Category Archives: October

A Wild Ride: Understanding Market Volatility Some reasons behind current market movements and why investors should refrain from emotional reactions.

On Monday, August 24, 2015, the Dow Jones Industrial Average plunged 1,089 points in the first 10 minutes of trading, the largest intraday point drop in the history of America’s oldest stock index. The benchmark rallied, regaining almost 1,000 points, only to slip again and close down 588 points — the most volatile day in a turbulent stretch that has seen the market bounce around while trending downward.1

As an investor, you might feel nervous about volatility, especially when the trend seems to be heading lower. However, it’s important to consider the reasons behind the market swings and maintain a long-term perspective.

China, Oil, and the Dollar

Three international concerns are at the heart of current volatility: economic weakness in China, low oil prices, and a strong dollar. All three are interconnected, but though they may slow the global economy, their effect on the U.S. economy and stock market reflects fear and uncertainty more than a direct threat.

A faltering Chinese economy, including reduced demand for oil, may affect trading partners that depend on exports to China. However, China accounts for only 7% of U.S. exports, and exports are a relatively small sector of the U.S. economy. Low gas prices and a strong dollar are a mixed bag — good for U.S. consumers while challenging for some multinational businesses.2

Balanced against these international issues is a stronger U.S. economy, as well as improving business results. On September 25, the U.S. Bureau of Economic Analysis released its third estimate of second-quarter 2015 economic performance, revising annual real GDP growth from the advance estimate of 2.3% (released before the big market drop) to a more robust 3.9%. Though consumer spending drove the overall increase, the revision also reflected increased business investment. Corporate profits rose at a 3.5% quarterly rate after falling by 5.8% in the first quarter.3

These are strong economic indicators that bode well for the long term, but uncertainty often has an outsized effect on short-term market performance.

What Will the Fed Do?

Adding to the uncertainty is concern about when the Federal Reserve will raise the federal funds rate. Despite expectations that it might pull the trigger at its September meeting, the Federal Open Market Committee (FOMC) held steady, saying “recent global economic and financial developments may restrain economic activity somewhat.” At the same time, the FOMC affirmed its belief that the U.S. economy is on the right track, and most members still anticipate raising the federal funds rate this year.4

In a measure of how interest-rate uncertainty makes investors nervous, the Dow dropped 121 points in four minutes after the Fed announcement and regained 119 points in the next eight minutes. It closed with a modest loss of 65 points or 0.39%.5

New Trading Strategies

Along with concerns about the global economy and domestic interest rates, new trading strategies may be adding to the volatility, creating rapid large-scale market shifts that do not always reflect investor sentiment about individual stocks. In one telling statistic, during the 15 trading sessions ending September 9, there were 11 “all or nothing” days when at least 80% of the stocks in the S&P 500 index either rose or fell — a daily mass movement unmatched in records dating back to 1990.6

Maintaining Perspective

Although a market loss may be difficult to accept, it’s important to keep the numbers in perspective. The S&P 500 index more than tripled in value from its recession low in March 2009 to its most recent high on July 20, 2015. The 9% loss from July 20 to September 25 still left the index up 185% over the last six-and-a-half years.7 No bull market lasts forever, but the recent pullback doesn’t necessarily mean the market has no more potential for gain, and it may be healthy in the long term.

Some analysts think stocks may have become overvalued during the long bull run, and a pullback or a correction (defined as a market drop of 10% from a previous high) can set a more realistic “floor” for future market growth.8

Fleeing the market during a downturn means you are not in a position to take advantage of growth on the upswing, as many investors learned when they left the market during the recession. In fact, a down market may be a buying opportunity, but it’s just as important to be careful about purchasing investments as it is to be careful about selling. In most cases, it would be wise to maintain a steady course and stick to the sound investment principles you used in building your portfolio.

All investments are subject to market fluctuation, risk, and loss of principal. When sold, investments may be worth more or less than their original cost. The S&P 500 index is an unmanaged group of securities that is considered to be representative of U.S. stocks in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results. Actual results will vary.

