All Things Financial Planning Blog


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Let the Debate Continue


Over 58 million viewers watched the first of three debates between the candidates for President of the United States of America. During the 90 plus minutes of spirited conversation, the voting public was witness to a swirling dervish of statistics and promises. The truth is generally hidden deep somewhere between the rhetoric and the facts.

The ability to get to the facts in any campaign is of tremendous difficulty. Political slant and bias is pervasive whether it is our own bias or that of our favorite publication or news outlet. From CNN to Fox Network and MSNBC, voters often seek political allegiances that match their own. It is up to the American public to go beyond the sound bites and headlines to seek out where the true facts actually reside.

U.S. Bureau of Labor Statistics
The predecessor to the Bureau of Labor Statistics (BLS) was formed by President Chester A. Arthur in 1884 in response to pressure from labor organizations for the U.S. Government to “help publicize and improve the status of the growing industrial work force.” (1) The First Hundred Years of the Bureau of Labor Statistics, 1984. The mission of “The Bureau of Labor Statistics of the U.S. Department of Labor is the principal Federal agency responsible for measuring labor market activity, working conditions, and price changes in the economy.”

Job Creation and Unemployment
The BLS publishes a tremendous amount of data relating to labor and prices. The keen focus this campaign cycle on job creation makes the numbers from the BLS very relevant. The framing of the employment situation will depend on whether you are the incumbent or the challenger. So who should voters believe? Check the facts. The BLS has published a chart of 70 years of Labor Force Statistics that include figures on the employed and unemployed. No spin, no rhetoric; just the numbers.

Two Independent Government Offices
The word “independent” and non-partisan usually does not align with offices inside the U.S. Government. The Congressional Budget Office (CBO) and the U.S. Government Accountability Office (GAO) are truly independent offices. The role of the CBO is to provide nonpartisan, objective analyses of budgetary and economic issues to support the U.S. Congress while that of the GAO is to investigate how the federal government spends taxpayer dollars.

Budgets and the Federal Deficit
The words deficits and debts are often intermingled into the same conversation as if they are one in the same. According to the Merriam-Webster dictionary, a “deficit is an excess of expenditure over revenue.” Debt on the other hand is defined as “something owed or a state of owing.” Here is an example on how deficits and debt work together.

In this example, the U.S. Government collected $1 trillion in revenue and had expenditures of $2 trillion incurring a $1 trillion dollar budget deficit. If the U.S Federal Government starts with $0 in debt and incurs a $1 trillion dollar budget deficit, how does it pay its bills? Through the issuance of U.S. Government debt. In this simple case, let’s say the U.S. Treasury sells $1 trillion dollars of government bonds to investors to cover the deficit spending. The national debt just increased by $1 trillion dollars. The following year, the government reigns in spending and balances its budget with revenues matching expenditures. While this appears fiscally responsible, the U.S. government still has a $1 trillion in debt that needs to be repaid.

According to the U.S. Government Accountability Office, the current federal debt is approximately $14.8 trillion with an annual budget deficit of $1.1 trillion.¹ The full picture is a little more daunting. The website US Debt Clock  gives a broader picture of the challenging financial situation looming before the United States.

One of the only ways to pay down debt is to create a budget surplus. The last year in which the U.S. Government had a budget surplus was over a decade ago and amounted to just over $124 billion dollars. So how many years would it take for the U.S. Government to pay off its national debt if it ran a budget surplus of this size year-in and year-out? The simple math puts it around 119 years.

But this kind of math is not simple. Given the fact that the debt was financed through bonds and bonds pay interest, the U.S. Government needs to pay off principal plus interest. Should the overall interest rate on the debt be 3.5%, the interest payment alone would be more three times the $124 budget surplus.

This is akin to a consumer who charges too much on their credit card and the amount of interest charged is greater than the minimum payment made. The debt will never go away and may only compound as interest owed is added to the overall balance. The true figures of a debt reduction plan are a little more complex but the facts don’t lie. We are in a lot of debt and the inability of our elected officials to create a budget surplus only exacerbates the situation. The state of finances in the U.S. are pretty grim.

“Most people can think about political issues either as a game or as a substantive discussion of how best to solve a problem. What the media is doing is simply drawing our attention to whatever thoughts we already have about the game aspect – which is the aspect of politics that is not as valuable to democracy” said Ray Pingree, assistant professor of communication at Ohio State University.

It is up to the voters within our great Nation to go beyond the snippets of what we hear or read in the headlines. Our founding fathers constructed a country upon a foundation of three pillars that have endured for over 236 years. The three pillars represent the branches of government: Executive, Judicial and Legislative.

Elected officials take too much credit when things go well and push blame to others when things go poorly. The reality is that no one branch of government holds supreme power. If there is credit or blame to go around, it must be shared and balanced, just as our founding fathers envisioned over two centuries ago.

¹Congressional Budget Office

Ed GjertsenEdward Gjertsen II, CFP®
Vice President
Mack Investment Securities, Inc.
Glenview, IL


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Falling Off the Cliff


I am reminded of Douglas Adams’ quote “It’s not the fall that kills you; it’s the sudden stop at the end.” The U.S. Government, as a way to help the economy out of the financial crisis, implemented financial measures designed to boost the economy through lower taxes, employee payroll tax reductions and unemployment compensation among others. While the U.S. economy was saved, the recovery has been tepid at best. The pressing issue facing the U.S. is that most of the measures that have provided financial life support are all due to expire at the end of 2012.

