10/29/2009
Which 'E' Word Will It Be?
‘E’xtend or ‘E’xpire? November 30th is fast approaching. That’s the day the $8,000 federal tax credit for first-time home buyers is set to expire. Will Congress and the Obama administration let it expire, or will they extend it as is, or with a higher amount and other benefits? Surely neither group can argue that it hasn’t increased the volume of home sales since its inception. But, much debate is going on in Washington concerning this important stimulus and the lobbies for the home building and realtor industries are pushing for extension and enhancement of this bill. Let’s look at some of the issues and try to determine in advance what might happen.
Senators Johnny Isakson (R) and Chris Dodd (D) are co-sponsoring a new bill that would open the program up to all home buyers and extend the date to June 30, 2010. The bill would also increase the income limits from $150,000 to $300,000 per couple. Isakson, a former real estate broker in the Atlanta area, contends that losing the credit will begin the slow demise of the real estate and home building industries. Dodd, senate banking chairman, wants to attach the bill to other pending legislation being written to enhance benefits for those who have lost their jobs. Both senators agree that opening the program to all home buyers will introduce new activity in the market from those who would take advantage of the credit to move up to a bigger house or to a new neighborhood. They say extending the credit would also help carry the industry through the slowest months in the real estate sales cycle.
Other politicians question the cost of the current program and the source of funds that would be tapped if it is extended. Senator Richard Shelby (R) recently quizzed Isakson in a senate committee hearing on the cost of extending the program and asked if the tax benefits of this program will ultimately be at the expense of other sectors of the economy. Isakson and Dodd believe the additional costs associated with the new bill can be covered with cuts in other budget areas. This is what Shelby was referring to as affecting other economic sectors.
A negative issue associated with the current legislation is claims of fraud within the system that administers the program. Recent reports indicate that the IRS is investigating over 100,000 claims of fraud from potential first-time home buyers seeking the credit. The IRS investigations will likely generate investigations within the senate and the house ways and means subcommittee. These investigative hearings will take time and most likely take away momentum from those attempting to pass new legislation before the November 30th deadline. The Obama administration has still not taken an official position on the matter.
So, what will be the outcome? Anybody’s guess will do for now. There’s still time for lobbyists to make their claims in favor of extension and enhancement. Out of the billions of dollars spent by the U.S. government in various stimulus packages, the home buyer’s tax credit is one that can be seen and experienced on Main Street. That fact alone should carry some weight in getting it approved. The misuse of stimulus monies in other areas and the lack of oversight for those programs seem to be such a waste of tax payers’ money. And since the real estate and home building industries generally lead the way as indicators of our economy exiting a recession, it’s probably also an indication that the benefits outweigh the negative factors related to the new bill. If you asked me to guess the outcome today, I’d say it will pass in some form. Six months from now, the debate will be making the rounds in Congressional committees again anyway.
There’s still time to get your house under contract and close by November 30th. But, time is running out! Contact your friendly home town banker for a referral to one of our experienced mortgage professionals who can help you own the home of your dreams before November 30th.
10/22/2009
Will Social Security Be There For You?
Watching the news, you've probably come across many stories on the health of Social Security. Social Security has been described as needing only minor adjustments to being in crisis requiring immediate, drastic reform. The underlying assumptions used can skew one's perception of the solvency of Social Security, and even experts disagree on the best remedy. So let's take a look at what we know.
According to the Social Security Administration (SSA), approximately 54 million Americans currently collect some sort of Social Security retirement, disability or death benefit. Social Security is a pay-as-you-go system, with today's current workers paying the benefits for today's retirees. Today's workers have the first $102,000 of their annual wages subject to 12.4% Social Security payroll tax, with half being paid by the employee and half by the employer. Self-employed individuals pay all 12.4%. This money is put into the Social Security trust fund and is used to pay out current benefits.
