Madden Advisory Services
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Credit Protection
Written by Brian Hughes, CFA, CFP®
It’s an unfortunate sign of the times when it seems every day we hear about a new data breach, exposing personal, private information to hackers. Most recently, an estimated 18 million current, former, and prospective federal employees had their personal data exposed. So what are some things you can do to protect yourself; more specifically, how do you protect your credit? Here are three ways you can reduce your risk and avoid becoming a victim of identity theft:
1. CHECK YOUR CREDIT REGULARLY
There a three main credit agencies, i.e., Equifax, Experian, TransUnion. Under the Fair Credit Reporting Act (FCRA), each of these agencies must provide you with a free copy of your credit report once every 12 months. It is important to take advantage of this. When reviewing your reports, please ensure all accounts and liabilities listed are legitimate and accurate. If you find a discrepancy, you have a problem and need to address the matter immediately.
**Think of this approach as similar to reviewing your credit card statement. Are there any purchases on there that are not from you? If so, time to take action.**
2. CREDIT MONITORING
Credit monitoring is a service that alerts you—via phone and/or electronically—when there is a “hit” on your credit, such as when a person submits a loan application. There are a lot of companies that offer credit monitoring services for a fee. A free option you can take advantage of is through CreditKarma.com. The downside of CreditKarma is that it only monitors two of the three main credit bureaus. With that said, two out of three is better than none.
**Think of this approach as a security system. When the alarm system is triggered, it sounds off and alerts you of a robbery in progress.**
3. CREDIT FREEZE
The freezing method does require the most work on your part; however, it does provide the most comprehensive protection. The system works by placing a block on anyone accessing your credit report to approve of new accounts and credit applications. In order for your credit to be accessed, you must first use a personal PIN you select to “thaw” or unfreeze your credit. By thawing your credit, you temporarily permit financial institutions to process applications for checking & saving accounts, credit cards, lines of credit, or loans. It will potentially cost $10 for each freeze and unfreeze request, but there are exceptions in Florida. The $10 fee is waived if you are at least 65 years old or can show you are a victim of identity theft. Furthermore, residents of Florida can extend a credit freeze on young children—something we strongly suggest.
**Think of this approach as having an extremely secure vault. The only way in is to know the code.**
The easiest way to set up a credit freeze is to visit each agency’s website listed below:
If you prefer to set up the freeze via certified mail, here are some instructions from consumersunion.org: Consumer Union security freeze information
Tools of the Trade
CFP®
We get a lot of questions from people looking for help trying to manage their own finances who are looking for tools and resources to help them out. In today’s day of technology, there are a lot of free online tools that we think can be beneficial for those. Here are a few that we use and recommend for people.
1) Basic investment information:
Have you ever listened to a show (maybe Smart Money Radio on Saturday morning), heard some investment terms, but had no idea what in the world was being talked about? www.investopedia.com is the place for you. Investopedia is a great resource for learning general background and definitions of most things having to do with investing.
2) Budgeting:
A solid and consistent budget is one of the most important, yet overlooked, aspects of financial planning. For better or worse, gone are the days where people need to put pen to paper and write out the budget by hand (yet obviously you still can). The first part of setting a budget is realizing how you currently spend money. Often times banks have software built in to your online access that will categorize your expenses for you. If not, we like www.Mint.Com, where you can set up a free account and add all your banking and credit card information in order to review your spending habits. You might just be surprised to find out where all of your money is going.
3) Calculators:
There are free calculators online covering everything from loan calculators, to investment and retirement calculators. We like www.bankrate.com for calculators on all kinds of information. A word of caution though, online calculators are designed to be quick, easy and simple. Sounds like what we want right? The trade-off though with being quick, easy and simple is that there is a lot of factors that get left out that can have dramatic effects on the results. So use the calculators as a general guide, maybe to set a baseline, but know that any easy calculator will generally have steep limitations in what they can provide.
4) Investments:
Gone are the days of checking quotes in the morning journal. You can get all research you need on companies or funds quickly and easily online. We like to use www.morningstar.com to get broad information about and to compare different mutual funds. For stocks, www.finance.yahoo.com is a great resource to view charts and fundamental data on companies. Also, if you have an online brokerage account, most brokerages provide proprietary and third party research written by analsyts on specific companies. For example, our clients use Charles Schwab as a custodian and through Schwab clients have access to research reports from 8 different investment research providers.