Ben Bernanke, Chairman of the Federal Reserve, dubbed the expiring stimulus measures a “fiscal cliff.” Chairman Bernanke urged Congress to put government debt on a long-term sustainable path, but should not do so at the expense of short-term growth. There is fear that Congress will be engaged in grid lock due to the upcoming elections and that the financial measures will expire at year-end. Should the U.S. economy fall over the fiscal cliff, the pain won’t be felt until the economy comes to a sudden stop.

The programs set to expire are the Bush Tax Cuts from 2001, 2003 and the more recent 2009, 2010 stimulus measures that created the Employee Payroll Tax Reduction and Emergency Unemployment Compensation programs. The estimate by Ned Davis Research on fiscal drag ranges from $72 billion to $388 billion in lost output. Should the loss be toward the higher end of the range, the sudden stop may come sooner than many of the pundits are predicting.

Congress may decide to “punt” like they did last year and extend the financial measures. The risk of this tactic is that while it may spare short-term growth, the long-term debt burden may become unbearable. The Congressional Budget Office projects that the ratio of government debt to Gross Domestic Product would increase to 93%. A larger debt burden may slow the economy by requiring the government to spend more on interest payments on the debt instead of spending on Social Security, Medicare, defense and other important areas. Over half of the interest payments could be going overseas as foreign investors currently hold more than half the U.S. debt.

The U.S. Government will also face increased funding pressures from the near depletion of the Social Security and Medicare Trust Funds. The 2012 Trustees report showed the Social Security Trust fund will be depleted in 2033, three years sooner than last year’s estimate. After 2033, the Trust will only be able to support 75% of benefits promised. Medicare is projected to face the same fate in 2024 with revenues sufficient to cover only 87% of costs.

Social Security and Medicare outlays currently account for a combined 34.5% of government spending, the largest combined spending of any other government program. These entitlements are going to become more burdensome as the Congressional Budget Office estimates that Social Security and Medicare will account for 43% of all U.S. government expenditures in just ten short years.

The burden of these programs will also be felt as entitlements become a larger percentage of the United State’s Gross Domestic Product (GDP). In 1970, Social Security and Medicare were approximately 3.9% of GDP where today it is nearly 9% of GDP. In 2022 the Social Security Administration estimates that the two programs will be nearly 10% of GDP and upwards of 12% in 2033. While these appear to be small incremental gains in terms of percentages, perspective must be kept on the sheer dollar size of the U.S. GDP.

Gross domestic product (GDP) refers to the market value of all officially recognized final goods and services produced within a country in a given period. The U.S. Nominal Gross Domestic Product as of March 31, 2012 was nearly $15.5 trillion dollars. Over a 20-year period, the rise in Social Security and Medicare spending as a percent of GDP will equate to approximately $465 billion dollars. The ability for the United State to avoid a “Greek Tragedy” is to keep our debts and entitlements to a manageable percentage of GDP. As the percentages continue their unabated rise, our Nation’s capacity to shoulder these burdens becomes more and more strained.

There is a definite “fiscal cliff” ahead. The challenge is we don’t know if it is 12 months or 12 years in front of us. The job of the Federal Reserve and our elected officials is to minimize the height of the fall from the top of the cliff. We can sustain a slow down, not a sudden stop.

Ed GjertsenEdward Gjertsen II, CFP®
Vice President
Mack Investment Securities, Inc.
Glenview, IL


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Democrats or Republicans: Who’s Better?


On November 6, 2012, registered voters will have the privilege of heading to the polls and cast their ballots for President, members of Congress and a whole host of local candidates. The citizens of the United States will elect its representatives to lead our Nation through challenging economic and political times.

Individual candidates aside, which political party should you vote for if wanted robust economic growth and higher stock markets? The answer may surprise you.

The two dominant political parties in the United States are the Democrat and Republican parties. It is difficult to define the complex ideology of the present day political parties and the followers that comprise them yet alone recalling ideology of decades past. Let us start with a “who we are” from the Democratic and Republican National Committee websites:

Democratic: Our party was founded on the conviction that wealth and privilege shouldn’t be an entitlement to rule and the belief that the values of hardworking families are the values that should guide us.¹

Republican: The Republican Party is inspired by the power and ingenuity of the individual to succeed through hard work, family support and self-discipline.²

My further refinement of their respective ideologies: Democrats believe in a more equal society where Government plays a larger role and Republicans believe more in an entrepreneurial society and less Government.

Which political party, Republican or Democrats, when in control of the White House, has the highest stock market returns over the last 111 years? The Dow Jones Industrial Average (DJIA) has increased 7.79% during years when there has been a Democrat as President. This is more than double the performance of a Republican Presidency which increased 2.95% over the same period. Not what many would expect.

This appears to be completely counterintuitive given the differences between both parties’ ideologies. What can be learned from the enclosed chart when looking at political party control for both White House and Congress and its historic impact on the stock market, economy and inflation?

