58 Percent of Investors Have Lost Faith in the Stock Market

Surveys are beginning to record what we all know is true. The financial crisis has had a profound impact on investors. In fact, 58 percent of investors have lost faith in the stock market, according to a survey of 1,274 Americans conducted by Prudential Financial. Forty percent say they have a conservative portfolio, up from 33 percent before the recession, and 44 percent say they are unlikely to ever again invest in stocks. Only 37 percent describe their portfolios as aggressive, down from 46 percent prior to the recession.

While 70 percent of the respondents said they have taken steps to improve their financial situation by saving more or reallocating their investments, the majority have moved their money to more conservative investments. This move to safety creates a new risk that they might fall short on achieving their retirement goals.

For most investors, the biggest threat to a financially secure retirement is not short-term market volatility, but inflation. Consider this: Even if inflation stays at the historical level of 3 percent, the cost of almost everything will double in 24 years. That means if you are living on $80,000 in 2011, by 2035, you’ll need $160,000 to maintain your standard of living. Accordingly, as we plan for retirements to span greater than three decades, it’s clear that portfolios comprised solely of bonds and cash will not protect against inflation. Today, the increased length of retirement requires an allocation to global equities for growth potential and diversification.

Yet, investors may not be as reluctant to invest in equities as they report. According to Strategic Insight, year-to-date cash contributions through April to equity and hybrid funds have surpassed inflows to fixed income funds for the first time since the financial crisis. Equity funds netted $110 billion through April, mixed funds $30 billion and bond funds $100 billion as investors acknowledge higher equity allocations to meet their long-term financial objectives.”

401(k) Plans Hit the Big 3-0

It’s been three decades since the 401(k) arrived on the retirement saving scene. And to celebrate the tax-deferred account’s milestone, many U.S. companies that eliminated their 401(k) matching contributions during the Great Recession are beginning to restore this valuable benefit.

According to the consulting firm Towers Watson, during the recent recession, almost one in five U.S. companies with at least 1,000 workers suspended 401(k) matching contributions. Now, many of those companies are reinstating the perk – albeit often at a reduced level. Today, the once standard 3% match is considered generous. In addition to offering smaller matches, some companies are linking their contributions to corporate profits or requiring employees to reach a particular dollar level in their account before any matching occurs.

With traditional pension plans going the way of the drive-in movie and concerns mounting over the long-term health of Social Security, 401(k) accounts are a critical leg to the retirement stool. According to the Employee Benefit Research Institute (EBRI), 79 percent of eligible workers (36 percent of all workers) say they participate in retirement savings plan with their current employer. Furthermore, 28 percent of participants report that they have increased the percentage of their salary that they contribute to the plan in the past year, and just 4 percent report they decreased the percentage. EBRI also found that workers who currently participate in this type of plan are more than twice as likely as those who do not to report retirement savings and investments of at least $50,000 (52 percent vs. 23 percent).

While 401(k) participation levels have certainly increased since the plan’s introduction and held steady even throughout the recent financial crisis, the industry can do a better job with education. In fact, EBRI found less than half of workers (42 percent) report they and/or their spouse have tried to calculate how much money they will need to save to secure a comfortable retirement. Disappointingly, this percentage is lower than the 53 percent recorded in 2000 and the 47 percent in 2008.

Dodd-Frank Debated

In a recent news article, “Old Fears Resurface as Lawmakers Confront Basel III, Dodd-Frank Changes,” Donna Borak reported that U.S. lawmakers at a House Financial Services Committee recently addressed whether requirements of the Dodd-Frank Act, combined with tougher international capital and liquidity rules are driving financial institutions overseas.

The article offered dueling perspectives. Rep. Shelley Moore Capito, R-W.Va., told top regulatory officials, "I think failing to examine the aggregate cost of compliance with Dodd-Frank could lead to job losses and, in the worst case, a downgrade of the United States as a financial center

Conversely, Lael Brainard, Undersecretary of the Treasury for International Affairs stated, “There are some who would argue that the United States is moving too fast on financial reform, that we should slow it down, wait to see what other countries implement. I don't agree. By moving first and leading from a position of strength, we are elevating the world's standards to ours."

