Behavioral Finance Put to the Test with Undiscovered Managers

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Ddingus

While markets are expected to behave efficiently over longer time frames, anomalies can appear in shorter spans. These anomalies are often attributed to human behavior. Mutual fund managers Russell Fuller and David Potter of Fuller and Thaler Asset Management, apply those behavioral finance principles to the Undiscovered Managers Behavior Value Fund, which concentrates on small company stocks. Behavioral finance seeks to combine behavioral and cognitive psychological theory with conventional economics and finance to provide explanations for why people make irrational financial decisions. Many of us know the adage of “buy low and sell high,” but in practicality many investors cannot implement this strategy because of their emotions. The textbook process of buying low is contrarian to the emotions of most investors.

David Potter, CFA®, lead portfolio manager with Undiscovered Managers Behavioral Value Fund says, “Often times it’s behavior that runs these markets”. From our analysis, questioning and study of past investment performance of the Undiscovered Managers Behavior Value Fund, we feel confident that Potter and the investment strategy provides the opportunity for strong performance. Unless, of course, we think human behavior will become completely rational at all times. Fragasso Financial Advisors investment research often begins and ends with performance and the quantitative factors that coincide with it. While the reasons for selecting or not selecting an investment are evident through readily available performance information, qualitative analysis involves some subjective reasoning and additional analysis beyond that found within reports. Often, the pinnacle of our research involves an interview of key personnel and team members of the strategy being analyzed. Fragasso Financial Advisors is fortunate enough to have access to many of the top investment professionals providing a level of analysis not typically found with all investment advisory firms.

In discussing the investment strategy with Potter, we were immediately able to discern the three- step investment process. Typically in the first step, Potter looks for significant insider buying or increasing share buybacks. Specifically, those share purchases are occurring during periods of “conditioning,” and thus the second stage of the investment process. At this point, investors’ pessimism is increasing and the stock is out of favor with the general market.

This second stage of the investment process has been formulated and instituted by Fuller and Thaler board member and 2002 Nobel Memorial Prize winner in Economic Sciences, Daniel Kahneman, Ph.D. Management principal and company founder Richard Thaler, Ph.D., then took those principles and refined them into the investment thesis behind the small value fund strategy. (Thaler is also the co-author of the book Nudge.) During this second stage, investors may extrapolate falling share prices and tend to over-react and become excessively pessimistic, providing an opportunity for those willing investors to “block out the noise.”

While a contrarian like Potter may believe that insiders are purchasing because they see value during times when a stock has pulled back or dropped in value, it does not alone signal a buy at this point. There is still the third investment stage, which is the fundamental credit analysis of the firm under scrutiny. There may be a very good reason why the company stock has been neglected by the market or if insiders are merely foolish in their own buybacks. Only after passing the examination of all three tests can a security be considered for their small company value fund. Small company stock managers often employ various levels of analysis including fundamental research, studying company insider purchases, as well as macro-economic theories in their investment philosophy. Using behavioral finance as an investment philosophy is more limited among investment managers.

With this three level approach grounded in behavioral finance, Undiscovered Managers has positioned themselves in a unique group of investment managers, a bit different than many others who rely on basic security analysis, offering a possible compliment to many other strategies. Replication of the process is difficult at best for most, offering a level of explanation behind their results. Our brief analysis begins to explain their approach and what is viewed as a competitive advantage we feel can continue moving forward to the benefit of shareholders and ultimately our respective clients. Although we must acknowledge that no strategy assures success or protects against loss and past performance does not guarantee future returns, our questioning provides us the reassurance that the past performance is not from randomness but rather the discipline to buy at the contrarian point. 

Daniel Dingus is president and director of portfolio management at Fragasso Financial Advisors, a Pittsburgh-based investment and financial planning firm.  Due to industry regulations, comments are not permitted on this blog.  If you would like to contact the author, please email us at blog@fragassoadvisors.com.  Daniel can also be reached for comment at 412-227-3200.

Stock markets and investments in individual stocks are volatile and can decline significantly in response to issuer, market, economic, political, regulatory, geopolitical, and other conditions.

Investing in mutual funds involves risk including possible loss of principal. 

The fund may not achieve its objective and/or you could lose money on your investment in the fund.

The prices of small company stocks are generally more volatile than large cap stocks.

Investors should consider the investment objectives, risks, charges and expenses of the investment company carefully before investing. The prospectus and, if available, the summary prospectus contain this and other important information about the investment company. You can obtain a prospectus and summary prospectus from your financial representative. Read carefully before investing.  

