Month: August 2016

Paved with Good Intentions

© Can Stock Photo Inc. / Elenathewise

Picture a stretch of a busy highway. The speed limit is a moderate 65 miles an hour, which most commuters follow comfortably. Occasionally a maniac driver speeds through doing 80 or more, and may or may not be caught. No one particularly minds, until a series of high-profile crashes creates a public outcry about the speeding problem. The department of roads resolves to crack down on speeders and adjusts the speed limit down to 55.

Commuters might grudgingly slow down a bit, but because the road is built for traveling at 65 miles an hour, it doesn’t make sense to drive at 55—so most drivers don’t, and traffic continues to travel at 60 mph or so. The highway patrol, seeing that everyone’s just matching pace with traffic, turns a blind eye to this insignificant “speeding” and continues to work on catching the big offenders. For the most part, the change in speed limit does not have much impact.

However, while the stricter speed limit may seem “harmless”, it actually has a very chilling effect. Suppose one day a trooper wakes up on the wrong side of the bed and decides he doesn’t like the look of a particular driver, so he pulls them over for speeding—an open and shut case, since they’re speeding like everyone else. It is hardly fair or just, however, that one speeder among many should be singled out for punishment based on an arbitrary whim. All that the lower speed limit accomplishes is giving enforcement officers discretion to punish normal driver behavior at will—it does not actually make it any easier to catch or punish the original problem speeders, since it is just as illegal for them to drive at 80 in a 65 zone as it is in a 55 zone.

We’re not writing about this to complain about law enforcement officers. Rather, we use this example to illustrate a broader failing of regulatory efforts. When enforcement agencies find themselves frustrated they often resort to casting a wider net, writing new rules that make normal and honest behavior illegal. Often, these rules are made with no malicious intent—they’re still only after the big fish, and they figure any small fry that get picked up along the way can be released with no harm. But by giving themselves their pick of targets, they substitute their own discretion for the rule of law.

This is no way to run a free country. We want regulators to catch the criminals as much as anyone does—more than most, since our reputation suffers when fraudsters are allowed to run free. But passing stricter rules and making everyone into criminals is absolutely not the right answer. The next time you hear someone calling for tighter regulations, listen with a critical ear to what they’re saying: are they proposing to catch bad guys, or will they end up targeting everybody?

The Next Best Thing to Free Money

© Can Stock Photo Inc. / turk12

We are always gratified when clients find themselves with money to invest and their first thought is to put it to work with us. We pride ourselves on our ability to help clients work towards their financial goals, and believe that we provide a compelling service. But regardless of how good we might be at what we do, there are some situations where you can definitely do better with your money elsewhere.

Occasionally, younger clients who find themselves with extra money to invest will ask us whether they should contribute to their brokerage accounts or their employer retirement plan. Sometimes, their employer plan has an employer match they have not yet maxed out, which makes this question a real no-brainer. A dollar-for-dollar employer match is essentially a guaranteed, instant doubling of your investment. We might be good—but we’re definitely not that good. Even if you are unhappy with your employer plan’s performance, an employer match lets you take quite a lot of losses and still come out ahead of a more successful portfolio that doesn’t have the match.

Another situation where it makes sense to put your money elsewhere first is debt. In today’s low interest environment, you might not feel a lot of pressure to pay off cheap loans. However, if you have debt you’re paying 8, 10, or even 12% on, you should put some serious thought into paying off that debt before you invest that money in the markets.

If you pay off $5,000 of credit card debt that you are paying 12% interest on, your $5,000 “investment” will save you $50 a month, $600 a year, like clockwork. You’d be hard pressed to find any other investment that will pay you that kind of return—and if you did, it would likely have many risks associated with it. But once you pay off your debt, those interest payments are gone forever. We can’t really compete with that.

This is basic financial literacy you can use to improve your financial situation before you think about investing. As always, everyone’s situation is a little bit different, and we’re more than happy to discuss the particulars of your situation with you—even if the obvious conclusion turns out to be that you have more important places to put your money.

Investing involves risk including loss of principal. No strategy assures success or protects against loss.

Regulation and Common Sense

© Can Stock Photo Inc. / dip

There is a tendency in politics for arguments about regulation to boil down to politicians on the left arguing for more regulations and politicians on the right arguing for fewer regulations. Too often what is lost in this debate is the discussion of the quality of regulations, rather than the quantity. Effective regulations are easy to understand, easy to follow, and clearly distinguish between the crooks and honest folk, but many regulations fall short in a variety of ways.

