We all have that junk drawer in the kitchen, the closet in the guest bedroom or the trunk of our cars that are filled with clutter. Whether it’s a childhood keepsake, a ten-year old sweater, a spare key to your neighbor’s house or pizza coupons, we all have things that we’ve accumulated through the years. Each time we venture into one of these spaces, we find something that was important to us at some time in our past, but has been neglected and forgotten. Until you clean out that drawer or closet, and if you’re like most, you’d rather delay completing that chore, you really don’t know what you have.
The same holds true with many investors and their financial investments. You may have begun your investment journey years ago by enrolling in your company’s 401k or starting a Roth IRA. Through the years, you have accumulated assets, just like you accumulated stuff in your home or car. If you changed jobs or moved to another town, your assets may have stayed where you left. You focused on other more pressing aspects of your life, such as buying a home, or educating your kids. Many investors look back and realize that they have a significant pile of financial clutter that is preventing them from being successful. Whether it’s seven different brokerage accounts, old IRAs and 401(k)s; or individual stock certificates that you’ve purchased directly through the company during the years, chances are you have significant financial clutter that can impair your ability to meet your financial goals.
During my career, I have lived through Black Monday (1987), the Friday the 13th mini-crash (1989), the real estate and savings and loan crisis of the early 1990s, the Asian Financial Crisis (1997), the Russian financial crisis and collapse of the Long-Term Capital Management hedge fund (1998), the dot-bomb crash (2000), the crashes of 2008 and 2009—and now the European crisis and crash of 2010. For a young guy, that seems like a lot.
As this list should demonstrate, though, market declines and financial crises are actually pretty common. Most of us have lived through, and ridden out, several—and even made money over time despite them. The European crisis is only the most recent. We can’t make light of it, because market movements affect the emotions and lives of millions of people. But we also shouldn’t make more of short-term market movements than they really are. In the context of a prudent financial plan, market movements are like storms at sea. While they can overwhelm small or poorly sailed vessels, properly designed and sailed ships tend to come through the turbulence just fine.
Market past and present—a look at subsequent returns
To illustrate this concept, take a look at the past and present of the market. We are in the midst of a serious crisis, we hear, and the market is in freefall. Let’s consider the scariest part first: the current 10-percent-plus decline in May. Surely this signals a continued bear market—right?
Not necessarily. We looked at the past 40 years to identify monthly declines of 10 percent or more in the S&P 500 Total Return Index; then we examined the subsequent performance of the market. Here’s what we found.
Subsequent Annual Returns, S&P 500 Total Return Index
Was the nearly 1,000 point decline in the Dow really about Greece? Let’s look at some trading data to make sense of it all. As the market bottomed around 2:47 today I compiled a list of Dow components and their individual contribution to the Industrial Average. As the chart below shows, five stocks (HPQ, BA, IBM, MMM and P&G) accounted for roughly 500 down points on the Dow alone.
Out of these, the action in Proctor and Gamble is the most peculiar. From an opening price of $61.91 per share, it reached an intraday low of $39.37 at 2:48 for a decline of 36%. The stock recovered to close at 60.71 for a modest 2% decline on the day. Do you think the fundamentals of the company changed that dramatically in less than two hours? Did the situation in Greece change that much?
Proctor and Gamble common stock on May 6th, 2010
Our Thoughts
On this record day, allow us to make an observation. This wasn’t rational trading behavior. Not on the part of individuals or institutional traders. In fact, how can a market comprised of irrational, emotional participants who eagerly trade on emotions instead of facts be considered “efficient” simply by aggregating all of the individual, irrational actions together? I’m not the first to offer this observation but in my opinion, May 6th, 2010 puts another nail in the coffin of the “efficient market theory”.
Economist John Maynard Keynes is attributed with the observation that, “The market can stay irrational longer than you can stay solvent.” Today was an opportunity for individual investors to keep their emotions in check and in doing so, outsmart the proprietary trading gurus at Goldman Sachs who were trading at warp speed this afternoon to no avail. When trading volumes reached their zenith this afternoon more than 1 million trades were dropping every second. Those weren’t humans entering all those trades. That’s faster than our teenager can text message.
Looking Forward
In a bear market traders sell the rallies and in bull markets they buy the dips. At this point we have a compelling question before us: Are the last few days the end of a bear market rally that should have been sold or is this a dip at the early stages of a new bull market that should be bought? The answer won’t come at a singular point in time but will become clear over time. Friday’s employment number will provide us with another piece to finish the economic puzzle.
Should the Commerce Department release data the shows significant improvement in hours worked and hourly wages, the market will shrug of the Greek tragedy and look on today’s trading volatility as a comedy of errors. In closing, we find further irony in the fact that today was also the National Day of Prayer. As long as brokers remain faithful to their black-box trading algorithms there will be prayer on Wall Street. Maybe God has a wicked sense of humor.
*The total decline in the DJIA from HPQ, BA, IBM, MMM and P&G was -504 points.
