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In Your Best Interest: Our Winter 2017 Newsletter

Click here to view the full newsletter, including recent news, important dates, financial tips & tools, and more.


MARKET HIGHLIGHTS: Q4 AND 2016 IN REVIEW

There’s no doubt that 2016 will be remembered for two major events that sent shock waves around the world: the election of Donald Trump as the 45th president of the United States, and the UK’s Brexit vote. And while those events certainly created some doubts as to the political direction of the US and Great Britain, neither outcome was able to dampen the growth of the US economy. As a result, the Fed raised interest rates for the first time since last December, noting that although inflation is currently below the Fed’s target of 2.0%, the Committee expects inflation to rise to its target level in the near future. 

That said, the year delivered a pretty bumpy ride to get us where we are today. A plummeting Chinese stock market pushed stock prices down and bond prices up, and Great Britain’s decision to exit the European Union wreaked havoc on equity prices, but the impact was short lived and stock prices rose again in Q3. Perhaps the biggest surprise of all was the dramatic surge in stock prices following the Presidential Election. The unexpected Q4 market rally had everyone watching for the Dow to break 20,000 for the first time, but that momentum stalled heading into the New Year, and only time will tell whether the trend will continue following President-elect Trump’s first few months in office. At year-end, the numbers across all financial markets landed on a positive note, bringing a little extra holiday joy to investors. 

This time last year, I encouraged everyone to stay disciplined and stay the course. For those who did, that tenacity paid off—in spades—and by the end of 2016, each of the indexes listed above posted year-over-year gains, some reaching all-time highs. The Dow recorded its best performance since 2013, gaining almost 13.5% from its 2015 closing value. The large-cap S&P 500 proved less volatile during the year, yet closed 2016 up almost 11.0%. The Russell 2000 came in as the year’s biggest gainer, soaring almost 20.0% over last year’s closing value. 

Numbers like these keep investors happy, but it’s important to remember that volatility is almost certain in the coming year. A carefully constructed, well diversified portfolio can help protect against the ups and downs of the market as equity prices, bonds, and currency values fluctuate in response to global, political, and economic events moving forward. The US dollar is strong, and our economy is continuing to improve. Unemployment is down, GDP is up, and inflation and consumer spending remain stable. I expect the worldwide rise of populism to go beyond rhetoric and bring surprises that may cause stock prices to fluctuate (as they always do!) as long-term market values continue to climb higher (as they always do!). We look forward to continuing to work together, leveraging the power of investing to support your personal financial goals.

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Get ready for a great New Year’s resolution (and to stick to it!)

Get ready for a great New Year’s resolution (and to stick to it!)

When it comes to New Year’s resolutions, there are three distinct camps: those who refuse them; those who make them—and break them by January 3; and those who make a true effort to improve themselves and their lives by making a change in the coming year. As someone who is continually striving to live a better, stronger, healthier life, I’m in that third group. And while I’m not always successful, I really do try.

Every year I make a list of my intentions for the next 12 months. As you’d expect, it includes the usual suspects. Lose some more weight. Reduce my golf handicap. Walk and meditate every day. But as I began to think about my list for 2017, I knew it was time to take the whole idea of resolutions a step further. I wanted to come up with personal and financial goals that were concrete—and that I knew I cared deeply enough about to be sure I followed through.

Then, last week, I got a brilliant idea: reach out to others for insight! I started emailing friends and clients right away, asking for their own personal and financial resolutions for the coming year (and promising to change their names in my blog to keep their thoughts anonymous). As I anticipated, the responses were each glorious in their own way…and they gave me the encouragement I needed to make my own resolutions as honest, direct, and thoughtful as possible. It seems almost everyone is dedicated to making 2017 a truly meaningful year.

The personal resolutions I received ran the gamut, including cutting back on sugar or alcohol, sleeping more (or hitting the snooze button less!), and being mindful about personal choices and the relationships that matter most and, as one friend wrote so eloquently, “to live more in the moment with love and gratitude.” Not surprisingly, aging was a big driver for those in my own generation, and their resolutions seemed to seep with sage wisdom. “As we age, we are confronted with losses in terms of our own health and the health of others and losses in many other aspects of living,” wrote Cynthia. “It is a natural and normal part of aging. My choice is to focus on gratitude rather than the losses.” Beautiful. For Liz, her own health is becoming an even greater priority. As a result, she is taking dieting to a whole new level, resolving to transition to a vegetarian or even a vegan diet to add some years to her life. “At 67, I’m beginning to feel vulnerable,” she says. Oh, how I can relate! Susan wants to meditate every day, Emma is working to “be less reactive when someone says something that upsets me, and try to put a smile on at least one person's face a day,” and Carol intends to “count every moment as the most precious there is” and to “live in the now.” (All three women would feel right at home in my Sangha meditation group, which you can read about in my Yom Kippur blog.)

