Investment Management

Oil’s Wild Ride

Rising Oil Prices

Much like stocks, oil prices have been on a rollercoaster ride recently. Triggered by Russia’s invasion of Ukraine, prices spiked to their highest levels since 2008 this month and then tumbled into bear market territory five days later. (In general, a price drop of 20% from a previous high represents a bear market.)

The recent drop in oil prices is the fastest decline into bear market territory since April 2020. Then, prices fell more than 20% and turned negative in a single day. Yet a dramatic change in oil prices typically doesn’t trigger the same emotional response that a similar change in stock prices would. Perhaps this is because oil markets tend to be even less understood than equity markets.

To put the many headlines you’re likely seeing about oil into perspective, I thought it would be helpful to provide an overview of how oil markets work, why we’re seeing volatility right now, and what this means—or doesn’t mean—for gas prices.

What Is the Oil Market?

There are two primary markets for crude oil: the physical market and the futures market. In the physical market, large producers like Exxon Mobil pump oil from the ground and sell it to processing companies, which then refine it into products like gasoline and jet fuel. A handful of companies act as middlemen, shipping oil around the world through various channels.

Meanwhile, the oil futures market is an electronic financial market consisting of banks, brokerages, and firms that deal in energy. Producers, refiners, traders, and other market participants use futures contracts to lock in oil prices for future transactions. For example, Southwest Airlines uses futures contracts to mitigate rising oil prices and keep costs low for its customers.

In the physical market, private deals between buyers and sellers determine prices. Details of these transactions aren’t widely available, making the physical oil market somewhat murky. Companies like S&P Global Platts publish daily price estimates known as spot prices based on discussions with traders.

The futures market is more transparent. Futures trade on two main exchanges, CME Group’s New York Mercantile Exchange in the U.S. and Intercontinental Exchange in London. The prices of these contracts are widely available.

Types of Crude Oil

Crude oil is graded according to thickness and sulfur content. Light, sweet crude oil is the highest grade and therefore the most sought after, as it is easier and cheaper to refine.

West Texas Intermediate (WTI), the primary oil benchmark for North America, is light and sweet because it contains very little sulfur. It is sourced primarily from inland Texas and is one of the highest quality oils in the world. Because the fracking boom has turned the United States into the world’s largest producer, WTI prices are followed globally.

WTI is similar to Brent crude, which they produce off the coast of Northern Europe. Brent is the main oil benchmark for most of the world. It is also very high quality, although it has a slightly higher sulfur content than WTI. Typically, WTI is ideal for gasoline, while Brent is ideal for diesel fuel.

Meanwhile, countries like Canada, Venezuela, and Russia, among others, produce sour crude oil that has a higher sulfur content. Lower-quality crude oil is cheaper to produce but more difficult to refine.

Global Oil Production & Consumption

Established in Baghdad, Iraq in 1960, the Organization of the Petroleum Exporting Countries (OPEC) is comprised of 13 nations that collectively control about 80% of the world’s proven oil reserves. These countries supply roughly half of globally exported crude oil by value. However, this percentage has been steadily declining in recent years. Outside of OPEC, the United States and Russia possess the largest reserves.

The following graphics show the top 10 oil producers/consumers and their share of the world’s total oil production/consumption, according to the most recent data from the U.S. Energy Information Administration (EIA).

In 2020, the world’s top five exporters of crude oil were Saudi Arabia (17.2% of global exports), Russia (11%), Iraq (7.7%), the United States (7.6%), and United Arab Emirates (7.2%). Russia is still a top exporter. However, it’s worth noting that the country’s oil exports by value declined more than 40% from 2019-2020.

In addition to oil, Russia is a major producer, consumer, and exporter of coal and natural gas, as well as the various refined products made from them. According to the IEA, Russia’s fossil fuel industry produced the energy equivalent of 11 billion barrels of oil in 2019.

Currently, Europe and China account for about 90% of Russia’s total exports. Within Europe, dependency on Russian oil and gas varies by country. By comparison, only 3.5% of the United States’ oil imports came from Russia in 2021—the highest percentage in over two decades (but not the highest value).

U.S. Oil Production & Consumption

Since 2008, the value of U.S. oil imports has fallen over 62% due to a surge in domestic production. Currently, about 35% of U.S. supply comes from international partners, compared to about 65% produced domestically.

