Barker Financial Group, Inc.

Special Report: 2011 Year-end Review – Economy and Markets

Doug Huddleston — Tue, 07 Feb 2012 17:41:11 +0000

The past year reminded investors that they should hope for the best, prepare for the worst, and be thankful when reality does not match their fears. Investors entered 2011 with hopes that the world economy would continue recovering from a long and painful deleveraging process. Equity markets had posted two straight years of positive performance, central banks remained committed to pro-growth monetary policy, and major developed nations were focused on reducing debt.

By mid-year, however, optimism faded as troubling events around the world dominated headlines. The devastating earthquake and tsunami in Japan, political unrest in the Middle East, rising oil prices, a US credit downgrade, the threat of another global recession, and an escalating debt crisis in Europe weighed heavily on markets. As stock market volatility returned to global financial crisis levels, investors faced a major test to their discipline and staying power.

In our year-end special report, we take a look back at the 2011 economy and how the global markets reacted to the major geo-political and economic shocks of the year.

To download your special report, Click Here

Do Dividend Stocks Offer a Sound Alternative to Bonds?

Doug Huddleston — Mon, 23 Jan 2012 16:02:52 +0000

By James T. Barker, ChFC, CLU

In today’s low-interest rate environment, investors relying on bond yields for steady cash flow may be tempted to look for alternatives to boost income. One direction many investors are heading is toward dividend stocks.

As of this writing, the dividend yield on the S&P 500 is roughly the same as the yield on a 10-year treasury note, slightly under 2%. And in many instances, yields on investment grade bonds are actually lower than the dividend yields offered by the same companies.

Beyond current yield, dividend stocks look attractive on a couple of other fronts. With the economic recovery seemingly underway, stocks have the potential for growth, boosting total return. Moreover, a look at the balance sheets of many dividend paying corporations reveals significant cash positions. With so much cash sitting on the sidelines, there is a potential for larger dividends in the future. In comparison, historic low interest rates have bond investors concerned that rising interest rates will decrease the value of their fixed income assets in the future.

You should think carefully, however, before substituting dividend stocks for fixed-income assets in your portfolio. Even though yields and total return my look attractive, dividend stocks are still equity assets and as such, they are an inherently riskier asset. Overweighting in equities will change the risk profile of your portfolio and may increase the volatility of your investments.

Diversification should also be considered when adding dividend stocks to your portfolio. Many of the attractive dividend yields can be found with large, value-oriented companies and they tend to be concentrated in industries such as energy and consumer goods. Without careful planning and execution, you may find yourself less diversified and at greater risk.

When considering the potential impacts of risk, asset allocation and diversification to your portfolio, you should also look closely at the individual companies in which you plan to invest. Adding companies with stable earnings and strong balance sheets may minimize volatility in these very volatile markets. As always, if you have questions, consult your financial professional for guidance.

Have You Considered The Benefits of a Revocable Living Trust?

Doug Huddleston — Fri, 06 Jan 2012 21:56:45 +0000

by James T. Barker, ChFC, CLU

When preparing your estate plan, a revocable living trust may be a fundamental element to consider.

A trust is created when a person (Trustor or Grantor) transfers a property interest to another person or corporation (Trustee) to be held for the benefit of himself or others (Beneficiary.)

The grantor of a revocable trust typically retains the right to revoke the trust at any time prior to his incapacity or death. Revocable trusts are commonly used to avoid probate and provide management of the grantor’s assets should he become incapacitated.

When an individual creates a revocable trust and transfers his property to the trust, the disposition of the trust property at death of the grantor will be governed by the terms of the trust and will not become part of the grantor’s probate estate. Upon the grantor’s death, the trust becomes a separate legal entity from the grantor. The grantor’s will does not control the disposition of the property because the property is not included in the grantor’s probate estate. The use of revocable trusts is important in states that have high probate costs which are typically determined as a percentage of the value of the probate estate.

Regardless of the costs associated with probate in a decedent’s will, the use of a revocable trust can provide a degree of privacy for the decedent and his family. To probate a will, the will must be submitted to the probate court, and the will is open for public inspection.