Stocks (DJIA)           Industrial Production          Inflation (CPI)
Democratic President            7.79                              5.27                                             4.46
Republican President             2.95                              1.81                                               1.80
Democratic Congress             6.05                              4.49                                              4.37
Republican Congress              3.57                              1.45                                              0.65
Dem. Pres., Dem. Cong.          7.33                             6.31                                               4.62
Dem. Pres., Rep. Cong.           9.63                              1.11                                               3.79
Rep. Pres., Rep. Cong.            1.62                               1.57                                             -0.37
Rep. Pres., Dem. Cong            4.92                              2.04                                               4.01
Table courtesy of Ned Davis Research, Inc.

If you are a stock market investor, you would welcome the very specific scenario of a Democratic President and a Republican controlled Congress. This combination would have resulted in a very satisfying 9.63% average gain for the DJIA.

What is the worst scenario historically for investors? This would have been during complete Republican control of both the White House and Congress. During this time, the DJIA was up only 1.62% on average, the worst performing period of any political party combination. Given the Republicans rooted fundamentals in business, entrepreneurship and small Government, this is a surprising outcome. Industrial Production, which measures output from factories, mines and utilities, also languished under complete Republican control with its second worst result of 1.57% growth.

How did stocks and the economy fare when Democrats completely controlled the White House and Congress? The DJIA had its second best result with an average gain of 7.33% while Industrial Production performed at a chart toping 6.31% growth rate. But, this scenario also produced the highest rate of inflation with the Consumer Price Index (CPI) surging 4.62% over that period. Good gains for stocks and the economy but tempered by higher rates of inflation.

Regardless of political ideology, history shows us that conflict may be the best scenario for investors. When the White House has been in Democratic control and Congress in the Republican’s hands, stock market investors have fared best.

Should you prefer gains in Industrial Production, you hope for a Democratic sweep of power. Low inflation rates, you would welcome a Republican President and control of Congress.

Who is Better? It all depends. Candidates, political parties and special interest groups are projected to spend billions of dollars persuading voters to punch a ballot in favor of their platform and candidate. They will use statistics, polls and a variety of other numbers to either taint the opposition or bolster their own standing. British politician Benjamin Disraeli stated “There are three types of lies — lies, damn lies and statistics.” Don’t be easily swayed by highlighted numbers. Dig deeper into the stated arguments and underlying statistics to better understand what you are being led to believe. Most important, on November 6, go vote.

1. www.democrats.org
2. www.gop.com

Ed GjertsenEdward Gjertsen II, CFP®
Vice President
Mack Investment Securities, Inc.
Glenview, IL


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Everything is Fine, Just Don’t Ever Die


It’s that time of year again when you are besieged with a blizzard of paperwork. Documents such as a W-2, 1099DIV, 1099R, 1099B, 1099INT, K1 and a whole host of other forms and documents are arriving daily. So what do you do? You cram all these forms into a 9×12 envelope and hand them over to your tax preparer hoping you didn’t miss something.

The problem is you may be missing something very important that has nothing to do with income taxes or your accountant. It is one of the most basic tenets of financial planning, the proper titling of your assets. It has been said that possession is nine-tenths of the law but the fact is that title supersedes your will or any other directives you may have in place. So don’t just stuff your tax documents blindly into your manila envelope, take this opportunity to do a thorough review of who really owns your assets.

No Worries if You Don’t Die

The proper titling of assets really does not come into focus unless something unexpected happens. Unexpected events such as divorce, litigation or death can wreak havoc on a financial plan. The first two events at least allow the true owner of the property to be able to dictate the intent of their actions. The third event, death, has a tendency to limit such post-mortem interaction.  So as long as you never die, you won’t ever have to worry about the disposition of your assets.

The Name Game

There are a wide variety of ways to hold the title of an asset. Assets can be held by real persons or by entities such as corporations, limited liability companies or trusts. The focus here will be on assets held by living, breathing individuals. Here are a few types of account titles:

Joint Tenant (JT)
A type of ownership of property in which each party owns an undivided interest. Joint tenants have the free, unconstrained right to use the property or asset and upon the death of one joint tenant, the surviving tenants retain full ownership.   

Tenancy in Common (TIC)
A type of ownership of property in which each party has an undivided interest, regardless of the percentage of interest. Unlike, Joint tenancy, upon the death of one of the tenants, the percentage of ownership does not pass automatically to the survivor. There needs to be documentation, such as a will, to determine who the decedent’s property reverts to. If there is no will, the courts will determine who receives the survivor’s property. 

Tenancy by the Entirety (TIE)
A type of ownership of property only allowed between a husband and a wife. Under a tenancy by the entirety, each tenant my not sell or give away his interest in the property without the consent of the other tenant. Tenants by the Entirety also protect property from individual creditor claims against one of the spouses. In the event of a spouse’s death, the property of the deceased conveys to the surviving spouse.

Where there is a Will there is a Way

It is estimated that nearly 70% of American’s have not executed a will. I have yet to source anything that verifies these numbers, but based upon my 19-years of experience, it appears pretty close. The question is how do individuals plan for the transfer of their assets in the event of their death? Simple, most people without a will use the account title as a cheap alternative to a properly drafted will. But even if properly executed, where there is a will, there is still a way to mess things up.

Even the Best Laid Plans…

Let’s tie this all together. You believe at some distant point in the future you may die so you execute a will. Your will states that all your assets will go to your surviving spouse then to your two adoring children.

