Sustainable Investments and Your Portfolio

Contributed by: Laurie Renchik, CFP®, MBA

Planning for a sustainable retirement is one that will financially support you for a lifetime. The financial planning process is dynamic as life unfolds and is subject to new information and changing circumstances along the way. 

One of the changes I see happening today is that a growing number of retirement savers are thinking more seriously about how a sustainable investment strategy fits into their overall investment plan. 

In tandem, the sustainable investment landscape is also evolving and growing.  Once a niche market, sustainable investing is becoming mainstream moving from a limited universe of investments focused on screening objectionable exposures to a range of solutions to achieve sustainable outcomes.  In fact, US investments focused on sustainable objectives grew 135% in the four year period from 2012 through 2016.**  With this volume of growth comes opportunity.  Demographic shifts, government policies and corporate views on environmental and social risk are the primary forces driving growth and change today.

For example, sustainable investing today includes Exclusionary Screens, ESG factors and Impact Targets.  Exclusionary screens avoid exposure to companies who operate in controversial sectors such as fossil fuels, tobacco or weapons.  ESG Factors invest in companies whose practices rank highly by Environmental, Social, and Governance (ESG) performance standards.  Impact Targets invest in companies whose products and solutions target measurable social or environmental impact.

If your goal is to create a sustainable retirement and in tandem allocate a portion of your investments to supporting a sustainable global future we can help. 

Our top priority is to create the best plan coupled with the best investment portfolio for you.  If that means taking sustainable investment preferences into consideration we have the resources and solutions available to build on traditional portfolio analytics to understand your current exposures and relevant sustainability factors.  We can set targets to improve the sustainability of your portfolio based on your personal objectives and measure performance data over time.

Contact us today to learn more!  Sustainable investing can drive positive social or environmental impact alongside financial results, allowing investors to accomplish more with their money.  Opportunity awaits.

Laurie Renchik, CFP®, MBA is a Partner and Senior Financial Planner at Center for Financial Planning, Inc.® In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie is a member of the Leadership Oakland Alumni Association and is a frequent contributor to Money Centered.

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**Year over year growth in sustainable assets in the U.S. 2012 to 2016. Source: Global Sustainable Investment Alliance. Views expressed are not necessarily those of Raymond James Financial Services and are subject to change without notice. Information contained herein was received from sources believed to be reliable, but accuracy is not guaranteed. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur.  Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success.

2018 2nd Quarter Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

Helping our clients achieve their goals is truly a team effort here at The Center.  You may not have met or spoken to the investment team here at The Center, but we are an important resource leveraged to help you achieve your goals.  Watch the video below to learn more about the investment team and how we help you reach your financial planning destination!   We are always here to help so please don’t hesitate to reach out to us! 

Rebalancing

The investment team monitors and rebalances your portfolio, in addition to portfolio construction.  It is equally important to continue to monitor portfolios and their compliance with your investing preferences and objectives as it is to determine what the proper investments are.  Rebalancing is a key part of this process.  See our recent blog post on how to rebalance a portfolio to understand the reasons and mechanics behind the process.  The most important way to be successful is to get invested and stay invested.  Rebalancing your portfolio on occasion will help you stay the course for the long-term.

Market Update

The story has stayed much the same over the past quarter with trade tensions remaining center stage.  Volatility remains, while trade war talks have spilled over into action and interest rates continue to rise.  Synchronized global growth is slowing but is not yet slow; so, do not expect growth to immediately fall off the cliff from a peak to a trough. 

U.S. markets remain in consolidation mode after a strong 2017 as investors waffle between getting comfortable with the lower rate of growth while having a strong economic and earnings outlook.  The U.S. market ended the quarter on a higher note up 3.43% for the S&P 500 despite the ups and downs throughout the quarter with China and U.S. relations.  Despite being up as much as 6.6% and down as much as 4.4% throughout the year so far we are up 2.65% through the end of the second quarter for the S&P 500. 

Bond markets have continued to struggle with bonds giving back what they are earning via interest payments, and then some, as the Bloomberg Barclays US Aggregate bond index is down 1.6% year to date.  Interest rates continue to increase at a well-telegraphed pace by the Federal Reserve with two more increases expected this year. 