With a revocable living trust (also known as a revocable inter vivos trust or grantor trust), your assets are put into the trust, administered for your benefit during your lifetime and transferred to your beneficiaries when you die—all without the need for court involvement.

Most people name themselves as the trustee in charge of managing their living trust’s assets. By naming yourself as trustee, you can remain in control of the assets during your lifetime. In addition, you can revoke or change any terms of the trust at any time as long as you are still competent. (The terms of the trust become irrevocable when you die.)

In your trust agreement, you will also name a successor trustee (a person or institution) who will take over as the trustee and manage the trust’s assets if you should ever become unable to do so. Your successor trustee would also take over the management and distribution of your assets when you die.

Estate planning can be a very complext process. When considering the elements of your estate plan, you should generally consult with an estate planning attorney.

Is Your Wealth Protected from the High Cost of a Long-Term Care Event?

Doug Huddleston — Fri, 09 Dec 2011 19:50:48 +0000

by James T. Barker, ChFC, CLU

When the need for long-term care arises, it’s too late to start thinking about long-term care insurance. Most people buy insurance for their home and car and make sure they are adequately covered for health issues. Unfortunately, few people consider the impact of a long-term care event on their finances. One can think of long-term care insurance as investment portfolio protection. The fact is, long-term care can be very expensive and without proper planning; can exhaust family savings within a few short years.

Long-term care is the term used to describe a variety of services in the area of health, personal care, and social needs of persons who are chronically disabled, ill or infirm. Depending on the needs of the individual, long term care may include services such as nursing home care, assisted living, home health care or adult day care.

Although long-term care is typically needed by the elderly, anyone with an injury or illness who needs help performing everyday functions such as feeding, bathing and getting dressed may also need long-term care. Studies have shown that 30% of individuals over the age of 65 will have a disability and that number increases to 53% for those 75 years and older.¹If the need for long term care arises and you don’t have insurance, you will need to pay for care out of personal savings or rely on family members to shoulder the burden.

Long-term care insurance mitigates the financial risk of a long term care event. Obtaining coverage avoids “self-insuring” for future care and using your existing assets. Like other insurance, long-term care insurance must be purchased before you require the services under the policy. Consequently, like other insurances, you may never use it. Most financial professionals advise their clients to consider long-term care insurance as they approach retirement. However, the earlier you secure a policy, the lower your annual premiums will be. Once the policy is purchased, the premium is fixed as long as you maintain the policy. Many insurers have filed for premium increases with the states in recent years although premiums can only be increased for all policy holders with similar policies upon state approval in most states.

There is a great deal of choice and flexibility in long-term care insurance policies. You can select a range of care options and benefits that allow you to get the services you need in the settings that suit you best. The overall cost of long-term care insurance is determined by several factors including your age, the number of years covered and the daily/annual benefit amount.

To illustrate the importance of Long Term Care Insurance, assume you experience a long term care event that requires nursing home care for 4 years. In 2010, the national average daily cost for a private room in a nursing home was $229/day or $83,585/year.² Without long-term care insurance, the event could end up costing you $334,340 from personal savings or financed by loved ones. And if you are unable to afford the cost of hiring professionals, family members may be required to assist you, taking time off from work to do so. By purchasing long-term care insurance, you help to ensure that any costs associated with your care are covered, thereby lessening the financial burden on yourself and your family.

As with any financial decision, be sure to consider your options carefully. Compare rates, features and benefits offered by different insurance companies and independent brokers before purchasing a policy. More importantly, consult with your estate or financial planner and/or attorney about the choices that are appropriate for you and your family.

¹Source U.S. Census Bureau, 2006 American Community Survey, September, 2007
²Source: The 2010 Metlife Market Survey of Nursing Home, Assisted Living, Adult Day Services and Home Care Costs, October 2010.

Are Your Emotions Exacting a Price on Your Wealth?

Doug Huddleston — Wed, 07 Dec 2011 18:57:13 +0000

by James T. Barker, ChFC, CLU

Since 2008, economic uncertainty and market volatility have tested the staying power of investors around the world. Many people fled equities during the worst months of the global financial crisis, while others waited for signs of a turnaround before investing more. Their emotional reactions may have exacted a large price on their wealth.

