Schwartz Financial Weekly Commentary (11/18/13)

The Markets

If you found holiday songs or Beatles tunes humming through your head last week, it may have been your subconscious processing world and market events.

 

Over the river and through the woods/To Grandmother's house we go… Janet Yellen, current Vice Chairman and nominee to be the next Chairman of the Federal Reserve System, testified at her confirmation hearing before the U.S. Senate’s Committee on Banking, Housing, and Urban Affairs on Thursday. Her comments were widely interpreted as indicating that current stimulus measures will remain in place. This made investors happy and helped push global stock markets higher.

 

In the United States, the Dow Jones, S&P 500, and NASDAQ, all appear to be headed toward milestones. The Dow is nearing 16,000, the S&P is closing in on 1,800, and the NASDAQ is approaching 4,000.

 

You say you want a revolution/Well you know/We all want to change the world… China’s third plenum of the 18th Central Committee, which also is being referred to as a blueprint for reform, a reform manifesto, and the Decision on Major Issues Concerning Comprehensively Deepening Reforms, is ambiguously phrased, according to The Economist. However, it appears to encourage:

 

“…Experimentation in everything from trading rural land to the freeing of controls on interest rates. Barriers to migration will be further broken down and the one-child policy relaxed. A widely resented system of extra-judicial detention, known as laojiao (re-education through labor), will be scrapped.”

 

China’s leaders also promised to elevate the role of markets in the economy. That news helped push Shanghai Composite Index higher last week.

 

Data as of 11/15/13	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 (Domestic Stocks)	1.6%	26.1%	32.9%	14.5%	16.2%	5.6%
10-year Treasury Note (Yield Only)	2.7	NA	1.6	2.9	3.7	4.2
Gold (per ounce)	0.1	-24.0	-24.7	-2.0	11.9	12.6
DJ-UBS Commodity Index	0.0	-11.4	-12.4	-6.1	0.0	-0.4
DJ Equity All REIT TR Index	1.3	5.0	12.9	12.0	21.9	9.3

Notes: S&P 500, Gold, DJ-UBS 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 TR 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.

 

Have you been offered a lump sum distribution? Not too many employers offer pension plans anymore. You know, pension plans. The kind of retirement plans that employers used to offer; the type where employees generally didn’t contribute and the benefits they received in retirement were determined by their salaries, length of employment, and other factors.

 

If you’ve ever worked for a company that had one, it’s possible that the offer of a lump sum distribution may be headed your way. If you accept a lump sum distribution, you’re choosing to receive a pile of cash today instead of monthly or annual pension payments in retirement. Basically, you’re agreeing to take responsibility for investing the money and generating a stream of income during retirement so your employer doesn’t have to do those things.

 

Why are companies offering lump sum distributions? The Pension Protection Act of 2006 (PPA) established new accounting rules. Companies with pension plans must recognize their plans’ funded status on their balance sheets each year. Since balance sheets are scrutinized by analysts and investors, and lots of pension plans are underfunded, companies decided it was time to take action.

 

How underfunded are these plans? A Wilshire Associates report cited by Reuters found the difference between the amount that S&P 500 companies will owe to retired workers and the amount those companies have set aside to pay retirees is more than $1.5 trillion. How much is that? Well, if you took one trillion one-dollar bills and strung them end-to-end, the chain would stretch further than the distance from the earth to the sun!

 

Anyway, having an underfunded plan became a corporate finance headache. Two-thirds of companies that have pension plans are trying to limit the effect of those plans on their financial statements (69 percent) and cash flows (58 percent), as well as reduce the overall cost of their plans (41 percent), according to a recent Towers Watson survey. CFO Research in collaboration with Mercer said employers plan to do this by:

 

• Adopting more conservative investment strategies
• Transferring pension obligations to insurance companies by purchasing annuities
• Offering lump-sum payouts to retired and current employees

 

In many cases, accepting a lump sum payout rather than having income from a pension may have a significant impact on your retirement.

 

Weekly Focus – Think About It

“The average 401(k) account balance fell 34.8 percent in 2008, then rose from 2009 to 2011. Overall, the average account balance increased at a compound annual average growth rate of 5.4 percent over the 2007-2011 period, to $94,482 at year-end 2011… The median 401(k) account balance (half above, half below) increased at a compound annual average growth rate of 11.5 percent over the period, to $42,082 at year-end 2011.”

