Do You Have Warren Buffett’s Stomach for Volatility?

It is rare that I don’t agree with advice from Warren Buffett, but earlier this year we took different sides of a debate. His recommendation for a simple, flawless investment strategy was putting 90% of your assets in an equity fund designed to mirror the performance of the S&P 500 and 10% in cash.

This sounds great if you have nerves of steel and can make it work. But most people can’t stomach it.  Buffett is an amazing investor who understands his emotions and has a great ability to see the value of companies and what he owns.  But we’re not all Warren Buffett.  That is one of the reasons there are financial advisors in the world who help people understand appropriate volatility in their portfolio and what to do when that volatility spikes. 

Your Own Risk Tolerance

One common question I got during the downturn five years ago was when do we stop the bleeding?  One client said to me, “I had $1,200,000. Now I have about $1,000,000 due to the financial crisis and the market falling.  When do I do something?” To determine a time to sell really takes two correct decisions.  When to sell and when to buy back in. It is almost impossible to be right twice consistently.   

These difficult questions were most prevalent during the final weeks of the financial crisis in January to March of 2009.  And there was a lot more bad news to come. GM’s pending bankruptcy was front stage in the spring of 2009.  If someone was to try and time the exit and reentry during this period, it could have been devastating. Actually, the S&P soared over 30% from March to June in 2009 in the face of such horrible news and if someone sold out, it would be almost impossible to buy back in without paying more.  And those are the people on the sidelines that missed one of the greatest markets in history.

Nerves of Steel or Appropriate Allocation?

No one knows when a market downturn will occur or for how long it will go. More importantly to reap the benefits of long-term equity returns we need to be in to win.  Even more important, we need to have the right amount allocated so that we can withstand any type of downdraft and wait it out.  

So, while Buffett and his steely nerves might be able to stay invested through thick and thin with 90% of his wealth in the stock market, most people need less volatility to stay the course.  Buffet realized the value of companies when they were extremely cheap in 2009, while most investors could only see the losses from the past. Through those challenging times when people kept asking if it was time to do something, many investors benefited from staying the course through the last market cycle and went on to reap the benefits of this bull market.  I believe some nerves were enforced with regular meetings, appropriate plan design and investment portfolio allocation.

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Holding stocks for the long-term does not ensure a profitable outcome. Investing always involves risk and investors may incur a profit or loss regardless of strategy selected. Inclusion of any index is for illustrative purposes only. Individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. C14-036847

IMO - In My Opinion: A take on mortgages, Roths, pensions & more

My wife, Jen, and I have been speed watching The Good Wife thanks to Netflix. In The Good Wife, one of the judges (apparently the legal system makes for good TV) constantly requires the lawyers in her courtroom to end their arguments with, “In my opinion.”  The attorneys look bewildered each time as if to say…well of course it’s only my opinion, just like every other statement I make, and everyone knows that except for you, apparently.  A recent consultation reminded me of the “in my opinion” skit (“IMO” for short). 

Professionals Offer Differing Opinions

In our field of professional financial planning (not to be confused with the majority of firms and advisors in the financial SALES industry) there are many rules of thumb, but very few technical standards of care that you might find in the medical or legal field.

As a Certified Financial Planner® practitioner, there are some guiding principles and general statements that CFP® practitioners are expected to display in their professional activities, but they are hardly a technical standard of care. The CFP Board states that “Allowance can be made for innocent error and legitimate differences of opinion, but integrity cannot co-exist with deceit or subordination of one’s principles.” Those legitimate differences of opinion are what I’m talking about.

Differenceofopinion-adisagreementorargumentaboutsomethingimportant

Reasonable minds can and will differ just as in everyday life it is not uncommon to hear reasonable folks say, “Let’s agree to disagree.”  Professional differences of opinion do not render the other professional a crook or even wrong if they are acting from a place of integrity – IMO.  Moreover, it is perfectly appropriate to express a difference of opinion with another financial professional when done in a professional and non disparaging manner – IMO.

