Another Bumpy Day

There’s no question that the stock market has been volatile so far this year.  In fact, in the first quarter of 2008, the Dow Jones Industrial Average had 35 days with triple-digit point moves and the S&P 500 had 31 days with a move of more than 1%.

Today’s action was no different.  The day started strong, with a better than expected rise in the GDP of .6%.  The was followed by the expected .25% rate cut by the Federal Reserve.  The end result was that the Dow reached a peak of roughly 13010 at little after two o’clock.  After the Fed cut was absorbed and a few more earnings, reports came out, the Dow closed at 12820.13.  For the day, the Dow  had a range from 12808.98 to 13010.00, for a swing of 201.02 points.

It looks like the Fed will now take a breather from the interest rate cuts that have trimmed a total of 3.25%  off rates since September.

With the summer months, which are generally fairly volatile, fast approaching, prepare for this seesaw up and down motion to happen for a little while longer.

As we always tell clients, as long as your portfolio is allocated the way it should be, although unnerving, these wide fluctuations are not unprecedented, nor are they particularly detrimental to your portfolio.

Hang in there.  This too shall pass.


To Catch a Middle Aged Insurance Agent

Apparently, Chris Hansen of Dateline NBC after, numerous versions of his ‘To Catch a Predator’ series, has run out of child molesters to catch on hidden camera. In his current sting operation entitled ‘Tricks of the Trade’ Mr. Hansen isn’t going after drug pushers, or pimps or even sweat shops. No, instead he’s focused his energy on the most nefarious operators out there, the unsuspecting, middle aged insurance salesmen pushing annuities on the elderly.

Thank God investigative journalism isn’t dead quite yet.

Now, I’m being a little facetious when I bag on Mr. Hansen for going after insurance agents. I will be the first to admit that there are unscrupulous agents out there selling annuities with long surrender periods to elderly clients that almost certainly won’t survive long enough to get out of, simply to earn a commission.

At issue in this particular piece was the sale of Equity Indexed Annuities. The selling point of these annuities is that you get some exposure to the returns of the stock market but you are protected from loss by a guaranteed minimum interest rate.  Sounds simple enough.  The problem is that there are many options in how your interest rate is calculated, the types of guarantees, length of surrender period and any number of other variables to be considered.   In fact, despite the way they’re sold, these types of annuities, by their nature are complex with many moving parts.

If you have an elderly client, friend or relative and they indicate there’s a salesman coming to talk to them, do them a favor and make time in your schedule to be there for the presentation, or be sure your trusted financial professional looks over any presentation before they sign.  You’ll save everybody a tremendous amount of grief.

Equity indexed annuities are not bad in and of themselves.  As I’ve said many times, most financial products aren’t bad, they’re just sold that way.

The Importance of Naming the Right Beneficiary

Quick, who is the beneficiary in your IRA, how about your 401(k) and life insurance? The truth is that most people, depending on how long it’s been since they designated the beneficiaries on their accounts, probably don’t know off the top of their heads. What they don’t know is that an incorrect or non-existent beneficiary can cause you and your heirs a lot of trouble.

Review Beneficiaries When Your Life Changes

Most people give considerable thought to who they’ll name as beneficiary when they originally establish their retirement accounts or purchase their life insurance. The problems arise when, over time, those designations are no longer valid. You may have named your spouse at the time you signed up for your 401(k), but she, unfortunately was 2 spouses ago. How do you think your current spouse will feel when she finds out your ex is entitled to your 401(k) and not her? Granted, you won’t be around to deal with the aftermath, but your passing is already stressful enough, without the added stress of a court fight over your estate.

So how often should you review your beneficiary designations? At least annually, and certainly when you have a life change such as a job change, birth of a child, divorce or re-marriage. In this way, you’ll be sure your beneficiaries reflect your current circumstances.

Why Name a Beneficiary At All?

Naming a beneficiary on your retirement accounts and life insurance policies allow those assets to pass to the beneficiary outside of probate. As we’ve discussed before, probate is a long, slow, expensive and PUBLIC process of determining where your assets go upon your death. With a beneficiary designation, no matter what your will says, the beneficiary designation takes precedent. So, even if you’ve changed your will to cut out your estranged son, if he is still listed as beneficiary on your life insurance policy, he will receive the money, regardless of what the will says.

The last thing you want to do is to have where your assets go determined by a judge that has little or no idea what you really wanted.

Estate Taxes and Beneficiaries

Correct use of beneficiaries can greatly reduce or eliminate estate taxes when you die. If you name your spouse the beneficiary of your IRA or 401(k), those accounts WILL NOT be counted in your estate and are therefore not subject to estate tax on your death. Be aware, however, that the government eventually gets their pound of flesh when your spouse passes away.

If you have more than one child and you want to have them split the proceeds from your IRA equally, you can reduce their tax burden by actually splitting your account. If you have three children, you split your IRA into three individual IRA’s naming one child as beneficiary of each IRA. By doing this, your children will have to take regular distribution from their inherited IRA, but they can spread those distributions over their longer individual life expectancies, not yours.

