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Should You Reduce Risk Exposure as You Get Older? (Updated 2014)

Should You Reduce Risk Exposure As You Get Older?

 

A study suggests the “conventional wisdom” may be flawed.

 

Presented by PlanningWorks

 

If you move away from equities with age, are you making a mistake? For some time, financial professionals have encouraged investors to lessen their exposure to the stock market as they get older. After all, a 60-year-old has less time to recover from a market downturn than someone decades away from collecting Social Security checks.

 

Is that conventional thinking flawed? It might be. It isn’t simply a matter of looking at the future; you may also want to look at the past.

 

What’s the price of playing not to lose? It could be significant – at least in terms of opportunity cost. At this moment, how many people really want to shift money into fixed-rate investments?

 

Obviously, bonds, CDs and money market accounts will always hold some appeal as they tout protection of principal. Aside from that sense of safety, how does a 1% or 2% return sound? The dawn of the second quarter of 2014 saw rates on 5-year CDs “bounce back” to the neighborhood of 2.25-2.5%, a far cry from the 5-6% yields of previous decades.1

 

While the Federal Reserve is necessarily winding down its stimulus effort, Janet Yellen and other Fed officials have continued to maintain that interest rates will remain at historic lows well into 2015 and perhaps into 2016. In fact, Yellen recently commented that deflation constitutes a bigger economic hazard to the U.S. than inflation. So the question remains: “When will rates finally rise?” The answer still remains hazy.1,2 

 

As the Fed and the European Central Bank have been flooding the global economy with cheap money, the tame inflation of the past few years may give way to something greater. Fixed-rate investments are great tools for diversifying a portfolio, but retirees and pre-retirees with significant assets in investments yielding 1-2% will start wincing if inflation gets back to 4-5%.     

 

The risk appetite of institutional investors seems to be increasing, and individual investors might want to pay attention to the signals. In a survey released in the first weeks of 2014 by the investment management firm BlackRock, roughly 50% of respondents indicated a desire to put money into real estate, while approximately 33% signaled a reduction in cash holdings.3

 

Is the “glide path” strategy overrated? You may or may not have heard of this term; it refers to a gradual adjustment in asset allocation across an investor’s time horizon. With time, the asset allocation mix within the portfolio includes more fixed-income assets and fewer equities, becoming more conservative. (This is the whole idea behind target date funds.)

 

A 2012 article in Investment News questioned the glide path approach. Research Affiliates chairman (and former global equity strategist) Rob Arnott looked at a whopping 140 years of bond and stock market returns (1871-2011) and ran model scenarios using three different asset allocation approaches across 41 years of hypothetical retirement saving and investing. The findings?

 

*“Prudent Polly” saves $1,000 annually and practices “classic glide path investing,” gradually devoting more and more of her portfolio assets to bonds after age 40. This way, she winds up with an average portfolio of $124,460 at age 63 (with a $37,670 standard deviation across assorted 40-year windows).

*“Balanced Burt” also saves $1,000 annually, but he invests it in an unchanging 50/50 mix of equities and bonds across 41 years. He ends up with an average portfolio of $137,870 at age 63. In terms of deviation, his worst-case scenario, 10th percentile outcome and median outcome are all better than Polly’s.

*“Contrary Connie” saves $1,000 annually while  practicing the inverse of the classic glide path strategy – her portfolio tilts more and more toward stocks after age 40. She ends up with an average portfolio of $152,060 at age 63 and her worst-case, median and best-case scenarios all give her more retirement funds than Polly’s.4

   

As many people haven’t saved enough for retirement to begin with, they more or less have to stay in stocks or other forms of equity investment. Instead of shifting their focus from wealth accumulation to wealth preservation, they need to focus on both. Accepting more risk may be necessary as they seek suitable returns.

 

PlanningWorks may be reached at 512 498-7526 or info@planningworks.biz

Market Commentary - Week of 6/2/14

The Markets

If you’re a fan of home renovation TV shows then you’re probably familiar with the types of bad news home inspections can uncover. Last week, the Commerce Department inspected its previous estimate for real gross domestic product (GDP) growth during the first quarter of 2014 and found some bad news. As it turns out, the rate of economic growth in the United States declined by 1 percent rather than increasing slightly, as previously thought.

