Bear markets are NO fun and test the long-term investor. This crisis is even more distributing because the coronavirus has thrown our lives upside down and we don’t know the impact of how it will change our lives potential forever.

Things we recommend you do –

  1. Review your emergency reserve
  2. Review your short & long-term spending plan (Is the plan in line with your goals)
  3. Make sure you are maxing your 401K, all new contributions should be directed to stocks
  4. Rebalance your portfolio – I have no idea where the bottom is, but it is at least 36% closer than Feb 19th when the DOW was at 29,500
    1. Rebalancing worked really well in 2002 “DOT COM” & 2008 “Lehman”
    2. As Warren Buffett stated: ‘Be fearful when others are greedy, and be greedy when others are fearful.’
    3. The price of most equities has become much lower, giving equities more room to grow before they reach what we’d consider to be their fair value.
  5. Tax Loss harvest – can deduct up to $3,000 of losses on Federal & most state returns. NJ doesn’t allow losses & tax loss carry forwards so you have to be more strategic if you live in the Garden State.
  6. Get rid of Individual stock holding that were hard to sell before
  7. Remember the Stock market is made up of companies who all want to survive and thrive

One of the positives of having your birthday in mid-January is it gives you the opportunity to reflect back on the prior year (after the hoopla of the Holiday Season and Best of Lists has worn off of course) while simultaneously appreciating the benefit of being a year older and more mature to plan for the year ahead. Let’s not also forget the other positive being January provides good weather for napping. I really should change my birthday to the sunny days of mid-July!

Heading into 2019, financial markets were on edge and the year ahead looked treacherous. Prognosticators were predicting doom and gloom and signs of the Big R-word (Recession) were flashing. Social and political crises were aplenty. Nevertheless, 2019 proved to be a wonderful year for investment returns. As famous Fidelity fund manager, Peter Lynch, said, “More people have lost money anticipating (market) corrections than in actual corrections.”

2020 brings not only hope and a renewed sense of purpose but also a new law pertaining to taxes and estate planning. The Setting Every Community Up for Retirement Enhancements (SECURE) Act became effective on January 1, 2020 and brings some major changes to 2020 planning and beyond. Some of the highlights:

  • Age to Begin Required Minimum Distributions (RMDs) – if you turn 70 ½ after 1/1/2020, then first RMD is delayed till the year you turn 72. Under the previous rules, RMDS started in the year you turned 70 ½.
  • Elimination of the “Stretch IRA” for Beneficiary of IRAs and Retirement Plans – If you are a non-spouse beneficiary of IRA/Roth IRA/Other Retirement Plan then you must deplete the entire account balance by 12/31 of the 10th year of original participant’s passing. Exceptions are still in place for spouses, minors, disabled individuals and beneficiaries less than 10 years younger than the original participant. Under the previous rules, non-spouse beneficiaries could take distributions based over their life expectancy and “stretch” the distributions. This provision will be a major area of planning since the facts of your finances and potentially your children/grandchildren will need to be reviewed. Does a Roth Conversion make sense?
  • Traditional IRA Contribution Age – no longer any age limit to make an IRA contribution as long as the account owner has earned income. Under the previous rules, the year account owner reached 70 ½ was the limit.
  • Penalty-Free Withdrawals for Birth or Adoption Expenses – up to $5,000 can be withdrawn penalty-free from a retirement plan or IRA to cover birth or adoption expenses. However, the account owner still has to pay ordinary income taxes on the withdrawal. Under the previous rules, a 10% penalty on the distribution applied.
  • Additional 529 Plan Eligible Expense – 529 Plan funds can always be withdrawn tax-free to pay for qualified higher education expenses, and now, up to $10,000 over your lifetime can be withdrawn to pay down student loans. Important to note in 2018, a law passed allowing up to $10,000 per year to be used towards K-12 educational expenses.
  • Annuities in 401(k) Plans – more employers will offer annuities via retirement plans

While much is still to be determined on how the SECURE Act impacts each of us, one thing is certain and that is we are here to discuss it with you. Looking forward to another exciting year!

Blockchain Technology is in general, a digital ledger that can record a plethora of different information. The information is decentralized, often anonymous and public. The information (often transactional) then cannot be changed or fondled with retroactively or proactively, without the alteration of all previous bits of information. In layman’s terms, it is the most hack-proof, mistake-proof and hinderance-proof way to keep, track and use information in many different areas and industries.