-- Employee Benefit Research Institute, June 2013 [12]

 

Value vs. Growth Investing (11/15/12)

Name	1-Week	YTD	4-Week	13-Week	1-Year	3-Year	5-Year
US Market	1.70	29.09	5.74	8.86	37.05	17.23	19.07
Large Cap	1.59	27.86	6.07	8.80	34.91	16.90	17.39
Large Core	1.46	32.30	5.93	8.67	39.26	18.97	18.45
Large Growth	2.07	26.76	5.98	11.39	33.63	16.89	20.08
Large Value	1.20	25.12	6.31	6.31	32.43	14.90	13.78
Mid Cap	2.00	32.19	5.06	8.96	42.07	18.04	23.51
Mid Core	1.97	29.01	5.34	9.15	38.24	18.76	24.56
Mid Growth	2.35	29.34	3.93	8.71	38.62	16.28	22.86
Mid Value	1.68	38.42	5.94	9.09	49.61	19.01	22.98
Small Cap	1.92	33.10	4.45	9.15	45.73	17.99	23.82
Small Core	1.91	31.50	4.03	8.99	44.26	16.77	23.45
Small Growth	2.36	38.13	4.72	11.35	50.86	19.72	24.25
Small Value	1.43	29.78	4.57	7.10	42.13	17.47	23.69
US Core	1.60	31.50	5.67	8.79	39.31	18.81	20.00
US Growth	2.15	27.98	5.47	10.83	35.66	17.01	20.96
US Value	1.32	28.10	6.11	6.95	36.49	15.91	16.27

 

 ©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 Notes:

 

Basic Investment Wisdom

 

Some things never change. One of them is the need to invest for the long term.

 

We know what we don't know. We have no idea what nominal returns or inflation or interest rates will be during the rest of our investing lifetime. We also know what we do know. Historically stocks have earned returns that are higher than bonds. 

 

Investing in common stock gives you a share in the ownership of a business. When you invest in bonds you're a loaner to businesses. All of our common sense and life experience tells us that owners of good businesses make more money than do their lenders, if only because owners take more risk. 

 

Still, many investors have trouble staying the course, especially when markets turn volatile. "The challenge that investors face is that every day they read or hear what is going on in the world, and there is really nothing they can do about it," says Ron Baron, president of Baron Capital. 

 

Baron says the media predicts a lot more recessions than ever occur, and that when the stock market goes down many investors believe the media may be right and that they need to get out before the market crashes.  Baron thinks this is ridiculous.          

 

"Inflation is what people should be thinking about and how everything is going to cost twice as much every 15 to 20 years. People have to think about the money they saved becoming less valuable all the time and most businesses becoming more valuable all the time,” he adds.

 

I believe the single biggest reason why people fail to achieve wealth and equity as investors – bigger than all other reasons combined – is that they never understand risk.

 

First, people generally overestimate the term risk when owning stocks.  Second, people  underestimate the long-term risk of not owning stocks, if suitable for their personal situation.  

 

One of the best things investors can do is to understand history, including the Great Depression of the 1930s and other volatile periods such as 1973-1974, 2001-2002 and 2008-2009.  History tells us such declines are quite common. 

 

Baron believes investment opportunities abound in today's world – in health care, education and alternative energy, to name a few industries. 

 

"In America we have under-invested in infrastructure, bridges, tunnels, sewers and roads, which provides opportunities for companies,” says Baron. "Our stock market is worth $19 or $20 trillion, and there is $4 trillion sitting offshore just waiting to invest in America…and you could just see it happen,” he adds. 

 

Although your experience may differ, Baron started investing in equities as a teenager and is a billionaire today.  He strongly believes that we need to invest for the long term.

 

All investments involve risk and may not be suitable for all investors.  The return and principal value of stocks fluctuate with changes in market conditions.  Shares, when sold, may be worth more or less than their original cost.  Past performance in not a guarantee of future results.  Actual results will vary.

 

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, offers securities and advisory services through Independent Financial Group, LLC., A Registered Broker/Dealer,  Member FINRA-SIPC. 

 

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.

 

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