Pros and Cons of Working at Home

Imagine that your employer gives you the choice between either working from home or commuting to the office throughout your work week. You might think the obvious choice is to work from the comfort of your own home; after all, staying in your pajamas all day and avoiding stressful commutes sound appealing. But there are some considerations to think about before you decide that telecommuting is right for you.

Advantages
file0001992856476Working from home could end up saving you a considerable amount of money. It eliminates the cost of commuting by cutting down what you spend on gas, public transportation and parking fees, and car maintenance. And depending on your company’s dress code, you could save what you might spend on expensive work-related clothes.

Besides reducing some of your daily expenses, working from home could provide you with more opportunities and increased productivity. Telecommuting might mean you are no longer tied to a single location, which could allow you to explore more flexible work opportunities within the company. Working from home may also motivate you to use your time more effectively and accomplish more for your company because you’ll save time commuting.

Balancing work and family life could be easier when you work from home, as well. Time that you might spend traveling to work, appointments, and family obligations will be saved when you no longer have to schedule around a daily drive to and from the office.

Depending on your company’s flexibility and the demands of your job, working from home may even eliminate or reduce child-care needs for your children, giving you more time to spend with your loved ones in addition to saving you money.

It’s possible that you could be healthier by working from home. Your exposure to co-workers who come to work with a cold or the flu is reduced, which prevents you from having to take a sick day to visit your doctor. You may also wind up feeling less stressed when you don’t have to worry about commuting or potential work-life issues.

Disadvantages
Before you get too excited about the appeals of working from home, consider the drawbacks. For instance, telecommuting could affect your work performance. Isolation from the office may result in your professional achievements being overlooked, which could potentially delay a promotion or raise.

Less opportunity to interact regularly with co-workers might mean missing out on important information, as well as feeling lonely. Plus, distractions around your home can interfere with your daily responsibilities and could result in a negative response from your employer.

Another financial downside of working from home is the prospect of providing your own office materials. Does your company provide you with supplies such as a computer, printer, and fax machine? Will you need to pay for office setup, postage services, or scanners, among other items?

file00032137357You might think that a home office tax deduction could alleviate the cost of home office expenses, but you’ll need to be careful with your home office use in order to qualify. The space you claim a deduction for must be used for business-only purposes. Any use of this space not related to your work may prevent you from taking this tax break. For more information, review IRS Publication 587, Business Use of Your Home.

You’ll also need to think about how your increased presence at home may result in an increase in your home utility usage. Specifically, you’ll probably spend much of your time using energy-consuming technology to perform your job. In turn, this could cause your electric bill to spike. Practicing energy efficiency may help reduce the bill, but you still might have to pay more than you’d like each month as the cost of working from home.

What works for you?
If your employer allows you to work from home, think about a few other things besides how it would affect your wallet:

1) Consider whether your home has appropriate space to accommodate a home office.
2) Understand that you may need to seek remote tech support on occasion to perform your job.
3) Think about whether you’re self-directed and able to work well independently in a home setting.
4) Set expectations for yourself.
5) Be familiar with any company policies that may apply to remote employees.

It’s possible that you can strike a balance and choose to work from home one or two days a week, thereby reaping more of the telecommuting positives than negatives. You could also ask to undergo a trial period to make sure that working from home is truly what works best for both you and your employer.

Changes to Social Security Claiming Strategies

The Bipartisan Budget Act of 2015 included a section titled “Closure of Unintended Loopholes” that ends two Social Security claiming strategies that have become increasingly popular over the last several years. These two strategies, known as “file and suspend” and “restricted application” for a spousal benefit, have often been used to optimize Social Security income for married couples.

SocSecurityTriColiStock_000008528384_sqIf you have not yet filed for Social Security, it’s important to understand how these new rules could affect your retirement strategy.

Depending on your age, you may still be able to take advantage of the expiring claiming options. The changes should not affect current Social Security beneficiaries and do not apply to survivor benefits.