Meanwhile, U.S. oil exports have increased nearly 3,000% after the United States ended a four-decade-long ban on oil exports, dating back to the Arab Oil Embargo of 1973. In other words, the United States is now less dependent on other countries for our oil and is becoming a more important exporter of oil to other countries.

The United States is becoming increasingly energy-independent. However, it continues to import lower quality oil from countries like Russia to make use of its existing infrastructure. According to Ryan Kellogg, a professor at the University of Chicago, the U.S. spent billions of dollars on its refining capacity in the 1990s and early 2000s. As such, it doesn’t make economic sense to let that equipment sit idle. In addition, domestic production is not yet at the level where the U.S. can stop importing heavier, sour oil from other nations.

What Affects Oil Prices?

Like other markets, supply and demand determine oil prices. Anything that affects either side of this equation can send prices up or down.

Historically, geopolitics have played a significant role in the direction of oil prices as producers jockey for position. In addition, changes in the global economic outlook can affect supply and demand.

Oil prices can also move in tandem with financial markets. For example, it’s not unusual to see oil prices drop when equity markets decline. In the futures market, speculative bets by traders can also influence prices.

What’s Responsible for Recent Volatility in Oil Markets?

In early 2020, demand for oil dropped sharply as Covid-19 cases surged globally. Government-issued lockdowns stopped people from driving to work, grounded airplanes, and slowed the pace of global trade. As a result, oil prices fell to their lowest levels in decades.

Oil prices have been on the rise as the global economy recovers from the effects of the pandemic. However, the Russia-Ukraine crisis exacerbated already inflated oil prices and is largely responsible for the uptick in volatility more recently.

When Russia invaded Ukraine in late February, the price of oil surged to over $110/barrel, a 15% increase from the previous week. Russia is the world’s third largest producer of oil after the United States and Saudi Arabia. Indeed, sanctions on Russian exports and reluctance to purchase Russian oil sent prices upward.

The United States is more insulated from the crisis that other countries—Europe, for example. Still, the shift in global trade flows has caused a lot of market uncertainty over the last month. Indeed, the Biden administration has banned Russian oil imports. However, this most recent price drop was due to the realization that Europe wouldn’t be abandoning Russian oil just yet, easing pressure on the rest of the world’s oil supply for the time being.

The Relationship Between Oil and Gas Prices

Gas prices have also been on the rise due to record-high inflation levels. But many consumers are wondering why the recent decline in oil prices hasn’t affected prices at the pump yet.

You may not be as affected by rising gas prices if you drive an electric vehicle or gas is a small part of your budget. However, the average American spends anywhere from 2-4% of their overall income on gasoline, and for lower earners a much greater percentage. When gas prices go up, these Americans then have less money to spend on other goods and services. This, in turn, can affect the broader economy.

Although oil prices influence gas prices, it’s not a cut-and-dry relationship. Retailers set their gas prices based on replacement cost. Therefore, there’s typically a lag between changes in oil prices and changes in gas prices.

When wholesale prices increase, retailers will often take a hit to their margins first to remain competitive with other retailers nearby. Similarly, retailers may hold their gas prices steady despite a lower delivery cost to make up for the margin they lost during the price increase.

In addition, there’s usually a drop in demand when gas prices spike as consumers top off their tanks in anticipation. This slowdown in demand affects when retailers schedule their next fuel delivery—another reason the prices of oil and gas don’t always move in tandem.

What Does All of This Mean for Your Investments?

Though it’s impossible to predict the future, we’re likely to see more volatility as the war in Ukraine continues. And while we’re currently experiencing a particularly painful period as prices rise and our account balances fluctuate, the good news is these things tend to be cyclical. Investors have historically been rewarded for staying the course—especially when it feels most uncomfortable to do so.

If you’re an ESG investor, you will not be participating in the rising stock values of oil and commodities companies due to the supply squeeze. However, I believe the long-term outlook for companies that incorporate ESG practices into their operations is still strong, as I write in my most recent op-ed for CNBC. You can read the full article here if you’d like to learn more.

As always, please feel free to contact us if you’d like to discuss any of this further.

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5 Inspiring Statistics About Women and Investing

Women and Investing

As a financial advisor who works primarily with women, I’m all too aware of the gender investment gap. Not only are women paid less than men on average (and therefore have less money to invest), but many women aren’t confident in their investment abilities. Unfortunately, this can result in lower returns—a contributing factor to the retirement savings shortfall.

