Category Archives: August

Could Chinese Market Turmoil Cause a World of Hurt? The Chinese government intervened in its financial markets in July. Will China’s troubles affect the global economy?

It’s been a stressful summer for millions of Chinese stock market investors. The Shanghai Composite Index dropped 32% and lost more than $3 trillion in value in less than four weeks. After hitting bottom on July 9, the market rebounded 15% by July 21 before plunging 8.5% on July 27.1–3

Foreign investors’ access to mainland China’s financial markets is limited by government quotas, but has slowly been expanding. It’s estimated that foreigners own about 4% of China A-shares, the local securities of Chinese companies trading on mainland exchanges.4 This differentiates them from H-shares, Chinese stocks listed in Hong Kong, and N-shares, Chinese stocks listed in the United States.

Still, China is the world’s second largest economy and has trade ties with much of the world. Chinese business activity accounted for 38% of global gross domestic product (GDP) growth in 2014, the largest share of any nation.5

If continued stock market weakness causes the broader Chinese economy to slow further, it could spell trouble for many other nations and the global economy as a whole. Moreover, the speed and depth of the Chinese market’s sudden descent have prompted unprecedented intervention by the ruling Communist Party, drawing attention to the risks that come with investments in foreign markets.6

Behind the Slide

The summer sell-off was preceded by a year-long stock rally that may have become overheated. The Shanghai Composite Index surged 150% in the 12-month period through June 12, and its median stock valuation reached 108 times earnings, even though the pace of GDP growth was slowing and profits were shrinking.7–9

The Chinese stock market is dominated by 90 million retail investors, many from working-class households. The Communist government has promoted stock investing, causing a large number of novice investors to wade into the rising markets over the last year.10

At the same time, margin debt on the Chinese stock market ballooned five-fold in the 12 months through June 12.11 The fact that Chinese investors were buying stocks with so much borrowed money likely made matters worse. As prices fell, more and more investors were forced to sell stocks to repay loans, resulting in a downward spiral.

Life Support

The Chinese government instituted a number of measures to help restore investor confidence and end the sell-off. Regulators tried to encourage stock buying by cutting interest rates, suspending IPOs to preserve liquidity, making loans more available for stock purchases, and allowing pensions to purchase stocks. In addition, a $19 billion stabilization fund was created to help shore up stock prices.12 When prices continued to fall, major shareholders were banned from selling for six months, and a government investigation into short selling was launched.13

Locked Out

Two Chinese market rules impeded trading during the sell-off. First, a daily-limit rule freezes a stock’s share price for the remainder of the day once it rises or falls by 10%. Second, companies can apply for trading halts ahead of major news that might cause their stock prices to fluctuate.

According to a Wall Street Journal analysis, only 3.2% of Chinese stocks were trading freely on July 9; the exchanges allowed about 51% of listed companies to suspend trading, while roughly another 46% of listed stocks were unavailable because of trading limits. Consequently, some U.S.-based money managers whose portfolios follow Chinese stock indexes had difficulty executing trades needed to rebalance holdings affected by market volatility.14

Chinese officials have defended their policies, contending they were necessary to stem an irrational panic that could have damaged the nation’s financial system. Considering that stock indexes were still well into positive territory for the year, some critics think regulators might have overreacted to a steep but necessary market correction.15 Going forward, the threat of aggressive government interference in the markets could have a chilling effect on foreign investment in China.

Financial news out of China and elsewhere in the world could continue to spur volatility in U.S. markets. Even so, it’s generally wise to ignore day-to-day fluctuations and stick to a long-term investment strategy based on your financial goals, risk tolerance, and time horizon.

The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.

Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to a specific country. This may result in greater share price volatility.

1, 14) The Wall Street Journal, July 21, 2015
2) BloombergBusiness, July 10, 2015
3) The Wall Street Journal, July 27, 2015
4) The New York Times, July 9, 2015
5–6) BloombergBusiness, July 13, 2015
7, 11) BloombergBusiness, July 15, 2015
8) BloombergBusiness, July 5, 2015
9–10) The Wall Street Journal, July 7, 2015
12) The Wall Street Journal, July 5, 2015
13, 15) The Wall Street Journal, July 20, 2015

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Gen X Turns 50: Time to Rescue Retirement? Some helpful strategies, not only for Gen Xers but for anyone concerned about falling short of retirement savings goals.