File and suspend
Under the previous rules, an individual who had reached full retirement age could file for retired worker benefits–typically to enable a spouse to file for spousal benefits–and then suspend his or her benefit. By doing so, the individual would earn delayed retirement credits (up to 8% annually) and claim a higher worker benefit at a later date, up to age 70. Meanwhile, his or her spouse could be receiving spousal benefits.

For some married couples, especially those with dual incomes, this strategy increased their total combined lifetime benefits. Under the new rules, which are effective as of April 30, 2016, a worker who reaches full retirement age can still file and suspend, but no one can collect benefits on the worker’s earnings record during the suspension period. This strategy effectively ends the file-and-suspend strategy for couples and families.

The new rules also mean that a worker cannot later request a retroactive lump-sum payment for the entire period during which benefits were suspended. (This previously available claiming option was helpful to someone who faced a change of circumstances, such as a serious illness.)

Tip: If you are age 66 or older before the new rules take effect, you may still be able to take advantage of the combined file-and-suspend and spousal/dependent filing strategy.

Restricted application

Under the previous rules, a married person who had reached full retirement age could file a “restricted application” for spousal benefits after the other spouse had filed for Social Security worker benefits. This allowed the individual to collect spousal benefits while earning delayed retirement credits on his or her own work record.

In combination with the file-and-suspend option, this enabled both spouses to earn delayed retirement credits while one spouse received a spousal benefit, a type of “double dipping” that was not intended by the original legislation.

Under the new rules, an individual eligible for both a spousal benefit and a worker benefit will be “deemed” to be filing for whichever benefit is higher and will not be able to change from one to the other later.

Tip: If you reached age 62 before the end of December 2015, you are grandfathered under the old rules. If your spouse has filed for Social Security worker benefits, you can still file a restricted application for spouse-only benefits at full retirement age and claim your own worker benefit at a later date.

Basic Social Security claiming options remain unchanged. You can file for a permanently reduced benefit starting at age 62, receive your full benefit at full retirement age, or postpone filing for benefits and earn delayed retirement credits, up to age 70.

Although some claiming options are going away, plenty of planning opportunities remain, and you may benefit from taking the time to make an informed decision about when to file for Social Security.

Rates on the Rise: Strategies for Fixed-Income Investors

A long period of low yields has been challenging for many fixed-income investors, but owning bond investments in a rising interest-rate environment could become even trickier. When interest rates go up, the prices of existing bonds typically fall. Consequently, the Federal Reserve’s rate-setting decisions could affect the entire fixed-income market.

RisinginterestratesiStock_000078549611_MediumStill, bonds are a mainstay for conservative investors who prioritize the preservation of principal over returns, and for retirees in need of a predictable income stream. Although diversification does not guarantee a profit or protect against investment loss, owning a diversified mix of bond types and maturities is one way to manage interest-rate and credit risk in your portfolio.

Consider duration
Overall, bonds with shorter maturities are less sensitive to interest-rate fluctuations than long-term bonds. A bond’s maturity is the length of time by which the principal and interest are scheduled to be repaid. A bond’s duration is a more specific measure of interest-rate sensitivity that takes cash flow (interest payments) into account.

For example, a five-year Treasury bond has a duration of less than five years, reflecting income payments that are received prior to maturity. A five-year corporate bond with a higher yield will have an even shorter duration, making it slightly less sensitive to interest-rate fluctuations. If interest rates increase 1%, a bond’s value is generally expected to drop by approximately the bond’s duration. Thus, a bond with a five-year duration could lose roughly 5% in value. (U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest.)

Build a ladder
Bond laddering is a buy-and-hold strategy that could also help cushion the potential effects of rising rates. This process puts your money to work systematically, without trying to predict rate changes and time the market.

file0001084609609Buying individual bonds provides some certainty, because investors know how much they will earn if they hold a bond until maturity, unless the issuer defaults. A ladder is a portfolio of bonds with maturities that are spaced out at regular intervals over a certain number of years. When short-term bonds from the low rungs of the ladder mature, the funds are reinvested at the top end of the ladder.