The amount of your retirement benefit is based on your average earnings over your working career. Your age at the time you start receiving benefits also affects your benefit amount. The full retirement age is in the process of rising from 65 to 67 in two-month increments. For instance: If you were born in 1940, your retirement age is 65 & 6 months; if you were born from 1943-1954, your retirement age is 66; if you were born in 1960 or later, your retirement age is 67. You can begin receiving Social Security benefits as early as age 62, but if you retire early, your Social Security benefit will be less than if you had waited until your full retirement age. If your full retirement age is 67, you'll receive about 30 percent less if you retire at age 62. This reduction is permanent with no future increases available.
Demographic factors are complicating Social Security's problems. Life expectancy is increasing and the birth rate is decreasing. This means that over time, fewer workers will have to support more retirees. According to the SSA, in 1950 there were 16 workers per beneficiary. Today there are 3 workers per beneficiary, and within 40 years there will be only 2 workers per beneficiary. The SSA predicts that in 2017, Social Security will begin paying out more money than it takes in. However, the SSA estimates that Social Security should be able to pay promised benefits until 2041.
The SSA continues to urge Congress to address its solvency issues sooner rather than later, to allow for a gradual phasing in of any necessary changes. While no one can say for sure what will happen, here are some solutions that might fix the problems:
- Allow individuals to invest some of their current Social Security taxes in personal retirement accounts
- Raise the current 12.4% payroll tax
- Raise the current ceiling on wages subject to the payroll tax
- Raise the retirement age beyond age 67
- Reduce future benefits
For now, the best thing you can do is stay informed. You should periodically check your Social Security earnings record and review your Social Security Statement, which the SSA mails annually about three months before your birthday to every worker over age 25. This statement will estimate the amount of Social Security benefits you will be eligible to receive in the future, based on your actual earnings and projections of future earnings. If you have questions, call the SSA at (800) 772-1213 or go to
www.ssa.gov for more information.
Contact your friendly home town banker to help you estimate and plan for the income you will receive during retirement.
10/15/2009
The Economy: What Can We Expect?
The current recession really started almost two years ago when real estate values began to plummet. Initially, we called this economic downturn the ‘Subprime Crisis’. As things worsened, the term became the ‘Credit Crunch’. As unfavorable conditions began to surface worldwide, the term morphed into the ‘Global Financial Meltdown’. The turn of events we’ve experienced since then has brought a new perspective on investing and the financial markets. With history as our teacher, we can look back at prior recessionary periods to try and predict what’s in store for us in the months and years ahead. Let’s uncover some history from prior recessions and look at the major factors that will shed some light on what we might expect in a post-recession economy.
According to the U.S. National Bureau of Economic Research, the Great Depression that began in 1929 lasted for 43 months. During that period, financial markets rallied several times before hitting bottom. The two most memorable recessions since then were the periods from 1973-1975 and from 1981-1982. These recessions were similar in that the decline in the economy from peak to trough both took an average of ten months. But the effect of these two recessions was mainly felt within our borders. The current economic crisis is much more far reaching in the devastation it has caused not only in the financial markets, but in the revaluation of world currencies, the production of domestic goods for domestic consumption and exporting, the production of foreign goods for exporting to the U.S. and other nations, the severe impact of unemployment, and the uncertainty it will bring with a new philosophy of consumer spending. Our current recession is not an average recession and, even if history does repeat itself, the experiences we encounter coming out of it may not be comparable to any previous recession we’ve had.
What will determine how we emerge from the current recession will depend on where our priorities lie in applying various methods to turn our economy around. Are we more concerned about easing credit policies and new government stimulus packages? Or are we more concerned with increasing debt and falling asset values? So far, it’s hard to tell. The U.S. government has spent billions of dollars in stimulus packages to prop-up financial institutions and insurance companies while, at the same time, it has agreed to spend billions of dollars purchasing mortgage-backed bonds at higher than market values to keep the real estate industry moving. I’m not sure I can identify the priorities we have for recovery, but I’m sure of this: we seem to be trying a little bit of everything on a trial and error basis to see what works. There’s nothing wrong with this, but down the road we can expect to have trillions of dollars of national debt, and governmental ownership, participation, oversight, and regulation of what once was corporate America.
