Author: Minich MacGregor Wealth Management

As a parent, you have probably experienced the fun and excitement of teaching your son or daughter to ride a bike.  A new bike, with just two wheels, marks a growth stage for kids.   Kids are validated for getting bigger.  It is a sign of progress.  As a parent you know that there is going to be some accidents, falls and bruised knees.  So in order to ensure that the fun and excitement lasts as long as possible the new bike comes with training wheels.

The training wheels are attached to the rear axle, and the wheels themselves do not touch the ground unless the bike rocks to the left or to the right.  The beauty of the training wheels is that your child can sit on the bike, and start pedaling from the beginning.  The alternative is that you hold the bike, your child starts to pedal, all goes well until the pedaling slows down and the inevitable crash occurs.

The capital markets have exhibited many ups and downs over the last 2 years.  2008 was not an up and down, it was just a down!  Coming off the huge down turn, the market has, by and large, been in a trading range.  Trading range simply means that the market seems to go up to a certain level and then right back down to a previous low point.  And this pattern is repeated many times.  It is frustrating because it seems to derail any real progress for the market or for your portfolio.  And the question becomes: why is this happening?  If you think of the capital markets as the bike, and government policy as the training wheels, I think some insight can be generated.  It is generally assumed that corporations are profitable.  The profitability may have been achieved at the expense of jobs, nevertheless a very high percentage of the S&P listed corporations are very profitable.  An indication of profitability is the willingness for many companies to raise their dividend.  Cisco just raised its dividend.  GE raised its dividend.  Corporations know that in order to reward shareholders during times of modest growth, dividends build commitment.  So, if companies are profitable, then why are we in a period of low growth?  Why are we in a trading range?  The answer lies in understanding the impact of government policy.  The year 2009 began a turnaround based simply on the fact that the U.S. government starting rolling out guarantees and fixes that created confidence and stabilized the markets.  The corporate assumption – a big assumption – is that government would do what was required to keep the economy from going backwards.  Consumer demand can only survive in a positive economy.  So companies assume that the government will do its job and as a result they will continue to be profitable as well.

The bike metaphor works as follows:  the bike = corporations/corporate profits, the training wheels = government policy.  We are in a recovery.  Companies still need the training wheels.

Examples of negative government policy and hence weak training wheels:  1. Bad news out of Europe, 2. Downgrading of U.S. debt security. 3. Out of control U.S debt. 4. No action by congress on a budget.

Visualize a time when the economy moves forward on its own.  No government support is needed.  The training wheels come off.  Corporations have figured out how fast to peddle so they stay upright. Frustrating trading range goes away.

If you have a 401(k) you may want to sit down for this bit of news.

According to a recent analysis by the nonpartisan research organization Demos, 401(k) fees have the potential to cost you more than 30 percent of the nest egg you’re attempting to build.

That’s right. The very thing you’ve been dutifully putting money into to secure your future could actually be costing you big time. In fact, the same Demos analysis found that the average American couple could pay nearly $155,000 in fees for their 401(k) plans over their careers. That number ticks up even higher as your income increases.

If you had no idea that fees could be that costly you’re not alone. It seems most 401(k) holders aren’t fully aware of the extent of the fees they pay and, according to the Government Accountability Office, many employers don’t understand the fees that 401(k) providers charge their workers.

But all of that is about to change. Starting this month, the U.S. Labor Department will begin requiring extensive disclosure of all 401(k) charges. Mutual-fund firms and other 401(k) companies will have to disclose all fees to employers. Based on that information, employers will not only be able to make meaningful apples-to-apples comparisons between plans, but will be required to report expense ratios for investments offered in their chosen plans.

And the revelations don’t stop there. Beginning

Aug. 31, all 401(k) statements will feature a “fee disclosure statement” which will clearly identify exactly what nest the money you’re putting away is lining.

Not only will you see exactly what fees you’re paying (and trust me, you’re paying fees) but you’ll see where the money is going and for what purpose (i.e. trade fees, revenue sharing, etc.). With this information in hand you’ll be better equipped to determine if your money and your savings plan are truly working for you.