As I read through the financial resolutions, I was suddenly filled with gratitude, knowing that I’ve helped more than a handful of people evolve to where they are today when it comes to money. Many said they were committed to paying off all their credit card debt, building a real budget and emergency fund, or eating out less to save more. Nicole is making an effort to “start planning for retirement, and to be happy with what I have.” What a perfect starting point. John’s goal is more specific: “I want to reduce my spending by at least $1,000/month.” Similarly, Anne realized that watching individual stocks was driving her crazy, so she converted her portfolio to a broad mix of ETFs. What a great way to remove the emotions from investing. Kelly wants to “keep abreast of what’s happening” in finance, and Marcia wrote the she plans to “continue taking on more responsibility financially.” (As a huge advocate of being your own financial fiduciary, this was music to my ears! Read more in my blog on financial literacy.)

All of these (and the many others I so gratefully received) are fantastic. Of course, the challenge for most of us is sticking to our resolutions. Over the years, I’ve found that writing down my resolutions—and putting that written reminder somewhere I will see it daily—makes a huge difference. It can also help to have an “accountability partner,” someone you can trust to hold your feet to the fire and press you forward right when that potentially life-changing resolution feels like it’s about to fall by the wayside. And, as is true for any change in behavior, do what you can to turn your resolution into a real habit. As soon as I read Beth’s resolution, I knew she was ready to tackle this part of the challenge. She not only wants to “recommit to improving my keyboard skills,” but she has a plan to make it happen by establishing a routine of playing the piano for a minimum of one hour each week. Every one of us would be wise to do the same. If creating new habits is a challenge for you, check out the WOOP approach—a scientifically based (and easy-to-use) method for increasing your motivation and, yes, ensuring those New Year’s resolutions become a reality in 2017.

When Pat responded to my query about New Year’s resolutions, he returned the challenge: “I'll share mine,” he wrote. “But I'd like you to share yours with me. I trust that you'll do that!” Plus, he upped the ante a bit with two pretty spectacular resolutions. The first was to “Be a good example to my children for financial management and security.” The second: “Devote 10% of my time, energy, and financial resources to ACTION for the climate change problem.” Wow.

To live up to my end of the bargain, here are my resolutions for 2017. I welcome you all to be my accountability partners to help keep me on track throughout the year. I’m happy to do the same in return.

Financially, I want to gain the courage to believe in myself fully, and to commit to the economic value of what I do. (Despite being a feminist to the core, I tend to undervalue and under-price myself, charging a ‘woman’s dollar for a man’s work.’)

Personally, the list is long, but the most important changes are to be less reactive to others, to entertain at home more often and, most importantly, to not be so co-dependent with others by understanding that I can’t stop others from failing—I can only improve myself and my choices.

And to help those who will likely suffer the most as a result of the policies of the incoming Trump administration, I want to find a way to help protect children, the environment, and women’s rights. Oh…and, yeah. And as corny as it my sound, I want to help shift us toward world peace. If none of us stop striving, perhaps one day we can make that dream come true!

I wish you all a happy, healthy, and prosperous New Year!

 

 

 

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5 reasons why you shouldn’t worry about rising interest rates

5 reasons why you shouldn’t worry about rising interest rates

A funny thing happened on Wall Street last week. After all the hoopla around raising interest rates and how it would send investors into a dither, Janet Yellen and the Fed finally made a move, raising rates by .25%. The reaction on Wall Street? Nothing. Nada. Zippo. In fact, the Dow climbed even closer to 20,000 the day of the announcement.

If you were paying attention to the headlines for the weeks leading up to the Fed meeting, that certainly wasn’t the reaction the media was expecting. But if you look at all the factors behind why no one seemed to care, it makes a whole lot of sense. Here are five reasons why many investors couldn’t care less about rising interest rates… and why you probably shouldn’t care either:

1.     The hike was priced into stock prices.
The Fed’s decision had been widely anticipated, so investors were already trading based on the assumption that rates would be raised by at least a quarter percent. As the market continued to climb over the past four weeks, you can bet that every trade that took place happened with the hike as a forgone conclusion. And though rates did go up, no surprises at the Fed meeting meant no surprises on Wall Street the day after.

