Smart401k Blog

In my previous article, I discussed capital gains. For this article, I thought I would take the time to discuss a topic know as tax loss harvesting. Tax loss harvesting is selling securities at a loss to offset capital gains. Loss harvesting is typically used to offset short term capital gains which are taxed at your ordinary income tax rate. Knowing when and how to use tax loss harvesting is an important part of tax planning strategy for any taxable account you may have. (more…)

Since the New Year is upon us, I thought I would take the time to discuss some year-end topics that will likely affect your investments.  This article is the first of two related to these topics.  Here I will discuss capital gains distributions, and in the second article I will discuss tax loss harvesting. (more…)

In the headlines

A look at some of the market movers over the past week:

• After a week of deliberation, the White House decided to provide the US automakers with $17.4 billion to help get them through the next three months
• The Federal Reserve took unprecedented actions to help spur the economy
• Fallout continued from the Bernard Madoff fraud
• Consumer prices continued to fall
• Oil prices continued to slide despite a big production cut announced by OPEC
• Barack Obama picked Mary Schapiro as the new head of the SEC
• Investment bank Goldman Sachs reported its first loss since becoming a public company
• The massive stimulus plan proposed by President-elect Obama continues to grab headlines
• Economic leading indicators in the US took a big hit in November
• Initial jobless claims fell from the prior week

Commentary

It was a rocky week with a big exclamation point on Tuesday that helped the S&P 500 index finish with a slight gain. Though three of the five days this week were down, the market finished with a gain just short of 1%.

The biggest news of the week was the announcement that the Federal Reserve would be targeting a rate of 0% to 0.25% for the Federal Funds Rate. The Fed’s press release cited deteriorating economic conditions as well as moderating inflationary pressures as the reason for the drastic move. Also sparking optimism for investors was the potential for the Fed to take even more unorthodox actions like buying agency and mortgage-backed debt. The S&P index rallied on the news and finished the day with a 5% gain.

Also playing a big part in the week’s news was the bailout for US automakers GM and Chrysler. Though hopes were high that the White House would step in early in the week, deliberations continued throughout the week and it wasn’t until Friday that the final approval came. Investors cheered the potential for a White House bailout at the end of last week, but didn’t have much of the cheer left by the time the loans were made official.

Meanwhile, economic news continued to be bearish. Housing starts and building permits were both below forecasts, while leading indicators fell in line with expectations. Initial unemployment claims were down from the prior week, but continued to be at an elevated level. While the fall in consumer prices will help alleviate some of the gains that prices made earlier in the year, there is a focus on the extent of the declines as fast falling prices can be a threat to the economy.

Looking ahead

Due to the Christmas holiday, next week promises to be a rather quiet one. There will be some important economic releases with final GDP and consumer sentiment numbers coming out on Tuesday. Initial jobless claims will be released on Wednesday and will still be a focus. Earnings, meanwhile, will be extremely light, with Walgreen’s report on Monday being the highlight of the week.

As we head into the holidays — regardless of what holiday you celebrate — it seems a good time to take a step back and look at the big picture. The big picture, of course, is primarily made up of everything outside of your portfolio, and this is a great time to enjoy all of that.

You are here, however, to read about the stock market and the economy and put the pieces together as to how all of that impacts your portfolio. Now, as we finish a particularly trying year and get ready to head into a new one, is likewise a good time to think about the big picture for your portfolio. While there are plenty of news sources that highlight performance of the stock market over hours, or days, or even years, it’s not all that often that you see 30- or 40-year returns highlighted. Given the fact that most people saving for retirement will (hopefully!) be saving over a period of much more than ten years, focusing on returns over this period doesn’t give the full picture.

As it has been noted elsewhere, it has been a truly sour dose of medicine for those that have been invested in equities over the past decade. The S&P 500 index is down roughly 28% over this period — a performance that makes stuffing cash in your mattress look like a very attractive option. Few should find this performance quite as disturbing as those preparing to retire this year or next. Those now preparing to retire, though, have likely been saving for more than just the last ten years in preparation of retirement, and even with the past decade’s slump, the S&P index is up 219% (or 6% per year) over the past 20 years and 825% (or 7.7% per year) over the past 30 years. It would seem that those that have consistently invested in stocks have benefitted from their equity exposure.