Borak also quotes Brainard as stressing that in passing Dodd-Frank, that “policymakers were not choosing between stability and growth, as critics charge” The “real point,” she says, “is that we will have much healthier growth if, in fact, we put in place a safe and sound financial system."

I couldn’t agree more, but am sure that the Dodd-Frank debate will continue – especially later this month when the SEC presents to Congress its cost benefit analysis of requiring that broker-dealers be subject to the same fiduciary standard of care as investment advisors. That’s something all investors deserve.

Investing is Boring

I came across an article in the Financial Post that I thought was worth sharing.  The article was titled Investing is Boring: If You Want Excitement, Go to Vegas.

The entire article is well worth reading but I particularly liked the following quote:  "timing the market is impossible, forecasts are for the gullible, and stock-picking is a mug’s game."

Recovery? What Recovery?

Soft. Stalled. Uneven. These are the words we’ve read in headlines that describe the market’s recovery. The economy grew at just an 1.8% annual rate in the first quarter of this year, down from 3.1% in the fourth quarter of 2010. Experts agree that two factors critical to any market recovery have been absent in our transitioning market. To get the recovery into high gear, home prices must stop declining and begin their ascent. Second, consumers, the driving engine of our economy, must regain their confidence and begin to spend more freely.

According to Susan M. Wachter, a Wharton real estate professor, we are three to five years away from being back to what might be considered the “new normal” in the commercial and residential real estate markets. She points out that construction is a job-intensive sector, and therefore, the sector that generally leads the job recovery. Without the boost from robust construction activity, she says the overall recovery is “far more vulnerable to other negatives.”

Mark Zandi, chief economist and cofounder of Moody's Economy.com. put a graphic spin on the market’s recovery. He says to have a vibrant recovery and economic expansion, housing has to go from “being a headwind to a tailwind.” Yet, with average housing prices having declined for six consecutive months, we have a ways to go before that happens.

As for consumer confidence, a survey by the Certified Financial Planner Board of Standards found that a majority of Americans are still experiencing negative fallout from the recession. Fifty-five percent say they have delayed a big purchase and 45 percent have dipped into their savings to stay afloat in tough markets.

However, The CFP Board of Standards survey also recorded hope: 83 percent of respondents said their own personal financial situation will remain the same or improve in the coming year. That optimism is a powerful first step in jumpstarting consumer spending and getting the economy moving full steam ahead.

Does Your College Aid Package Include a Loan?

According to Finaid.org, more than $100 billion in federal education loans and $10 billion in private student loans are originated each year. Of course, the terms of various loans can vary greatly.

• Stafford Loans are federal loans that come in two varieties: Subsidized (based on financial need) or unsubsidized. Subsidized Stafford loans have a lower interest rate than the unsubsidized loans and interest doesn’t start accruing until after graduation. Unsubsidized Stafford loans start accruing while the student is in school, but payment can be deferred until after graduation.
• PLUS Loans are designed for parents and interest rates are usually higher than other types of federal loans.
• Perkins Loans are made through the schools and interest does not begin to accrue until after graduation.

To compare various loans’ terms, you can use the Loan Comparison Calculator at Finaid.org. And remember that if your aid package includes a loan with a very high interest rate, you can decline that part of the package.

Inevitably, evaluating financing options prompts the question: How much college debt is too much college debt? Getting a sense of national averages may help you to answer that question. Using data from the 2007-2008 National Postsecondary Student Aid Study (NPSAS) conducted by the National Center for Education Statistics at the US Department of Education, Finaid.org offers the following table showing the percentage of students borrowing and the average cumulative debt per borrower (excluding Parent PLUS Loans) at graduation according to type of educational institution.

Who Doesn’t Dream of Working for the Next Google?

U.S. job growth is driven by startup companies, but if you’ve been offered the opportunity to get in on a company’s ground floor, it’s important to consider potential risks along with the rewards.