The oldest members of Generation X are turning 50 in 2015, and a recent study suggests that this generation is well behind in saving for retirement. Although Gen Xers expect to need at least $1 million for a comfortable retirement — and many think they’ll need even more — the median savings in their retirement accounts is just $70,000.1

An additional challenge is that Gen Xers will start reaching their full Social Security retirement age of 67 in 2032, just a year before the Social Security trust fund is expected to run out. At that time, it’s projected that the program may be able to pay just 77% of scheduled benefits, unless Congress finds a solution in the meantime.2

This may sound bleak, but there’s still time to get back on track. Here are some ideas to consider, not only for Gen Xers but for anyone concerned about falling short of retirement savings goals.

Calculate retirement needs. Only 12% of Gen X workers have used a calculator or worksheet to estimate the savings they will need for a comfortable retirement.3 Regardless of age, workers who try to calculate their retirement needs tend to have higher savings goals and are more confident about reaching those goals.4

Make saving a priority. Gen Xers have many competing financial priorities — mortgages, auto loans, college for their children, and sometimes their own student loans. If that sounds familiar, you might have to reduce expenditures in order to allocate more to savings. When your children are out of school or your auto loan is paid off, you can dedicate additional resources to saving for retirement.

Increase contributions. Even though 84% of Gen Xers who are offered a savings plan through work participate in their plans, their average contribution percentage — 7% of salary — may not be enough to achieve their retirement goals. Experts generally recommend saving at least 10% to 15% of salary throughout a working career, and even higher percentages may be required for those who start saving later.5 When you turn 50, take advantage of annual “catch-up” contributions that allow you to save an additional $1,000 in an IRA and an additional $6,000 in most employer-sponsored plans.

Keep your savings working. More than one out of four Gen Xers have used their 401(k) accounts for purposes other than retirement — cashing out when changing jobs, taking early withdrawals (which may include penalties), or borrowing against their account balances.6 Instead of tapping retirement funds, it’s wiser to keep a separate emergency fund and to save for special purchases outside of a retirement account.

Educate yourself and consider professional guidance. Sixty-five percent of Gen X workers say they do not know as much as they should about retirement saving and investing, and 58% would like outside advice. Yet only 35% work with a financial professional.7 There is no assurance that working with a financial professional will improve investment results. But by focusing on your overall objectives, a financial professional can provide education, identify strategies, and help you consider options that could have a substantial effect on your long-term financial situation.

Every generation faces retirement challenges. The good news for Generation X is that there is time to turn those challenges into opportunities to prepare for a comfortable retirement.

1, 6) Forbes.com, August 28, 2014
2) Social Security Administration, 2014
3, 5, 7) PlanSponsor.com, August 28, 2014
4) Employee Benefit Research Institute, 2014

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Protecting Your Most Precious Asset Why all parents should have a will, regardless of any material assets they may possess.

Americans tend to drag their feet when it comes to estate planning. Only 36% of adults have a will, and the numbers are even lower for young adults. For example, among adults aged 35 to 44 — an age when many people have accumulated substantial assets — only 20% have a will to help ensure that their assets are distributed according to their wishes.1

Protecting material assets is important, but protecting your children — your most precious asset of all — is even more important. Yet only 49% of married parents and 17% of single parents have a will.2 People cite various reasons for not creating a will: procrastination, a lack of urgency, or because they don’t think they need one.3 If you have minor children, however, you need a will regardless of any material assets you may possess.

Naming a Guardian

A will is generally the simplest and most appropriate way to select a guardian for minor-age children and adult children with special needs. If you do not select a guardian, a probate court will select one for you, and your child’s financial matters might be managed through the court. A legal guardian can provide daily care as well as financial oversight, but you may name a different person as custodian for specific accounts.

