:

Medicare Part A:  If you paid Medicare taxes while employed (most people do), there is typically no premium associated with Medicare Part A.  The majority of individuals are automatically enrolled in Medicare Part A once they reach age 65.  Generally speaking, Medicare Part A covers partial costs for hospital visits.

Medicare Part B:  There is a varying premium associated with Part B of Medicare depending on your reported income.  For married couples earning $170,000 or less, the premium for 2014 was $104.90 (can be deducted from Social Security benefit if desired).  If you fail to enroll in Part B when you’re first eligible (age 65), you’ll have to pay a late enrollment penalty for as long as you have Part B.  This is typically a 10% increase for each year you COULD have had Part B, but is subject to change on an annual basis. You will not have to pay a late enrollment penalty if you are employed and elect to use your employer’s coverage instead.  If this is the case, you must still enroll in Medicare Part A and provide proof of coverage through your employer at the time you enroll in Part A.  We encourage our clients to sign up for Medicare three months prior to turning 65 years of age to avoid the late enrollment penalty.

Medicare Part C:  Part C is more commonly referred to as the “Medicare Advantage Plan.”  This part of Medicare is optional and most individuals purchase this part of Medicare to supplement Part A and B or purchase a full blown Medicare Supplement Plan.  I will explain this in further detail later on.

Medicare Part D:  This is another optional part of Medicare you may purchase to cover the costs of medications.  This is usually built into Medicare Advantage Plans (Part C) but must be purchased additionally with Medicare Supplement Plans.

Unfortunately, Medicare Part A and B only cover a portion of medical costs.  As a result, most people elect to purchase some type of additional supplemental insurance.  This is where Medicare can become complicated and people become frustrated; leading to the most frequently asked question:

Do I purchase a Medicare Supplement or Advantage Plan (Part C)?

Ok, this question is much more complex than it seems.  Since I am trying to simplify Medicare, it would make sense to first explain the difference in a couple sentences:

Simply put, if you are in good health and do not visit doctors often, you can get away with a Medicare Advantage Plan (Part C).  If your health is deteriorating, you visit the doctor(s) more than you would like, and/or you simply want the most robust coverage available, then a Medicare Supplement plan is probably a better option.  Hopefully the chart shown below can help you decide which is most appropriate:

Medicare Supplement
Pros:
– Most comprehensive
– Variety of different plans/premiums
– Accepted by majority of medical providers

Cons:
– Higher premiums than Advantage Plans
– Must purchase Part D in addition (drug coverage)

Medicare Advantage Plan
Pros:
– Very Inexpensive
– Built-in drug coverage

Cons:
– More restrictive networks
– High variability between plans
– Higher copays than Supplemental plans

As shown, Medicare Advantage Plans usually have very small or even no premiums because the insurance company is compensated by your Medicare Part B payment.  However, these are not as comprehensive as Medicare Supplement plans.  There are copays for doctors and higher copays for specialists, but even if you are the healthiest person there is no reason not to enroll in one of the zero premium plans (…it’s free, but you get what you pay for).  Most plans also have built-in prescription drug coverage (Part D).

Medicare Supplement Plans have a higher monthly premium and are more comprehensive.  There are several different plans to choose from and several different insurance companies that offer these plans.  Most people don’t realize that the insurance companies charge different premiums for identical plans!  As of 2015, there are ten Supplement plans that are distinguished by a letter, such as Plan F or A.  These plans are standardized across all insurance companies and you will get the exact same benefits purchasing a Plan F from any company.  However, the premiums the companies charge are different depending on the company you choose!  There is absolutely no reason to not purchase the lowest cost insurance provider of whatever Medicare Supplement plan that you decide makes most sense for your situation.  Of all the different Medicare Supplement Plans, Plan F is the most comprehensive (and expensive) and classified as the “Cadillac” plan.  There are typically no copays or out of pocket costs outside of the monthly premium paid.  However, you must purchase a prescription drug plan (Part D) in addition to any Medicare Supplement.