The picture may look even better for those that aren’t currently knocking on retirement’s door. While the ten-year slump is a disappointment for equities already owned, it could turn out to be a great buying opportunity for the future. A recent issue of The Economist came out in favor of stocking up on equities now, arguing that savers may be turned off by the extended underperformance of equities and be turning too conservative at the wrong time. In one article on the subject, the author put it:

The problem is that investors do not regard financial assets as they do other goods; lower prices do not encourage them to buy more, but simply reduce their confidence. Past returns are the main determinant of flows into the stockmarket; investors buy when prices have gone up, not down.

In another article from the same issue, the author concludes:

Caution is understandable, after the trauma of this year. Equity and corporate bond markets could yet fall further, especially as the news on the economy seems to get worse every week. But it is still perverse that investors were happy to buy shares nine years ago, when the ratio of share prices to profits was three times what it is today, and are now determined to keep their money in cash and bonds. … Implausible as it may sound, right now equities and corporate bonds are a better long-term bet than cash.

In short, if now isn’t the time to put extra money into equities, it certainly isn’t the time to pull out of stocks or cut back on regular savings. So enjoy the holidays and what may be an unusually quiet week on Wall Street, and be sure to take some time to see 2008′s turmoil for what it may well turn out to be — an opportunity for higher future returns.

As a result of new government regulation for 403(b) retirement accounts, plan sponsors may be reducing the number of providers offered, likely causing frustration for many hospital, school and non-profit organization workers. 

A 403(b) plan typically provides an employee a list of account providers (e.g. Fidelity and Vanguard) from which they select from.  It is up to the employee to contact the provider, open up the account and then select the funds they would like to invest in.  Unlike 401(k)’s, a participant can select multiple providers and select their favorite funds from each.

These new regulations, the first in 40 years, are intended to make 403(b) plans mirror 401(k) plans.  Currently, there is little or no regulation in regards to loans or hardship withdrawals.  This is one of the biggest differences between a 401(k) and a 403(b) plan.  In a 401(k), the plan sponsor (employer) creates rules in regards to loan amounts, number of loans and payback terms.  A 401(k) also has a plan document that spells out all rules that must be followed.

With the new regulations in place, 403(b) providers are now required to enter into an Information Sharing Agreement (ISA).  For a plan to maintain compliance with Section 403(b) of the Internal Revenue Code, it will become mandatory to share essential information with plan sponsors and their third party administrators regarding certain transactions, e.g. loans, hardship distributions, etc.

If your current provider has signed the necessary ISA then you will not be affected.  If your current provider does not sign the ISA then no new contributions can deposited and you will need to open a new account with an eligible provider.  Note:  you can leave your existing account where it is, the new IRS regulations do contain a grandfathering provision that protects such contributions.

What can you do if you think you might be affected?

• 1. Contact your 403(b) administrator to find out if your service provider will continue to be offered.
• 2. If a change is needed, research your options of new providers- look at fund choices and fees.
• 3. Contact your 403(b) administrator to let them know where your contribution needs to be deposited (if your current provider is being removed from the approved list).

If you’d like help selecting a provider or managing your account, please feel free to contact an advisor at 877-627-8401 or info@smart401k.com.

Jessica Slaters, Investment Advisor

In the headlines

A look at some of the market movers over the past week:

• Congress went back and forth all week on the idea of bailing out US automakers, but ended the week by rejecting the bailout and potentially pushing the matter into the White House’s lap
• The New York Times Company announced that it will be borrowing $225 million against its Manhattan headquarters building
• The 161-year-old Tribune Company filed for bankruptcy
• The Federal Reserve floated the idea of issuing its own debt
• The troubled in insurer AIG may be facing yet more difficulties with some bad trades
• In a rush to safety, investors pushed Treasury bill yields to historic lows
• Pending home sales declined less than expected
• The proposed $41 billion buyout of Canadian telecom BCE officially fell apart
• Reports suggest that hedge fund assets were trimmed by $64 billion in November
• Bernard Madoff has been accused of perpetrating perhaps the largest fraud in Wall Street history
• Bank of America announced the latest round of banking job cuts
• Initial jobless claims continued to climb
• Wholesale prices fell more than anticipated
• Retail sales fell in November, though not as much as many anticipated

Commentary

It was a wild week on the market but finished with a weekly change of less than a half percent on the S&P 500 index. The week started off well, with a cheerful reaction to President-elect Obama’s ideas for a massive stimulus package. The S&P index rallied 3.8% on Monday as investors looked forward to a potential tsunami of government money hitting the economy.