1, 8) money.cnn.com, August 24, 2015
2) The Wall Street Journal, August 24, 2015
3) U.S. Bureau of Economic Analysis, 2015
4) Federal Reserve, 2015
5, 7) Yahoo! Finance, 2015
6) barrons.com, September 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.

Coverage You Can Keep Differences between term and permanent life insurance and how consumers should consider what coverage they need.

In a 2015 study, 43% of Americans said they would feel a financial impact within six months if the primary wage earner died. Perhaps reflecting this concern, three out of 10 acknowledged that they needed more life insurance coverage.1

Four out of five consumers overestimate the cost of life insurance, which may explain why many people don’t always buy the insurance they need. Millennials, who can typically buy less-expensive coverage than older people, overestimate the expense by more than 200%, and Gen Xers overestimate by more than 100%. Many consumers also don’t understand the factors that could affect what they pay for coverage.2

An Individual Policy

You may have group life insurance through work, but the face value of employer-based policies is generally low — typically one or two times your annual salary. Although the amount of coverage you need depends on a variety of factors, one traditional guideline suggests having coverage equal to seven to 10 times your salary.3 Just as important as the amount of your coverage is the continuity — you might lose coverage if you change employers.

An individual policy is yours to keep for as long as you pay the premiums. Two basic types of individual life insurance are available.

Term life insurance is generally the most affordable. As the name suggests, this type of coverage offers a death benefit if the insured dies within the covered time period, which could range from one to 30 years. Premiums may adjust each year or remain fixed for the full term. You might be able to continue coverage beyond the original term at a higher premium, or possibly convert to a permanent policy (subject to age restrictions and policy minimums) while the policy is in force.

Permanent life insurance (also called whole life) offers lifetime protection and a guaranteed death benefit as long as you keep the policy in force by paying the premiums. Although the premium is usually higher than for term insurance, it typically remains level for the rest of your life.

A portion of the permanent life insurance premium goes into a cash-value account, which accumulates on a tax-deferred basis throughout the life of the policy. You might be able to borrow against the cash value during your lifetime to help pay for retirement, education, emergencies, or other needs.

Withdrawals of the accumulated cash value, up to the amount of the premiums paid, are not subject to income tax. Loans (as long as they are repaid) are also free of income tax. Loans and withdrawals from a permanent life insurance policy will reduce the policy’s cash value and death benefit, and may require additional premium payments to keep the policy in force. Any guarantees are contingent on the financial strength and claims-paying ability of the issuing insurance company.

Keep in mind that policies commonly have mortality and administrative charges beyond the cost of premiums. If a permanent life policy is surrendered prematurely, there may be surrender charges and income tax implications.

1–2) LIMRA, 2015
3) Bankrate.com, 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.

Time to Make Medicare Changes Medicare beneficiaries can switch plans and coverage during different enrollment periods throughout the year.

When Medicare was first signed into law in 1965, it consisted of Part A hospital insurance and Part B medical insurance, now referred to as Original Medicare. These programs are administered directly by the federal government and have standardized services, premiums, and deductibles.

Two other types of coverage have since been added — both offered by Medicare-approved private insurance companies — with varying costs and benefits. Part C, or Medicare Advantage, replaces Original Medicare and often includes prescription drug coverage and other benefits. Part D Prescription Drug Coverage can be selected with Original Medicare or with Medicare Advantage Plans that do not offer drug benefits.

With all these options, it’s not unusual for beneficiaries to switch plans and coverage, either because of changing circumstances or because another plan better suits their current needs. Fortunately, there are opportunities to do so during several enrollment periods throughout the year.

Medicare Open Enrollment Period: October 15 to December 7. During this period, changes can be made by participants in Original Medicare, Medicare Advantage, and Medicare Prescription Drug Plans. Any changes made during this period become effective on January 1.

Medicare Advantage Disenrollment Period: January 1 to February 14. Participants in Medicare Advantage Plans can also switch to Original Medicare during this period, with Original Medicare coverage beginning the first day of the following month. Those who make this change have until February 14 to enroll in a Part D Prescription Drug Plan, with coverage beginning the first day of the month after the plan receives the enrollment form.

