May
14
January 23, 2008
NEW YORK (AP) - With the stock market standing on shaky legs, financial advisers are working to bolster clients’ psyches as well as their portfolios.
Relationships between advisers and their clients can grow strained when markets head south, as investors want to hastily sell their positions or change their investment strategies on the fly. To stem the lack of confidence, financial advisers are developing strategies to create recession-resistant portfolios and soothe client concerns before they, too, become volatile.
Calming clients may require listening to their worries, rather than simply citing investment theory and history. Portfolios can be adjusted with a number of tools, including the newfangled (inversely performing exchange-traded funds) and the old fashioned (bonds, cash, gold bullion).
Clients “want to get out of the way of a train wreck,” says Bob Phillips. “But these are the worst times for them to make decisions about their portfolios,” says the managing partner at Spectrum Management Group of Raymond James & Associates Inc., a unit of Raymond James Financial Inc.
To pre-empt some of those impulses, many advisers will send reassuring e-mails to clients when market news turns inordinately bad; Phillips sent one such e-mail Tuesday morning, when the Dow Jones Industrial Average started the day down more than 460 points, or more than 3.8 percent.
Market jitters can affect the wealthy as well as the mass affluent. “I have clients worth tens of millions of dollars who will lose sleep over a 3 percent decline,” says Gary Schatsky, a financial adviser and founder of Financial Planning firm ObjectiveAdvice.com.
“But it’s not for the adviser to say ‘You’re ridiculous,’ ” he says.
Since advisers are well-versed in theories of investing and behavioral finance, it can be tempting to respond to clients’ fears with academic theories and statistics of past market declines. But advisers could end up hurting more than helping their relationships with clients if they keep the discussion abstract.
“An adviser can’t be a shrink, but the worst thing they can do is not listen,” says Dr. Brett Steenbarger, clinical associate professor of psychiatry and behavioral sciences at SUNY Upstate Medical University who works with professionals in financial services. “There’s a real value in the venting, and a real value in someone feeling like they’re being heard.”
May
13
Risk of Chasing Yields
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May 12, 2008 5:12 p.m.
Municipal bonds, let’s face it, could make anyone snooze. “They’re complicated and boring,” says Donald Cummings, principal of Blue Haven Capital, a fee-based wealth-management firm in Geneva, Ill. When he brings up the subject at cocktail parties, he says, people walk away.
These days, Cummings may find it easier to grab listeners’ attention. Over the past two months, municipal bond yields have consistently exceeded Treasury yields, even before factoring in the tax advantage. As of May 7, 30-year Treasurys yielded 4.61%, while AAA-rated (the highest credit quality) municipal bonds of the same maturity hit an average 4.88%. Since interest earned on munis is tax free, that’s the equivalent of a taxable investment yielding 7.3% for someone in the 33% tax bracket, or 6.5% for someone taxed at 25%. Shorter-maturity Treasurys were also close, or lower than AAA-rated munis on a pretax basis, while munis rated AA or lower exceeded Treasury yields on all fronts. “I’ve been in institutional trading and sales of municipal bonds since the late 1980s and I’ve never seen such a run,” says Cummings. “Never all through the curve and never for so long.”
Normally, municipal bonds yield less than Treasurys, with the tax-free interest making up the difference for investors in the highest tax brackets. But the credit crunch and concerns with bond insurers’ downgrades caused many institutional investors to sell off munis and other securities not guaranteed by the government. “There was a flight to quality in the past 12 to 15 months where investors sold anything with risk and bought Treasurys,” explains Scott Berry, senior fund analyst with research firm Morningstar. The selloff suppressed muni prices and, consequently, pushed yields up. Increased demand had the opposite effect on Treasurys.
As a result, investors as low as the 25% tax bracket may be compelled to shift a part of their fixed-income portfolios to municipal bonds. And given the paltry returns of money-market funds and savings accounts these days, munis may even sound like a good place to park your extra cash.
For most investors, however, the risks outweigh the returns. “Right now the yields look fantastic and juicy, but they’re juicy for a reason,” says Michael Boone, a fee-only certified Financial Planner in Bellevue, Wash.
Housing-bust spillover
Thanks to low default rates, municipal bonds have historically been considered extremely safe. But the weakening economy and plummeting housing prices have put the health of some municipalities at risk, raising questions about their ability to repay debts. “The overall feeling is that as the economy weakens, a lot of these municipalities may not be in good shape, so there’s a fear that their credit quality may decrease,” says Boone.
If a municipality relies largely on collecting real estate taxes, for example, falling property values would cut into revenues — a problem that many municipalities have not had to deal with in recent history. Just this week, the Northern California city of Vallejo declared Chapter 9 bankruptcy, allowing it to continue providing services while freezing its debts. When a municipality declares bankruptcy, the bond insurer would typically take over payments of principal and interest, Boone explains. But should the number of such bankruptcies increase, investors now question the ability of insurers to take over the financial burden.
Hence, the importance of location, Boone warns. “A real estate-led decline, unlike other struggles in the economy, is very much localized. When we build a portfolio for clients, we consider geographic diversification just as important as maturity diversification and credit diversification.”
For a combination of high yields and safety, Cummings recommends pre-refunded or escrowed-to-maturity bonds. These are bonds that municipalities have refinanced into Treasurys at some point in the past to take advantage of lower interest rates. Since they continue making the original coupon payment, investors get higher yields for a security backed by the government.