Unfortunately, that was largely where the good news for the week ended. The defeat of the proposed $14 billion aid package for US automakers General Motors and Chrysler topped the list of news that provided drag for the stock market. Though the bill appeared to have positive momentum in Congress early in the week, a coalition of Republican Senators stalled the bill late in the week, effectively killing it. For the time being, the blow to the equity markets has been cushioned by news that the White House may pull funds from the Treasury’s TARP program to help carry the automakers through to the beginning of the next administration.

Company news continued to be rather bleak as well. Tribune Company, which was just bought out by real estate financier Sam Zell in 2007, filed for bankruptcy this week, as did toymaker KB Toys. In addition to Bank of America’s announcement of 35,000 job cuts over the next three years, Dow Chemical and Rio Tinto, among others, announced hefty layoffs. Multiple companies also stepped forward to guide down on anticipated earnings.

Likewise, economic news was mostly to the downside, with initial jobless claims continuing to rise and hitting new highs. The announcement that the producer price index fell more than expected could be taken as a spot of good news, however anything more than moderate deflation could be a threat to the economy.

And though as of yet it appears that there hasn’t been any direct impact on the equity markets from the Bernard Madoff fraud scheme, the announcement that a highly respected trader and former Nasdaq chairman perpetrated perhaps the largest fraud in Wall Street history can’t be good for investors’ already fragile psyches.

There is, however, a silver lining in all of these lousy headlines. The fact that the markets were up slightly for the week, suggests that investors may be starting to see events as already priced into the current market levels. One week certainly doesn’t give us too much of a basis for drawing this conclusion, but a barrage of news like we had this week would have almost certainly caused the markets to swoon just a few months ago.

Looking ahead

There’s no doubt that action will start to slow as we approach the holidays, but next week promises to be particularly eventful.

Front and center we will continue to have the tug of war between the US automakers and the US government. After finishing last week with a dead rescue bill in Congress and a begrudging White House saying it may pull funds from TARP for Detroit, all eyes will be on whether some sort of deal gets worked out. Regardless of what automaker bankruptcies will really mean in the long term, in the near term the market will likely focus on the potential flood of job cuts that would come from a bankruptcy scenario.

On the economic front there will be a few notable events next week. On Tuesday we’ll get both the change in the consumer price index for November as well as November housing starts. The current expectation is that “core” CPI will be up slightly, while overall CPI, which includes food and energy will show a drop of 1.3%. Per usual, Thursday will bring the latest initial unemployment claims, and given the elevated levels recently, this will likely be a focus late in the week.

The biggest economic event of the week, though, will almost certainly be the Federal Reserve’s policy statement on Tuesday. Though the current Federal Funds Rate of 1% is notably low, most market watchers are expecting that the Fed will continue to try to jumpstart the economy by cutting rates. According to the Federal Reserve Bank of Cleveland, which uses Fed Funds futures to calculate implied probabilities of Federal Reserve Board actions, the most likely outcome of Tuesday’s announcement is a 75 basis point cut to bring the intended rate to 0.25%.

And though the primary earnings season rush is over, there is a host of notable earnings reports scheduled for next week. Goldman Sachs and Morgan Stanley report Tuesday and Wednesday, respectively, and will likely bring some of the spotlight from the automakers back to financial services as both are expected to announce losses for the quarter. On the consumer side, Best Buy, General Mills, Nike, Take-Two Interactive, Discover Financial, Pier 1, and Darden Restaurants, among others, will all presumably have comments about their perception of the US consumer. Homebuilders Hovnanian and Lennar will be watched for any sign of light in the housing market. Finally, investors will be looking for broader economic signals in the results from Adobe Systems, Accenture, FedEx, and Oracle.

As I noted above, the market’s relatively benign reaction to a week of pretty bad news releases suggests that we could be nearing a turning point in the markets. As I’ve noted in this column in prior weeks, the equity markets are always trying to anticipate events rather than react to them after the fact. This means that anticipation of economic weakness caused investors to start selling stocks before the worst of the economic news had been released. This also means that contrary to what might seem logical, many investors will not continue to sell through the worst of the economic news, but rather will start anticipating a future turn in the economic picture.

Whether we’re at a bottom, approaching one, or are still nowhere near it, our conviction in consistent investing doesn’t change. As I have reiterated a number of times, there have not been any tools or signals that have consistently been able to correctly time market movements, so we believe that the best approach for long term investors is to continue investing on a regular basis and taking advantage of the long term appreciation of the equity markets.