It’s usually not a good idea to name a minor child as the primary beneficiary of a retirement account, pension plan, or insurance policy, but it may be appropriate to name children as contingent beneficiaries as long as you also specify a guardian or custodian. Beneficiary designations on such accounts typically supercede instructions in a will, so be sure that the guardian/custodian you name on the beneficiary form corresponds with your will unless you want the account assets controlled by a different individual.

Creating a will does not have to be expensive or complex, but it could make a big difference for your children and other heirs. If you already have a will, you should review it regularly to make sure it reflects your current wishes.

1–3) Rocket Lawyer, 2014

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Should I Stay or Should I Go? Easing into Retirement Two strategies that might help those who are considering retirement make a smoother, more confident transition.

Unforeseen events can sometimes force a person to retire, but for many people the decision to retire is a personal choice. And like any big decision, it can be fraught with uncertainty.

If you’re considering retirement in the not-too-distant future but not sure whether you’re prepared — financially, emotionally, or both — here are two approaches that might help you make a smoother, more confident transition.

Practice Makes Perfect?

One “practice retirement” scenario that has been promoted in recent years goes like this: The pre-retiree would stop saving for retirement around age 60 and continue working into his or her late 60s, allowing current savings to grow and Social Security benefits to accrue, while spending the income formerly dedicated to savings on the fun things he or she imagines in retirement. Getting a jump-start on the fun would be great, but this approach might work only for those fortunate few who have saved enough by the age of 60 to support a comfortable retirement. For many people, spending instead of saving in their early 60s could be disastrous.

A more realistic approach may be to try living on your projected retirement budget for six months or a year before you make the decision to retire. You might even set up two separate accounts: one for the expenses you anticipate in retirement and another for expenses that you may no longer have when you retire (for example, commuter expenses or a mortgage that you expect to pay off). Put only the amount of retirement income you expect to have into the “retirement account” and determine whether you can live comfortably on that income. If not, you may have to adjust your spending or work longer to increase your savings and Social Security benefits.

If you plan to move to a different part of the country when you retire, it may be difficult to simulate your retirement lifestyle while maintaining your current job. In that case, you might take an extended vacation and try living for a time in your planned retirement destination.

Phasing Out

The federal government recently established a formal phased retirement program that allows eligible full-time federal employees to collect half their pensions while working half-time; at least 20% of their remaining work hours will be spent mentoring younger workers.

Only 11% of companies in the private sector offer some form of phased retirement, but there seems to be growing interest.1 If your company does not offer such a program, you might suggest an arrangement that could be beneficial for all concerned. Here are some ideas to keep in mind.

Make sure you understand the effect of reduced hours on your benefits, such as health insurance and employer pension or retirement plan contributions.

Because pensions are less common in private industry, you may have to supplement your lost income. If you claim Social Security before full retirement age and continue to work, not only will you receive a permanently reduced benefit but you’ll be subject to the “earnings test,” which may temporarily reduce your benefit until you reach full retirement age.

A moderate phaseout program, such as working four days instead of five, might allow you to try living on 80% of your income without tapping other sources. This could be good practice for retirement.

If you do phase out of your current job, make sure you don’t end up trying to do all of your former work in fewer hours!

Retirement should be a positive experience after a long working career. By taking a practice run or a phased approach, you may be more comfortable as you move into an exciting new stage of your life.

1) ConsumerReports.org, March 10, 2015

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Cyclical vs. Defensive Stocks Cyclical and defensive stocks differ and consumer spending and economic growth may affect various sectors of the stock market.

It’s no secret that consumers are the driving force behind the U.S. economy; consumer spending is responsible for more than two-thirds of U.S. gross domestic product (GDP).1

Even though real GDP increased at an unimpressive rate of 2.4% for all of 2014, consumer spending in the fourth quarter grew at the fastest pace in more than eight years.2 In January 2015, the Consumer Confidence Index followed suit and surged to its highest level since before the Great Recession hit in 2007.3

A stronger job market and lower gas prices, which left many consumers with a little extra money in their wallets, contributed to the fourth-quarter spending spree.4

But will U.S. consumers help shift the economy into higher gear in 2015? The answer will most likely depend on whether the average American’s financial prospects continue to improve.