Since World War II, the U.S. dollar has been the world’s reserve currency. This means that if other national currencies falter, the U.S. dollar will maintain value. In October 2008, the U.S. Treasury issued $30 billion in 4-week bonds and sold out before the auction ended in one day. Only 40% of this auction was purchased domestically, meaning that 60% of these U.S. bonds were purchased by international investors. The real kicker here is that these bonds were sold with zero percent coupons. In other words, 60% of international investors bought zero percent U.S. bonds expecting to keep their money---and their investments---safe. Forget about making any interest, just keep the investments safe.
What does this mean, really? It tells us that the U.S. has a reputation of long-term financial stability. When a severe recession like we’re experiencing hits the U.S., it makes things difficult and we Americans have to adjust, find resolve, and keep moving forward. When the same recession hits countries that are not as stable as the U.S. it can mean financial devastation and could even result in collapse of foreign governments. Bottom line, this reputation of long-term financial stability the U.S. enjoys basically allows us to operate at larger deficits and print money cheaper than any other country in the world.
So how do we make sense of all of this? What’s going to happen----and when? While the U.S. enjoys its reputation of stability, the global consequences of this recession may be more severe. Post-recession, the world will be poorer and quite possibly more dangerous. Emerging countries that survive may become militant toward their neighboring countries possibly spawning new wars and the rise and fall of governments. The U.S. will use its military might to sustain those countries with democratic principles. Domestic production might increase as a result and money begins to flow again---maybe---domestically at least. Economic conditions improve and the focus gets moved from the severity of the recession to international issues and foreign policy.
We wake up one day and determine this recession is over. Why? Domestic production is up in response to increasing demand for products. Unemployment is down with more jobs needed to meet production demands. Faith in our financial system is becoming restored. Investors are beginning again to take risks in the markets. The U.S. dollar is holding its value against international currencies. Uncle Sam is looking to increase tax rates to payoff trillions of dollars of debt. Unforeseen problems in healthcare reform are emerging. Government intervention in U.S. private enterprise is at its highest level ever. And an election year is coming up.
All of a sudden, this doesn’t seem so unusual. Or does it?
10/8/2009
Forecasting: Will Your Money Last Through Retirement?
Financial planners use many tools to help you make informed decisions about investments, insurance, and retirement. Financial forecasting involves predicting what will happen with your funds in the future, given that certain circumstances occur. Let’s look at some forecasting methods so you can determine which ones might be most beneficial to your situation.
Straight-line forecasting methods assume a constant value for the projection period. It takes a value from today and projects it to its new value after applying years of compounding interest at a specified rate. This method gives you the best case scenario for the growth of your money, but rarely do returns end up this consistent year after year.
Scenarios forecasting provides a range of possible outcomes. It will use the straight-line method with optimal rate and term to reveal your best case scenario. It will assume some rate fluctuation within the defined term to reveal your most likely scenario. Finally, it will add life expectancy tables to the rate fluctuations to reveal your worst case scenario. Although scenarios forecasting gives you a better idea of the range of possible outcomes, it’s not very precise in estimating the likelihood of any specific result.
The Monte Carlo forecasting method produces analysis based on computer-generated simulations. It works like computer-generated weather forecasts that look at weather behavior near you and moving toward you and predicts what your weather will be in the future, based on those variables. The Monte Carlo method relies on computer models to replicate the behavior of economic variables, financial markets and different investment asset classes.
In contrast to other forecasting methods, a Monte Carlo simulation explicitly accounts for volatility, especially the volatility of investment returns. It enables you to see the spectrum of thousands of possible outcomes, taking into account not only the many variables involved, but also the range of potential values for each of those variables.
By attempting to replicate the uncertainty of the real world, a Monte Carlo simulation can actually provide a detailed illustration of how likely it is that a given investment strategy will meet your needs. When it comes to retirement planning, a Monte Carlo simulation can help you answer specific questions, such as:
- What is the probability that you will run out of funds before age 85?