That’s the bad news. The good news – there’s evidence that this gap may be closing. Fidelity recently released its 2021 Women and Investing Study, which provides some interesting insights into women’s attitudes and behaviors about investing. The study’s key finding: more women than ever are taking a seat at the investing table.

Here are five inspiring statistics about women and investing that may make you feel more optimistic about your financial future:

#1: 67% of women are now investing outside of retirement compared to just 44% in 2018.

When it comes to closing the gender investment gap, younger women seem to be leading the charge. Indeed, 71% of Millennial women invest outside of retirement, according to Fidelity. But, the numbers are encouraging among older generations as well. Two-thirds (67%) of Gen X women and 62% of Baby Boomers say they invest outside of retirement.

So, what’s holding women back from closing the gap completely? According to Fidelity, 70% of women say they need to know more about picking individual stocks. In addition, 65% of women said they’d be more likely to invest or would invest more if they had clear steps to do so.

#2: When women invest, we see better results than men do.

Based on an analysis of more than 5 million Fidelity customers over the last ten years, women outperformed their male counterparts by 0.4% annually, on average. According to a recent CNBC article, there are many reasons women tend to be better investors than men.

For one thing, women trade less, which helps avoid unnecessary fees and many of the pitfalls associated with market timing. In addition, women tend to invest more consistently, meaning we like to have a strategy in place and follow it. Interestingly, none of these reasons has anything to do with knowing how to pick the right stocks. Instead, they require discipline.

#3: 9-in-10 women plan to take steps within the next 12 months to help their money work harder to grow.

Nearly 70% of women surveyed said they wish they had started investing their extra savings earlier. On the bright side, 90% of women say they plan to take steps to remedy this situation in the next 12 months. Specifically, their goals include:

  • Improving their financial literacy.
  • Creating a financial plan.
  • Reaching out to a financial professional.
  • Investing more of their savings.

#4: 64% of women would like to be more active in their finances, including investment decisions.

Perhaps some of the good money habits we developed during the pandemic contribute to these inspiring statistics about women and investing. For example, half of the women surveyed said they have been more interested in investing since the start of the pandemic. And 42% of women say they have more money to invest than they did pre-pandemic.

However, despite women wanting to invest more, the vast majority still don’t feel confident when it comes to long-term planning and investing for the future. Only 19% of women feel confident selecting investments that align with their goals. Meanwhile, only 31% feel confident planning for financial needs in retirement. (If this sounds like you, here are 5 Ways to Boost Your Financial Confidence.)

#5: 71% of women said they felt more confident once they set up a financial plan.

An overwhelming theme throughout the Fidelity study is that women feel better when they have a financial plan. Yet, though interest in investing is on the rise, less than half of women say they would know what to do if they had $25,000 to invest in the stock market today.

Unfortunately, this lack of confidence goes beyond women’s financial lives. More than a third of women said their financial situation keeps them up at night at least once a month. The primary culprit? Their long-term finances.

If these statistics about women and investing have inspired you to take the first step towards securing your financial future, a trusted advisor can help.

If your finances are keeping you up at night or you simply want a clear path towards your financial future, working with a trusted financial partner can help. In fact, 86% of women agree that having their investments managed by professionals makes life less stressful, according to Fidelity.

Curtis Financial Planning can help you develop a plan for your future and align your investments with your goals and values. To get started, please schedule a call.

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Sustainable Investing Simplified

Sustainable Investing Simplified

Over the years, the nomenclature around sustainable investing has morphed to the point of confusion. Besides “sustainable,” other descriptive terms for this investment style include environmental, social, and governance (typically referred to as ESG), socially responsible (SRI), and impact investing. You may also see the terms green, values-based, climate, intentional, or personal investing used to describe this investment approach.

While the terminology may vary, there’s a common theme inherent to this investment style. People who invest sustainably not only want to grow their wealth, but they also want to support their values with their capital.

What is Sustainable Investing?

In traditional stock analysis, investors evaluate a variety of fundamental factors to determine a stock’s expected return. For example, they may look at a company’s earnings and growth prospects to determine if it’s a good investment. The underlying belief is that if a company is profitable, its investors should profit as well. Unfortunately, traditional investment analysis doesn’t consider how a company makes its money.