Good regulation provides a clear line as to what is or isn’t allowed. When the line gets fuzzy, it becomes easy for upstanding businesses to fall afoul of regulatory issues unintentionally. It costs a lot of time to figure out the details of a vague regulation. And in the end, it may not become clear where the line is draw until expensive fines get handed down for crossing it. As a result, many companies may choose to err on the side of caution. This turns useful, valuable services into collateral damage of unrelated regulation.

Even when the regulations are written clearly, the costs of complying with them may be high. Increased documentation and oversight may sound like a good idea, but the extra work of supervising and documenting everything doesn’t come for free. Compliance overhead increases costs for businesses and, ultimately, hurts consumers when prices go up to compensate.

These may sound like problems that only big corporations need to worry about, but they have a very real and tangible impact on our everyday lives. I have been privileged in my career to work with many community banks. Sadly, these are a dying breed these days as more and more of them fold under the weight of regulatory burdens. Some are lucky to merge with fine, upstanding regional chains, but some towns have seen the local bank replaced with a megabank. The sad irony is that these regulations were often written to rein in big banks, but wound up driving out many smaller competitors instead.

Some of our politicians talk as though the solution is to do away with regulations altogether and create a Wild West environment for business. We’re not advocating for anything so extreme. But we need to call for simple, elegant rules that can protect the public effectively without undue burden on business. We ask you to join us in promoting common sense policies and leaders.

Age 70 1/2–What’s Up With That?

© Can Stock Photo Inc. / karenr

We have noticed that the rules about IRA account withdrawals cause some confusion, particularly among those who are approaching age 70. This article will cover the basics for most people. It is not intended to be advice or a recommendation for your specific situation.

For traditional or rollover IRA account owners, withdrawals after age 59 ½ are free of penalty but income taxes must be paid on the amounts withdrawn. One may withdraw money or not, in accordance with their needs and plans. Beginning at age 70 ½, the rules change a little.

For each year beginning with the year you turn 70 ½, a “Required Minimum Distribution” (RMD) must be withdrawn. ‘Required’ means there is no option about it, it must be done. ‘Minimum’ means that at least the calculated amount must be withdrawn, but you may withdraw more if you choose. ‘Distribution’ is simply the word the IRS uses for withdrawals.

The way the numbers work, the RMD starts out a little under 4% of the account balance at age 70, then rise gradually each year to a little over 5% at age 80 and close to 10% by age 92. The withdrawals will be taxable—that is the whole object of the exercise. You can see that with those requirements, IRA accounts may still have significant balances until advanced ages.

Here are just a few fine points:

  • The calculation begins with the prior year-end balance.
  • The factor used comes from an IRS table, and we will do the arithmetic for you.
  • The withdrawal may be made any time in the calendar year.
  • The first time only, you may delay until April 1st of the following year—but if you do, you will also need to withdraw for the second year in the same year—so income will be bunched up.
  • If you have multiple IRA accounts, you may take the RMDs from whichever accounts you prefer, as long as the total requirement is met.

Our object for each client is to have money do what people need it to do. So the question of how you should manage your accounts and your withdrawal strategy is best answered in a one-on-one discussion. If you would like our help, please call or email us. The IRS publication about RMDs is available online here

Different rules apply to inherited IRAs, Roth IRAs, and certain other situations. Check with your advisor about your situation.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

What’s Next?

© Can Stock Photo Inc. / chungking

Fifty years ago, comic strip hero Dick Tracy’s famous 2-way wrist radio got upgraded to a 2-way wrist TV. Forty years ago, visionaries were talking about telephones that would fit in a shirt pocket. Instead of each home having a phone number, each person would have one. In between those dates, the country’s only telephone company introduced push-button “dialing” as an alternative to the rotary dial.

You all know the rest of the story. In many respects, what seemed like science fiction or fantasy in decades past has become a routine part of everyday modern life. The same is true in many aspects of our lives.

There are constants in life, of course. We each seek to make a difference, to be happy, to provide for ourselves and others, to smile and be smiled at, to connect with our fellow human beings. Many of our most fundamental impulses remain unchanged since the dawn of time.

