Warren Buffett and the Bond Market

On, Monday, May 6^th, during an interview on CNBC, Warren Buffett, the venerated Chairman of Berkshire Hathaway and famous investor, called the fixed income or bond asset class a "…terrible investment right now".  Obviously, it is important to listen closely to what Mr. Buffett has to say given his investment track record.  However, it is also important to take several other factors into consideration as well, such as:

1.) Mr. Buffett is in a different financial position than probably 99% of us and, therefore, can afford to take a different amount of risk.  This is also likely true for most of the people who earn a living by making financial predictions.

2.) As The Wall Street Journal wrote on Sunday, bond bears were making the same calls in the beginning of 2010, 2011, and 2012; those predictions led to lower yields (e.g., higher bond prices and thus higher bond returns) as the year went on.  If the keep predicting this every year I guess eventually they will get it right.

3.) While bonds may be a "terrible investment right now,” according to Mr. Buffett, that shouldn't mean that if you currently own bonds you should get rid of them at this time because, when the stock market pulls back, and it will, you will be glad you owned bonds.

4.) A "terrible" market for bonds is much better than a "terrible" market for stocks.  One of the worst bond markets occurred in 1994 when the Federal Reserve raised the funds rate from 3.00% in January 1994 to 6.00% in 1995 in quarter percentage rate increments and the bond "market" as measured by the Barclays Aggregate index lost 2.9% where the stock market, as measured by the S&P500, gained 1% in 1994 but lost 9% in 2000, 12% in 2001, 22% in 2002 and 37% in 2008  (Sources:  http://www.bonddeskgroup.com/main/market-data/historical-returns/bond-vs-equity-returns , http://www.ritholtz.com/blog/2011/04/is-it-1994-again/ )

5.) All of Mr. Buffett's investments and predictions, as well as those of most financial market predictors, have not always been correct or made money.  In 2009 his company lost 62% due to their investment portfolio (Source: http://www.cbsnews.com/2100-500395_162-4835570.html )

6.) In our opinion instead of trying to guess what the financial markets are going to do, which we cannot control, it is more important to look at your investment portfolio with respect to your goals and the amount of risk you are willing to take and to not to have all your "eggs" in too few baskets.  This is what we help our clients do.


 

*Please note that it is not possible to invest directly into an index.

I saw this quote at a CrossFit box I worked out at in Stuart, Florida called Be CrossFit.

"Pain of discipline now or pain of regret later.  Your choice!"

This is a somewhat shortened version of the following original quote by Jim Rohn.

“There are two types of pain you will go through in life, the pain of discipline and the pain of regret. Discipline weighs ounces while regret weighs tonnes.”

― Jim Rohn

I think this quote applies to so many aspects of life from family, physical fitness and definitely to personal finances!!!

The Media and Investment Strategy

The media has been reporting that market indexes are hitting a new high, which can make many people feel that their portfolio is not doing as well as "everyone else's”.  We must be very careful when we let the media dictate our investment strategy.  Based on our experience, when this happens, it is important to keep the following things in mind:

1.) The media's first priority is to make a profit by selling advertising, not to make you a profit by making good investment decisions.

2.) Most people only tell you about how much money they have made in their portfolios, not how much they have lost.

3.) Our fist job as a financial advisor is to understand the level of risk that you can take and to do everything we can to preserve your capital.  Our second job is to help you maximize the growth of your portfolio, given the amount of risk you can afford to take.

4.) The Dow Jones Industrial Index or S&P500 index being at a seven year high means that it has had almost a ZERO return in seven years!

5.) The market indices (e.g., The Dow Jones Industrials, S&P500, etc.) are only a small fraction of the overall financial market.

6.) If you try and time the market you WILL LOSE most of the time.

7.) Depending on what time frame you are using, you can draw completely opposite conclusions about the markets.

So what then is an investor to do?  Stick to your plan and good money management tenets such as:

1.) The amount you save and at what frequency are more important than what you invest in.

2.) Do not have your "eggs" in only a few baskets. 

3.) Rebalance your portfolio at fixed periodic intervals no matter what the market is doing.

 

White House Financial & Investment Solutions helps families live easier and less stressful lives through the proper management of their financial resources.  We do this by acting as our clients’ trusted advisor providing a personal touch customized to the client’s needs!  Please visit our web site at www.whitehousellc.com  or contact us directly for more information!

Please be aware that we do not provide tax or legal advice, and that the information set forth herein was obtained from sources which we believe reliable, but we do not guarantee its accuracy.  Neither the information nor any opinion expressed constitutes a solicitation by us of the purchase or sale of any securities or commodities.  In addition, past performance is no guarantee of future results.  Diversification does not guarantee against loss; it is a method used to help manage risk.