A sustainable investment approach takes traditional analysis a step further by including environmental, social, and governance factors in the analysis. The goal is to reward companies that not only take care of their investors and stakeholders, but that also care about their employees, the planet, and society in general.

Indeed, numerous studies have found that companies that score well on ESG factors perform better over time. Since many of us are investing with a long-term view for retirement, investing in companies that operate responsibly can be both financially and personally rewarding.

Let’s take a closer look at the individual elements of ESG:

In many cases, ESG can be used interchangeably with sustainable investing. Here’s a deeper look into each ESG factor.

The E, which stands for environment, measures how a company uses energy and resources. Today, carbon emissions and climate change are critical environmental issues encompassed in the E analysis.

S stands for social and addresses employee and labor relations, diversity and inclusion, and reputations fostered between people, institutions, and communities.

G, or governance, refers to a company’s internal system of practices. In other words, it considers the procedures a company follows to govern itself, make effective decisions, comply with the law, and meet its stakeholders’ needs.

Unfortunately, analyzing securities for these criteria can be challenging since there aren’t uniform ESG reporting standards yet. However, as investor interest grows, so has the industry that rates companies for ESG performance. This trend suggests the future of ESG investing may offer greater opportunities for investors who wish to align their investments with their values.

How to Invest Sustainably

Investor interest in ESG investments hit an all-time high during the Covid-19 pandemic. In fact, Morningstar reported that ESG funds captured $51.1 billion of net new money from investors in 2020—a record and more than double the net inflows in 2019.

As interest in responsible investing gains momentum, sustainable investment strategies are increasingly becoming more accessible to individual investors. Whereas options were once constrained to mutual funds, there’s now a wide variety of ESG exchange-traded funds (ETFs) available. Specifically, the number of sustainable mutual funds and ETFs available to U.S. investors rose 30% year-over-year in 2020, according to a report issued by Morningstar earlier this year.

In addition, ESG strategies are no longer limited to stock funds. There’s also a growing number of options entering the ESG bond fund universe. Meaning, investors can now incorporate sustainable investment strategies across their entire asset allocation if they want.

Women and Sustainable Investing

Interest in sustainable investing appears to be growing among all types of investors. However, women have long led the charge in ESG investing since values-based investment strategies entered the scene.

For example, a recent client survey conducted by RBC Wealth Management found that women are more than twice as likely as men to say it’s extremely important that the companies they invest in integrate ESG factors into their policies and decisions. Another report from Cerulli found that the majority of women in the U.S. under age 60 favor ESG investing. 

Why do these statistics matter? Today, more than half of women in the U.S. are the primary breadwinners in their families, according to research from Prudential. And 30% of women surveyed are married breadwinners who are producing more than half of their household income. In other words, as our financial power grows, our investment decisions can have a greater impact on how companies address environmental, social, and governance issues.

At Curtis Financial Planning, we help you invest in strategies aligned with your values, so you can feel better about your financial decisions. Please get in touch if you’d like to learn more. We’d love to hear from you.  

In the meantime, if this brief primer on sustainable investing interests you, please take this survey. You’ll find out what issues you care most about when it comes to your investment dollars.

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The Truth About Diversification

financial planning diversification

financial planning diversification

Most investment advisors  (including me) believe that building and maintaining a diversified portfolio is the most prudent way to invest clients’ money.

Not only do numerous studies of asset class* returns support this, but no matter how smart and experienced the advisor is, it’s near impossible to predict with consistency which asset will outperform in any given time frame. That isn’t to say that it doesn’t take skill and expertise to build a diversified portfolio – it does – many metrics come into play such as growth prospects, valuation metrics, and global economic trends.

* There are four broad assets classes:

  • Stocks or equities
  • Fixed income or bonds
  • Money market or cash equivalents
  • Real estate (represented by REITS)

And, within each asset class are sub-asset classes  (or stock sectors) that allow for greater diversification, for example, with the stock asset class, you will find large U.S. stocks, small U.S. stocks, international stocks, and emerging markets stocks. And, within the fixed income asset class are different types of bonds: short-term, hi-yield, muni, etc.

The reality about diversification is that a truly diversified portfolio will not provide the return of the best performing asset over a given time, nor will it match the performance of the worst performing asset. The return will be somewhere in between. Which is precisely the point – the highs are less high, but the lows are less low making it more likely that an investor will not panic and change strategy at exactly the wrong time.