Five-Star Special Enrollment Period: December 8 to November 30 of the following year. An additional opportunity allows Medicare beneficiaries to switch to a top-rated “5-star” Medicare Advantage Plan, Prescription Drug Plan, or Medicare Cost Plan (alternate coverage available in certain areas of the country). Medicare rates these plans every year, and a 5-star rating is considered excellent. You can use the star ratings to compare plans based on quality and performance.

For more on Medicare enrollment, visit medicare.gov/sign-up-change-plans.

Source: Centers for Medicare & Medicaid Services, 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.

Correlation and Portfolio Performance How correlation plays a role in constructing a portfolio that strikes a balance between risk and potential return.

Different types of investments are subject to different types of risk. On days when you notice that stock prices have fallen, for example, it would not be unusual to see a rally in the bond market.

Asset allocation refers to how an investor’s portfolio is divided among asset classes, which tend to perform differently under different market conditions. An appropriate mix of investments typically depends on the investor’s age, risk tolerance, and financial goals.

The concept of correlation often plays a role in constructing a well-diversified portfolio that strikes a balance between risk and return.

Math That Matters

In the financial world, correlation is a statistical measure of how two securities perform relative to each other. Securities that are positively correlated will have prices that tend to move in the same direction. Securities that are negatively correlated will have prices that move in the opposite direction.

A correlation coefficient, which is calculated using historical returns, measures the degree of correlation between two investments. A correlation of +1 represents a perfectly positive correlation, which means the investments always move together, in the same direction, and at a consistent scale. A correlation of –1 means they have a perfectly negative correlation and will always move opposite one another. A correlation of zero means that the two investments are not correlated; the relationship between them is random.

In reality, perfectly positive correlation is rare, because distinct investments can be affected differently by the same conditions, even if they are similar securities in the same sector.

Correlations Can Change

While some types of securities exhibit general correlation trends over time, it’s not uncommon for correlations to vary over shorter periods. In times of market volatility, for example, asset prices were more likely to be driven by common market shocks than by their respective underlying fundamentals.

During the flight to quality sparked by the 2008 financial crisis, riskier assets across a number of different classes exhibited unusually high correlation. As a result, correlations among some major asset classes have been more elevated than they were before the crisis. There has also been a rise in correlation between different financial markets in the global economy.1 Tighter relationships among asset classes may be a good reason for some investors to reassess their portfolio allocations.

Over the long run, a combination of investments that are loosely correlated may provide greater diversification, help manage portfolio risk, and smooth out investment returns. But it’s important to keep in mind that correlations between assets can and do change over time and in particular circumstances. Future correlations may also differ from those in the past because of changing economic and market environments.

All investing involves risk, including the possible loss of principal. Asset allocation and diversification strategies do not guarantee a profit or protect against investment loss; they are methods used to help manage investment risk.

Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. When sold, investments may be worth more or less than their original cost.

1) International Monetary Fund, 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.

Executors Inherit Important Title Settling an estate can be a difficult and time-consuming job that could take months to a year or more to complete.

Being named as the executor of a family member’s estate is generally an honor. It means that person has been chosen to handle the financial affairs of the deceased individual and is trusted to help carry out his or her wishes.

Settling an estate, however, can be a difficult and time-consuming job that could take several months to more than a year to complete. Each state has specific laws detailing an executor’s responsibilities and timetables for the performance of certain duties. A thoughtfully crafted estate plan with up-to-date documents tends to make the job easier for whomever fills this important position.

If you are asked to serve as an executor, you may want to do some research regarding the legal requirements, the complexity of the particular estate, and the potential time commitment. You should also consider seeking the counsel of experienced legal and tax advisors.

Duties and Details

If the deceased created a letter of instruction, it should include much of the information needed to close out an estate, such as a list of documents and their locations, contacts for legal and financial professionals, a list of bills and creditors, login information for important online sites, and final wishes for burial or cremation and funeral or memorial services.