5) Test Run:
Let’s say you want to test out your investment skills before actually putting money out. You can use a Virtual Stock Exchange to measure how well you would do in a real market while in a game like environment. We especially like this for teaching children and teens how to invest. You can visit www.marketwatch.com/game to try it out.
Keep in mind, if you have planning needs that go beyond the capabilities of the tools online, we are also available to help. For any questions or comments, feel free to e-mail me at m.barron@MaddenAdvisory.com.
Financial New Year’s Resolutions
Written by Brian Hughes, CFA, CFP®
Happy New Year’s everyone!! It’s that time of year when we take a look at ourselves and set goals for the upcoming year. Your resolutions may revolve around exercise, travel or education, but we hope readers of a financial blog will include some of these resolutions geared towards improving your financial health.
Set Priorities
In my opinion, setting financial priorities is the most difficult aspect of creating a budget. Maybe you have retirement to save for, kids to send to college, a down payment on a house looming, and dreams of a sports car. With a limited budget, how do you pick where to save first? The answer is as much personal preference as financial science. I recommend writing out your goals and classifying them into three buckets. Your basic needs bucket includes your day to day expenses and emergency savings. The financial foundation bucket has goals that will help make your finances secure, such as your retirement contributions and insurance needs. Finally, your aspirational bucket is where you place goals like the saving for your children’s college (and yes, that means you should save for your retirement before your children’s college) and the sports car. Cover everything in the basic needs bucket, then move to the foundation bucket, and finally, what’s left over can be applied to your aspirational goals.
Get a plan
The CFP® Board of Standards estimates that less than one third of financial decision makers in families have a financial plan. A good financial plan is one that takes your realistic financial goals, identifies the actions you need to take to achieve your plan, and helps you track your progress along the way. I compare this to returning from an offshore fishing trip. Sure I know the general direction of the inlet and I can start motoring that way, but it’s not going to be the most direct way, and worse, when I finally see land, I probably won’t be near the spot I want to be in. If I want the most direct path to get our fresh catch to the grill, then I need to plot out where I’m going and chart the best path to take to make sure I stay on course. A good financial plan will get you to your goals faster and help you end up where you desire.
Check your risk
The last time the market experienced a technical correction (as defined by a drop of 10% or more) was in the summer of 2011. While the rebound off the 2008 financial crash has been comparatively slow to other bull markets, it also has not experienced a lot of volatility. With certain geopolitical risks, the end of Quantitative Easing, and slowing global markets I expect volatility to increase in the coming year. After a shaky October and subsequent bounce back in November, this is the perfect time to evaluate if your portfolio’s risk is still within a comfortable range.
Here’s a toast to making the changes necessary to make 2015 a year of personal financial success.
If you have any questions or comments please e-mail me at b.hughes@maddenadvisory.com._____________________________________________________________
Medicare Enrollment... Did you know?
by Tammy Cremeans, RP®
Who doesn’t have questions regarding Medicare!?!
Medicare is an extensive program, where one question most often leads to another. The goal in this series is to cover some of what we’ll call “did you knows”. The series begins with enrollment and articles regarding original Medicare, Medicare penalties, Advantage Plans, and Supplement Plans will follow.
So, let’s get started with enrollment!
Did you know……?
You will NOT have to enroll in Medicare if you’re already receiving benefits from Social Security or the Railroad Retirement Board. You’ll receive your red, white and blue Medicare card in the mail three months before your 65th birthday.
So what happens if you don’t fall into the above stated parameters? You have 3 ways to sign-up. You can enroll on-line at Medicare.gov (they claim it takes less than 10 minutes), make an appointment at your local Social Security office, or call 800-772-1213.
Did you know…..?
There are several enrollment periods within Medicare but when first signing up you’re in the “Initial Enrollment” period. This is a period of seven months that includes the three months before your birth month, your birth month, and the three months following your birth month. For example, let’s say I’m turning 65 on August 12th. My initial enrollment period would be May 1st through November 30th. Your coverage begins on the first day of your birth month if you enroll during the first three months of the “Initial Enrollment” period. It will then depend upon which month you enroll, as to when your coverage starts. You are strongly encouraged to enroll within this time frame to avoid penalties. If you miss this deadline you would want to mark your calendar for the “General Enrollment” period. It runs from January 1st through March 31st and your coverage would begin on July 1st.
Did you know…..?
