Tarheel Advisors, LLC has produced an educational text on financial planning available at Amazon and Barnes & Noble. In order to have a successful retirement, you must have a plan that allows you to identify risks, reduce taxes, find good investments, understand insurance, save for education, and manage your estate planning.
Preparing for Retirement: A Comprehensive Guide To Financial Planning does this with a 160 page guide that is full of easy to read charts, examples, and an appendix of commonly used financial planning forms. Whether you have managed your money for decades or you're new to financial planning, this 2015 edition of Preparing for Retirement provides the information and techniques needed to successfully create and maintain a financial plan.
If you are an adult and have a credit report, there’s a good chance you were affected by the most recent massive data hack. For those who may have missed it, or don’t know the full details, Equifax, one of the nation’s three largest credit reporting bureaus, notified the public that they were hacked, and the personal information of over 143 Million Americans may have been exposed. The hackers accessed people’s names, Social Security numbers, birth dates, addresses and, in some instances, driver’s license numbers. They also stole credit card numbers for about 209,000 people and dispute documents with personal identifying information for about 182,000 people. Pretty scary stuff on the surface!
What does this mean for us? Maybe, and hopefully nothing. It seems that somewhere in the computer industry, critical information is lost quite frequently. I can remember quite a few similar large-scale breaches over the last few years at Target, Home Depot, Yahoo, etc.. In fact, I’d say the probability that information committed to computers will remain confidential has become pretty slim at best. Now, this doesn’t mean that having your personal information stolen should be trivialized or on the other end of the spectrum, create paranoia. We live in a day and age where this has become something we all must think about and devote time to. So, let's start with what to do about the current Equifax debacle and put in place some good groundwork to help prevent future fraudulent activity for your accounts.
The first thing to do is to contact Equifax and find out if you may have been affected. The company set up a new website to answer questions and walk you through finding out your status, and then enabling you to sign up for their free credit monitoring service. Click on the “Am I Impacted?” button and enter your information. If you have been tagged as someone that was affected, you’ll then be able to sign up for 1 year of free credit monitoring service. Due to high volume, there has been a 48 hour wait to complete the activation on a date they provide to you via email. Once you’ve checked that one off the list, you might think you’ve done enough to be safe. I’d suggest a couple more tasks to not only cover yourself in this instance, but also to take precaution for the inevitable future breaches down the road.
The next step you should take is to look over your credit reports for suspicious activity. You can view them via Equifax, but there are other players in the industry: TransUnion, Experian, and to a lesser degree, Innovis. Not all information will be the same for each company, and it is a good idea to view your full credit reports at least annually. If you do notice unauthorized transactions or see new accounts you don’t recognize, put an immediate fraud alert on your credit files. If you're concerned about identity theft but haven't yet become a victim, you can also place an initial fraud alert. For example, you may want to place a fraud alert if your wallet, Social Security card, or other personal, financial or account information are lost or stolen.
Assuming everything looks normal, the next point to consider is whether or not to freeze or lock your credit file. A credit freeze prevents creditors from accessing your credit report. It prevents credit, loans, and services from being approved in your name without consent. It does not affect your credit score. A freeze is federally regulated and takes several days to place or lift. You’ll receive a PIN number in the mail that corresponds to the freeze, and you’ll need that should you want to thaw it to apply for credit in the future. A lock is similar, but is more flexible and controlled by that specific company. You can create and log into an account at the credit bureau and lock or unlock your credit file anytime. Some of the bureaus charge a fee for each of these services that is usually at a maximum of $5. I was able to “lock” my file at Equifax and Transunion for free and “freeze” my file at Experian and Innovis at no cost. For those wondering about their kids or grandkids, it appears that the bureaus don’t maintain files on minors. Anybody over 18 should consider the above steps in light of our data heavy world.
-Walter Hinson, CFP®
It’s that time of the year where Ryan writes a boring article about interest rates. I’ll let you pause a moment and decide whether to continue to read or turn the page (joke’s on you, more is on the back).
