How this late-winter, coronavirus-induced market turbulence affects you depends upon how old you are. For people in or near retirement, it is scary – yet there are ways to offset a shrinking stock portfolio. Regardless of your age, look at market dips as opportunities, not threats.

Eleven Trading Days for the Record Books

For the last part of February and at least through the first third of March, the stock market could be described as “tumultuous.” The S&P 500 Index, the DJIA and NASDAQ are all off more than 10% from recent highs.

The nasty coronavirus is somewhat to blame, but that would be much too simple:

·       Oil was in free-fall

·       The Federal Reserve cut rates by 25 basis points in an emergency meeting

·       Fed-watchers think another 100 basis point rate cut is coming, pushing rates to almost 0

·       Every single one of the 11 S&P 500 sectors is in the red YTD, with the Energy sector off over 40% and the Financials and Materials sectors off over 20% YTD

And here are some history-making days to think about: from February 24th through March 9th, there were 11 trading days:

·       Those 11 trading days saw 5 of the 7 largest one-day-point-losses for the DJIA in history

·       Those 11 days also saw the two best-one-day-point-gains for the DJIA in history too

Now Might be a Good Time to Invest

How such market action, which is normal, impacts you financially and psychologically depends on where you are, age-wise. If you are younger and have long investment time frames relative to your goals, a market dip can be your friend. For example, let’s say you have young children and are saving for them in a 529 college savings plan, and college is a number of years away. If your account is down along with the market, compared to a previous high point, consider adding money.

Ditto if you are saving for retirement in a 401(k), individual retirement account or similar plan. If you save regularly, dollar cost averaging works. That’s where you invest a set amount on a regular schedule, perhaps at the first of each month. When stocks decline your contribution buys more cheaper shares and less expensive shares. Over time your average share cost is less than the current share price.

Is Opportunity Knocking?

If you are retired or some other life event has forced you to live off of your savings, naturally, you are nervous amidst scary headlines and histrionics of media commentators during significant market declines.

But consider heeding the words of the legendary investment manager John Templeton, who famously counseled, “Buy when there is blood in the streets.”

Occasionally you get event-driven market routs such as the aftermath of 9/11 in 2001 and the debt crisis of 2008. In your life span as an investor, you have hopefully saved for rainy days, kid’s educations, future retirement and life-enriching experiences like global travel. When markets dropped, you should have dropped in extra funds. It’s likely that you never bought at the bottom, as that is obvious only with 20/20 hindsight.

Your Investment Policy is Critical

The key is a sound investment policy that allows a cushion – in money market funds or other safe and low-volatility repositories that provides living expenses without having to sell stocks at low levels. Alternative investments in real estate, private equity and financing, energy infrastructure, etc., may also provide cash flows to supplement living needs without selling stocks.

You also may focus on value stocks with good dividends and reasonable P/E ratios. Such portfolios eschew aggressive growth stocks that pay no dividends and have no profits. A hot story may sell, but do economic fundamentals underpin the stock value?

Big Picture

No one likes to see markets continuing to set one-day point-drop records. And while the media continues to scream that the sky is falling, it’s not.

Remember that through the first few months of 2020, we see:

• Low and declining energy costs

• Low and declining interest rates

• Low inflation rates

• Easy monetary policy

• Low unemployment (50-year low)

• A stable housing market

The sky is not falling as winter 2020 comes to a close. But rain clouds and storm fronts can be vexing, unless you are prepared with rain gear. A comprehensive investment policy is the financial planning equivalent of rain gear. You may not be singing in the rain, but you will maintain peace of mind.

According to the College Board, the most recently published figures of the average annual cost of tuition and fees at a public university for a school year was $9,139 for in-state students and $22,598 for out-of-state students. The average cost of a private university was much higher at $31,231.

Thankfully, much like tax-advantaged accounts designed to help us save for retirement, there are
tax-advantaged accounts designed to help families set aside funds for future college costs. Named after Section 529 of the Internal Revenue Code and created in 1996, there are two types of tax-advantaged college savings programs: pre-paid tuition plans and college savings plans.

The attraction of 529 college savings programs is that both provide for investment earnings to grow on a tax-deferred basis. In addition, funds used to pay for qualified education expenses may be withdrawn free of tax. Nonqualified withdrawals, on the other hand, are subject to ordinary income tax and a 10% penalty on earnings. Let’s examine the differences.

Prepaid Tuition vs. College Savings Plans

One type of 529 programs is the prepaid tuition plan, which allows you to lock in tuition rates at eligible state colleges and universities.

Most are sponsored by state governments and allow account holders to “purchase” tuition at today's rates and “redeem” the credits in the future when your child is going to college. In effect, the state is absorbing tuition increases during the years in between.

Pre-paid tuition plans allow you to pay for tuition in one payment today or through installments, but generally don’t cover expenses such as room and board. Your contributions are then pooled with other plan participants and invested by the state, then transferred to the appropriate school when your child starts college. But since the state is managing the investments, you have no investment options.

In contrast, college savings plan typically offer several investment options, at varying levels of risk, depending on how close the child is to college. Plus, college savings plans allow students to attend any accredited post-secondary school, public or private, irrespective of the state where you live or where the college is located.

In addition, although the investments are managed by a state-designated professional money manager – typically through mutual funds – and are allocated to mutual funds based on the age of your child (the beneficiary), you generally get to determine which investment is appropriate or you, based on your risk tolerance and other factors.