One of my favorite things about Christmas is the familiar lineup of movies that always appear this month.  The usual suspects include:  Miracle on 34^th Street, A Christmas Story, Christmas Vacation, and It’s a Wonderful Life.  I’ve seen all of them at one point or another, but one of my favorites is A Christmas Carol because it exemplifies the spirit of the holidays. 

Maybe it’s the story surrounding issues of social injustice that makes the storyline so endearing.  Or perhaps it’s the theme that many things, such as love and friendship are more important than money that appeals to me during the holiday season.  Even though I am passionate about helping people with retirement, it’s nice to get a break from thinking about money every now and then.  (Ironicly, that’s just what we will discuss shortly – this is a financial blog after all).

For those not familiar with the story, the main character is Ebenezer Scrooge, who holds money dearer than anything.  His deceased partner appears one night to warn him about his fate if he continues to live his life in greed.  To give him an opportunity to change, he arranges three spirits to visit him each night – one that shows him his past, one his present and the third shows him his future.   Likewise, I’m going to conjure up three ghosts of my own in an attempt to save anyone out there who may need it.

The Ghost of 401(k) Past

The first spirit that appears to Scrooge is The Ghost of Christmas Past.  This spirit shows him the errors of his ways and also gives insight on how he became the person he is today.  So let’s review some common mistakes that cause many people to dislike their current retirement situation.  The Ghost of 401(k) Past shows you those who:

• Didn’t start soon enough – It’s very easy to put off saving until one is in a better financial position. Often times, they never reach this point until much later in their working career. Each year wasted makes it that much harder to meet those retirement goals.
• Never established an investment strategy – Years of “following the herd” have led them to continually invest more money at the top of the market and take money out at the bottom. This failed attempt to time the market has substantially hurt their long-term performance.
• Were confused about their options – so they just went with a fund or mix of funds and decided that was enough. And that lack of diversification hurt their long-term performance.

The Ghost of 401(k) Present

The second spirit that appears to Scrooge is the Ghost of Christmas Present.  This spirit takes him around the city to show those both enjoying the holidays and those who are suffering.  In our world of 401(k)’s there is also a mixture of those who are well on their way to retirement, and those who lack a plan or are very concerned about the future.

Many of the problems people face today with their retirement outlook includes a combination of the mistakes mentioned above.  This downturn has certainly added to the dispair that many people are facing; however, sound investing and a disciplined approach will give people a high probability of success over the long-term.  (If this ghost speaks to you and you are looking for a quick to-do list to get caught up, check out our Smart Savings series in the Insights section of our website.)

The Ghost of 401(k) Future

The final spirit in A Christmas Carol is The Ghost of Christmas Yet to Come, which shows Scrooge his current future.  And, needless to say, it is not pleasant.  Scrooge realizes he still has time to redeem himself; you too have time to make the necessary changes to boost your retirement savings. 

The good news is, the future is whatever you make it (I know this because of the scientific evidence from the Back to the Future movies – also among my favorites).  The Ghost of 401(k) Future shows you some things you can do now to make your future retirement chances better:

• Save more – Even though this may seem impossible given the current economic environment, make every effort you can, even if the step is small. At times I also feel like I have no extra room in my budget for savings, but regardless I am increasing my contribution next year by 1%. I won’t miss this money and it just might make a significant difference later.
• Build an investment strategy that makes sense for you and your situation. Be mindful of how long you have before retirement and use the best mix of funds that are available in your plan.
• Play an active role in your retirement – Just like you shouldn’t make changes on a daily basis to your retirement account, you cannot just set it once and forget about it. We recommend making changes four times a year to ensure that you maintain your investment objectives and goals.
• Get professional help – If you’re just not sure what to do or where to get started, or just want some confirmation of what you are already doing, consider getting some help. Even if it’s not with us, just be sure that you get the help you need. (Feel free to contact myself or one of our advisors at 877-627-8401 or by email at info@smart401k.com if you would like to talk through your situation and options).

As Scrooge learned, even if you’ve made some mistakes in the past, it is not too late to get on track for retirement.  Learn from your past, address your present situation and give yourself the get possible future.