The graph below documents investor behavior during the stock market downturn in 2008 and subsequent market rebound. It offers a few key lessons about investing in turbulent markets.

Quarterly Equity Mutual Fund Flows¹
Industry Outflows Compared to S&P 500 Index Performance
January 2008–June 2011

Reading the Graph
First, look at the shaded graph in the background, which plots the performance of the S&P 500 Index (measured by growth of a dollar) over this three-and-a-half-year period. The market began falling in late 2008 and hit bottom in early March 2009. It then reversed sharply and began a long climb through June 2011.

Now consider how mutual fund investors responded to the stock market’s downturn and recovery. The orange line plots quarterly net cash equity flows for the US mutual fund industry over the same period. Equity fund flows were cumulatively negative over the period. Investors were selling more shares than they were buying, and on a net basis, capital was leaving mutual funds.

Note that these fund outflows followed the stock market downturn, and net flows stayed negative even after the market rebound. Investors were reacting to the falling stock market by either selling their fund shares or delaying the purchase of additional shares. When the stock market suddenly rebounded in March 2009, investors who had reduced their exposure to equities missed a good part of the recovery.

This apparent lack of discipline is well established over longer time periods too. Industry analyses and academic research suggest that investors tend to focus on recent performance and make decisions that compromise long-term returns in their portfolio.

Recent history illustrates why the average fund investor may fail to earn returns comparable to those of the average fund or market index. Markets change quickly, and investors must be in their seats to capture returns. Unfortunately, many investors let their emotions get in the way of participating in long-term market performance.

Taking emotions out of the equation underscores the value of sound professional advice. The education, encouragement, and discipline of a competent investment advisor during difficult times may help investors avoid bad decisions. An advisor’s steady hand helps investors apply discipline in all types of markets, which can positively impact individual performance over time.

¹For illustration purposes only. Industry net new cash flow data for US-domiciled equity funds provided by Investment Company Institute ©2011. Quarterly cash flows are estimates that are adjusted to represent industry totals, based on reporting covering 95% of industry assets. S&P 500 Index performance is based on monthly returns data. The S&P data are provided by Standard & Poor’s Index Services Group. The S&P 500 includes 500 US stocks chosen for market size. Past performance is no guarantee of future results.

Diversifying a Portfolio with Real Estate

Doug Huddleston — Wed, 23 Nov 2011 22:12:51 +0000

By James T. Barker, ChFC, CLU

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Real estate as a wealth generator is hardly a new idea. People owned property long before the advent of stock exchanges and other capital markets. In more recent times, large corporations and institutions have held commercial real estate in their portfolios.

But individual investors have not traditionally had ready access to a professionally managed, diversified real estate portfolio. This has changed in the last few decades with the development and growth of real estate investment trusts, or REITs. Now individuals can add a real estate component to their portfolio to improve overall diversification.

A REIT is a company that owns, operates, and/or finances real estate property. Equity REITs manage different types of income-producing properties, such as hotels, office buildings, industrial facilities, apartments, and shopping centers. As commercial landlords, equity REITs typically generate dividend income from the rent paid by tenants. Since REITs have to pay out a large fraction of earnings as dividends, they tend to offer higher-dividend income than equities, and this may benefit certain income-oriented investors. Total return of the shares is tied to income and change in market value.

Publicly traded REITs offer liquidity, as they can be bought or sold whenever the stock market is open for business. The availability of market-determined share prices can reveal information about the market’s assessment of the company’s prospects, including the ability of the firm’s management team.

Publicly traded REITs offer investors several potential benefits:

• Real estate exposure
• Diversification
• Higher yield, regular income, and capital appreciation
• Distinct asset class due to their low long-term correlation with stocks
• Liquidity and transparency
• Favorable tax treatment – REITs operate as “pass-through” corporations and therefore pay little or no taxes on corporate earnings.

A REIT mutual fund that manages a portfolio of REITs typically offers more diversification than owning a single REIT. Most REIT funds are either actively managed or indexed.