- If that probability is unacceptably high, how much additional money would you need to invest each year to decrease the probability to 10%?
A Monte Carlo simulation is an important tool because it illustrates how changes to your financial plan can affect the likelihood of achieving your goals. Combined with periodic progress reviews and financial plan updates, Monte Carlo forecasts can help you make better-informed investment decisions to keep your financial goals on track. A Monte Carlo simulation illustrates how your future finances might look based on the assumptions you provide. But remember, there is no guarantee of this outcome.
If you’re planning for retirement, it’s important to have frequent financial check-ups, just like you go to the doctor for check-ups. Things change in your financial life that can drastically impact how your investments respond to these changes. Or, your financial life can be solid as a rock, but the financial world around you changes. This can also have a huge impact on how your investments respond to these changes.
Contact your friendly home town banker to schedule your financial check-up. We have the tools and financial advisors to help you plan your financial future. And, we are with you all the way to make adjustments when needed to give you financial peace in knowing you’re doing everything you can to make your financial dreams come true.
10/01/2009
Stock Growth vs. Stock Value: What's the Difference?
With the wide variety of stocks in the market, figuring out which ones you want to invest in can be a daunting task. Even if you don't want to select stocks yourself, it can be helpful to understand the concepts that professionals use in evaluating and buying stocks.
There are generally two schools of thought about how to choose stocks. Value investors focus on buying stocks that appear to be bargains relative to the company's intrinsic worth. Growth investors prefer companies that are growing quickly, and with finding companies and industries that have the greatest potential for appreciation in share price. Either approach can help you better understand just what you're buying when you choose a stock for your portfolio.
Value investors look for stocks with share prices that don't fully reflect the value of the companies, and that are effectively trading at a discount to their true worth. A value investor believes that eventually the share price will rise to reflect what he or she perceives as the stock's fair value. A stock's price-earnings (P/E) ratio--its share price divided by its earnings per share--is of particular interest to a value investor, as are the price-to-sales ratio, the dividend yield, the price-to-book ratio, and the rate of sales growth.
Contrarian investors are perhaps the ultimate example of a value investor. Contrarians believe that the best way to invest is to buy when no one else wants to, or to focus on stocks or industries that are temporarily out of favor with the market.
The challenge for any value investor is figuring out how to tell the difference between a company that is undervalued and one whose stock price is low for good reason. Value investors who do their own stock research comb the company's financial reports, looking for clues about the company’s management, operations, products, and services.
Growth investors look for companies that are expanding rapidly. Stocks of newer companies in emerging industries are often especially attractive to growth investors because of their greater potential for expansion and price appreciation despite the higher risks involved. A growth investor would give more weight to increases in a stock's sales per share or earnings per share (EPS) than to its P/E ratio. A growth investor's challenge is to avoid overpaying for a stock in anticipation of earnings that eventually prove disappointing.
Momentum investors look not just for growth, but for accelerating growth that is attracting a lot of investors and causing the share price to rise. Momentum investors believe you should buy a stock only when earnings growth is accelerating and the price is moving up. If a stock falls, momentum theory suggests that you sell it quickly to prevent further losses, then buy more of what's working.
Day traders are the most extreme momentum investors who may hold a stock for only a few minutes or hours then sell before the market closes that day. Momentum investing obviously requires frequent monitoring of the fluctuations in each of your stock holdings, and is best suited to investors who are prepared to invest the time necessary to be aware of those price changes.
Growth stocks and value stocks often alternate in popularity. A company can be a growth stock at one point and later become a value stock. Some investors buy both types, so their portfolio has the potential to benefit regardless of which is doing better at any given time. Investing based on data can assist you as you evaluate a possible purchase and also help you know when to sell because your reasons for buying are no longer valid.
Consult your friendly home town banker for questions you have in structuring your investment portfolio.