2.     When you invest, you’re investing in real companies—not “the market.”
When you go to the grocery store, you go to buy tomatoes and milk, not the grocery store itself. The same is true with stocks. Interest rates inevitably impact the market as a whole, but when you invest in stocks, you buy ownership shares of real companies. Apple. GM. Exxon. You own something tangible that continues to grow in value, no matter what interest rates are at the moment.

3.     Bonds are relatively stable assets.
The value of bonds dropped the moment rates went up, but that doesn’t mean you should suddenly switch to a 100% equity-based portfolio. Interest rates are inversely correlated to bond prices, which is why bonds are considered to be every portfolio’s safety net. First, they’re used specifically to hedge against much less predictable equity prices. Bonds are rationally priced based on term and credit quality. U.S. Treasury bonds are considered the world’s “risk-free” asset, with all other bonds measured by the “spread” between its credit rating and U.S Treasury bonds. Second, bond prices are mathematically quantifiable. That’s not the case for stock prices, which are determined at an auction between buyers and sellers and are impacted by fast-changing factors, such as the US and global economies, political instability, investor sentiments or sometimes seemingly nothing (like traffic jams). So don’t run from bonds. Instead, keep reinvesting in this stable asset class to balance risk and reward across your portfolio.

4.     Interest rates can be unpredictable.
Sure, the economy is getting stronger. Unemployment is low. The dollar is strong. Inflation is creeping upward, if slowly. But even with the small hike, interest rates are still at historic lows (remember the ‘70 and ‘80s when interest rates were in the teens?). While the Fed sets the benchmark rate, the market sets longer-term rates, and the resulting “spreads” reflect investors’ sentiments about risk. Since there’s no way to know when rates will rise or to predict the shape of the yield curve (even the “bond kings” often guess wrong about the future), it’s wise to use bonds to stabilize your portfolio and provide liquidity to meet your cash needs throughout your retirement.

5.     Higher interest rates don’t hurt your wallet over the long term.
Yes, rising rates hurt bond values, but as older bonds are sold and reinvested at higher rates, you can potentially increase your long-term returns. It’s also good to keep in mind that high quality, shorter-term bonds perform a lot like cash, providing necessary liquidity in a “safe” investment. (Note that this is not the case for high-yield bonds, which behave more like stocks.) Plus, while stuffing cash assets under the mattress has been a fine choice for the past decade, in a rising interest rate environment, your cash assets can finally start earning interest again. What a thought!

Ultimately, the Fed only sets benchmark interest rates. The increase only directly applies to the target of the federal fund's rate, which banks use to lend to each other overnight, by 25 basis points or .25% to a range of 0.50 to 0.75%. For the rest of the world, the market dictates the rates based on supply and demand (which is why mortgage rates can fluctuate no matter what the Fed rate may be). Of course, the market rate is often aligned with the Fed rate, so all interest rates are expected to continue to rise throughout 2017. Just remember that higher interest rates are the reward for strong policies that have been in place ever since the financial crisis. Those policies—including sustained low-interest rates—fueled growth, and today we have a stronger economy to show for it. That’s good news for anyone who is doing more with her money than stuffing it under the mattress.

Want to understand how your own portfolio can sustain rising rates?  This email address is being protected from spambots. You need JavaScript enabled to view it.  to schedule a time to chat. As always, I’m here to help.

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Aging parents? Offering help early can ease the way

Aging parents? Offering help early can ease the way

Getting older is a trip.

When I was just a little girl, there were two sisters—probably in their 60s—who would walk our neighborhood every evening. I remember watching them walk and chat and laugh together. It seemed like I would never be that old! Then, as my sister and I were chatting and laughing our way through the English countryside this summer, I realized: we’ve become those sisters!

Of course, walking with my sister is one of the enjoyable things about getting older. Not everything about aging is quite so pleasant (what an understatement!). And while physical decline is something every one of us dreads, one of the bigger threats to our health and happiness is mental decline. As a financial advisor, I see the effects of it every day on the lives of my clients. Watching my clients age is hard, not only because it reminds me that I’m no spring chicken myself, but because I know that, inevitably, there will come a time when they won’t be able to manage their finances themselves. The hardest part? If they don’t realize they need the help of a trusted family member or friend—or they aren’t willing to accept that help once it’s offered.

