Welcome To Our Blog

2015 – Q3 Review

Domestic Equities     Volatility spiked in Q3 to its highest point in 4 years as domestic blue chips were down 6.9% for the quarter.  Employment figures again improved, with the unemployment rate falling 0.2% to 5.1% (1).  Home prices also had a setback (2), and corporate earnings showed continued signs of weakness as a stronger dollar continues to hurt the earnings related to international operations.  The estimated earnings per share of the S&P 500 for the full year 2015 was over $131 per share on December 31, 2014.  Today, estimated earnings for the full year are only $109 (3).   Foreign Equities     Headlines concerning Greece died down in Q3, only to be replaced by fears surrounding China.  China makes up 27% of our emerging market ETF benchmark.  The country faces uncertainty over whether it can continue its growth.  The chart below shows China’s GDP growth for the past 8 years as well as estimates for 2015 and 2016.  Continued weakness in commodities also helped to push emerging markets down 17.9% in Q3.               As seen below, over the past 5 years investors have not been compensated for the extra risk associated with international and emerging market economies.               Source: Yahoo! Finance This year that trend changed in Q1 and Q2, only to return in Q3 as foreign equities were hit hard.                 Domestic Bonds       The US dollar was flat for the quarter, as the Fed’s decision to delay raising rates caused the currency to... read more

2015 Reminders

These 2015 reminders are for informational purposes only.  Please note this list is neither all-inclusive nor does each item necessarily apply to your specific situation.  Please contact your tax adviser for more information. We are going to start sending out reminders each quarter (4 emails per year) for the items listed below that will be coming up.  The closest items due in the list below are: 1)  If you reside in a county that was granted tax relief due to the severe storms in Texas earlier this year, your extended 2014 income tax returns may be due November 2, 2015 2)  The deadline to convert a traditional IRA to a Roth IRA is December 31 3)  Ensure that you use any amounts in your Flexible Spending Accounts (FSA) by December 31 4)  Payments of 2015 property tax for Texas counties are generally due by January 31, 2016 5)  Quarterly estimated federal income tax payment is due January 31, 2016 for the period September 1, 2015 through December 31, 2015   Federal Income Tax Filing Deadlines Tax Filing                              Original Date                      Extension Date (3) Individual                              April 15                                 October 15 Partnership (1, 2)                 April 15                                 September 15 Corporation (1, 2)                 March 15                              September 15 1  –  For calendar-year partnerships and corporations 2  –  The dates for the calendar-year partnership and corporation will change... read more

Fiduciary vs Suitability – Real Examples (Part 3 of 3)

Take a look at these figures (1): $1,980,000 by the Securities Industry and Financial Markets Association $1,280,000 by the Investment Company Institute representing the mutual fund industry $721,220 by the National Association of Insurance and Financial Advisors   What was all this money spent on?  Lobbying AGAINST the Fiduciary Rule. This third and final part of our Fiduciary series discusses the why the Fiduciary standard will likely never be adopted by the financial industry.  The first part of our Fiduciary series focused on the differences between a Fiduciary and a Suitability Standard, using real life examples of how the latter can hurt investors.  The second installment discussed the main arguments against a Fiduciary Standard and why they don’t hold water. Let’s talk a bit more about those huge amounts spent on lobbying.  They represent only 3 of the top associations.  In reality there are a TON of big companies lobbying against the rule as well.  But the most alarming fact about these figures?  THE AMOUNTS WERE SPENT IN JUST THE FIRST 3 MONTHS OF 2015! I am already bound by a fiduciary standard as an independent registered investment advisor.  However, the majority of representatives at larger institutions such as Merrill Lynch, Mass Mutual, and other similar financial institutions are not held to this high standard.  The proposed Fiduciary rule by the Department of Labor would move these reps to a fiduciary standard.  You can guess why it is being opposed, despite the clear benefit it poses to investors. The single most important reason this Fiduciary Rule will never be adopted comes down to money.  There is a TON of... read more

Fiduciary vs Suitability – Real Examples (Part 2 of 3)