Disclosure:Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Barclays Capital U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. The Barclays Capital U.S. Credit Index is comprised of the U.S. Corporate Index and the non-native currency sub-component of the U.S. Government-Related Index. It includes publicly issued U.S. corporate, specified foreign debenture, and secured notes denominated in USD. The Barclays Capital Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Barclays Capital government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Barclays Capital Municipal Bond Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than two years) selected from issues larger than $50 million.
In April Financial Literacy Month, LeConte Wealth Speaks to High School Seniors on Importance of Wise Credit Use and Savings
Alcoa, Tenn. – With spring graduations fast approaching, it’s time for high school seniors to finish their last days of classes and soon take the much-anticipated walk across the stage to receive their diplomas. With this life transition, these young adults must also prepare for their futures and the responsibility of managing their own finances.
April is Financial Literacy Month, and Alcoa-based LeConte Wealth Management is taking part in local educational outreach by coaching high school seniors on the right way to maintain a good credit standing post-graduation.
The firm presented “LeConte’s Financial Real-World Challenge” April 9 at Maryville High School, where Kevin Painter, co-founder and managing partner, and Andy Oaks, financial planner, led interactive discussions and activities with graduating seniors as part of an effort to teach the importance of financial literacy.
With these activities, LeConte Wealth Management hopes to influence young adults to take their financial decisions seriously so that they will not accumulate damaging long-term debt. The firm also aims to teach young adults the benefits of saving money and building good credit for a stable future.
According to LeConte Wealth, students’ need for financial literacy and good practical advice is more urgent than ever.
“Debt for college students and young adults has always existed as a common concern – but in this economy, it’s even more of a challenge and a potential threat to young people’s financial futures,” Painter said.
“With rising tuition costs nationwide, students are legitimately more hard-pressed to stretch their educational dollars along with their living expenses,” Painter said. “Plus, back at home, parents can easily be facing financial instability of their own with lost jobs and depleted savings, so students often have less of a safety net. It’s especially critical for students to get started on the right foot financially and to stay on track long-term.”
Kevin Painter and Andy Oakes talk with seniors at Maryville High
A September 2009 report by The Wall Street Journal indicated students now borrow more than ever for college, with the U.S. Department of Education reporting a steep rise in the 2008-2009 academic year alone, with total student-loan disbursements rising 25 percent over the previous year.
A 2008 survey by Sallie Mae found that 84 percent of college students had a credit card, and of those cardholders, 92 percent used their card for college-related expenses. The average college graduate faces an average credit card debt of more than $4,100.
“Maryville High School offers our Senior Seminars as a proactive approach to help prepare our seniors even more for life after high school,” said Maryville High School Principal Mike Casteel. “We are thankful to all of the outside presenters who volunteered to talk with our seniors during these seminars on such important topics as credit and money management.”
In the Maryville High School session, LeConte Wealth taught the five C’s of maintaining good credit: capacity, capital, collateral, conditions and character. With the knowledge learned from the seminar, students will be more aware about maintaining good credit.
“When students accumulate debt, they also have the potential to accumulate bad credit,” Painter said. “Credit is something that many young adults do not fully grasp until they are faced with their own credit problems.”
LeConte Wealth Management also offered the following tips on how to build a sound credit history:
Keep your own checking and savings account. Use care not to overdraw your account by maintaining an accurate knowledge of account balances with every check written and debit card use.
Establish a credit card in your own name, and use it responsibly.
Pay bills before the due date, including at least several days for payments to process through the mail.
Limit the number of credit cards you own. Too much open credit, even if the accounts have zero balances, will negatively affect your credit score.
Close unused accounts—do not just cut the cards up—or the account will still show as an open line of credit on your credit report. Ask the issuer to state on your credit report, “account closed by consumer.”
Limit the number of credit inquiries. Every time you apply for credit, it shows as an inquiry to your credit report. Too many inquiries are viewed negatively by lenders.
A large number of recently established credit accounts may hurt your ability to be granted credit.
Periodically obtain a copy of your credit report to verify that information reported is accurate and to look for ways that you can improve your credit.
LeConte Wealth Management is also available to speak to community groups about financial and wealth management topics. Groups interested in scheduling a presentation from LeConte should call 865-379-8200.
Even though the market was down on the last day of March, the first quarter ended without much fanfare and markets showed resiliency. Equity markets pushed higher over the quarter, with the Dow Jones Industrial Average (the Dow) returning 4.82 percent and the S&P 500 Index (S&P 500) returning 5.39 percent.
It was the strongest first quarter for the Dow since 1999 and the strongest for the S&P 500 since 1998. Leading the way were industrials, up 12.98 percent, and financials, up 11.50 percent, as both sectors were buoyed by an improving economy and better than expected earnings. International markets were also higher, though they failed to keep up with U.S. markets, due in part to the strength in the U.S. dollar. The MSCI EAFE Index gained 0.87 percent for the quarter, while the more risky MSCI Emerging Markets Index advanced 2.11 percent.