Fortunately, medicare.gov lists all providers AND premiums of Medicare Supplement Plans sorted by zip code.  The Medicare Advantage plans are not standardized and differ from company to company.  Please visit medicare.gov or contact Rockbridge if you would like assistance regarding Medicare options.  We understand that this is very confusing for consumers, and with our expertise we can point you in the right direction!

As the newest member of the Rockbridge team, I thought I would take this opportunity to introduce myself. Whether you are a client, or another financial services professional, I believe it’s worth taking the time to explain my background, how I got here, and why I decided to pursue a career in the financial services industry.

My name is Claire Ariglio. I graduated from Elmira College in 2014 where I studied Business Administration and Economics. Right out of school, I was hired as an Operations Administrator at a local broker-dealer. Fast forward about a year and a half, and here I am:  a financial planner at Rockbridge Investment Management.

Throughout middle and high school I had an idea, though broad and vague, of what I wanted to do with my life:  help people and work with money or numbers. I was good at math, I was Treasurer of my class for as long as I could remember, and I grew up in a household of accountants; something along the lines of money and numbers had to be good fit. However, I struggled with the specifics of how I was going to make that happen, especially the “helping people” part.

When I entered my freshman year at Elmira College, I was unsure what I wanted to study. I took classes in mathematics education and accounting before I finally declared myself as a business administration major. In my sophomore year, my economics professor approached me and asked if I had ever considered studying economics. She told me I had a natural inclination towards the science and convinced me to give it a shot. Although I never saw myself studying economics, I grew to love it. For my remaining years at Elmira, I learned about strategic management, corporate finance, the stock market, international trade models, development economics, and even a little bit of game theory.

After graduating from Elmira College, I was hired as an Operations Administrator at a local broker-dealer. I thought it would be an excellent introduction to the financial industry, and would serve as the perfect combination of my business and economics degrees. While I was there, I was able to gain a lot of first-hand experience working with clients and was exposed to the industry in a way that can’t be taught in a classroom. After working there for a little over a year, I had the self-realization that I wanted to be more than a member of the operations staff. Although I enjoyed working as part of a team to support our advisors, I wanted to have more of a forward-facing, upfront position that I would be able to grow into. I wanted to have more control over what I was doing on a day-to-day basis. Enter Rockbridge.

At that point, financial planning hadn’t really been on my radar. However, when I heard that Rockbridge was looking to hire more financial planners, I figured why not look into it? It could be the perfect career opportunity hiding right under my nose. I contacted them right away, we set up a few interviews, and the rest, as they say, is history.

Once I learned how Rockbridge conducted their business, I knew it was a good fit both personally and professionally. It was the perfect blend of my love of finance and numbers, and being able to help people. A person’s wealth is one of the most integral parts of their lives, and most people struggle to manage it effectively. There are so many decisions to make when it comes to retirement – “Where and how much should I be saving?” “Is my portfolio diversified?” These are primary concerns for the average person and they are difficult to consider while attempting to maintain a financially stable life; it can be overwhelming without the guidance of a professional. That’s what makes financial planning such a rewarding experience. It’s a job that allows you to ease financial worries simply by laying out a person’s finances all in one place, and getting them on track for a comfortable retirement. The fee-only investment philosophy that Rockbridge implements is also something I love; it truly allows an advisor to act in the best interest of the client without some monetary figure getting in the way. Needless to say, I can’t wait to see where this new journey at Rockbridge takes me.

(And for those of you who were looking for something of some financial substance, here’s one of the most important things I’ve learned from working in this industry:  the stock market is a long-term vehicle. It’s going to have its ups and downs. Don’t be alarmed when the market takes a dive and the value of your brokerage account or IRA decreases. It’s not a loss until you sell everything and realize the loss. Just wait it out, and over the long run, your account should grow.)

 

Would you stop being a fan of the Yankees, Mets, Giants, Jets, Bills or the Syracuse Orangemen and root for a team in Florida in order to save on your tax bill?  It might help!

