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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

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Personal Banking Security Measures for the 21st Century

clientuploads/21st-Century-Securitysquare180.pngMany of us are constantly connected to the online world these days. This means that the potential is there for our computers and personal information to be compromised which greatly increases the risk of ID theft and financial fraud to occur. However, by taking some basic precautions you can significantly reduce the risk of your computing environment being compromised. Following these simple guidelines should help your computing environment become more secure:

Keep your computer and software up-to-date

Keep your computers and network equipment secured with the latest software updates and enable automatic updates whenever possible.  This includes updates to third party applications such as Java and Adobe Products.  

Use hard drive encryption

In the event your machine is lost or stolen, drive encryption can prevent others from accessing the data on your hard drive.  The purpose is to encrypt or scramble your data on your machine so that it can only be read with your encryption key.Many operating systems offer drive encryption.  Microsoft offers Bitlocker and Apple has FileVault. There are also other third party encryption offerings.   

Enable your firewall

Think of the firewall to your computer as the fence around your property.  If there were multiple holes cut in the fence, it wouldn’t be very useful at keeping people out.  Firewalls are typically enabled by default on Windows machines, but double check to make sure it’s on.  Here are instructions to do so if you are using Windows 7. Only allow necessary applications inbound access through your firewall. The same principles apply to your network firewall. 

Configure your screensaver

Set an auto-locking screensaver so your account gets locked out after a few minutes.  This is useful if you forget to lock your machine when are away from it. On Windows machines this can usually be done by pressing the “Windows Key” and the “L” button simultaneously.

Make your passwords stronger

The longer and more complex the password, the better.  At least 16 characters with a combination of upper and lowecase letters, numbers, and special characters is a best practice.

Configure your router

Use the strongest wireless security available (currently WPA2-CCMP) with a long and complex password for your wireless network. Disable WPS on your wireless router for greater security.   

 


Think that some secure banking information
of yours has been compromised?

If you suspect that your personal financial information has been compromised, call MutualBank Customer Support at 800-382-8031.


 

Monday, April 7, 2014

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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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