As interest rates rise, investors may be able to increase their cash flow by capturing higher yields. A ladder may also help insulate bond portfolios from volatility, because higher yields on new bonds may help offset any paper losses on existing holdings.

Bond ladders may vary in size and structure, and could include different types of bonds depending on an investor’s time horizon, risk tolerance, and goals. Individual bonds are typically sold in minimum denominations of $1,000 to $5,000, so creating a bond ladder with a sufficient level of diversification might require a sizable investment.

Rise with rates
Adding a floating-rate component to a bond portfolio may also provide some protection against interest-rate risk. These investments (long offered by U.S. corporations) have interest payments that typically adjust based on prevailing short-term rates.

The U.S. Treasury started issuing floating-rate notes with two-year maturities in January 2014. Investors receive interest payments on a quarterly basis. Rates are tied to the most recent 13-week Treasury bill auction and reset weekly, so investors are paid more as interest rates rise and less as they fall.

Note: Bonds redeemed prior to maturity could be worth more or less than their original cost, and investments seeking to achieve higher yields also involve a higher degree of risk. Interest payments are taxed as ordinary income. Treasury bond interest is subject to federal income tax but exempt from state and local income taxes.

‘Tis the Season To Unwrap Your Crystal Ball!

It’s that time of year again! No, I am not referring to the Holidays which brings the hustle and bustle of gift buying, parties, and hopefully special time with family and friends. Those subjects could produce material for an interesting read, but there is another annual tradition which I have been thinking about.

file9821301453431I am referring to the scores of prognostications offered by many financial, investing and economic gurus. In a ritual as widely practiced as Holiday gatherings and New Year celebrations, we are hearing (or will soon hear) predictions about what 2016 “will” bring in the world of finance, including the direction and pace of economic growth, the path of interest rates, the outlook for oil prices (a hot topic!), and more!

Some of these pronouncements may sound convincing and could even be very well-reasoned. They will sometimes even come along with advice about the moves you can make to profit from those opinions or how to avoid losses. But I would caution anybody reading these missives to avoid making bold moves, no matter how compelling the prediction.

That’s because I have learned over the years to take these forecasts with a gigantic grain of salt. The business of making reliable forecasts about the sometimes arbitrary movements of the economy and financial markets is a very tough endeavor. As the late, great baseball icon and “philosopher” Yogi Berra once said, “Making predictions is difficult, especially about the future”!

That idea was recently underscored by research I have read from two prominent researchers at the International Monetary Fund (IMF), the well-known international financial organization. In a study published in May, 2014, Prakash Loungani and Hites Ahir, two IMF researchers, studied forecasters’ ability to predict recessions.

This paper, along with previous research compiled by Loungani and other economists, showed that forecasters possess a “record of failure to predict recessions” which “is virtually unblemished.” Ouch!

IMG_1312Does this mean you should ignore all prognostications? Not necessarily! I do read commentaries from many economists and investment experts. Understanding different perspectives about the financial world, especially when there are differing views, can be helpful. They can provide a measure of context and awareness.

But it is important to remember they may not be useful as an infallible investment or financial manual for the next 12 months. The workings of the economy and financial markets are extremely complicated and dynamic, making it extraordinarily difficult to forecast their movements, especially over a relatively short timeframe like one year.

In fact, if a forecaster says they know exactly what’s going to happen next, you might want to view such opinions, based on the aforementioned research, with skepticism. Alternatively, forecasts which acknowledge the possibilities of different outcomes might actually help inform you about unexpected developments.

Regardless of the quality of the forecast and research, I think most individuals and families may likely be much better off by placing their primary focus on having a long-term financial plan and following a disciplined process in making financial and investment decisions.