Blockchain Technology is the next big thing in many industries and sectors. It is a trend that has solidified its position as the up-and-comer and is becoming a standing topic in discussions about the future. The Financial Industry is a leader in applications of all Fin-Tech trends, and that translates to the Blockchain technology as well. 2020 is the year that we will be seeing Blockchain Technology gain a lot more foothold in the industry and start to tie in the different uses for the technology into a more streamlined process. Below are some predictions / projections for 2020:

  • Most Blockchain startup companies and processes will fail – As the technology is not even fully understood, let alone embraced and implemented in most industries, there will be a lot of fails and missed marks on a lot of new projects. Investors will need to be weary of this and extra cautious of investing.
  • Financial Industry will continue to lead Implementation – After the safety and anonymity of crypto-currencies were implemented, the financial industry started to review and research possible implementations. It is easiest for the banking system and most beneficial to implement the security of blockchain technology to increase safety and speed of transactions. It is estimated that a staggering 77% of all Financial Institutions (In Developed Nations) will utilize Blockchain technology in at least a part of a process in 2020.
  • National Crypto-Currencies will start popping up – Venezuela already has a crypto-currency backed by the mineral and oil reserves of the nation. Sub-Westernized countries like Russia are also considering their versions of crypto-currencies.
  • Blockchain technology will grow exponentially in sectors where secure financial presence is a must. We will likely see large growth in sectors such as banking and financial services. The technology will be able to protect the anonymity of the transactions as well as the sensitive information involved.
  • Legality / lawmaking will start to catch up and cover blockchain technologies and their hosts. This will have to be a stepping stone before the point above can be put into action: no legitimate company would incorporate an unregulated technology into providing a regulated service (i.e. financial advice, banking services, etc…).

Overall, we have a lot to look forward to in 2020 for this new technology, and even though it may not be market-ready for anything major or even noticeable yet, its time will come and 2020 will bring forth large steps toward a united and secure blockchain world.

Sources:

https://www.bbvaopenmind.com/en/economy/finance/ten-trends-of-blockchain-in-2020/

https://www.aithority.com/guest-authors/blockchain-technology-in-the-future-7-predictions-for-2020/

When creating a healthy diet for your family you look at many things. What does each person need? For instance, if someone is diabetic you would watch for the amount of sugar in a meal or if someone has high blood pressure the amount of sodium. What do they like or dislike eating? What goals do you have? For example, are you trying to lose weight, gain weight, or build muscle? Is the meal balanced? How does it fit into the overall nutritional balance of the day, week, month, and year? As a person ages, their nutritional needs continue to change so the plan for this year may look very different from the plan 5 or 10 years from now. Creating a healthy financial life for you and your family is very similar to creating a healthy diet.

It is important to look at the specific needs of every person.  For example, having a disability or medical condition that requires care needs to be taken into consideration when planning.  Is it a long term situation or short term? How expensive will the care or equipment be? Does the person need a full-time caretaker?  What and how much does insurance cover? Will time off work be needed and how will that affect the overall income?  These are just some aspects that can affect your overall financial plan.

What do people like to do?  Sports, hobbies, and travel are all interests that can become expensive.  Planning for these expenses and knowing how much income can be allotted to enjoying life without sacrificing financial security allows the freedom to relax and have fun while partaking in these activities.

When setting financial goals such as a specific age to retire, paying for a child’s education, or being debt-free it is important to monitor them regularly so that you can make adjustments when needed to stay on track.  Knowing where you want to be in the months and years to come will help determine the steps to be taken now and in the future to achieve your goals.

Having the proper balance in your financial life is also important.  Paying all your bills on time but being over-insured or overpaying for insurance coverage and not contributing enough to your retirement funds can hurt your overall financial health.  Cash management, employee benefits, estate planning, insurance, investments, real estate, goals, specific needs, and taxes are all important aspects of your total financial situation.  Each aspect should be considered not only on an individual basis but also from a holistic perspective to determine how each will affect the whole.

Where you are in your life journey is also important when making financial decisions.  A young adult has different needs, goals, and responsibilities than someone who is retired.  Continuing to evaluate and alter your finances as your needs change is important to creating and maintaining a healthy, stress-free financial life. 

