Tuesday, December 30, 2014

Schwartz Financial Weekly Commentary 12/29/14



 


The Markets

With gas hovering around $2 a gallon in many parts of the country, chances are you’re smiling every time you fill up the tank.

The oil price drop, which is one of the biggest stories of 2014, is a twist on a familiar tale. Rising supply (production in non-OPEC countries, like the United States, increased) and falling demand (in Europe, Japan, and China) caused prices to move lower. In this case, they’ve moved a lot lower. Last summer, the price of crude oil was about $107 a barrel. Last week, it finished below $55 a barrel.

Overall, according to the International Monetary Fund (IMF), lower oil prices are expected to be good news for the global economy. They’re expected to have economic benefits for countries that import a lot of oil, like China and India. They also are a boon for U.S. consumers who have more money in their pockets when they pay less at the pump.

However, low oil prices aren’t good for everyone. In the United States, oil-producing states like Texas, Louisiana, Wyoming, Oklahoma, and North Dakota may lose jobs and tax revenues. Outside the United States, oil exporters like Russia, Iran, Nigeria, and Venezuela are likely to suffer adverse consequences as a result of falling prices, including domestic unrest, according to MarketWatch.com. The International Energy Agency (IEA) said,

“…For producer countries, lower prices are a negative:  the more dependent on oil revenues they are and the lower their financial reserves, the more adverse the impact on the economy and domestic demand. Russia, along with other oil-dependent but cash-constrained economies, will not only produce less but is likely to consume less next year.”

The supply and demand equation isn’t likely to change soon. The IEA forecasts global demand growth will be relatively weak during 2015. Meanwhile, the Organization of the Petroleum Exporting Countries (OPEC) has done nothing to reduce supply, largely because of Saudi Arabia which is the second largest oil producer in the world. Saudi has reserves that make it better able to absorb the oil price shock than other oil exporters. It also has political motivations to keep oil prices low. These include punishing Iran and Russia for supporting Bashar Assad in the Syrian Civil War, according to the International Business Times.

If you want to know where oil prices may go, keep an eye on Saudi Arabia.


Data as of 12/26/14
1-Week
Y-T-D
1-Year
3-Year
5-Year
10-Year
Standard & Poor's 500 (Domestic Stocks)
0.9%
13.0%
18.2%
19.8%
13.1%
5.7%
10-year Treasury Note (Yield Only)
2.3
NA
3.0
2.0
3.8
4.3
Gold (per ounce)
-1.6
-2.0
-3.1
-9.2
1.3
10.3
Bloomberg Commodity Index
-2.0
-15.3
-16.5
-9.2
-5.3
-3.0
DJ Equity All REIT Total Return Index
1.3
29.6
29.5
16.5
16.2
8.5
S&P 500, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

It’s not the 1 percent, it’s the 0.1 percent. They say history repeats itself. That seems to jibe with the findings of a brand new paper by Emmanuel Saez of the University of California, Berkeley, and Gabriel Zucman of the London School of Economics.

“Wealth concentration has followed a U-shaped evolution over the last 100 years: It was high in the beginning of the twentieth century, fell from 1929 to 1978, and has continuously increased since then. The rise of wealth inequality is almost entirely due to the rise of the top 0.1% wealth share, from 7% in 1979 to 22% in 2012—a level almost as high as in 1929… The increase in wealth concentration is due to the surge of top incomes combined with an increase in saving rate inequality.”

The pair found that the average real growth rate of wealth for the 160,000 families that comprise the top 0.1 percent was 1.9 percent from 1986 to 2012. As it turns out, income inequality has a snowballing effect on wealth distribution. The wealthiest people earn top incomes and save at high rates, which helps concentrate greater wealth in the hands of a few. It’s interesting to note that top wealth-holders are younger today than they were in the 1960s.

In contrast, the riches of the bottom 90 percent did not grow at all from 1986 to 2012. Historically, the share of wealth divvied up among this group grew from 20 percent in the 1920s to 35 percent in the 1980s. However, by 2012, it had fallen to 23 percent. Pension wealth grew during the period, but not enough to offset the rapid growth of mortgage, consumer credit, and student loan debt.