Unfortunately, your spouse predeceases you and you are left a widow or widower. The good news is that you are comforted by one of your adoring children who take good care of you. You visit your local bank to update your accounts. The nice personal banker has you fill out paperwork to have your account title changed to you and your adult child as joint tenants. Should the banker not understand your wishes or just not know the difference in titling, things can go horribly wrong.  

For illustrative purposes, let’s say the bank held 80% of the surviving parent’s assets. The surviving parent dies and the will states that all assets are to be split 50%-50% between the two siblings. The problem is that the bank account, which is 80% of the estate, now belongs to the one adoring child who was the joint tenant leaving the other sibling with much less than was intended. In a perfect world, the siblings could potentially work out a solution. But after the death of the last surviving parent, things can change and relationships can quickly sour. 

Not only does this scenario create estate planning issues, the parent may also have given an inadvertent gift to the child when changing the title to a joint tenant account. Depending on the size of the account, the IRS may have an added interest in all of this as well. The deceptive convenience of adding a child or anyone who is not a spouse to an account title is fraught with potential issues, all of which may not be apparent until after the fact.

We are all going to die at some point, we just don’t know when. Take the time to review all your accounts and their respective titles to ensure they are in alignment with your intentions. A properly executed will that is coordinated with the proper titling of property and assets is essential in creating a strong foundation in your financial plan.

Ed GjertsenEdward Gjertsen II, CFP®
Vice President
Mack Investment Securities, Inc.
Glenview, IL


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Get a Tax Rate Like Mitt…You May Be Already There and Don’t Know It


The recent release of candidate Mitt Romney’s tax returns stirred up a firestorm debate on how someone with his wealth pays so little taxes. It begins to rekindle debates over inequity which will only drum on louder throughout the remaining months of the U.S. Presidential campaign.

The complexity of the U.S. tax system cannot be overstated. There were 1,396,000 words in the entire tax code of the Internal Revenue Code and Regulations in 1955.  In 2005, the word count was just over 9,097,000 words, a whopping 545% increase in that given time.

It is no wonder that the Oracle of Omaha, the great investor Warren Buffet, must have been confused when he wrote an Op-Ed piece in the New York Times stating that among his secretary and other office workers their “tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.” If this truly is the case, the office workers should immediately seek qualified tax preparers to file amended tax returns. So how does one of the world’s richest men not understand individual income taxes and the rates they really pay? Simple, he doesn’t prepare his own tax returns.

Let’s cut to the chase. There is a perception that the rich do not pay their “fair” share of taxes and that middle class and poor suffer because of it. First, let us focus on giving and receiving. Specifically, who pays the taxes and who receives the government spending generated from taxes. According to the Tax Foundation, for every dollar taxpayers in the top 20% of earnings (household income over $191,400) paid, they received $0.32 of Federal spending. Compare that to every dollar taxpayers in the bottom 40% paid (household income less than $35,300), they received $17.75 of Federal spending.1 It is estimated that a trillion dollars ($1,000,000,000,000) is transferred each year from high- to low-income groups.2

According to the Internal Revenue Service, there were 137,982,203 tax returns filed in 2009 with positive adjusted gross incomes. The average tax rate for earners in the top 1% was 24.01%. The average tax rate for the bottom 50% of all taxpayers was 1.85%. In fact, the total share of income taxes paid by the top 1% of earners rose from 43.26% in 1987 to 58.66% in 2009. Contrast that to the bottom 50% of earners whose share went from 6.07% in 1987 to 2.25% in 2009. The tax burden of the top 1% of taxpayers now exceeds that paid by the bottom 95% of taxpayers.

Source: Tax Foundation

Get a Rate Like Mitt

What is a taxpayer to do if they find themselves paying tax rates above the national average relative to their income? The first suggestion is to have a professional tax preparer review your situation and look for ways to reduce your tax liability. If you are a single person who rents, does not contribute to any retirement plan, no investments, no children and makes no charitable contributions, you will be in a relatively high tax bracket. There are a wide variety of tax deductions (lowers taxable income) and tax credits (dollar for dollar offset against tax liability) that are available to nearly all taxpayers.

In addition, there are ways to reduce your tax liability by investing wisely. For investors, dividends can be treated in two ways – as ordinary income or as a qualified dividend. The qualified dividend is taxed at a maximum rate of 15%. If you are in a 15% or lower bracket, you will pay 0% on qualified dividends while all other dividends will be added to your income and potentially subject to much higher rates. 

How you sell an investment for a gain can also have a big impact on your tax liability. If you sell a stock or mutual fund that is held for less than a year, the gain will be subject to ordinary income taxes. Instead, should you hold the investment for a year, the gain will be subject to long-term capital gains rates. For taxpayers at or above the 25% bracket, the long-term capital gains tax rate is 15%. For investors at or below the 15% bracket, the tax liability is 0%. 

The problem with taxation does not lie within the socioeconomic structure that currently exists. The problem is put directly on our elected officials and in particular members of the House of Representatives where tax legislation is introduced. Over 22 million tax returns claimed $6 billion dollars in tax preparation fees of which $1.7 billion was claimed by those with adjusted gross incomes below $60,000. Another issue. All of the above suggestions are for this year only. It all changes in 2013 as the Bush-Era tax cuts are set to expire.