So the conditions of our world are a mix of unchanging things like human nature and the sun rising in the East, and rapid change in other things. All the way back in 1970, futurist Alvin Toffler wrote about “Future Shock,” a perception of too much change in too short a period of time. If anything, the pace of change has accelerated since then.

In life, we suspect that being grounded in the enduring truths help equip us to adapt to change.

In the field of investing, we believe that understanding the unchanging aspects of human nature help us understand and deal with change. The ever-evolving landscapes of the economy, markets, companies, and technology produce constant and unpredictable changes. But no matter how different the world may seem, new changes will still produce reactions and over-reactions, fads and manias, and varying amounts of fear and greed.

We will admit it. We are entranced with the conflict between simple eternal principles and the endless complexity of the world. Making sense of it to help people in their real lives—that’s why we wake up and get to work every day. If you would like to talk to us about your situation, write or email us.

Peril or Opportunity?

© Can Stock Photo Inc. / flocu

Everybody talks about “the market” but each company in the market has its own story. We need to revisit this to understand the errors we perceive in a currently popular theory.

Some say that actions by the Federal Reserve and other central banks have artificially pumped up asset prices across the board, so there is no safe place to invest. When we look at the pieces of the market, however, a different story emerges.

Some sectors are far below their peak prices from many years ago. Many oil and natural resource companies are trading at only one-third to two-thirds of past high points. The financial sector has actually lost money over the decade ending July 31st.1

Within these and other sectors, we see opportunities. So we reject the idea that everything is too high to own.

At the same time, we know that there are distortions and potential bubbles in some parts of the investment universe. Even though we know the Federal Reserve will eventually get it right (because the markets force it to), we’ve described why we do not like current policy. We have also talked about the potential bubble we see in the bond market, and what might burst it.

Bottom line, the investment universe has rarely been this interesting. It contains both opportunity and peril, the potential for growth and stagnation. As always, we are studying hard to understand the pieces we should own. Please call or email if you would like to discuss your situation.

1As defined by Standard & Poor’s and calculated by State Street Global Advisors

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Happy Anniversary!

© Can Stock Photo Inc. / mikos

Leibman Financial Services (LFS) was born in August, 1996. It was the culmination of nearly twenty years of prior experience in virtually every aspect of financial services. August 2016 marks the 20th Anniversary of our founding.

While the twenty years before LFS covered a wide range of insurance and banking and investment and benefit products, LFS was intended to focus very tightly on helping people manage their money to get where they wanted to go. This is why we are in business.

And what an incredible twenty years it has been!

  • We were fortunate to be aligned with the independent broker-dealer LPL Financial. LPL provides the platform, resources, and expertise we need to provide state-of-the-art services to you.
  • We were fortunate to land our facilities at 228 Main in beautiful downtown Louisville. It’s a great place to do business.
  • Most of all, we were fortunate to be able to serve so many wonderful people. We are privileged to help with many of life’s most important topics.

A milestone is a natural place to look back and look ahead. We are excited about the future, for a number of reasons:

  1. The gap between expectations and reality as it unfolds is where investment opportunity lives—and we believe the gap is historically wide right now.
  2. We have the largest and most capable staff we’ve ever had, to do the work we need to do for you.
  3. Our range of offerings is expanding to better pursue the diverse needs and circumstances of our clients.
  4. Our communications program expanded dramatically over the past year, with a complete library of our philosophy and methods at 228Main.com and daily commentary in three ‘New Media’ venues.
  5. The founder is intent on working to age 92, and feels better than ever about being able to do so.

A heartfelt ‘Thank You’ to everyone. We are looking forward to the years and decades ahead.

The Next Recession is Coming, Continued

Federal Reserve Bank of St Louis
Federal Reserve of St. Louis

Once again it is time for our quarterly assessment of economic conditions. Is the economy growing or shrinking? This is the fundamental question.

The next recession is always out there, of course, as is the recovery which will follow it. The excesses that build up in good times lead to imbalances that get corrected by economic downturns. But what are the current indications?

• The Index of Leading Economic Indicators is supposed to point to the direction of the economy in the months ahead. It has remained solidly in positive territory.
• The bond market speaks to us about economic conditions through the yield curve. Although it has flattened somewhat recently, it remains in growth mode.
• The Current Conditions Index from LPL Research remains in positive territory.
• The “Overs,” a proprietary LPL measure of potential over-spending, over-borrowing, and over-confidence, point to continuing expansion.
• Details on the LPL Research work are available here.