Remember the calmness in the markets in 2017 when all stock sectors seemed to go only up? And, indeed, the returns were pretty amazing: 37.2% for emerging market stocks, 27.4% for S&P 500 growth stocks, and 24.2% for the MSCI (a global stock index) for example. Now, take a look at the chart below which shows returns year to date through June 15, 2018. You can see that the best performing sector so far this year is the Russell 2000 (an index that represents small-cap U.S. Stocks).

And, the worst performing sector is emerging markets stocks (EM Equity). The S&P 500 (representing large U.S. stocks) is up only 2.3%. I’ll wager that there aren’t too many investment advisors that could have predicted that small-cap stocks would be the best performer so far this year, but I can also almost guarantee the portfolios they manage for their clients have an allocation to small-cap stocks.

A truth about investing is that past performance does not predict future results. A great visual of this phenomenon is shown in Callan’s Periodic Table Of Investment Returns – a chart showing annual returns for key indices from 1998-2017. You can see how random the returns are and how easy it might be to try and chase top performers and then be disappointed.

You can liken diversification to the Tortoise, and the Hare story…as the Tortoise said: “slow and steady wins the race.”

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Stock Market Corrections are Inevitable

As you open your account statements and see your balance go up month after month you breathe a sigh of relief. But, then your next thought is – can the market keep going up like this? When will it end?

It helps to recognize that every market has pullbacks and that they are a regular part of stock market behavior.

Volatility does not imply the direction of the stock market. Instead, it’s the price we pay for a higher return in the long run.

We are currently in the 9th year of a bull market that started on March 9, 2009. In a few months, it could be the most extended bull market in history. However, it hasn’t all been up, up, up. There have been five corrections (market drops of 10% or more) and many smaller dips since 2009.

Second, it helps to recognize that market corrections are unpredictable. Realizing there will be a pullback doesn’t tell us when or help us maximize returns. If we cash-out today, we are just as likely to miss another year or two of upward movements as we are of sidestepping the next downturn. In result, our long-term financial plan may get derailed.

Third, recognize now that the next unpredictable correction will look obvious in hindsight. The reality is that even the most seasoned of investors can’t accurately predict stock market direction. Why? There are many events that can cause stocks to drop that are unpredictable themselves – from terrorist attacks to civil unrests, to a sudden change in economic policy.

Finally, realize that corrections are healthy for long-term bull markets. As stocks get close to full value or overvalued, it makes sense that prices will fluctuate to a more reasonably priced range. This leaves the door open for buying stocks at better prices and more gain in the future. Sometimes taking no action is the best action.

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Why You Need A Financial Plan

There are a few times a year when the volume of calls to my office from people seeking financial advice goes way up. One of them is in January when New Year’s resolutions are top of mind and another is the 30 or so days leading up to the tax deadline in mid-April.The “January effect” arises from a wish to get a fresh start on financial planning; the “tax effect”  has to do with figuring out how to pay less to Uncle Sam.

But most people would be better off if they didn’t wait for a deadline or time of year to take a hard look at their finances. Financial planning can be compared to being proactive about your health – we’re way better off maintaining a healthy lifestyle than waiting for a medical crisis to change our habits! Same goes for your finances. Making smart financial choices early and often will ensure a strong financial future.

For sure, meeting with a financial advisor isn’t always the easiest thing to do. It’s hard to talk about money especially if you feel “clueless” (not my word, but a word many women use to describe their financial savvy) or embarrassed about some of the financial decisions you’ve made in the past. But a good advisor doesn’t care about any of those things; they want to objectively help you make good financial decisions going forward.

When I ask a potential client why they contacted me, here are some of the most common answers:

  • I want to retire early and do something different with my life. Can I afford to do this and how soon can I do it?
  • I am retiring in 5 years and I have no idea if I’m on track.
  • I want to buy a house and I need to know how much to save and what I need to do to qualify for a loan.
  • I am afraid to invest my money in the stock market because I don’t trust it, but I’m not earning any return on my money in the bank, what should I do?
  • My father (or mother) just passed away and left me some money. I want to make sure that I make the right decisions with this money and need help and a plan.
  • I want to send my kids to private schools but they are expensive. I want to know if I can afford it and save for other goals like retirement.
  • I’m single and I don’t want to rely on anyone else for my financial health, I want a plan to reach my goals.
  • I’m going through a divorce and I worried about my financial future.I need help figuring it out.
  • I make a great salary but I spend too much. I want help to set up a budget, reign in my spending and start saving and investing more.
  • My spouse/partner passed away and I’ve never managed the finances alone. I need someone I can trust to help me.

