Financial Literacy Archives - Seacure Advisors

The Stock Market Rout: Healthy Correction or The Start of a Bear Market?

October 15, 2018 By SeaCure Advisors Leave a Comment

OCTOBER 12, 2018 | By Adam Goff

On the latest edition of Market Week in Review, Adam Goff, managing director, investment practice, and Rob Cittadini, director, Americas institutional, discussed possible factors behind the recent sell-off in global equity markets and what the road ahead may look like for investors.

Is a Bear Market Beginning?

The stock market was pummeled in a two-day stretch from Oct. 10-11, with major indexes tumbling across the globe. This has led many investors to wonder if the much-anticipated beginning to the next bear market is underway. Goff’s answer? Probably not.

“The recent downturn looks a lot more like the market correction that occurred in early February, following January’s peak in equities,” he stated. Looking at market moves so far this month, stocks appear to be re-tracing—or walking back—some of the excessive gains from the third quarter, Goff noted. Case in point: U.S. large-cap equities, as measured by the S&P 500® Index, were up approximately 7.5% last quarter, and are now down roughly 6.5% in October. Likewise, global equities (as measured by the MSCI World Index) advanced roughly 5% in the third quarter, and have now retreated by roughly the same amount.

“Essentially, we’re seeing the market re-thinking its excitement over the past few months,” Goff said, “with investors now realizing that perhaps there’s more to be concerned about, especially in regard to the forward- looking economic outlook.”

What Drove The Market Plunge?

What factors behind the scenes may have led to this shift in thinking? Looking at the actual news from the week of Oct. 8, nothing in particular happened that should have triggered such a steep sell-off, Goff said. For instance, the release of the U.S. Bureau of Labor Statistics’ Consumer Price Index (CPI) for September showed a 2.3% increase, year-over- year. While that was slightly below consensus expectations, it wasn’t enough to set off a firestorm of concern, he remarked.

In Goff’s mind, in order to really assess what happened in markets, it’s best to take a step back and look at things from a broader perspective. Last year was an extraordinary year for markets, he said, with stocks consistently churning upward. Ever since this year’s January high-water mark, in Goff’s opinion, a very different sort of market environment has set in, “a push-and-pull between concerns about how high interest rates will climb, when inflation will become a problem and whether trade tensions between the U.S., China and other countries will impact economic growth rates.”

These issues have all surged to the forefront in the past few weeks, Goff said, likely indicating that the remainder of 2018 will be plagued by higher volatility across markets. While there will be a bear market at some point in the future, he reiterated that the recent slide is likely not indicative of its beginning.

Is Volatility Here To Stay?

As for what the road ahead may hold for investors, Goff said it’s important to assess markets in terms of cycle, value and sentiment. When examined under these three lenses, he and the team of Russell Investments strategists don’t see the overall picture today as looking much different from a few weeks ago.

› In terms of value, equities still remain very high, especially in the U.S., Goff said. “Across the globe, stocks are at levels from which we don’t expect explosive upside,” he said.

› Turning to cyclical factors, he said that a tug-of-war remains between concerns over a flattening U.S. Treasury yield curve and rising interest rates, versus continuing robust economic data in the U.S. and many other regions of the globe.

› In regard to sentiment, Goff said that he and the team of strategists don’t view the U.S. equity market as fully oversold yet, as they don’t think it’s quite poised enough for a big upturn. “We do feel that the S&P 500® Index’s dip below its 200-day moving average represents a point at which some investors who’ve been underweight U.S. equities may want to consider getting back in,” he stated. U.S. Treasuries may also be a little oversold, Goff added, due to the sharp spike in the 10-year yield the week of Oct. 1.

All things considered, Goff expects to see continued volatility in the weeks and months ahead. The main takeaway for investors, in his opinion? “Now is not a great time to be taking lots of risk, given historically high valuations and the late-cycle phase of the market.” That said, Goff concluded that he and the team of strategists at Russell Investments will be looking for opportunities to exploit market weakness in the days ahead.

Watch The Video

Please do not hesitate to contact us if we can be of any assistance and as always, we welcome your feedback. You should follow us on Facebook for our weekly commentaries, for insights on how to navigate through times of market uncertainty, updates and other news as it relates to financial markets.