Back to President's Articles
10/29/2009
Which 'E' Word Will It Be?
‘E’xtend or ‘E’xpire? November 30th is fast approaching. That’s the day the $8,000 federal tax credit for first-time home buyers is set to expire. Will Congress and the Obama administration let it expire, or will they extend it as is, or with a higher amount and other benefits? Surely neither group can argue that it hasn’t increased the volume of home sales since its inception. But, much debate is going on in Washington concerning this important stimulus and the lobbies for the home building and realtor industries are pushing for extension and enhancement of this bill. Let’s look at some of the issues and try to determine in advance what might happen.
Senators Johnny Isakson (R) and Chris Dodd (D) are co-sponsoring a new bill that would open the program up to all home buyers and extend the date to June 30, 2010. The bill would also increase the income limits from $150,000 to $300,000 per couple. Isakson, a former real estate broker in the Atlanta area, contends that losing the credit will begin the slow demise of the real estate and home building industries. Dodd, senate banking chairman, wants to attach the bill to other pending legislation being written to enhance benefits for those who have lost their jobs. Both senators agree that opening the program to all home buyers will introduce new activity in the market from those who would take advantage of the credit to move up to a bigger house or to a new neighborhood. They say extending the credit would also help carry the industry through the slowest months in the real estate sales cycle.
Other politicians question the cost of the current program and the source of funds that would be tapped if it is extended. Senator Richard Shelby (R) recently quizzed Isakson in a senate committee hearing on the cost of extending the program and asked if the tax benefits of this program will ultimately be at the expense of other sectors of the economy. Isakson and Dodd believe the additional costs associated with the new bill can be covered with cuts in other budget areas. This is what Shelby was referring to as affecting other economic sectors.
A negative issue associated with the current legislation is claims of fraud within the system that administers the program. Recent reports indicate that the IRS is investigating over 100,000 claims of fraud from potential first-time home buyers seeking the credit. The IRS investigations will likely generate investigations within the senate and the house ways and means subcommittee. These investigative hearings will take time and most likely take away momentum from those attempting to pass new legislation before the November 30th deadline. The Obama administration has still not taken an official position on the matter.
So, what will be the outcome? Anybody’s guess will do for now. There’s still time for lobbyists to make their claims in favor of extension and enhancement. Out of the billions of dollars spent by the U.S. government in various stimulus packages, the home buyer’s tax credit is one that can be seen and experienced on Main Street. That fact alone should carry some weight in getting it approved. The misuse of stimulus monies in other areas and the lack of oversight for those programs seem to be such a waste of tax payers’ money. And since the real estate and home building industries generally lead the way as indicators of our economy exiting a recession, it’s probably also an indication that the benefits outweigh the negative factors related to the new bill. If you asked me to guess the outcome today, I’d say it will pass in some form. Six months from now, the debate will be making the rounds in Congressional committees again anyway.
There’s still time to get your house under contract and close by November 30th. But, time is running out! Contact your friendly home town banker for a referral to one of our experienced mortgage professionals who can help you own the home of your dreams before November 30th.
10/22/2009
Will Social Security Be There For You?
Watching the news, you've probably come across many stories on the health of Social Security. Social Security has been described as needing only minor adjustments to being in crisis requiring immediate, drastic reform. The underlying assumptions used can skew one's perception of the solvency of Social Security, and even experts disagree on the best remedy. So let's take a look at what we know.
According to the Social Security Administration (SSA), approximately 54 million Americans currently collect some sort of Social Security retirement, disability or death benefit. Social Security is a pay-as-you-go system, with today's current workers paying the benefits for today's retirees. Today's workers have the first $102,000 of their annual wages subject to 12.4% Social Security payroll tax, with half being paid by the employee and half by the employer. Self-employed individuals pay all 12.4%. This money is put into the Social Security trust fund and is used to pay out current benefits.