The revision sparked debate among economists and politicians about the health of the U.S. economy. According to The Guardian, some economists found the revised numbers difficult to reconcile because they seem to contradict other first quarter economic data – such as expansion of non-farm payrolls, healthy manufacturing activity, and stronger retail sales – which indicate a more positive growth trend.

News that the U.S. economy might have shrunk slightly didn’t deter investors at all. The Standard & Poor’s 500 Index finished the week at a new record high. This could mean investors are confident economic growth will rebound in the second quarter of 2014 or it may reflect a belief economic weakness in the United States will encourage a more stimulative monetary policy.

The Wall Street Journal suggests signs of slower growth in the United States and Europe are behind the resurgent popularity of emerging markets. If you recall, investors pulled about $60 billion from emerging countries early in 2014 as they worried these markets would be affected negatively by the U.S. Federal Reserve’s less stimulative monetary policy. In May, a Reuters’ poll found 51 investment houses in the United States, Japan, and Europe had reduced their cash positions to the lowest levels since last November and invested the proceeds in emerging markets.

One expert cited by The Wall Street Journal called the rush into emerging markets a “global chase for yield.” No matter what you call it, last Friday, Morgan Stanley Capital International's emerging markets stock index rose to its highest level since October 2013. It was up 3 percent for the year.

Data as of 5/30/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    1.2%    4.1%    16.3%    12.7%    15.3%    5.6%
10-year Treasury Note (Yield Only)    2.5    NA    2.1    3.1    3.7    4.7
Gold (per ounce)    -3.2    4.1    -11.5    -6.6    5.0    12.2
DJ-UBS Commodity Index    -1.4    6.4    1.9    -7.0    0.7    -1.5
DJ Equity All REIT Total Return Index    0.9    15.1    8.0    10.3    21.3    10.0
S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

HOW DO YOU MAKE A PEANUT BUTTER AND JELLY SANDWICH? If you’ve ever been asked to write clear instructions for a seemingly simple task, you know the challenge is in the details. To illustrate how to make a PB&J, you start with bread, peanut butter, jelly (in a squeezable bottle), and a knife. Then you need to remember to tell the reader to open the bread bag, unscrew the top of the peanut butter jar, and turn the jelly bottle upside down before squeezing it. You have to provide a lot of very concise information.

Communicating financial and investment ideas effectively also can be challenging. It appears a significant number of Americans are not receiving all of the information they may need. For several years, the Financial Industry Regulatory Authority’s (FINRA) Investor Education Foundation has employed a five-question quiz to evaluate financial literacy. The questions include fundamental concepts related to financial knowledge and decision-making. If you want to test yourself, take the quiz at www.usfinancialcapability.org

In 2012, about 30 percent of Americans were able to answer three of the five quiz questions correctly. That was about the same number of questions that were answered correctly when the quiz was first offered in 2009. The percentage of respondents who were able to answer four or five quiz questions correctly varied significantly by generation:

•    24 percent of Millennials (born between early 1980s to early 2000s)
•    38 percent of Gen Xers (born between early 1960s to early 1980s)
•    48 percent of Baby Boomers (born between 1943 to early 1960s)
•    55 percent of the Silent Generation (born between 1925 to 1942)

When a similar quiz was offered to people in countries throughout the world, financial literacy was linked (in all countries) to retirement planning or participation in private pension plans. In most countries, people who were financially literate were more likely to plan for retirement which requires an understanding of interest rates, risk, and diversification.

If someone you care about would benefit by knowing more about financial matters, please give us a call. We would be happy to sit down and talk with them about a specific topic or recommend some good reading materials.

Weekly Focus – Think About It

“Courage is the most important of all the virtues, because without courage you can't practice any other virtue consistently. You can practice any virtue erratically, but nothing consistently without courage.
--Maya Angelou, American author and poet

Listen Up, Advisors: Only Fire Clients When It Makes Sense

“Out of economic necessity, owners who want to grow their smaller firms need to take almost every new client who comes in the door. But once their firm is positioned to grow and starts to take off, it’s time to start weeding out those clients who are holding them back.”

Click here to read more: http://www.thinkadvisor.com/2014/04/17/listen-up-advisors-only-fire-clie...

