A lot of attention is being paid to generational differences between the wealthy, particularly the differences between prosperous Gen X and Y’ers, and their boomer parents. Several recent studies have looked into this, notably the Fidelity Millionaire Outlook, which looks at the financial behavior of millionaires of different generations.
Understandably, the younger generation wants to find their own path. I’ve experienced this firsthand, with two of my kids. When they each bought a house, they chose their own agents, and their own mortgages. I was more than willing to help with my professional expertise, but they wanted to make their own choices.
The danger is that this deep level of engagement, which is fantastic, is often not matched with a deep knowledge of financial matters….and that, like all people, Gen X and Y’ers tend to be trend followers. Without the benefit of professional advice, they may be more likely to buy high and sell low—and see the financial damage that results.
Some of the Fidelity study results bear this out. It’s really easy to feel knowledgeable and successful in an up market like the one we’ve been experiencing. Mistakes are masked…if you’re in the market, you’re most likely making money. The study shows that Gen X and Y’ers are making an average of 30 trades per month…probably following the advice of pundits like Jim Cramer.
These folks are paid to make bold and knowledgeable-sounding predictions…but they aren’t paid by how accurate those predictions are! I would advise investors to look at sites like pundittracker.com, which tracks the performance of pundit recommendations. I’d also suggest that they read a great whitepaper produced by Davis Distributors, Timeless Strategies for the Successful Investor.
Predicting the day-to-day movement of the market is next to impossible…and a high level of self-directed trading is, to me, a huge red flag. Many of my current clients are former self-directed investors, who did some damage to themselves, and then luckily realized in time that they needed professional help.
If you’re looking for a financial advisor, I’d suggest that you check out the Consumer Advocacy page on our website. There are many types of advisors, and they are not all created equal!
Gen X and Y’ers are correct to shy away from commission-based advisors who get paid based on the products they sell you. But, professionals can help you avoid getting hurt by the next market downturn. Picking a NAPFA-certified, fee-only, fiduciary financial advisor, whether that’s Wade Financial Group or another firm, is the best move you can make…and then you can focus on your career and family!
--Jerry Wade, CFP®, CFS
Chief Investment Officer
Chief Wealth Advocate
UPDATE: Jerry Wade was interviewed on WCCO radio on this subject on Thursday, October 10. Listen to the full audio.
According to a recent survey of company CFOs, nearly half believe that the stock market is overvalued. At Wade Financial Group, we have the belief that what goes up, must come down. We’ve seen 50 percent drops in the stock market twice in the past 15 years—in 2000 and 2008. We’re now riding a 5-year rise in the market…which means that we may be poised for ugly results over the next 5-10 years.
Let’s look at the Shiller Price-to-Earnings ratio, commonly called the Shiller P/E ratio. This is an equity valuation that divides the market price per share by the earnings per share. Here's a chart from GuruFocus.com, looking at the ratio.
At the time of this writing, the Shiller P/E ratio is 23.6 (the red line), which is higher than the average of 16.49 (the gray line). What does that mean? Company stock prices are high compared to company earnings.
Global investment companies like PIMCO look at that; PIMCO just this summer released a forecast that annual returns will be in the area of 4.2% over the next five years, and a dismal 1.5% over the next 10 years.
As we mentioned before, we’re riding a 5-year rise in the markets…which means we may face a possible correction that will hurt investors:
What happens when you buy at the peak? Let’s look at history. What would you have earned if you bought stocks at the peak of the tech bubble in 2000 and just held them until today?
- 10.5% total return over 13 years
- 0.81% per year—before fees and taxes
If you bought today, my feeling is you would have the similar returns over the next 5-10 years.
What can investors do?
If you’re looking for income, there are a few areas I am recommending to my clients:
- Carefully selected high yield bonds
- There are mutual funds where you can buy $1 worth of tax-free muni bonds for 0.85 cents.
- Carefully selected dividend stocks in US
- Consider selling covered calls for a more reliable income stream.
