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Fiscal Cliff

You probably have noticed the media’s never-ending commentary relating to the “Fiscal Cliff.” The “Fiscal Cliff” is the confluence of two factors; the first, the expiration of the Bush tax cuts and the second, the automatic spending reductions that the Republicans in Congress negotiated for, during the 2011 debt ceiling debate. It was feared that if both of these events were triggered at the beginning of 2013, economic contraction would result. According to the non-partisan Congressional Budget Office (CBO), the combination of higher taxes and lower spending could reduce GDP by four percentage points, resulting in recession. The CBO estimated this could result in the loss of 2,000,000 jobs. From a positive standpoint, it was estimated by the same CBO that these automatic tax increases and spending reductions if left in place, would reduce U.S. government borrowing by $7.1 trillion over the next ten years or 70%.

On Tuesday, January 2nd, Congress passed and the President signed a partial compromise that deals with the tax issues, but defers the spending cuts. A summary of the changes:

  • Raises highest tax rate to 39.6%, while preserving rates for all other taxpayers
  • Increases the capital gains and dividend rates for high-income earners from 15-20%
  • One year extension of unemployment benefits for the long-term unemployed
  • Two month delay in the discretionary and non-discretionary spending cuts
  • Permanent fix for the AMT (alternative minimum tax)
  • Increase in the estate tax rate from 35-40% with the first $5 million exempt
  • One year deferral of a 27% cut in Medicare payments to doctors
  • Provision permitting businesses to write off 50% of new investments in the first year

Will the above compromise avert a recession? We are not sure, but perhaps a better question is, if a recession were to take hold how would it likely impact our clients?

To answer that question, we look at how recessions tend to impact markets. Since 1950, there have been ten recessions and the average decline of the stock market or S&P 500, has been 20.69% during these periods. The market tends to decline in advance of recessions as market participants anticipate the economic decline. Nine out of the ten recessions since 1950, were preceded by at least a 10% decline in the market. This sounds fairly predictive until you observe that there have been 47 corrections of 10% or more since 1950. Therefore, only 19% of corrections have predicted recessions accurately. Furthermore, the average decline in stocks, after a 10% correction, is 8.3% for all periods, but 10.3% during recessions. So, accurately predicting the recession by observing market corrections is tenuous and not terribly rewarding. Another challenge is when to get back in the market. The average increase in stocks during the first twelve months, after the end of a recession is 43% and roughly half of that return tends to occur in the first three months (making it easy to miss the recovery)! The bottom line is that unless you can properly time both the buy and sell decision, you will be hard pressed to improve your results over time. Mutual fund research firm DALBAR, suggests that, due to poor timing, the average equity investor earned 3.8% per year for the twenty years ending December 31st, 2010, while the market averaged 9.1%.

At MutualWealth, we orient our client portfolios towards a diversified combination of stocks, bonds commodities and other asset classes. This tends to produce results that are less volatile than the stock market.  We model our balanced portfolios to experience a standard deviation (measure of risk) of three to five, versus the stock market standard deviation of around twenty. This means we expect our clients to experience a fraction of the volatility of the S&P 500 during recessions. While we do not look forward to the potential for the “Fiscal Cliff” to rile markets, we are also confident our clients will be adequately insulated from the excessive volatility that may result. Diversification and prudence are better weapons against these uncertain times than attempting to predict recessions and other macro-economic events. We welcome any questions you may have regarding this topic and any other wealth management concern. 

Shayne Nagy, CTFA - Senior Vice President, Trust and Investments

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Personal Social Media Account Security

For many of us, social media has become a part of our everyday lives and helps us conveniently keep tabs on the people and topics we care most about.

Recently however, there has been an increase of social media account take overs by cybercriminals. As stated in the media, one contributing factor in some of the social media account takeovers has been the use of weak passwords.


Tips for creating a stronger password:


  • Passwords should typically:
    • be at least 8 characters in length
    • contain at least 1 number
    • contain at least 1 special character (!@#$$%)
    • contain both upper and lower case characters.
  • Do not use your name, date of birth, maiden name, mother’s maiden name, address, or other easily guessable words for passwords. 
  • Another way to create a strong password is to use a series of words that do not relate to each other. For example, JumpingFastRelaxStop!#.

 


Social media additional security options:


Another way to help avoid social media account takeover is to use the additional security options available. Two-factor authentication adds an extra layer of security that drastically decreases your chances of account takeover. Two-factor authentication is essentially the using of two separate components to verify your identity, the combination of something you HAVE with something you KNOW. A good example of two-factor authentication you most likely are already used to is withdrawing cash from an ATM, for example. Having both your debit card AND knowing a pin number is required to complete the withdrawal and protect your identity.