In contrast to the U.S. market, international markets are struggling for the year with the MSCI EAFE posting a -2.75% so far.  In stark contrast, domestic small company stocks are enjoying a nice tailwind from the corporate tax reform so far this year.  The Russell 2000 is posting a startling 7.6% return year-to-date, all of which occurred in the second quarter.

Inflation continues its slow creep back into our economy with wages slowly starting to increase.  Just as slowing growth in the economy is not yet slow, rising inflation is not high inflation.  We are still at very low levels of inflation when you look at the history of our domestic economy.  Our investment committee has decided to add an allocation to an inflation-focused real asset strategy.  We want to add exposure within the portfolios to a strategy that would have the potential to respond more favorably than the broad equity markets to rising inflation. 

Preview of exciting changes

The investment team has been working on some exciting developments for your experience.  We will soon have a “Center for Financial Planning, Inc®” app for your smartphone where you can view returns, asset allocation and even your probability of success for your financial plan.  This new portal will be available to all who are interested.  More information and training on how to set up and view information will be coming later this year so watch your inboxes!  As always, please feel free to reach out if you ever have any questions.

On behalf of everyone here at The Center,
Angela Palacios, CFP®, AIF®
Director of Investments
Financial Advisor 

Angela Palacios, CFP®, AIF® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and no strategy can ensure success. The process of rebalancing may carry tax consequences. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Diversification and strategic asset allocation do not ensure a profit or protect against a loss. The S&P 500 is an unmanaged index of 500 widely held stocks. The Bloomberg Barclays US Aggregate Bond Index is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most U.S. traded investment grade bonds are represented. Municipal bonds, and Treasury Inflation-Protected Securities are excluded, due to tax treatment issues. The index includes Treasury securities, Government agency bonds, Mortgage-backed bonds, Corporate bonds, and a small amount of foreign bonds traded in U.S. The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. These international securities involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. The Russell 2000 index is an unmanaged index of small cap securities which generally involve greater risks. Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. Holding bonds to term allows redemption at par value. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise.

Under the Hood: Investment Allocation for 529 Savings Plans

Contributed by: Matthew E. Chope, CFP®

As many parents and grandparents know, 529 plans can be a wonderful strategy for families to help build college tuition savings for their children.  Not only do the plans benefit students, but they also carry advantages for the account creators or donors. The student can potentially enjoy tax-deferred growth with federally tax-free distributions if used for qualified educational expenses. Advantages to the donor include complete control of the account, high contribution limits, and no age restrictions or income limitations to inhibit investing.  It’s no surprise that 529 savings plans have become popular savings vehicles.

Have you ever wondered how 529 college savings plans are invested to meet time-sensitive tuition expenses? 

Age-based investment funds make this challenge easily manageable.  The graph below shows the glide path of equity allocations for 529 savings plans at various ages of the beneficiary from 2010 to 2013.

• Generally, 80% of the portfolio is invested in equities at age 0 and reduces to 10% by the time the beneficiary is enrolled in college.

• Since 2010, plan investment managers have become more conservative in the beginning (age 0) and end (age 19) stages of plans.

• Investment managers have become 6-7% more equity aggressive during ages 5-15 to meet tuition goals.

To meet tuition needs within 18 years, the graph reveals that investment managers are becoming more aggressive during the middle of a student’s investment time horizon, but they are also growing more cautious about preserving money closer to the end of the student’s investment time frame.  Interestingly, the graph also reveals that investment managers still rely on bonds as one of the safest places to preserve money (90% of the portfolio by age 19), despite the negative reputation bonds have received in our current rising rate environment. 

The glide path is designed to allow for an outcome with minimal surprises to all investors, no matter the economic environment when it’s time for college.  Some cycles will end on a poor note with markets crashing, while in other times markets will be soaring as students begin to tap the funds.  Ultimately, the guide path is designed to gradually reduce investors’ risk and exposure to market disruptions in the final years of saving, when investors are closest to needing the money they’ve worked so hard to save.  

Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 plans before investing. This and other information about 529 plans is available in the issuer's official statement and should be read carefully before investing. Investors should consult a tax advisor about any state tax consequences of an investment in a 529 plan.

