- Do The Right Thing
- Special Report: Closed-End Municipal Bond Funds
- Retirement Funding for 2014
- Investment Spotlight
By: Paul Sutherland, CFP®
As a member of the World Future Society (WFS), I have over the years presented at its annual gathering about finance and other topics. What’s refreshing about futurists, especially those who are professionals and executives, is that they are oriented toward helping people anticipate and influence the future. For me, “futuring” is about coming up with ideas that contribute to making good, solid decisions.
A WFS conference is not a gathering of soothsayers making outrageous statements. Rather, it’s hundreds of contemplative people gathering together who are interested in being wisely informed about how they assess, approach and move forward. My career has been built on making investment management decisions that grow clients’ portfolios, providing them with growth, income security and peace of mind. Affiliating myself with the WFS, and befriending other futurists and seminar leaders whose jobs are to contextualize the future and explore it wisely, has been one of the most rewarding aspects of my education.
What I find so interesting about this time of year (late December) are the predictions for the upcoming year made by folks from the press, various media outlets and Wall Street’s trumpeters.
In full disclosure, FIM Group is just a small company whose role is to take good care of its clients and help preserve, grow and protect client families’ well-being and wealth. For us, the information we gather is used simply to help us make good decisions. And this newsletter is a way to let our clients know what we are thinking. It is important that you know what we “think” about the current “fact set” and “why” and “how” we interpret the right response and actions based on the reality of the complex interconnected world we live in. But first, a story …
It’s All About Perspective
President Ronald Reagan told one of his favorite stories when our country was deep in despair over rampant inflation, a sluggish economy and the Cold War and such. What follows is an excerpt from the book, How Ronald Reagan Changed My Life, by Peter Robinson.
Chapter One: “The Pony In the Dung Heap: When Life Buries You, Dig”
Journal Entry, June 2002:
Over lunch today I asked Ed Meese about one of Reagan’s favorite jokes. “The pony joke?” Meese replied. “Sure
I remember it. If I heard him tell it once, I heard him tell it a thousand times.”
The joke concerns twin boys of five or six. Worried that the boys had developed extreme personalities – one was a total pessimist, the other a total optimist – their parents took them to a psychiatrist.
First the psychiatrist treated the pessimist. Trying to brighten his outlook, the psychiatrist took him to a room piled to the ceiling with brand-new toys. But instead of yelping with delight, the little boy burst into tears. “What’s the matter?” the psychiatrist asked, baffled. “Don’t you want to play with any of the toys?” “Yes,” the little boy bawled, “but if I did I’d only break them.”
Next the psychiatrist treated the optimist. Trying to dampen his outlook, the psychiatrist took him to a room piled to the ceiling with horse manure. But instead of wrinkling his nose in disgust, the optimist emitted just the yelp of delight the psychiatrist had been hoping to hear from his brother, the pessimist. Then he clambered to the top of the pile, dropped to his knees, and began gleefully digging out scoop after scoop with his bare hands. “What do you think you’re doing?” the psychiatrist asked, just as baffled by the optimist as he had been by the pessimist. “With all this manure,” the little boy replied, beaming, “there must be a pony in here somewhere!”
After more than 30 years of managing money, I have drawn the conclusion that most investors need to “Prove that they are right about their perspective on life.” So the investor who wishes to prove that the economy is a manipulated zero-sum game that’s stacked in favor of the rich, the educated and the lucky will behave in a way that proves himself to be correct – even if his behavior is self-defeating. And he’ll surround himself with like-minded advisers, writers, books and websites that will affirm his “wait and see how the gods of luck behave for him” investment strategy. Naturally his advisers use charts, graphs and Nobel Prize-winning theories to prove that ponies don’t exist, or that the only way to get one is by pure luck.
At FIM Group, our culture resonates from a belief that hard work pays off, integrity matters, and virtues like courage, faith, hope, temperance, honesty, justice, persistence, patience, social intelligence, enthusiasm, love, bravery, curiosity, critical thinking, perspective and wisdom matter. These virtues matter in the people who guide the companies and the countries we choose to invest in. There are reasons why winning companies are successful. And, conversely, there are reasons why great companies fail, have rough patches and go through gut-wrenching creative destruction.
I remember investing in Apple years ago and nearly having a client revolt. They asked, “Why would you invest in a company as flash in the pan and as poorly performing as Apple?” My simple reply was, “Steve Jobs is back.” We sold the stock way too early. Apple was rated as a “CCC junk bond” and nearly went bankrupt, which is one reason Mr. Jobs became compulsive about a balance sheet strength with no debt and billions of cash. He learned. Now Apple is a Wall Street favorite.
