Market Decline Perspective From Gary P and Bill O'Grady

Good morning.  The U.S. stock market has declined significantly this week, reacting to several factors.  I believe the markets must "correct" occasionally (dropping 10% or so from recent highs), and it's been a long time since that has happened (~mid-2011).  This may be the time for it, and we could be a good deal of the way through it already.

Still, I recommend long-term investors remain invested and diversified.

Trying to time the market is risky and the results are usually not successful.  There is Nobel Prize-winning research supporting the "asset allocation" methodology I employ for most of my clients' long-term money (retirement, college savings).

As is often the case, Bill O'Grady of Confluence Investment Management offers a brief and helpful view of current conditions:  http://confluenceinvestment.com/assets/docs/2015/daily_Aug_21_2015.pdf

If you have any questions, please contact me.  Thank you, and happy Friday!

--Gary

P.S.--Are you prepared for financial emergencies?  Let's make sure we're evaluating your cash reserves, your Disability Insurance, your Life Insurance, and your estate plan.  I don't sell insurance and I don't draft legal documents, but I will coach you on how to make sure you buy the right product and have the right documents in place.  No charge--it's part of the value I want to add to the investment advice already being provided.

Garo Linck Partoyan

Potomac Wealth Strategies, LLC

(703) 746-8195 direct

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January Financial Checklist:

1)  401(k)/403(b)/TSP contributions limits are $17,500 for most, higher for some.  Make sure your automatic contributions are updated if necessary.

2)  IRA contribution limits--$5500 for most, $6500 for some; talk to your tax person to be sure.  Don't forget to complete your 2013 contributions first--folks with automatic deposits need to watch this carefully.

3)  Get your tax forms together a month before you meet with your tax preparer.  Folks who wait will probably leave money on the table by not maximizing refund or minimizing payment owed.

4)  If you die or become disabled, what income will be there going forward?  Life insurance and Disability insurance are not pains in the neck or expensive "upsell" products; they are your first line of defense.  Get on this, or double-check what you have in place.  (Note:  Although I do not sell insurance, I still want clients to have--or buy--what they need to protect themselves.)

The Financial Crisis Was Worse Than We Thought

Per the information released this week by the Federal Reserve, there was a lot more scrambling, perhaps panicking, in the financial markets that most even know. And we knew it was bad. Cases in point:

1) The Federal Reserve has released details on the $3.3T (TRILLION) it extended via more than 21,000 transactions during the financial crisis. The extent of the Fed's aid included help to foreign firms

2) The Fed's Primary Dealer Credit Facility was tapped 84 times by Goldman Sachs, 212 times by Morgan Stanley, and almost daily by Citigroup through April 2009. And most of us know about Bear Stearns and Lehman Brothers.

3) The Fed lent cash to more than a thousand companies, including McDonald's, GE, and Harley-Davidson. Those companies are extremely sound financially, or maybe they weren't. All say they have paid-back their loans.

4) UBS, a Swiss bank whose retail brokerage unit is one of the biggest in the US (comparable to Morgan Stanley, Merrill Lynch and SmithBarney), borrowed a total of $74.5B. Barclays borrowed $47.9B.

5) Nine of the ten largest money-market fund companies, including BlackRock, arguably the best in the business for that ultra-conservativ-but-not-government-guaranteed cash management stuff, turned to the Fed for support.

6) Foreign central banks received nearly $600B of credit.

Say what you want about the politics and economics of the rescue and recovery plans, but the whole entire "city" was on fire, and wondering how to pay the water bill was, at the time, a bit beside the point.

WHAT DO WE DO? Live within or even below your means, have an emergency reserve fund, prioritize your priorities (saving for college is great, but are you on-track for at least a half-decent standard of living in retirement, and do you have life and disability insurance policies that will provide enough to your family if you die or can't work?), and invest around the globe in diversified and nimble portfolios.

How To Prepare For the Storm We Hope Won't Hit Us

With a new round of "quantitative easing" (printing new money so the Federal Reserve Bank can buy US Treasury Bonds that investors and China don't want to buy at such low interest rates) threatening to cause potentially crushing inflation, albeit while it is intended to fight-off looming near-term DEflation, Americans and others around the world are afraid.

Rightly so, as this could get ugly. It's a big storm brewing, but we don't know if it will hit us or pass us by. For those who want to prepare for it hitting us, here are some action items I recommend:

1) Make sure you have life and disability insurance enough to pay the bills for the family if you die or can't earn your living any more.

2) Pay-down or pay-off any credit cards and personal loans, including 2nd mortgages and HELOCs.

3) If you accomplish #2 above, then build-up cash reserves, preferably a year's worth of necessary family living expenses (food, shelter, transportation, health insurance and medicine, but no need to budget, in this case, for vacations and clothes and spa treatments).

4) If you have investments, diversify globally; 50% of your stocks/stock-mutual-funds should be investing in foreign developed and emerging markets, and same with your bonds/bond-mutual-funds.

5) To make #4 really work, do not use index funds or even traditional style-pure mutual funds; find global and flexible mutual funds with consistent management and outstanding long-term track records--the best among them were down only 25% or less during the 2008 40% market crash, and many were actually UP during the early-2009 market crash, and they have kept-up pretty well during the post-March 2009 market rally; these funds also often invest in currencies and commodities better than most of us ever could.

6) Be prepared to do radical things, like the adult children moving home, or the elderly grandparents moving-in.

7) Stay optimistic. There are some good signs. Ford Motor Company has made an astonishing turn-around, so other manufacturers can also.

8) Take prudent advantage of current low interest rates--re-finance your house and investment properties, buy that new car if you need to, consolidate debt you can't pay-off.

9) Make sure you have that cushion described in #2 and #3 above.

Helpful?

Insurance: How Much Do You Need?

Make sure you have enough life insurance, everyone. $1mm of investible assets for every $50k you need to spend each year. If you need $50k per year of spending money to replace your wife's income if she dies (to be expected if she makes a salary of, say, $75k), you need $1mm nest egg. If you have $200k in your portfolio and savings plus her retirement plan, then you need $800k of life insurance coverage on your wife. Make sure you or your Trust is the beneficiary.

Also, makes sure you have Long-term Disability Insurance, and pay the premium yourself, even if your employer offers to pay it for you as a fringe benefit. Paying it yourself allows you to get the income tax-free; if your employer pays the premium, you will have to pay income taxes on your benefit.

Waste no time with this. Too many people need insurance before they get the right amount.