Always at your service,

Carolyn Howard, CFP®

New Credit Legislation

October 9, 2018 By SeaCure Advisors Leave a Comment

Recently, as part of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, Congress made several changes to credit rules that benefit consumers.

Under the new law, consumers are now allowed to “freeze” and “unfreeze” their credit reports free of charge at all three of the major credit reporting bureaus, Equifax, Experian, and TransUnion. The law also extends free credit freeze protection to children under age 16 and increases initial fraud alert protection to one full year (previously, fraud alerts expired after 90 days unless they were renewed).

What exactly is a credit freeze?

A credit freeze prevents new credit and accounts from being opened in your name. Once you obtain a credit freeze, creditors won’t be allowed to access your credit report and therefore cannot offer new credit. This helps prevent identity thieves from applying for credit or opening fraudulent accounts in your name.

To place a credit freeze on your credit report, you must contact each credit reporting bureau separately. Keep in mind that a credit freeze is permanent and stays on your credit report until you unfreeze it. This is important, because if you want to apply for credit with a new financial institution in the future, open a new bank account, or even apply for a job or rent an apartment, you will need to “unlock” or “thaw” the credit freeze with all three credit reporting bureaus. Each credit bureau has its own authentication process for unlocking the freeze (e.g., using a password and/or a PIN).

What about fraud alerts?

A less drastic option is to place a fraud alert on your credit report. A fraud alert requires creditors to take extra steps to verify your identity before extending any existing credit or issuing new credit in your name.

To request a fraud alert, you only have to contact one of the three major credit reporting bureaus. Once you have placed a fraud alert on your credit report with one of the bureaus your request for a fraud alert will be passed along to the other two bureaus.

Where can I find out more information?

The new law requires that each credit reporting bureau set up a webpage devoted exclusively to requesting credit freezes and fraud alerts. You can also find more information on the Federal Trade Commission’s website, IdentityTheft.gov.

Estimating College Costs

October 2, 2018 By SeaCure Advisors Leave a Comment

Before diving into college costs and how to estimate them, we’d be remiss in not announcing that IT’S FAFSA TIME! Starting October 1, you are able to fill out and submit your FAFSA. As we mention in our workshops and discuss with our families, financial aid is a first come, first serve bucket of money. The sooner you get your forms in, the better chance you stand of being awarded fairly. This is particularly true of families with exceptional need who may qualify for the Pell Grant and/or the Federal Supplemental Educational Opportunity Grant.

Even if you do not except need-based financial aid, the FAFSA is required in order to receive the Federal Direct Loan For Students – arguably the most favorable student loan available – and is also a requirement to be eligible for many merit-based grants and scholarships offered directly by schools. There simply is no reason NOT to submit the FAFSA.

In fact, if you’re the parent of a high school senior, stop reading right now. Go submit your FAFSA and come back. This blog post isn’t going anywhere.

…waiting…

…done yet? Great! On with the article!

What is the forecast for college cost increases?

You’ve seen the numbers — a college education is expensive. All those benefits of personal growth, expanded horizons, and increased lifetime earning power come at a price, a price that increases every year. According to the College Board’s annual Trends in College Pricing Report, for the 2017/2018 academic year, the average cost of attendance at a four-year public college for in-state students is $25,290, the average cost of attendance at a four-year public college for out-of-state students is $40,940, and the average cost of attendance at a four-year private college is $50,900. Many private colleges cost substantially more.

For decades, college costs have outpaced annual inflation, and this trend is expected to continue. Annual college cost increases in the range of 3% to 6% would be a reasonable projection based on historical averages.

The following table shows what college costs might be in 5 or 10 years based on current costs and a 5% annual college inflation rate.

Year	Public	Private
2017/2018	$25,290	$50,900
2018/2019	$26,554	$53,445
2019/2020	$27,882	$56,117
2020/2021	$29,276	$58,923
2021/2022	$30,740	$61,869
2022/2023	$32,277	$64,962
2023/2024	$33,891	$68,210
2024/2025	$35,585	$71,621
2025/2026	$37,364	$75,202
2026/2027	$39,233	$78,962
2027/2028	$41,194	$82,910

What expenses are included in the cost of college?