The amount of your retirement benefit is based on your average earnings over your working career. Your age at the time you start receiving benefits also affects your benefit amount. The full retirement age is in the process of rising from 65 to 67 in two-month increments. For instance: If you were born in 1940, your retirement age is 65 & 6 months; if you were born from 1943-1954, your retirement age is 66; if you were born in 1960 or later, your retirement age is 67. You can begin receiving Social Security benefits as early as age 62, but if you retire early, your Social Security benefit will be less than if you had waited until your full retirement age. If your full retirement age is 67, you'll receive about 30 percent less if you retire at age 62. This reduction is permanent with no future increases available.
Demographic factors are complicating Social Security's problems. Life expectancy is increasing and the birth rate is decreasing. This means that over time, fewer workers will have to support more retirees. According to the SSA, in 1950 there were 16 workers per beneficiary. Today there are 3 workers per beneficiary, and within 40 years there will be only 2 workers per beneficiary. The SSA predicts that in 2017, Social Security will begin paying out more money than it takes in. However, the SSA estimates that Social Security should be able to pay promised benefits until 2041.
The SSA continues to urge Congress to address its solvency issues sooner rather than later, to allow for a gradual phasing in of any necessary changes. While no one can say for sure what will happen, here are some solutions that might fix the problems:
- Allow individuals to invest some of their current Social Security taxes in personal retirement accounts
- Raise the current 12.4% payroll tax
- Raise the current ceiling on wages subject to the payroll tax
- Raise the retirement age beyond age 67
- Reduce future benefits
For now, the best thing you can do is stay informed. You should periodically check your Social Security earnings record and review your Social Security Statement, which the SSA mails annually about three months before your birthday to every worker over age 25. This statement will estimate the amount of Social Security benefits you will be eligible to receive in the future, based on your actual earnings and projections of future earnings. If you have questions, call the SSA at (800) 772-1213 or go to
www.ssa.gov for more information.
Contact your friendly home town banker to help you estimate and plan for the income you will receive during retirement.
10/15/2009
The Economy: What Can We Expect?
The current recession really started almost two years ago when real estate values began to plummet. Initially, we called this economic downturn the ‘Subprime Crisis’. As things worsened, the term became the ‘Credit Crunch’. As unfavorable conditions began to surface worldwide, the term morphed into the ‘Global Financial Meltdown’. The turn of events we’ve experienced since then has brought a new perspective on investing and the financial markets. With history as our teacher, we can look back at prior recessionary periods to try and predict what’s in store for us in the months and years ahead. Let’s uncover some history from prior recessions and look at the major factors that will shed some light on what we might expect in a post-recession economy.
According to the U.S. National Bureau of Economic Research, the Great Depression that began in 1929 lasted for 43 months. During that period, financial markets rallied several times before hitting bottom. The two most memorable recessions since then were the periods from 1973-1975 and from 1981-1982. These recessions were similar in that the decline in the economy from peak to trough both took an average of ten months. But the effect of these two recessions was mainly felt within our borders. The current economic crisis is much more far reaching in the devastation it has caused not only in the financial markets, but in the revaluation of world currencies, the production of domestic goods for domestic consumption and exporting, the production of foreign goods for exporting to the U.S. and other nations, the severe impact of unemployment, and the uncertainty it will bring with a new philosophy of consumer spending. Our current recession is not an average recession and, even if history does repeat itself, the experiences we encounter coming out of it may not be comparable to any previous recession we’ve had.
What will determine how we emerge from the current recession will depend on where our priorities lie in applying various methods to turn our economy around. Are we more concerned about easing credit policies and new government stimulus packages? Or are we more concerned with increasing debt and falling asset values? So far, it’s hard to tell. The U.S. government has spent billions of dollars in stimulus packages to prop-up financial institutions and insurance companies while, at the same time, it has agreed to spend billions of dollars purchasing mortgage-backed bonds at higher than market values to keep the real estate industry moving. I’m not sure I can identify the priorities we have for recovery, but I’m sure of this: we seem to be trying a little bit of everything on a trial and error basis to see what works. There’s nothing wrong with this, but down the road we can expect to have trillions of dollars of national debt, and governmental ownership, participation, oversight, and regulation of what once was corporate America.