This approach might actually offer more long-term promise than placing too much emphasis on short-term forecasts which appear to be unreliable, no matter how credible the source.

To help provide context and perspective, this month’s blogs provide information about the recent interest rate hike by the Federal Reserve Bank as well as guidance about potential year-end tax moves:

Federal Reserve Bank Rate Hike: What Does It Mean?

Should You Worry About a Federal Reserve Interest Rate Hike?

2015 Year end Tax Planning Basics

As always, if you have any questions about your situation, I encourage you to email me at bill.pollak@lpl.com or at (925) 464-7057.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Federal Reserve Rate Hike: What Does it Mean?

The events of the past week bring one word to mind: finally. Last Wednesday, the Federal Reserve (Fed) finally raised the target for the federal funds rate by 0.25%. By raising this key overnight borrowing rate, the Fed raised interest rates for the first time in nine years—an event that has been receiving a great deal of attention recently. Surrounding the past several Fed meetings, there has been much talk of “will they” or “won’t they.” Leading up to this meeting, the Fed implied it would raise rates, and the market was expecting it.

file000821289525However, until the announcement was made today, a degree of uncertainty remained. So, what does this really mean? It means the potential for key rates to tick up, such as mortgage or credit card rates. Most bonds have “priced in the hike,” but some could still feel a slight negative impact. However, overall, we should take this as a positive sign. We have not experienced a rate hike in nine years, and, perhaps more importantly, we have not had rates above the 0–25 basis point range (0–0.25%) since late 2008.

The Fed said it would only raise rates if the economic data signaled a healthy economy. We have seen strong numbers posted over the past few months, and the Fed affirmed today it believes this trend should continue. To sum up, the Fed has raised rates because it believes the economy is strong and likely to continue to grow without the added support of near zero interest rates.

For the market, this is potentially a positive event. Yet, rate hikes also reaffirm that we are in the mid-to-late stage of the economic cycle. In this part of the cycle, we can expect additional market volatility. We especially anticipate it in the coming weeks and months, as investors become comfortable with the “new routine” for U.S. monetary policy.

Although we have just experienced the first raise, many will immediately start thinking about what’s next. The debate will continue regarding how fast the Fed will raise rates, how far it will raise them, and when it will stop. Today, the Fed’s own projections put the fed funds rate at 140 basis points (1.4%) a year from now, while the fed funds futures market puts the fed funds rate at just 80 basis points (0.80%) by year-end 2016.

arrowThis difference implies a gap between what the Fed says it will do and what the market thinks the Fed will do. How this gap is resolved will play a key role in the future direction of financial markets, particularly fixed income markets. Luckily, Fed Chair Janet Yellen is aware that markets will continue to debate what may lie ahead. Her comments during the post-meeting press conference suggest the Fed will continue to proceed cautiously, taking into consideration the impact of rising rates on consumer spending, the housing market, business capital spending, the value of the dollar, and overseas economies and financial markets.

A slow path for further increases will give the economy and markets time to adjust to the changes. It has been a long time since we last saw the Fed hike rates. It does feel unusual, but also positive, and hopefully this change is well worth the wait. It means that we are returning to a more typical economic environment, which is a welcome change from the atypical environment we have lived in since the Great Recession.

And even though this is a big change in Fed policy, what shouldn’t change is our commitment to the long-term investment plan that is ultimately our blueprint for success. As always, if you have any questions, I encourage you to email me at bill.pollak@lpl.com or at (925) 464-7057.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

Economic forecasts set forth may not develop as predicted.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price.

This research material has been prepared by LPL Financial.

Securities offered through LPL Financial. Member FINRA/SIPC.

Tracking #1-449334 (Exp. 12/16)

Comparing Health Insurance Options during Open Enrollment

The decisions you make during open enrollment season regarding health insurance are especially important, since you generally must stick with the options you choose until the next open enrollment season, unless you experience a “qualifying” event such as marriage or the birth of a child.