Drawing from a 2010 Kauffman Foundation study, Polly Black, Director of the Center for Innovation, Creativity and Entrepreneurship at Wake Forest University, has developed a list of five important considerations for those contemplating joining a startup:

1. Passion. Look in the mirror, advises Black. Long hours and low pay require that you have a real passion for what the small startup company is doing.
2. Financial stability. Evaluate the company’s financial backing. Is it profitable? If it hits a major roadblock, what are the plans to stay afloat?
3. Chemistry. Start ups require a lot of team work, so you need to decide if you fit in with the other employees.
4. Market need. Black says company leaders should be able to clearly articulate the market need they are meeting with their product or service in a sentence or two. If they can’t, that may indicate a lack of focus that could impede the company’s success.
5. Experience. How will your work be balanced between job responsibilities and decision decision-making? Will you be comfortable with the level of autonomy offered?

Interestingly, your evaluation of risk and reward on the employment front is not unlike the work we do to accurately identify your risk tolerance that informs the construction of your portfolio. In both cases, if you take on additional risk, you have the potential to reap greater rewards. Also, as with investing, there are different periods in your life that may be more conducive to taking on additional risks.

Pessimistic Mass Affluent Need a Plan

MFS' recently released findings from its Investing Sentiment Survey show that mass affluent investors (those with between $100,000 and $1 million in household investable assets) have pessimistic attitudes toward investing. Primary factors contributing to the negativity include the impact of 2008's financial crisis and concerns over potential reductions in Social Security. Interestingly, although many have accumulated significant assets, these investors are not optimistic about the future. In fact, 32% describe themselves as protective, 17% as pessimistic, and 16% as fearful. Only 41% describe themselves as hopeful. Other findings include:

• 44% reported reducing their discretionary spending over the last 12 months; only 14% reported an increase in discretionary purchases.
• 59% agreed with the statement: “I am more concerned than ever about being able to retire when I thought I would,” with only 16% disagreeing.
• 49% agreed with the statement: “Over the past few years, I've lowered my expectations about what life will be like in retirement.”

It seems to me that the mass affluent need a financial plan. I would point out that in the October 2010 Dow Jones Affluent Investor Study of 1,287 investors with more than $500,000 in investable assets, approximately half reported that they prefer to manage their own investment portfolios. Additionally, the study found that of those investor working with an advisor, one-third said they had not developed a retirement plan.

As our clients know, an investment policy statement (IPS), a written plan that details their goals and a plan to meet them, is integral to feeling secure. To ensure investment decisions are based on reason rather than emotions and support short- and long-term goals, an IPS specifies an investor’s time horizon, risk tolerance, and standards for a diversified, risk-appropriate portfolio he or she can live with in all markets. In addition to keeping investors grounded during times of market stress, an IPS helps them measure their progress towards their goals.

CFA to Congress: Ignore Misleading Industry Arguments and Allow SEC to Proceed with Fiduciary Rule

In January, in response to a requirement of the Dodd Frank law, the SEC delivered a report to Congress recommending that broker-dealers be subject to the same fiduciary standard of care as investment advisors. However, the SEC delayed imposing the fiduciary rule to conduct a cost benefit analysis. In advance of the SEC’s planned July meeting to address those findings, advocates for imposing a universal fiduciary duty are urging the SEC to enact the rule.

Notably, the Consumer Federation of America’s (CFA) Director of Investor Protection Barbara Roper recently wrote to U.S. House members urging them not to be swayed by misleading arguments from a small segment of the broker-dealer community. In her letter, Roper contested the view set forth mainly by brokers whose business model depends on the sale of high-cost variable annuities, that imposing a universal fiduciary standard could have “unintended consequences” for middle income investors.

Roper wrote, “The SEC has proposed a way to move forward on fiduciary duty that maximizes investor protections while minimizing industry disruption. In doing so, it has won broad support from industry and investor advocates alike. It would be tragic if opposition from a few industry members intent on maintaining the status quo were able to derail that progress. Despite the self-interested claims of certain industry members, it is the middle income investors who must make every dollar count who are most in need of these enhanced protections.”

I couldn’t agree more. I am proud that the Bernhardt Wealth Management team serves our clients as a fiduciary and look forward to the day when all investors can be confident that all financial advisors act only in their clients’ best interests.

Nebraska

I was recently reminded of this video and thought I would share it.  The song was written by Kevin Marcy and sung by The Marcy Brothers.  (Kevin was two years behind me in high school.)  The video was shot in and around my hometown of Hay Springs, Nebraska--where I spent the first 18 years of my life before I attended college.  I hope you enjoy it!