Fixed income markets continued to show signs of strength, now almost fully recovered from the credit difficulties of the past two years. The broad market, as measured by the Barclays Capital Aggregate Bond Index, gained 1.78 percent. The Barclays Capital U.S. Corporate High Yield Index pushed 2.68 percent higher, as lower-quality credits continued to benefit from the improving economic environment. Investors in these more risky bonds still realized an attractive yield, but a significant portion of their upside had already been achieved off the historically depressed prices this time last year. The quarter was also favorable for tax-conscious investors, as municipal bonds gained 1.25 percent, according to the Barclays Capital Municipal Bond Index. Continue Reading…
April 15th is like a national appointment with the dentist. It’s painful, expensive, and all you want to do is forget about it until next year. But just like promising yourself that you’ll become a “faithful flosser”, so it might be wise to take a “preventive maintenance” look at your finances now to ease the pain of next year’s annual appointment with the IRS.
Let’s start with a review of some of the proposed tax changes. First, because this is a term you’ll hear a lot in the coming debate, we should define “high income earner (HIE)”. Typically, for purposes of proposed legislation, this means any individual with gross income of more than $200,000, or any couple with gross income above $250,000. That said, here’s a brief overview.
Back in the 1950s, Ray Danner and Alex Shoenbaum founded the restaurant business that eventually became Shoney’s. At its peak with more than 1,500 stores, Shoney’s was one of the largest restaurant chains in America. One of Shoney’s restaurants, Captain D’s, is named for Mr. Danner.
When Mr. Danner passed away in September 2008, the 83-year-old businessman left a sizeable estate to his wife and four children. Unfortunately, he also left a complicated mess of business dealings that have yet to be resolved. His son, Ray Danner, Jr., is the executor in charge of Mr. Danner’s estate.
In an effort to collect several unpaid loans that the elder Danner made to various businesses, the younger Danner filed a number of lawsuits this past January in a Nashville court.
The East Tennessee community has connections to this situation as the elder Danner was the lead investor in a group of automotive businesses that included Neill Sandler Ford and a local auto parts store. Anyone who drives down Alcoa Highway knows that the Ford dealership is no longer there, but few people could have foreseen the depth of troubles it created for Mr. Danner’s heirs. For more information about this financial litigation,click on: http://www.nashvillepost.com/news/2010/3/8/nashville_at_law_danner_estate_feuds_center_on_loans_accepted_practice
According to the lawsuits, the elder Danner apparently loaned large sums of money to various businesses, such as the ones listed above in this article. Although the transactions were properly documented, the counterparties now allege that Mr. Danner frequently overlooked the terms of the loans and did not demand repayment unless they were profitable. So, millions of dollars have not been repaid to date.
This provokes a few observations. Did his business dealings need to be this complicated to be successful? At 80-plus years of age, was it really necessary to be taking on that much risk? Did he even understand what he was doing? Although Mr. Danner had a number of attorneys and financial advisers, did he have any close associates who could “talk straight” with Mr. Danner or his family?
LeConte Wealth Management has a saying at the company, “friends don’t let friends drive drunk.” In this scenario, “drunk” is referring to over-indulgent behavior—not alcohol.
What aspect of your own life would benefit from a serious reality check? Are you taking too much risk for your age and net worth? Can you quantify your financial risks? Is your financial and/or business life drowning in unnecessary financial clutter? Do you have a trusted adviser keeping you on the straight and narrow?
LeConte Wealth Management prides itself on its ethics and trustworthy personal relationships with its clients while focusing on keeping clients grounded.
Being self-employed has many benefits. You can make your own hours. You can choose your salary. And you will definitely get along well with your boss! But self-employment also comes with challenges, one of which is tax planning.
When you work for someone else, many tax considerations are taken care of by your employer. Income, social security, and Medicare taxes are withheld from your paycheck. When you are self-employed, the responsibility of determining the amount of taxes you owe falls to you. As such, you may want to take steps to ensure that you complete tax requirements effectively and beneficially for your business—and for you. Continue Reading…
LeConte Wealth Management offers tips for parents as National Financial Literacy Month is just around the corner in April
Time and again, parents will tell their children, “Do as I say, not as I do.” Yet, this old adage has no place in a family’s vernacular when it comes to financial literacy.
“Financial literacy is a foundational concept, which means that good habits and good decisions have a positive compounding effect,” said Andy Oakes, financial adviser for LeConte Wealth Management. “But the opposite is true as well, and maybe you want to save your children a lot of the headaches you’re experiencing because of decisions you wish you could revisit.”
It is never too late to take control of one’s finances. Sometimes the simplest lessons are the best, especially when it comes to teaching children about the value of healthy financial habits.
As Benjamin Franklin once said, “An investment in knowledge always pays the best interest.” When it comes to teaching children about money and personal financial responsibility, the earlier money lessons are learned, the better.
According to investorguide.com, “the benefits of teaching children about money are both short- and long-term. They may develop strong saving habits, learn how to make smart purchases, begin to understand the true meaning of ‘investment,’ and perhaps even learn why they can’t always have everything they want. By teaching the value of saving for the future, you can help them plan for financial security and avoid potential debt accumulation.” Continue Reading…