Of course, nothing will be crystal clear to begin with, so be prepared to ask a few questions. Ask your employer:

• Is your company’s plan competitive?
• How do the fees you’re paying compare to other plans?
• When was the last time the company compared the existing plan(s) to others available?

Because all this information is now available, your employer should be able to provide you with clear and complete answers on all fronts. If not, don’t hesitate to call that company that manages your plan.

But remember, there’s more to building a nest egg than simply avoiding fees. It’s up to you to use all the information available to you — from fees and return on investment rates to level of risk and employer matches — to choose the investment that will keep your nest egg growing. Even with fees, a 401(k) is a great retirement savings option, especially if it includes an employer match. That said, if you can work with your employer to reduce associated costs, you’re nest will definitely be lined a little nicer.

Jason MacGregor, principal of Minich MacGregor Wealth Management in Saratoga Springs, is a fee-only adviser who provides investment advice to individual company retirement plan participants. He can be reached at (518) 499-4565 , jason@mmwealth.com, or Twitter@mmwealth.

A few months ago, I got a call from my friend Ken who lives Clifton Park. Ken called to talk about an invention he has been working on in his spare time (podprops.com) and it was fascinating to hear how a simple idea progressed from just an idea to a product soon headed for production. But the real reason for Ken’s call was this: With production pending, it was time for him to come up with more cash and he wondered if borrowing against his 401K was a good idea.

Before I answer that question, there are a few things I need to cover.

The first is the fact that Ken has been with a major corporation in Albany for 15-plus years. Having used his personal savings up in the first few months of his invention’s development, the majority of his savings now sits in the very employer-held 401k he was considering tapping.

The second is that the IRS does allow you to borrow from your 401K, either up to $50,000 or 50 percent of the account value, whichever is less. While the IRS does not count those funds as income and it waives the 10 percent penalty if you are under age 59-1/2 , it does charge interest, usually the Prime Rate plus 1 percent, but the interest paid goes back to your own account.

Given Ken was only looking to borrow $20,000, well below the $50,000 and 50 percent marks, he thought this all sounded pretty good.

Here’s where I interjected the not-so-happy realities of working with the IRS as a financial partner.

The major downside of borrowing against your 401k is that if you lose or quit your job, the money you borrowed must be paid back within sixty days of your last day of employment. If the money isn’t paid back within sixty days it becomes taxable income and potentially subject to a 10 percent penalty if the borrower is younger than 59-1/2 years of age.

Because like most people who borrow against their 401K, Ken has depleted all other savings resources, the likelihood that he’ll be able to come up with $20,000 within sixty days of losing his job and avoid the subsequent tax bill is a pretty big long-shot.

There’s also the whole matter of missed opportunity costs.

If Ken plucks $20,000 from his 401k today, that money won’t be growing in his account tomorrow or the day after. Plus, the money borrowed must be repaid within five years. In order to cover that expense, many people simply reduce their plan contribution further decreasing their retirement savings.

Then there’s a whole tangle of additional IRS rules and restrictions that further limit what you can and can’t do and at what expense. It’s important that you tease each and every one of those out before seriously considering borrowing from your 401k. In most cases, it should only be used as an absolute last resort.

As it turns out, Ken didn’t need to sort through the regulations to determine the 401k loan route wasn’t for him. Instead he got creative and found funding through the crowd funding website kickstarter.com.

So now, even if Ken’s employer were to suddenly go out of business or outsource his position, he’ll still be on pretty solid ground. While he still has debt, there isn’t a sixty-day clock ticking loudly with the promise of a whopping 10 percent penalty and additional taxes if he misses a deadline.

As far as I can see, Ken’s only real concerns of the moment are:

1) seeing his product through production

2) funding a round of drinks for me for the good advice.

Ken, I’ll be waiting for your call.

Jason MacGregor, principal of Minich MacGregor Wealth Management in Saratoga Springs, is a fee-only adviser who provides investment advice to individual company retirement plan participants.