Some of these situations are like a medical crisis – “oh my gosh…I’m retiring in 5 years and I haven’t saved enough money!”, others are unexpected, such as a divorce. But all share one thing in common: all situations will be less stressful and better managed with financial education and a plan.

Photo by Teerapun/freedigitalphotos.net

Editor’s note: This post was originally published on April 7, 2014 and has been updated and refreshed.

Related articles:

Do You Need A Financial Advisor?   Investopedia
Six Important Steps to Hiring a Financial Advisor  Forbes

 

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Smart and Savvy Roth IRA Strategies Updated for 2018

 

Roth IRA’s are a great savings tool. Contributions aren’t deductible like with traditional IRAs, so Roth contributions don’t lower your tax bill immediately. However, the tax-free nature of any earnings, no required minimum distributions (RMD’S) and ability to withdraw your at any time, tax and penalty free, make them an excellent planning and savings tool.

Before any discussion about Roth IRA strategies it’s important to be aware of the income and contribution limitations:

Income Limits

In 2018, for single taxpayers, there are phase-outs between modified AGI of $120,000 and $135,000 and over $135,000 Roth contributions aren’t allowed. For married taxpayers the phase-out range is from $189,000 to $199,000 and over $199,000 is disqualifying.

Contribution Limits

In 2018, the total amount individuals can contribute $5,500. People over 50 can contribute an additional $1,000 for a total of $6,500.

Here are some features of Roth IRA’s that highlight their unique saving and planning advantages:

1. You Can Open A Roth For Your (Employed) Children

As soon as your child has taxable earned income and regardless of age, you can contribute to a Custodial Roth IRA for them up to their earnings, or a maximum (in 2017) of $5500.00, whichever is less.

As a parent, you retain control of the account until your child turns 18 (or 21 in some states). What a great way to start a nest egg for your children and teach them something about money at the same time!

2. High Earners can contribute to a Roth 401(k)

High earners can work around the income limits noted above by contributing to a Roth 401(k) if their company plan allows it. No income limits apply to Roth 401(k) contributions so it can make good sense for big earners to contribute to a Roth 401(k) or split contributions between a traditional and Roth 401(k). Total contributions cannot exceed the 2018 limit of $18,500 (or $24,500 for those 50 and older).

3. Roth Conversions

Seven years ago income limits on Roth conversions lifted so that anyone no matter how much money they make can convert a traditional IRA to a Roth in any given year. High-earners may not want to take the tax hit that a conversion would trigger while earning the big bucks, but if there is a year where income is lower (i.e., a sabbatical year, quitting a salaried job, first years of retirement before RMD’s,  to work at a start-up) a Roth conversion may be a good move.

For many, the lowest tax years of post-20’s life may be the years in between retirement and the beginning of Required Minimum Distributions (RMD’s) at age 70 ½ – this is also a good time to consider converting some IRA money to a Roth.

4. The Backdoor Roth

At about the same time the rules on Roth conversions were changed, a strategy developed called the Backdoor Roth. People who hit the income limits for Roth contributions instead contribute to a non-deductible IRA and then immediately convert it to a Roth IRA.

However, it’s not that simple because of the pro-rata rule. If the person converting has other traditional IRA assets, the taxes due on the conversion will depend on the ratio of IRA’s that have been taxed to those that haven’t. There is a workaround to the pro-rata rule: roll traditional IRA assets into a company plan such as a 401(k) or solo 401 (k) before attempting the back-door Roth, taking them out of the pro-rata equation. This move makes sense if the company plan has decent investment choices and low fees.

Due to the wide array of tax outcomes that could occur while applying these strategies, it would be wise to get a second opinion from your financial advisor or tax accountant.

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Getting On The Same Page: Investing With Your Spouse

When couples are on the same investment strategy page, it will help avoid some of the following situations.Are we speaking a different language?

Financial experts, thought leaders, and academics have written extensively about the role gender plays in investment styles, and the innate differences can be a source of conflict during financial planning.

Studies generally agree women feel less confident about investing, and prefer to keep more cash assets, while men can be overconfident, preferring to make more trades – with either style, a singular approach often adversely affects long-term returns.