At Lighthouse Financial Advisors we understand how important all of these financial aspects are and take a holistic approach to managing to ensure the decisions being made are in the best interest of your overall financial health.  After all, our goal is to liberate you from the complexity of finances so you can live prosperously and enjoy the journey.

Parents and students who are currently completing the FAFSA and learning about financial aid may be kicking themselves for not having a better plan in place to pay for college. When it comes to college costs, a little planning can go a long way.

There are several useful ways to save money for your child’s college education, each of which has its pros and cons.

A. 529 Educational Savings Accounts

  1. A plan operated by a state or educational institution, with tax advantages and potentially other incentives to make it easier to save for college and other post-secondary training, or for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school for a designated beneficiary, such as a child or grandchild.
  2. Earnings are not subject to federal tax and generally not subject to state tax when used for the qualified education expenses of the designated beneficiary, such as tuition, fees, books, as well as room and board at an eligible education institution and tuition at elementary or secondary schools. Contributions to a 529 plan, however, are not deductible for Federal Tax Purposes or NJ tax but can be claimed in some states on their state tax returns.
  3. As of 2018, the term “qualified higher education expense” includes up to $10,000 in annual expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school.  A qualified, nontaxable distribution from a 529 plan includes the cost of the purchase of any computer technology, related equipment and/or related services such as Internet access. The technology, equipment or services qualify if they are used by the beneficiary of the plan and the beneficiary’s family during any of the years the beneficiary is enrolled at an eligible educational institution.
  4. Anyone can set up a 529 account and name anyone as a beneficiary — a relative, a friend, even you. There are no income restrictions on you, as the contributor, or the beneficiary. There is also no limit to the number of plans you set up. Any beneficiary initially named on any 529 account, can always be changed to yourself or any other person.

B. ESA (or Coverdell Account)- Educational Savings Accounts

  1. A Coverdell Education Savings Account is a tax-deferred trust account created by the U.S. government to assist families in funding educational expenses for beneficiaries 18 years old or younger. The age restriction may be waived for special needs beneficiaries. While more than one ESA can be set up for a single beneficiary, the total maximum contribution per year for any single beneficiary is $2,000.
  2. The ESA allows families to increase investment earnings through tax-deferral as long as the funds are used for educational purposes.

C. Custodial Brokerage/Investment Accounts

  1. UGMA and UTMA accounts are considered the granddaddy of college savings accounts. The UGMA (Uniform Gift to Minors Act) and UTMA (Uniform Transfer to Minors Act) are nothing more than custodial accounts, which are used to hold and protect assets for minors until they reach the age of majority in their state. These accounts typically allow stock, bond, and mutual fund investments, but not higher-risk investments like stock options or buying on margin. Because the assets are considered the property of the minor, a certain amount of the investment income will go untaxed while an equal amount is taxed at the child’s tax rate, instead of the parents’ (or custodian’s) rate.
  2. The Potential Disadvantages:
    1. The same tax benefit that makes custodial accounts attractive can also make them unattractive. After the first amount of money in income is sheltered from higher taxes, excess income is taxed at the parents’ marginal tax bracket. This effect would not occur in a 529 plan or a Coverdell ESA.
    2. The account format also requires a custodian to hand over control of the assets to the child anywhere from age 18 to 21, depending on the state. While parents who have a good relationship with their child might be able to coerce those assets into actually being spent on college, a strained relationship may present a problem.
  3. Tax Benefits: Every child under 19 years old (or 24 for full-time students) who files as part of their parents’ tax return is allowed a certain amount of “unearned income” at a reduced tax rate.
  4. Eligible Expenses:   A custodian can initiate a withdrawal for the benefit of the child as long as the expenses are for legitimate needs. Any expense that is for the benefit of the child, such as precollege educational expenses, may be paid from the custodial account, at the custodian’s discretion. Unlike other college savings accounts, however, these expenses are not limited to education and can be used for anything related to the child. Likewise, upon becoming a legal adult, the child can use the money without limitations.
  5. Impact on Federal Financial Aid Eligibility:  Custodial accounts are considered an asset of the child and are counted against financial aid. Approximately 20 percent of these assets will be expected to be used toward funding a student’s education in any given year.
  6. Contribution Rules: There are no contribution limits. However, someone setting aside money in one of these accounts needs to be aware of how larger gifts affect their annual gift tax and lifetime estate tax exclusions. Consulting a financial adviser is helpful.
  7. Unused Funds: Any unused money must be distributed by the time the child reaches the age of majority or the maximum age allowed for custodial accounts in their state. For classic UGMA accounts, this generally occurs at the age of 18. For the newer UTMA accounts, this age is usually 21, but may be as late as age 25. Unlike Section 529 plans and Coverdell ESA’s, there’s no ability to transfer the account to another child or change beneficiaries.