Back to my recent consultation – as I listened to the recommendations of another professional, I realized I had several different opinions on what was best for this particular situation and needed to share:

ROTH Conversions: As my colleagues here at The Center can attest, I hold a pretty strong opinion that most people have gotten the Roth Conversion issue “incorrect”.  I believe that many folks have accelerated income taxes at a higher rate than they will pay in the future.  Most workers have a higher income, which usually translates into a higher marginal tax bracket, during their working years than they do in retirement.  But wait; there is no Required Minimum Distribution from a ROTH. True, but this is still only relevant as to what bracket the money comes out.  Don’t get me wrong, this is not an absolutist opinion, there are plenty of correct situations where ROTH’s makes sense (IMO) – look for an upcoming post about converting after tax 401k contributions to a ROTH as an example. There are other limited situations where a ROTH makes sense, IMO.  For example, if you are a high net worth person and reasonably expect that you will always be in the highest marginal bracket, then converting and paying at 35% vs the new 39.6% marginal rate seems to make sense. 

Mortgage vs no mortgage:  A firm attempting to become a national financial planning firm recently counseled a young retiree looking to relocate to another state to, “Get the biggest mortgage possible.” Call us old school – but we think that most retirees are best served entering their retirement years debt free. And this client has substantial taxable funds to complete the purchase.  Our suggestion was to actually RENT initially.  Once they are comfortable and they have found a location that suits them for at least the next 5 years, we think they should consider a cash purchase. Rates are low, which does make obtaining a mortgage more attractive, however in retirement (at age 50) the rate is going to be much higher than any suggested distribution rate (1-3%?).

Pension Lump Sum: Our recommendation is for the client to take a monthly pension at age 55 in the form of a 100% survivor benefit even though her husband is older. The other advisor suggested that even assuming a low return, investing the lump sum will produce more money.  The client suggests that age 94 mortality was very reasonable given her family history.  Under these assumptions, the “low return” needed from the investment portfolio turned out to be 6%; hardly a “low” return IMO. Assuming only a 1% annual difference in return (5%) the lump sum lasts only to age 86.  One of the advantages to taking the lump sum is flexibility or access to a lump sum if needed.  Fortunately, the client’s other assets are substantial. Other more confident professionals might find the hurdle rate low; not me.

401k Rollover:  We both recommended a 401k rollover to an IRA managed by our respective firms.  The client left the employ of a major corporation with what I would categorize as containing a competitive 401k, in terms of investment options and expenses.  My sense is that the client will be better served by rolling the account to either professional.  Successful investment management is more about behavior than selecting the best allocation or underlying securities to complete the allocation – IMO.

Asset Allocation: The other professional recommended a 70% equity and 30% fixed income allocation versus our 60/40 allocation.  My thinking is at this time of their life, less risk is a bit more important.  I do, however, appreciate that because they are so young (hedging against inflation), and their expected withdrawal rate is under 3%, that a higher equity allocation may be reasonable. The other adviser apparently pointed out that their allocation was “optimized” (directly on the efficient frontier) because their mid cap exposure was higher than our recommendation in addition to our international equity allocation being 12% vs their 10% recommendation.  Due to current valuations, we have reduced our allocation to mid and small cap equities from a neutral weighting of 10% down to 8.5% and our international (large developed) is at our target weighting of 12%.  The other professional suggests 14% and 10% respectively.  Only time will tell which portfolio was more successful.  I do feel pretty strongly that in the end our client’s behavior will be more determinative of their investment success versus the subtle differences in portfolio recommendation – IMO.

Annuities:  Do you remember when some advisors called anyone recommending an annuity a crook?  Fast forward a few years and some of the profession’s highly regarded practitioners recommend annuities in many situations.  I still believe that they are way oversold, but that doesn’t mean there are not appropriate situations - IMO.

Everyone has an opinion and I give my clients mine. So, what’s your opinion?

Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth.  ~Marcus Aurelius

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The forgoing is not a recommendation to buy or sell any individual security or any combination of   securities. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision.

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Putting your Priorities First: A big rocks lesson

 When I was an undergrad at EMU, I heard a time management expert speak to a group of business students and, to drive home a point, she used an illustration we students would never forget. As she stood in front of the group of high-powered overachievers, she said, "Okay, time for a quiz."