Weekly Focus – Think About It

--Joseph Conrad, Polish author

Value vs. Growth Investing (12/26/14)
0.97
14.36
0.87
5.89
14.81
20.73
15.75
0.88
15.19
0.83
5.69
15.60
20.55
15.24
1.03
18.95
1.80
8.89
19.31
23.20
16.82
0.58
15.94
-0.01
5.27
16.28
21.79
15.59
1.04
10.74
0.74
2.92
11.27
16.97
13.34
1.15
13.59
0.88
6.03
14.19
21.64
17.21
1.09
17.21
1.26
7.03
17.83
22.18
18.47
0.70
11.01
-0.28
5.74
11.49
19.56
16.28
1.67
12.79
1.69
5.26
13.51
23.27
16.84
1.53
7.83
1.25
7.64
8.20
19.77
16.32
1.46
9.16
0.85
7.14
9.48
19.85
15.72
1.51
3.55
1.36
7.20
3.80
18.63
16.66
1.62
10.73
1.54
8.59
11.28
20.81
16.56
1.07
17.89
1.63
8.40
18.30
22.75
17.13
0.66
14.12
0.02
5.48
14.48
21.12
15.87
1.21
11.16
0.98
3.76
11.73
18.51
14.27

 ©2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results.  Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase.  This can only be done by prospectus and should be on the recommendation of a licensed professional.

Office Happenings

New Year’s Financial Health

As we get ready to begin the upcoming New Year later this week, I hope you are having a happy holiday season and are doing well with planning your New Year’s resolutions.
I wanted to share some information with you on developing a financial plan, which I have included below. The document goes over seven steps, from establishing financial goals, to implementing them. It is important to have a plan because failure to plan is planning to fail, as I’m sure you have all heard before.
I wanted to wish you and your family a happy New Year and a prosperous 2015

Your Financial Health: Developing a Financial Plan

It takes more than luck to get what you want out of life. It takes careful planning. The most effective tool for your financial well being is a sound plan. Think of a sound plan as a road map to help you get where you want to go.

Financial plans help individuals live within their means, identify their financial goals, and accumulate the savings needed to meet those goals. A good plan also helps individuals to be prepared for financial emergencies as well as to reduce credit use. Having a financial plan in place can allow an individual a sense of financial security, and control over their financial future.

In order for a financial plan to be successful, one must take the time to gather relevant and realistic information, make some crucial decisions, prioritize their financial goals, put the plan into action, and continuously evaluate the plan.

The following steps can be used when developing an ongoing financial plan:

1. Establish Financial Goals

The first step in designing a financial plan is to identify what it is you want out of life—your goals.  Take the time to put your goals in writing; not only will that reinforce the significance of the goals, but it will help you be able to organize them as well.

One way to organize your goals is to group them into short-term and long-term. Short-term goals are those to be reached within a year or less. Examples include an emergency fund, a new sofa, paying off a charge card, or building a holiday gift fund. Long-term goals are those to be reached in more than a year, perhaps five or more years. Examples of long-term goals include a new home, children’s college education, and retirement. (Saving methods may vary for short and long-term goals. This will be addressed in a later feature.)

In establishing goals you also need to ask the following questions: What do I need to do to accomplish each goal? When do I want to accomplish it? What will it cost? What money have I set aside already?  How much more money will I need to save each month to reach the goal?

Look at the priority of your goals. How hard are you willing to work and save to achieve a particular goal? Would you work extra hours for example? How realistic is a goal when compared with other goals? Reorganize their priority if necessary.

2. Determine Net Worth

Determining your net worth is not as difficult as it may seem. Your net worth is simply the total value of what you own (assets) minus what you owe (liabilities). It is a snapshot of your financial health.
To determine your net worth, start by adding up the approximate value of all your assets. Your assets include such items as your home, vehicle(s), checking and saving accounts and the cash value of any life insurance policies you may have, excluding any death benefits. Assets also include the current value of investments, such as stocks, real estate, certificates of deposit, retirement accounts, IRAs, and the current value of any pensions you have. You may have other assets that are also of value.  Use particular caution and realistic market values when evaluating their worth.

Next, add up the approximate value of all your liabilities. Liabilities may include the remaining mortgage on your home, auto loans, student loans, credit card debt, income taxes due, taxes due on the profits of your investments (if you cashed them in), and any other outstanding bills.

Subtract your liabilities from your assets. Do you have more assets than liabilities (a positive net worth), or more liabilities than assets (a negative net worth)? The goal is to produce a positive net worth and to build upon it.

Plan to review and update your net worth annually. Your net worth is a way to monitor your financial health since the goal is for it to increase each year. Compare annual net worth statements to determine if you need to modify your financial behavior and/or your goals to meet your changing financial conditions. If you expect significant changes in your liabilities such as college expenses, you may want to project what your conditions will be in the coming year to help prepare and plan.

3. Estimate and Balance Income and Expenses

By estimating your income and expenses you can obtain a picture of your current financial situation. Understanding how your income is being used for expenses can help you develop a realistic plan to reach your financial goals.