In the academic world, the cost of college is generally referred to as the cost of attendance (COA). Each college has its own COA. The COA consists of five items:

Tuition and fees: These expenses are generally the same for all students.
Books and supplies: These expenses can vary depending on the courses selected.
Room and board: These expenses can vary depending on where the student lives (e.g., dorm, off-campus apartment, at home) and the meal plan chosen.
Transportation: This expense can vary depending on how far the student lives from the college. It can involve daily commuting expenses, three round-trip flights home a year, or anything in between.
Personal expenses: This category varies greatly among students. It can include telephone bills, health insurance, late-night pizzas, personal spending money, or even day-care bills.

Twice per year, the federal government recalculates the COA for each college and then adjusts the figures for inflation. The government then uses the COA figures to determine your child’s particular financial need come financial aid time.

Why you should start saving early

Next to buying a home, a college education is the largest expenditure most parents will ever make (and perhaps the biggest expenditure when more than one child is in the family picture). Faced with such a daunting task, you might be inclined to ignore the problem and wait until you are more financially settled before you start saving. But that would be a mistake.

The key to sanity in the area of education planning is advance planning. The earlier in the process you become informed about the potential costs and your saving options, the greater chance you will start saving. And the more money you save now, the less money you or your child will need to borrow later.

It is important to begin saving as early as possible so you can earn interest, dividends, and/or capital gains on as much money as possible. With a long-term savings strategy, you can hopefully keep ahead of college inflation.

Regular investments add up over time. By investing even a small amount of money on a regular basis, you have the potential to accumulate a significant amount in your child’s college fund. The following table illustrates how your monthly investment can grow over time (assuming an approximate 6 percent after-tax return rate):

Monthly investment	5 years	10 years	15 years
$100	$6, 977	$16,388	$29,082
$300	$20,931	$49,164	$87,246
$500	$34,885	$81,940	$145,409

Note: The above example is for illustrative purposes only and does not represent the return of any investment. There is no guarantee that your investment will realize a return and there is a risk that you will lose your investment entirely.

How much do you need to save?

How much you need to save obviously depends on the estimated cost of college at the time your child is ready to attend. Often, these numbers are staggering. For many parents, the question of how much they should save becomes how much they can afford to save.

To determine how much you can afford to save for your child’s college each month, you will need to prepare a budget and examine your monthly income and expenses. Don’t be discouraged if you can save only a minimal amount at first. The key is to start saving early and consistently, and to add to it whenever you can from raises, bonuses, or unexpected gifts.

After you determine how much you can save each month, you will need to choose one or more college saving options. There are many possibilities for college savings–529 plans, Coverdell education savings accounts, custodial accounts, bank accounts, and mutual funds. To help make your nest egg grow, you will want to maximize the after-tax return on your savings while minimizing risk.

Finally, keep in mind that most parents are not able to save 100 percent of their child’s college education (after all, do you know anybody who purchased a home entirely with his or her own savings?). Instead, parents generally supplement their savings at college time with a combination of personal loans, financial aid (student loans, grants, scholarships, and work-study), and tax credits to cover college costs.

Using Savings and Investments To Pay For College

September 4, 2018 By SeaCure Advisors Leave a Comment

college savings If you have savings and/or investments on which to draw, you might consider using these funds to pay your child’s private school or college tuition bills as they come due.

Savings

A savings account can be a typical savings account at a bank or a money market account. There are several advantages to paying education bills from your savings.

First, withdrawing from your savings account is simple. For one thing, no independent approvals are necessary (except perhaps from your spouse). You simply go to the bank and withdraw as much money as you like. In addition, there are no tax implications or penalties associated with such withdrawals, so you won’t have to worry about complicated tax calculations come tax time.

Second, savings accounts generally earn the lowest rate of return as compared to other investments, so you don’t have to worry about missing out on high returns. This is referred to as low opportunity cost.