Focus on the Big Rocks First

She pulled out a ½ gallon, wide-mouthed Mason jar and set it on the table for the class to see. Then she produced about 5 fist-sized rocks and carefully placed them, one at a time, into the jar. When the jar was filled to the top and no more rocks would fit inside, she asked, "Is this jar full?"

Everyone in the class said, "Yes."

Then she said, "Really?" She reached under the table and pulled out a bucket of gravel. Then she dumped some gravel in and shook the jar causing pieces of gravel to work themselves down into the space between the big rocks. Then she asked the group once more, "Is the jar full?"

By this time the class was on to her. "Probably not," one of them answered.

"Good!" she replied. She reached under the table and brought out a bucket of sand.  She started dumping the sand in the jar and it went into all of the spaces left between the rocks and the gravel. Once more she asked the question, "Is this jar full?"

"No!" the class shouted.

Once again she said, "Good." Then she grabbed a pitcher of water and began to pour it in until the jar was filled to the brim.  Then she looked at the class and asked, "What is the point of this illustration?"

One eager beaver raised his hand and said, "The point is, no matter how full your schedule is, if you try really hard you can always fit some more things in it!"

"No," the speaker explained, that wasn’t the point. The truth this illustration teaches us is:

If you don't put the big rocks in first, you'll never get them in at all."

What are the “big rocks” in your life? Your children? Your loved ones? Your education? Your dreams? A worthy cause? Teaching or mentoring others? Doing things that you love? Time for yourself? Your health? Your significant other? Remember to put these “big rocks” in first or you'll never get them in at all.

If you sweat the little stuff (the gravel, the sand) then you'll fill your life with little things you worry about that don't really matter, and you'll never have the real quality time you need to spend on the big, important stuff (the big rocks). So, ask yourself this question, “What are the 'big rocks' in my life?” Then, consider whether you’re putting them in your jar first. Because, like that time management expert showed me, if you don’t put them first, you’ll never find room.

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.

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Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

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Where are we in the full market cycle?

Cycles exist everywhere.  One of the first cycles we learn about as a child is the water cycle or the journey of a raindrop. There’s something about the circularity of cycles that I just love.

The economy and financial markets also cycle. An economic cycle is the periodic ebb and flow of economic growth like Gross Domestic Product or employment.  According to the National Bureau of Economic Research the average economic cycle lasts a little less than six years.  This span is measured both from one peak to the next peak or one trough to the next trough.  While six years is an average, the cycle can be much quicker or much longer than six years. 

The Cyle of Economic “Seasons”

The various stages of the economic cycle can be thought of like seasons of the year as shown in the chart below.  From winter, or recession, where jobs are lost and the economy is shrinking to summer, where growth is accelerating and jobs have been recovered. 

Every quarter we take a poll at The Center to see where team members think we fall in this spectrum.  Our consensus is that we believe we are in the midst of summer meaning that this bull still has some room to go as we are still lacking some keys signs of a maturing economy like inflation and volatility.

Stock Market Cycles

The stock market also goes through cycles and, along with it, investor emotions ebb and flow.  Usually the stock market cycle is slightly ahead of the economic cycle meaning that market indexes often peak before the economic cycle peaks.  Our latest survey of our employees placed the stock market cycle near excitement in the picture below.  At this point (excitement/thrill/euphoria) investors start to question why they don’t have more aggressive positions because they have clearly performed very well and many even start to shift their portfolios in this direction.  As Warren Buffett said”

“Be fearful when others are greedy and greedy when others are fearful.”

Refocusing on the Long Term

This is the point when it is most important to stay in a diversified portfolio, not abandon your long-term investment objectives while reaching for more returns. Rebalancing at these market extremes may go against what investors want to do, for example, selling your stock positions to buy more bonds right now or selling your bonds in 2009 to buy more stocks. However, going against these basic emotions have potential to be the best decisions you can make for your portfolio.  Navigating these emotions is the single most difficult road block to the success of an investment strategy.  While markets and economies will cycle as long as water continues to cycle, having sound financial advice during these market extremes can make big difference in the success of your long-term financial plans. 

