Monthly Archives: October 2010

Looking Through the Curve on the Financial Road

There is a lesson taught in motorcycle and biking safety courses that if you look at an obstacle while riding you will steer toward it.  So if you concentrate at a person coming toward you, you will steer toward that person.  If you look at a bend coming up in front of you, you will steer into the elbow of that bend and run off the road if you don’t quickly correct your course.  Try it and you will likely prove the principle for yourself.  By contrast, if the rider “looks through the curve” as the riding experts instruct, the cycle or bike moves cleanly through the bend in the road.

I believe the same is true of our financial course of action. Experience shows that investors are often so mesmerized by current events that their actions steer them toward the risk instead of away.  Let’s try an example and see if you agree, or maybe you are even currently proving the point.

The stock markets around the world suffered a mighty crash in late 2007 through early 2008.  While severe, it was not of the magnitude of the early 1930s crash, but many investors thought it might be.  Some investors were so focused on the sharp “bend in the road” that they couldn’t look through it and, in effect, steered right into it by panic selling good investments.  We did not, and clients who accepted our management and guidance did not, sell at the bottom.  But the bend-hypnotized investor did and crashed off the side of the road by realizing the losses at the bottom of the market and then sitting on the side of the road during the recovery that our clients enjoyed.

So now we hear and read many prognostications by folks who can’t see around the bend in the road any better than anyone else.  And unsure investors allow themselves to be guided by those supposed seers once again right into the bend in the road with likely similar consequences as unreasoned panic has caused in every downturn previously.

If we focus on the curve in front of us, we see and hear things like. “We don’t manufacture anything in this country anymore,” or “Our country’s best days are behind us and other countries are taking all of our jobs.”  How about the current gospel of gold, land, cattle and chickens as the way to financial security?  Last I heard that advice was back in the 1970s when the “experts” also added freeze dried food and ammunition to the list of things to store.  I have recently had people ask me, with serious intent, if dollars should be put “under the mattress” because of the rampant inflation that is “sure to come.”  Well, if you keep looking into that bend in the road, I believe you may hit some serious gravel and spin out, in a manner of speaking.

Now let’s try looking through the bend in the road.  What might be on the other side?  No one knows for sure.  But considering the course of economic history, I prefer to focus on a road beyond the curve that may be influenced by the following factors.

Rather than see the world economy as a zero sum game, I believe the rise of emerging markets will only add to the number of consumers who can use and will buy our goods and professional services.  This is in contrast to the bend in the road focus that says they will take our jobs and thus they win and we lose.  How about the no U.S. manufacturing lament?  A western Pennsylvania manufacturing company began operations in the middle of the Great Depression, a far worse economic time than now.  Over the decades their brand of manufacturing was taken over by overseas manufacturers who could do that type of commoditized manufacturing more cheaply.   So the local company upgraded the level of their work from continuous, routine manufacturing to engineering solutions for specific client needs.  They now have plants all over the world near their client companies to service their needs, including their original operations here.  And the education and compensation level of both engineering and manufacturing employees has risen substantially.  Yes it is true that we have lost many manufacturing jobs.  For example, street sewer lids are now being made more cheaply in India rather than stateside.  But do you really want to work in a street sewer manufacturing plant?  Would you rather, for example, engineer innovative solutions to traffic control problems and guide the manufacturing of those unique solutions to meet the needs of your customers?  I am suggesting to you that what we are experiencing now is akin to the changeover from an agricultural to an industrial economy 100 years ago.  So let’s look through this bend in the road to what is likely coming and benefit from it.

Let’s bring similar thinking to some of the following fields.  Let lose your imagination while thinking about medicine and pharmacology, financial management, products and services (do you think you’ll always write checks and go into a bank branch?), communications, computing, business transport and personal travel, multi-national and multi-cultural profit opportunities, new methods of retailing and advertising, new and better ways to educate students and to gain job skills, the next phase of managing the environment, and many, many more such areas of opportunity.

So by looking through the curve you will find that the textbook principles of diversification, balance, and asset allocation will allow us to research and include tomorrow’s opportunities into today’s portfolio.