When I turned my calendar over to May a few days ago I couldn’t help but take a deep breath and sigh. As experienced investors know, the next six-month stretch has long been proven to be the stock market’s worst. Year after year, the U.S. stock markets perform much better between November and April than they do May through October.
In fact, according to the Stock Trader’s Almanac, if you had invested $10,000 in the Dow Jones Industrial Average on May 1 and sold it on Oct. 31 each year since 1950, you would have lost money. That 61-year investment of $10,000 would now be worth just $9,261 today. However, if you had invested that same $10,000 on Nov. 1 and sold on April 30 of the same years, your investment would have grown to almost $610,000.
And while all the gains in the Dow Jones Industrial Average since 1950 have occurred during the seasonally strong months and were especially evident in the past two years (up
15 percent both years), there’s no guarantee the same will occur this year. As an investor, that leaves you with a few options:

Option 1: Play the trend.
If a 60-plus-year trend is enough to fuel your confidence, you can certainly sell all your stock funds and wait for the calendar to reach Nov. 1 to reinvest. If the trend holds, you’ll be sitting pretty. However, if this is the year that bucks the trend — and there will be a year that does — and the current stock market rally continues, you’ll end up leaving money on the table.

Option 2: Do nothing.
If you like the feel of the current stock market rally, you can opt to leave your funds where they are and hope it continues. Of course if the year shapes up like the last two, the profits earned in the first five months may be nowhere to be seen come November.

Option 3: Track market signs and move as needed*.
*Disclaimer: I am 100 percent biased toward this approach.
Not based on history or hunches, this approach is based on a stock’s, or any tradable security’s, current performance and guides you to buy and sell as “signals” deem necessary. By signals, I mean a stock’s 50- or 150-day moving average. For example, when an investment moves below its 50-day moving average, that’s a signal to sell. An even stronger sell signal is when it goes below its 150-day moving average. And as you might guess, the opposite is true on the upside — when a stock moves above its 50- or 150-day market average, it’s a signal to buy.

But even if you’re not comfortable with a 50-day wait, you can employ the same approach using a stock’s highs and lows. Simply take a rolling
10-day average of either of those two statistics to establish a market average. When the current average breaks below that number, it is a sell sign. Conversely, when it goes above it, it’s a buy signal.
All the numbers and averages you need to employ this approach are readily available online or in stock listings. Yes, it takes a bit more effort but it allows you to rotate out of weakening assets classes and move your money into stronger ones where the yields will be higher.

In the end, this year’s market could rally or it could fizzle out like it has so many times before, but you don’t have simply sit by and watch. In fact, by taking a steady, mechanical, non-emotional approach to your investing, you may find yourself greeting every day of the next six months smile.

At a recent client review meeting, the term “Relative Strength” was used extensively.  The client was patient and listened closely.  However I could tell that there was some hidden assumption that I was making, that I was not doing a good job of communicating.  So I decided to go back to the basics of market analytics to see if I could clear up the confusion.  Let me share with you what I said.

An article from James Minich…

Essentially all security analysis is broken down into two schools of thought:  fundamental analysis and technical analysis. Fundamental analysis looks at the fundamentals of corporate structure, and balance sheet numbers.  In a sense, fundamental analysis is what a CPA would do if you hired him to go over your books and give you his opinion about the fiscal soundness of your business.  Debt levels, cash flow, account receivables, cash on hand, gross sales etc.  In the world of the capital markets, AKA the stock and bond markets, the issue that fundamental analysis addresses:  Is the corporate stock fairly valued?  Fair value is defined as the total value of the corporation divided by the number of shares of that same corporation that are outstanding- total of all publically owned shares of stock.  Let say that the price of the stock was $50.00 and the appraised value was $40.00, that would mean the price of the stock was overvalued, and vice versa, if the stock was valued at $40.00 and appraised value was $50.00 the stock would be considered undervalued.  Fundamental analysis determines whether the current price of a stock is a fair price based on the fundamentals.  Bargaining hunting is the best analogy for what fundamental analysis is all about. 