High-Frequency Trading – A tempest in a teacup for long-term investors


avoicu

Michael Lewis, author of the “Big Short” and “Boomerang,” was promoting his new book “Flash Boys” on the March 30 episode of 60 Minutes on CBS News.

After offering great insights on the U.S. and European financial crisis in his previous two books, Michael Lewis turned his attention to a more obscure topic: high-frequency trading.

High-frequency traders use computer algorithms to rapidly trade securities ahead of other investors and traders. Their goal is to shave off a fraction of a cent on each transaction. Over billions of transactions, this adds up.

Throughout the years, advancement in technology and deregulation has reduced the cost of transactions from hundreds of dollars in broker commissions to fractions of a penny. Assuming high-frequency traders are using public information for trades, they have found a way to still make money off transactions in this environment.

One of the most popular strategies is trading ahead of an index fund rebalancing. The securities an index fund must buy and sell are known ahead of time, permitting high-frequency traders to get in front of that trade with their fast computers and algorithms.

It has been estimated that high-frequency traders will cost a typical Standard & Poor’s 500 fund anywhere from 0.21 percent to 0.28 percent per year[1]. That is why Michael Lewis stated that everyone invested in the market is affected by this activity, not just hedge funds and day traders.

Does this mean the stock market is “rigged” and we should not invest? The average S&P 500 index fund had an annualized 22.3 percent over the last five years[2]. Without high-frequency traders, the average S&P 500 fund may have returned 22.5 or 22.6 percent.

The fact that someone still manages to earn a fraction of a percent from transactions today hardly seems like a rational reason to forego the investment returns of the market. As far as long-term investors are concerned, high-frequency traders are much ado about nothing.

*As of this posting, several news outlets have reported that the FBI is investigating high-frequency traders over whether they base trades on non-public information, which is illegal.

Andrei Voicu is Chief Investment Officer at Fragasso Financial Advisors, a Pittsburgh-based investment and financial planning firm.  Due to industry regulations, comments are not permitted on this blog.  If you would like to contact the author, please email us at blog@fragassoadvisors.com.  Andrei can also be reached for comment at 412-227-3200.


[1] Source: Morningstar

[2] . Source: Morningstar Direct : Average of 78 index funds (all share classes) tracking the S&P 500.  Returns measured from February 28, 2009 through February 28, 2014

 

Mind, body, soul…and finances

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bsutherland

Far from the unexpected

I recently had an enlightening conversation with our head of Institutional Investment Accounts, Gregg Daily.  The discussion revolved around his reminiscing about an instance when he donated his time and professional services to charity for an auction.  The highest bidder of this particular package would be awarded a full financial plan.  Well, when the donated services came to auction on that particular day, Gregg never had a chance to shake hands with a winner.  The auctioneer whittled his way to zero without a bid being made.  Even though we had a laugh over the outcome, the reality is that these results were far from surprising.  The same conclusion would likely be expected from a package containing a free audit.  For most, probing deep into one’s own financial positioning can sometimes be downright scary.  In the back of our minds, we know we could be doing more to help out our financial situation: spending less and saving more, finally opening that IRA, and so forth.  Having someone shed light on our personal economic missteps might not be an enjoyable experience, which is why we are inclined to dodge the conversation.  This brings me to my next point.

What you don’t know can hurt you

We have all heard the saying “What you don’t know can’t hurt you.”  While ignorance may be bliss in certain circumstances, it could be your downfall when it comes to your finances.  Knowledge is indeed power.  Simple mistakes are made every day that can be potentially detrimental to your future financial security, and the reality is that many can be easily avoided if brought to light.  For example, when planning for retirement, many individuals calculate their required lump sum nest egg on a figure that will give them a set spending amount for the remainder of their life.  This is an effective strategy; however, too often this spending figure does not account or adjust for inflation.  It’s a common mistake that unfortunately forces retirees to scale back their standard of living later in life.

Think about a scenario where an individual wishes to retire at 60.  With the realistic expectation that a person could live to be 90 years old, this individual would need to plan for 30 years of financial security.  All other costs aside, the US Bureau of Labor Statistics shows that average rents of primary residences across the United States have increased by over 169 percent during the most recent 30 year period, 1983 to 20131.  Hence, a renter heading into retirement in 1983 with a static annual spending figure would indeed be forced to curtail their living standards as housing costs inflated.  This is a sad reality that no one should have to encounter.  However, having an inflation-adjusted spending goal and monitoring the portfolio on a regular basis alleviates this concern.  This is something you should keep in mind and your financial planner can easily assist you with this process.