Many New York State residents planning for retirement expect to maintain a residence in New York, but claim another state as their state of domicile.  Their purpose is to reduce their tax burden (state income taxes and/or estate taxes).  There are currently nine states with little or no state income tax.  The most popular of these for New Yorkers is Florida.  Florida has no state income tax and no estate tax.  Particularly for those with expected high taxable incomes in retirement, and/or high taxable estates, the tax savings can be considerable.

In the “old days,” if you lived out of New York State for more than 183 days per year, you were not deemed to be a “statutory resident” of New York, and this was thought to be the main litmus test for claiming not to be domiciled in New York and not subject to income and estate taxes in New York.   Your domicile is the place you intend to have as your permanent home, where your permanent home is located and the place you intend to return after being away (as on vacation, business assignments, educational leave, or military assignment).  You are a New York State resident for income tax purposes if your domicile is New York State or your domicile is not New York State but you maintain a permanent place of abode in New York State for more than 11 months of the year and spend 184 days or more in New York State during the tax year (note – there are special rules for military members and their spouses).

This still sounds fairly straightforward and not difficult to achieve.  However, in recent years, New York State, as they have been losing considerable revenue from individuals claiming domicile elsewhere, has become far more aggressive in challenging a change in domicile.  From a recent court case, “A domicile once established continues until the individual in question moves to a new location with the bona fide intention of making such individual’s fixed and permanent home there…  The burden is upon any person asserting a change in domicile to show that the necessary intention existed…  Although petitioners may have registered in Florida, obtained driver’s licenses and registered their cars there, there is little convincing evidence as to petitioners’ intent to abandon their New York State domicile and acquire a new one in Florida.”

New York State, in a residency audit, will examine all aspects it considers indicators of domicile, including your “home,” active business involvement, where you spend your time, where you keep things “near and dear” to you, family factors and so forth.  Where you are registered to vote; where your driver’s license is maintained and cars are registered; where you go to church; what clubs you belong to; what charities you support; where your accountant, lawyer, doctors, insurance agent, etc. are located, will all be looked at.

A change in domicile from New York State can be established and defended if you are indeed changing your domicile in substance.  It is advisable to consult with a tax practitioner or lawyer with expertise in this area before claiming the change, so that you can properly defend, document and support your position (without abandoning your favorite New York team!).

Measuring investment performance without a benchmark is like judging the results of a football game when you only know one team’s score.  To get the real story, there must be a “measuring stick.”  Obviously, in football you also need to know the opponent’s score.  In the case of investment performance, results should be compared to an overall market with similar risk characteristics.

Here at Rockbridge, we structure clients’ portfolios to maximize the probability of meeting long-term financial goals.  In doing so, we are committed to the idea that a portfolio’s asset allocation (mix of stocks and bonds) determines its risk profile.  Asset allocation is also what explains a portfolio’s long-term results, and the best way to implement these portfolios is through the use of market-tracking funds/ETFs.  The philosophy hasn’t changed, going back to the firm’s roots in 1991.  The use of benchmarks helps us measure if portfolios are delivering on their long-term objectives.

The following indices are generally used to construct our portfolios’ benchmarks:

S&P 500/Russell 2000 – Domestic Stocks

MSCI EAFE – International Stocks

Barclays Government/Credit Index – Bonds

In our benchmark construction, the amount allocated to each of the above markets mimics the risk profile it is designed to measure.  By design, many portfolios are diversified beyond the above benchmarks and include exposure to emerging markets and real estate.  Over the past quarter, this exposure has not helped overall portfolio performance when compared to benchmark results.  However, we continue to believe this diversification is appropriate and will bring incremental value in the future, as it has in the past.

 

Many investors nearing retirement are beginning to focus on life after work.  Questions arise that can be difficult to answer, such as:

  • How much savings is enough to retire?
  • What sources of income will I have after I stop working?
  • How do I construct a portfolio to fund spending goals?
  • What will I do with my time?
  • When should I apply for Social Security?
  • Lump sum vs. pension payments?