By now you might have heard of the term grit and the author Angela Lee Duckworth.  In her book, “Grit: The Power of Passion and Perseverance,” she explains how through her research on high achievers she discovered that more so than talent or IQ, the largest determining factor of success was if they had that right “combination of passion and perseverance…In a word, they had grit.” Grit… the ability to pursue something with consistency of interest and effort.

In order to achieve anything notable in life, you can assume it’s going to demand some grit.  When it comes to finances, most significant financial goals unfold over a long period of time.  Achieving these goals is not about your IQ level, it’s about how determined you are to reach them, stick with the plan, and how quickly you can get back on track when life hands you a boatload of lemons.  Through a deep commitment to what you value most and holding true to a set of ideals you can be in it for the long haul.

The great news is grit is something you can create and continually improve.  If one way doesn’t work, find another path.  It’s just as the ancient proverb says, “Fall down seven times, stand up eight.”  When it comes to your finances (or anything for that matter) it can help to start with smaller, attainable goals that will get you to that big vision of yours. For example:

  • Create a budget (that actually works!).
  • Pay down debt (by sacrificing discretionary spending).
  • Put money into an emergency fund (and automate, automate, automate).
  • Max your employer match on your 401k (don’t leave money on the table).

Achieving your long term financial goals will require many ordinary acts over many years.  What might seem impossible now will become real the closer you get to achieving that big vision. Times are guaranteed to get tough but if you stay the course you will reach the finish line.  It can also be extremely helpful to build the right support team.  Know you tend to get off track? Find someone that you can check in with and rely on to hold you accountable to your goals.  You can get there…just add grit.

Success is stumbling from failure to failure with no loss of enthusiasm.” – Winston Churchill 

Want to see how you rate on the grit scale? Check out UPenn’s official Positive Psychology Center website https://www.authentichappiness.sas.upenn.edu/. Here you can not only take the Grit Survey but a plethora of other questionnaires and learn more about positive psychology.

As another Summer comes to a conclusion, all you will hear from TV pundits and news articles is the next recession is impending. It seems a recession is always just around the corner! The Nostradamus of recession predictions is the Inverted Yield Curve which was achieved last week and just in time for Back to School shopping. The yield curve inverts when the 2-year U.S. Treasury bond yield is greater than the 10-year U.S. Treasury bond yield. While many factors do indicate a recession is looming (US-China trade relations, political uncertainty, lack of stimulus from 2018 tax cuts, etc.), several indicate the fear is overblown. The job market remains strong, reduced interest rates by the Federal Reserve and strong corporate balance sheets. The good news is this fear is a constant in the market whether it’s August 2019, August 2017 or August 2008. To achieve sizeable investment returns requires a degree of risk. So, sit back, relax, enjoy the last week or two of Summer and practice the following (whether a recession is looming or not):

  1. Proper Emergency Fund – 3 months minimum but 12-24 months is not out of the question for some. Understanding how you will react during a recession is not an enjoyable exercise and better to prepare for the worst especially if worried about ongoing employment.
  2. Access to Credit – much easier to obtain a Home Equity Line of Credit (HELOC) when employed and home values are high. Not only does it provide liquidity but allows you to reduce the amount of emergency funds needed.
  3. Continued Employment – if work is steady and not worried about staff reduction or cutback in hours then riding out a market downturn is less impactful especially if more than 5 years till retirement.
  4. Reduce Expenses – no time like the present to understand what the household needs each month to run properly. If cuts need to be made, have a list ready of the first expenses to go (e.g. cable bill, travel, and eating out).
  5. Investments – never stop dollar cost averaging into retirement accounts and other investments. That is the key to long-term success and a much less stressful path. If investment risk is correct in an up market it should not change in a down market unless you want to be aggressive and reallocate into more equities especially in retirement is more than 10 years away.