Financial health as part of your overall well-being

Financial woes don’t simply impact your wallet.  These missteps and concerns can also have a significant impact on your health and the health of those with whom you associate.  The evidence of this is rather profound.  A recent study by Kansas State University found that the top reason for relationship disgruntlement stems from arguments over money (KSU Study).  WebMD has compiled a list of causes of stress (WebMD Stresses), of which a large percentage can be tied back to one’s personal financial situation.  In the course of our everyday lives we have come to make trips to the doctor, yoga instructor and pastor fairly routine in the hopes of a healthier mind, body and soul.  So why not visit your financial planner on a regular basis to help alleviate financial stresses too?   I assure you, uncovering and implementing a path towards financial security and stability is not as scary as you may think.  Usually minor adjustments are all that are necessary to put you on a better course towards your future.  And who knows, you might just save your personal relationships and reduce your blood pressure at the same time.  So stop delaying. Let down your guard and take control of your financial picture.  Your overall well-being is waiting on you.

1 - The Bureau of Labor Statistics,Consumer Price Index-All Urban Consumers (Current Series)  http://www.bls.gov/cpi/data.htm

Brent Sutherland, CFP® is Portfolio Manager at Fragasso Financial Advisors, a Pittsburgh-based investment and financial planning firm.  The links provided in this article are being provided as a courtesy and we hope that you find them helpful.  Please understand that while we generally believe the information contained in these articles to be accurate, we cannot guarantee their accuracy and we do not endorse the websites.  Due to industry regulations, comments are not permitted on this blog.  If you would like to contact the author, please email us at blog@fragassoadvisors.com.  Brent can also be reached for comment at 412-227-3200.

Don’t get caught off guard by estate tax rules!

dgraverAs of Jan. 1, 2014, the federal estate tax rules changed such that only individuals with assets in excess of $5.34 million are now subject to this tax at death.  A married couple’s federally taxable estate now begins when assets exceed $10.68 million.  Those figures are much higher than the $1.0 million level that the estate tax was slated to revert to without new federal legislation in 2013.  As a result of this significant increase, if your estate is less than $5.34 million, you may think that you are exempt from paying taxes on the assets you leave to your heirs.  This may be true relative to federal tax rules, but such is not the case at the state level.

Each state has the ability to impose its own inheritance tax for assets domiciled in their state.  Pennsylvania’s inheritance tax varies from 0 percent to 15 percent, depending on to whom the assets are bequeathed. Pennsylvania’s tax rates are as follows1:

  • 0 percent on transfers to a surviving spouse or to a parent from a child aged 21 or younger, charitable organizations and other exempt institutions
  • 4.5 percent on transfers to direct descendants and lineal heirs
  • 12 percent on transfers to siblings
  • 15 percent on all other transfers

So, if you are among the 99.8 percent of the population with assets below the federal threshold of $5.34 million, your estate could be taxed by as much as 15 percent at the time of your death.  That equates to $150,000 on a $1.0 million estate.

There are various ways to minimize this tax burden, such as gifting during your lifetime or to charities upon death.  Most of us don’t want to give away all of our assets in an effort to save taxes. Investing in a life insurance policy that would indemnify your estate of these costs when you’re gone may be a great alternative approach.  This financial planning strategy can be easily implemented by paying pennies on the dollar in annual premiums for a guaranteed benefit at the time of your death2.  Investing in such a manner helps to ensure that your heirs receive the hard earned assets you intended to give, despite the bite taken by the state’s inheritance tax.

1  www.revenue.state.pa.us
2  assumes financial stability in the issuing life insurance company

Deborah Graver, CFP®, CLU®, AIF® is Senior Vice President of Advanced Planning and Chief Compliance Officer at Fragasso Financial Advisors, a Pittsburgh-based investment and financial planning firm.  Due to industry regulations, comments are not permitted on this blog.  If you would like to contact the author, please email us at blog@fragassoadvisors.com.  Deborah can also be reached for comment at 412-227-3200.

3 Essential Elements to Small Business Success

BW Small Business Fragasso

Ray Amelio

As I think back to when I started my business and the challenges that I faced, there were a lot of people who helped me along the way. I have always been thankful for their assistance and advice. After eight collective years as a business owner, I found that success is all about “paying it forward” and people helping people.