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risk and investors may incur a profit or loss regardless of strategy selected. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Investing involves risk and investors may incur a profit or loss regardless ofstrategy selected. C14-031971

Want to be a Genius when it comes to Retirement?

My friend* and fellow professional Marc Freedman, CFP® recently published his first book Retiring for the Genius®. The two subtitles capture the essence of the book: “Your Blueprint for Planning a Comfortable Retirement” designed “For the Genius in All of Us™”. I had the honor of providing a peer review during editing and, according to the Author’s Acknowledgement, provided “invaluable and honest insights.” Writing a book is an admirable undertaking and it was truly an honor and pleasure playing a very small role.

Retiring for the Genius® is very comprehensive, covering almost 400 pages of text. Marc addresses an enormous amount of content including social security, income taxes, designing retirement income, estate planning; Marc covers it all. Fortunately there’s an array of summaries, examples and “inspiration” tips to keep the material interesting and practical.  Marc accomplished his goal of providing meaningful content that we all can understand and implement. Give it a read.

*In the spirit of full disclosure, I need to define “friend”.  Marc and I are Facebook friends, and according to my three kids, that means in 2014 we are almost like family.  More importantly, we both served the Board of Directors of the Financial Planning Association and its 25,000 members about a decade ago. I came to honor his knowledge and passion for serving his clients and the financial planning profession. Congrats my friend!

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. C14-026543

Could The Dollar Lose World Reserve Currency Status?

 Clients have been asking about the potential that the U.S. could lose the role as the world reserve currency.  To really understand the issue, you need to know what a world reserve currency is and what advantages (if any) it gives the U.S. to be the world’s current leading reserve currency. 

World Reserve Currency: Protection & Stability

Almost all countries hold foreign financial reserves, whether they are in bonds or money markets, denominated in another country’s currency. In addition to this, countries will usually hold gold and special drawing rights with the International Monetary Fund. These reserves help protect a country’s currency from large swings in valuation. 

For instance, let’s say that large amounts of Japanese Yen were being sold on a global scale. The policy makers in Japan might not like the idea of their currency being depressed due to outside forces.  One strategy they might use to maintain the value of their currency is to tap into their foreign reserves (like U.S. dollars) and begin selling dollars and buying Yen.  This usually would have the effect of stabilizing the value of their local currency if they held enough U.S. dollars to make an impact on the Yen market.

Currency Liquidity

Think for a second about how many U.S. dollars the Japanese government would need to sell in order to have an impact on a global scale for the Yen.  The number is probably billions if not tens of billions of U.S. dollars. What this means is that for a reserve currency to have relevance and make sense for widespread use, it has to be very “liquid”.  Liquid means that the currency can be sold quickly and readily without having too much of an impact on the overall price.  The U.S. dollar is simply the only currency in the world currently that can make this claim. 

Alternatives to the Dollar

Some other currencies used today to bolster foreign reserves are the Euro and the British Pound/Sterling. The Euro is becoming more popular, but is still a very distant second to the U.S. dollar in terms of overall use.  In fact, recent estimates suggest that the U.S. dollar comprises 60% of foreign reserves with the Euro making up 20%.  With the recent economic troubles in Portugal, Spain, Greece, and Ireland, most experts don’t see the Euro overtaking the dollar anytime in the near future.  As far as the British Pound/Sterling goes, it would seem that the British economy is simply too small to support massive global use.  This goes back to my earlier point on liquidity.

A dark horse in reserve currency use is the Chinese Renminbi or Yuan.  The Chinese economy is certainly big enough to provide enough liquidity to global markets. However, due to tight Chinese government controls and some outright manipulation, other countries have shown hesitancy to adopt this currency on any large scale. So it would seem that the U.S. Dollar is fairly “safe” from being replaced as the world’s primary reserve currency for the time being, but why does it matter if the U.S. dollar is the world reserve currency, does it offer any competitive advantages?