There are those every year who don’t enroll in Medicare due to existing health coverage. Maybe they’re on a group health plan with an employer or their spouse’s health plan. Whatever the reason, when that coverage ends, there’s an enrollment period for them too. The “Special Enrollment” period is an eight month period that begins the month after your coverage ends or the employment that coverage is based on ends. Again, you will want to take advantage of this enrollment period because much like the “Initial Enrollment” period you may run into penalties if you don’t enroll before the deadline. (Also, note that you may enroll any time you’re still covered by the health plan.)
Stay tuned in the weeks to come for articles on the A, B, C’s (and D’s) of Medicare and what Medicare penalties will actually cost you!
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5 ways to completely fail at investing
Written by Brian Hughes, CFA, CFP®
Our office days and the majority of what we do is focused on helping those who want to achieve their investment goals. Rational investors make decisions on the basis of risk, return and how the investments will help achieve long term goals. This article is not for rational investors. This is written for the small subset of people who focus on failure. Here are 5 ways to completely fail at investing.
1) Have no regrets
No one likes to be wrong, so avoid making decisions that you might later regret. Instead of making decisions to try to improve the efficiency and returns of your portfolio, just leave everything the same. What if those decisions were wrong? If for some reason you do in fact decide to make changes, it’s best to follow the herd and popular opinion. That way, if you are wrong, it does not hurt as much because you are in the same boat as a lot of others.
You can usually expect your portfolio to be overly-conservative by investing like this but the benefits are long-term underperformance and potential failure to meet your goals.
2) Keep the keepsakes
Your parents held those investments you inherited, you should keep them too. Ignore your advisor when he tells you about the risks of a concentrated position in the stock. When he points out that your goals, financial position and tax position are completely different than your parents, put on the earmuffs. Instead of ensuring that the investment is appropriate for your portfolio, you just need to hang on to that position for sentimental value.
This will usually help you create a portfolio concentrated in one or a few positions that carries quite a bit unnecessary risk, an essential ingredient for investment failure.
3) Have a lot of confidence
Let’s ignore that most professional portfolio managers (people who devote their careers, education and experiences to investing) fail to beat the market over a long range, have some over-confidence in yourself, you might be able to do it. A quick search of the internet, read an article or two, I’m sure you can find an investment opportunity the market has not discovered yet.
As a result of your wonderful overconfidence, expect that you will trade excessively, hold a poorly diversified portfolio and underperform the market. Clearly overconfidence can help you fail.
4) Don’t be a control freak
Successful investors have saving and investment discipline. They set a plan and stick to it the best they can. Not you. Instead, focus on the now. Make rash decisions. If you want to go to Europe for three weeks instead of maxing out the IRA account for the year, go for it.
At some point you will realize you have insufficient savings. All that is needed at that point is just to increase the risk in your portfolio to try to make up for the shortfall. Insufficient savings and an overly-aggressive portfolio, sounds like a recipe for failure.
5) Keep your time
Time is money, so don’t spend time researching options for your money. Instead, use general rule of thumb shortcuts. You heard some guy say he was investing in it on Bloomberg TV last night, so it must be good. Instead of thoroughly researching all your options, save your time and choose the one you saw advertised a week ago.
Fortunately for you who are trying to fail, this will lead to a limited number of options to choose from, a lack of diversification and inappropriate asset allocation.
These behaviors are just a sampling of the many options available to those of you who want to fail, but are some of the most commonly used options out there. The common thread to achieve failure is to avoid investing around a well thought out financial plan based around your risk/return objectives and any financial constraints.
If you have any questions or comments please e-mail me at b.hughes@maddenadvisory.com.
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5 Bond Strategies for a Rising Interest Rate Market
Written by Brian Hughes, CFA, CFP®
Last time we posted we laid out some problems bond investors face in rising interest rate market. As a quick recap to cover the basics, interest rates go up your bond values go down. Here are 5 bond strategies for a rising interest rate market.
1) Get low
If you read the last article, you would pick up that the easiest solution rising interest rates is to shorten up your duration. The lower the duration of our bonds the less sensitive they are to interest rates. Lowering duration can be accomplished in a few ways. You can switch your bond funds to low duration or short term bond funds. If you use individual bonds, you can simply shift your holdings into shorter maturity bonds.