As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state.

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc.® Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions.

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The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and are not necessarily those of Raymond James.

How to Rebalance a Portfolio

Contributed by: Center Investment Department

An investment strategy that uses asset allocation must rebalance, or realign the weightings of the portfolio assets; the question is not if, but how.  Rebalancing is a type of active portfolio management strategy we employ either to potentially enhance returns, control risk, or both.  There are several ways to rebalance a portfolio: on a calendar basis, using cash flows, and opportunistically.  We utilize a combination of Cash Flow and Opportunistic rebalancing.

Calendar Rebalancing

Calendar rebalancing is done by choosing a specific date (usually arbitrarily such as on a quarterly, semiannual or annual basis) to rebalance portfolios. Studies have shown that there is not much performance differential between the different frequencies of rebalancing.  By utilizing a set calendar date to rebalance, often the best buy-low/sell-high opportunities are missed. 

Cash Flow Rebalancing

In contrast, cash flow rebalancing is prompted when cash is moving into or out of the accounts.  For example, if a cash distribution is needed, the asset category or categories that are the most overweight will be sold to raise cash.  Within the overweight asset category, we will sell the security with the lowest preference first to generate the needed cash.  If cash is flowing into the account, we will purchase the asset category or categories that are the most underweight.  Within the underweight category, we will purchase the security with the highest preference first. Security “preference” is determined opportunistically within our investment committee.

Opportunistic Rebalancing

When an asset allocation is determined after the financial planning and risk assessment, a set of drift ranges are also assigned.  The highest level strategic allocation (i.e., stocks to bonds) is allowed to drift a total of 10% either direction from the overall target.  On a more granular level, each asset category is allowed to drift 20% in either direction.  For example, if the US Large Cap allocation is at 25% of the portfolio, it could drift to as low as 20% or as high as 30% of the portfolio before rebalancing would occur.  The idea behind this is to help your winners continue to grow before you are flagged to rebalance and “sell high”/”buy low”. This can also be referred to as range or threshold rebalancing.  Range rebalancing occurs when at least one asset category is outside of the range bands.  At this point, the out of tolerance band is brought back to target. 

Rebalancing is an important tool for long-term investors to stay on course.  A Financial Planner can help you employ these more sophisticated strategies outlined above!

Daryanani, Gobind CFP®, Ph.D.”Opportunistic Rebalancing: A New Paradigm for Wealth Managers.” 2008.   Journal of Financial Planning.

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Rebalancing a non-retirement account could be a taxable event that may increase your tax liability.  Illustrations have been provided for educational purposes only and are not intended as investment advice.  Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed.

The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of the professional of the Investment Department at The Center and not necessarily those of Raymond James. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

What are Time-Weighted and Dollar-Weighted Returns?

Contributed by: Center Investment Department

Monitoring investment performance is pretty important.  It can help identify positive or negative investment decisions and help determine whether your investment goals are on track.  For many investors, reading investment performance statements can be very confusing.  Your rate of return on one statement may look different from another.  The truth is that those differences can largely be attributed to the way the rate of return is calculated.  There are two basic performance calculation methods: the time-weighted rate of return (TWRR) and dollar-weighted rate of return (DWRR).

Key Differences

Each method is designed to measure different scenarios.  The time-weighted rate of return calculation method (top of diagram) was originally developed so fund managers could measure the performance of their portfolios independent of an investor’s actions.  It isolates the manager’s specific performance from investor timing of contributions and withdrawals. TWRR depends only on the length of time money has been in the portfolio and not on the size of the investment – hence the term “time-weighted.”  Performance is broken down into smaller pieces when cash flows occur and then linked together so the cash flow itself doesn’t have an impact on the return calculated. This way if an investor were to make a large deposit halfway through the year, the performance of the second half of the year doesn’t hold more weight than the first half. The opposite would be true for withdrawals.