The Internal Revenue Code is not nearly as complex as the attempt for the citizens of our republic to define “fair” when it comes to paying taxes. The debate over the word “fair”, especially during the intense heat of the upcoming elections, is filled with political partisanship, misinformation and fuzzy math. Voters owe it to themselves to become more knowledgeable about the issues at hand. Great sources of information can be found at TaxStats on the IRS website (www.irs.gov/taxstats), the Congressional Budget Office (www.cbo.gov) and the nonpartisan education organization Tax Foundation (www.taxfoundation.org).

1 www.taxfoundation.org/files/wp1.pdf
2 “Why Taxes Matter” Tax Foundation 2008 publication

Ed GjertsenEdward Gjertsen II, CFP®
Vice President
Mack Investment Securities, Inc.
Glenview, IL


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The Positive State of the Union


The end of one year and the beginning of another is a popular time to reflect and plan. 2011, and for that matter the first decade of the 2000’s, was pretty miserable for matters of money. Whether you are young or old, working or retired, these are difficult times. The headlines reflect the uncertainty and frustration that many are experiencing. Unemployment is high, interest rates low, stock markets volatile and housing prices subdued. It is no wonder that the State of the Union for most Americans is pretty low. 

The S&P 500 Stock Index was nearly unchanged for the year. If you fell asleep after New Year’s Eve 2010 and woke up a year later, you would have been none the wiser on what transpired throughout the year. The popular stock market averages experienced losses over 20% only to recover by year-end. If invested in foreign markets, your slumber may have turned into more of a nightmare with some overseas stock markets down over 25% on the year.

Our elected officials in Congress could not play well together in the sand box which nearly caused a shut down for the U.S. Government. Concerned over the financial stability of America, Standard & Poor’s downgraded the credit rating on U.S. debt. Counter to the plethora of talking heads who called for America’s financial collapse, interest rates on U.S. debt fell dramatically over the ensuing months. So much for “conventional” wisdom.

The devastating earthquake in Japan had the world on edge. The threat of a meltdown from the Fukushima Nuclear power plant coupled with major business disruptions and loss of life damaged the fragile economic recovery.

The leaders in the European Union appeared to do more talking than doing. After countless meetings, votes, referendums and elections the European Debt Crisis still lingers, just not as loud as before. The European Union may be at the start of a recession with several countries, Greece in particular, still battling solvency issues. 

Now that we have reflected upon what was, let’s start to plan on what could be. If you are currently in a negative mental state, take another couple of minutes or so to wallow. Alright then, enough. Pull up your bootstraps and start to focus on positive ways to change your state of your union. 

Napoleon Hill wrote “every adversity has the seed of an equivalent or greater benefit.” When life gives you lemons, make lemonade. The current “State of the Union” may provide unforeseen opportunities, but you need a clear, positive frame of mind to find them. Here is a listing of negative circumstances that could plant the seed to a greater benefit:

Negative: Interest rates are near historic lows and I am not making anything on my savings.
Positive: Use low interest rates to your advantage. Look to lower your borrowing costs. Use low rates to refinance a mortgage or negotiate for lower rates on credit cards or any other debt you carry. The money saved in reduced interest cost could be used to accelerate paying down the balance of the debt. If you refinance a 30-year 6% mortgage down to a 4.25% and maintain the same monthly payments, you could knock nearly a decade off the term of the loan – a huge savings.

Negative: My 401(k) has suffered under the stock market’s terrible performance over the last five years.
Positive: There is power in commitment. For some 401(k) investors, when the going gets tough, they get going, to the money market or reduce their contribution. This is the wrong thing to do. The benefit lies in dollar cost averaging. Dollar cost averaging is an investment method where systematic contributions are made month-in and month-out into a diversified portfolio whether the market is high or low. The true power of dollar cost averaging is found when prices are low, not high. Your contribution accumulates more shares at a faster rate at lower prices whereby upon a market recovery gains in the account can be accelerated.

Negative: The economy is slow and businesses are suffering.
Positive: Customer loyalty is extremely important during difficult economic environments. The cost of a business to retain a current client is a fraction of what it takes to attract a new one. Competition is everywhere and intensifies during hard economic times. It’s time for businesses to show you their loyalty and their money. Slip on your negotiating hat and have some fun with this one. Look at all your expenses from cell phone, internet, cable TV and gym memberships. Start calling the companies you are currently doing business with and ask them for more competitive pricing. Are you paying for extras on your cable bill? Ask for a reduction on some if not all of add-ons. Paying for a texting plan on your cell phone? See if the company will waive the fee for six months or a year. Make this a treasure hunt game. See what companies will work with you, whether it’s a permanent reduction or a temporary one, you could free up additional cash flow.

The best way to strengthen your personal “State of the Union” is to use the excess cash flow to pay down current debts. The lower your financial obligations, the higher your financial freedom. It may be difficult to plant seeds during times of adversity but a clear, positive state of mind can create benefits way beyond your expectations.

Ed GjertsenEdward Gjertsen II, CFP®
Vice President
Mack Investment Securities, Inc.
Glenview, IL


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The European Union Blues: Why You Need to Know What’s Going On!


When an individual or corporation owes more money than can be paid back, they can declare bankruptcy. But what happens when a country like Greece owes more than it can pay? Can a country go bankrupt?  

