It's all about the Benjamin's

Well, not really.  So many times the focus when discussing financial planning and investment management is maximizing returns, growing balance sheets, minimizing taxes, and inflating positive cash flow through various strategies.  A saying that goes something like “it’s all about the Benjamin’s” reflects this focus which is echoed through media outlets and (sometimes) our society as a whole.

Have You Considered......

What rate of return do you need to achieve on your investments to meet your lifetime financial goals?  What type of investment risks can you afford to take?  Have you ever considered these questions? 

Through our comprehensive wealth planning process, we provide the answers.  We analyze your yearly spending (adjusted for inflation) relative to the value of your investment portfolio and sources of income.  From this analysis we help you determine appropriate risks to take and the rate of return you must achieve to meet your financial goals. 

April 2011 Market and Planning Update (Posted to our blog two weeks after sending to our clients.)

“Pay no attention to that man behind the curtain”

The Wizard of Oz

(A 1939 film)

PLANNING Commentary

We have written often about owning up to the truths our country is facing.  When we mention the country we think of political leaders, taxpayers, business owners and future generations, who will arguably feel the effects of decisions - good or bad - that are made today.  Each of us has a choice when it comes to factors that can greatly affect our future (financial or otherwise) - go along as you are told by the booming voice, or yank the curtain open to see what lies behind it (and deal with what you find). 

In our planning work there are assumptions used about the future - investment rates of return, social security income received, medical costs (outside of what government programs cover for seniors) and other significant measurements.  The goal in this work is to find the truth – look behind the curtain - understand what is really reasonable to use in planning your financial future - then deal with those truths in the ways most appropriate.

We are now only reflecting a portion of promised social security income in wealth plans we are building for those in their forties and younger.  In three of the past five years, we have increased the future growth rate used for medical costs that retirees will be responsible for.  Due to economic headwinds and global challenges we reduced our expected investment rate of return earlier this year.  These efforts are not in an attempt to be pessimists, but merely to prepare plans for our clients that can withstand whatever surprises may lie behind the curtain.   

Market Commentary

As we write this letter on April 29, the S&P 500 index is up 8.9% this year.  The bond market has been quite resilient, generating a small gain of 1.5% since December 31 as measured by the Barclays Capital Aggregate Intermediate Bond index.   International stock markets have also shown more strength over the past couple months so that now the MSCI EAFE Developed Market stock index is up by 8% year-to-date.  Emerging market stocks have been volatile and were down for most of the first quarter; however, thanks to gains in March and April they have now advanced 4.3% this year.

As part of his long-standing campaign to be more open and accessible, Fed Chairman Ben Bernanke stepped out from behind the curtain this week with the first ever press conference by a Fed Chairman following an FOMC meeting.  No other Chairman has done this in the Fed’s 98 year history.  Previously, the Fed released a short policy statement after their meeting and then their actual meeting minutes were released about 20 days later.  Before 1994, the Fed didn’t even release a statement after its meetings. This move to a more open and transparent Federal Reserve should help the financial markets better understand and anticipate future changes in Fed policy.

In his news conference, Bernanke said that “the economy is growing steadily, but it is still weighed down by a period of prolonged unemployment.”  The Fed expects the economy to continue to grow through 2012 and 2013.  He acknowledged that higher gas prices are creating a hardship for many Americans, but he said the Fed doesn’t think gas prices will continue to rise at their recent pace.  He also acknowledged that the Fed can’t take additional steps to try to ease high unemployment without escalating inflation.  Specifically, “It’s not clear that we can get substantial improvements in payrolls without some additional inflation risks, and in my view we can’t achieve a sustainable recovery without keeping inflation under control.”  

The Fed has clearly stated that June 30 of this year will mark the end its “QE2” program under which it purchased $600 billion of U.S. Treasury securities (80%+ of recent issuance).  The Fed will maintain its holdings of these instruments for the time being; meaning that whenever an instrument matures the proceeds will be reinvested in a new instrument.  Although the market seems very comfortable with this concept as indicated by the 10-year Treasury yield of about 3.3%, we do wonder what the effect of losing this buyer will be on interest rates - seems to us that they should go up.  Therefore, we are investing the bond portion of client portfolios with anticipated future interest rate increases in mind.

Worsening Picture – Not Really Surprising News

The government reported today that the recent recession and weak recovery has shortened the life of the trust funds supporting Social Security and Medicare.  The annual report projects that the Medicare hospital insurance fund will be exhausted in the year 2024.  This is five years earlier than last years estimate.  The report says that our Social Security trust fund will be exhausted in 2036, one year earlier than previously expected.