We prefer REITs that follow a structured strategy. Rather than trying to replicate an index, a manager may choose securities based on risk-return characteristics, diversification benefit, and favorable price negotiation. By keeping costs low and trading efficiently, a structured REIT strategy seeks to generate improved returns over time. Advantages of this approach include broader, more systematic exposure to the REIT universe at a lower cost.

Adding a real estate component to a portfolio may be a good diversification move. But strategy and implementation are crucial, and before investing, you should consider how a real estate strategy and the REIT you select may affect your portfolio.

Increase Real Portfolio Return Through Capital-Loss Harvesting

Doug Huddleston — Thu, 10 Nov 2011 15:42:23 +0000

by James T. Barker, ChFC, CLU

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As we enter the final quarter of the fiscal year, it’s time to start thinking about strategies for reducing your income taxes. Capital loss or tax-loss harvesting can be an effective way to help.

Tax-loss harvesting is the selling of securities to realize portfolio losses from your taxable accounts. Once the losses are realized, the investor then uses these losses to offset capital gains, lowering the overall income tax liability. Realized capital gains not only occur when you sell assets above your cost basis, but potentially from owning mutual funds that realize gains through active portfolio management.

With current tax law, there is no limit to the amount of realized capital gains that can be offset with realized capital losses. Alternatively, if capital losses are greater than capital gains during the year, the capital losses can be carried forward until death to offset future gains. Moreover, up to a maximum annual $3,000 deduction from ordinary earned income (married, filing jointly) is available to further reduce the tax liability.

When utilizing a tax-loss harvesting strategy it is important to understand the wash-sale rule. Essentially, the wash-sale rule disallows any capital loss deductions when the investor engaged in buying and selling the same (or substantially identical) asset 30 days prior or 30 days after the transaction date. For example, If an investor bought AT&T stock on November 30th and then sells it on December 15th for a loss, he cannot recognize the loss for tax purposes because the transactions occurred within 30 days of each other. Likewise, if the investor sells AT&T stock on December 15th for a loss and then buys it back on January 1st he cannot recognize the loss for tax purposes. If he really likes AT&T and wants the security in his portfolio, he must wait until January 16th or later in order avoid a wash-sale and claim the loss for tax purposes.

Often times, investors don’t want to miss out on market opportunities during the wash-sale rule black out period. One strategy to “stay in the market” is to invest in similar companies in the same industry as the security being harvested. For example, if selling AT&T for the tax-loss deduction, one might consider adding Verizon stock to the portfolio to replace AT&T stock.

It is important to note that tax-loss harvesting only considers the tax implications of the investment and not the appropriateness of the investment itself. Prudent investors should consult with investment and tax specialists to help weigh the benefits and costs of a capital loss harvesting strategy. These professionals can then help identify appropriate securities from which to harvest the losses.

Your Fixed Income Strategy Depends on Your Goals

Doug Huddleston — Wed, 26 Oct 2011 21:19:39 +0000

By James T. Barker, ChFC, CLU

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Research shows that two risk factors—maturity and credit quality—account for most of the average return differences in diversified bond portfolios. Long-term bonds and lower-quality corporate bonds typically offer higher average yields to compensate investors for taking more risk. But keep in mind that these premiums are considerably lower than the market, size, and value premiums documented in the equity world.

Investors generally hold fixed income to either (1) reduce overall portfolio volatility, or (2) generate a reliable income stream. These objectives typically lead to different investment decisions.The first approach, volatility reduction, is an application of separation theorem (i.e., hold equities for higher return and use fixed income to temper portfolio volatility). Rather than increasing risk to maximize yield, these investors want to hold fixed income securities that are lower risk. Certain fixed income asset groups are better suited for this strategy.

With this in mind, some long-term investors may seek to earn higher expected returns by shifting risk to the equity side of their portfolio. With an eye to minimize maturity and credit risk, they hold short-term, high-quality debt instruments that have historically offered lower yields with much lower volatility.

The second purpose for holding bonds is to generate reliable cash flow. Income-oriented investors, including retirees, pension plans, and endowments, may not worry as much about short-term volatility in their bond portfolio. Their priority is to meet a specific funding obligation in the future. Consequently, they design a portfolio around bonds and accept more volatility in hope of earning higher yields, which they pursue by holding bonds with longer maturities and/or lower credit quality.