Let’s assume that we do our fundamental analysis and determine that XYZ stock is undervalued.  We buy the stock at $40.00.  Naturally we expect the price to go up based on the homework we did.  In fact what happens is the price goes to $35.00.  Ouch, a 12.5% loss.  We vow never to let that happen again.  And in the process we discover that there is another school of thought called Technical Analysis.  Technical Analysis looks only at the price of the stock.  There is nothing fundamental, in a sense, about tracking the price of the stock.  The price of the stock reflects what buyers and sellers think a fair price for the stock should be.  If you have ever been to an auction, you have seen Technical Analysis in action.  The price says it all.  Supply and demand, the core ingredients of economics, sets the price.  If there is more demand than supply the price goes up.  If there is more supply than demand, the price goes down.  Technical analysis is essentially the process of tracking security prices.  The tracking takes the form of charts and graphs.  We use a charting process call Point and Figure.  When price is going up then a column going up is shown in X’s.  Just think of the graph paper you used in school with all the little boxes filled in X’s going straight up when the price is going up.  And when the price is going down, a line of boxes going down is filled with O’s.  This produces a graph.  The graph when properly understood tells at a glance the price history.  If the trend of the graph is down, getting back to our $40.00 purchase of XYS stock, then yes it is a good value, but just not a good time to buy.  There may be further decline in the price, and you want to buy when it has bottomed and the trend is up!

Merging fundamental analysis and technical analysis, gives the answer to the question:  is this a fiscally sound company, is its current price a bargain, and has demand asserted control of the supply such that the price is headed up.

OK, now we get to the issue of relative strength.  Let’s assume that there are many stocks that are undervalued and are in a positive price trend.  The question becomes: which one of these stocks should we buy.  The answer may well depend on which of the stocks has the strongest relative strength.  Relative strength belongs to the technical analysis school.  The analysis is all about the price.  Let’s say XYZ stock goes from $10.00 a share to $80.00 a share.  And for comparison we have ABC stock, in a similar sector, which goes from $10.00 to $100.00 a share.  From a relative strength point of view, we say that ABC stock has a stronger relative strength.  You and I may be very strong.  But when we have a contest at a local gym, you can lift more weight than I can.  I can lift a lot, just not as much as you can.  You have stronger relative strength!

You know the expression, “It’s all relative.”  That is precisely the point.  You want to buy the stock that relative to all other similar stocks has the greatest potential for price appreciation. 

(Next Time:  I will address the issue of Growth vs. Value stocks.  Can a growth stock continue to appreciate when the price seems to be so high currently, and can a value stock ever be TOO much of a bargain?)

Your financial advisor plays a significant role in how your financial future and, to some extent, personal happiness will play out in the years ahead.

Given the influence they bear on your life, you might think it important to understand what drives the decisions they make. But if you’re like most folks, you probably don’t.

Fortunately, finding out what motivates your financial advisor isn’t that difficult. With the three simple questions that follow you’ll get a little closer to understanding how your finances are being handled and if their choices are based on your future happiness and not just theirs.

1. How do you get paid?
Understanding how your financial advisor gets compensated is important as it can affects the rules they must adhere to and the advice they might offer.

There are a few different payment schemes with the two broadest (and most common) categories being commission-based and fee-based.

Commission-based advisors charge you a fee every time you add money to your account or buy or sell a product. A very traditional payment model, this method works great if you are taking a buy-and-hold approach and don’t need much in the way of ongoing advice. However, if your advisor is recommending moving your money around on a regular basis, you might want to reconsider the advice or even the relationship as the only person adding to their account in that scenario is the advisor.

A fee-based advisor typically doesn’t charge any commissions based upon transactions but instead charges a set percentage fee based on the assets being managed. Since the advisors compensation is based upon the account value, you both have the same goal: making you money.
The potential downside to this approach is that over time and depending on the percent fee being charged and how much proactive advice is being offered, the annual fee may end up being more than a one time commission up front.