Third, if you have enough savings, you can avoid tapping into your retirement accounts, something most planners recommend avoiding if possible. Similarly, the more savings you use, the less money you (or your child, if college age) will need to borrow. Borrowing increases the cost of private school or college because you must pay back principal and accrued interest. By contrast, when you use your savings to make education payments, you avoid interest payments.

The disadvantage of using your savings is that the more funds you deplete, the less available money you will have for emergencies. It is generally recommended that you keep at least three to six months of your salary in a savings account for emergencies. In addition, using a large portion of your savings to pay education bills may mean postponing other purchases like a new car or furniture.

Investments

Investments can include more common items like stocks, bonds, and mutual funds or more obscure items like real estate investment trusts and precious metals. Liquidating your investments (i.e., converting them to cash) is also a good way to pay current education bills. Most investments are easily liquidated (though it may take a few days to get your check in the mail or to have funds transferred to your checking account) and do not require an application or other approval.

However, liquidating investments is a bit more complicated than simply withdrawing from your savings account. First, if you have several different investments, you need to choose which investment(s) you want to liquidate. Factors you should consider here are the rate of return that each investment is earning, your asset allocation, the prospects for each investment in the coming year, and which investment will generate the most capital gain (or loss) if sold. Your financial planner can help you determine which investments may offer the best benefits if liquidated.

In addition, liquidating investments can mean a small headache come tax time. When you do sell an asset, make sure to keep track of the number of shares sold (if appropriate), how long you have held the asset (if the asset sold was a capital asset, then any holding period over 12 months will result in long-term capital gain), your tax basis, the sale price, your profit (or loss), and any accompanying paperwork so that you can properly document the transaction on your tax return.

In some instances, parents may choose to gift an asset (such as stock) to their child and have the child sell it. The benefit is that the child generally pays capital gain tax at a lower rate.

How can you increase your savings and/or investments?

Some parents may not have sufficient funds in their savings account today (for example, when their child is a college freshman) but would like to build up their reserves to pay education bills a couple of years down the road. If so, this money needs to be accumulated gradually through savings.

Systematic savings is a structured method of accumulating money in which you save by “paying yourself first.” This means setting aside something from each paycheck as soon as you get it rather than saving whatever is left at the end of the month. You must stick to your savings plan to make it work, and you may have to make sacrifices in other areas, but systematic savings can be an excellent way to boost your savings account so that you have a reserve of funds to pay tuition bills in future years.

The first step is to determine how much money you can save out of each paycheck. If your employer offers payroll deduction, you may want to consider this option because it is less difficult to part with money that is taken directly from your paycheck. As you accumulate money for education bills, you may want to place your savings in an investment vehicle that protects the principal. Because of the relatively short-term nature of your goal (i.e., less than five years), the stock market may not be an appropriate choice. Instead, you may want to consider a savings account, a money market fund, or a certificate of deposit timed to mature when you are ready to pay a tuition bill.

How do you know if this strategy is right for you?

Most parents probably draw off their savings and/or investments at one time or another to pay their child’s private school or college bills. So the real question is probably how much of your savings and/or investments you should expend.

The answer depends on several factors, primarily the amount of your savings, your expected income needs in the next couple of years, your expectations about maintaining your current lifestyle, your monthly expenses and emergency fund requirements, and the current cost of borrowing. For example, if you want to retain the comfortable lifestyle to which you are accustomed (i.e., nice vacations, new cars), then you will need to leave a bigger savings cushion than if you are willing to budget for a few years. As for budgeting, in addition to accounting for regular monthly expenses (e.g., car payments or their own student loans), parents must also try to anticipate other one-time expenses, such as braces for Junior or a new roof for the house.

Other factors that parents of college-bound children may want to consider are how much (if any) they expect their children to contribute to college costs. Some parents expect their children to take out student loans in order to have a greater stake in their education. If so, parents can use less of their own savings. In addition, parents may want to estimate the amount of financial aid their child will receive (if any) in the upcoming year. If your child wins a scholarship in his sophomore year that will cover part of the following year’s costs, you can adjust any withdrawals from savings and/or investments accordingly.