In contrast, the dollar-weighted rate of return calculation method (also referred to as money-weighted return) measures the size and timing of cash flows, in addition to the investment performance of the funds chosen by the investor. Periods in which more money is invested contribute more heavily to the overall return – hence the term “dollar-weighted.”  Investors are rewarded more for larger investments made during periods of greater price appreciation or penalized less for negative returns that occur when a lower amount of money is invested.  The internal rate of return is synonymous with the dollar-weighted rate of return, but the term is typically used in corporate finance to predict the rate of growth a project is expected to generate.  It is the rate of return that equates the present value of costs and benefits of an investment.  You often see internal rate of return calculations used for private equity investments or when determining the viability of investing in a project.

Which Method Should You Monitor?

Dollar-weighted returns can be thought of as investor-centric because they do not isolate the portfolio’s underlying performance from an investor’s luck and timing. This is what is shown on Raymond James statements because it is a more helpful representation of what the investor actually experienced during the time period.

The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of professionals of the Investment Department at The Center For Financial Planning, Inc. and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Charitable Giving Reminder Due to New Tax Law

Contributed by: Timothy Wyman, CFP®, JD

Are you making charitable contributions in 2018? 

There are three parties to every charitable gift; the charity, you, and the tax man. Due to the increased standard deduction, many folks will NOT receive an income tax benefit when making direct contributions to charities.  For those over the age of 70.5, consideration should be given to making charitable contributions via your IRA. For those under the age of 70.5 you should consider “bunching” your contributions into one year; a donor-advised fund can be quite useful. 

If we have not had an opportunity to discuss either of these strategies, and you expect to make charitable contributions, please feel free to contact our team to discuss your options in making tax-efficient charitable contributions.   

Here are two links to articles outlining the QCD strategy. 

Required-minimum-distribution-update

Qualified-charitable-distributions-giving-money-while-saving-it

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc.® and is a contributor to national media and publications such as Forbes and The Wall Street Journal and has appeared on Good Morning America Weekend Edition and WDIV Channel 4. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), mentored many CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Timothy Wyman, CFP©, JD and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This material is being provided for information purposes only. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. You should discuss any tax or legal matters with the appropriate professional.

2018 1st Quarter Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

Trade wars and tariffs have dominated the headlines over the past quarter. Volatility has increased for equity markets around the world because there are fears stemming from the possibility of a trade war.  To learn more about tariffs and what we think about how this could impact the markets click here.

The Federal Reserve (FED) raised rates as anticipated in March.  This is the first rate hike of the year.  There are two more rate hikes widely expected to come this year.  Gross Domestic Product (GDP) growth has been slightly ahead of what has been expected; so, this could hint at a faster rate hike path than anticipated.  Economists were expecting growth to come in at 2.7% for the 4th quarter and it came in at a revised 2.9%.  Good news for the economy as we are growing faster and seem to be on solid footing.  However, if the market thinks that the FED will start to raise rates faster in response to increased growth, this could negatively impact bond prices as their yields increase.  Both consumer spending and business investment have been strong.  Payroll taxes went down in February with the new tax reform which means we may have more money in our pockets, meaning we have the capacity, now, to spend even more.

The story is even better overseas as GDP growth has gone from mixed throughout the world (disappointing in most countries outside of the U.S. up until recently) to synchronized expansion.

Breaking a streak

The Dow Jones Industrials Average and the S&P 500 snapped an impressive nine-quarter streak of gains.  This has been the longest stretch of quarterly gains for the Dow for over two decades.  Prior long streaks were broken in 1997 (an 11 quarter rally for the Dow).  The S&P had a more recent impressive streak that also lasted nine quarters and was broken the first quarter of 2015.  Other markets including bonds and international were also down this quarter.  See the chart below for more details

The cash quandary

Have you noticed your money market or bank deposits rates spiking along with all of these rate hikes from the Federal Reserve?  If not, you aren’t alone.  Rates have continued to remain frustratingly low on our most liquid savings accounts.  While the FED has raised rates by .25% on six separate occasions since 2015, deposit rates have not moved much.  There are two likely reasons for this:

1. While the FED has raised short-term rates, long-term rates have not reacted as much. Since banks make money on the difference between the interest they charge on loans (which tend to be longer, think mortgages) and what they pay out in interest to their depositors, rates have stayed low for depositors. Banks have been unable to increase the rates they charge to loan individuals money and, therefore, they cannot raise the rates they pay on savings accounts.