Liquidity concerns
Municipal bonds trade infrequently, which makes pricing difficult, says Jeff Tjornehoj, research manager at financial research firm Lipper. “Your broker may buy it from you and execute the trade as quickly as possible, but if the last bond sold six months ago, how do you know [you’re getting] the right price?” A lack of buyers could mean that you take a hit on your original investment.
That makes buying individual bonds with your emergency cash a bad idea, says Gary Schatsky, a fee-only certified Financial Planner in New York. “An emergency fund is something you could liquidate right away without having your arm cut off,” he says.
Inflation risk
With yields exceeding 4% on AAA-rated bonds, those 20- or 30-year munis may be hard to resist. But locking your money in for a long period of time in today’s low-interest-rate environment exposes you to inflation risk. “A lot of people say if you hold a bond to maturity you have no risk, but that’s a lie,” Schatsky says. “If you’re getting 5% for 20 years and everyone else is getting 6% for 20 years, you’re kidding yourself if you think you’re not losing money.”
Steve McLaughlin, director of business analytics at Municipal Market Advisors, recommends three- to five-year bonds. Faced with lack of demand for so-called adjustable-rate securities, or long-term bonds with floating rates adjusting every seven, 28 or 35 days, municipalities are now forced to restructure them into bonds that mature in three to five years. That causes an oversupply that suppresses prices and, therefore, increases yields, McLaughlin explains.
Hidden costs
Individual bonds are purchased through brokers, whose commissions can be exceptionally high, Schatsky says. That’s why he warns investors with less than $100,000 to spend to stay away from individual bonds. “For more modest purchases, I am inclined to look at no-load, low-cost, diversified muni bond funds,” he notes.
Morningstar’s Berry recommends looking into the tax-exempt funds offered by Vanguard, Fidelity or T. Rowe Price. “You get really good management and low cost,” he notes. But don’t expect impressive yields: The average municipal bond fund has actually lost 1.31% year-to-date, according to Lipper.
Cost-conscious investors may also look into muni bond ETFs, such as the iShares S&P National Municipal Bond or State Street’s SPDR Lehman Municipal Bond funds. Since they track an index, ETF yields are also on the lower side, McLaughlin says. For many investors, however, the pros — lower costs, liquidity and diversification — may outweigh the cons.
May
12
Wall Street Chaos
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Wall Street chaos: How to plan your money
Planners advocate prudence - and a cash cushion - to get you through volatile times.
NEW YORK (CNNMoney.com) — The phrase “run on the bank” is really something you never want to hear. Yet that’s what best describes Bear Stearns’ swift demise - and it has caused investors to wonder if such a run could happen elsewhere.
From the average person’s perspective, it’s a little hard to know how worried, if at all, to be about your money right now.
While certified Financial planners are concerned about the financial news coming out of Wall Street these days, they are far from running scared on behalf of their clients. In fact, they’re still encouraging them to stay invested in a well-allocated portfolio.
But they do see value in taking certain prudent measures - many of which make solid sense even when the financial markets aren’t as rocky as they are now.
Consider the money you’ve got in the bank. The Federal Deposit Insurance Corp. will insure your money in checking, savings, certificates of deposit and money market deposit accounts up to $100,000. That’s per depositor, per institution. In some instances, you may qualify for more coverage, but generally speaking $100,000 is the cut-off for deposit accounts.
So if you have more than $100,000 combined in all your accounts at one bank, you might consider moving some of it to another institution. “That’s a good general rule of thumb,” said Jim Whiddon of JWA Financial Group in Dallas.
If you’re not willing to move money because you’d sacrifice convenience or possibly some yield, “then pay attention to the credit quality of the underlying bank,” said Gary Schatsky of Independent Financial Counselors in New York.
Having access to a cash cushion, wherever you park it, is a big plus.
“In a recession, the secret to getting through it is having cash,” said Mari Adam of Adam Financial in Boca Raton, Fla.
Adam would typically recommend having access to enough money to cover three months’ worth of expenses. But now an even better idea is six months’ worth, she said. That doesn’t mean you need to keep every spare dollar in your bank accounts - access to a line of credit or some liquidity in your portfolio will do the trick.
Keeping an eye out for yield and return is always smart. But you may find it in some surprising places these days, especially given the hit savings rates have taken from all the Fed rate cuts. Adam said she is getting a better return on her short-term CDs (1 year or less) than on the 10-year Treasury.
The hunt for value
If you’re an optimistic contrarian, you’re probably thinking - correctly, many experts say - that some companies are getting punished unfairly in this environment and that long-term they’re solid bets. After all, whatever happens with the mortgage mess, everyone is still going to need toilet paper, right?
But rather than placing your bets on an individual stock or sector to find long-term winners, Schatsky recommends looking for a solid value fund and let the fund manager do all the research on undervalued companies for you.
The same goes for bonds. If you’re looking to expand the bond portion of your portfolio, he recommends looking for a fund that is more focused on shorter-term, high-quality bonds such as Vanguard Short-Term Investment Grade Bond Fund (VFSTX).
The personal finance self-exam
There are still a lot of unknowns about the Bear Stearns fallout. But the biggest opportunity it presents for the perplexed investor and saver is to get smart about their investment exposure.
“It’s a wake-up call to look at your portfolio. How is the overall portfolio allocated?” said Schatsky. Don’t just consider your 401(k) or your brokerage account in isolation.
Consider the allocation across all accounts and figure out if the breakdown between stocks and bonds is right for you. “Markets like this truly test risk tolerance,” Schatsky noted.
Then, Adam said, do what you you should have been doing all along: get rid of any investment that is toxic regardless of the events surrounding the mortgage meltdown on Wall Street.
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