Great! You stayed around and clearly are a glutton for punishment, or maybe you’re just tired of the 0% interest rate attached to your checking account. Well, if you’re the second camp, I have some great news for you: cash has a positive rate of return again!
Nearly a decade ago the Federal Reserve dropped its target lending rate down to 0-0.25%. While this helped support the economy during the “Great Recession,” it also effectively killed off any returns to be had in the short-term fixed income market.
Fast forward nine years to today, and after a couple of recent rate hikes cash has a return hovering around 1%. While it isn’t the more exciting 3-4% we grew accustomed to in the early 2000s, at least it is a whole number.
What does this mean from a financial planning standpoint? First of all, you need to monitor and review where your cash is sitting again. The era of 0% rates lasted so long that most people stopped shopping around for better rates on their cash. This complacency could cost you moving forward.
Currently, short-term treasuries and investment grade corporate bonds are yielding around 1.1% These are the securities that money market funds invest in. So, you should be shopping for a similar rate of around 1% in your savings accounts.
The interest rate story gets a bit more complicated as you look further down the road. If you listen to media pundits, you might be hearing that interest rates are rising, but this has only been the case in short-term rates.
The 30 year treasury bond yield spiked upward to 3.2% shortly after the Trump election, but has since dropped as low as 2.7%. As you can see from the yield chart below, the differential between a 30 and 5 year treasury is less than 1%. So, for 25 years of interest rate risk you are only being rewarded with a 0.9% increase in annual return. In the fixed income world we call this a flat yield curve.
You’re probably wondering why anyone cares about a flat yield curve. The good news is that since the recent increases have only impacted the short-term interest rates, the continued historically low rates on the long end of the curve are keeping mortgage rates down. Thus, home prices and mortgage financing remain amenable and companies can continue to finance their operations and spur growth at a reasonable borrowing rate.
Of course you know that sometimes bad news follows the good news. A flat yield curve is typically indicative of a stalled economy.
What is worse is that a flat yield curve can be a precursor to an inverted yield curve, where long-term borrowing rates are actually lower than short-term rates. This phenomenon is fairly rare, but it has been a strong harbinger of an imminent recession whenever it has appeared in the past.
The real challenge right now is figuring out where longer term interest rates head from here. While most think rates will increase from here, we are bucking conventional wisdom and think we will see the 30 year treasury hit 2% before we see it hit 4%. The Pandora’s box of global 0% interest rates (and even negative in a few major countries) is wide open now. Despite many in the United States wanting the box closed, my feeling is that during the next stock market correction we will see long-term US interest rates hitting new lows. Nobody knows when the next correction will occur, but it certainly seems like we are overdue for at least a moderate pullback before year’s end.
- Ryan Glover, CFP®
Everybody wants to be the next one that benefits off a penny stock skyrocketing in value. Everyone wishes they could’ve predicted Bitcoin’s rise from its humble beginnings in April 2010 of $0.003 to peaking at $3,000 on June 12th. Three years ago, Ryan wrote about the new fad in Bitcoin, which you can view here: http://www.tarheeladvisors.com/newsletters/July% 202014.pdf. However, despite the glitz and glamour, Bitcoin has too many concerns to make it a serious investment.
In a short two day span from March 26-27, Bitcoin’s price dropped an astounding 33% from $2,760 to $1,850. This wasn’t a onetime occurrence, however, as Bitcoin reached an all-time high of $3,000 on June 12th and subsequently dropped to $2,316 just three days later (a 23% decrease). Bitcoin’s volatility makes it more of a speculative asset than a currency, and should be regarded as such by those considering investing. Bitcoin will not be a safe asset until enough time has passed allowing it to stabilize its worth.