2) Ditch the fund
Bond funds do not always hold bonds until maturity, instead they cycle through them, and are more subject to interest risk because of it. When a bond is sold early to another investor on the secondary market, the price received for the bond will be based on what someone is willing to pay for it. The price someone is willing to pay is partly based on available interest rates. To give you an example, the largest bond fund in the world, Pimco Total Return, has a high turnover rate of 227% according to Morningstar. This indicates the fund manager is very active buying and selling investments on the secondary market. In addition to that, a lot of mutual funds use leverage (meaning investing more assets than they have) which increases the return in good times and the losses in bad times. Pimco Total Return has 153% of its assets invested into bonds, so if bond prices go down it will have a more profound effect on the fund.
Instead, buy an individual bond and hold it to maturity so you will not be affected by the up and down price in the secondary markets. You really only care about the starting price, the payment stream, and the ending price. So long as you are able to create a diversified portfolio of individual bonds, we recommend buying the individual bond instead of bond funds in this market.
3) Stock up on bullets
A relatively new option to the market are bond ETFs with a defined maturity (called bullet ETFs). You can buy an ETF that only holds bonds coming due in a certain year and when bonds in the ETF mature the money from them will be distributed to investors. Again, as long as you hold these until maturity, the interest rate risk is greatly reduced. The downside is the costs. You will typically earn .25-.5% less if you buy the bullet ETFs compared to buying individual bonds, but if you do not have enough assets or experience to create a diversified bond portfolio on your own, the costs of these are a worthwhile tradeoff. Guggenheim and iShares are two ETF providers that currently offer bullet ETFs.
4) Put to par
For older investors who intend to pass their assets to beneficiaries instead of using for themselves, bonds with survivor options (also known as death puts) should be attractive. A survivor option allows a beneficiary to receive par value ($1,000) for the bond regardless of what the bond could be sold for in the secondary market. For example if you bought a new issue bond for $1,000 but the current market value $930, if you pass away your beneficiary would be able to receive the full $1,000 back for the bond, therefore eliminate the effect of the increase in interest rate.
5) Give yourself credit
Bonds have two primary sources of risk, interest rate risk and credit risk. Interest rate risk is definable and measurable in portfolios therefore can be eliminated. Portfolio managers can use financial instruments to eliminate interest rate risk leaving you with just the credit risk of the bond. Proshares and iShares have interest rate hedged ETFs that invest this way and there are a variety of unconstrained actively managed mutual funds that will also do the same thing.
It’s important to note one of the strategies is not to eliminate bonds from your portfolio altogether. Bonds play an important role in allocations for their diversification benefits. They tend to be less volatile than stocks and often times move in opposite direction than stocks, so if the stock markets are down your bonds can still be up. For income investors, they also provide a steady source of interest payments to meet cash flow needs. These are actionable strategies you can use to protect your bond portfolio.
If you have any questions or comments please e-mail me at b.hughes@maddenadvisory.com.
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A Primer on Measuring Interest Rate Risks on Your Bonds
Written by Brian Hughes, CFA, CFP®
With a rise in interest rates seemingly in sight, investors hear a chorus of worry from analysts and talking heads on financial shows discussing the negative impacts this could have on fixed income portfolios. In order to give you a conceptual understanding of what is going on in your portfolio, we will dive into the workings of the bond markets. You will need to put on your nerd hat and grab a double shot of espresso for this topic, but ultimately understanding the moving pieces in your bonds will lead to an understanding of strategies to protect your portfolio against rising interest rates.
Bond prices and interest rates have an inverse relationship. If we imagine a seesaw from our days on the school playground, bond prices would have a seat on one side with interest rates seated on the other. As interest rates go down bond prices go up and as interest rates go up bond prices go down. In bonds this conceptually makes sense. Let’s say I am choosing between two bonds, call them bond A and bond B. These two bonds have the same maturity and same credit risk, the only difference in them is bond A pays 3% interest and bond B pays 4% interest. If they both cost me the same, I will obviously pick bond B as it pays more. The only way to get me to buy bond A is for the owner of the bond to offer it cheaper than bond B to make up for the difference in interest. Conversely, the owner of bond B may be able to raise her price make more money on the bond.
We can take that relationship a step further. Instead of thinking about the price and interest relationship in terms of comparing a two bond, we can think about it in terms of what the overall market demands for returns on a bond. Investors will require returns based on a variety of factors, such as maturity length and risk, for each bond. If the market demands 5% for a 10 year A rated bond and that bond pays a 4% coupon, the 4% bond will be priced at a discount to enhance the overall return in order to attract investors. If the market demands 3% for a 5 year AA rated bond that pays a 5% coupon, the 5% currently pays more than what the market requires so it’s price will increase as it is in demand by investors.