- Global bonds
If you’re looking for long-term return, I would consider emerging markets, which have been beaten up badly in the past few years. We've blogged before about the opportunity we're seeing with emerging markets. Their Shiller P/E ratio is in the 10-15 range—or below average. While there are no guarantees in investing or in life, this may signal a higher return over the next 5-10 years.
--Jerry Wade, CFP®, CFS
Chief Investment Officer, Wade Financial Group
UPDATE: Jerry was interviewed on this subject on WCCO radio, on Tuesday, October 8. Listen to the full audio of the interview.
On October 1, state health care insurance exchanges are scheduled to open, in the first major implementation of the Patient Protection and Affordable Care Act—also known as the ACA or Obamacare.
There’s a lot of conflicting information in the media about how the exchanges will impact consumer health insurance. The highly reputable CFP Board’s Consumer Advocate blog has published several helpful articles, discussing the known or expected impacts for three distinct groups:
For Medicare recipients, the impact will be smaller. The law makes no changes to Medicare eligibility or enrollment, and reduces the “doughnut hole”—the gap in prescription drug coverage. By 2020, the gap is scheduled to be eliminated. The law also includes free preventative care, including some vaccines and screenings.
We will continue to monitor the changes in health insurance, and will pass along helpful resources to you as we have access to them.
From Bob Smrekar, AIF®
Wealth Advocate
Investment News interviewed Jerry earlier this week for an article about how advisors are once more seeing opportunity in emerging markets.
Describing them as a “screaming long-term buy,” Jerry shared some of our recent moves in that area, which we discussed in an earlier blog post.
Read the full Investment News article. Investment News is a national newspaper covering the financial services industry.
The timing of purchases and sales of assets affect whether they are subject to special long-term tax treatment or considered part of ordinary income. People with variable income from year to year should pay special attention to when they pay bills or accept income.
For example, some expenses can be prepaid or paid early to maximize a deduction, such as property taxes.
Bonuses and stock awards could be deferred from one year to the next if you are likely to be in a lower tax bracket in the future year.
This ability to move income from one period to the next underlies the benefit of tax-advantaged retirement savings: Defer payment of taxes in high-tax earning years until the low-tax, lower income retirement years.
This is part of an occasional series of tax tips from Tom Brunberg, head of Wade Financial Group’s Year Round Tax Planning Service.
Last week, we recognized a potential long-term opportunity in emerging markets…and we seized it.
A price gap—now almost a 50 percent difference—has grown between U.S. and emerging market equities and bonds.
At this point, we believe that emerging market equities and bonds are undervalued…and therefore present a long-term investing opportunity.
Sensing this, we took immediate action, adding emerging market exposure to our Paid to Wait®, Foundation, and Lifestyle Income Bond accounts.
For our Foundation accounts, this move was in addition to our normal rebalancing schedule, as we felt we needed to act quickly and proactively. We will perform the full rebalancing on this account as scheduled.
Also, for those clients with Wade Financial Group-managed 401(k)’s, we performed our regularly quarterly rebalancing a month early, so that we could increase exposure to available emerging market funds.
This move exemplifies our Contrarian Value (ConVal®) investment approach, with its focus on identifying and purchasing undervalued assets as we invest with a long-term view.
We continue to eye potential opportunities in emerging markets and elsewhere, and will continue to research and seize potential investing opportunities on your behalf.
Adequately documenting your income and expenses is essential for correct analysis and calculation of the taxes you owe. Throwing receipts into a desk drawer or relying upon memory is a sure way to understate deductions and overpay taxes.
Monthly statements from banks, brokers, mutual fund managers and others who provide financial information should be filed for easy retrieval and safely stored.
Remember, the IRS can go back a minimum of three years in a tax audit, and even six years in some serious violation cases, from the date a return is filed. It's prudent to not only maintain good records to file correctly, but to keep them for at least six years after the filing date in case of an audit.
This is part of an occasional series of tax tips from Tom Brunberg, head of Wade Financial Group’s Year Round Tax Planning Service.