Begin the process by totaling all of the income you expect to receive during a given period of time (one month is a good place to start). Include regular income such as wages, Social Security benefits, public assistance, child support payments, gifts, allowances, interest, and dividends.

Next, keep detailed records for one month to record all expenses. Based on this information as well as old records, receipts, bills, and cancelled checks, estimate future expenses. Calculate estimated expenses for the same time period that you used for your income estimation.

Compare your income to the total estimated expenses. Are income and expenses balanced?  Are you paying more in expenses than you have in income? If so, where are you overspending? Which expenditures can be postponed? How can you increase your income? Or does your income exceed your expenses, in which case do you have an established savings plan in place for your goals?

Now is the time to consider which expenses can be cut back or where money should be reallocated. For instance, in order to meet your goals you may decide to cut back on spending (such as golf and dancing) and apply the money towards savings (perhaps for a new car).

4. Review Personal Debt Situation

Credit is a powerful personal finance tool that can make it possible for you to have and enjoy things now and pay for them later. But purchasing on credit costs additional money and can tempt us to overspend. Before purchasing with credit, ask yourself the following questions: Do I really need it? Can I really afford it? Why exactly do I want it? What other things will I have to do without? What happens if I can’t pay this off?

How much debt can you afford? A general rule of thumb is that no more than ten percent of a household’s take-home pay should be committed to consumer installment and credit card debt. If your current personal debt situation exceeds this amount you should seriously consider reducing your financial debt as your top priority.

While paying cash is almost always less expensive than using credit, there are times when using credit is necessary. When you do use credit, it is in your best interest to borrow as little as possible, seek the lowest finance charge, and pay off the loan as soon as possible.

5. Allocate Savings to Reach Goals

If you want to successfully accomplish your goals you need to actively save money. When developing a financial plan, many financial advisors will suggest that you pay yourself first. Paying yourself first means establishing a set amount to save each payday and putting that money into savings rather than spending it on current consumption. In developing a habit of regular savings for future goals you are making a commitment to successfully accomplish your goals. For instance, if your place of employment offers a retirement plan by choosing to participate not only will you have a plan to meet your retirement goal, but you may be able to do so with tax advantages and by paying yourself first.

When developing a financial plan you may initially find it difficult to save money because current income is needed for current living expenses, but even a few dollars a month can grow and contribute to financial independence. For instance, saving a mere $10.00 a week for five years, at an average return of 10%, will give you $3,327.81. Saving the same $10.00 a week for 10 years will give you $8,687.29 (at 10% average rate of return). This is called compounding interest. The money you save is actually making you more money. And the longer the savings have to make money, the more it will make.

6. Implement the Plan

The mistake that most people make is that they fail to implement the financial plan that they have taken the time to create. The implementation of your financial plan is essential to its success. Set a date to implement your plan (the sooner the better) and stick to that date. Plan a schedule to pay the bills, balance the checkbook, review the monthly financial statements, and set up a savings account. Make the success of your financial plan a top priority. By doing so, you will better ensure your financial security and the successful accomplishment of your goals.

7. Review and Modify the Financial Plan

And lastly, a financial plan cannot remain the same for the duration of one’s life. A financial plan is a tool to help you reach your financial goals. As your financial goals change so should your financial plan. Constant review and modification of your financial plan helps to ensure its long-term success.

Regards,
,
Michael L. Schwartz, RFC®, CWS®, CFS

P.S.  Please feel free to forward this commentary to family, friends, or colleagues.  If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added. 

Michael L. Schwartz, RFC, CWS, CFS, a registered principal offering securities and advisory services through Independent Financial Group, LLC., a registered broker-dealer and investment advisor.  Member FINRA-SIPC. Schwartz Financial and Independent Financial Group are unaffiliated entities.

This information is provided for informational purposes only and is not a solicitation or recommendation that any particular investor should purchase or sell any security. The information contained herein is obtained from sources believed to be reliable but its accuracy or completeness is not guaranteed.  Any opinions expressed herein are subject to change without notice.  An Index is a composite of securities that provides a performance benchmark.  Returns are presented for illustrative purposes only and are not intended to project the performance of any specific investment.  Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly.  Past performance is not a guarantee of future results.

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices. 

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

* Past performance does not guarantee future results.

* You cannot invest directly in an index.

* Consult your financial professional before making any investment decision.

* To unsubscribe from our “market commentary” please reply to this e-mail with    “Unsubscribe” in the subject line, or write us at “mike@schwartzfinancial.com”.