Fun Medical MGD©As a result, you should take the time to carefully review the types of plans offered by your employer and consider all the costs associated with each plan. With most health insurance plans, your employer will pay a portion of the premium and require you to pay the remainder through payroll deductions.

When comparing different plans, keep in mind that even though a plan with a lower premium may seem like the most attractive option, it could have higher potential out-of-pocket costs.

You’ll want to review the copayments, deductibles, and coinsurance associated with each plan. This is an important step because these costs can greatly affect what you end up paying out-of-pocket. When reviewing the costs of each plan, consider the following:

1) Does the plan have an individual or family deductible? If so, what is the amount that will have to be satisfied before your insurance coverage kicks in?

2) Are there copayments? If so what amounts are charged for doctor visits, specialists, hospital visits, and prescription drugs?

3) Will you have to pay any coinsurance once you’ve satisfied the deductible?

You should also assess each plan’s coverage and specific features. For example, are there coverage exclusions or limitations that apply? Which expenses are fully or partially covered? Do you have the option to go to doctors who are outside your plan’s provider network? Does the plan offer additional types of coverage for vision, dental, or prescription drugs?

In the end, when reviewing your options, you’ll want to balance the coverage and features offered under each plan against the plan’s overall cost to determine which plan offers you the best value for your money.

If you have any questions about how to approach your decisions, please email me at bill.pollak@lpl.com or call my office at (925) 464-7057!

2015 Year-End Tax Planning Basics

As the end of the 2015 tax year approaches, set aside some time to evaluate your situation and consider potential opportunities. Effective year-end planning depends on a good understanding of both your current circumstances and how those circumstances might change next year.

TaxesSMBasic strategies
Consider whether there’s an opportunity to defer income to 2016. For example, you might be able to defer a year-end bonus or delay the collection of business debts, rents, and payments for services. When you defer income to 2016, you postpone payment of the tax on that income.

And if there’s a chance that you might be paying taxes at a lower rate next year (for example, if you know that you’ll have less taxable income next year), deferring income might mean paying less tax on the deferred income.

You should also look for potential ways to accelerate 2016 deductions into the 2015 tax year. If you typically itemize deductions on Schedule A of Form 1040, you might be able to accelerate some deductible expenses–such as medical expenses, qualifying interest, or state and local taxes–by making payments before the end of the current year, instead of paying them in early 2016.

Or you might consider making next year’s charitable contribution this year instead. If you think you’ll be itemizing deductions in one year but claiming the standard deduction in the other, trying to defer (or accelerate) Schedule A deductions into the year for which you’ll be itemizing deductions might let you take advantage of deductions that would otherwise be lost.

Depending on your circumstances, you might also consider taking the opposite approach. For example, if you think that you’ll be paying taxes at a higher rate next year (maybe as the result of a recent compensation increase or the planned sale of assets), you might want to look for ways to accelerate income into 2015 and possibly defer deductions until 2016 (when they could potentially be more valuable).

BF-AA310_401k_D_20101210153343Complicating Factors
First, you need to factor in the alternative minimum tax (AMT). The AMT is essentially a separate, parallel federal income tax system with its own rates and rules. If you’re subject to the AMT, traditional year-end strategies may be ineffective or actually have negative consequences.

That’s because the AMT effectively disallows a number of itemized deductions. So if you’re subject to the AMT in 2015, prepaying 2016 state and local taxes probably won’t help your 2015 tax situation, and, in fact, could hurt your 2016 bottom line.

It’s also important to recognize that personal and dependency exemptions may be phased out and itemized deductions may be limited once your adjusted gross income (AGI) reaches a certain level. This is especially important to factor in if your AGI is approaching the threshold limit and you’re evaluating whether to accelerate or defer income or itemized deductions.

For 2015, the AGI threshold is $258,250 if you file as single, $309,900 if married filing jointly, $154,950 if married filing separately, and $284,050 if head of household.