In the July 2013 Business Insider article, Invaluable Advice from 18 of America’s Top Small Business Owners, 18 of the 50 small business owners nominated as Small Business Person of the Year from each state offered their own pieces of advice to their fellow and aspiring entrepreneurs.

Here are my three favorites, with a bit of my own reflection on each.
1. Chuck Hammond, Iowa, president and CEO Raining Rose
“Try to find a mentor if possible. I had a great business partner who was a great sounding board, never really told me what to do, but he asked great questions that led me to the right answer.”

My mentors were invaluable to me and the success of my consulting business. One friend who immediately comes to mind underscored with me the importance of staying organized. I always considered myself an organized person. But while managing multiple clients, various projects and all of the elements that make up a burgeoning business, I quickly realized the true meaning of the term.

I was a team of one. This meant it was not only my job to get current projects done, it was also my responsibility to prospect for new clients. “No matter how busy you are, each and every week, make sure that you schedule two or three appointments with new prospects,” said another one of my astute mentors. She knew how easy it could be to get so wrapped up in working on projects and meeting deadlines that talking to other people and organizations that could benefit from the services that I offered would get lost. She reminded me that it is just as important to have future business in the pipeline. THAT was a very important piece of advice, which I value to this day. Incidentally, every so often she would call or email me and ask how my marketing was going. She was a wonderful mentor and is still a good friend today.

2. Mike Sawyers, Maryland, president 7Delta
“It’s about long-term relationships and treating your customers right. Do what’s right for them long-term. Once you win the business, that’s when the hard work begins . . . It’s all about relationships and reputation.”

This sentiment is echoed in my father’s work ethic. He had his own shoe store where he sold and repaired shoes for more than 50 years. I learned at a young age that taking care of the customer and delivering a quality product and service was the key to success. I watched him as customers came into his store. He always knew them by name, greeted them with a smile and listened with intention. Not only did his customers return time after time, but they were good referral sources. They felt comfortable recommending my dad and his store because of the quality of the shoes he sold and the high quality repair work that he consistently provided. He truly understood the power of developing strong relationships. My father’s example taught me to take care of my clients and deliver what I promised, a philosophy that served me very well in my business relationships.

3. Judith Huck, Oregon, president, Classique Floors Inc.
“Always take the high road in business decisions. Do the right thing. You’ll never regret it.”

During my middle and high school years, I worked in a pharmacy owned by a very good friend. He was always honest with his customers and vendors. But more importantly, he knew how to be gentle and caring. Each month I would prepare the bills for the customers who had charged their purchases. Back then there were no credit cards as we know them today, and what was charged was owed directly to my friend. There were times when some of the bills became excessive and I would ask Mike what should be done. Knowing each customer personally and understanding their circumstances, he would say, “Raymond, they are going through a rough patch right now. I can carry them until it passes.”

He did the right thing. Always. The proof of how valuable his kindness was to these people was apparent when our neighborhood held a celebratory dinner in his honor toward the end of his career. More than 500 people attended and gushed about what a fine example of a business man Mike truly was.

Find a mentor. Build strong relationships. Do the right thing. No matter the venture, when you start the journey with these key elements, you are assuredly on the right path to success.

photo credit: dok1 via photopincc

Ray Amelio is family assets business development officer at Fragasso Financial Advisors, a Pittsburgh-based investment and financial planning firm.  Due to industry regulations, comments are not permitted on this blog.  If you would like to contact the author, please email us at blog@fragassoadvisors.com.  Bob can also be reached for comment at 412-227-3200.

 

 

 

 

 

 

 

 

Family Assets Business Development Officer

Entrepreneurial Spirit Thrives in Pittsburgh’s African-American Community

CarnegieLibrary


dbechtolOur region is so very rich with nonprofits…we have more than 4,000 in our 10-county area. The Robber Barons of the 19
th century were well established here…Carnegie, Frick, Westinghouse, Heinz and Mellon all left a legacy of philanthropy after establishing their place in history as the major industrialists of their time. These nonprofits offer us many benefits including but not limited to enhanced social services, access to premier healthcare and education, support for causes and diseases and access to the arts.  They are one of the reasons Pittsburgh ranks so highly in quality of life among cities nationally.

The nonprofit sector adds to our economy, too.  The sector makes up 13 percent of the U.S. economy.  One in 10 workers is in the nonprofit sector.  In the Pittsburgh region, nonprofits bring in $10 billion in revenue and provide jobs that add up to $3 billion in payroll.  We live a richer life as a result of our nonprofits; they service needs for the general good of the public.