A popular and convenient two-factor authentication method is using a combination of both an online password and a text message verification sent to your phone. Enabling this type of authentication typically follows this process:

  1. Enter your password into Facebook or another website
  2. Immediately receive a text on your phone with a temporary pass key
  3. Enter the passkey received back on the site/app and you’re logged in

This may seem like overkill, but enabling this two-factor authentication will drastically decrease the chances of your social accounts being hacked. And actually, the process of setting up and using this authentication is pretty simple and convenient.

 


How to enable two-factor authentication:


Many popular social networks like Facebook, Twitter, LinkedIN, and others already support two-factor authentication. To learn more about how to do so on the most popular sites on the web, be sure to check out this article:

http://socialcustomer.com/2014/04/how-to-enable-two-factor-authentication-on-50-top-websites-including-facebook-twitter-and-others.html

Wednesday, April 22, 2015

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Fiscal Cliff

You probably have noticed the media’s never-ending commentary relating to the “Fiscal Cliff.” The “Fiscal Cliff” is the confluence of two factors; the first, the expiration of the Bush tax cuts and the second, the automatic spending reductions that the Republicans in Congress negotiated for, during the 2011 debt ceiling debate. It was feared that if both of these events were triggered at the beginning of 2013, economic contraction would result. According to the non-partisan Congressional Budget Office (CBO), the combination of higher taxes and lower spending could reduce GDP by four percentage points, resulting in recession. The CBO estimated this could result in the loss of 2,000,000 jobs. From a positive standpoint, it was estimated by the same CBO that these automatic tax increases and spending reductions if left in place, would reduce U.S. government borrowing by $7.1 trillion over the next ten years or 70%.

On Tuesday, January 2nd, Congress passed and the President signed a partial compromise that deals with the tax issues, but defers the spending cuts. A summary of the changes:

  • Raises highest tax rate to 39.6%, while preserving rates for all other taxpayers
  • Increases the capital gains and dividend rates for high-income earners from 15-20%
  • One year extension of unemployment benefits for the long-term unemployed
  • Two month delay in the discretionary and non-discretionary spending cuts
  • Permanent fix for the AMT (alternative minimum tax)
  • Increase in the estate tax rate from 35-40% with the first $5 million exempt
  • One year deferral of a 27% cut in Medicare payments to doctors
  • Provision permitting businesses to write off 50% of new investments in the first year

Will the above compromise avert a recession? We are not sure, but perhaps a better question is, if a recession were to take hold how would it likely impact our clients?

To answer that question, we look at how recessions tend to impact markets. Since 1950, there have been ten recessions and the average decline of the stock market or S&P 500, has been 20.69% during these periods. The market tends to decline in advance of recessions as market participants anticipate the economic decline. Nine out of the ten recessions since 1950, were preceded by at least a 10% decline in the market. This sounds fairly predictive until you observe that there have been 47 corrections of 10% or more since 1950. Therefore, only 19% of corrections have predicted recessions accurately. Furthermore, the average decline in stocks, after a 10% correction, is 8.3% for all periods, but 10.3% during recessions. So, accurately predicting the recession by observing market corrections is tenuous and not terribly rewarding. Another challenge is when to get back in the market. The average increase in stocks during the first twelve months, after the end of a recession is 43% and roughly half of that return tends to occur in the first three months (making it easy to miss the recovery)! The bottom line is that unless you can properly time both the buy and sell decision, you will be hard pressed to improve your results over time. Mutual fund research firm DALBAR, suggests that, due to poor timing, the average equity investor earned 3.8% per year for the twenty years ending December 31st, 2010, while the market averaged 9.1%.

At MutualWealth, we orient our client portfolios towards a diversified combination of stocks, bonds commodities and other asset classes. This tends to produce results that are less volatile than the stock market.  We model our balanced portfolios to experience a standard deviation (measure of risk) of three to five, versus the stock market standard deviation of around twenty. This means we expect our clients to experience a fraction of the volatility of the S&P 500 during recessions. While we do not look forward to the potential for the “Fiscal Cliff” to rile markets, we are also confident our clients will be adequately insulated from the excessive volatility that may result. Diversification and prudence are better weapons against these uncertain times than attempting to predict recessions and other macro-economic events. We welcome any questions you may have regarding this topic and any other wealth management concern. 

Shayne Nagy, CTFA - Senior Vice President, Trust and Investments

Contact a Representative Today

Back to Education Resources

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