Market Commentary - Week of 5/26/14

The Markets
Alongside the irises, daffodils, tulips, and other perennials that were popping up (in seasonal parts of the United States) last week, there was a lot of talk about the housing market and what its performance means about the state of the economy. Perceptions varied.

The U.S. housing market has shown improvement in recent years; however, sales slowed during 2013 as interest rates and home prices moved higher. Last week’s housing data showed sales of existing homes were up 1.3 percent for April which was lower than expected, but sales of new single-family homes were up more than expected. In addition, the S&P/Case-Shiller 20-City Composite Home Price Index showed February housing prices had reached levels last seen in 2004.

According to MarketWatch.com, some big-name investors are worried about the housing market’s recovery because younger investors are not inclined to take on mortgage debt. Others suggest homeownership may drop because people are marrying later. Balancing the naysayers are pundits who believe demand for housing will continue to strengthen. Finally, the minutes of the Federal Open Market Committee, which were released last week, showed the Fed recognized recovery in the housing sector remained slow, but expects economic activity to expand at a moderate pace:

“Most participants commented on the continuing weakness in housing activity. They saw a range of factors affecting the housing market including higher home prices, construction bottlenecks stemming from a scarcity of labor and harsh winter weather, input cost pressures, or a shortage in the supply of available lots. Views varied regarding the outlook for the multifamily sector, with the large increase in multifamily units coming to market potentially putting downward pressure on prices and rents, but the demand for this type of housing [is] expected to rise as the population ages. A couple of participants noted mortgage credit availability remained constrained and lending standards were tight compared with historical norms, especially for purchase mortgages.”

What are we to make of the conflicting opinions? The housing market is considered to be a leading economic indicator. This means it tends to change direction before the economy changes direction and offers some indication about where the economy may be headed. (It should be noted housing data generally is several months old before it is reported.) Housing is not the only leading indicator. The Conference Board tracks an index of leading economic indicators. For April, its Leading Economic Index® showed improvement for a third consecutive month. It’s a reminder of how important it is to pay attention to the big picture.

Data as of 5/23/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    1.2%    2.8%    15.2%    13.0%    16.5%    5.7%
10-year Treasury Note (Yield Only)    2.5    NA    2.0    3.1    3.5    4.7
Gold (per ounce)    -    7.5    -6.5    -5.1    6.5    12.9
DJ-UBS Commodity Index    0.4    7.9    2.4    -5.5    2.3    -1.1
DJ Equity All REIT TR Index    -0.6    14.2    2.5    11.5    23.7    10.3
S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

THE NEWEST EUROPEAN IMPORT IS THE CHIP AND PIN CARD. Discussions about credit and debit card security were heating up even before retailers experienced data breaches last winter. Needless to say, after the breaches and a wealth of media reports touting the fact that Europe, Canada, and most of the rest of the world already have more secure payment systems than the one we use in the United States, interest in replacing our current system increased.

Eighty countries around the world are currently implementing Europay, MasterCard and Visa, or EMV™ technology. In some places, EMV compliance is further along than it is in others. For instance, about 95 percent of point-of-sale credit card machines (aka terminals) in Europe are EMV compliant; 79 percent of terminals in Canada, Latin America, and the Caribbean; 77 percent of terminals in Africa and the Middle East; and 51 percent of terminals in the Asia Pacific region.

Why is a card with a chip and pin better than a card with a magnetic stripe and a signature? One of the primary reasons, according to Forbes, is improved security:

“Most credit cards in the United States operate with a simple magnetic stripe that can be captured and copied relatively easily. Much of the rest of the world uses a small chip on the credit card to validate with a transaction. The chip employs cryptography and a range of other security features and measures that create a multi-layered defense against card fraud. When combined with a Personal Identification Number or PIN code (the sort used on ATM cards), it substantially raises security. Even with just a signature it makes a marked improvement over a simple magnetic stripe.”

The United States, until recently, was the last major market holdout. However, according to current estimates, 60 percent of merchants will have EMV compliant devices by 2015. Check your mail. A new card may be on its way soon.

