October 22, 2015
Dear Clients and Friends,
The third quarter, which ended on September 30, was a reminder of just how volatile the markets can be. Setting up the pullback was the fact that the U.S. stock market had advanced for six years without a correction. There seemed to be two major factors that triggered the decline: China’s slowing economy and the threat of higher interest rates. China is seeing a gradual shift from an economy dominated by exports to one with more domestic consumption. The anticipation of a slowing demand for commodities from China, the world’s biggest buyer, caused the energy and materials sectors to be down 18% and 17% respectively.
Moving to the credit markets, it remains a question of when, not if, the Federal Reserve Bank (the “Fed’) will decide to increase interest rates. It will do so by raising the Federal Funds Rate, the rate banks charge to borrow money from each other. Changes will probably be made in 0.25% increments. There are a number of factors being considered before concluding that the time is right to begin raising rates, including, but not necessarily limited to: the strength of the U.S. job market, the strength of the global economy, and U.S. inflation. It seems as if all the stars must be properly aligned before the Fed dares to raise rates. This patience seems to be a reflection of just how fragile the current economic recovery is.
Investment Management Conundrum
Wouldn’t it be much easier if investment returns followed a linear path (i.e. annual returns and the average returns were exactly the same)? This would remove a few major risks: 1) there would be no risk of buying high and selling low; 2) there would be no risk of withdrawing monies when the portfolio was down, and 3) there would be no need for diversification, as an investor could simply buy the asset class with the highest expected return for that particular time frame. Obviously, real world investments do not work this way. Instinctively, however, many investors often behave in a way that presumes that they do. Take the NASDAQ 100 Index (an index composed up of the 100 largest domestic and international non-financial companies traded on the NASDAQ stock exchange) in the late 1990s, for example. Annual returns were as follows:
With these eye-popping returns, it was difficult to convince investors that prospectively avoiding NASDAQ-laden growth stocks was the right thing to do. Investors behaved in a way that assumed these returns would persist, that there was no risk of buying high and selling low, that there was no risk of loss when sales to meet cash needs were required, and they certainly saw no need to diversify. While the NASDAQ Index was up a staggering 441% over that 5-year time period from 1995 to 1999, the Emerging Markets Stock Index up a mere 10.45%. Despite our near certainty that technology stocks would crash, defending our more conservative approach was a struggle in 1998 and 1999. Not only were our clients missing out on this euphoric run, but they had to listen as many of their friends boasted about their DIY (do-it-yourself) investment genius. Needless to say, It was not a happy time to be in the business of giving financial advice.
The prospective 10-year (2000-2009) cumulative return for both the NASDAQ and Emerging Markets Index was -44.2%and +154.3%, respectively. Many DIY investors “got out of the business” of managing their own money by 2001, after piling on to tech during the run up. Many professionals fared no better having jumped on the tech bandwagon themselves out of a fear of underperforming a benchmark (a.k.a. the fear of failing unconventionally).
“History doesn’t repeat itself, but it does rhyme.” – Mark Twain
While we are not suggesting that the current market is in bubble territory compared to the late 1990s, the U.S. market does measure expensively. Again, there will be advisors that will continue to remain more exposed to the U.S. markets than any other. Failing conventionally helps to escape blame and may prevent client defection. Within the framework of comprehensive planning, our investment management objective is completely different. It is to make prudent investment decisions, which we believe will enhance your ability to achieve your goals. As in the late 1990s, we are prepared to take the heat and be wrong in the near-term. Long-term fundamentals have and will continue to dominate our investment stance.
Enclosed, is a piece written by Research Affiliates that provides a good perspective on long-term investing and highlights the best long-term opportunities existing today. Other fundamental managers are arriving at similar conclusions. We are paying attention.
Seventy percent of all Medicare enrollees will NOT see an increase in their Medicare Part B premiums in 2016. This includes all individuals currently receiving both Medicare and Social Security Benefits whose Modified Adjusted Gross Income falls below $85,000 for Single filers and $170,000 for Joint filers.
If your 2014 Modified Adjusted Gross Income (basically your Adjusted Gross Income found on line 37 on page 1 of your Form 1040 plus any Tax-Exempt Interest found on line 8b) is more than $85,000 for Single Filers or $170,000 for Joint filers, then you will experience an increase in Part B Medicare premiums in 2016.