Here’s a closer look at how consumer spending and economic growth may affect various sectors of the stock market.

Riding the Economy

The stocks of companies that primarily offer non-essential goods and services are generally referred to as “cyclical.” When times are tough, consumers often forgo spending on luxuries and delay big-ticket purchases they can live without.

The consumer discretionary sector is considered cyclical in nature; it includes industries such as retail, financial services, travel, and apparel that tend to benefit from growing consumer demand. Durable goods manufacturers (automobiles and appliances), home builders, and technology companies are also part of the cyclical category.

Cyclical stocks are “economically sensitive,” which means their share prices typically fall during recessions and rise as employment, consumer spending, and economic activity improve.

Playing Defense

“Defensive” (non-cyclical) stocks are less affected by economic changes, because these companies produce goods and services that people typically continue to buy no matter what. Examples of defensive sectors include consumer staples (which includes food, beverages, and household necessities such as toilet paper), utilities (water, gas, and electric), and health care.

The share prices of defensive stocks tend to hold up better during periods of economic uncertainty and financial market turbulence. On the other hand, companies in defensive sectors often carry higher amounts of debt, in which case their share prices or dividends might be negatively affected by a rise in interest rates.

Cyclical and defensive stocks tend to outperform during different stages of the business cycle. But keep in mind that every cycle is different from the last, and macroeconomic events or unexpected geopolitical shocks can sometimes disrupt regular trends. In most cases, it is difficult to recognize turning points until after they have passed.

Investors who “chase performance” and move assets into hot sectors may be too late to benefit from market gains and could suffer losses instead. Investing in an appropriate balance of cyclical and defensive shares may help increase return potential, smooth volatility, and moderate risk in your equity portfolio.

The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Past performance is no guarantee of future results. A portfolio invested only in companies in a particular industry or market sector may not be sufficiently diversified and could be subject to a significant level of volatility and risk.

1–2, 4) The Wall Street Journal, February 27, 2015
3) The Wall Street Journal, January 27, 2015

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.

Funding a Succession Plan with Insurance How life and disability insurance can be used to fund two different types of buy-sell agreements.

Death, disability, divorce, and bankruptcy are just a few of the events that can threaten the future of a once-thriving business. What would become of your life’s work if you decided to retire or had to leave suddenly for another reason?

In the midst of an emotional transition, it may be difficult or even impossible for surviving family members and/or co-owners to come to terms.

A properly drafted buy-sell agreement is a contract that establishes how ownership shares should be transferred when specified triggering events occur. Even though pre-negotiating who will buy out a departing owner may be a good idea, it could prove impossible if the timing of the sale is unexpected and the buyers don’t have the money to close a transaction. For that reason, it may be helpful to fund a buy-sell agreement with life and/or disability insurance.

Two Ways to Go

A buy-sell agreement can be structured to fit the business’s unique circumstances. A sale price is set in the agreement, or a formula is agreed upon for calculating the price at the time of the purchase to account for any changes in the value of the business.

A one-way agreement states that a specific person will buy the business when the owner retires, becomes permanently disabled, or dies. Permanent life insurance could be purchased on the owner’s life, with the successor as owner and beneficiary of the policy. The successor can use the proceeds from the policy’s death benefit to buy the company from the owner’s estate, with the monies passing through to heirs. Otherwise, the cash value that the policy has accrued could help fund the purchase of the business when the owner retires.

A cross-purchase agreement is for a business with multiple owners. It stipulates that the remaining owners will purchase the interest of the departing owner. Each owner could purchase insurance on the lives of the others and would be responsible for premiums on these cross-owned policies.

The guaranteed liquidity provided by insurance may help prevent surviving family members and/or co-owners from being forced to sell assets or borrow money.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing an insurance strategy, it would be prudent to make sure that you are insurable. Any guarantees are contingent on the financial strength and claims-paying ability of the issuing insurance company.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2015 Emerald Connect, LLC.