NRT-SEPPQ113_02IRA and retirement plan contributions
Deductible contributions to a traditional IRA and pretax contributions to an employer-sponsored retirement plan such as a 401(k) could reduce your 2015 taxable income. (Note: A number of factors determine whether you’re eligible to deduct contributions to a traditional IRA.)

Contributions to a Roth IRA (assuming you meet the income requirements) or a Roth 401(k) plan are made with after-tax dollars–so there’s no immediate tax savings–but qualified distributions are completely free of federal income tax.

For 2015, you’re generally able to contribute up to $18,000 to a 401(k) plan ($24,000 if you’re age 50 or older) and up to $5,500 to a traditional or Roth IRA ($6,500 if you’re age 50 or older). The window to make 2015 contributions to an employer plan generally closes at the end of the year, while you typically have until the due date of your federal income tax return to make 2015 IRA contributions.

Important notes
The Supreme Court has legalized same-sex marriage nationwide, significantly simplifying the federal and state income tax filing requirements for same-sex married couples living in states that did not previously recognize their marriage.

A host of popular tax provisions (commonly referred to as “tax extenders”) expired at the end of 2014. Although it is possible that some or all of these provisions will be retroactively extended, currently they are not available for the 2015 tax year.

Among the provisions: deducting state and local sales taxes in lieu of state and local income taxes; the above-the-line deduction for qualified higher-education expenses; qualified charitable distributions (QCDs) from IRAs; and increased business expense and “bonus” depreciation rules.

Taxes, Retirement, and Timing Social Security

The advantages of tax deferral are often emphasized when it comes to saving for retirement. So it might seem like a good idea to hold off on taking taxable distributions from retirement plans for as long as possible. (Note: Required minimum distributions from non-Roth IRAs and qualified retirement plans must generally start at age 70½.) But sometimes it may make more sense to take taxable distributions from retirement plans in the early years of retirement while deferring the start of Social Security retirement benefits.

Some basics
sscardUp to 50% of your Social Security benefits are taxable if your modified adjusted gross income (MAGI) plus one-half of your Social Security benefits falls within the following ranges: $32,000 to $44,000 for married filing jointly; and $25,000 to $34,000 for single, head of household, or married filing separately (if you’ve lived apart all year).

Up to 85% of your Social Security benefits are taxable if your MAGI plus one-half of your Social Security benefits exceeds those ranges or if you are married filing separately and lived with your spouse at any time during the year. For this purpose, MAGI means adjusted gross income increased by certain items, such as tax-exempt interest, that are otherwise excluded or deducted from your income for regular income tax purposes.

Social Security retirement benefits are reduced if started prior to your full retirement age (FRA) and increased if started after your FRA (up to age 70). FRA ranges from 66 to 67, depending on your year of birth.

Distributions from non-Roth IRAs and qualified retirement plans are generally fully taxable unless nondeductible contributions have been made.

Accelerate income, defer Social Security
It can sometimes make sense to delay the start of Social Security benefits to a later age (up to age 70) and take taxable withdrawals from retirement accounts in the early years of retirement to make up for the delayed Social Security benefits.

file5511312030154If you delay the start of Social Security benefits, your monthly benefits will be higher. And because you’ve taken taxable distributions from your retirement plans in the early years of retirement, it’s possible that your required minimum distributions will be smaller in the later years of retirement when you’re also receiving more income from Social Security.

And smaller taxable withdrawals will result in a lower MAGI, which could mean the amount of Social Security benefits subject to federal income tax is reduced.

Whether this strategy works to your advantage depends on a number of factors, including your income level, the size of the taxable withdrawals from your retirement savings plans, and how many years you ultimately receive Social Security retirement benefits.