Since World War II, the U.S. dollar has been the world’s reserve currency. This means that if other national currencies falter, the U.S. dollar will maintain value. In October 2008, the U.S. Treasury issued $30 billion in 4-week bonds and sold out before the auction ended in one day. Only 40% of this auction was purchased domestically, meaning that 60% of these U.S. bonds were purchased by international investors. The real kicker here is that these bonds were sold with zero percent coupons. In other words, 60% of international investors bought zero percent U.S. bonds expecting to keep their money---and their investments---safe. Forget about making any interest, just keep the investments safe.
What does this mean, really? It tells us that the U.S. has a reputation of long-term financial stability. When a severe recession like we’re experiencing hits the U.S., it makes things difficult and we Americans have to adjust, find resolve, and keep moving forward. When the same recession hits countries that are not as stable as the U.S. it can mean financial devastation and could even result in collapse of foreign governments. Bottom line, this reputation of long-term financial stability the U.S. enjoys basically allows us to operate at larger deficits and print money cheaper than any other country in the world.
So how do we make sense of all of this? What’s going to happen----and when? While the U.S. enjoys its reputation of stability, the global consequences of this recession may be more severe. Post-recession, the world will be poorer and quite possibly more dangerous. Emerging countries that survive may become militant toward their neighboring countries possibly spawning new wars and the rise and fall of governments. The U.S. will use its military might to sustain those countries with democratic principles. Domestic production might increase as a result and money begins to flow again---maybe---domestically at least. Economic conditions improve and the focus gets moved from the severity of the recession to international issues and foreign policy.
We wake up one day and determine this recession is over. Why? Domestic production is up in response to increasing demand for products. Unemployment is down with more jobs needed to meet production demands. Faith in our financial system is becoming restored. Investors are beginning again to take risks in the markets. The U.S. dollar is holding its value against international currencies. Uncle Sam is looking to increase tax rates to payoff trillions of dollars of debt. Unforeseen problems in healthcare reform are emerging. Government intervention in U.S. private enterprise is at its highest level ever. And an election year is coming up.
All of a sudden, this doesn’t seem so unusual. Or does it?
10/8/2009
Forecasting: Will Your Money Last Through Retirement?
Financial planners use many tools to help you make informed decisions about investments, insurance, and retirement. Financial forecasting involves predicting what will happen with your funds in the future, given that certain circumstances occur. Let’s look at some forecasting methods so you can determine which ones might be most beneficial to your situation.
Straight-line forecasting methods assume a constant value for the projection period. It takes a value from today and projects it to its new value after applying years of compounding interest at a specified rate. This method gives you the best case scenario for the growth of your money, but rarely do returns end up this consistent year after year.
Scenarios forecasting provides a range of possible outcomes. It will use the straight-line method with optimal rate and term to reveal your best case scenario. It will assume some rate fluctuation within the defined term to reveal your most likely scenario. Finally, it will add life expectancy tables to the rate fluctuations to reveal your worst case scenario. Although scenarios forecasting gives you a better idea of the range of possible outcomes, it’s not very precise in estimating the likelihood of any specific result.
The Monte Carlo forecasting method produces analysis based on computer-generated simulations. It works like computer-generated weather forecasts that look at weather behavior near you and moving toward you and predicts what your weather will be in the future, based on those variables. The Monte Carlo method relies on computer models to replicate the behavior of economic variables, financial markets and different investment asset classes.
In contrast to other forecasting methods, a Monte Carlo simulation explicitly accounts for volatility, especially the volatility of investment returns. It enables you to see the spectrum of thousands of possible outcomes, taking into account not only the many variables involved, but also the range of potential values for each of those variables.
By attempting to replicate the uncertainty of the real world, a Monte Carlo simulation can actually provide a detailed illustration of how likely it is that a given investment strategy will meet your needs. When it comes to retirement planning, a Monte Carlo simulation can help you answer specific questions, such as:
- What is the probability that you will run out of funds before age 85?
