Does Global Diversification Still Make Sense?

U.S. equities have generally dominated broad global equity indices over the last ten years, and many investors are wondering if globally diversified portfolios still make sense. I recently ran across a brief and very basic piece from Vanguard, that very simply outlines a few of the views that are common right now among investment advisors and money managers. Please click here to read Vanguard’s “Embracing a global stock market”.

Designating a Trust as an IRA or Retirement Plan Beneficiary

There are many reasons you may consider naming a trust as beneficiary of your retirement plan or IRA. The most common reasons are: 1) The beneficiary is a minor or is disabled (special needs). 2) The beneficiary is not financially responsible, and you want to retain control over the distributions after your death. Some other common reasons include asset protection, estate planning, and charitable gifting.

If your goal is to pass on the tax deferral benefits of your retirement accounts to your beneficiaries, or to ensure that your beneficiaries don’t spend their inheritance all at once, the trust must be structured properly. The trust must satisfy IRS rules qualifying it as a “look through” or “see through” trust, thereby allowing for required minimum distributions (RMD) to be paid out over the beneficiary’s life expectancy. If not structured properly, the trust may be required to liquidate the retirement plan and distribute the assets within 5 years from the owner’s death, with all distributions being subject to taxes. In some instances, immediate taxation of the entire retirement plan or IRA may be triggered.

There are two types of trusts that are used: conduit trusts and accumulation trusts. A conduit trust is simpler and more widely used. It distributes the RMD through a trustee. An accumulation trust is more complex and allows the trustee to hold on to the RMD in the trust, so it grows with the principal.

It is important to get help from advisors and estate planning attorneys with experience in setting up trusts that satisfy all IRS requirements. It isn’t difficult to name a trust as a beneficiary, but care must be taken, and it must be done correctly. The following article has some good information about naming trusts as beneficiaries of retirement accounts. Please click here to read "Naming a Trust as a Beneficiary of Retirement Accounts."

This Has Happened Every Single Time In the History of the S&P 500

Stock Market Below is a portion of a recent article from "The Motley Fool". The author makes a few very good observations about long-term investing in the U.S. stock markets. None of these observations are new or unique, but I think they are well worth reviewing. After reading it, I found myself thinking about one of the points in a slightly different way. That is, that there is one thing that has happened every single time in the history of the S&P 500. 100% of the time, the S&P 500 has recovered from corrections and moved to new highs! This is good news for long-term investors. Other points worth noting are that stock market corrections are more common than may people realize, and that they tend to not last very long. 

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Volatility in Equities - A Longer-Term Perspective Helps

Stock Market When investing in equities, it is very helpful to view volatility from a long-term perspective. As illustrated by the charts below:

  1.  the longer an investor holds stocks, the more likely the investor receives an overall positive return. (For example, the S&P 500 had a positive 1 year return 76% of the time and a positive 10 year return 97% of the time.)
  2. the longer an investor holds stocks, the narrower the range of returns is. (For example, for 1 year holding periods, the range of returns is approximately -39% to + 52% for the S&P 500. For 10 year holding periods, the range of returns is approximately -1.25% to +13.5%.)
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Do International Equities Provide Diversification Benefits?

Stock Market Over the last decade, U.S. equities have outperformed equities from other countries around the world, and globalization has increased correlations between U.S. and non-U.S. stocks. Many investors, including professional money managers and advisors, have been questioning whether this increased correlation has eliminated the benefits of diversification between U.S. and non-U.S. Equities. To answer that question, I believe that it is important to not just consider the correlation of returns, but also the dispersion of returns.

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Market Commentary

bigstock Stock Market Analysis 570645What a day in the equity markets. Here are some thoughts about what is happening.