The first part of our Fiduciary series focused on the differences between it and a Suitability Standard, using real life examples of how the latter can hurt investors.  Next let’s go through some of the main arguments against a Fiduciary Standard and why they don’t hold water.  The following arguments were taken from Insurmark, an insurance marketing organization.  Of course they are against a Fiduciary rule – they make their money from commissions! (http://www.insurmark.net/readingroom/Flawed-Arguments-of-Department-of-Labors-Fiduciary-Only-Rule.pdf) 1)  Insurmark argument against Fiduciary Rule:  It would cause smaller investors to lose access to advice because many fee-only advisers typically require at least $250k of investable assets, while the median value for an IRA is only $64k.                 Solution:  Technological advancements make it easier for fee-only advisers to lower or eliminate asset minimums altogether.  At Composed Financial, we are a fee-only adviser and have no asset minimums. 2)  Insurmark argument against Fiduciary Rule:  It would lead to a fee-only model which would cost more for smaller investors.  The annual fee is often 2.0% of assets under management for smaller investors. Solution:  Again, technology opens up opportunities for fee-only advisers to take on more clients and lower their fees.  Our highest assets under management fee at Composed Financial is only 1.0% of assets under management, a far cry from the 2.0% fee claimed by Insurmark. 3)  Insurmark argument against Fiduciary Rule:  It would lead to a fee-only model which advisers charge clients year-after-year.  A commission based adviser would only charge a fee at the time the product is sold. Solution:  The commission based model ensures service ends after the product is sold.  Once an agent... read more

Fiduciary vs Suitability – Real Examples (Part 1 of 3)

Most financial advisers out there work for the big names such as Merrill Lynch, Morgan Stanley, UBS, USAA, LPL Financial, Ameriprise, etc., and work under what is called the Suitability Standard.  Independent advisers such as yours truly work under the Fiduciary Standard.  It is clear that one standard is better for investors than the other, which is why the President and the Department of Labor have been championing a switch to the Fiduciary Standard for all advisers.  The proposed Fiduciary Rule could be implemented as early as 2016.  Advisers working under the Suitability Standard result in losses of 1% per year to investors, or $17 billion per year, according to the White House Council of Economic Advisers.  (http://www.dol.gov/ebsa/newsroom/fsconflictsofinterest.html). This 3 part series will help to explain: 1) why the Fiduciary Rule is better using real life examples, 2)  why the arguments against a Fiduciary Standard are flawed, and 3)  why the better Fiduciary Standard is unlikely to be adopted. First let’s talk about the Suitability Standard.  If your adviser uses this standard, there are various items he must consider, such as your time horizon, investment objectives, and other unique financial circumstances.  Notice it does not say anything about conflicts of interest.  An adviser under the Suitability Standard’s may be more loyal to his Company and his own pockets than to you.  The Fiduciary Standard is less specific but more protective to the investor – essentially it says the adviser must put the client’s interests above all others. I have seen the Suitability Standard at work in real life and the harm that it can cause.   I typically analyze a prospective... read more

Inheritance Pitfalls – 401(k) vs IRA

401(k)s and IRAs are the two most common ways people save for retirement.  In fact, 401(k)s and IRAs accounted for nearly 50% of all retirement assets ($12.0 trillion of $24.7 trillion) in the United States at the end of 2014.  63% of the 123 million households in the United States have either an IRA or an employer-sponsored retirement plan (1).  It is essential for these 77 million households to understand how their assets transfer once they pass on.  Many might be surprised to know that these retirement accounts transfer differently versus the other assets they own, and that 401(k) and IRAs even differ between themselves. Many people create a will to direct how their assets will transfer at death.  What they might forget is that a will does not govern how your 401(k) and IRAs are passed on.  401(k)s and IRAs pass outside of probate.   If a beneficiary is not named, generally your spouse inherits the assets.  If you do not have a spouse, only then are the assets passed to your estate and move through probate. Now, how do the rules around 401(k)s and IRAs differ in regards to inheritance?    401(k)s and other employer sponsored plans are governed by a federal law called the Employee Retirement Income Security Act of 1974 (ERISA).  IRAs are not subject to ERISA.  This is what causes the difference. The simpler of the two is the IRA.  Generally, the person named as a beneficiary on the IRA inherits the assets. With a 401(k), however, the spouse is presumed the beneficiary regardless of any names your write down on your beneficiary form.  If you name someone... read more

Total US Debt Update 2 of 2 (2014 Q4)

