Proprietary investment strategy
401 Advisor, LLC specializes in building client portfolios using dividend paying stocks due to their long term history of providing superior returns over non dividend payers. I recently contributed to an article posted by U S News on their web site. The article highlights warning signs that a stock may be cutting their dividend in the future.
Just a quick warning to anyone that may have purchased a Genworth Long Term Care product. Genworth’s stock dropped over 30% on Thursday after they reported earnings. Apparently the restated their financials after recalculating the reserves required for their outstanding Long Term Care Insurance contracts. Simply put, they admitted that they grossly underestimated how long clients would live and thus how long they would utilize their long term care insurance.
What does this mean to an insured? Likely premium increases. LTC products guarantee premiums won’t go up on an individual basis, but they can increase premiums across all policies of the same class. Based on what I’ve read, expect rates to go up very significantly.
For more information give us a call and we can review your coverage.
While the markets have shown some recent volatility, the one thing we can count on is our dividends and dividend increases. One of our popular holdings, Microsoft (MSFT) announced a dividend increase yesterday. Their quarterly payment has been upped from $.28 to $.31 giving investors an 11% raise in their income. When is the last time you received an 11% raise?
For more information on how to have a life long stream of rising income schedule a free portfolio analysis today!
As of noon today our “Growth” portfolios will be 80% in cash.
I anticipated that the market would be a little volatile as we head into earnings season, but selling sentiment seems to have been unusually strong over the past week.
Hopefully markets will rebound with earnings announcements, but if sell off is related more to China and Europe, than this could be more than just a 10% “correction.”
I hate to put a damper on the biggest gift giving season of the year (the time between Hanukah and Christmas), but one warning could save major headaches down the road.
Many times seniors like to take advantage of the current $14,000 gift giving exclusion. This allows anyone, at anytime, to give up to $14,000 a year to as many individuals as they desire, without paying income tax or affecting their estate tax exclusion. The confusion and potential problem is that such gifts are not allowed under Medicaid rules, and could potentially limit when a nursing home patient would become eligible for Medicaid assistance.
A little background. Nursing homes today can easily run over $80,000 per year depending on level of medical care required. Few seniors have the income necessary to fully pay this kind of cost, especially if a stay at home spouse is involved. Assets are typically sold off to pay the difference. In the circumstances of an extended stay, many seniors will eventually rely on Medicaid to supplement the cost of care. However, Medicaid has strict financial requirements. Meaning you must spend down all but a very small amount of your assets before Medicaid will assist with the costs. Medicaid also considers any gifts given over the last five years as if they were still part of your current assets, and so will not start paying until additional costs equal to those gifts are incurred.
For example, Mrs. Smith gives $10,000 a year to each of four children every year for the past five years. She enters a skilled care nursing home facility costing $80,000 per year. Her Social Security and pension equal $20,000 a year, so she must liquidate $60,000 of savings each year to cover the cost. In three years she has exhausted her original $180,000 nest egg. Normally Medicaid would now step in and cover her costs over her $20,000 per year income. However, since she was still gifting the $10,000 to her children for two of the prior five years, Medicaid will not start until she incurs additional nursing home costs equal to the amount of those gifts, or $80,000. The children will be expected to pick up her nursing home tab for two years before Medicaid will begin payments.
While this is a simplification, formulas and state rules will come into play, the general point is valid. So while gifts are always nice, if you are receiving financial gifts from elderly parents or grandparents, you may want to put that gift into the bank, instead refurbishing the kitchen.
On a Positive Note
I can’t end without a more positive planning note. If you are planning on making gifts to charity, consider giving shares of appreciated stock directly. This way you avoid paying capital gains taxes, still receive the full charitable deduction, and a charity can cash in the securities without being taxed on the gain. Most charities have brokerage accounts established just for such gifts. If not we can make arrangements for them.
For more information on proper gifting techniques feel free to call and schedule an appointment for a free consultation.
I recently posted an column at: MarketWatch.com titled: “Why Individual Bonds Remain Very Attractive” While investors are bailing from bond mutual funds – a wise move, individual bonds do offer protections against rising interest rates not found in bond mutual funds.
My overall prediction is that rates cannot go up dramatically. With every 1% increase in interest rates, the added amount the government must pay to just pay the added interest cost on the Federal debt, increases by about $180 billion. For perspective, the “sequestration”, the mandated cuts put into place that get the blame for everything bad in the economy, only cut spending by $42 billion (and prevented another $43 billion of spending increases). Simply put, the government and the Federal Reserve have a lot at stake to keep interest rates relatively low for a very long time. That said, a ½% increase across the board seems likely – but only if the economy continues in a positive direction. I think this is a big “if”.
The short version of the MarketWatch article is that many investors think that a bond’s value is fixed, and that they are stuck holding a bond to maturity. The reality is that a bond’s value will naturally increase in value through the first half of its life. This allows a bond investor to sell their bonds at a profit after a short holding period. If rates don’t increase. But even if rates rise, a bond will likely return to its par value several years before its actual maturity date.