Bullet points:
• Concerns over rapidly rising interest rates led to a selloff in equities. A 10 year Treasury yield of 3.25% was not expected to occur this rapidly.
• Investors are speculating on how long the fed will continue to raise rates, and by how much. No-one knows, not even the Fed. It’s best to let that play out and not speculate.
• Inflation seems to remain manageable.
• We expect volatility but for continued economic growth in the short term.
• The economy remains strong and company earnings this year have also been strong.
• Interest rates are still fairly low and are not at a level that should put much pressure on valuations.
• Economic reports are still coming in very good.

Nothing here points to anything other than a short term market correction at this point. Emotions and lack of discipline can, however, lead to substantial short term volatility. Corrections are a normal occurrence for markets and they are expected. We do expect more down days and increased volatility but we expect the U.S. economy to continue its expansion for now. Focusing on long-term investing and not worrying too much about short-term volatility produces better long-term results.

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International Equity - Is Now a Good Time To Have Exposure

Stock Market For many decades now, research has shown that investing in international equities can help reduce volatility in a portfolio while preserving or increasing long-term returns. While institutional investors have been investing in international equities longer than individual investors, assets in international equity mutual funds and ETFs have grown substantially as individual investors become increasingly more aware of their diversification benefits. Both Vanguard and Morningstar report that close to 30% of all equity mutual funds and ETFs are now international equity funds. In contrast, in the year 2000, about 16% of all equity mutual funds and 3% of all ETFs were international equity funds. But is now a good time to be invested in international equities?

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Using 529 Plans and Roth IRAs to Invest For College

ManyEducation Costs parents are now aware of the benefits of using a 529 plan when saving for college and are aware of the education expense exemption in an IRA. As college savings vehicles, 529 plans and Roth IRAs both have their advantages and disadvantages but provide some of the same main benefits. Both can provide tax free growth, and tax and penalty free distributions to pay higher education costs. However, there are important differences, and it is your own specific financial circumstances that help determine which is better for you.

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New Rule Requires Disclosure of Costs In Muni Bond Transactions

muni bonds bigstock 187420153One of the primary disadvantages to investing in individual municipal bonds is cost. “Markups” on individual muni bonds can be large. The lack of transparency of these costs made it very hard for an individual investor to quantify trading expenses, however, a new rule took effect on May 14, 2018 requiring more transparency for muni bond transactions.

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Bond Performance During Periods of Increasing Interest Rates

Short term bonds bigstock 192321925With interest rates now rising and the Fed expected to continue to raise it’s Fed Funds rate by 25 bps at each of the next few quarterly meetings, we expect treasury yields to increase as well. Generally, higher quality longer-duration bonds perform poorly when interest rates rise, however some types of bonds tend to perform relatively well.

This blog post nicely outlines a strategy that Broad Reach Wealth Management is using for the bond positions in investment portfolios. In summary, based on historical evidence, we expect short duration bonds to outperform longer duration bonds and bonds with higher yields due to higher credit risk to outperform lower yielding, higher quality bonds.

Please click here to read more about this investment strategy.

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Ultra-Short-Term-Bonds Reduce Volatility While Providing Income

Short term bonds bigstock 192321925When interest rates rise, bond prices fall. The extent of the fall in price is determined by many factors, one of which is time to maturity. The longer the time to maturity the more volatile the bond’s price will be. Ultra-short-term bonds have proven to be relatively stable in times of rising interest rates. Combining ultra-short-term bond strategies with floating rate notes, which provide the potential for increasing income as interest rates rise, can help reduce volatility of an investment portfolio overall. This has become a popular investment strategy that financial advisors use when interest rates are rising.

Please click here to read more about this investment topic.

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Shape of the Yield Curve May Be Best Economic Indicator

bigstock Stock Market Analysis 570645Of all the indicators analysts watch to guage where we are in the economic and market cycle, the bond market - and more specifically the shape of the yield curve - gets it right more often than any other.

The Federal Reserve Bank of San Francisco recently noted "Every recession in the last 60 years was preceded by a negative term spread, that is, an inverted yield curve." The current shape of the yield curve is telling us what we already know: that we are not at the end of the cycle but are getting closer. The cycle likely still has room to run. 

Please click here to read more about this investment topic.

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