In part 1 of our Total US Debt Update, we discussed how the US has deleveraged over the past 5 years.  Too often people focus on only government debt instead of looking at the total debt of a country.  It is better to look at the debt households and businesses hold – not just the government – to see the big picture of how a country is faring.  If you are buying a house, I doubt you just walk through the living room and make a decision.  I bet you look at every room to see if it’s worth an offer. Below is a breakdown of the total debt of the United States in 2014 and in 2007:           As you can see, total debt to GDP has actually improved over the past 7 years.  Granted, government debt has ballooned – but some of this could have been expected.  During a downturn, usually the government enacts policies to stimulate the economy and this typically results in an expansion of government debt.   The government helps out households and businesses to get them back on track.  This is part of the reason why household debt has essentially remained flat and financial sector debt has decreased.  Remember, financial sector debt was one of the main causes of the crisis so it was necessary for this sector in particular to deleverage. Our country’s GDP has expanded at higher rate than our total debt over the past 7 years.  That is an indication that the US handled the downturn well.  It has deleveraged since the crisis and our economy has improved.  Unemployment... read more

2015 – Q2 Review

Domestic Equities     Volatility continued to rise in Q2 as domestic equities were negative for the quarter and YTD are up only 1.6%.   Employment figures continued to improve, with the unemployment rate falling 0.2% to 5.3%.  Home prices advanced for the 3rd quarter in a row.  However, corporate earnings showed continued signs of weakness as a stronger dollar continues to hurt the earnings related to international operations.  The estimated earnings per share of the S&P 500 for the full year 2015 was over $130 per share on December 31, 2014.  Today, estimated earnings for the full year are only $115.   Foreign Equities     Greece dominated the headlines in the 2nd quarter as the country had a referendum and overwhelmingly voted no to accept its creditors’ proposal for more austerity.   Initial results in the markets continued to show that Greece was contained, and that markets would persevere.  Developed markets advanced 0.6% in Q2, up 6.1% YTD.     Emerging markets advanced 1.0% (3.3% YTD) as oil continued to show signed of stabilization as of 6/30/2015. As seen below, over the past 5 years investors have not been compensated for the extra risk associated with international and emerging market economies.             Source: Yahoo! Finance   This year that trend has changed, as investors are seeing stronger gains in equities abroad as compared to those at home.             Source: Yahoo! Finance   Domestic Bonds       The dollar continued to strengthen, as uncertainty abroad pushed investors into more stable alternatives.  Consensus for the first Federal Reserve rate hike is September.  Bonds returns... read more

Total US Debt Update 1 of 2 (2014 Q4)

With all the new presidential candidates beginning to vie for positions, the topic of our nation’s indebtedness continues to be a hot topic.  I’m willing to bet you won’t hear that our nation’s total debt situation has improved over the past 5 years.  But that is exactly what has happened.  It is always prudent to get the facts and focus less on the emotional outbursts we hear from the podiums. First, let’s talk about debt.  It is not necessarily bad, as many would lead you to believe.  In fact, if used properly and in moderation (as can be said with all things), it can lead to a more prosperous economy from both a micro and macro point of view. As Ray Dalio, manager of the world’s largest hedge fund, explains in this video ‘How the Economic Machine Works’ – one person’s spending is another person’s income.  That means if one person earns $100k and is granted a mortgage to buy a house for $200k, his total spending power is increased.   This debt of $200k is essentially adding to a second person’s income.  Put another way, if debt didn’t exist the person earning $100k would not have been able to buy the house.  Since debt exists, it provides an opportunity for a house to be built and sold to the first person.   It creates a job and income to the second person building the home.  The economy is improved because of the debt machine.  It allows for more production which should be the long term focus for any economy – increased production. People like to talk about debt in absolutes and... read more

Real Estate Investing by Sherlock Holmes

Note: We would like to remind our readers that we are an independent firm.       We receive no commissions from third parties. We are a fee-only financial adviser, making our interests more aligned with your interests. “Data data data. I cannot make bricks without clay,” avowed Sherlock Holmes in Arthur Conan Doyle’s short story “The Adventures of Copper Beeches”. I think it is safe to say that the renowned detective would be in heaven in today’s world with data readily available at the click of a button. I had the Guy Ritchie adaptation on last week in the background while I was doing some analysis on townhomes in the downtown Houston area. Christina and I are putting ours up for sale and were in a debate about what was an appropriate list price. Spoiler alert: we compromised but were closer to her figure! Too often people go with their gut or with a figure that is based on what they need to make from selling a property. Just like with the stock market, people let emotions get in the way.   People hold on too long, and once they get out, they take too long to get back in. The key is to use what data you have available to make an informed and pragmatic decision. One of the main jobs of a real estate agent is to act as a barrier between you and poor decisions. In fact we feel that’s our job here as well on the personal finance side – to give you a fresh recommendation that is free of emotion. The cause of our debate stemmed from... read more