This matters because the rates the market demands are ever changing and are partly controlled by The Federal Reserve. The fed uses various open market instruments to move fed fund rates to their interest rate targets. Because of the pricing relationships we just went over, we know that when the fed makes moves to tighten monetary policy and increase market interest rates, that move puts downward pressure on the prices of bonds. The sensitivity of a bond’s price to a change in interest rates is called its duration. Duration gives us an approximation for how much a bond price will change given a change in interest rates. It is the main measure of interest rate risk.
Calculating a bond’s duration can be tricky, especially if the bond has embedded options like a call feature. A lot of investors think of duration as equal to a bonds maturity, but there is actually more to it than that. It is true that a bond with a long maturity is going to have a higher duration than a short term bond. This is simply because the short term bond will pay the money back sooner, but a bonds yield and coupon will also effect a bonds duration. A high coupon and a high yielding bond will lead to a lower duration. A low coupon and low yielding bond will lead to a higher duration. In fact all coupon paying bonds will have a duration that is less than their maturity.
Fortunately most investors do not need to go through the formulas to calculate their portfolio duration, but if you do want to do it by hand, a quick search on the internet will give you the formulas and different ways to calculate if you are interested. If you are in a fund that invests into bonds you can go to Morningstar.com and the portfolio duration is listed or there are calculators online that will calculate the duration for you.
Once you know the duration of a bond or your portfolio, you can use it as a way to estimate how price will change with interest rates. The approximate change in price = -duration x change in yield x 100. For example if we have a bond portfolio with a duration of 4.7 and interest rates increase by 1%, we would expect our portfolio to decline by 4.7% i.e. (-4.7)(.01)(100). If we had a bond with a duration of 3 and interest rates decrease by 0.5% we would expect our portfolio to increase 1.5% i.e. (-3)(-.005)(100). That estimation only works for small changes in interest rates, for larger changes there are additional adjustments you need to make relating to convexity. There is a lot more to measuring a bonds risk than just duration, but duration isolates interest rate risk and is very relevant in the current market.
That was a very long winded way to come to 2 basic conclusions related to where the bond market is today with increasing interest rates on the horizon. First, a rising interest rate environment is not a positive indicator for the bond portion of portfolios. Second, in a rising interest rate environment we would like the duration of the bond portion to be lower than average.
This was a primer into some of the issues faced in a rising interest environment. It’s important to have some background on the problems that come with a rising interest rate environment so you can understand the solutions and what you should do about it. Next week I plan to write about some of those options you can take to limit your interest rate risk (if you followed me through this article you can probably guess a few of them already).
If you have any questions or comments please feel free to e-mail me at b.hughes@maddenadvisory.com.
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Florida Prepaid Costs Drop by 40-50%
by Michelle Barron, CFP®
Great News!! It is not often that we see a reduction in the cost of items. I am happy to report that due to a recent law passed by Governor Scott the cost of Florida Prepaid College Tuition just declined 40-50% and application fees will be waived for plans bought by the end of 2014.
For the 18,000 families who purchased the more expensive plan during 2008-2014… good news for you too! You will be receiving a refund. The Board announced it estimates that about $200 million dollars will be going out in refunds.
For those not familiar with the Florida Pre-paid program it is a program where you pay a set amount in advance and state tuition will be covered at a later date, no matter how much the cost increases - essentially locking in today’s tuition rates.
Different options are available covering state/community colleges, universities or a combination of both. They even have options to cover dormitory expenses.
Payment options include monthly, 55 month payment plan or lump sum.
Under the new terms announced on Thursday the cost of a 4 year university plan will drop from $350 to $173 a month for a newborn. The cost of a 2 + 2 plan which covers 2 years at a state or community college and two years at a university will fall from $235 to $136 a month.
They also created a new one year university plan that allows families to pay the cost of up to 4 years at a state university, but in one year increments. This is a great idea for family members who want to contribute for a grandchild, niece, or nephew. The one year plans start at $43 a month.
Rates increase based upon the plan you choose and the age of the child at the time of purchase.
Open enrollment starts October 15th and goes through Feb. 28th. But don’t forget the application fee is waived if you enroll prior to the year end.
Prepaid is not the only option available for education planning. It is a good idea to talk to your investment professional to see what is best for you.