As we celebrate Black History Month, it seems appropriate to acknowledge Pittsburgh’s great nonprofits that serve our African-American population, which makes up 13 percent of the population in Allegheny County.  Hill House Association, Hosanna House, Poise Foundation, Kingsley Center, NEED, Pittsburgh Community Services, EECO Center, and Rosedale Block Clusters are just a few of our nonprofit gems.  Our strong African-American Chamber of Commerce of Western Pennsylvania (AACCWP) helps to connect those nonprofits and provide access and business opportunities to African-American, for-profit businesses.

In the mid-1990’s the African-American community of Pittsburgh found itself plagued by disconcerting statistics that indicated the city’s lack of social progress. Numbers like black household income was just 60 percent of that of white households became a catalyst for a new movement.  As African-Americans were displaced from corporate America, entrepreneurship became an alternative for them.  From this entrepreneurial spirit, the idea of the AACCWP emerged.

The AACCWP was chartered in 1994, after an ambitious number of black business owners and professionals saw a need and joined together to formalize an entity that would serve as a business and information resource center for aspiring black entrepreneurs and business professionals. The AACCWP has grown its membership from fewer than 50 members in 1998 to its current level of more than 520 members and has become the 10th largest minority chamber in the country. Their 520 members include 76 nonprofits, as those nonprofits work to build better community relationships.

The AACCWP’s mission is to improve business and professional opportunities for all small businesses, with a focus on African-American controlled companies. They are guided by core values of equity in opportunity, economic advancement, self-sufficiency and entrepreneurial excellence.  They have grown to a full-service chamber, in partnership with over 32 other chambers in this region, offering discounted benefits, payroll services, insurances and other business services and tools to its members.  The AACCWP also has created a successful Business Institute that works with their membership to help them compete in the global marketplace.

Doris Carson Williams photo courtesy of the Pittsburgh Business Times

The success of the AACCWP can be credited in great part to the dedication and tenacity of the founding president and CEO, Doris Carson Williams. The Pittsburgh Regional Alliance originally provided offices until the AACCWP grew and was able to secure its own space in one year.  She was officially appointed president and CEO in 1999.  Ms. Williams believes that “the greatest gift one has is that of service to others.  I am relentless when advocating for Chamber members who deserve the right to be at the table.  The mission of the organization is being realized when members are introduced to decision makers and they establish relationships.”

In addition to her responsibilities at the AACCWP, Ms. Williams uses her 28-plus years in the corporate world to apply her strategic business acumen to help organizations in the region and is active on many boards of directors.  Among other projects, she was co-chair of the G-20 Summit held in Pittsburgh in 2009.  Ms. Williams has been designated a Certified Chamber Executive by the American Chamber of Commerce Executives, the only national certification for chamber professionals.

Pittsburgh’s AACCWP is one of the many nonprofits that help to make our region a better place to live and raise our families.

Carnegie Museum of Natural History Planeta – Galileo photo credit: wallyg via photopin

Dotti Bechtol is Fiduciary Asset Business Development Officer at Fragasso Financial Advisors, a Pittsburgh-based investment and financial planning firm.  Due to industry regulations, comments are not permitted on this blog.  If you would like to contact the author, please email us at blog@fragassoadvisors.com.  Dotti can also be reached for comment at 412-227-3200.

2013 – The Year of the Bull (Part 2)

Bull2

Ddingus

Last week we discussed the first half of 2013, which served up a bullish year for the American markets.  This week we wrap up the year that was.

After a strong first half, the equity markets began to have a noticeable pullback in August. The S&P 5001 dropped almost 3 percent for the month. The emerging markets continued to lag as the MSCI EM NR USD index dropped another 1.72 percent. If there was decoupling in global markets it was the disappointing returns in emerging markets. Slower growth and empty houses in China, inflation in Brazil and the slide of the Indian rupee all contributed to the year-long difficulty in emerging markets.

In September, we inched closer to the government shutdown on Oct. 1. In the meantime, equity markets rallied, bonds staged a minor comeback and investors let out a big yawn. It seemed not even Washington’s power play could derail equity markets as they continued their march higher.

 
Ralph Orlowski/Reuters

October proved that the rally in stocks, bonds and even emerging markets was stronger than many anticipated. An eleventh hour deal in Congress led to the reopening of regular federal operations on Oct. 17. Many celebrated the Congressional feat by happily flocking to reopened national parks. Despite more than two weeks of furloughed federal workers, the markets were not concerned with the effect on the economy, responding with a raucous rally.