Potential Advantages for U.S. Dollar as Currency Reserve

There are likely two main reasons the U.S. wants to remain as the world’s leading reserve currency. Since much of the reserves other countries hold are in the form of Treasury Bills, this has the effect of keeping a nice steady demand for bonds issued by our government.  This demand has helped to keep interest rates relatively stable over time.  Also, since the U.S. dollar is so widely accepted, American businesses do not usually need to arrange currency swaps when doing business internationally. It’s not clear what percentage this potentially adds to the bottom line for U.S. corporations, but several economists have said somewhere between 1-3%. 

There is potentially a third benefit, referred to as “seigniorage” which is the profit a country makes in the difference of issuing currency versus production costs. Experts are deeply divided on whether this is significant or has a nominal impact. For more, take a look at the Federal Reserve’s white paper on the topic. Ultimately, if the U.S. dollar is less widely used, there will be some unpleasant ripple effects, but by no means would it likely be the doomsday scenario you might have heard about from the media.

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. C14-024135

Factoring the Cost of Living in a Post-Retirement Relocation

Your retirement plan may involve a move. You could be moving some place warm so you don’t have to put up with the wonderful Michigan winters or perhaps moving to be closer to your kids and grandkids.  Whatever the motivation, there is always a financial component in the decision-making process.

Paying for what you want vs. what you need

The cost to live in other areas of the country can be higher or lower, but some people don’t know the specific figures you will probably pay after you make the move.  Is a dollar in Michigan the same as a dollar in California or Utah? A recent conversation with a client evaluating relocating placed focus on this specific issue. His thinking was that it didn’t matter where you lived, you can always find a way to spend money.  While I certainly have to agree with him on that point, I think the bigger point is that there is a difference between spending money on things you want versus spending money on things you need.

Comparing Expenses

Let’s take a look at the cost of different goods and services in the two cities. These figures were taken from www.costofliving.org and they are an average estimate taken from people who live in Salt Lake City and San Francisco. The list of goods and services has more than 75 commonly purchased or used items but we’ll look at just a sampling of expenses.

As you can see, everything in San Fran is more expensive except the T-Bone steak. Unfortunately, after you pay for your basic living expenses, you might not have any money left over for that T-Bone! According to the living expense calculator on www.costofliving.org someone living on $70,000 of net income in Livonia, Michigan would need approximately $120,000 net in San Francisco.  In Salt Lake City, that same person would only need $69,000 to maintain the same standard of living. 

If you think a move might be in your future, talk to your financial advisor to weigh the costs associated with the new location and make sure it fits within your retirement income goal.

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. C14-022592

The Power of Compounding

 

When you’re just starting in your career, you can feel strapped, earning a small salary and trying to make ends meet.  You might not feel like there is any money left over at the end of the month and that’s why some people decide to wait to start saving for retirement. However, the power that time has on your money can’t be understated.

I recently had an opportunity to meet with a long-time client’s daughter.  The goal of the meeting was to give some timely financial advice as she embarks on her new career after college. One of the key points I made was the power of compounding dollars over time.    

Using Time to Compound Money

For instance, if a 25 year old were to save approximately $4,500 a year compounding at 7% she would have close to 1 Million dollars by age 65. But, if she decided to wait to start saving for retirement until she was making more money at age 45, she would need to save $21,904 a year to accomplish the same result. That’s a staggering 486% increase in the dollars she’d need to save compared with the 25-year-old saver.

Knowing Your Benefits

To help with your retirement savings, it’s very important to fully understand your employer benefits before you begin employment.  Many employers will offer qualified retirement savings programs like a 401(k) or 403(b). If these plans exist and the company offers a match on your contributions, you should do everything you can to make sure you at least get the matching dollars.  For instance, in the case of our 25 year old, we know the potential of a $4,500 a year savings and earning 7% on that money. Now, if we factor in an employer match of $2,250, that same 25 year old would have accumulated approximately $1,350,000 over that same time horizon.

The longer you wait to start saving, the more you are going to have to put away. In other words, the pain could be much worse the later you wait.