Successful long-term investment strategies can be especially challenging to implement when a couple can’t agree on what to do with their nest egg – or when one investment style dominates to the detriment of the couple’s finances.

As an advisor, facilitating communication and building consensus between clients is so important. Being on the same investment strategy page will help avoid some of the following situations:

Over-Invested in One Asset Class

Pam and Kevin* were confident they had enough money to retire, and happily sold their high-priced home in the San Francisco Bay Area, relocating to a lower cost area in the Southwest. Kevin was a do-it-yourself investor and prided himself on growing the couple’s retirement savings. Pam was happy to let her husband handle the investments, and focused on managing the household finances.

For the first few retirement years the outgoing couple thoroughly enjoyed life without work, getting involved with the local community and volunteer opportunities, and taking full advantage of their newly free time. However, when oil prices plunged in 2015, so did the value of their investments.

Since 2009, Kevin had invested the majority of their savings in Master Limited Partnership (MLP) funds that invested in companies in the oil and gas industry. He was not alone – between 2010 and 2014, $44 billion flowed into these MLP Funds, primarily for their high dividend pay-out, but also to enjoy the growth of the oil and gas industry in the U.S. In 2015 the price of U.S.-traded crude oil declined 30%, but the shares of MLP’s fell over 44%.

The devastating loss in the value of their investment portfolio prompted Kevin and Pam to reenter the job market – they realized it was no longer sustainable to withdraw from their investments for living expenses. Retirement looks very different to them now, but they are recalibrating, and dealing with changed circumstances as best they can.

Trying to Time the Market

Ann and Paul* both worked for Silicon Valley technology companies for many years and saved enough to fund substantial IRA’s for retirement, and a good amount in taxable savings, as well. During the 2007-2009 recession Paul pulled all his money out of the market, and has kept it in cash. Ann recently rolled over her 401(k) to an IRA, and on Paul’s advice has kept that money invested in cash.

Because Ann and Paul have always kept their assets separate, Ann is now withdrawing from her IRA early (before Required Minimum Distributions begin at age 70 1/2) to pay expenses. She is very concerned because there is no growth in her IRA, and she sees the balance declining. Paul insists that it isn’t the right time to invest in stocks and bonds, and is convinced there is a huge market crash coming. Ann, however, understands asset allocation and diversification, and believes in investing for the long haul. The problem is, she can’t get Paul to see it her way, and she is hesitant to rock the boat.

What can be learned from these two couples, and their financial challenges (and opportunities)?

Although men and women may have innately different investment styles as evidenced by the stories above, when differing strategies come together they can create a strong complementary approach. As with every ‘battle of the sexes’ difference, communication is key.

If Pam had been more involved in decisions about how the couple’s money was invested, she may have urged Kevin to take a more balanced approach. In Paul and Ann’s case, her long-term outlook could have helped temper Paul’s urge to control things, and time the market.

If consensus isn’t possible, I would suggest the couple agrees to have each person invest a portion of their money individually – especially when the investments involve separate funds such as IRA’s or investment accounts. In the cases I reference, it would be the responsibility of Pam and Ann to educate themselves about different options, and to use that knowledge to make confident investment decisions.

In many cases, couples at odds over investment styles choose to go it alone – without the guidance of a professional advisor to help them find a middle ground.

My advice?

Having a portion of an investment portfolio invested in a balanced way is better than none at all.

And, of course, gender differences may not apply to all couples – every individual approaches investment decisions in their own unique way. Consider your own investing style — it might be the first step in open conversation with your partner about long-term financial goals.

*Names have been changed.

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NoBody Knows – And That is Why You Diversify