There has been a lot of negative news emanating from Europe which has had a direct impact on U.S. stock markets and interest rates. Why should you care what happens outside the friendly confines of the good ole USA? Simple. Unlike Las Vegas, what happens in Europe does not stay in Europe.

First, a history lesson on European economics and the establishment of the European Union. Europeans have been trading with each other for thousands of years. The continent of Europe is comprised of approximately 50 states including well known countries as the United Kingdom, Russia, Germany and France and not so well known names like Malta, Andorra, San Marino and the Republic of Macedonia. Each country had its own currency, trade and tax laws which complicated business transactions and slowed economic progress.

Starting in 1958, several economic communities were created among European states that were designed to expand economic ties and make trade more standardized. In 1993, the Maastricht Treaty officially established the European Union (EU) as an economic and political union which currently comprises 27 independent member states that are primarily located in Europe.

The initial success of the EU evolved into the monetary union called the “euro area” which was established in 1999 and currently comprise 17 of the 27 EU member states. Euro area or eurozone members include Germany, France, Italy, Spain and Greece among others. Eurozone states use the Euro (€) as the common currency and sole legal tender.

The EU countries produce approximately 26% of the world Gross Domestic Product (GDP) compared to U.S.’s 19.7% contribution of world GDP. The size of the EU’s contribution to world GDP has a direct impact on the overall health of our planet’s economy.

In the first eight years since the eurozone founding, the world economy was expanding. Eurozone member states issued national or sovereign debt. This is similar to the United States issuing Treasury bills, notes and bonds to help fund national spending. Sovereign debt of eurozone members were primarily viewed as relatively risk-free given their economic stability and ability to tax citizens. The perception of “risk-free” began to change with the advent of the 2007 financial crisis.

The country of Greece was one of the first eurozone members to come under scrutiny regarding the government’s ability to pay back the money its government borrowed from banks, institutions and private citizens. Allegations of governmental accounting errors, rampant budget deficits and a slowing economy helped fuel concerns of a possible default. 

Greece’s contribution to the overall EU GDP is less than 2% and its total public debt is approximately $454 billion U.S. equivalent dollars. Even though Greece may have a relatively small financial impact, the fact that a eurozone country could default on its sovereign debt called into question the financial health of other eurozone countries. 

The governments of Ireland, Portugal, Spain and now Italy are all under intense scrutiny regarding their budgets and ability to pay back borrowed funds. The potential domino effect of government debt defaults is what concerns worldwide investors. Italy and Spain contribute over 20% to the EU’s GDP and their combined debt outstanding is in the trillions of dollars. These are no small numbers.

A bond is simply a loan to an entity that carries an interest rate or coupon and a maturity date. In the case of sovereign debt, an investor lends money to a government for a fixed interest rate and a fixed maturity date. The amount of interest paid by the borrower and received by the lender is directly tied to the perceived ability of the borrower to pay back the loan. The lower the risk of default, the lower the amount of interest paid and received. The higher the risk, the higher the interest paid to compensate the lender for taking the greater risk.

A major problem arises when the perceived risk of the issuer changes after the bonds are purchased. For instance, should the borrower be initially perceived as low risk by the lender and that perception changes to that of higher risk, the value of the issued bonds will decrease. In some cases of Greece’s sovereign debt, investors are sitting on a 60% decrease in the value of its issued bonds. 

For banks, investment firms and other financial institutions, a decline in value like this can be a catastrophic event. Large losses in “high quality” bonds can change the health of the institution literally overnight. As bond values decline, the amount of “good” capital that was originally purchased and held must be replaced or found elsewhere. These are the headline stories where governments and European banks are in need of bailout money in order to stay afloat and not collapse.

Because money and investments are so intertwined worldwide, what affects institutions abroad creates issues domestically. The stock prices of large domestic banks and financial firms have declined sharply due to changing perception of risk associated with investing in foreign sovereign bonds.

The situation is made worse given that the European Union is believed to be headed back into a recession. The high level of uncertainty that has hovered over the European debt crisis for so long may have finally taken its toll on business. Rising unemployment in EU member states coupled with a slowing economy only exacerbates the situation.

Given the fact that the European Union is the largest contributor to worldwide GDP, a slowdown across the pond will definitely affect the U.S. economy, its financial institutions and even the perception of the safety of U.S. sovereign debt. During robust economic times, treaties, agreements and political alliances are easy to come by. When times get tough and hard decisions need to be made, politicians tend to slow things down even to the detriment of their own sovereign nation.

Sources: 2011 CIA World Factbook, Financial Times, Economist magazine, wikipedia

Ed GjertsenEdward Gjertsen II, CFP®
Vice President
Mack Investment Securities, Inc.
Glenview, IL


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Money Resolutions


We are getting toward that time of the year again where we start to reflect on the events of the past year and look forward to the opportunities ahead. Instead of waiting for the traditional day to initiate a new set of New Year’s resolutions, stop procrastinating and start one or two a little early.

The most challenging aspect of resolutions, especially those that involve money, is keeping the personal commitments. One method to achieve a better success rate is to make the resolutions simple, relatively painless and most importantly, rewarded. 