 

 

White House Financial & Investment Solutions, LLC

COMPREHENSIVE – CLIENT FOCUSED – FINANCIAL ADVICE

114 South Main Street • Suite 300 • Chelsea, Michigan 48118 • Phone: (734) 433-1670 • Fax: (734) 433-1671

www.whitehousellc.com

Securities offered through Sigma Financial Corporation. Member FINRA/SIPC

Fee-based investment advisory services offered through Sigma Planning Corporation, a registered investment advisor

Feb. 6, 2013

One of the most common misunderstood financial planning concepts that we come across when meeting with new clients is the Individual Retirement Account also more commonly known as an IRA.  The most common misconceptions we find with respect to IRAs typically are:

1.) That an IRA is a type of investment which earns a certain rate of return and

2.) That one can contribute any lump sum they receive into an IRA.

An IRA is a type of investment account. It is a form of retirement plan provided by many financial institutions that offers tax advantages for retirement savings in the United States as described in IRS Publication 590, Individual Retirement Arrangement (IRAs).  Within this type of account one may invest in many different types of investments or simply hold the contributions in cash.  Second, depending on the type of IRA, as described below, one is limited to a certain amount which they can contribute to an IRA in a year and which must come from EARNED INCOME and not another asset.  For example, many times when someone receives an inheritance, which is outside of an IRA there is the common misconception that they can simply contribute the entire inheritance to an IRA and thereby make it tax deferred.  Unfortunately, again IRAs are governed by strict limits as to the annual amounts one can contribute to them and the contribution must come from earned income (with the exception of spouses who can contribute on behalf of their non working spouse if the working spouse has earned income).  A brief discussion of the types of IRA follows:

There are several types of IRA:

• Traditional IRA – contributions are often tax-deductible (often simplified as “money is deposited before tax” or “contributions are made with pre-tax assets”), all transactions and earnings within the IRA have no tax impact, and withdrawals at retirement are taxed as income (except for those portions of the withdrawal corresponding to contributions that were not deducted). Depending upon the nature of the contribution, a traditional IRA may be referred to as a “deductible IRA” or a “non-deductible IRA.” It was introduced with the Tax Reform Act (TRA) of 1986.
• Roth IRA – contributions are made with after-tax assets, all transactions within the IRA have no tax impact, and withdrawals are usually tax-free. Named for Senator William V. Roth, Jr.  The Roth IRA was introduced as part of the Taxpayer Relief Act of 1997.
• SEP IRA – a provision that allows an employer (typically a small business or self-employed individual) to make retirement plan contributions into a Traditional IRA established in the employee’s name, instead of to a pension fund in the company's name.
• SIMPLE IRA – a Savings Incentive Match Plan for Employees that requires employer matching contributions to the plan whenever an employee makes a contribution. The plan is similar to a 401(k) plan, but with lower contribution limits and simpler (and thus less costly) administration. Although it is termed an IRA, it is treated separately.

There is one instance in which a lump sum can be contributed to an IRA (typically a Traditional IRA) and that is when someone is leaving a position where they had an employer sponsored qualified retirement plan such as a 401(k).  In this instance the balance of their 401(k) no matter how large can be "rolled" into an IRA (also known as an IRA rollover account) which is then controlled by the individual and not their former company.

White House Financial & Investment Solutions helps families live easier and less stressful lives through the proper management of their financial resources.  We do this by acting as our clients’ trusted advisor providing a personal touch customized to the client’s needs!  Please visit our web site at www.whitehousellc.com  or contact us directly for more information!

White House Financial & Investment Solutions, LLC

COMPREHENSIVE - CLIENT FOCUSED - FINANCIAL ADVICE

114 South Main Street· Suite 300 · Chelsea, Michigan 48118 · Phone: (734) 433-1670 · Fax: (734) 433-1671

Visit our website

Securities offered through Sigma Financial Corporation. Member FINRA/SIPC

Sigma Planning Corporation, A Registered Investment Advisor

 

CAUTION: electronic mail sent through the Internet is not secure and could be intercepted by a third party. For your protection, avoid sending identifying information, such as account, Social Security, or card numbers to us or others. Further, do not send time-sensitive, action-oriented messages, such as transaction orders, fund transfer instructions, or check stop payments, as it is our policy not to accept such items electronically. Please be aware that we do not provide tax or legal advice, and that the information set forth herein was obtained from sources which we believe reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation by us of the purchase or sale of any securities or commodities.

January 18, 2013

 We recently had a client contact us who wanted to know what she was earning in our money market fund because she had heard that another advisor was claiming significantly higher earnings on what they had to offer. During my over 15 years in the financial advising and investment business I have encountered this kind of reaction from clients several times. My experience and gut told me that if we were truly comparing apples to apples in terms of financial vehicles, earning a return that the competing advisor was claiming was highly unlikely. However, we always give people the benefit of the doubt and I never claim to know everything!