There will be more opportunities to make money in 2014 than ever in the history of the world.
Most U.S. investors will have comparatively crummy returns in 2014.
Most investors will continue to think that investing is about “predictions” and not about investing in and discovering great risk-adjusted bargains no matter where they are in the world or investment “category”– large cap, small cap, international, bonds stocks real estate, metals, inflation linked, preferred convertibles, etc.
The year will have its share of volatility – this is especially good as it allows patient risk-adverse investors, like FIM Group, to buy investments at great prices with a significant margin of safety.
Investors will again head for what worked in the past. If they are fear-driven, they will stay frozen in fear. If not, hopefully they will wisely invest in the opportunities that are present for the diligent investor.
Investors will once again think that it is productive reading about predictions and even making predictions regarding the Dow Jones Industrial Average, economic statistics, unemployment, GDP, Fed Funds, holiday shopping, Internet sales, ECB, currencies and political outcomes.
I must admit that I love reading about the political economy and economic literature, but after 30 years I realize that as an investor the predictive literature really is just background music.
The FIM Group team will obsess over each investment we make on a client’s behalf. We will stress test our holdings against various scenarios, and base our investment case in context with industry, business and other cycles, the economic backdrop and how we see things unfolding based on our policy of objectively and critically “standing in the future” with each investment we make. As CIO, I will continue my habit of working a lot in the evening, early mornings and/or or getting up at night to make sure I did not “miss something,” so I can go back to a restful sleep.
I Can (Nearly) Guarantee the Following for 2014:
We will have a GDP – economic activity will happen.
Emotions, complacency, indifference, fear and greed will make markets drift and fluctuate.
Bottom line: Seriously, I have had few times in my career where it felt that the opportunity to have superior returns was more present than what I see today. Will it take patience? Yes! Is that statement predictive? Yes. Is it true? We will know in 12 months.
History shows, that success comes from doing a lot of little things right – and avoiding the things that are not helpful toward attaining the goal. In other words, separating the essential from the non-essential. And then doing what needs to be done.
By: Zach Liggett, CFA®
The final weeks of 2013 were quite busy for our investment team, and clients may have noticed a pick-up in trading activity. We found a variety of year-end, bargain-priced investments, including one area of the market that is particularly attractive for taxable accounts: closed-end municipal bond funds. We wrote a special report regarding closed-end municipal bond funds and have excerpted a section of the report. The complete report is located at www.fimg.net, or we would be happy to send a hard copy in the mail. Please call our Michigan office for a hard copy: 231.929.4500
Summary: Closed-End Municipal Bond Funds (CMBFs) offer an unusual combination in today’s fixed-income market: solid, tax-exempt income yields AND price appreciation potential. Our team likes the underlying asset class (municipal bonds) given gradually improving finances across many state and local municipalities. We are also attracted to the unique characteristics of the closed-end bond fund structure, which allows specialized fund managers maximum flexibility to position for superior long-term total returns. Within the fixed-income universe, these investments currently stand as our most preferred area for taxable accounts.
The Asset Class
As a quick refresher, municipal (“muni”) bonds are simply bonds issued by a local government or agency. They are either general obligations of the issuer (supported by the issuer’s taxing power) or they are secured by specified revenues (for example, a toll-road). Munis have long been a primary source of funding for “mission-critical” areas in our economy like roads, schools, water infrastructure, hospitals and emergency responders.
Unlike most other bonds, interest income received by muni bondholders is exempt from federal income tax in many cases (and in some cases state and local income taxes too). This, combined with historically low default rates, has made munis attractive to individual investors, especially those in higher tax brackets.
Like most bonds, munis have done very well for most of the last three decades. This performance has been driven primarily by the general fall in interest rates, as declining rates make the fixed interest of a previously issued bond more attractive and thus pushes its price higher. It hasn’t been all smooth sailing though, and over the last six years or so, munis have reminded investors how volatile the price action can be in this space.
Interestingly enough, state and local finances have been, in aggregate, improving each year since 2009. This is a function of both belt-tightening by the municipalities and higher tax receipts (think income, sales and property taxes) and may come as a surprise given the media’s obsession of outliers like Detroit. While concerns remain over municipalities’ longer-term ability to cope with underfunded pension and benefit plans, the general trend in municipal finance for the last few years has been one of gradual recovery. Muni bond prices, in aggregate, do not seem to yet reflect this trend.
The Closed-End-Fund Opportunity
As patient, opportunistic investors with a strong belief in the cyclicality of markets, we are never afraid to pursue investments that are out of favor.