Resolution #1: Increase your retirement plan contributions by 1%

This resolution suggestion is designed to start you in the right, positive direction. It doesn’t involve any daily rituals or focus or complicated accounting. It’s a simple as adding “one” to the current contribution rate of your company’s defined contribution plan whether it’s a 401(k), 403(b) or other similar plan. It may not appear to make a big difference at first, but here’s the catch. Keep raising your contribution limit by 1% each year for next 3 years.

It is often stated that the lack of retirement saving is the 800 pound gorilla in the room. I tend to look at the lack of retirement planning as the elephant in the room. Given that a male elephant may weigh 24,000 pounds on average, now we are talking about something that can’t be ignored. Question: What is the best way to eat an elephant? Answer: One small piece at a time. By raising your contribution limit by 1% annually, you are “eating” your retirement elephant one piece at a time.

Resolution #2:  Establish one short-term goal

Short-term goals give you the ability to achieve personal success relatively quickly. Success begets success and as your confidence in obtaining your goals grows the easier it is to set more significant targets.  Here are two examples of short-term goals.

  • Pay your bills on-time: If you chronically pay your monthly bills late, focus on paying one before the due date. Paying bills late will usually generate late fees, which can add up to serious money over time. A $20 late fee for 3 bills can add up to over $720 per year alone.
  • Set up or modify direct deposit: Direct deposit is a good way to keep money squirreled away. If you have all of your paycheck going directly to checking, add a savings account. Automatically transfer 2% of your net pay every time your check hits the account. Again, nothing onerous but it’s simple and effective.

Resolution #3: Review your financial foundation

When individuals think of their financial foundation they immediately consider their savings, retirement plans, investment accounts, home and other assets. This is not the foundation but the first, second and for some, third floors of their financial structure. The foundation is the documentation that is necessary to weather any financial storm that may hit. Your foundation should include at the minimum a simple will, powers of attorney for property and powers of attorney for health care. These are the basics, nothing very complicated and relatively simple to put in place. The best place to find a competent attorney is to find a professional who specializes in estate planning. Check with friends, co-workers or the Financial Planning Association for referrals. In a hurry or on a very tight budget? There are a number of online services including Legalzoom.com. These sites don’t offer legal advice, but helpful questions that can guide you should your needs be relatively straight forward.

Resolution #4: Establish one long-term goal

The establishment and completion of a long-term goal is, for most, cause for celebration. Long-term goals take focus and commitment. If achieving long-term goals was easy, we wouldn’t have dozens of magazines published on a monthly basis that are dedicated to informing us about money or health. A long-term goal can be anywhere from 12 months to many years into the future. Here are a couple of long-term goals to consider:

  • Pay off one credit card: Take the credit card with the highest balance and within 18 months get the balance to $0. For some, this is no easy feat. Remember, it took a while to build up the balance and it may take awhile to knock it down. Come up with a spending plan to reach this goal. Like training for your very first marathon, you don’t start day one running 26 miles. You slowly build, day-in and day-out, week-in and week-out until you are prepared. It may take some effort, will power and focus but it can be done.
  • Cash Vacation: Do you take vacations the old fashion way? Most likely not. One of the reasons consumers take on high credit card balances is due to the play now and pay later mentality. How about a long-term goal with a terrific reward – the all cash vacation. A trip of this nature takes on several positive attributes. The trip needs to be planned relatively well. Develop a spending plan that includes travel, meals and lodging. Once the dollar amount is determined, develop a savings plan to meet your goal. Now back into a date for your trip by taking the amount you need and dividing that by your ability to save. The bigger the trip the longer it may take to save. Instead of one large trip, try smaller excursions to create the positive feeling of achieving your goals and resolutions

Resolutions should not come around only once per year. There are many goals and resolutions that should be made throughout the year. The key to success is keeping targets realistic and manageable. Start simple, start small and you will be surprised at how easy it will become to meet your money resolutions.

Ed GjertsenEdward Gjertsen II, CFP®
Vice President
Mack Investment Securities, Inc.
Glenview, IL


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October: A Trick or Treat for Investors


“October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” This is a great quote from Mark Twain. As the message states, not only may October be a dangerous month to speculate in stocks, every month carries risk.

What makes the month of October so worrisome for investors is their knowledge of the great stock market crashes that occurred. The crash in late October 1929 was a catalyst behind the Great Depression and the October 1987 crash still lingers in the minds of most investors.

So does the month of October deserve such a bad reputation? The statistical answer is no. A quick look at the historic monthly average returns of the Dow Jones Industrial Average (DJIA) since 1900 shows October does not deserve its bad rap. The award for the worst performing month goes to September whose average monthly return over that period is down 1.1%. October’s average return over that time frame is up 0.1%. The best month: December which was up 72% on average with a positive monthly return of 1.5%.

So why should investors look for a treat instead of a trick in October? By looking at the historic monthly returns of the stock market, an interesting pattern develops. There appears to be a seasonal tendency for the stock market to perform better over successive months than other months. 

The seasonal tendency is straight forward. Split a year into two distinct investment time frames, 5 months and 7 months. With the first time frame, $10,000 is invested in May 1950 and is sold in September 1950; the cash is held until May 1951 when the proceeds are reinvested in the same manner. The other portfolio invests $10,000 in October 1950 and is sold in April 1951, with cash similarly held until reinvested in October 1951. If the pattern of two distinct investment time frames is repeated year after year for 60-years, a dramatic difference in values surfaces.