I contacted several trusted resources including our broker dealer who had several employees who had recently worked for the competitor who was supposedly offering this higher interest rate. All of the sources confirmed that the competitor did not have such a money market fund that earns what they were claiming and that the product must be one with more risk and liquidity restrictions.

The bottom line is this: The financial markets are so open and transparent now due to technology that we all have the same things to invest in. Therefore, if an investment has a MUCH higher return than other similar types of investments only one of two things can be true: 1.) It is not the same kind of investment OR 2.) The investment with the higher return has greater risk than the investment with the lower return.

Here is an example I always recall to illustrate this point: When I started in the business in the late 1990's, true money market rates were in the 4 - 5% range due to the higher interest rates at that time. The other large dynamic going on at that time in the financial markets was the Internet company craze. At that time we were seeing just about any company with a ".com" on the end of its name making significant stock market returns. During these times many clients called and did not want any of their portfolio sitting in the lowly money market fund which was ONLY making 4 -5% per year when they could be invested in an Internet stock and make significantly more. Well, we all know how THAT turned out.

 Yes, there are many things which change second- by- second in the financial markets. However, one tenet I believe is still constant and that is: Given the same two investments, Higher Return = Higher Risk.

 

White House Financial & Investment Solutions helps families live easier and less stressful lives through the proper management of their financial resources. We do this by acting as our clients’ trusted advisor providing a personal touch customized to the client’s needs. Please visit our web site at www.whitehousellc.com for more information!

 

The information set forth herein was obtained from sources which we believe reliable, but we do not guarantee its accuracy. In addition, past performance is no guarantee of future results and we do not provide legal or tax advice.

Securities offered through Sigma Financial Corporation. Member FINRA / SIPC Fee-based investment advisory services offered through Sigma Planning Corporation, a registered investment advisor

Fiscal Cliff Resolution Summary

We hope that you had a safe and wonderful holiday season and wish you and your family a HAPPY NEW YEAR in 2013!!!

We have been closely following the changes our government is advocating to avert the so called "fiscal cliff" and how it will affect our client's financial plans in the future.  While there are many details still to be hammered out and communicated, here is a summary of what we know now, based on the agreement currently on the table:

Congress skidded to a halt with the front tires hanging over the fiscal cliff, with the House last night joining the Senate in passing Taxpayer Relief Act.  Initially, the stock markets have shown gains, however, we believe that this excitement will evaporate, because the buildup does not include raising the debt ceiling or longer-term budget cuts.

Republicans and Democrats are hardening their positions ahead of the upcoming battle over the debt ceiling, which the government hit on Monday but which the Taxpayer Relief Act didn't address. The sides also face a fight over $110B of automatic spending cuts that were delayed for two months. To buy it a couple of months regarding the ceiling, the Treasury is taking special measures.

The fiscal-cliff deal increases taxes on household incomes of over $450K to 39.6%, as well as taxes on capital gains, dividends and inheritances. The hope is to raise $600 billion in new revenue over 10 years. The payroll tax cut is allowed to lapse, so the employee portion of the Social Security tax will return to 6.2% from 4.2%. All in all, overall taxes will increase for over 75% of households in 2013, says the Tax Policy Center.

The Taxpayer Relief Act will add almost $4 trillion to the deficit over the next ten years, the Congressional Budget Office has calculated, citing the codification of the Bush-era tax cuts for most Americans. Meanwhile, the deal will probably ensure that the U.S. avoids recession but it will also help cut economic growth, economists have forecast.

As expected, the Act extends some farm support schemes for a year and averts the "dairy cliff" by ending fears that the price of milk could double - the measures prevent the revival until September of a decades' old subsidy that would have forced the USDA to buy up milk at prices way above what farmers are receiving now.

There will no doubt be much discussion and dissection of the Fiscal Cliff resolution in the media in the coming weeks.  We hope you’ll feel free to call us with any questions you may have about how the plan affects you.



White House Financial & Investment Solutions helps families live easier and less stressful lives through the proper management of their financial resources.  We do this by acting as our clients’ trusted advisor providing a personal touch customized to the client’s needs!  Please visit our web site at www.whitehousellc.com  or contact us directly for more information!