For example I was recently quoted an Ohio municipal 10 year bond, Aa2 rated and insured, a ten year maturity, and a 3.655% yield to maturity. That is a federal and state tax free interest rate. If interest rates do go up ½%, the face value of the bond will drop below purchase price for the first 3 ½ years or so. But by year 5 the bond should be back to what an investor would pay for it today. So in effect, your 10 year bond has come a 5 year bond – paying 3.655% tax free. That is a pretty good deal.
If you own bonds and want to know when an optimum time would be to sell them, contact my office and we will run the analysis for you. If you need more income, or just want to diversify but don’t know where to go, give us a call and we can explain what bonds can do for you, even at a time when everyone is cashing in on their bond funds.
I was recently interviewed by Robert Margetic of Web Talk Radio for a piece on “The New Retirement – Its Your Attitude” The segment discusses new thinking that retirees must adapt to for a successful financial retirement.
The markets have had a very nice rally since mid July when Mario Draghi, ECB Head, gave a speech indicating that the ECB will do “whatever it takes” to keep the Euro together.
This week has brought a modest pause to the advance. The question now becomes, “Is this a pause, or the beginning of the end to the rally?” Unfortunately, in today’s politically charged environment judgment can be clouded. And global events certainly add an additional interesting backdrop for today’s investors.
The chart below is from http://www.chartoftheday.com. The chart plots all major market rallies of the last 111 years. Each blue dot represents the rally’s total return and the length of the rally. The “You Are Here” dot is in the bottom left corner.
The question I am asked frequently is whether the market is “too high” since we are approaching all time highs. From the chart below, it is evident that, by historic market rally standards, this rally has just begun.
Unfortunately, investing is never that clear cut.
If you look just above the “You Are Here” dot, you’ll see the label for “2002”. The post “tech wreck” rally was slightly less in return and slightly longer in duration than where we are now. And as we all now know, the 2002 – 2007 rally ended most unhappily.
Conclusion: If this is another “Bear Market Rally” i.e. Similar to the 2002 – 2007 rally, we are likely looking at an over extended market.
But if this is truly the beginning of a new market cycle, then we are just at the beginning.
Over the weekend I’ll work on a new post outlining our current strategy as we head into the years final quarter.
Bottom Line: There is plenty of time for patience to pay off. Being conservative is not such a bad idea. More aggressive investors might want to start looking at building there “market rally” portfolio, if they haven’t done so already. With cash on the sideline, I think it would be prudent to see how earnings season plays out before committing. If in the market, I’d plan an exit strategy now
Our portfolios have lagged the overall market since mid-June when the recent market rally started. The portfolios have continued to hold our “low beta” selection of dividend paying stocks and ETF’s.
The rationale to remain in “coast” mode is that it is my opinion the rally has been primarily fueled by Mario Draghi’s comment that the ECB stood ready to take “any action necessary” to preserve the Euro and by extension the EU, including Greece. The problem is that the ECB does not have the authority to follow through on such statements. Simply put, the ECB is prohibited from “printing” the money they would need to implement a U.S. style round of quantitative easing (QE). It is pretty well accepted, that absent such action, there is just not enough economic backing to backstop the financial bleeding in Europe.
The bull argument continues with the “bad news is good news” theme. With China’s economy softening, U. S. economic data “softening” at best, the economic stage is being set for a global simultaneous easing from China, the U.S. and Europe.
The best bull argument is that things are getting worse, so there has to be Fed intervention which would fuel a global rally. I am not willing to buy into that scenario. However, if we actually see such action come to fruition, we will change the look of our portfolio, jump on the bandwagon, and look for higher beta (more aggressive holdings) to capture gains if the rally truly emerges. With the risk to the markets extremely high if such hopes don’t materialize, I will wait for the Central Banks to literally “show me the money” before making a commitment with client’s hard earned investment dollars.
Below is a screen shot from covestor.com comparing my Dividend and Income Plus Portfolio (Dark Blue line labeled “Manager”)to the S&P 500 for the prior 90 days. While the underperformance is clear, so should be our lack of volatility. In fact the portfolio sports a beta of .63, or a volatility measure of 37% less than the S&P 500. And even with our 20% cash position, the portfolio is sporting a very healthy 4.5% dividend yield.
Combining the low volatility with the dividend yield, we are extremely happy with our overall performance, especially for the risk adverse income investor, such as a current or near retiree. Furthermore looking at the graph below, again from covestor.com, I zoom in our recent performance.
Since the recent market peak on August 17, the portfolio has outperformed the market by .7% over just two weeks.
Our ETF Seasonal Growth Model has had similar relative results.
Mario Draghi has “leaked” his plan for ECB bond buying and the reaction has been a big yawn. I expect September to be a volatile month and expect to close the recent gap in relative performance with the S&P 500. Primarily by maintaining value while the S&P 500 corrects. I hope to be true to our motto, “It is not what you make, but what you keep that matters”.
Looking a little further out I do expect the post election rally. I have picked more aggressive investments to rotate into our portfolios if the rally does materialize. Until then patience is prudent.
Individual performances will vary depending on timing of investments, withdraws, specific holdings and allocations. Past performance does not indicate future results. All investing involves risk. Please consult with your financial advisor on suitability of any investments specifically mentioned prior to investing.