Parks Shutdown

 Michael Quinn/National Park Service

There appeared to be no late-year sell-off in the markets. U.S. equity markets continued to reach all-time highs in November as soon-to-be-new Federal Reserve Chairwoman Janet Yellen indicated that bond tapering was on hold.  Equity markets were not the only item reaching new highs. Andy Warhol’s 1963 8-by-13 foot painting titled “Silver Car Crash (Double Disaster)” fetched a lofty $105 million at the Sotheby’s Contemporary Evening sale. As it turns out, Warhol’s 15 minutes of fame keeps on ticking.

andy-warhol-silver-car-crash

 Andy Warhol’s Silver Car Crash (Double Disaster) courtesy of Sotheby’s

There was no Grinch this holiday season as Wall Street was finalizing one of the strongest equity returns in decades. The S&P 500 added 2.53 percent in December closing the year up an astonishing 32.39 percent. The bond market did receive a lump of coal in 2013 finishing at one of its worst returns in several decades, down 2.02 percent as represented by the Barclays U.S. Aggregate Bond Index. More importantly though, unemployment2 inched further down to 7 percent adding to the slow but steady healing from the Great Recession of 2008. Looking back on 2013, the equity rally climbed the wall of worry and overcame the challenges of years past.

PNC Park

As a Pittsburgher, it is impossible to ignore the parallels between the American economy in 2013 and the great story of our beloved Pirates. After two decades of losing seasons, the longest stretch in the history of North American sports, fans and even the franchise seemed to lose all hope. Would this, COULD this losing streak ever end? Our last stitch of faith rested in the belief that the Pirates would never lose 21 seasons in a row. Roberto Clemente’s number was 21. It simply could not be.

Just when it seemed the last fan had jumped the bandwagon and things could not get any worse, the Pirates did something remarkable – they rallied. They won. They won a lot all the way to the playoffs. And that’s all it took to give their fans hope again.

Sometimes it takes more time than we care to wait. But a strong year is always on the horizon.

1S&P 500, MSCI EM NR USD Index, and Barclays U.S. Aggregate Bond Index returns from Morningstar Direct®
2U.S. Unemployment rate from U.S. Bureau of Labor Statistics 

Daniel Dingus is Director of Portfolio Management at Fragasso Financial Advisors, a Pittsburgh-based investment and financial planning firm. Due to industry regulations, comments are not permitted on this blog.  If you would like to contact the author, please email us at blog@fragassoadvisors.com. Dan can also be reached for comment at 412-227-3200.

Investment advice offered through Fragasso Financial Advisors, a registered investment advisor.

NYC – Bowling Green Charing Bull photo credit: wallyg via photopin cc
PNC Park photo credit: wfyurasko via photopin cc

2013 – The Year of the Bull (Part 1)

Bull

Ddingus

At long last, American markets experienced a bullish year. The positive momentum was realized despite the fact that some entities seemed poised to take pot shots at the economy throughout the year. Perhaps the markets stumbled upon a discarded Iron Man suit (clearly that’s not possible). Whatever the reason for its resilience, investors are beginning to feel hopeful about the economy again. Let’s take a look back at The Year of the Bull.

We began 2013 with the American Taxpayer Relief Act. You may know it better as the deal that averted the fiscal cliff. While there may have been little in the way of tax cuts, the markets rallied quickly in January, with the S&P 500 up 5.18 percent1. In hindsight the strong start would serve as an indication of what was in store for the year to come.

Cliff1a

February continued the upward trend in market returns until a cooling off late in the month. The market pull back did not stop 3-G Capital and Berkshire Hathaway from scoring in the Heinz Red Zone. The iconic Pittsburgh based H.J. Heinz was purchased by the two firms for $28 billion, a 20 percent premium over the prior day’s closing price.

Heinz ketchup bottle isolated

March began with 10 straight days where the S&P 500 had increased before settling in for the month. A few days later, the country of Cyprus reached a contentious agreement for a European bailout with some of the burden on depositors. Ordinary citizens and foreign money launderers alike were upset at the unique decision.

BoCyprus1

The equity markets became a bit more volatile but again pushed slightly higher in April. The Dow Jones Industrial Average started to flirt with 15,000. Japan, the still formidable Asian economy, saw its benchmark Nikkei Index touch 13,900, its highest level in five years. The massive quantitative easing by the Bank of Japan’s new governor, Haruhiko Kuroda, was an indication that he was listening attentively to market investors.