Example
Mary, a single individual, wants to retire at age 62. She can receive Social Security retirement benefits of $18,000 per year starting at age 62 or $31,680 per year starting at age 70 (before cost-of-living adjustments). She has traditional IRA assets of $300,000 that will be fully taxable when distributed.

file0001270953716She has other income that is taxable (disregarding Social Security benefits and the IRA) of $27,000 per year. Assume she can earn a 6% annual rate of return on her investments (compounded monthly) and that Social Security benefits receive annual 2.4% cost-of-living increases. Assume tax is calculated using the 2015 tax rates and brackets, personal exemption, and standard deduction.

Option 1. One option is for Mary to start taking Social Security benefits of $18,000 per year at age 62 and take monthly distributions from the IRA that total about $21,852 annually.

Option 2. Alternatively, Mary could delay Social Security benefits to age 70, when her benefits would start at $38,299 per year after cost-of-living increases.

To make up for the Social Security benefits she’s not receiving from ages 62 to 69, during each of those years she withdraws about $40,769 to $44,094 from the traditional IRA–an amount approximately equal to the lost Social Security benefits plus the amount that would have been withdrawn from the traditional IRA under the age 62 scenario (plus a little extra to make the after-tax incomes under the two scenarios closer for those years).

When Social Security retirement benefits start at age 70, she reduces monthly distributions from the IRA to about $4,348 annually.

Mary’s after-tax income in each scenario is approximately the same during the first 8 years. Starting at age 70, however, Mary’s after-tax income is higher in the second scenario, and the total cumulative benefit increases significantly with the total number of years Social Security benefits are received.*

Back to School and Snore Your Way to Investment Success

I hope you are enjoying these last days of summer and that you have had the chance to take a great vacation! For me, the past few weeks has brought another “Back to School” season for the family. But this time around, the school year’s start is much different!

back-to-schoolInstead of attending more high school, my twin sons, Daniel and Benjamin, are now going “Off to School” to start their freshman years at the University of California, Davis and at the University of Illinois, respectively.

I admire the dedication they have shown over the years and especially how they gracefully navigated the very competitive college admissions environment during their Senior year! As I reflected on their hard work in recent weeks, their journey has reminded me that learning is an on-going process that takes place inside and outside the classroom.

This idea is certainly applicable to just about everything in our lives, even personal finance and investments. And the financial world sometimes provides ample opportunity to “test” how well we have learned our lessons!

Recent conditions in the investment markets, for example, might be providing investors with the equivalent of a mid-term exam! During 2015, returns in the broad US stock and bond markets have struggled at times to produce positive returns.

And in recent days, of course, global equity markets have been much more volatile, temporarily serving up a 10% correction before rebounding and paring some of the losses. The past few weeks have certainly been very different from the tame price fluctuations of the past few years.

roller-coasterThere is also no shortage of economic uncertainty around the world. Investors are trying to digest a potential rise in US interest rates later this year, the rapid decline in oil prices, increasing volatility in the Chinese stock market, and other economic and political worries.

So, the weeks or months ahead might test the resolve of many investors. The “exam” may not be multiple choice, but such a period might be a good assessment of whether one is truly a long-term investor.

Staying the “course” with your investment plan might increase the odds of long-term investment success. If the markets move back into correction territory, and you stick with your plan, you will have “aced” your investment midterm and will be on your way to the coveted diploma!

On the other hand, you could try to predict short-term market movements, sell before another possible market decline and then buy back in at lower prices. But objective studies of market timing have shown that they might not be successful over a reasonable period of time and that they could potentially lead to less optimal returns.

Even the world’s greatest investors cannot reliably forecast short-term market movements, and they happily admit this fact. Here are a few opinions on the subject from some of the best investment “professors” of our time:

file000986451810Warren Buffett, known for holding stocks like Wells Fargo Bank and Coca Cola for decades, once wrote, “We continue to make more money when snoring than when active.” Peter Lynch, one of the most highly regarded mutual fund managers of his era, said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves”.