Whether investing for total long-term return or for income, a portfolio should be diversified across issues and global markets to avoid uncompensated risk from specific issuers and to capture differences in yield curves around the world.

What is the Real Value of Professional Investment Advice?

Doug Huddleston — Fri, 14 Oct 2011 21:10:33 +0000

By James T. Barker, ChFC, CLU

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Retirement savers who sought investing advice enjoyed a median annual return almost 3% higher than those who didn’t — even after the fees they paid for that advice, according to the study of eight large 401(k) plans with more than 425,000 participants and $25 billion in assets. The study was conducted by Aon Hewitt, a consulting firm, and Financial Engines, an investment advisory firm.

And 3% can make a big difference over time. Consider two portfolios, both with a beginning balance of $10,000. Portfolio A has an average annual return of 5% while Portfolio B has a return of 8%. Over a twenty year period, Portfolio A is worth $26,523 while Portfolio B’s worth is almost twice as much at $46,610.

The study also found that investors who did not seek advice generally had inappropriate risk levels and inefficient portfolios – a portfolio that assumes more risk for a given level of expected return. Moreover, these investors tended not to reduce these risk levels as they moved closer to retirement. We see this over and over again when meeting with prospective clients for the first time.

Managing investor behavior is another critical benefit of proper professional guidance. It has been shown that the dominant determinant of long-term, real-life investment outcomes isn’t investment performance but rather investment behavior. People who don’t ask for help are more likely to try and time the market, panicking when markets decline and chasing the latest fad or hot fund when markets are high. Many of those investors that panicked in 2008 and moved out of the market likely missed the recovery of 2009.

And those individuals that are inclined to aggressively trade do not fare well either. A Barber, Lee, Liu and Odean (2009) study concluded that aggressive trading by individuals reduces returns by about 4% per year.

Seeking professional help to construct a properly diversified, efficient portfolio and maintaining a systematic, disciplined approach to investing may be worth multiples of what that advice actually costs.

A “Simple” Decision with a Profound Impact on Your Wealth?

Doug Huddleston — Fri, 07 Oct 2011 18:21:47 +0000

By James T. Barker, ChFC, CLU

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Choosing a basic stock-bond mix is an important first step in portfolio design. Although the decision may appear simple, it can have a profound impact on your wealth.

All investors face two important decisions; deciding how much risk to take and then building a portfolio with risky assets (equities) and “less risky” assets (fixed income) to achieve the desired risk exposure. The stock-bond decision implements this risk position.

Investors that are willing to take stock risk should begin with a diversified market portfolio and then “dial-down” the total risk by adding fixed income. The greater the bond allocation relative to stocks in the portfolio, the less risky it is and the lower expected return.

A common method to determine your allocation is to evaluate model portfolios along the risk-return spectrum. Using standard stock-bond allocations such as 80%-20%, 60%-40% and 40%-60% you can compare the average annualized return and volatility of each model portfolio for different periods, such as one, three, five, ten and twenty years. The analysis should look at average returns as well as best and worst case scenarios for each period.

Once the investor has established the basic stock-bond mix they can then refine the equity portion depending on risk tolerance and tilt their allocations accordingly. For example, research published by Eugene Fama and Kenneth French found that small cap stocks had higher average returns than large cap stocks, and value stocks have had higher average returns than growth stocks.

The final step in diversifying the stock component of the portfolio is to diversify globally. By holding an array of equity asset classes across domestic and international markets, investors can reduce the impact of under performance in a single market or region of the world. This diversification can further reduce volatility in a portfolio, which translates into higher compounded returns over time.

The stock-bond decision drives a large part of your portfolio’s long-term performance. During portfolio design, evaluating different stock-bond combinations can help you visualize the risk-return trade off as you consider the range of potential outcomes over time. Once you determine a mix, it can guide more detailed choices of asset classes to hold in the portfolio. And as your appetite for risk shifts over time, you can revisit the mix to estimate how shifting your portfolio mix may impact your wealth accumulation goals in the future.