Haruhiko Kuroda_ReutersJapan1
Photo credit: Reuters in Tokyo courtesy of South China Morning Post

The old adage “Sell in May and go away” applied not to equities as normally understood but rather bonds. Equities continued a strong rally while bonds pulled back. The Federal Reserve tested the waters by hinting of slowing, reducing, ending and tapering their quantitative easing program. (We were never quite sure what the plan was in May but at least we added the term tapering to our lexicon.) What we did realize is that the long-anticipated rise in the artificially low interest rates was starting to move.

Traders1

June was a tough month in an otherwise strong rally for 2013. Federal Reserve Board Chairman Ben Bernanke remarked to the potential beginning of the end to the Fed’s monetary-easing policy. Rising rates are typically bad for equity markets. But let me put this into context. Depending on the level of inflation and at what level interest rates are moving means more to equities than the actual inflection. At present, interest rates are merely moving from arguably absurd lows and inflation is below historical norms.

Fed Chair Ben Bernanke Testifies On Economy To Senate Budget Committee

In July, Ben Bernanke backed off earlier comments he made about the central bank beginning to withdraw its monetary stimulus. Equity markets pushed forward once again, although bond markets were a bit weary and more or less stayed level for the month. For municipal investors, the sell-off (in relative fixed-income terms) continued as the city of Detroit filed for bankruptcy on July 18. Seeing no end in sight for their fiscal woes, emergency manager Kevyn Orr quickly pointed to the dilapidated infrastructure sadly represented by the fact that 40 percent of the city’s street lights were turned off.

AbondanedPackardFactory1

The Year of the Bull (Part 2) will continue next week with the second half of 2013’s stock market review and its impressive results.

1S&P 500 returns from Morningstar Direct®

Daniel Dingus is Director of Portfolio Management at Fragasso Financial Advisors, a Pittsburgh-based investment and financial planning firm. Due to industry regulations, comments are not permitted on this blog.  If you would like to contact the author, please email us at blog@fragassoadvisors.com. Dan can also be reached for comment at 412-227-3200.

Investment advice offered through Fragasso Financial Advisors, a registered investment advisor.

Expectations, opportunities and the right New Year’s resolution for 2014

2014banner_new

Bob Fragasso

I don’t know about you, but the last year seemed to pass by in the blink of an eye.

Looking back, it’s clear 2013 was a good year for the investment markets, so it seems only logical that investors are asking if 2014 will offer the potential for similar gains.

As we often talk about with our clients, predicting the future simply isn’t possible. There is no magic recipe or crystal ball. However, understanding where we are in the economic cycle can provide some insight and – while no one can time market movements – it is useful and prudent to project current facts and data into the future.

On a more macro scale, we need to consider that Shale gas and other energy related opportunities are not fleeting. Many industry experts believe we can become energy independent sometime during this decade. This possibility would have tremendously beneficial implications on industrial production, construction, employment, balance of trade and innovation.

The U.S. continues to recover from the destructive downturn of 2007-09 as world economies also slowly continue to improve.  However, possibly even more important, those economies are adapting to new realities.  Such movement has historically proved to make economies stronger, not weaker.  That being said, those outcomes are not within our individual control, but our own individual economic courses of action are.

We can put action plans into play for 2014 that have huge significance for our individual economic futures.  How we spend our income, how we save and invest and how we protect our families against economic reversals will determine our future comfort and security much more so than tax policy and Federal Reserve stimulus plans.  Consider these additional components.

Personal and family spending:  For many people, budgets work as well as diets, so we aren’t recommending draconian reductions in spending.  Rather the key word is redirection.  Begin with allocations toward savings and investment.  Then the remainder of spending should go to items and activities that further the goals of the family, including even recreation and vacations. This process helps to eliminate indiscriminant and nonproductive expenditures.

Debt:  Pay down all “bad” debt as quickly as possible and do not acquire more.  Bad debt represents consumer, non-durable spending.  A good example would be putting a vacation on a credit card without having the ability to pay it off when the bill arrives.  That kind of debt impedes asset growth and is usually (and unfortunately) funded with high interest, nondeductible charge cards.  By contrast, it’s quite acceptable to take on good debt in the form of a home or a business asset that goes toward making a living. This debt is often tax deductable and lower cost. It can be paid down in an orderly fashion while still allowing you to accumulate investment assets and savings.

