Schwartz Financial Weekly Commentary 1/6/14

The Markets

Like a half-full bottle of champagne that was left uncorked overnight, stock markets were anything but effervescent during the first few days of 2014.

On Tuesday, December 31, the Standard & Poor's 500 Index (S&P 500) bubbled upwards, finishing 2013 at an all-time high. On Wednesday, markets were closed as Americans celebrated the New Year. On Thursday, despite relatively positive economic news, the S&P 500 suffered its worst first-day-of-the-new-year performance since 2008. Is it a hangover? Is it lethargy? Are people still on holiday?

Some folks think a key issue is concern about the Fed’s changing monetary policy. MarketWatch suggested investors are wary about the timing of and reasoning behind the Federal Reserve’s decision to taper quantitative easing (QE) this month, as well as conflicting comments made by Fed officials. Last Friday, Philly Fed President Charles Plosser suggested the U.S. central bank may need to become aggressive about raising rates. His comments don’t square with those of outgoing Chairman Ben Bernanke who has said rates will remain near-zero for some time to come.

Plosser’s comments raise red flags because tapering QE is not the same as tightening monetary policy. Tapering is simply providing less economic stimulus. If the Fed raises rates, it will be tightening monetary policy. Generally, tighter monetary policy is used to constrict too-fast economic growth or curb rising inflation. Barron’s may have provided some insight into Plosser’s statement when it declared:

“…We also suspect U.S. and global economic growth will quicken more than most anticipate…Stronger economic growth combined with a further tightening in the resource markets (i.e., expect the unemployment rate to decline toward 6% by year-end and for the factory utilization rate to rise above 80% during the year) may lead to a modest rise in the U.S. inflation rate and produce the first "inflation scare/overheat/can the Fed exit fast enough" panic of the recovery.”

Hold onto your hats! The minutes of the Fed’s Open Market Committee meeting will be available this Wednesday and the way in which they’re interpreted could buffet markets.

Data as of 1/3/14	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 (Domestic Stocks)	-0.6%	-0.9%	25.5%	12.9%	14.6%	5.0%
10-year Treasury Note (Yield Only)	3.0	NA	1.9	3.3	2.5	4.4
Gold (per ounce)	1.7	2.8	-26.5	-3.4	7.7	11.4
DJ-UBS Commodity Index	-2.1	-0.7	-9.9	-8.4	0.7	-1.2
DJ Equity All REIT TR Index	0.3	0.7	1.9	9.2	18.2	8.7

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.

what makes a great invention? It probably depends on who you ask. The angel investors (a.k.a. sharks) on the television reality show Shark Tank share their opinions on air, and Time Magazine recently revealed its thoughts in print when it published, “The 25 Best Inventions of the Year 2013.” The article suggested a great invention solves either a problem people thought couldn’t be solved (such as helping quadriplegics walk) or a problem they didn’t realize needed to be solved (who knew we needed a cronut – the offspring of a croissant and a donut – or an invisible skyscraper). Among Time’s top inventions for 2013 were:

• The Smart Lens: (slide 5) Ever been frustrated by the low resolution of photos snapped with your mobile phone? Now, you can attach a smart lens and your smart phone will take pictures like a high performance camera and save them online automatically.
• The edible password pill: (slide 10) Nope. It’s not on the market yet but, sometime in the future, you’ll be able to swallow a pill with breakfast. The chip inside will be powered by stomach acid and make your body into its own unique personal password every single day. The FDA has already approved it.
• The 3Doodler: (slide 12) If you think 3D printing is neat, check out the 3Doodler. It’s a pen that melts and cools colored plastic so you can sketch and scribble actual structures. It’s the more sophisticated brethren of Popsicle sticks and pipe cleaners.
• Artificial memories: (slide 14) It’s likely to be just as controversial as cloning and the human genome, but scientists at MIT have managed to implant false memories in mice. They hope human applications will help treat depression and post-traumatic stress.

From the wheel to disposable diapers to the worldwide web, inventions have powered new industries and changed lives. So, are our most inventive days behind us? There are a few pessimists out there, but the Time Invention Poll found more than one-half of respondents think there are plenty of great inventions ahead. Where will they be discovered? Those polled said the United States, China, Japan, India, South Korea, and other nations.

Weekly Focus – Think About It

“Creativity requires the courage to let go of certainties.”

--Erich Fromm, German psychologist and philosopher

Value vs. Growth Investing (1/3/14)

Name	1-Week	YTD	4-Week	13-Week	1-Year	3-Year	5-Year
US Market	-0.45	-0.86	2.38	9.22	28.89	15.50	17.81
Large Cap	-0.52	-0.90	2.20	9.77	27.59	15.43	16.38
Large Core	-0.39	-0.62	1.63	8.64	30.71	17.18	16.72
Large Growth	-0.73	-1.24	2.47	10.65	27.78	15.77	19.78
Large Value	-0.42	-0.81	2.49	9.97	24.77	13.36	12.91
Mid Cap	-0.25	-0.80	2.82	7.79	32.03	15.73	21.43
Mid Core	-0.12	-0.62	2.76	8.43	28.98	16.30	22.12
Mid Growth	-0.26	-0.81	3.30	6.16	30.03	14.09	21.33
Mid Value	-0.36	-0.96	2.38	8.82	37.19	16.72	20.72
Small Cap	-0.32	-0.65	2.93	8.07	33.46	15.23	21.93
Small Core	-0.38	-0.65	2.51	8.31	32.10	14.03	21.43
Small Growth	-0.10	-0.49	3.04	6.43	37.94	16.34	22.28
Small Value	-0.49	-0.80	3.23	9.65	30.53	15.37	22.02
US Core	-0.34	-0.62	1.92	8.57	30.39	16.81	18.15
US Growth	-0.59	-1.11	2.68	9.40	28.84	15.50	20.30
US Value	-0.42	-0.84	2.52	9.70	27.66	14.19	15.10

 ©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:

New Year’s Financial Health

As we begin this New Year, I hope you had a happy holiday season and are doing well with your New Year’s resolutions.

I wanted to share some information with you on developing a financial plan, which I have included on the next page. 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.

Once again, I wanted to wish you and your family a happy New Year and a prosperous 2014.

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, 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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