2) What fees will I pay?
Ah, the hidden fees of financial management. A friend once described the cumulative effect of fees as like “being pecked to death by ducks”. I would modify that analogy slightly to “being pecked to death by invisible ducks” as most of us never see them coming but we sure feel them.
The reality is all investment products (mutual funds, ETF’s, annuities, etc.) have some sort of internal expense associated with them. While they’re all listed in each product’s prospectus, most investors don’t read them. However, a forthright advisor will openly share with you what the true cost of each investment is and how any associated fees may or may not impact your potential gain. Nonetheless, ask for this information in writing and clarify that the document you receive represents ALL potential fees.

3) What is your approach to investing and what specific services can I expect?
While it might sound like a “fluff” question, this one’s important. You need to be absolutely clear that you understand their investment approach is. Is it based on buy-and-hold, tactical rotation based upon the calendar quarter, or is it based on some other style? Do they use individual stocks and bonds, mutual funds, ETFs, or other products on a regular basis? Do they focus on financial planning and less on portfolio management or vice versa? A good advisor will be able to quickly and thoroughly articulate their style and give you a sense of ‘fit’. But just to be sure, ask for this information in writing and be wary of anyone who shies away from answering your questions.

While these three questions alone won’t ensure your financial future entirely, they can go a long way to helping you choose and stay with the right financial planner.

I was watching the show ‘MythBusters’ the other night (because I’m kind of geeky that way) and I found myself thinking, “You know the financial world could really use its own MythBusters type of program.”

Further confirming my geek status, I quickly gave myself the title of program director of this completely non-existent program and slated the first four episodes to be entirely dedicated to busting open the myth of buy-and-hold investing.

‘Four episodes?’ you might ask. Yes, at least four. I think it’s going to take that many to shake investors of the notion that this grand idea Wall Street has been pushing for decades doesn’t actually yield the touted results.

As my first piece of evidence, I will offer up famed investor Warren Buffet.

By all accounts, Buffet is a skilled investor. His success in the market (i.e. HUGE and consistent returns) have been extremely well-documented and chronicled. However the tale that Wall Street tells of Buffet’s approach — one of mythical savvy in picking the right stocks and holding on to them for the long haul — is far from the truth.

In fact, a team of academics led by John Hughes from the University of California at Los Angeles recently analyzed the quarterly filings of Buffet’s company, Berkshire Hathaway, for the years 1980 to 2006. The filings offer a detailed tracking of Buffet’s actual trading activity. And you know what it revealed? Buffet’s median holding period during that time was…drumroll…one year.  In fact, 30% of his investments were sold within six months and only 20% earned a spot in his portfolio for more than two years. That, my friends, is not a buy-and-hold approach but rather active trading and management. (If I had a special effects budget for my program this is where I’d blow something up. Something big.)

With the dust of this revelation (and awesome explosion) settled, I’d now turn my program’s focus to this question: given that one of the world’s greatest investors doesn’t actually buy-and-hold, why does this myth persist? While there’s no single agreed-upon reason, there are a couple of good theories.

The first is that mutual fund companies basically discourage it. Why would they do that? Well, mutual fund companies only make money while the client is invested. So let’s say the market takes a turn and you pull your money for, say, just three months. At the end of that year the mutual funds you-based revenue would be cut 25%. Now imagine if EVERY client had that idea…

The second theory is similar to the first except the key advocates of buy-and-hold here are Wall Street trading firms. While they stand to make some money on initial investment sales, there’s no guarantee that you’ll bring that money back when the market improves. So in that sense, when Wall Street says buy-and-hold works, it does. But only for them.

Theories aside, the reality is that in the world of investing, discipline is what yields the best return. You do your research, you buy smart. You hold onto what’s working and you cut loose those investments that aren’t turning a profit.  Conclusion: Buy-and-hold is a bust.

Jason MacGregor, Principal of Minich MacGregor Wealth Management – in Saratoga Springs, is a fee only Advisor who provides investment advice to individuals and individual company retirement plan participants. He can be reached at 518-499-4565, jason@mmwealth.com, or Twitter @mmwealth.

The old adage states that in life nothing is certain but death and taxes. But given today’s economic climate, you might consider adding changing jobs to that list. According to the Department of Labor, most Americans change jobs every three and half years. Sometimes the choice to make a change is your own, sometimes it’s not.