Money has never been an easy thing to talk about. At any age, it takes courage to open that checkbook, investment report, or credit card statement and face reality. For some, it is because of shame—that they should have earned more, saved more, or invested more wisely. Others have a deep-rooted fear of losing all they’ve accumulated—either because someone will come along and take advantage of them, or because they’ll make a monstrously poor decision that will suddenly wash away their wealth. It’s no wonder so many seniors have such a hard time with this important transition.

We’ve all seen it. Sweet Aunt Sally is suddenly defensive when anyone offers help, and angry whenever there’s a hint of suspicion that her capacity is diminishing. Or Grandpa Bill starts angrily accusing everyone of trying to control his every move—and his money—even when it’s clear he needs help to get safely through his day. When the people we love are so easily agitated, we’re often not sufficiently brave or skillful to bring up the elephant in the room.

I’m not a psychologist. I don’t know the complex psychology behind how seniors react and deal with the decline of their cognitive abilities, but I’ve certainly seen it manifest itself into troublesome financial decisions… over and over again. That’s precisely why, as adult children or caring friends, we need to find a way to broach the issue—at the right time and place.

I recently visited my client and good friend Cindy at her home in Sedona. Hours away from her adult children and family, at 84, she relies heavily on her live-in caregiver. From managing her physical care, to picking up her prescriptions, to balancing her checkbook and managing her daily cash flow, her caregiver seems to do it all. I had to raise a red flag. “She’s a great resource for you,” I said to Cindy. “I know that you trust her, but do you have any mechanisms in place to be sure she doesn’t take advantage of you?” Initially, Cindy was defensive. “It took me forever to find someone I could trust. I don’t even want to think that of her.”

I get it. But because Cindy was in a potentially vulnerable situation, I carefully continued. “I have a thought,” I said. “As your financial advisor, I know how you manage your money today. Will you give me written permission to contact your daughter if your finances ever start to look sketchy? Or if you start asking me to make financial transactions that are inconsistent with your plan? That way I’ll know you’re protected.” Cindy’s face immediately eased into a smile of relief. Having a solution seemed to ease her mind and put her on more solid footing.

Aging is a given—for all of us. Cognitive decline is inevitable, and research shows that our skills at financial decision-making are affected early in the aging process. At the same time, our emotions get more reactive and our capacity to handle new challenges declines. It’s a deadly combination. If you’re spending the holidays with your own aging parents, I urge you to be on the lookout for any signs of cognitive decline. Are they confused about basic things? Do they get agitated when they’re offered help or suggestions? If so, here are three next steps to consider when the ”happy and hectic” joys of the holidays are over:

1.     Help put an A-team in place. Everyone needs an A-team to assist with critical decisions, and your mom or dad may need one more than ever to manage the transition into older age. Read my blog When all feels lost, it’s time to find your A-team for a detailed list of the seven players I recommend you help find and recruit a strong team right away.

2.     Offer to start helping with the finances today. Change is coming. Suggest a Standing (not Springing) Durable Power of Attorney that gives you the legal authority to help manage your parent’s finances right away—without having to go through the legal process of having him or her deemed incapable. See if you can agree to a firm date, perhaps a specific birthday, when you can take over completely. Agreeing to this transition in advance can reduce or even eliminate the fear and anxiety about how and when to hand over the keys to the coffer.

3.     Schedule a family meeting. Communication is the key to family bliss—especially when it comes to money. Be sure all your siblings understand your parent’s wishes so no one is accused of manipulating the finances later on. Make a list and cover all the details to be sure the right people have the right information when they need it in the future. Even perfectly prepared legal documents can’t help anyone if they’re not in the right hands.

Over the holidays, take the time to relax and have fun together. But if it seems like Mom or Dad may need help today—or even within the next five years—make your New Year's resolution an important one and begin the conversation. By talking about the changes that are coming, you can help one or both parents prepare for an easier, more secure future.

Need help broaching the topic or putting a plan into action?  This email address is being protected from spambots. You need JavaScript enabled to view it.  to schedule a time to chat. As always, I’m here to help.