The average recession lasts 1.5 years and 3 out of 4 economists are predicting another one by 2021 so make sure to follow the above advice sooner than later. It’s always best to pack the life jackets before leaving the shore!

Recently, both the CFP® Board and the Securities and Exchange Commission have set higher standards of care & transparency when dealing with clients.  While both are welcome developments, they are still catching up to our pledge to uphold a fiduciary duty to our clients since Lighthouse Financial Advisors was founded in 1999! A fiduciary duty is the legal obligation of one party to act in the best interest of another. Brokers fear being asked if they have a fiduciary duty.

 

As noted in our May 2, 2018 blog, the CFP® Board is strengthening its code of ethics to require advisors to act as fiduciaries at all times when working with clients.  The policy was set to go into effect Oct 1, 2019, but enforcement is delayed to June 30,2020.  This is to allow time for increased enforcement capabilities and to allow CFP® certificants and employers at firms that do not require a fiduciary standard to catch up to the new rules.

 

Meanwhile, the SEC adopted Regulation Best Interest: The Broker-Dealer Standard of Conduct, which requires that broker-dealers act in the “best interest” of their “retail customers.” While any progress is welcome to see on a Federal level, under the new SEC reforms, brokers still do not have to operate under a fiduciary standard.

 

While we are overseen by the SEC, we are also CFP®’s and members of the Alliance of Comprehensive Planners. From day one we have held ourselves to the higher Fee-Only Fiduciary Standard, and could not agree more with how even the SEC Commissioner Robert Jackson put it, consumers “should seek out true fiduciary advice from financial professionals who have chosen to hold themselves to higher standards” than those set by the SEC. We couldn’t agree more!

 

THE OFFICIAL CFP® FIDUCIARY DUTY STANDARD – At all times when providing Financial Advice to a Client, a CFP® professional must act as a fiduciary, and therefore, act in the best interests of the Client. The following duties must be fulfilled:

  1. Duty of Loyalty. A CFP® professional must:
    • Place the interests of the Client above the interests of the CFP® professional and the CFP® Professional’s Firm;
    • Avoid Conflicts of Interest, or fully disclose Material Conflicts of Interest to the Client, obtain the Client’s informed consent, and properly manage the conflict; and
    • Act without regard to the financial or other interests of the CFP® professional, the CFP® Professional’s Firm, or any individual or entity other than the Client, which means that a CFP® professional acting under a Conflict of Interest continues to have a duty to act in the best interests of the Client and place the Client’s interests above the CFP® professional’s.
  2. Duty of Care. A CFP® professional must act with the care, skill, prudence, and diligence that a prudent professional would exercise in light of the Client’s goals, risk tolerance, objectives, and financial and personal circumstances.
  3. Duty to Follow Client Instructions. A CFP® professional must comply with all objectives, policies, restrictions, and other terms of the Engagement and all reasonable and lawful directions of the Client.

We live in a world where technology drives almost everything we do.  Unfortunately, having almost everything at our fingertips can also make you vulnerable to scams and fraud.  In 2018, banks reported approximately 25,000 cases of suspicious activity, an increase of 12% from 2017.  An immense portion of these cases target senior citizens. Financial abuse is not always easy to distinguish, especially towards elders. As a result, banks have increased their surveillance of potential scams and fraudulent activity. In May 2018, the Senior Safe Act was signed into law, which allows banks to report all suspicious activity without concerns of being sued as long as compliance requirements are met.

Emails, robocalls, and telemarketers are some of the many ways senior citizens have been financially targeted.  In many cases, phishing emails are sent out to individuals as if they were from a real institution.  As most of us are aware, these fake emails use almost the exact same logo and company information in attempt to scam innocent internet users.  Before clicking on any links, be sure to check all content and recipient data. Ask yourself: Do I typically get emails like this from (fill in the blank)?

Most of us receive endless robocalls and messages from telemarketers.  Many people ignore most calls if they don’t recognize the caller ID.  Typically, if something seems out of the ordinary, odds are that you are correct.  When in doubt hang up with the person who called you and call the company’s customer service number or the agent you usually work with to confirm if any action needs to be taken.