The investment objectives of the mutual funds are also what most people are familiar with: equity mutual funds, fixed-income mutual funds, and money market mutual funds or age-based mutual funds that shift the allocation among stocks, bonds and cash depending on the age of your child.

The following chart was copied from the Securities and Exchange Commission and outlines many of the major differences between prepaid tuition plans and college savings plans:

College Savings Plan

Prepaid Tuition Plan

• No lock on college costs.

• Covers all "qualified higher education expenses," including:

• Tuition

• Room & board

• Mandatory fees

• Books, computers (if required)

• Many plans have contribution limits in excess of $200,000.

• No state guarantee. Most investment options are subject to market risk. Your investment may make no profit or even decline in value.

• No age limits. Open to adults and children.

• No residency requirement. However, nonresidents may only be able to purchase some plans through financial advisers or brokers.

• Enrollment open all year.

• Locks in tuition prices at eligible public and private colleges and universities.

• All plans cover tuition and mandatory fees only. Some plans allow you to purchase a room & board option or use excess tuition credits for other qualified expenses.

• Most plans set lump sum and installment payments prior to purchase based on the age of beneficiary and number of years of college tuition purchased.

• Many state plans guaranteed or backed by the state.

• Most plans have age/grade limit for the beneficiary.

• Most state plans require either owner or beneficiary of the plan to be a state resident.

• Most plans have a limited enrollment period.

 

Which is Right for You?

Your own financial situation will determine whether a prepaid tuition plan or college savings plan is the preferred vehicle to help someone through college. Part of this determination includes the effect that either will have on your student’s financial aid eligibility and your own estate planning. That being said, as a financial advisor I worry about prepaid tuition plans for a few reasons:

First, there just are not that many states providing prepaid tuition plans and accepting new applications. While this list is always changing, right now I found 10 that are accepting new applicants: Florida, Illinois, Maryland, Massachusetts, Michigan, Nevada, Pennsylvania, Texas, Virginia, and Washington.

Second, I really don’t like to rely on a state to fulfill a financial guarantee, especially with shrinking state budgets.

New Mexico, for example, terminated its program altogether; Colorado is no longer open to new account holders; and Alabama froze its payouts at 2010 levels.

That doesn’t mean that college savings plans are not without flaws either. My “worry” with college savings plans are fewer, however: some college savings plans are very expensive and some don’t have great investment options from which to select. With a bit of homework, however, both of these worries are mitigated.

The Key to Saving for College

The reality is that depending on the number of children you have, saving for college will be the most expensive item you encounter, outside of saving for your retirement. So much like I counsel clients with their retirement, the key is to start early so that your savings have more time to grow. Feel free to email me at ivan@otbfinancialplanning.com if you have any questions or would like to start saving for college today. If you found this blog post helpful, subscribe below.

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Why You Need Commercial Umbrella Insurance

In our increasingly litigious society, business owners, especially those in the fitness industry, must be prepared for the possibility of lawsuits. You may have seen CrossFit, Inc. be involved in a number of lawsuits and think that something like this may not happen to you. Here is an example of Kansas City area CrossFit being sued and ultimately losing when a member hurt his back during a 1-rep max deadlift. The jury found the man 50% negligent, yet he was still awarded $400,000 in damages which were split between CrossFit, Inc. and the gym owner.

A lawsuit could result in large legal fees and settlements. In addition, negative publicity and lost time resulting from court-related activities can have a substantial impact on your business.

A commercial umbrella liability policy is designed to help protect you and your business from claims that can be catastrophic for your business. It can provide protection above the required liability limits of your commercial general liability, auto liability, and employer’s liability (workers compensation) policies.

How Commercial Umbrella Insurance Works

Umbrella coverage takes effect when the limits of your underlying policies have been exhausted, and may also cover what your current business policies exclude. Because it pays only after your underlying policy is exhausted, its usually very affordable. Typically, a commercial umbrella policy may offer extra protection for legal defense expenses, losses occurring outside the U.S., and personal injury or property damage claims. In addition to covering the named insured, it may also protect your coaches and others you agree to protect under a written contract, at least to the extent that losses occurred within the scope of business duties.

However, while umbrellas provide for losses and liabilities above and beyond the scope of other insurance, certain exclusions may still apply. In most cases, you will be expected to maintain your underlying insurance, without alterations in terms or conditions, during the term of the umbrella policy. You may also be required to carry certain amounts of insurance in these underlying policies in order to qualify for an umbrella. But, the cost for your umbrella coverage will likely be lower if your primary deductibles or policy limits are higher.

The Important of Regular Insurance Policy Reviews

Be sure to review your insurance policies regularly because the amount of umbrella coverage you need may change over time. For instance, changes in your underlying policies, such as new exclusions or limitations, may leave gaps in your umbrella coverage. Also, inflation and ever-increasing legal awards often necessitate an increase in coverage.I recommend using a fee-only advisor, such as Outside The Box Financial Planning, because fee-only advisors do not receive commissions or other compensation from insurance companies for selling their products. This way you get the most objective advice. 

Your primary insurance may not always provide all the protection you need, especially when an expensive court settlement is involved. Contact us at 312-554-5889 or ivan@otbfinancialplanning.com for more information on how you can help protect your business from lawsuits and other potentially catastrophic losses.