Nola Kulig
Kulig Financial Advisors
Longmeadow, MA, 01116 USA
413-565-2839
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IRA Rollovers: Important Rule Changes

May 9th, 2014

We have historically recommended that clients do trustee-to-trustee transfers when transferring assets from 401(k) to IRAs. But a recent ruling gives you yet another reason to avoid taking a check and along with it, the responsibility of making the rollover within a short window of time to avoid penalties.

Please see http://www.usatoday.com/story/money/personalfinance/2014/04/06/irs-ira-rule-change-rollover/7317035/ for a summary. The story covers a recent decision by the United States Tax Court that states a taxpayer can perform only one tax-free “rollover” of an individual retirement account each year — regardless of how many IRAs they may have.

While this situation should not impact many IRA owners, it is something to be aware of if you have several IRAs. For example, those who may have several IRAs sprinkled between many bank accounts could be affected. In addition to making a case for trustee-to-trustee transfers, this ruling makes our usual recommendation to consolidate accounts even more appealing. Perhaps it is time to spring clean finances along with the house and garden!

2014 Q1 Market Review: The Bull Holds up against a Russian Bear, Emerging Market Anxieties, and a Blustery Winter

May 9th, 2014

This month we take our regular quarterly temperature of the markets. We look at recent market results with the goal of putting them in some perspective, and to see how that experience should set our expectations going forward.

This market review post discusses the following topics:

    • Emerging Markets Volatility
    • Federal Reserve Policy and Winter’s Impact on Economic Data
    • Portfolio Implications

There were three major themes that dominated headlines: emerging market jitters early in the quarter, Russia’s incursion into Ukraine, and a long and brutal winter.

Despite a January hiccup, most of the major indexes climbed as the quarter wore on, with the S&P 500 Index claiming new highs in late February and into early March. There was a modest amount of volatility, especially near the end of January, when jitters in emerging markets created an excellent excuse for some to book profits following 2013’s big run-up in stocks. But as you may recall from our year-end review, to expect stocks to continue to go straight up after a strong 2013 would be unreasonable.

Overall observations for the quarter include:

  • End-of-month strength left stocks up roughly 2% for quarter.
  • Bonds — and REITs! — were especially rewarding. You may recall that in 2013, bonds were left for dead on expectations of rising rates.
  • Emerging markets made a comeback in March, after struggling earlier in the year.
  • Commodities made a comeback despite a weakening Chinese economy, due to weather-related issues and Ukrainian political concerns driving up grain prices.

Market Returns

Market

Index

March

Q1 2014

YTD
3-31-2014

Stocks        
Large Cap S&P 500 Index

   0.8%

1.8%

1.8%

Midcap S&P Midcap

0.4

3.0

3.0

Small Cap S&P Small Cap

0.7

1.1

1.1

Non-US Developed Markets MSCI EAFE

-0.6

0.7

0.7

Emerging Markets MSCI Emerging Mkts.

3.1

-0.4

-0.4

US Bonds Barclays US Aggregate

-0.2

1.8

1.8

REITs S&P US REIT

0.5

9.9

9.9

MLPs Alerian MLP

1.5

1.9

1.9

Gold Dow Jones-UBS Gold Sub index Total Return

-2.9

6.7

6.7

Commodities Dow Jones-UBS Commodity Index TR

0.4

7.0

7.0

Sources: AJO Partners, Factset, Dow Jones Indexes

Emerging Markets Volatility

Emerging markets had a rough time during the quarter for a variety of reasons. Problems in countries like Turkey and Argentina generated eerie reminders of the 1997-98 currency crisis that rocked emerging markets. But those taking a more sanguine approach, including the International Monetary Fund, argued that most emerging markets are far less vulnerable than they were in the ’90s. In the meantime, China, the 800-pound gorilla of developing economies, has been hit by a rash of soft economic data. Last but hardly least, investors grew concerned when unexpected geopolitical instability in the Ukraine created market volatility. Around-the-clock news gladly fed us a steady diet of disturbing photos that fueled the angst.

Federal Reserve Policy and Winter’s Impact on Economic Data

Much of the country is just now emerging from a very rough winter, something the Federal Reserve acknowledged at its March meeting. The harsh weather restrained many data readings early this year, mudding any clarity as to the direction of the US economy.

Among its many functions, the Fed is probably best known for setting monetary policy, which has a huge influence over the interest you and I earn on safe, short-term investments such as CDs, T-bills, money markets, and savings accounts. And its policy influences not only interest rates but also stock prices.

Following its March meeting, the Fed signaled interest rates could remain low for quite some time. Fed officials did not provide any explicit reasoning as to why they may continue to hold rates below what might be considered normal, even after the economy is running on all cylinders. However, in addition to the lack of clarity in economic readings, a second major factor is that inflation continues to run well below the Fed’s target rate of 2%.

A stronger statement from the Fed that rates would remain low contributed to a rebound in emerging markets in March. Investors have migrated to emerging markets in recent years seeking higher yields than those available in developed markets. This has caused their markets to be particularly impacted by Fed policy statements in recent months.

Portfolio Implications

1. Stick with your plan

We touch on this point every quarter, but we can never say this enough. Decisions made in haste are rarely beneficial. Markets were a little rocky early in the quarter, thanks in large part to some profit-taking that was inspired by anxieties in the developing economies. But stocks never rise in a straight line. A sell-off that amounted to barely more than 5% for the S&P 500 Index would simply be considered “noise” by most analysts.

The same could be said of the one-day sell-off tied to the early uncertainties over the Russia/Ukraine situation. If you are a client of mine, your diversified portfolio has been crafted with your financial goals and tolerance for risk in mind. We recommend you include asset categories with investment returns that move up and down under different market conditions within a portfolio since it helps to reduce the odds of significant losses.

Historically, the returns on stocks, bonds, and cash have not moved up and down at the same time. Market conditions that cause one asset category to do well often cause another to have average or poor returns. By taking a more balanced approach, you’ll reduce the risk that you’ll lose money, and your portfolio’s overall investment returns will have a smoother ride. Those who are running with the bulls inevitably get gored.

Remember your golfing buddy’s success with LinkedIn? Since late summer, traders have shaved nearly 40% off the stock’s value.

Remember when everyone said we should sell bonds last year? We cautioned against that, as they play an important role in moderating portfolio volatility (this assumes you have a properly diversified bond portfolio, as discussed in previous issues of Kulig Financial Perspectives). Sure enough, bonds have continued to play their stability role, despite low yields. While the direction of future rates is anybody’s guess, if you construct your bond portfolio appropriately, you may not get rich off of today’s yields, but they surely remain less volatile than stocks.

2. Rebalance

Anytime we see a big run-up in equities like in 2013, some of our clients exceed their target asset allocation for stocks. In order to reduce significant fluctuations in your portfolio, we recommend that clients who exceed their targets reduce their exposure to stocks.

If your personal situation has changed, let’s talk and see how we might be able make some adjustments. Options may include a more conservative stock selection or possibly reducing the equity weightings. It may reduce the upside, but managing risk is a critical component of any investment portfolio.

Investment advisor representative of an investment advisory services offered through Garrett Investment Advisors, LLC, a fee-only SEC registered investment advisor. Tel: (910) FEE-ONLY. Kulig Financial Advisors may offer investment advisory services in the state of Massachusetts and other jurisdictions where exempted.