These callers and e-mails can sometimes be highly convincing and unfortunately many seniors have been tricked into giving away sensitive information including social security numbers and transferring money.  The pushier the message the more often it is a scam. Many banks have been reporting unusual account transactions such as foreign bank wiring.  In most cases, a typical consumer will not come in and request a large sum of cash to be sent overseas. This should immediately spark a red flag at a bank and should be reported to appropriate agencies.  Artificial intelligence has been used and is a hot topic for financial institutions to help spot suspicious transactions before they are authorized.

Although advances have been made, lawmakers, banks, and other financial institutions are continuing to look for more ways to combat increased senior citizen scams, fraud, and financial abuse.  While senior citizens are more vulnerable please remember anyone can be targeted and to be vigilant in protecting yourself financially.

Suggestions to protect yourself against hackers and fraudulent activity:

  • Set up 2 factor identification for all financial and bank accounts. Allows users to sign in with their username and password, then entering a unique code from your phone/email
  • Regularly review account balances and transactions. Any unfamiliar activity should be a red flag and reported immediately.
  • Never click on links from emails unless it is secure and a verified account. Hackers send out “phishy” emails which resemble real companies.
  • Create strong usernames and passwords. Many websites recommend having at least 8 characters including upper and lower case letters, symbols, and numbers. This makes it difficult for hackers to gain access to your accounts.
  • Never give away your social security number to anyone over the phone or by email. In addition, ignore any unusual requests for bank wires. This immediately is a sign of a scam.

What to do if you may be a victim:

  • Immediately report any suspicious activity to police if you feel you may be a victim of a cybercrime. Contact the institution where the activity took place and notify your credit card companies to help freeze your accounts. Any identity theft should also be reported to the FTC.

Seasons Greeting Lessons from Scrooge…. past, present, and future.

As of Friday’s market close, the S&P 500 1-year return is 0.0% – 2018 Year-to-Date down 0.9%.  So a lot of ups and downs (Downs we notice and feel more) to get to 0.0% return for the index. The S&P is made up of the largest 500 companies in the United States. International Stocks and US Mid & Small Cap companies have fared a lot worse. International Stocks – 1-year return down 15% – US Small Caps down 13%

The news has been grim for short term investors; however one of the main reasons equity investors are rewarded with higher long term returns is for the uncertainty “risk” & market movement “volatility”. Given the current level of uncertainty, expected returns going forward should be higher to compensate long term investors for taking the risk. This is known as the risk premium.

  1. There is news of a potential government shut down. I didn’t realize the government has been shut down 2 times already in 2018.
  2. Watch one White House daily briefing – if you can
  3. Tariffs – which in plain English are a tax on goods and services passed on to consumers
  4. Price of crude is down 40% since October
  5. Flat yield curve – savings accounts paying 2% – seems high after years of 1%
  6. Home sales have slowed in really hot real estate markets
  7. Plus its market prediction season on top of everything else. To get on TV you need to predict disaster.

Ghost of Christmas Past – It’s always good to reflect on how we prepared & managed through other periods of market turmoil. 20 years ago, the Dow Jones index was at 9,200 and the largest company was GE. A lot has happened over the past years. It’s funny & sad that most of the charts we look at seem to highlight the bad times. I guess that’s human nature – try and think of some good financial times & be grateful for all you have accomplished.

Ghost of Christmas Present – Where are we now? What has changed since the summer (other than being colder)? Today, the Dow Jones Index stands at 23,850 and 3 largest companies are Microsoft, Apple & Amazon – a lot of people can’t imagine life without their products, 20 years ago very few used their products.

Ghost of Christmas yet to come – One of the main reasons we constantly review cash flow (Have money in the pantry) and taxes, is to be prepared for the future. No one really knows what will happen in markets over the next year, but I am rationally optimistic that the world will move forward and 5, 10, 20 years from now will be talking about new companies we can’t imagine life without.

Over the last 20 years Lighthouse Financial Advisors, Inc. has stayed focused on what we can control and we will continue that focus as we move forward into the next 20 years. I know the news and markets are discouraging, but please don’t hesitate to call if you have questions or concerns. That’s why you work with us, we are here to help and listen.

Wishing you a wonderful holiday and a Happy New Year,