One thing that often surprises people when they move into a new job is how different retirement savings options can be, especially if they’re moving from a for-profit to a nonprofit entity, or vice versa.

But don’t be overly concerned about the different labels for the various 401(k)’s. Across the different plans, the basic premise is the same: you build your retirement savings by putting part of every paycheck into a retirement account on a pre-tax basis. The money grows while in the account and is tax deferred. Later, when you retire, you can take the money out and claim the distribution as income. But you have to make the decision to make the investment and you have to understand how each option works.

Here’s a little guidance on how the three most common plans work and differ:

401(k): Probably the most widely known plan, 401(k)s are offered to employees of for-profit entities. The contribution limits for 2012 are $17,000 if you are younger than age 50 and $22,500 if you are 50 or older.

Sometimes employers will offer a contribution “match” to encourage saving for retirement and as an additional recruiting and retention perk. Essentially free money, a match is one of the best and easiest ways to grow your retirement savings.

403(b): A slightly lesser known plan, 403(b)s are offered to employees of nonprofit institutions and public education employers. If you are a teacher, chances are this is the plan you have. The annual contribution limits are the same as the 401(k) but, after 15 years of service, additional employee contributions can be made to the plan (big bonus). In addition, most schools offer participants a choice of 403(b) providers to choose from giving you more options for growing your money.

457: The least known of the three, 457s are offered by state and local governments and some tax-exempt institutions. The state of New York’s Deferred Compensation is a 457 plan. While the contribution limits are the same as the 401(k) plans, this type of plan often has a special catch-up feature that lets you add additional funds with no penalty three years prior to normal retirement age stated in the plan. If you are close to that age and want to save more money on a pre-tax basis, this is an option definitely worth asking about.

Another unique feature of some 457 plans is that there is no coordination of contribution limits. This means that if your employer offers both a 401(k) and 457, the maximum amount contributed can be made to both.

While your career path may take a few unexpected turns, it inevitably ends with retirement. Understanding and taking advantage of the various retirement plan options offered to you now will go a long way toward ensuring you reach that end with sufficient funds to enjoy your retirement without worry.

For many of us, 2011 was a year that we were more than ready to say goodbye to. Happily, 2012 began on a high note with an inspiring opening day rally. While it’s nice to hope the trend will last longer than the holiday glitter and leftovers still lingering in our homes, it pays to start the year with a reality check about the next 12 months and beyond.

Given that traditional pensions are the exception and not the norm, your 401k should be your primary concern as far as future finances go. Now if you’re cringing because you don’t have a 401k or have been neglecting yours, take heart. There’s good news to be had.

Recent changes to 401k limits now make it possible to begin building up this retirement base in a more meaningful way than was ever possible in the past. Or, in instances where you’ve been short-changing your account, the new limits will help you make up some of the ground lost. Contribution limits have been ratcheted up to keep closer pace with inflation and will be specifically keyed to inflation beginning in 2013.

For individuals age 50 and over who have put off retirement planning, the good news continues in the form of a catch-up limit. If you are 50 or over by year’s end, you can make an additional catch-up contribution to your 401k on a pre-tax basis. For 2012, the catch-up limit is $5,500. Like standard contributions, catch-ups will be indexed to inflation in 2013 and you are free to make additional catch-up contributions on annual basis (or until you max the option out at $22,500) so as to improve your financial status by the time you reach retirement.

Something that all 401k holders should try to take advantage of regardless of age or the size of their 401k is an employer match. While not all companies offer match programs, it’s of the utmost importance that you find out if a program is available. While the structure of programs can vary dramatically they all offer the same thing: free money for your retirement. Not taking advantage of this option or simply failing to ask if it exists is one of the most short-sighted things you could possibly do. If you do nothing else in the new year, besides take advantage of a match, you will have made a significant improvement in your future financial outlook. Get on it.

While 2011 will no doubt go down as a less-than-stellar financial year, the positives for the economy in 2012 appear to outweigh the negatives for the 2012 economy. With that in mind, I wish you a very happy and prosperous new year and urge you to stay focused on the present and always with an eye to the future, not the past.