Finally, if you name a charity or other 501(c)(3) as beneficiary of your account, the asset will pass to the charity tax-free and your estate will also be entitled to a charitable deduction, which may reduce or eliminate taxes on the rest of your estate.

If you haven’t reviewed the beneficiary designations on your account in a long time, don’t guess, or hope they’re still valid. Take the time to talk to your trusted estate planner or financial advisor to ensure that your assets are disposed of the way YOU WISH, and not leave it up to the courts to decide.

Financial Products Aren’t Bad, They’re Just Sold That Way

Oftentimes when meeting with clients and prospects, we caution them about putting too much credence into the rantings of the popular financial press. We remind them that these writers and pundits are in the business of selling magazines, newspapers, books or investment courses (or some combination thereof). Due to limited space, and in order to stand out from the crowd, they must take very strong stances, pronouncing some financial products “good” and others “bad”.

It has been our experience that, save for outright illegal products, it is ridiculous to attach a “good” or “bad” moniker to a particular financial product. Any tool, financial or otherwise, is “good” for some situations and “bad” for others. Very rarely is a particular tool flat out good or bad in all circumstances. Would you say that a screwdriver is a “bad” tool because it doesn’t cut wood? No, of course not. What you might say, however is that the screwdriver is a bad choice for cutting wood but a good one for it’s designated purpose of turning screws.

All financial products are, like that screwdriver, merely tools to help you achieve your financial goals. Most financial products available are good for some situations and bad for others. Problems arise not from the design of the tool, but when it is sold for an inappropriate purpose by either an unscrupulous or poorly trained financial advisor.

Let’s use a product that we see getting bad press all the time – annuities. Various columnists we’ve seen (who shall remain nameless), when asked about annuities will say simply that they are “bad”. They’ll argue that annuities are illiquid, expensive, pay huge brokerage commissions and that you absolutely don’t need one. What these columnists fail to tell you is that annuities are a great tool when used for their primary purpose – providing a stream of income that you cannot outlive. When annuitized, they work much like traditional pension plans, providing a steady stream of income that will last a lifetime. For a segment of the population this guarantee provides the priceless benefit of peace of mind. Is your money illiquid? Generally speaking yes, for a finite period of time. Does the guarantee of not outliving your money come with a cost? You bet. We all know there’s no such thing as a free lunch. Did your broker get a commission? More than likely, yes. The fact that the broker receives a commission doesn’t make it a bad product; it just makes it imperative that you understand the potential conflicts of interest the broker may have had in selling it to you. Do you not need an annuity? We don’t have a clue. Until we’ve met with you for a full review of your entire financial picture, we can’t tell where an annuity fits in the mix. Nobody can. In fact, we recommend you run far and run fast from any advisor that makes a recommendation without asking a LOT of questions first.

Hopefully we’ve learned two important lessons here: 1) Remember that newspapers, magazines, radio and TV shows are in the business of selling more of their product, so take what they say with a grain of salt, and 2) Be very wary of anybody that tells you that a product is “good” or “bad” without understanding your unique financial situation. To paraphrase a line from the movie “Who Framed Roger Rabbit?”, “Good products aren’t bad, they’re just sold that way.”

From Ben Bernanke’s Mouth to God’s Ear

In his testimony before Congress, Fed Chairman Ben Bernanke admitted that the economy is slowing and that it could actually contract in the first half of the year, even conceding that a recession was “possible.”

That’s the bad news.

The good news is that he, and many other economists, feel that with the recent stimulus package (i.e. rebates to taxpayers), plus the moves the Fed has made to help alleviate the credit crisis, will grow in the second half of 2008, stating “Much necessary economic and financial adjustment has already taken place, and monetary and fiscal policies are in train that should support a return to growth in the second half of this year and next year.”

Although not directly stating it, Mr. Bernanke also hinted that the Fed might not act as quickly to cut interest rates again, instead opting to see how the stimuli in the “pipeline” will play out.

Let’s hope Mr. Bernanke and the economists at the Fed get it right so that if we are in “recession” it ends up being a relatively mild and short one.

Is The Worst Over?

Both UBS and Deutsche Bank announced HUGE writedowns on their risky assets today. UBS wrote down $19 billion, that’s right billion with a ‘B’ and Deutsche Bank wrote down an additional $4 billion on their assets.

A week ago, the market would have responded negatively to MORE writedowns in the banking sector. Instead, the financials are rallying today on the news.

What gives?

Although the numbers are staggering, the consensus is that, hopefully, this is the last of the huge writedowns from the major banks. More than anything, markets HATE uncertainty. When things are uncertain, the market tends to drop based on the absolute worst case scenario, which rarely if ever comes to pass. By ‘biting the bullet’ and aggressively marking down questionable assets, we can now move on to repairing the damage.

Of course, there will continue to be fall out from the sub-prime mortgage mess and the stocks of the financial firms will remain volatile for some time, it just might be that, finally the worst of the damage is over.