2. Deposits at banks in small savings accounts are at an all-time high. This money tends to be steady even if the interest rate paid at the bank down the street is higher. So banks don’t have to raise the rates they pay to keep the assets. It is too much of a bother to close your account, withdraw the money, open a new account and deposit the money for a .1% boost in the interest rate.

Technology volatility

Technology stocks are catching headlines recently as Facebook had a breach of privacy and Apple and Alphabet suffer from fears of tightening regulation.  The recent darlings of the stock market suffer because investors are calling in to question all of these technology companies that gather our personal data to enhance our user experience.

Midterm Elections

While it is still early in the year, midterm elections are starting to heat up.  Democrats are out of power, and the midterm elections tend to favor the party that is out of power.  Currently, we have a strong economy, and that is a factor that can influence whether voters go out to the polls and for whom they vote. A stable economy tends to encourage the status quo vote. The increased stock market volatility could favor the party that is out of power, though.  While I’m not here to debate who will and won’t win, I am interested in how(or if) that could affect your portfolios.  Generally, it isn’t a good idea to make changes within a portfolio based on politics.  Politics are emotional, and it is rarely a good idea to mix these sensitive emotions with our investment dollars.  We generally recommend not to make any major changes to a portfolio driven solely by an upcoming election. 

In times of market distress including the areas outlined above that cause temporary volatility in markets, investors need to focus on the basics:

• sticking to a diversified portfolio

• maintaining appropriate cash reserves

• rebalancing

If you ever have any questions on these or other topics don’t hesitate to reach out to us!

On behalf of everyone here at The Center,

Angela Palacios, CFP®, AIF®
Director of Investments
Financial Advisor

Angela Palacios, CFP®, AIF® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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https://finance.yahoo.com/news/dow-streak-quarterly-gains-risk-184351660.html https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/should-i-hold-cash The information contained in this commentary does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of the professionals at The Center and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This material is being provided for information purposes only. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Investments mentioned may not be suitable for all investors. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The companies engaged in the communications and technology industries are subject to fierce competition and their products and services may be subject to rapid obsolescence. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index. The Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The Bloomberg Barclays U.S. Corporate High Yield Bond Index is composed of fixed-rate, publicly issued, non-investment grade debt, is unmanaged, with dividends reinvested, and is not available for purchase. The index includes both corporate and non-corporate sectors. The corporate sectors are Industrial, Utility and Finance, which include both U.S. and non-U.S. corporations. The IA SBBI US IT Government Bond Index is an index created by Ibbotson Associates designed to track the total return of intermediate maturity US Treasury debt securities. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

 

Choosing a Down Payment Option on a House: Beyond the Numbers

Contributed by: Robert Ingram

Whether you’re buying your first home, looking to downsize or are considering that ultimate dream house, you’re probably facing a couple of common questions. How much should I put down on the purchase?  How much should I finance through a mortgage?  A 20% down payment is typically recommended as a good starting point because amounts less than 20% will likely subject you to private mortgage insurance (PMI) in most conventional loan programs, which increases your mortgage payment.  However, as financial planners we’re often asked if it makes more sense to put down larger amounts and carry smaller mortgages, or to keep those extra funds and invest them.

Making a larger down payment

There are several benefits to increasing the amount you put down on your home purchase.  Having a smaller mortgage balance that you repay over time lowers your monthly payment.  This can provide more flexibility in and control over your monthly budget with smaller portions being committed to servicing debt. 

The smaller mortgage also means you will pay less interest on your loan.  For example, if you put an additional $25,000 down on your home purchase, you are borrowing $25,000 less and you save interest that you would be paying had you borrowed it.  This interest cost savings is like a return on the $25,000 that you are not borrowing.

There are, however, some important considerations when taking more of your assets and putting them towards the home purchase.

• Those resources are no longer as accessible for your other needs or financial goals. Is your cash reserve still intact in case of unexpected emergencies? Would you still be on track to retire or to fund that college plan?

• Changes to your financial circumstances or in the economic environment could make it difficult to access the equity in your home through future borrowing. Unfortunately, we saw this all too often during the financial crisis in 2008-2009 when many banks and lending institutions cut home equity lines of credit and drastically tightened their lending standards.