An executor is responsible for communicating with financial institutions, beneficiaries, government agencies, employers, and service providers. You may be asked for a copy of the will or court-certified documentation that proves you are authorized to conduct business on behalf of the estate.

Here are some of the specific duties that often fall on the executor.

Arrange for funeral and burial costs to be paid from the estate. Collect multiple copies of the death certificate from the funeral home or coroner. They may be needed to help you fulfill various official obligations, such as presenting the will to the court for probate, claiming life insurance proceeds, reporting the death to government agencies, and transferring ownership of financial accounts or property to the beneficiaries.

Notify agencies such as Social Security and the Veterans Administration as soon as possible. Federal benefits received after the date of death must be returned. You should also file a final income tax return with the IRS, as well as estate and gift tax returns (if applicable).

Protect assets while the estate is being closed out. This might involve tasks such as securing a vacant property; paying the mortgage, utility, and maintenance costs; changing the name of the insured on home and auto policies to the estate; and tracking investments.

Inventory, appraise, and liquidate valuable property. You may need to sort through a lifetime’s worth of personal belongings and list a home for sale.

Pay any debts or taxes. Medical bills, credit-card debt, and taxes due should be paid out of the estate. The executor and/or heirs are not personally responsible for the debts of the deceased that exceed the value of the estate.

Distribute remaining assets according to the estate documents. Trust assets can typically be disbursed right away and without court approval. With a will, you generally must wait until the end of the probate process.

The executor has a fiduciary duty — that is, a heightened responsibility to be honest, impartial, and financially responsible. This means you could be held liable if estate funds are mismanaged and the beneficiaries suffer losses.

If for any reason you are not willing or able to perform the executor’s duties, you have a right to refuse the position. If no alternate is named in the will, an administrator will be appointed by the courts.

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.

The ABCs of Incorporation The differences between organizing as a C, S, or B corp, primarily in relation to tax status and legal requirements.

One question that a business should revisit from time to time is whether its current organizational structure is meeting its needs. Sole proprietorships, partnerships, and limited liability companies (LLCs) are fairly basic forms of ownership, whereas corporations are significantly more complex.

A corporation is a separate legal entity from its owners, which means shareholders generally cannot be held liable for a corporation’s debts. S and C corporations may provide broader legal protections, but usually must meet more demanding regulatory requirements.

In addition, many states now recognize the legal status of benefit corporations, which may appeal to for-profit businesses with a stated “social mission.”1

Key Distinctions

Both S and C corporations must file annual tax returns, but they are taxed very differently. S corp profits and losses are “passed through” to the owners, who are taxed at personal income tax rates, even if profits are later reinvested in the business to pay for new employees or equipment. C corporations could be subject to the corporate income tax at both federal and state levels, but they may be able to deduct the salaries and bonuses of owners and employees as business expenses. Any dividends distributed to C corp shareholders are paid from the corporation’s after-tax profits and are taxable to the recipients, creating the potential for double taxation.

An S corp shares many of the formal corporate requirements as a C corp, including articles of incorporation (and other document filings), a board of directors, an annual meeting, corporate minutes, and shareholder votes on major decisions. Larger and fast-growing companies are commonly organized as C corps because multiple classes of stock and an unrestricted number of shareholders are allowed. S corps are limited to one class of stock and a total of 100 shareholders.

Accounting for the Greater Good

Normally, corporations might be compelled to make economic decisions that maximize profitability for shareholders, which can result in legal or ethical challenges for some firms. Benefit corporation status may provide legal protection by mandating other considerations, including the potential impact on employees, the environment, or the community.

Becoming a benefit corporation only affects requirements of corporate purpose, accountability, and transparency. It does not affect a company’s tax status, which means it can still elect to be taxed as a C corp or an S corp.

When choosing an organizational structure for your business, it’s important to weigh the potential costs and benefits of the various options and consult with your tax and legal professionals.

1) The Washington Post, April 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.