Bonds have been a tricky place to find value this year with prices high and interest rates low, but we have found some interesting places to invest in the closed-end fund space. As a refresher, closed-end funds trade on an exchange at prices independent from their underlying bond holdings. This means that there are times, especially when an asset class is in favor, that closed-end funds can trade above the market value of their holdings (technically known as trading at a premium to the fund’s net asset value, or NAV). Conversely, there are also times when an asset class becomes so disliked that related closed-end funds trade at large discounts to their net asset value. This is one of those times for CMBFs.
As we frequently remind clients, ALL INVESTMENTS HAVE RISKS. CMBFs are no exception, but on balance, we believe that these risks are manageable and are worth accepting as one component to our overall diversified investment strategies. As noted above, muni bonds in general can experience above-average volatility given the relatively less liquid nature of their markets and the herd-like behavior that can sweep over the individual investors that dominate their ownership ranks. Leverage deployed by CMBF managers can amplify this volatility risk, so it is imperative that we stay emotionally neutral through such volatility while staying focused on the fundamental value of the underlying bonds.
As always, our investment team welcomes your questions and feedback. If you would like to learn more about our CMBF investments or any of the other investment(s) in your portfolio, please never hesitate to be in touch.
By: Kevin Russell, CPA, CFP®, AAMS®, CRPC®
IRA Contribution Limits
The maximum amount you can contribute to a traditional IRA or Roth IRA in 2014 remains unchanged at $5,500 (or 100% of your earned income, if less). The maximum catch-up contribution for those age
50 or older in 2014 is $1,000, also unchanged from 2013. (You can contribute to both a traditional and Roth IRA in 2014, but your total contributions can’t exceed this annual limit.)
Traditional IRA Deduction Limits for 2014
The income limits for determining the deductibility of traditional IRA contributions have increased for 2014 (for those covered by employer retirement plans). For example, you can fully deduct your IRA contribution if your filing status is single/head of household, and your income (“modified adjusted gross income,” or MAGI) is $60,000 or less (up from $59,000 in 2013). If you’re married and filing a joint return, you can fully deduct your IRA contribu-tion if your MAGI is $96,000 or less (up from $95,000 in 2013). If you’re not covered by an employer plan but your spouse is, and you file a joint return, you can fully deduct your IRA contribution if your MAGI is $181,000 or less (up from $178,000 in 2013). (See Table 1)
Roth IRA Contribution Limits for 2014
The income limits for Roth IRA contributions have also increased. If your filing status is single/head of household, you can contribute the full $5,500 to a Roth IRA in 2014 if your MAGI is $114,000 or less (up from $112,000 in 2013). And if you’re married and filing a joint return, you can make a full contribution if your MAGI is $181,000 or less (up from $178,000 in 2013). (Again, contributions can’t exceed 100% of your earned income.) (See Table 2)
Employer Retirement Plans
The maximum amount you can contribute (your “elective deferrals”) to a 401(k) plan in 2014 remains unchanged at $17,500. The limit also applies to 403(b), 457(b), and SAR-SEP plans, as well as the Federal Thrift Savings Plan. If you’re age 50 or older, you can also make catch-up contributions of up to $5,500 to these plans in 2014 (unchanged from 2013). (Special catch-up limits apply to certain participants in 403(b) and 457(b) plans.)
If you participate in more than one retirement plan, your total elective deferrals can’t exceed the annual limit ($17,500 in 2014, plus any applicable catch-up contribution). Deferrals to 401(k) plans, 403(b) plans, SIMPLE plans and SAR-SEPs are included in this limit, but deferrals to Section 457(b) plans are not. For example, if you participate in both a 403(b) plan and a 457(b) plan, you can defer the full dollar limit to each plan – a total of $35,000 in 2014 (plus any catch-up contributions).
The amount you can contribute to a SIMPLE IRA or SIMPLE 401(k) plan in 2014 is $12,000, unchanged from 2013. The catch-up limit for those age 50 or older also remains unchanged at $2,500. (See Table 3)
Note: Contributions can’t exceed 100% of your income.
The maximum amount that can be allocated to your account in a defined contribution plan (for example, a 401(k) plan or profit-sharing plan) in 2014 is $52,000 (up from $51,000 in 2013), plus age-50 catch-up contributions. (This includes both your contributions and your employer’s contributions. Special rules apply if your employer sponsors more than one retirement plan.)
Finally, the maximum amount of compensation that can be taken into account in determining benefits for most plans in 2014 has increased to $260,000, up from $255,000 in 2013; and the dollar threshold for determining highly compensated employees remains unchanged at $115,000.
If you would like to discuss if you are on track for meeting your retirement goals, or review your retirement funding for this or next year, please contact one of our FIM Group advisers.
There is no Spotlight for this issue.