Here are my four steps to a successful retirement experience:

1)  Have a plan

The most successful retirees have a well thought-out plan before retiring.   Write down your goals.  If you have a spouse, each of you may have differing goals.  Write them all down and decide which ones take priority and come to an agreement; memorialize your goals in a document.  Decide on a sustainable withdrawal rate from your portfolio and an asset allocation that takes into account how much risk you are willing and able to take to achieve your spending goals.  You will also need to consider taxes, legacy and estate plans, long-term care needs and risk management.

2)  Create a “retirement paycheck”

Set up direct deposits of all income sources, such as a pension and Social Security.  Add a recurring transfer of funds from your investments (IRA or Brokerage account) to supplement your fixed monthly income sources.  Don’t be afraid to set up recurring payments of all your monthly expenses to eliminate the need for check writing and mailing.  Automate and free up your time for more important things to do in retirement.  It’s also a great idea to consolidate all of your various accounts with one custodian.

3)  Find a new passion

Once you have the financial part of retirement under control, you will need to address your personal goals.  You need to retire TO something, not just FROM something.  Spend some time considering what you will want to do with your free time.  Options include working part time in your current field, paid work in a new field, volunteering, traveling or just relaxing at home.  Everyone has a distinct path that is right for them, but surveys suggest the most satisfied people continue to have a passion for something in their life.

4)  Balance, outsource & simplify

Some people enjoy managing their retirement portfolio, while others prefer to work with a trusted advisor to free them up to focus on their personal goals and priorities.  Either way, there are many ways to simplify your financial life and minimize time devoted to finances.  Lack of organization often creates unnecessary stress that can be unhealthy.  Decide which tasks you can do on your own and which tasks you would gladly pay to outsource to someone you trust.

In my experience, working with many pre-retirees, these are the four critical steps to a successful retirement experience.  Add in some investing and spending discipline and you can confidently move from a life of work to a life of whatever you choose!

 

No one likes to see their savings decline in value. Times like these are not much fun for investors, watching markets “correct” in the face of abundant global uncertainties. As investment advisors, one of our most important jobs is to help long-term investors keep hold of their long-term perspective. Here are some things to consider.

A drop in stock prices makes us feel poorer – like we lost something – but it only really matters if we are buying or selling now, and if we are buying (or adding to our 401(k)) it’s a good thing!

Watching stock prices fall, and our nest eggs shrink, makes us feel like our financial security is out of our grasp, or at least out of our control. At times like these people say things like, “maybe I should buy real estate.” Land and buildings seem more tangible and sure to hold their value. Of course in 2008 we found out that real estate doesn’t necessarily hold its value, and when it must be sold, prices can swing wildly, just like stocks.

The stock market is very liquid so shares can always be sold at some price. When we try to sell our house in a bad market we say “there just aren’t any buyers right now,” which really means there is no one willing to pay a price I will accept. I could sell at a fire sale price, and maybe my neighbors would feel like they just lost some of their wealth, but until it becomes a blood bath like 2008, most of us would ignore it. We would say, “I’m not selling my house now anyway, so it doesn’t matter.” The difference with the stock market is that we cannot put our heads in the sand and ignore it. The 24-hour news channels are bombarding us with the news of falling stock prices and a tsunami of global uncertainties.

This will likely be a down year for our client portfolios. For clients withdrawing from their accounts, we can use income or sell bonds to provide cash and avoid selling stocks at reduced prices. For others we will be using new cash to buy stocks at reduced prices, and sell bonds to rebalance portfolios by buying stocks.

Three- and five-year trailing returns for stocks are still well above long-term averages. While we could have an extended period of weak returns, we expect markets to behave much as they have in the past, providing reasonable returns to those willing to take risk. We remain convinced that diversification and a steady exposure to stock market risk is still the best approach for long-term investors who are willing to keep a long-term perspective.