• Having to fall back on other assets such as your qualified retirement plans or IRA accounts could result in additional taxes and/or early withdrawal penalties depending on your age and other circumstances. Not only could this negate some of the cost savings from making the larger down payment, but it may also derail your retirement.

Smaller down payment and investing the difference

Choosing to make a smaller down payment and investing the additional dollars rather than adding them to the down payment can make sense financially if a key assumption holds true. This assumption is that your investment’s returns outperform the interest cost of your mortgage.  Consider a bank that pays depositors an interest rate (its borrowing cost) and then lends those funds to borrowers for a charged interest rate (its investment return).  If the bank pays 2% interest to depositors and earns 5% interest on the money it lends, its potential earnings exceed its costs, a profitable financial move.

A risk to this strategy of investing the additional funds in lieu of a larger down payment, however, is that earning the required investment return is not guaranteed.

When thinking about making the investment decision, there are some important points to consider.

• What kind of investor are you?
  Investors should have the appropriate risk tolerance and willingness to invest in a portfolio of different asset categories that may provide the opportunity to earn their required rate of return long-term. For very conservative investors it may be more difficult for their portfolios to outperform the mortgage interest costs. (It may be especially difficult if the mortgage interest rates are higher than historical averages)
  

• Following your investment strategy also takes discipline over the long-term.
  It can be challenging to avoid some of the emotional buying and selling decisions that in hindsight can lead to under-performance, and to keep your investments invested.
  

• How do you handle debt?
  If the mortgage without the larger down payment is not a burden to your cash flow and you have been successful in limiting other forms of consumer debt, this strategy may fit. If you are prone to getting overextended or have a large part of your budget allocated to paying off debt, reducing your potential mortgage debt may be the appropriate option.

As you can see, many factors can play into the down payment decision depending on your own unique circumstances and values.  As always, consult your planner when considering these financial moves.  We are here to look at the big picture to help you make confident decisions.

Robert Ingram is a Financial Planner at Center for Financial Planning, Inc.®

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Any opinions are those of Bob Ingram and not necessarily those of Raymond James or RJFS. Information contained herein was received from sources believed to be reliable, but accuracy is not guaranteed. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Asset allocation and diversification do not ensure a profit or protect against a loss. Past performance is not indicative of future results. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. Raymond James Financial Services does not provide advice on tax, legal or mortgage issues. These matters should be discussed with an appropriate professional.

Trade War or Negotiation Tactic?

Contributed by: Center Investment Department

In March, President Trump announced tariffs for the steel and aluminum industry (25% tariff on steel and 10% tariff on aluminum) outside of the approval from his advisors.  He stated these tariffs are to protect industries in the U.S. and protect national security. Trump’s campaign focused a lot on trade with China and Mexico. This announcement lead to the departure of Gary Cohn who held the top economic advisor position to the President.  Since then, potential exemptions or grace periods for some countries were created softening his initial threat.  These exemptions are designed primarily for Canada and Mexico with whom; by the way, we are in the middle of re-negotiating NAFTA (North American Free Trade Agreement).  This exemption is contingent on a NAFTA deal.  This type of threat is exactly the type of shock and awe we have gotten used to from the President as a bargaining chip.  While the stock market initially had a strong negative reaction as this news came out, it has since recovered.  The market also took in stride the news of Gary Cohn departing and threats from other countries to retaliate with their own tariffs.

Following is some insight from our team into what tariffs are and why we need to pay attention to a potential trade war and how it may affect portfolios.

What are tariffs?

Let’s start from the top – a tariff is a tax placed on imports from another country. The idea is to make goods from other countries more expensive to encourage consumers to purchase domestic goods.

Who wins and who loses?

Winners:

• + Domestic industries whose competition has been limited

• + Workers in those domestic industries

• + The government which collects the revenue from the tariff

Losers:

• - Foreign exporters whose goods are less attractive to the domestic country

• - Domestic consumers who see prices rise

• - Secondary industries who rely on the imported product (in the case of steel think automobiles, heavy duty equipment, etc.)

On what products/countries does the U.S. currently impose tariffs?