The Sun Tarot card

the sun tarot– Nobody knew that the yield on the 10 year Treasury would keep going down. – Nobody knew that the price of a barrel of oil would drop by 55%. – Nobody knew the Russian ruble would crash. – Nobody knew that Japan would dip into a technical recession. – Nobody knew that Europe’s tentative recovery would falter and fail. And this week, nobody knew, including Christine LaGarde, the director of the International Monetary Fund, that Switzerland was going to un-peg the Swiss Franc from the Euro. These are just a few of the surprises that happened in the last year that even the most experienced investors didn’t predict. These unexpected events can have either a positive or negative effect on stock and bond markets worldwide. Unexpected events like these are also why most investment professionals, including me, espouse the mantra of diversification. You’ve probably read about diversification in your employee benefits package when signing up for your 401 (k) or from reading investment articles or from your financial advisor. Diversification is what it sounds like – an investment strategy that combines a variety of investments (both U.S. and international, a mix of small and large cap stocks, and a variety of bonds) designed to reduce exposure to risk. However, diversification doesn’t just reduce the downside potential it also reduces the upside potential, in the end, hopefully providing a smoother portfolio trajectory. You might say, what?, why would I want to invest in a strategy that reduces the upside potential? Well, if you knew anyone that bailed out of stocks in 2008 or early 2009 and never reinvested, you will know the answer to that question. A portfolio with 100% invested in the S&P 500 in 2008 lost 37%, and if it had a good dose of large technology stocks even more (the NASDAQ Composite was down 41%). That unfortunate time in stock market history scared off a lot of seasoned and unseasoned investors. If instead, that 2008 portfolio was diversified with a dose of bonds in it, the loss would have been less and the investor, more likely to stay in the market. Which is the point – less volatility is more likely to keep a person invested for the long haul. In 2014, the more diversified your portfolio was, the less closely it would have matched the returns of the S&P 500, which was up 13.69%. The S&P 500 is the index along with the Dow Jones Industrial Average, (up 7.52% in 2014) most often quoted in the media. Below are the 2014 returns of various indexes representing the broader asset classes and geographic areas you would find in a diversified portfolio: REITS (Real Estate Stocks)                 28.0% Inter.Term Bonds                                5.97% US Small Cap Stocks                           4.90% Global Stocks (includes US)                4.0% Hi-Yield Bonds                                    2.46% Emerging Markets Stocks                  -1.8% International Stocks                           -4.90% Global Diversified Bonds                   -5.72% Europe Stocks                                     -7.10% Pacific Stocks                                      -7.10% Commodities(includes oil&gas)        -17.01% Russia Stocks                                       -44.9% As you can see, the returns were all over the map, and mostly down. It was not a great year to invest internationally and definitely not in energy stocks. But nobody could predict that going into 2014, in fact, back then it the world looked like it was poised for synchronized global growth. If you were in a diversified portfolio, you had another decent year, maybe nothing to jump up and down on the bed about, but decent. And, the good thing about decent years, even single digit ones, is that they add up over time. ——————– For additional food for thought on this topic, the attached charts illustrate the randomness of asset class and sector return year by year. Please note that the “AA” or Asset Allocator portfolio was created by novelinvestor.com and is for illustration purposes only. asset class returns s&P 500 sector returns

Cultivating a Healthy Relationship with Money

Cultivating a healthy relationship with money is the foundation of a rich and happy life. Just like any other relationship, for your money to prosper and grow, it needs attention and care.

You don’t want to smother it with worry and fear, but you also don’t want to be neglectful. You need to get to know it, love it, and not be afraid to let it go, if you strike the right balance, it will always be there for you.

A little understanding goes a long way in our relationships, and it’s the same for money.The first step to understanding money is to figure out how much you need to live your life the way you want.

You can spend your whole life pursuing more money, or you can figure out what it takes to live and be happy. Money is a tool to fund your life – when you think about money as a tool, it’s easier to plan.

How much do you need?

How much money do you need to meet your financial obligations and commitments: the mortgage, the rent, your other fixed bills, your medical insurance, your kid’s education? How much is an important number because you if you can’t afford your basic lifestyle, life becomes one big worry about money.

Next comes regular saving. This step is hard. It trips many people up. It usually involves delayed gratification, and we don’t like that. It also involves investing. Investing can seem scary and complicated. But we must save for the things or experiences we want soon and in the future, and we must invest or our money will lose value due to inflation.

Retirement is the most daunting savings need of all because it involves large numbers and lots of assumptions – assumptions regarding our longevity, health, returns on investment, interest rates, to name a few. For most of us, social security is the only source of income we will have in retirement besides our savings. For this reason, saving at least 10% of income each year and more if behind is critical.

After you understand how much money you need to cover your emergency fund, your necessary expenses and your retirement savings, then you can focus on what else you want to create a rich and happy life. A healthy relationship with money means knowing that you can’t have everything. Instead, you figure out what in life brings you the most joy and satisfaction, and you prioritize those things.

You will know you have achieved a healthy relationship with money when you worry less about it and start feeling good about how you are spending and saving it. Get started working on this most important relationship now for a happier future.

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