The $10,000 invested in the 5 months between May and September would have grown to $12,436. Not a great return for 60-years of work. The $10,000 invested in 7 months between October and April would have grown to $606,806. These numbers do not take into account taxes or investment expenses which would lower the overall totals. But with a 4,700% difference in returns between the two investment time frames, it is a pattern worth noting.

So where’s the catch? Not every time frame has worked. The most recent example is the period from October 2007-April 2008 which whould have resulted in a 9% loss and the October 2008-April 2008 would have resulted in a 25% loss. 

While seasonality may give us a “tip” on how the stock market may have performed in the past, remember that any investment involving stocks may be “peculiarly dangerous” at any time.

Ed GjertsenEdward Gjertsen II, CFP®
President
Mack Investment Securities, Inc.
Glenview, IL


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Are Your Adult Kids Mosquitoes, Leeches or Vampires?


According to a recent survey commissioned by the National Endowment for Financial Education (NEFE), nearly 60% of parents provide financial support to their adult children when they are no longer in school. So what do kids have in common with mosquitoes, leeches and vampires? They both can be draining. While one may want your blood, the other may want your bank account. 

For the blood suckers, it’s the amount of blood that each one draws that determines whether we just itch or die. Fine, vampires aren’t real, but author Stephanie Meyer of the Twilight book series sure made them cool. Losing some blood to these voracious creatures is okay, but being drained of too much could be fatal. That goes the same for your bank account. A little here and there may result in an “itch,” but too much money sucked out of your account could be financially lethal. 

Let me draw you a picture. The recent worldwide financial meltdown was the most disruptive economic event since the great depression. Unlike the dot-com bust which negatively affected a smaller sub-set of Americans, the wounds were much deeper this time around. While capitalism survived, the patient is still in a fragile state. Just as tens of millions of hard working American’s started to head off into the sunset of retirement, the bottom fell out.

This is the plight of the largest demographic group in the United States; the Baby Boomers, some 70 million strong. The current age range of this group runs from those in their early 50s to their mid-60s. A careful analysis of the Baby Boomers influence on the economy over the last five decades is impressive. When this large group started to have children, they created the “echo boomer” generation. And this is where our story begins.

 The economic turmoil that currently exists is causing tremendous financial pressure on both Baby Boomers and their children alike. So what do our children do, regardless of age, when they are in need? They turn to their parents. The NEFE survey found that parents are supporting their children in a variety of different ways that include helping with housing, living expenses, transportation costs and medical bills. 

When asked the reason why they offer support, some of the answers were quite astonishing. While 43% were legitimately concerned with their child’s financial well being, 37% stated they didn’t want to see their children struggle like they once did. What? While good intentioned, think of all the butterflies that would be unable to fly if we “helped” them out of their chrysalis. Struggle, at some level, brings about important life lessons that can’t be taught in the classroom.

This is where balance, fortitude and the need to financially survive come in to play. Most retirees utilize a spending plan. They understand the importance of balancing income with expenditures. With historically low interest rates, volatile stock markets and weak home prices, Baby Boomers are feeling more pressure than ever to keep expenditures in check. This plan works well until unexpected expenses creep into the picture, especially when the unexpected involves their children. 

When interest rates are high and stock markets soar, an investment portfolio can heal itself relatively quickly when unexpectedly drained. But, the ability for today’s Baby Boomers to recover financially is currently limited. Put that on top of a weak job market and throw in inflation pressures for good measure, it’s no wonder people are less optimistic today.

So what can parents do to insure that the “itch” does not turn into something fatal? Here are a couple of simple suggestions that both parties can use in their struggle to survive:

  1. Have a candid conversation about your child’s current financial situation. Are you being asked to support a lifestyle or truly keep them out of harm’s way? Without full disclosure, you will only be guessing as to the magnitude of the situation.  
  2. Is it bad habits or circumstance? Is your child good at handling their finances or are they in need of a life lesson. There are circumstances that may not have been planned for like job loss, health issues, etc. But if their lack of savings and high lifestyle kept them at the edge of the financial abyss, any small set back would have set things in a downward spiral. Your monthly support check won’t fix this.
  3. Family or Business. If you just give your money to your adult child, this is a family matter. Get it in writing and its more about business. Make it more formal. Create a simple note that outlines the terms of the loan: nominal interest rate, payments and expected payoff date.  
  4. Home is where the heart is. If your adult child (and maybe their entire family) is living at home, insure that they help out either with their wallet, their backs or both. Charge them nominal rent, have them buy groceries, help with the utilities payment or do the chores they so desperately hated during their first go around in the house.
  5. Establish a plan and stick with it. Before making any major financial assistance to your child, set the rules and stick by them. Determine the amount of support, its frequency and how long it will be needed. This could help avoid misunderstandings in the future

It is hard to see anyone suffer financially, much less your own children. Emotions run deep and this is where decision making becomes difficult. Clarity surrounding expectations and financial conditions are imperative in order to help maintain the relationships we cherish. It is important for Baby Boomers to recognize the point when a simple itch may be heading toward something more dangerous.

Ed GjertsenEdward Gjertsen II, CFP®
President
Mack Investment Securities, Inc.
Glenview, IL

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