Retirement savings:  Everyone wants the ability to retire with financial security and stability. Saving for this purpose is best done on a pretax basis in a retirement plan like a 401K.  Contribute the maximum you can afford regardless of company match amounts and invest your account in a diversified and asset allocated manner that aligns with your goals, family responsibilities and risk tolerance level.  Most plans offer educational resources for participants so they can better understand the mix of and fees associated with their investments. At Fragasso, we guide our clients in the proper methods of investing in their company plans.

Higher education funding:  The best gift we can give our children and grandchildren is education that prepares them to make a living and develop into valuable contributors to society.  Prefunding your family’s educational expenses is the most economical method.  This strategy should employ the textbook principles of compounding earnings over time, as well as shifting the tax burden to allow you to add more to the education fund up front.  This certainly beats the alternative of acquiring school loans and then selling other productive assets come college time. We also help our clients with this all-important planning consideration.

Personal portfolio savings and investing:  This last leg of the investment stool allows for flexibility and added security that helps you navigate the various financial demands you’ll encounter throughout your life.  Systematically saving and investing can add up to a considerable cache of money, enabling you to eventually attain all your financial goals.

These strategies work synergistically and cannot exist in a vacuum. You exert maximum control on their long-term success, and their accomplishment has little to do with Federal Reserve monetary policy or government spending and debt.  Addressing these issues puts you in charge of your destiny, which is what we want and the way it should be. Talk to us today to help you coordinate your financial and overall life goals. Fragasso Financial Advisors exists to help get you on track toward financial security and peace of mind. Let’s get started now. After all, what could be a more perfect New Year’s resolution?

’Tis the season to remember the importance of proper estate planning

dgraverThe holidays are upon us again, a period when most people spend more sustained time with their families than during any other point of the year.

While this obviously is a great chance to gather together and rejoice, it’s also a time when many will reflect on their life, their family, and yes – their estate plan. In fact, the holidays may present the best opportunity for older generations within each family to discuss where and to whom they want their assets distributed when they’re gone.

One aspect of the 2012 holiday season that no one looks back with fondness upon was the “fiscal cliff” debate in Washington, D.C. In the end, we did not fall off the fiscal cliff, and as of December 31, 2012, some very important estate tax provisions were made permanent eliminating uncertainty within previous legislation. As a result, families can now plan to distribute their estates with more confidence after a decade of planning under previous laws that contained expiration dates. Note the emphasis on “certainty” and “confidence” instead of “permanence.” Nothing in Washington, D.C. is permanent, but these tax provisions are the law until/unless Congress changes them.

With that in mind, below are some key considerations to make when assessing the current landscape of your estate planning.

  1. The federal gift, estate, and generation skipping transfer tax exemptions were unified and set at $5.0 million in 2011, with a provision to adjust annually for inflation. ($5.12 million in 2012, $5.25 million in 2013, $5.34 million in 2014). So in 2013, a person can gift up to $5.25 million estate and income tax-free. Doing so transfers the assets and all of the future growth on those assets out of their estate. This may be an extremely beneficial planning tool for high net worth individuals wishing to pass significant assets to the next generation.
  2. The maximum federal estate tax rate increased from 35 to 40 percent. Therefore, an estate or gift greater than $5.25 million (2013) is now subject to a 40 percent top estate tax. That increase makes the proper estate planning even more important to conserve assets.
  3. The “portability” provision of the federal estate tax exemption between married couples was made permanent. This allows couples to transfer up to $10.5 million (2013) through lifetime gifting or at the time of their death. It also allows the unused portion of the exemption of the first spouse who dies to transfer over to the surviving spouse, without having to set up estate planning for this single purpose. This portability provision is something new, and you should be sure your estate planning documents account for it.

Estate planning really boils down to taking care of our families and ourselves the way we want, either through lifetime gifting or distribution of assets upon death.

Working with your legal counsel, Fragasso Financial Advisors can offer you ideas from a financial planning standpoint that will help you determine how you can pass assets to future generations in the most tax-efficient way. We believe that estate planning is not a single event. Our team is dedicated to working with you through the years to make sure your plan is updated when necessary to reflect the state of your family, your assets and – in this case – current legislation.

Deborah F. Graver, CFP®, CLU®, AIF®, is President and Chief Operating Officer at Fragasso Financial Advisors, a Pittsburgh-based investment and financial planning firm. Due to industry regulations, comments are not permitted on this blog. If you would like to contact the author, please email us at blog@fragassoadvisors.com. She can also be reached for comment at 412-227-3200.

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