While it is true that individuals who have suspended or delayed the receipt of Social Security retirement benefits will have an increase in Medicare Part B premiums in 2016, this increase is less than the increase in benefits they will receive by continuing their deferral.
We have attached an article that more fully explains this situation. If you still have questions, give us a call.
We are trying out a new service for sending confidential information through emails. The service is called RMail from RPost. It encrypts sensitive emails and attachments and unencrypts them for the recipient. Encryption is a process that codes messages to protect them from unauthorized access as they travel from the sender to the receiver.
Year-End Tax Planning
Our advisors will soon be engaged in year-end tax planning. Proper planning requires the review of your filed 2014 returns, and projecting your tax liabilities for 2015 and 2016. As part of this review, we will be processing Required Minimum Distributions (RMDs) from IRAs of clients who meet that requirement. Our review will include recommendations of federal and state income tax withholding from these distributions.
If you are employed for any period in 2015, or receive a pension, please provide us with your most recent paystub or pension statement. We cannot overemphasize the importance of responding to our requests for information as quickly as possible as the year-end approaches. Providing you with the best possible service and recommendations requires a high level of timely cooperation.
Fidelity Charitable Gift Fund
Using a charitable gift fund allows you to make a higher than normal deductible gift in one tax year and spread out the actual disbursements to charities in future years. This allows you to receive a higher tax break than making the same total contribution to charities spread out over years subject to a lower level of taxation.
This benefit is often combined with a contribution of one or more low tax basis securities to the gift fund, allowing for an immediate tax-free sale to diversify or preserve principal.
Clients wishing to set up a Fidelity Charitable Gift Fund account should contact us for assistance or to answer any questions you may have on how these accounts work. The decision to actually fund the account can be made in the tax year of choice.
Donations in Lieu of Holiday Gifts
It is a tradition at Schiavi + Dattani to deliver gift baskets to our clients during the holiday season. Clients do have the option of donating the value of their gift to charity.
Because of administrative constraints, we limit the charities eligible to participate in this program. Since we have clients in several states, we have selected charities with a national scope. Clients who would like to direct their gift should contact Kate Madden at our office before Friday, November 13th. She can be reached at 302-994-4444 or via email at firstname.lastname@example.org.
This following is a list of this year’s charities, emphasizing support of individuals with disabilities:
Mental Health America (MHA)– founded in 1909 by Clifford Beers, Adolf Meyer and William James. Mr. Beers was a recent graduate of Yale and working on Wall Street when he suffered his first bout with bipolar disorder. He attempted suicide by jumping out a third story window but survived. He ended up in institutions and witnessed cruel and inhumane treatment of people with mental illness. During one episode he was placed in a straightjacket for 21 consecutive days. Upon his release, he published an autobiography “A Mind That Found Itself” and helped to create the National Committee for Mental Hygiene, a precursor to the MHA, the nation’s leading community-based non-profit dedicated to helping all Americans live mentally healthier lives. Their work includes prevention services, early identification and intervention, and integrating care and treatment, with recovery as the goal. They believe that mental health conditions should be treated long before they reach the most critical points in the disease process.
Easter Seals– founded in 1919 by Ohio businessman Edger Allen who lost his son in a streetcar accident. The lack of adequate medical services prompted him to sell his business and begin a fund-raising campaign to build a hospital in his hometown. When he became aware that children with disabilities were often hidden from view, he founded the National Society for Crippled Children, which eventually became Easter Seals. Easter Seals has been helping individuals with disabilities and special needs, and their families, live better lives ever since. From child development centers to physical rehabilitation and job training for people with disabilities, Easter Seals offers a variety of services to help people with disabilities address life's challenges and achieve personal goals.
Goodwill – founded in 1902 by The Rev. Edgar J. Helms, a Methodist minister. Helms collected used household goods and clothing in wealthier areas of Boston and hired those who were poor to mend and repair the used goods. The goods were then resold or were given to the people who repaired them. Goodwill works to enhance the dignity and quality of life of individuals and families by strengthening communities, eliminating barriers to opportunity, and helping people in need reach their full potential through learning and the power of work. Goodwill believes in “a hand up, not a hand out”.
We encourage everyone to reflect on the needs of others as we approach the Thanksgiving season. We continue to work daily to earn your trust and confidence.
Vincent A. Schiavi, CFP®, CPA/ PFS Ravi P. Dattani, CFP®, CPA