Weekly Focus – Think About It

“Kindness is the language which the deaf can hear and the blind can see.”
--Mark Twain, American writer and humorist

Market Commentary - Week of 5/19/14

The Markets

Americans have long relied on standards and averages to help them gauge the performance of everything from intelligence to athletics to the economy. So far, in 2014, American stock markets have been grinding along without making much progress in either direction and that has left many people looking for guidance about what they can expect in the future.

Last week, a writer at Barron’s enlisted Jeremy Siegel, a finance professor at Wharton, to help explore the question by updating data used in a 2009 article. That piece had looked at the performance of the U.S. stock market over 142 years and found “below-average returns over five- and 10-year periods generally are followed by above-average returns in the next five and 10 years.” In the new article, Siegel and his associates looked at rolling five-, 10-, 20-, and 30-year return periods through the end of 2013 and found:

“For the 60 months ended in April, the compounded annual real return was nearly 17 percent, well above the median 7.17 percent for all five-year periods. (Taxes and investment fees aren't included.) That suggests the next five years could run below the average.

While that might temper bullishness, in the 120-month period ended April, the compounded annual real return was just 5.58 percent, a full percentage point below the 6.64 percent median 10-year annual return for all the periods measured – again, since 1871.”

Despite the mixed signals provided by long-term averages, Siegel told Barron’s “the odds-on bet” is the Dow Jones Industrial Average will hit 18,000 by the end of the year (although there may be corrections along the way). His expectations are interest rates will remain lower than has been suggested and earnings will experience strong growth.

It’s a good idea to take the esteemed professor’s thoughts with a grain of salt. An eight-year study of market pundits found they were right about 47 percent of the time.

Data as of 5/16/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    -0.2%    1.6%    13.8%    12.2%    15.6%    5.7%
10-year Treasury Note (Yield Only)    2.5    NA    1.9    3.2    3.2    4.7
Gold (per ounce)    0.8    7.5    -6.5    -4.9    7.0    12.9
DJ-UBS Commodity Index    -1.1    7.6    3.3    -5.3    2.5    -0.9
DJ Equity All REIT TR Index    1.9    14.9    0.3    11.3    22.6    10.7
S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

THE MARKET ISN’T THE ONLY THING THAT CAN PUT A HITCH IN YOUR FINANCIAL PLAN’S GIDDY-UP. The overall rate of divorce in the United States trended lower between 2000 and 2011 (the latest dates the Centers for Disease Control has made available). In 2000, there were about four divorces or annulments per 1,000 Americans (total population). By 2011 that rate had fallen slightly to 3.6 per 1,000. As they often do, Baby Boomers bucked the trend. The divorce rate for Americans over age 50 has trended higher. The New York Times wrote:

“A half-century ago, only 2.8 percent of Americans older than 50 were divorced. By 2000, 11.8 percent were. In 2011, according to the Census Bureau’s American Community Survey, 15.4 percent were divorced and another 2.1 percent were separated. Some 13.5 percent were widowed.

While divorce rates over all have stabilized and even inched downward, the divorce rate among people 50 and older has doubled since 1990, according to an analysis of census data by professors at Bowling Green State University in Bowling Green, Ohio. That’s especially significant because half the married population is older than 50.”

Anytime you experience a significant life change, such as a divorce late in life, it’s important to let us know. We can offer strategies to help compensate for any cash flow disruption and tactics for managing taxes when splitting large assets, such as qualified retirement plans. In addition, we can help with essential (and often forgotten) steps, including reviewing and revising beneficiary designations (on retirement plans, investment accounts, and insurance policies) as well as modifying powers of attorney, named trustees, and other designations. We also can coordinate our efforts with those of your attorney and/or accountant.

Weekly Focus – Think About It

“Good judgment comes from experience, and a lot of that comes from bad judgment.”
--Will Rogers, American humorist and commentator* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.

What about your digital assets?

What about your digital assets? Do you even know what they are? They are more important than you realize. Click to view this article, and let us know how we can help.

http://www.usatoday.com/story/tech/personal/2014/04/17/digital-asset-pla...