US Fiscal Issues: Larger Deficits Are Driving Up Debt

August 28, 2018 By SeaCure Advisors Leave a Comment

According to the most recent Congressional Budget Office (CBO) projection, the federal budget deficit for fiscal year 2018 (which ends on September 30) will reach $793 billion, or 3.9% of gross domestic product (GDP). This figure is $230 billion larger than the CBO previously estimated in June 2017, largely because legislation enacted since then reduced potential revenues and increased anticipated spending.¹

The government runs a deficit when it spends more money over the year than it collects in tax revenue. To cover the difference, the government must borrow money from investors through the sale of Treasury bonds. Annual budget deficits add to the national debt, which already exceeds $21 trillion.²

As things stand, the budget shortfalls are not projected to end any time soon. In fact, the federal deficit is projected to widen substantially over the next several decades, reaching 9.5% of GDP by 2048.³

Here’s a closer look at the nation’s current fiscal situation and what it could mean for future economic growth.

Lower taxes, higher spending

The Tax Cuts and Jobs Act, which took effect in January 2018, included permanent rate reductions for corporations and temporary ones for individuals. The CBO projects that the tax law will stimulate economic activity and increase annual real GDP by 0.7%, on average, between 2018 and 2028.⁴

The Bipartisan Budget Act of 2018, passed by Congress in February, is a two-year budget deal that raises statutory spending caps that have been in place since 2011. It allows for $80 billion in additional spending for defense and $63 billion for domestic programs in 2018, and similar amounts for next year. The Consolidated Appropriations Act, a massive 2,232-page spending bill approved in March 2018, provides $1.3 trillion in government funding through fiscal year 2018.⁵

Despite higher GDP growth, these three bills are expected to increase deficits by $2.7 trillion between 2018 and 2027, with $1.7 trillion from reduced revenues and $1.0 trillion from increased spending.⁶

Future unfunded liabilities

While discretionary spending is controlled by Congress on an annual basis, mandatory spending (primarily for programs such as Social Security, Medicare, and Medicaid) is set automatically by formulas. Mandatory programs will account for about 38% of federal non-interest spending in 2018.⁷

Going forward, mandatory spending is projected to rise by an average of 6% per year, reaching $4.4 trillion by 2028. This trend is partly due to demographics, as a large population of baby boomers become eligible for benefits. In addition, health-care costs per Medicare and Medicaid beneficiary are likely to grow faster than the economy over the long term.⁸

Debt and the economy

If the nation stays on its current path, debt held by the public will grow from roughly 78% of GDP in 2018 to 96% of GDP by 2028, according to CBO projections. This would be the highest level since 1946 and more than two times the average over the last 50 years.⁹

Rising debt combined with higher interest rates will increase the government’s annual interest costs, which would roughly double between 2018 and 2028 (when measured as a percentage of GDP).¹⁰

The CBO expects that a significant rise in federal spending will boost the U.S. economy in the short run, especially in 2018 and 2019. However, it is likely to lower real GDP in later years, when rising debt payments take a bigger bite out of tax revenues, resulting in even larger deficits.¹¹

Potential consequences

Increasing federal borrowing to cover large deficits could erode Treasury bond values.¹² The Treasury is selling more bonds to finance higher debt at the same time the Federal Reserve is winding down its bond-buying program. To some degree, the expected increase in the supply of available Treasury bonds could be offset by an increase in demand if new Treasuries offer higher yields, but imbalances of supply and demand could spur some market volatility.

Another concern is that the economy and inflation could heat up too quickly, prompting the Federal Reserve to raise rates at a faster pace. And with debt mounting, lawmakers may have less flexibility to use fiscal policies to respond to future economic challenges.

The widening deficit also highlights some key challenges in balancing the federal budget. Tax breaks are often welcome, but they reduce revenue unless they generate large-scale economic growth. Many costly government programs are popular, essential, or both. Eventually, it could take some hard choices to reduce annual deficits and keep the national debt from rising to unsustainable levels.

U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. Bonds not held to maturity could be worth more or less than the original amount paid.

1, 3-4, 6-11) Congressional Budget Office, 2018

2) U.S. Department of the Treasury, 2018

5) The Wall Street Journal, March 23, 2018

12) The Wall Street Journal, April 23-24, 2018