- If that probability is unacceptably high, how much additional money would you need to invest each year to decrease the probability to 10%?
A Monte Carlo simulation is an important tool because it illustrates how changes to your financial plan can affect the likelihood of achieving your goals. Combined with periodic progress reviews and financial plan updates, Monte Carlo forecasts can help you make better-informed investment decisions to keep your financial goals on track. A Monte Carlo simulation illustrates how your future finances might look based on the assumptions you provide. But remember, there is no guarantee of this outcome.
If you’re planning for retirement, it’s important to have frequent financial check-ups, just like you go to the doctor for check-ups. Things change in your financial life that can drastically impact how your investments respond to these changes. Or, your financial life can be solid as a rock, but the financial world around you changes. This can also have a huge impact on how your investments respond to these changes.
Contact your friendly home town banker to schedule your financial check-up. We have the tools and financial advisors to help you plan your financial future. And, we are with you all the way to make adjustments when needed to give you financial peace in knowing you’re doing everything you can to make your financial dreams come true.
10/01/2009
Stock Growth vs. Stock Value: What's the Difference?
With the wide variety of stocks in the market, figuring out which ones you want to invest in can be a daunting task. Even if you don't want to select stocks yourself, it can be helpful to understand the concepts that professionals use in evaluating and buying stocks.
There are generally two schools of thought about how to choose stocks. Value investors focus on buying stocks that appear to be bargains relative to the company's intrinsic worth. Growth investors prefer companies that are growing quickly, and with finding companies and industries that have the greatest potential for appreciation in share price. Either approach can help you better understand just what you're buying when you choose a stock for your portfolio.
Value investors look for stocks with share prices that don't fully reflect the value of the companies, and that are effectively trading at a discount to their true worth. A value investor believes that eventually the share price will rise to reflect what he or she perceives as the stock's fair value. A stock's price-earnings (P/E) ratio--its share price divided by its earnings per share--is of particular interest to a value investor, as are the price-to-sales ratio, the dividend yield, the price-to-book ratio, and the rate of sales growth.
Contrarian investors are perhaps the ultimate example of a value investor. Contrarians believe that the best way to invest is to buy when no one else wants to, or to focus on stocks or industries that are temporarily out of favor with the market.
The challenge for any value investor is figuring out how to tell the difference between a company that is undervalued and one whose stock price is low for good reason. Value investors who do their own stock research comb the company's financial reports, looking for clues about the company’s management, operations, products, and services.
Growth investors look for companies that are expanding rapidly. Stocks of newer companies in emerging industries are often especially attractive to growth investors because of their greater potential for expansion and price appreciation despite the higher risks involved. A growth investor would give more weight to increases in a stock's sales per share or earnings per share (EPS) than to its P/E ratio. A growth investor's challenge is to avoid overpaying for a stock in anticipation of earnings that eventually prove disappointing.
Momentum investors look not just for growth, but for accelerating growth that is attracting a lot of investors and causing the share price to rise. Momentum investors believe you should buy a stock only when earnings growth is accelerating and the price is moving up. If a stock falls, momentum theory suggests that you sell it quickly to prevent further losses, then buy more of what's working.
Day traders are the most extreme momentum investors who may hold a stock for only a few minutes or hours then sell before the market closes that day. Momentum investing obviously requires frequent monitoring of the fluctuations in each of your stock holdings, and is best suited to investors who are prepared to invest the time necessary to be aware of those price changes.
Growth stocks and value stocks often alternate in popularity. A company can be a growth stock at one point and later become a value stock. Some investors buy both types, so their portfolio has the potential to benefit regardless of which is doing better at any given time. Investing based on data can assist you as you evaluate a possible purchase and also help you know when to sell because your reasons for buying are no longer valid.
Consult your friendly home town banker for questions you have in structuring your investment portfolio.
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