One of the greatest allures of Bitcoin is that it's not backed by a government, which allows its users to remain somewhat anonymous. If governments around the world declared Bitcoin to be a legal currency, Bitcoin exchanges would have to comply with anti-money-laundering regulations. Government involvement would reduce the prized invisibility which could lead to diminished appeal for Bitcoin resulting in plummeting value. The fad of being anonymous may not be permanent, and it is only a matter of time until laws are established to remove anonymity or ban the currency altogether.
Just because something has an upward trend in trading value doesn’t mean it’ll last forever, and it certainly doesn’t mean you’re ahead of the curve if you want to jump on the bandwagon now. People might understand a general concept of Bitcoin and cryptocurrency, but they might not understand the larger implications of how it’s challenging monetary theory. On top of being mysterious, there isn’t any reasonable way to invest in Bitcoin other than through risky n o-n ame exchanges. The risk associated with a Bitcoin investment is substantial and disproportionate when compared to the potential reward. Don’t invest in something if you don’t know what it is.
The three points previously stated about Bitcoin’s price volatility, anonymity, and mysteriousness all are due to one encompassing principle: Bitcoin is not real. Bitcoin is an online currency which you cannot hold in your hand. Its value is based entirely on your trust in the algorithm, the exchange, and the willingness of the market to accept it. Dana Blakenhorn of Investor Place says, “Complain all you want about the ease with which the Federal Reserve creates dollars. You can create your own crypto-currency, today, using the PC in front of you, which becomes real as soon as someone is willing to create, or mine, and trade the resulting encryption keys.” Bitcoin’s value can fall as fast as it rises.
In my opinion, Bitcoin’s drawbacks make it a logical comparison to your odds of profiting off gambling in Vegas. Would you trust risking your life savings at a casino?
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It’s the end of the first quarter and once again it’s time to do the Tarheel Advisors’ annual bracket challenge. As usual, there are no perfect brackets remaining. However, investors would be wise not to focus on the early upsets, and instead make sure they’ve picked the eventual champion correctly. With that in mind, let’s take a look at the Final Four Investment themes and see which one holds the key to success.
Coming out of the MidWest, we see one of our blue bloods and annual contenders, the Federal Reserve. Coach Yellen once again has her team in the headlines with solid play on offense and defense. Having changed her strategy from prior years, Coach Yellen no longer relies on her full-court printing press, but instead has tightened up the passing lanes with the first of perhaps three interest rate hikes in 2017. We believe that monetary policy is profoundly more important to the markets than fiscal policy. So, keep an eye on the Fed as a potential title matchup with the Trump Administration looms in the next round.
In the West we have a newcomer to the Finals. The MSCI EAFE Index tracks 929 large and mid-cap stocks in Europe, Asia, and the Far East. This index has been stifled by a strong dollar and has missed the tournament the last few years. However, it seems to have regained its touch from long distance and is lighting up the scoreboard in the 1st quarter. With a return of 7.25% YTD, it may have what it takes to be this year’s Cinderella storyline. However, fighting a currency battle on the boards against a much bigger opponent may prove too much for the early momentum.
In the South we have the “Brexit” back fully in the news as England takes the next steps towards leaving the Euro and the monetary union. The unexpected original vote in 2016 sent shockwaves through the world markets. However, since then global indices seem to have warmed up to the idea, and Parliament has shown a strong inside game leading to a rebounding edge for the Pound Sterling and the Euro since the end of a calamitous 2016. This investment story may still have legs to finish strong, but my guess is it succumbs to fatigue before the 4th quarter.
Last but not least, we have a new challenger in the East that is revolutionizing the game. With a new coach at the helm since January, the Trump Train has come into town and unleashed a new style of play that has the other teams on its heels. Talk of tax cuts, deregulation, and infrastructure spending has helped US equities get off to another great start in the first quarter. The S&P 500 is now up 6.07% in 2017 and close to 15% since inauguration day. However, many pundits feel the top seed may be overrated as Trump’s coaching policies (at least to this point) have been mostly rhetoric without a timetable. Either way, Coach Trump has built his strategy around building a great perimeter defense. Whether you personally agree with his playbook or not, Trump has influenced the markets to some degree and investor sentiment is now the highest it’s been since January 1987 with 63.2% of respondents bullish about the Market’s future. This is often a contrarian sign, so beware of an upset in the title game.