The logic behind not trying to time the financial markets is compelling. Still, I recognize that it can be difficult to stay on track. To help you through these volatile times, I want to continue my practice of providing relevant financial education articles and to inspire you to make sound financial decisions! Here are a few that might help you navigate the challenging moments:

Should You Worry About China Stock Market Volatility: Many investors are wondering whether China’s stock market volatility might slow down China’s economy and eventually global growth prospects. Should you make any portfolio changes? Read more…

Five Steps to Tame Financial Stress: Studies show that most of us get stressed about money some of the time. Here are some tips that can help you through those tough moments! Read more…

Can You Count on Dividends for Reliable Income? With fixed income investments offering low yields, it is tempting to think about using dividend paying stocks as a substitute for bonds. Here are some issues to consider before you take the plunge. Read more…

Finally, use this blog as a reminder to reflect on your own situation. If you are uncomfortable with the recent market volatility, or are unsure whether your investments are aligned to your long-term financial goals, please email bill.pollak@lpl.com or call me at (925) 464-7057. I would be happy to help!

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. Investing involves risk including potential loss of principal.

Should You Worry about China’s Stock Market Volatility?

The volatility of the Chinese stock market has been viewed by U.S. investors with a mixture of concern and fascination. As of August 4, the Shanghai market is still up 16% year to date even after a nearly 30% decline from its June 12 peak. This roller coaster ride has received a great deal of attention; however, the research department at LPL Financial and some other investment firms believe that the impact on China’s economy will be limited.

Shanghai 323Until recently, the Chinese stock market was walled off from the global financial market. Chinese investors could only invest in “A-shares” traded in Shanghai or Shenzhen, and non-mainland investors were not allowed to buy shares in these markets. Though there are now options for non-mainland investors, these investors represent less than 2% of the Chinese stock market.

The link between China’s economy and its stock market is not as strong as it is for the U.S. Chinese investors prefer to hold cash and real estate relative to stocks; only 9% of Chinese household wealth is invested in the stock market, compared with nearly 30% in the U.S.

Most of the money in the Chinese stock market comes from a relatively small group of wealthy (by Chinese standards) investors. Looking historically, regardless of the performance of the equity market, there appears to be very limited correlation between consumer spending and stock prices.

We believe the recent decline in the Chinese stock prices is likely a reaction to a 60% rise in less than six months and the rapidly changing government policies. In April, the Chinese government limited margin lending before quickly reversing course as equities sold off sharply. It has worked to prop up stocks in July and August. These moves, including banning short selling and restricting trading, have been viewed as evidence of panic by policymakers.

While the slowing Chinese economy may be having some impact on the equity market, China’s overall economic outlook is largely unchanged. The small role the market plays in the economy is unlikely to have a material impact on economic growth.

The LPL Research Department and some other investment research organizations continue to recommend that investors who desire exposure to the Chinese market achieve it by investing in the so-called “H-share” market, shares of Chinese companies that trade in Hong Kong.

The Hong Kong market has a more traditional regulatory structure and less intervention than the mainland Chinese market. This market has been less susceptible to wild swings and is more attractively valued than the “A-share” market based on price-to-earnings multiples. This fact does not eliminate the volatility inherent in any China-related investment, but it does offer investors a better risk-reward balance.

As always, if you have any questions, please email me at bill.pollak@lpl.com or call me at (925) 464-7057.

Definitions:
The P/E ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower P/E ratio.

Short selling (also known as shorting or going short) is the practice of selling assets, usually securities, that have been borrowed from a third party (usually a broker) with the intention of buying identical assets back at a later date to return to the lender. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as the seller will pay less to buy the assets than the seller received on selling them.

Margin debt is debt used to purchase securities within an investment account. Margin debt carries an interest rate, and the amount of margin debt will change daily as the value of the underlying securities changes.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. The economic forecasts set forth may not develop as predicted.

Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

This research material has been prepared by LPL Financial. Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit