Has It Been Two Years?

I can't believe it. It's been two years since I last posted. I haven't checked the site in MONTHS. Yet I still see I'm getting page views.

Are you people so starved for something to read that you have to visit HERE? To what *I* write? :) Wow. I am humbled.

I do have some thoughts on what is going on. Very dangerous times methinks. I do not see the open ended promises of continuous market injections by Ben Bernanke and the Federal Reserve as a long term good. Do I see it as inflationary? Well we've posted on that before. In my opinion it will take years for substantial inflation to appear in the economy. Too many deflationary forces in place. Is it destabilizing though? You betcha. Junior was just handed a set of keys to the car and only has a learner's permit. I think it was absolutely the wrong signal to give market participants. Will it help the economy? I don't think that QE1 or QE2 helped the economy in any material way and neither will this. Will it help the stock market? In the short term. Maybe even *very* short term. It's clear from my models that these actions are having smaller and shorter effects.

As a planner how does one advise his clients? Again, in the short term I think the chances of a market advance are not insignificant. But less so than the first two rounds of Quantitative Easing. Maybe as little as 55/45. If invested, I'd have two hands on the wheel. If not invested in stocks, I'd find something cheap to invest in. Hedged equities. A cash plus strategy. Certain balanced risk strategies (risk parity), although those will fail too if correlations go to one again (like 2008). Good luck!

A Break In The Action

I haven't been posting lately. I took on some new outside activities for myself in addition to my normal obligations. I'm going to see how those go before deciding whether to resume or not.

The Continuing Saga of Your House As An Investment

From the Report issued by CoreLogic:

CoreLogic reports that 11 million, or 23 percent, of all residential properties with mortgages were in negative equity at the end of the second quarter of 2010, down from 11.2 million and 24 percent from the first quarter of 2010. Foreclosures, rather than meaningful price appreciation, were the primary driver in the change in negative equity. An additional 2.4 million borrowers had less than five percent equity. Together, negative equity and near negative equity mortgages accounted for nearly 28 percent of all residential properties with a mortgage nationwide.

The Rising Tide: Taxation

This is not a political post per se but the theme of inexorably rising taxes has been a focus of this blog. For planning purposes.

We learn today that Cost of Government Day, a calendar date by which the average American is deemed to have paid for the cost of government falls on August 19th this year, the latest date ever recorded. The entire report of the Americans for Tax Reform Foundation is in the link above.

From the Report:

Cost of Government Day: Trends
Cost of Government Day (COGD) falls 8 days later in 2010 than last year’s revised date of August 11. In 2010, the average American will have to work an additional 51 days out of the year to pay off his or her share of the cost of government compared to 2000, when COGD was June 29.

In fact, between 1977 and 2008, COGD has never fallen later than July 20. 2010 marks only the second year that this has happened—2009 being the first. The difference between 2008 and 2009—from July 16 to August 11—was a full 26 days, spurred primarily by the Emergency Economic Stabilization Act (EESA) that created the Troubled Asset Relief Program (TARP) and the American Recovery and Reinvestment
Act of 2009 (ARRA).

A look at methodology is below:

The Cost of Government is determined by adding the figures for government spending (federal, state and local expenditures) and an estimate of the cost of government regulations (both on the federal
and state level). The total cost of government is then divided by an estimated Net National Product to determine the percentage of national income consumed by government. This percentage is applied to the 365.25 weighted calendar year to determine the date of Cost of Government Day.

More Tax Planning Havoc: Coverdell Savings Accounts

As presently constructed, Coverdell college savings accounts are a great deal, even better than the more widely known 529 savings plans. We've discussed their features here. But the tax breaks that made Coverdells a favorite of so many planners and their clients are expiring at the end of 2010. Will Congress act on this one? We don't know.

You've got about five months to figure out what to do with your account. Here's what we said about Coverdells before:

1. Annual contributions are capped at $2,000 per beneficiary. They can come from any source but if the total exceeds $2,000, the IRS will slap a 6% tax on the excess.

2. Contributions are not tax-deductible. But any growth in the investment is tax-deferred, and money can be pulled out tax-free as long as it is used for qualified education expenses, which include items such as books, tuition, room and board and necessary equipment, such as a laptop computer.

3. Money can be withdrawn to cover approved expenses for kindergarten through 12th grade, as well as higher-education expenses. Approved expenses could include private-school tuition or an after-school tutor.

4. The money has to be used before the beneficiary turns 30. If the beneficiary reaches 30, or if the money is used for anything but education expenses, the IRS will levy a 10% penalty plus regular income taxes on the amount pulled out. One major exception: Special-needs beneficiaries can continue to draw from their accounts, tax-free, to cover approved expenses after the cutoff age. Contributions can also be made for a special-needs beneficiary after he or she turns 18.

Why use a Coverdell instead of a 529 Plan?

* Flexibility: Coverdell money can be spent on expenses for kindergarten through 12th grade; 529s are limited to higher-education expenses only.

* Wider investment choice: Coverdells must be held by a bank, a brokerage or some other institution approved by Federal law to handle them. Depending on the trustee chosen, investment choices in a Coverdell can be very broad, including stocks, bonds, mutual funds and nearly any other type of investment vehicle offered by the trustee. Most 529 plans limit their investors to only those options provided by their plans. Those choices are often as narrow as the limited selection of mutual funds offered by only one company. In a handful of states, 529 investors can opt instead for prepaid tuition plans.

So what should you do?

Well, if you like Coverdells there no reason to assume everything just goes away or that Congress will be punitive with how it handles them going forward.

You can always transfer the balance of your child's Coverdell account into a 529 plan for him or her. Wait to see what Congress decides to do with them and then make your own plan.

You could always pull money out for private school, if that's what you've been saving for. Use it know. There's always the risk that this distinction goes away and it's your last chance.

You could use up the account early by buying a buying a computer for your child or other supplies he/she will use at school.
You can just keep making contributions. I can't see a scenario where Congress doesn't allow you to convert the funds to a 529 plan.

Secular Bear Market Update

From planner Doug Short and his popular blog Financial Life Cycle Planning, a very revealing chart about how the secular bear market has affected a portfolio invested strictly in the S&P 500 index of stocks:


(Right click for a larger image.)

In a word: DEVASTATING.

Nearly 45% down in real terms after 10 years. That is why I talk about risk and absolute returns. Most investors can't stand a) the volatility much less b) the losses inherent in investing this way.

No Social Security Benefit Increase. Sorry!

The Bureau of Labor and Statistics reported yesterday morning that the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) was at 213.898 in July. What does this mean? Likely there will be no change to Social Security Benefits and the Maximum Contribution Base this year. (Hey it's Friday the 13th! You expected good news?)

There wasn't one last year either. Luckily they can't reduce the benefit should CPI start falling on a sustained basis. 0.25% on your savings (money market) and reduced SS benefits. That would really hurt retirees.