Market Commentary - Week of 5/12/14

The Markets

“Gonna take a sentimental journey…Gonna set my heart at ease…Gonna make a sentimental journey…To renew old memories.” If you’re a fan of Ella Fitzgerald or Frank Sinatra, then you probably recognize these lyrics. Although we rarely think of them as such, the ups and downs of stock and bond markets are sentimental journeys. They reflect the thoughts and attitudes of investors toward particular companies, investments, and markets. Investopedia explains it like this:

“Market sentiment is the feeling or tone of a market, or its crowd psychology, as revealed through the activity and price movement of the securities traded in that market. For example, rising prices would indicate a bullish market sentiment, while falling prices would indicate a bearish market sentiment. Market sentiment is also called "investor sentiment" and is not always based on fundamentals.”

The American Association of Individual Investors (AAII) measures investor sentiment by polling their membership each week. The long-term average is 39 percent bullish, 30.5 percent neutral, and 30.5 percent bearish. Last week, 28.3 percent of its members were bullish, 28.7 percent were bearish, and 43 percent were neutral.

According to Yahoo! Finance, that’s the highest level of investor neutrality in more than a decade and may indicate a sharp move up or down is coming soon. “Going back to 2005, AAII neutral sentiment has pushed to 38 on four distinct prior occasions… Looking at the S&P 500 a month later showed greater than 4 percent moves each time over the subsequent 30 days.”

The article, which was published last week, failed to mention the AAII neutral sentiment measure has surpassed 38 on eight occasions since the start of 2014. A quick inspection of S&P 500 pricing indicates markets have moved by 1 to 6 percent during the subsequent month (although we are not yet 30 days from some of those dates). Regardless of the number of times investor neutrality has pushed to 38 or above, or the sharpness of the subsequent market moves, not all of those moves have been in the same direction so it’s hard to predict what this bout of neutral sentiment may indicate.

Data as of 5/9/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    -0.1%    1.6%    15.5%    11.7%    15.6%    5.6%
10-year Treasury Note (Yield Only)    2.6    NA    1.8    3.1    3.2    4.8
Gold (per ounce)    0.8    7.5    -11.9    -4.9    7.2    13.2
DJ-UBS Commodity Index    -0.7    8.0    0.3    -5.8    2.4    -0.9
DJ Equity All REIT TR Index    1.4    14.4    1.5    11.0    22.5    10.9
S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

DOUBLE, DOUBLE, TOIL, AND TROUBLE… During the twentieth century, the world’s population doubled not once, but twice. While it is not expected to double again in this century, according to The Economist, the number of older people is expected to double. By 2035, 13 percent of the world’s population – about 1.1 billion people – will be age 65 or older. Assuming no major diseases, disasters, or world wars, demographers at the United Nations predict the global population will reach nine billion by 2045. That’s a lot of people!

Demographic changes are likely to have a powerful effect on global economies. In the United States, the leading edge of the Baby Boom generation is entering retirement. According to National Geographic:

“The end of a baby boom can have two big economic effects on a country. The first is the “demographic dividend” – a blissful few decades when the boomers swell the labor force and the number of young and old dependents is relatively small and there is thus a lot of money for other things. Then the second effect kicks in: The boomers start to retire. What had been considered the enduring demographic order is revealed to be a party that has to end. The sharpening American debate over Social Security and last year’s strikes in France over increasing the retirement age are responses to a problem that exists throughout the developed world: how to support an aging population.”

The old-age dependency ratio, which compares the number of older people (above age 64) in a country to the working population (people aged 15 to 64), was 20:100 in the United States during 2012. By 2035, the United Nations predicts the ratio will be 44:100. How will our aging population affect economic growth? Some economists believe economic growth will slow in countries with high ratios; others say that older, well-educated people will work longer and retire later so aging will have little effect. A third group anticipates persistent economic stagnation. So, what can we expect? It all depends on “changes in the size of the workforce; changes in the rate of productivity growth; and changes in the pattern of savings.” Stay tuned!

Weekly Focus – Think About It

“It seems essential, in relationships and all tasks, that we concentrate only on what is most significant and important.”
--Soren Aabye Kierkegaard, Danish philosopher and theologian

Market Commentary - Week of 5/5/14

The Markets

Sometime this year, you may have the opportunity to experience an event that’s even more rare than a lunar or solar eclipse – an economic eclipse. The United States has had the world’s largest economy since we surpassed Britain back in 1872, but our economy is about to be overshadowed by China’s.