 

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Giving when (and where) it’s needed most

Giving when (and where) it’s needed most

For many, Thanksgiving begins the giving season. The holiday is a time to be thankful and to give to charity—whether that means volunteering to feed the homeless on Thanksgiving Day, or offering time, money, and physical goods to a worthy cause. In recent weeks, it’s been thrilling to see the outpouring of charity to non-profit organizations. Charities that support the environment, immigration, and equal rights for women and LGBT people have seen a swell of support—adding up to an unprecedented outpouring of donations. The Sierra Club saw a 400% increase in its average monthly donations in November, and the American Civil Liberties Union (ACLU) broke its own donation records this month as well, collecting $2.4 million from nearly 39,000 contributors.

If you’re feeling equally enthusiastic about giving this Thanksgiving, it’s a great time to put your money where your heart is. Major cuts in federal support for many of these non-profits may be in the works, and it’s likely that tax incentives for giving will decrease in the coming years. The good news: there are a number of ways you can maximize your giving immediately. Here are just a few ideas:

Donate from your IRA. Last year, Qualified Charitable Distributions (QCDs) from individual IRAs were finally made permanent. A great tool if you are overfunded in your IRA, a QCD allows you to donate up to $100,000 of your tax-deferred IRA savings annually—and the portion you donate qualifies toward your annual Required Minimum Distribution (RMD). Even better, it isn’t added to your Adjusted Gross Income for tax purposes, which strengthens your gift by enabling you to give even more.

To qualify, you must be 70 ½ or older on the date the donation is made, all funds must be transferred directly from your IRA to the charity (most charities are prepared and more than happy to assist with the paperwork!), and the transfer must be completed before you receive any other distribution toward your RMD.

Create a Donor-Advised Fund. If you have significant assets to donate today, this type of philanthropic fund allows you to receive a current-year tax deduction (under the current rates) while providing support for the charity of your choice for years down the road. Because any gifts to a Donor-Advised Fund are irrevocable, you receive the tax credit for the current year only. You also have the option of donating non-cash assets such as stocks or other complex holdings directly into the fund. This not only helps you avoid capital gains tax, but that savings enables you to give even more to the causes you’re helping to support. Your contribution is treated as a gift to a 501(c)(3) public charity, and you are allowed to deduct up to 50% of your adjusted gross income for cash gifts, and 30% for appreciated securities.

Once assets are gifted to the fund, the investments can be sold or reinvested for continued growth without generating any capital gain tax to you as the donor. And though you’ll receive the tax deduction right away (that means 2016 if you can pull it all together by year end), you can donate the account proceeds at any time—in the year the gift was made (and credited to your taxes) or in any subsequent year.

Donate stocks or other investments “in kind.” The Dow just broke yet another record this week, topping 19,000 for the first time in history. That’s great news—in part because there are substantial benefits when you donate appreciated securities directly to charity. When you sell your securities directly, you’re likely to get hit with some hefty capital gains tax, which can significantly reduce the funds you have remaining to gift. Luckily, there’s a way around this conundrum.

By donating your appreciated assets “in kind” to a charity, they receive the actual stock (or other assets), rather than the proceeds from the sale of the asset. As a result, you save the Federal capital gains tax and any state taxes. Benefits to you include a lower adjusted gross income (AGI), and the market value of the donation as an itemized charitable contribution. The charity benefits as well; because the gain on the security is tax-free to a qualified 501(c)(3) charity, the organization is able to sell the security tax-free. Leaving taxes out of the equation means more dollars to your beneficiary charity.

No matter how you give, deciding where to give is an important choice. There are numerous sites to help you research potential charities to be sure that they’re legitimate and that your dollars will actually be used to help your intended recipients. Take a look at Charity Navigator and Charity Watch to help you determine the best options. And when you do make a decision, I recommend making significant contributions to a select few rather than smaller contributions to many. Not only will your gift have a greater impact, but you’ll likely feel a stronger connection to the charities that matter most to you—and vice versa.

Of course, the most important thing is simply giving what you can, when you can, to the charities that matter most to you. Remember that every dollar makes a difference. In times like these, when certain causes are in greater need than ever, I hope you’ll consider giving what you can.

Need help setting up a donor-advised fund, QCD, or other vehicle for charitable donations? Please contact us right away to be sure we can meet the December 31 deadline. As always, I’m here to help.

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Index

09 November 2016

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All written content on this site is for information purposes only. Opinions expressed herein are solely those of Lauren S. Klein, President, Klein Financial Advisors, Inc. Material presented is believed to be from reliable sources and we make no representations as to its accuracy or completeness. Read More >