 

White House Financial & Investment Solutions, LLC

COMPREHENSIVE - CLIENT FOCUSED - FINANCIAL ADVICE

114 South Main Street· Suite 300 · Chelsea, Michigan 48118 · Phone: (734) 433-1670 · Fax: (734) 433-1671

Visit our website

Securities offered through Sigma Financial Corporation. Member FINRA/SIPC

Sigma Planning Corporation, A Registered Investment Advisor

CAUTION: electronic mail sent through the Internet is not secure and could be intercepted by a third party. For your protection, avoid sending identifying information, such as account, Social Security, or card numbers to us or others. Further, do not send time-sensitive, action-oriented messages, such as transaction orders, fund transfer instructions, or check stop payments, as it is our policy not to accept such items electronically. Please be aware that we do not provide tax or legal advice, and that the information set forth herein was obtained from sources which we believe reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation by us of the purchase or sale of any securities or commodities.

Fiscal Cliff Commentary

 

At White House Financial we pride ourselves on being unique and different and hence we were going to attempt to NOT have any commentary on the “Fiscal Cliff”, however, prudence won out and we just wanted to make sure all of our friends and clients knew where we stand on this subject.  So here it is!!  Hot off the presses!

For those of you who have been traveling far away from any type of “civilization” the “Fiscal Cliff” is a package of significant tax hikes and spending cuts scheduled to take effect in 2013.

 

Prior legislative compromises over U.S. fiscal policy have set the stage for automatic spending cuts and tax hikes.  The fiscal cliff refers to:

 

1.)    Sun-setting of Bush-era tax rates,

2.)   Expiration of Obama-era stimulus measures, and Implementation of across-the-board spending cuts.

The timing and magnitude of any resulting shocks are subject to debate, but the near-term implications are clearly negative and quite capable of tipping the U.S. economy into recession.

While 2012 was a major election year, nothing really changed.  President Obama won re-election and, although 86 lawmakers will not be returning to office, the makeup of the Senate and House are nearly identical in terms of party affiliation.  We see difficult negotiations and more political gridlock ahead of the fiscal-cliff deadline.  We still believe there’s a greater likelihood of some kind of resolution to the fiscal cliff, however temporary.  But there is enough uncertainty at this point to ask the question, “What happens if we do take the dive?”

 

For  financial advisors like us,  the  challenge  with  an event like the fiscal cliff is that you don’t know whether or not  it  will  happen  until  after  the  fact.  Positioning a portfolio for an event that never transpires can have as detrimental a result in terms of performance and trading costs as the actual event itself.  Despite this, the concerns about the fiscal cliff are already having an impact. Government spending in the fourth quarter set new records as purchases have been pulled forward (Source:  SEI Investments).  Businesses have held off on hiring and purchasing decisions as they wait for clarity. Financial markets are already reacting.

 

Investors  who  have  a  primary  objective  of  avoiding short-term volatility should carefully consider the portion of  their  portfolios  invested  in  stocks.  However, we believe that short-term turmoil created by concern over the fiscal cliff underscores the importance of goals- based investing. In our view, goals-based investing can be a powerful tool to help steer clients against market fear and uncertainty by better managing human preferences, biases and behaviors that can undermine their financial success. Goals-based investing can help clients invest according to their unique needs, desires and time horizons in a way that helps them look beyond intermittent market volatility.

 

If the fiscal cliff is avoided, fundamentals are still good and equity valuations reasonable. The U.S. economy is in pretty good shape. If markets fall sharply or the cliff is resolved in a surprisingly favorable way, we would take a bullish outlook. The 2011 debt-ceiling fiasco may be instructive. There were several negative surprises and markets fell apart for a time. A rerun of this is possible.

 

We are sympathetic to the view that emerging markets and Europe offer better relative value than U.S. equity markets. But Europe is cheap for good reason.

 

So what should you do? First, we never advocate ever changing your long term investment strategy based on the tax code.   Your investment strategy should be managed for tax efficiency on a regular basis and should also be sufficiently diverse and flexible to weather different tax environments (please note that diversification is a risk management strategy and does not guarantee against investment losses).  Second, leave worrying about the fiscal cliff and the effect on your investments, the economy and your financial health to us and ENJOY THE HOLIDAYS WITH YOUR LOVED ONES!!!

 

HAPPY HOLIDAYS FROM ALL OF US AT WHITE HOUSE FINANCIAL!!!

 

It is going to be an interesting end of the year!

White House Financial & Investment Solutions helps families live easier and less stressful lives through the proper management of their financial resources.  We do this by acting as our clients’ trusted advisor providing a personal touch customized to the client’s needs!  Please visit our web site at www.whitehousellc.com for more information!

Securities offered through Sigma Financial Corporation.  Member FINRA / SIPC

Fee-based investment advisory services offered through Sigma Planning Corporation, a registered investment advisor

The information set forth herein was obtained from sources which we believe reliable, but we do not guarantee its accuracy.   In addition, past performance is no guarantee of future results and we do not provide legal or tax advice.