A lot of folks were anticipating an economic eclipse sometime around the end of this decade. As it turns out, the event horizon may be much, much shorter. Last week, The World Bank released its International Comparison Program (ICP) report. Every six years, in an effort to measure the real size of the world economy, the ICP surveys countries and measures their relative economic might. The ICP report was the final analysis of data collected during 2011. It found, at that time, the U.S. had the world’s biggest economy. It also established that China’s economy had grown much faster than ours between 2005 and 2011. China’s economic growth has continued to exceed that of the United States. As a result, China’s economy is expected to eclipse that of the United States during 2014. The U.S. economy will be the second largest and behind us will be India. The ICP also noted that:

•    The six largest middle-income economies (China, India, Russia, Brazil, Indonesia, and Mexico) account for 32.3 percent of world Gross Domestic Product (GDP)
•    The six largest high-income economies (United States, Japan, Germany, France, United Kingdom, and Italy) account for 32.9 percent of world GDP
•    Asia and the Pacific, including China and India, account for 30 percent of world GDP
•    The European Union and countries in the Organization for Economic Cooperation and Development (OECD) account for 54 percent of world GDP
•    Latin America comprises 5.5 percent of world GDP (excluding Mexico, which is an OECD country, and Argentina which did not participate in the ICP survey)

Some people are unsettled by the news. Among them, apparently, are members of China’s National Bureau of Statistics (NBS). According to The Washington Post, the NBS expressed reservations about the study’s methodology and did not endorse the results as official statistics. As with solar and lunar eclipses, the event may be notable, but its effects are unclear.

Data as of 5/2/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    1.0%    1.8%    17.8%    11.4%    16.5%    5.4%
10-year Treasury Note (Yield Only)    2.6    NA    1.6    3.3    3.2    4.5
Gold (per ounce)    -1.5    6.6    -12.8    -6.0    7.1    12.6
DJ-UBS Commodity Index    -1.0    8.7    3.9    -7.8    3.4    -1.0
DJ Equity All REIT TR Index    1.9    12.8    0.9    9.8    21.2    10.2
S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

SO, YOU’VE HEARD U.S. COMPANIES ARE FABULOUSLY PROFITABLE and sitting on record piles of cash. It’s true. According to Moody’s Investors Service, non-financial U.S. companies had hoards of cash at the end of 2013 – about $1.64 trillion. That’s about 12 percent more than the previous year’s record-setting $1.46 trillion. Technology, healthcare/ pharmaceutical, consumer product, and energy companies held the most cash.

Why are profits at U.S. companies so high? The Economist offered several possible explanations: 
1) Corporate executives favored capital and not labor in recent years. An expert cited by The Economist suggested, “…Had pay kept pace with productivity in recent years, profit margins would be around their historic average, not close to a 50-year high;” 2) When the U.S. dollar loses value, which it has, the foreign earnings of American companies get a lift; and 3) Firms have limited their capital expenditures on equipment, software, and other items. As a result, depreciation charges have fallen making companies look more profitable.

Why aren’t companies spending? It has a lot to do with overseas profits and tax rates, according to The Wall Street Journal’s MoneyBeat. It reported, “Growth in the cash stockpiles, however, came largely from operations overseas. Instead of bringing that money back to the U.S. and paying taxes as high as 35% upon repatriation, companies borrowed money in the U.S. bond market, where interest rates were historically low. The report calls that strategy ‘a form of synthetic cash repatriation.’”

The stark reality is companies are profitable, but they’re also sporting a lot of debt. During the past three years, corporate debt has risen by $3.67 for every $1 of cash growth, according to a report from Standard & Poor’s Rating Services which was cited by The Wall Street Journal. That’s okay when interest rates are low, but may not prove to be so great when interest rates in the United States move higher.

Weekly Focus – Think About It

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--Thomas Jefferson, American President

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Market Commentary - Week of 4/28/14

The Markets

Newton’s third law says for every action there is an equal and opposite reaction. Since things became tense between Ukraine and Russia, we’ve been getting a primer on the relative strength of diplomatic, economic, financial, and military actions and reactions.