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

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This is a hypothetical illustration and is provided for illustration purposes only and is not intended to reflect the actual performance of any particular security. Future performance cannot be guaranteed and investment yields will fluctuate with market conditions. C14-022060

EU Makes History by Setting Negative Interest Rates

 Some of you may have seen headlines recently regarding the European Central Bank’s (ECB) move to set interest rates on deposits from 0% to -.10%.   This is the first time in history that a major global central bank has made a move like this.  It’s important to note that this negative interest rate does not directly apply to customers of EU banks who deposit their money in savings and checking accounts.  The ECB is only applying this negative interest rate on deposits that banks make with the ECB.  In other words, the ECB is trying to penalize banks for parking large sums of money with the central bank, rather than lending it to consumers.   

Why set negative interest rates?

What is the ECB hoping to accomplish?  To answer this question I need to provide a little background on what’s been going on lately in the European economy.  The European Union (EU) has been going through a period of disinflation lately and there is much worry that it may fall into deflation. Disinflation is a slowing in the rate of inflation.  In the instance of the EU, the central bank estimates that increases in the general prices of goods and services has slowed over the last 12 months from 1.6% to .49% (as of May of 2014). If this trend continues, the ECB worries that deflation could set in, which is a general decrease in the price of goods and services.

What’s so bad about deflation?

Now this might not sound bad to many readers. After all, if the price of gas goes from $3.80 down to $2.80 that’s great, right? However, if companies aren’t making as much money on their products, they have to cut costs elsewhere in order to maintain the bottom line, and that ultimately means lower wages for workers. Which means less discretionary income to spend and the economy can get caught in a deflationary trap that can be hard to get out of.  

The hope is that setting a negative interest rate will stimulate lending and therefore growth in the economy. This could lead to slightly increasing inflation, which most experts agree is a better option over the long term than deflation. Will it work?  Experts are divided on how effective this monetary policy will ultimately be on the European economy, but like many things, only time will tell. 

Matthew Trujillo, CFP®, is a Registered Support Associate at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

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Is Retirement Too Late to Find a Financial Planner?

Let’s say you are approaching retirement or you have already taken the plunge. Let’s also say you have not worked with a financial planner along the way. Is there a reason to consider forming a relationship at this stage of the game? 

Even at this stage in life, it may help to seek out a financial planner to be a thinking partner leading up to and along your retirement journey. But finding the right fit may not be easy. A successful financial planning engagement starts with you figuring out what is most important.  Details about your money are equally as important when put in context with your envisioned life. 

Here are two steps that will help you pull together your overall financial picture:

1. Create a financial plan: This will be a roadmap to help you see your financial picture in one coordinated view. 

• This plan is all about you, your priorities and needs.  The goal is to help you feel secure and at ease about your financial future.

• It will show you how you are currently invested and make suggestions for appropriate changes.

• Analyze how your investments could be working to supplement your income, either on a regular basis or as needs arise.

• Make sure that your estate plan is the way you want it. 

2. Consolidate: If your accounts are spread around with many different companies, it may come with a financial and organizational cost.

• With consolidation you can easily access all of your information in one place.

• You’ll simplify the ongoing paperwork you receive and streamline information gathering at tax time and when you must take required distributions.

• It provides more consistent management and ongoing monitoring in a cohesive framework.

Even if you have the individual areas of your finances under control, it is still important to pull all the pieces together.  Perhaps you have multiple IRA’s that too closely mirror each other, investments you have inherited that aren’t worked into your overall strategy, or your life circumstances have changed and your investments have not. 

The right fit might take some trial and error.  You don’t have to settle.  A financial planner that truly understands your financial story will be able to guide you to think about areas of your financial life you may not have considered up to this point. If you’re nearing, at, or past retirement and need help exploring your financial planning options, don’t hesitate to contact me about building a relationship and shaping your plan.

Laurie Renchik, CFP®, MBA is a Partner and Senior Financial Planner at Center for Financial Planning, Inc. In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie was named to the 2013 Five Star Wealth Managers list in Detroit Hour magazine, is a member of the Leadership Oakland Alumni Association and in addition to her frequent contributions to Money Centered, she manages and is a frequent contributor to Center Connections at The Center.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. You should compare your current and prospective account features, including any fees and charges, before making consolidation decisions. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. C14-022519