The U.S has tariffs in place on thousands of products including animals, food, other commodities, but most tariff revenue in the U.S. comes from apparel and cars (https://www.cnbc.com/2016/12/07/trump-tariffs-countries-and-products-that-pay-the-highest-us-tariffs.html). The countries that pay the most to the U.S. from tariffs are China, Vietnam, and Japan. Canada and Mexico import more than every other country besides China, but do not come close to duties paid compared to the other countries because of current agreements through NAFTA.

China is currently the world’s largest producer of steel, but according to the International Trade Administration (https://www.trade.gov/steel/countries/pdfs/imports-us.pdf), less than 2% of the U.S.’s steel came from China. Mexico and Canada are large exporters of steel to the U.S., but are currently exempt from the tariff, for now, while NAFTA negotiations are underway.

The impact on markets and portfolios

Steel and aluminum market capitalization is less than $50 Billion (or about 1/10 the market cap of Facebook Inc.), so direct implications on stock prices may not be the cause of much worry. The fear comes from the uncertainty of a global trade war. Countries can retaliate and place tariffs of their own on products imported from the U.S., which could disrupt any number of markets.

So what is going to happen? Whenever you restrict the flow of goods and services, you risk causing inflation and a deterioration in global trade. Low and rising inflation is usually good for stock markets, and we are starting from a place of low inflation.  Initially, there could be some market jitters as inflation creeps back up.as we witnessed in early February but those should abate as investors realize that inflation is still quite low.  The deterioration in global trade is what could have a more significant impact on stock and bond markets.  The question of whether or not this is just a bargaining chip for President Trump remains to be seen.  If this is the case, it will likely not be pushed to the point where it starts to meaningfully affect global trade. The last time the U.S. took a similar step to impose tariffs on steel was back in 2002 and retaliatory actions from other countries caused President Bush to halt the practice after only 19 months.  In an economy that has a strong fundamental footing, as the U.S. does now, higher inflation and even interest rates should not be too punitive for stocks.  We recommend maintaining a well diversified portfolio in this environment.  If you have any questions, don’t hesitate to reach out!

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The information provided does not purport to be a complete description of the securities, markets, or developments referred to in this material; it has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. Opinions expressed are those of the team of Center for Financial Planning and are not necessarily those of Raymond James. There is no assurance that any forecasts provided will prove to be correct. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Please note, direct investment in any index is not possible. Past performance is not a guarantee of future results. Diverisification does not ensure  a profit or guarantee against loss. Links are being provided for informational purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

Does Staying the Course Pay Off for your Investment Strategy?

Contributed by: Center Investment Department

Almost every year, it seems there is some reason to be concerned with markets.  When market volatility strikes, we often get questions from investors as to whether or not they should sell their portfolio.  Russell Investments does a great job illustrating portfolio performance during the market’s many ups and downs in the chart below.  They look at a hypothetical portfolio of 60% stocks and 40% bonds faced with three alternative investment paths as of Sept. 30, 2008 (two weeks after the collapse of Lehman Brothers).

The starting point for the $100,000 hypothetical portfolio is Oct. 9, 2007, the market peak before the great recession. Over the next year, you would have watched the S&P 500 drop over 20%.  The three choices as of Sept. 30, 2008 are:

1. Stay invested, and make no changes (orange line).

2. Move to 100% cash, and remain in cash (light blue line).

3. Move to 100% treasuries, and remain in treasuries (grey line).

The chart shows the clear winner – stay invested and make no changes. Even though you had to stomach even more downside initially, as well as a menu of other market-altering headlines in the following years, when sticking with a 60/40 diversified portfolio, investors recovered a greater percentage of their lost value— and at a faster rate—than going to cash or treasuries.

Now imagine the potential magnification of the success of the orange line if you were saving regularly during that same time period through a vehicle like your 401(k).  While it may have been difficult to stay the course, 2008 offered a buying opportunity that eventually supported portfolio performance success through 2017.  Planning without panicking is the key.  Make sure you develop a sound savings plan and stick to it regardless of what markets may throw our way!

This information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. Asset allocations are presented only as examples and are not intended as investment advice. Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed. Future investment performance cannot be guaranteed. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Please note, direct investment in any index is not possible.