Kevin Jaegers, Senior Investment Advisor

In the headlines

A look at some of the market movers over the past week:

• Though Black Friday sales looked good, investors feared tight margins on those sales
• The National Bureau of Economic Research concluded that the US entered a recession in December of last year
• Fed chief Ben Bernanke suggested that the Fed could look to push rates below 1%
• The Big Three US automakers were back on Capitol Hill this week making their case for a bailout
• Auditors strongly urged more oversight for the TARP funds
• GE cheered investors with an update that promised to keep the dividend intact
• Yahoo! continues to get bounced around and has recently found itself in AOL‘s sights
• November auto sales were ugly
• Prominent economists are calling for an ever larger government stimulus package
• The Fed’s beige book didn’t paint a very positive picture
• Mortgage applications were surprisingly strong
• Retail sales dropped by the most in almost 40 years
• More than a half million jobs were cut last month, bringing the unemployment rate in November to 6.7%

Commentary

The market just couldn’t hang on to the positive gains from the Thanksgiving week. Kicking off this week, the S&P plunged, knocking off nearly 9% of its value. Tuesday and Wednesday saw some recovery before another drop on Thursday and finally a surprising gain on Friday (more on that in a minute).

The news this week focused on two main areas — economics and automakers. The automakers were back on Capitol Hill this week looking for government funds to keep them going. Though all three companies are skating on thin ice, General Motors and Chrysler seem to be in the most dire need of quick cash. Congress has continued to play its cards close to the vest on this one, but it would seem it faces a tough decision given the number of jobs represented by the auto industry and the amount of money that has been given to financial firms that were also driven to need by mismanagement.

Economic news hardly helped investors’ psyches this week. Reports were consistently negative, with the employment reports sounding a particularly dour note as unemployment ticked up to 6.7%. The NBER, considered the official US arbiter of recessions, also came out and officially declared the US in a recession this week and said that we’ve been in a recession since December of last year.

Of particular interest to investors, though, was the reaction to some of the poor economic news. The release of unemployment numbers on Friday, arguably the worst report of the week, was shaken off by investors through the trading day and the S&P finished Friday with a 3.7% gain. This could suggest that investors are beginning to see at least a pinpoint of light at the end of this tunnel.

Looking ahead

It’s another busy economic schedule heading into next week. Pending home sales will get some attention early in the week as investors continue to look for some sign of a housing floor that will help stabilize the rest of the economy. Later in the week initial unemployment claims will be watched closely after the big losses last week and the general employment concerns. The Producer Price Index, retail sales, and a preliminary report on consumer confidence in December will all be important releases on Friday.

There will be a few earnings announcements of note next week, including Costco, but the earnings schedule has wound down from the third quarter rush and will continue to be relatively quiet until fourth quarter results start coming out. Instead, company news next week will likely continue to focus on the situation with the Big Three US auto makers as well as the potential impact that the proposed Obama stimulus plan could have on specific companies.

On a broader note, if you’ve been following the news, you no doubt are thoroughly confused as to what to believe when it comes to stocks right now. Some experts seem to be of the belief that you should sell everything and sit out of the market for the next couple of years. Swiss investment bank UBS, on the other hand, recently said that the S&P index could rise 53% next year. That’s a pretty big range!

Meanwhile, you’re likely to hear few espousing the strategy that we’ve recommended week after week — that is, maintaining a consistent investing schedule and not worrying about what the market does in the short term. Why won’t you hear that? Quite simply because it’s too boring to sell newspapers and it would put TV viewers to sleep. Fortunately, our primary concern is helping you build a retirement nest egg, not selling newspapers or attracting TV viewers.

In fact, as the disagreement among “experts” shows, it’s nearly impossible to accurately time what the stock market is going to do, and that’s why we don’t bother trying to guide you when to jump in and jump out. However, we do realize that in these times of economic distress there may be a natural inclination to want to do something to help improve your financial position. While we do recommend that you put aside the stock market crystal ball, we can share a few active steps that you can take to help make sure your financial house is in order:

1. Create a budget – A budget is an invaluable tool in managing your finances. If you don’t have one already, there’s no better time than the present to get down and dirty with your credit card statements and set a budget for yourself.
2. Make sure you’re contributing to your retirement fund – Don’t let the turbulent times scare you out of continuing to build your retirement fund. Make sure that setting aside money for your 401(k) plan is part of your budget.
3. Make sure you have emergency savings – This may seem like a luxury, but the three to six months of living expenses that most financial advisors recommend that you have set aside offers great peace of mind in times like these. From personal experience, I’ve found that once you add this into your budget you get used to it very quickly.

Economic downturns are simply a part of the economic cycle, and just as sure as we’re in a recession right now, this will at some point transition into a new economic expansion. For now, your best bet is to make sure that your financial house is in order and that you’re continuing to contribute to your retirement plan. Outside of that, though, try not to let your portfolio pull you away too much from the rest of your life. After all, it’s the holidays, and regardless of where the stock market is, enjoying the company of friends and family is free.