By contrast one could fixate on the current bend in the road lamenting about low interest rates, a somewhat sideways stock market, the upcoming election, possible inflation and other distractions that may cause that person to steer off the road to future profit and prosperity.  So picture that poor investor sitting on the side of the bend with a broken bicycle watching others steering through the curve to the exciting opportunities that lie ahead.

No one knows what the future will bring.  But history, while providing no guarantees about the future, does give us a good indicator of recurring themes.  As such, I believe that the world and this country will continue to adapt, improvise and continue to thrive.  Let’s look through the curve together.

Robert Fragasso is the Chairman and Chief Executive 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.  Robert can also be reached for comment at 412-227-3200.

Capital Gains, Large Stock Positions, and You

It’s likely that 2011 will bring changes to how long term capital gains are treated for most investors.  For some time, we have enjoyed the 15% long term tax rate on assets held longer than one year.  Next year that will very likely change, moving up to 20%.  While it’s not the case for everyone, some investors have had fairly large positions in certain stocks for quite some time, with quite a bit of unrealized capital gains now built into the position.  Sometimes this is because of holding on to a stock that was inherited from a parent, it can also be a large position in the stock of a former employer.  Regardless of the reason, it may be worthwhile to consider selling some of these positions before the year is over, while you can still realize the gains at 15%.   While a 5% difference may not necessarily seem like much, it can change the taxes owed on a stock sale by quite a bit depending on the size of the position and the amount of the gain.  While some hold out hope that a change in the composition of congress may mean a greater likelihood of maintaining more of the current tax rates, this absolutely cannot be counted on.  Remember that the Federal government (as well as state and local governments who often depend on federal dollars flowing down to them) are hungry for revenue due to high deficits and unfunded liabilities, and that may not be a good recipe for fast action to retain the current tax rates.  Of course, tax law changes by themselves are not the only factor to consider when making such a decision, you must always weigh tax considerations along with long term goals and strategy, to decide what’s right for you.   If you have thoughts or questions about this, please contact your advisor here at Fragasso Financial Advisors.  We’re happy to help.

Fragasso Financial Advisors does not offer tax advice. Please consult with a qualified tax advisor.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Gregg Daily is Vice President and Financial Advisor 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.  Gregg can also be reached for comment at 412-227-3200.

As a 401(k) Sponsor – Do You Know Your Fiduciary Responsibilities?

As a plan sponsor you have certain responsibilities that you must understand and follow to mitigate risk. This blog will review those responsibilities and offer tips to help assist compliance.

First, you should establish and follow a sound fiduciary process.  You may want to establish a fiduciary committee to oversee the plan’s fees, service providers, decisions that are made and the plan’s investment options.  Another part of this process is to establish processes and procedures that include periodic due diligence reviews and to ensure that the plan maintains its tax-qualified status.

Second, you should ensure you take advantage of 404(c) protection.  Plan documents should reflect  that you intend to comply with this protection by allowing participant direction of all investment options, by diversifying  investment choices and then monitoring these options.  In line with this other disclosures and information should be provided to participants.

Third, plan participants should be made aware of the plan’s provisions, investment information, investment options and assistance with retirement planning.  This is accomplished through employee education that provides essential information to eligible employees and even non-participating employees that provide specific steps to achieving the retirement that they desire. A summary plan description should be made available to all participants which discloses  404(c) intent and additional plan documentation.  You should ensure that the written plan document complies with the ERISA rules and regulations that govern retirement plans and establish procedures to update and follow the plan’s provisions.

Fourth, ensure that you satisfy all reporting and disclosure requirements.  ERISA has reporting requirements that must be followed including the disclosure of required information to participants and beneficiaries.

Finally, you should continually update your fiduciary and retirement plan knowledge by taking advantage of education sources that are available. Your plan sponsor should offer information and education on investment, current regulatory, and fiduciary topics.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Ray Amelio is Managing Director and Chief Marketing 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.  Ray can also be reached for comment at 412-227-3200.

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