Highlights of This Update:
- Start 2015 off right with your own personal long term plan/update, don’t wait any longer
- 2014 saw mixed gains for stock indices; Dow up 7.52%
- Lower interest rates brought down yields and mortgage rates as we had anticipated
- Commodity prices fell in general, led by a sharp decline in oil, stronger dollar
- Portfolios were re-allocated at year-end and the first of 2015 based on our outlook moving forward
READ ON FOR FURTHER DETAILS……………………………………………………….
2015: Let’s Make this the Year to Plan:
With all the services and tools we now have at our disposal to assist you in preparing/updating your own personal long term financial plan, let’s start out the New Year together with a current personal plan in place. We can cover the following issues with you personally if applicable, or any other financial item that may affect you individually:
- Look early this year for tax planning opportunities-
- Are you taking full benefit of your current retirement plans?
- Do you qualify for a Health Savings Account (HSA)?
- Charitable Giving schedule?
- How will dividends, capital gains, etc. affect you in 2015?
- Are you aware of the additional Medicare tax for higher income earners under Obamacare?
- Is this the first year you are required to take a minimum distribution from your IRA accounts? If so, what are the rules and what is the amount you must report as income?
- Other tax planning issues facing you in 2015?
- If you are considering taking social security, what is the best option for your personal situation?
- Looking to buy/sell/refinance a home? Mortgage rates could hit lows again this year-let’s review.
- Do you have a will? Trust? What might be your best planning option given your current circumstances? When was the last time you reviewed your overall estate plan?
- Does your current insurance coverage meet your needs? When did you review your overall insurance program last? This includes life, auto, homeowner’s health, long term care, etc.
- Have you ever looked at your personal finances as a whole? Our new system, MyWealth can help you do this on a daily basis. You can track income, spending, net worth, investments, etc. together.
- Any other financial matters that you need to include as part of your own long term plan.
Call today and schedule your individual planning review, either in person or by phone, so we can begin 2015 on the right path to achieving your personal goals. We want to work together with each of you early this year in order to put into place your formal financial plan and then monitor and update it with you in the years ahead. Call us now and get a jump start on 2015 and your own future.
2014 saw further gains in the major U.S. stock indices with increased volatility, lower interest rates, and lower oil prices. The drop in oil during the last four months of the year was steep, and oil prices, based on West Texas Intermediate Crude, ended at $53.27 per barrel, down from $98.42 per barrel at the beginning of 2014, for a decline of 46%. The Dow Jones Industrial Average ended the year 7.52% higher while yields on the 10 year U.S. Treasury closed the year at 2.17%, down from 3.04% on December 31, 2013, or a decline of 29%. Gold closed out 2014 at $1,206.50 per ounce compared with $1,201.50 at the end of 2013. (Source: U.S. Treasury, MarketWatch, St. Louis Federal Reserve)
Interest Rates Surprise Many:
2014’s drop in Treasury yields defied the consensus with many analysts predicting higher rates in 2014. We had expected lower rates, and continue to feel rates could even go lower the first quarter of 2015 before leveling out. Mortgage rates also declined over the past year, and the current rate for a 30 year fixed rate mortgage is now around 3.99% or less and 3.00% for a 15 year fixed mortgage. (Bankrate.com)
It’s Exhibit A as to how markets can confound some of the best minds on Wall Street. It also highlights why diversification among and between asset classes is an important principle to successful long-term investing. So why did yields slide and confound many of the so called “experts”?
For one, the Fed has promised to keep short-term interest rates low. By using its powers of moral suasion, the Fed’s goal has been to keep investors interested in longer term bonds, holding the longer-term rates lower and stimulating economic activity.
Another reason: Inflation remains below the Fed’s 2% target (Bureau of Labor Statistics and Bureau of Economic Analysis). And survey based measures of inflation expectations are stable, while market-based measures of inflation expectations are falling (Federal Reserve).
Third, we have to look overseas for probably the biggest reason why we’ve seen yields in the U.S. slide. With deflation at Europe’s doorstep (Eurostat) and the European Central Bank openly discussing a U.S.-style bond buying program, yields in Europe are at record lows.
The yield for the 10 German Bund is a paltry 0.54%. Even with their credit troubles, Italy and Spain aren’t much better. Their respective 10-year bonds yield 1.89% and 1.61% (all yields as of Dec 31, 2014 – Bloomberg). The rate for the Japanese 10 year government bond is even lower, currently around 0.33%. (MarketWatch) With the yield on the 10 year U.S. Treasury at just over 2%, it’s likely that low yields in Europe and Japan are encouraging a flight into safer U.S. bonds, which is keeping a lid on yields here at home.
Oil’s Dramatic Price Decline:
The stunning drop in oil prices was probably the economic story of the year. Oil prices have continued their slide so far in 2015, closing just below $50.00 per barrel today, January 5th. (MarketWatch)
While oil producers and energy-related firms suffer, it could be a boon to other segments of the U.S. economy. Look no further than the decline in the average price of regular gasoline. It has tumbled from an average at its peak of $3.71 per gallon nationwide at the end of April to $2.30 as of December 29 (Energy Information Administration-EIA).
Reasons for the drop begin with the revolution in the U.S. oil industry. Hydraulic fracturing has lifted U.S. production from just over 5 million barrels per day in 2008 to over 9 million barrels per day in 2014 (EIA). That’s oil the U.S. no longer needs to import, but still must find a home. Second, oil is priced in dollars around the globe. It’s hard to ignore the inverse relationship between oil and the dollar.
Finally, Japan is in a recession, growth in Europe has been tepid, and Chinese growth has slowed. Translation – the outlook for demand has suffered. In December, the International Energy Agency cut world oil demand for the fifth time in six months (Wall Street Journal), and OPEC reduced its 2015 demand forecast for its oil to the lowest in a decade (Reuters).
Our Portfolios and Outlook for 2015:
We continued to see stock valuations stretched even further through 2014. We focused on individual stock issues for our stock/equity holdings in all three stock models at our various risk levels. The allocations models at the various levels of risk have been updated and rebalanced since year-end. Taxable accounts were reviewed at year-end, and an attempt was made to minimize capital gains and harvest capital losses where appropriate to offset realized gains for 2014 if possible. Fixed income holdings within all risk levels performed well relative to their comparable indices as interest rates moved lower. We were disappointed in overall commodity prices during 2014, which moved lower in general led by oil prices and a stronger dollar. We did reduce our exposure to the “alternative” asset category and replaced certain holdings with asset allocation funds based on portfolio risk. We would not be surprised to see increased market volatility in 2015 due to the current level of stock valuations, but this may not necessarily translate to lower market prices by the end of 2015, just more difficulty for the overall index returns. We will keep you posted.
We hope you all had a great Holiday Season and were able to enjoy more time with family and friends over the Christmas and New Year’s break. We are looking forward to 2015 and working with you in the years to come.
Your TEAM at F.I.G. Financial Advisory Services, Inc.
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1 The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results.
4 New York Mercantile Exchange front-month contract; Prices can and do vary; past performance does not guarantee future results.
5 London Bullion Market Association; gold fixing pricing at 3 p.m. London time; Prices can and do vary; past performance does not guarantee future results.