Taking things over isn’t anything new for Russian President Vladimir Putin. A decade ago, he nationalized Yukos (a large publicly held Russian oil company) after jailing its founder for tax evasion and fraud. The financial repercussions of the takeover are still rippling through the global economy. In 2012, Russia lost a lawsuit filed by foreign shareholders of Yukos Oil and was ordered to pay damages.

Not long after the Yukos debacle, Putin lamented the demise of the Soviet Union was the greatest geopolitical catastrophe of the century. In 2014, he annexed Crimea – the first time a European nation has taken territory from another European nation since World War II – justifying the action in many ways, including by saying the Crimean peninsula should have been returned to Russia in 1991 when the Soviet Union dissolved. The West responded by imposing sanctions.

Today, Russia’s economy is in distress in part because of sanctions, according to Bloomberg BusinessWeek. Just last week, Standard & Poor’s knocked the country’s debt rating down to one level above junk, and Russia’s central bank raised rates for the second time since March significantly increasing the cost of borrowing for businesses and individuals. Inflation is high in Russia – above seven percent – although, as one economist pointed out, raising rates had little to do with inflation and much to do with supporting the ruble and discouraging the flight of capital from Russia. During the first quarter of 2014, $50 billion was pulled out of Russia, and estimates suggest that amount could rise to $200 billion by year-end depending on what happens in Ukraine.

The Russian central bank wasn’t the only one taking action last week. On Thursday, despite threats of further economic sanctions, Russia placed thousands of troops along the Ukrainian border for military exercises. Additional sanctions are likely to be imposed on Russia this week. We’ll soon have more insight into which actions speak the loudest.

Escalating tensions affected stock markets around the world last week, and many indices finished the week lower than they started.

Data as of 4/25/14
1-Week    Y-T-D    1-Year    3-Year    5-Year    10-Year
Standard & Poor's 500 (Domestic Stocks)    -0.1%    0.8%    17.5%    11.8%    16.8%    5.1%
10-year Treasury Note (Yield Only)    2.7    NA    1.7    3.4    2.9    4.4
Gold (per ounce)    0.2    8.3    -10.3    -4.6    7.5    12.6
DJ-UBS Commodity Index    0.3    9.8    4.1    -7.5    4.9    -0.6
DJ Equity All REIT TR Index    0.3    10.8    0.3    10.0    23.1    10.0
S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

HOW LONG WILL YOU LIVE? Life expectancy plays an important role in financial planning. It influences decisions about how much to save, invest, and/or insure to cover retirement, healthcare, long-term care, and other needs that may crop up over the course of a lifetime. Of course, there are some important nuances to life expectancy.

First and foremost, life expectancy changes throughout your lifetime. In 2010, according to the Centers for Disease Control and Prevention, the average life expectancy for a newborn was 78.7 years, while a 65-year-old could expect to live to about age 84 and a 75-year-old to age 87.

Second, during the past two centuries, life expectancy increased by leaps and bounds. In the 1900s, most people didn’t live past age 50, according to the National Institute on Aging. By the end of the first decade of the 21st century, people were living beyond age 70. Not everyone’s life expectancy has increased at the same pace. A 2012 Brookings Institute article said:

“Analysts have long recognized the powerful association between personal income and expected life spans. People with higher incomes tend to live longer than people with lower incomes. Statistical tabulations suggest that the relationship is nonlinear. A $10,000 increase in annual income does more to lift the life expectancy of someone who lives on a meager income than it does to boost the life span of someone who is already well off.”

Gender plays an important role, too. While it’s true women have lived longer than men for decades, the gap has been closing. Since 1980, men’s life expectancy at birth has increased from 70 years to 76.2 years – a gain of more than six years. Women’s life expectancies at birth have increased from 77.4 years to 81 years – a gain of less than four years.

Life expectancy isn’t the only thing that can have a significant effect on your financial plans. If your plan hasn’t been thoroughly reviewed in the past year or so, you may want to contact your financial professional. It’s time for a planning checkup!

Weekly Focus – Think About It

“One looks back with appreciation to the brilliant teachers, but with gratitude to those who touched our human feelings. The curriculum is so much necessary raw material, but warmth is the vital element for the growing plant and for the soul of the child.
--Carl Jung, Swiss psychotherapist

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