Which of the four investment themes will ultimately prevail this year is yet to be determined. Let’s just hope the coaches don’t tweet out blame towards the officials for their performances, even if they try to slow down the championship game to a nearly unwatchable pace with too many foul calls!
-Walter Hinson, CFP®, AIF®
Congratulations! If you’re reading this you’ve successfully navigated a tumultuous 2016 and made it to the New Year. Regardless of your political affiliations I think we are all ready for a non-election cycle year.
Year in Review—After making New Year predictions for nearly a decade, I finally have a report card with straight A’s (it is going on the fridge). While the politics of 2016 got most of the headlines, the true market driving force of last year was in the commodities markets. It was our understanding of that market that guided our successful predictions for the year.
Commodities were in the midst of a multi-year bear market, and we predicted that bear market would finally bottom out in 2016, which it did in the first quarter. We foresaw oil going below $30/barrel, and it did just that hitting a 13 year low at $27/barrel. From the lows, oil bounced back and ended the year nearly doubling in value to over $50/barrel.
From an investment standpoint you probably liked where you ended up in 2016, but you may not have enjoyed the ride to get there. It seems like eons ago now, but the first 10 market days of 2016 were the worst start in market history. Contagion from the bear markets in commodities ended up hitting all asset classes, and even corporate bonds felt significant pain to start the year.
While market returns were a hair over 10% for 2016, the volatility in the stock market managed to yet again handcuff the Federal Reserve. We only saw a single interest rate increase of 0.25% in December, which was identical to what we saw in 2015.
2017 Predictions—Where to now? I’m not sure exactly where we’re going yet, but I do know our current mode of transportation—The Trump Train. Markets have spiked since the Trump win in mid November, and as I write this, the DOW is eyeballing the 20,000 mark for the first time ever.
Whether you agree with Trump economic policy or not, the Trump Train has generated some undeniable and significant market momentum. In our view, this momentum has the potential for propelling the markets the next 12-18 months. While we are at all-time highs, consider this: it took almost 18 YEARS for the DOW to double from the 10,000 mark it first hit in March of 1999. That is only a 4.1% annualized return over nearly two decades. Thus, it is hard to make a case that the markets are wildly out of control. For 2017 we are looking for around 10-15% gains in the equities markets.
We foresee GDP growth exceeding 3% in 2017, and this will pressure the Federal Reserve to increase interest rates at a faster pace. For the coming year we are looking for two rate hikes for a total increase of 0.5%.
The Fed says they want to raise rates faster than this, but for the past decade I’ve always felt they secretly have little interest in high interest rates. Increasing rates in the US will cause further Dollar currency appreciation, and our expectations are that this will be the limiting factor for any significant rate increases. While the US is performing relatively well from an economic standpoint, the rest of the world hasn’t followed suit yet. Plus there’s that small dirty detail—we as a country are the biggest debtor in the world with $20 trillion in debt, so low rates are in our “best interest”.
For my last prediction I’m going out on a bit of a political limb. My expectations are that in 2017 we see a significant overhaul to Social Security in order to sure up its future solvency. This is a subject that has been near and dear to Paul Ryan in Congress for over a decade, and he finally has the numbers on his side to do something about it. While it is impossible to say exactly what this will look like, if I had to guess it will include a full retirement age increase to age 70 for millennials and benefits being fully taxable versus the current 85% taxability threshold for current beneficiaries.
As we enter the first 100 days of the Trump administration we are sure to still see a significant amount of political headlines in the year to come. We have been telling clients for the past year to divorce their investment strategies from political views. I am of the opinion that politicians don’t have the impact on the economy and stock market that they profess to have. Now is as important as ever to not build a wall around your future investment returns.
-Ryan Glover, CFP®