Economic news is always mixed, and can always be better. But jobs and incomes and spending continue to grow in fits and starts. The weight of the evidence says we are doing OK, at least.

We do have challenges. Policy makers attempt to manage the economy from above, using a philosophy that was discredited long ago. Their interventions create distortions which we monitor carefully. Much of our work involves avoiding the problems created by people trying to “help us.”

We are on the job, doing the best we can to preserve your interests and take advantage of opportunities as they arise. Call or email us if you have questions or comments.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All indices are unmanaged and may not be invested into directly.

Broadening Our Horizons

© Can Stock Photo Inc. / phototrekker

For many years, we have specialized in total return investing. If the fruit crop is enough to live on, we haven’t needed to care what the neighbor would pay for the orchard. We have promoted the idea that living with volatility is rewarding. The concept seemed right for the times, since the prevailing low interest rates offer little return on fixed investments.

This traditional core approach hasn’t been right for everyone. Some lack the confidence that we will overcome our challenges, persevere, and continue to grow and thrive. Others just can’t tolerate the ups and downs of long term investing. While our approach is not right for everyone, some of the alternatives are not good either. Consequently, we have come to the realization that we can do a better job for you and others if we offer a range of options.

One client on the verge of retirement has a more pessimistic view of the future than we do. He concluded he ought to put half of his wealth in capital preservation strategies that are likely to hold the money together in case of disaster. And he also concluded that the growth potential of our core approach could be an important hedge against rising cost of living in the years ahead. So he ended up with a 50/50 split based on the idea that he might be right, or we might be right—and the best course was some of each instead of all of one or all of the other.

A retired couple has been comfortable with our approach, but felt that 20% in more stable strategies would offer some preservation against unexpected major health problems.

Others understand and like our traditional approach, and have no desire to change a thing. The key is, each person may make their own decision about the tradeoff between stability and growth.

So we will be bringing our values and principles to a wider range of options. We’ll be at home with a range of viewpoints and investment objectives. On the capital preservation side, we will bring our research strengths to attempt to avoid the major sources of risk and to find opportunity where we can.

That old “buy low, sell high” thing continues to influence our thinking. We won’t be interested in helping people sell out at the wrong time by getting more conservative at low points. Nor will we want to see people getting enthusiastic and more aggressive at market high points. The new structure of offerings is intended to help people find the portfolio they can live with in all market conditions—and be able to do that in our shop if they choose.

As always, if you have questions or concerns or would like an expanded discussion about your circumstances, please email or call.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

You Can Rig the System, Too

© www.canstockphoto.com / AlexMax

Politicians are telling us that we would be doing better if the system was fair. “The system is rigged” is a bipartisan theme this season. Through incompetence or malevolence or greed, the powerful few are supposed to be holding us down.

If you know us, you know we don’t spend a lot of time arguing politics. It is no surprise that any human endeavor has room for improvement. More pointedly, there are things about our society that are terribly unfair—including some things that are deeply rooted.

Each of the seven billion of us retain the ability to wake up each day and make the most of what we have to work with. Our resources may be few or many; our challenges may be petty or life-threatening; each one of us has our own story and our own situation. But we can each make the most of what we have to work with, day by day.

In key ways, YOU can rig the system in your favor. This thought was inspired by a list going around the internet, ‘Ten Things That Require Zero Talent.’ We can judge the merits of this list with a simple thought experiment.

Imagine that you are an employer, providing a valuable product or service to the rest of society. Among your employees there are two in particular you are considering for promotion and a good raise. One of them has all ten of these traits, the other has none of them. Here’s the short version of the list:

Being on time; having a good work ethic; putting in the effort, having positive body language; demonstrating energy, attitude and passion; being coachable and prepared.

So as you think about the free items on this list, which employee will you choose to promote? (Please accept our apologies for asking such a silly question with such an obvious answer.) The simple fact is that one employee rigged the system in his favor, and the other did not.

Our point is that each of us has considerable influence on our own destinies. In election season we discuss political and societal issues, we challenge things that need challenging and support things that deserve support. As we do so, let’s remember that our first job is to wake up each day and make the most of what we have to work with.