THE CURRENT CD QUANDARY

THE CURRENT CD QUANDARY

Today’s yields can’t beat inflation.

Presented by Kip A. Hoover

CD investors are effectively losing money. According to Market Rates Insight, a research firm tracking bank rates, annualized inflation has surpassed long-term certificate of deposit rates since February. In April, 12-month inflation hit 3.16% while the highest-yielding 5-year callable CD on the market offered a 2.4% interest rate. May’s Consumer Price Index put annualized inflation at 3.6%; as of mid-June, the highest-yielding nationally available 5-year CD was at 3.05% APY.^1,2,3

Still, the Federal Reserve found that almost $9 trillion of American wealth was held in CDs, bank accounts and various FDIC-insured products as of April.⁴

It’s a case of déjà vu. This is the second time in recent history that CD investors have been punished for assuming so little risk. During the period from January-July 2008, the negative yield on 5-year CDs was 1.8% according to MRI.⁵

                     

They might come out ahead … should inflation diminish. As Bankrate.com senior financial analyst Greg McBride reminded Bloomberg, “Investing in a CD isn’t compensating you for last year’s inflation; it’s compensating you for next year’s inflation, which is unknown.” Will inflation ease in the long term? Many analysts aren’t betting on it.

The appeal of CDs remains strong. After all, not many investments are federally insured. MRI vice-president Dan Geller said it best to Bloomberg: “Right now, people are more concerned about the return of their deposits rather than a return on their deposits.”

With 63% of Americans still believing the nation is in a recession (according to a recent Rasmussen Reports poll), there is still plenty of skittishness about equity investment. Even with the Fed’s bond-buying campaign sending yields on short-term Treasuries and CDs toward all-time lows, some investors really aren’t hungry for risk.⁵

Are CDs still worth it? There is no pat answer. Your own answer will depend on your preferred investment style, your risk tolerance and your financial objectives. Many people choose to park some of their invested assets in CDs and other savings instruments as part of a diversification approach. The inflation-adjusted return is dismal at the moment, but knowing that your principal is safe certainly has its appeal.  Note that Surrender charges apply should you attempt to liquidate your CD.  Any guarantees regarding safety of principal are based on the claims paying ability of the issuing financial institution.  Traditional CD’s are FDIC insured and offer a fixed rate of return if held to maturity. 

Kip A. Hoover may be reached at 440-729-0036 or email:  kip.hoover@lpl.com .

www.goodmoneycents.com

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty.

Citations.

1 - bloomberg.com/news/2011-05-23/savers-lose-as-long-term-cd-yields-fall-below-inflation.html [5/23/11]      

2 - bls.gov/news.release/cpi.nr0.htm [6/15/11]             

3 - depositaccounts.com/blog/2011/06/highest-5year-cd-rate-in-the-nation-at-fort-knox-federal-credit-union.html [6/17/11]

4 - articles.philly.com/2011-06-13/news/29653033_1_inflation-rate-mutual-funds-stock-market/2 [6/13/11]

5 - online.wsj.com/article/BT-CO-20110523-712255.html [5/23/11]

6 - montoyaregistry.com/Financial-Market.aspx?financial-market=roth-ira-rules-and-regulations&category=1 [6/19/11]

REASONS FOR OPTIMISM - Stocks are fizzling ... but things could change this summer.

REASONS FOR OPTIMISM

Stocks are fizzling ... but things could change this summer.

Presented by Kip A. Hoover

When was the last time the Dow took a six-week tumble? On June 10, the Dow dipped below 12,000 and posted its sixth straight weekly decline. You have to go back to October 2002 to find a Dow losing streak that long. If you’re hearing bearish groans in the distance, you’re not alone: the bears are making their voices heard as the Dow is down almost 7% from where it was at the end of April.¹

June certainly has been tough on Wall Street, with the bulk of economic indicators flashing a slowdown. However, there is reason to think the third and fourth quarters of 2011 may be better for stocks – in fact, that’s what many analysts believe.

Q2 earnings projections are quite good. Investment research firm FactSet finds that despite the losing streak, aggregate Q2 S&P 500 earnings estimates are basically unchanged from late May. The collective forecast projects a 14.6% growth in earnings for the quarter and a 10.4% jump in revenues. (That double-digit revenue growth would be the best since Q1 2010.) As earnings are truly the mother’s milk of stocks, the market could heat up this summer if these collective predictions come true.²

Stocks are still cheap. On June 3, the S&P 500’s P/E ratio was 16.4 compared to 18.3 a year earlier. Most stocks look like a fair value right now.³

The economy is still growing. The Federal Reserve’s latest Beige Book and the twin PMI indices from the Institute for Supply Management both signal this. In fact, the ISM service sector index showed the growth of that sector accelerating in May.⁴

Homebuying could be poised to pick up. Sustained high unemployment isn’t going away this year, but some silver linings are emerging that bode well for the housing market. Moody’s Analytics says that the ratio of home prices to income is now 20.9% below the average ratio from 1985-2010. Mortgage interest rates are at levels unseen since the early 1960s. There are also indications that prices may be approaching a bottom in metro areas not rampant with short sales and foreclosures. Real estate analytics company CoreLogic found that home prices were down 7.5% year-over-year in April, but only down 0.5% when distressed sales were factored out.⁵

                     

Hang in there. The bull market is maturing; QE2 is ending. We haven’t yet seen a correction, just a pullback. Mays and Junes have brought more than a few of those.

Kip A. Hoover may be reached at 440-729-0036 or kip.hoover@lpl.com     

www.goodmoneycents.com

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty.

The Standard & Poor’s 500 Index is an unmanaged index generally representative of the U.S. Stock Market.  It is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Stock investing involves market risk including loss of principal. 

² Actual results, performance or event may differ substantially from those in such statements.  Past performance cannot be utilized as an indicator of future results or returns.

Citations.

1 - blogs.wsj.com/marketbeat/2011/06/10/were-going-streaking/ [6/10/11]      

2 - blogs.wsj.com/marketbeat/2011/06/10/q2-earnings-and-revenue-estimates-remain-upbeat/ [6/10/11]

3 - smartmoney.com/invest/stocks/why-the-market-worrywarts-are-wrong-1307117379674/ [6/3/11]

4 - ism.ws/ISMReport/NonMfgROB.cfm [6/3/11]

5 - online.wsj.com/article/SB10001424052702304563104576361522020024248.html [6/4/11]

6 - montoyaregistry.com/Financial-Market.aspx?financial-market=money-and-happiness&category=29 [6/12/11]

A WOMAN’S FINANCIAL REALITY

A WOMAN’S FINANCIAL REALITY

Your financial future is up to you … and no one else.

Presented by Kip A. Hoover

Will this be your future? Did you know that Social Security income represents two-thirds of income for women 65 and older? Did you know that without Social Security, an estimated 58% of widows aged 65 and older would live in poverty? ¹

These findings are from a 2010 U.S. Congress Joint Economic Committee report. As Rep. Carolyn Maloney (D-NY) put it, “Social Security is literally a lifeline for most elderly women.”

That lifeline is barely adequate. With inflation and other economic pressures, a mature woman relying on SSI may eventually have to choose between food or medicine, or rent or car repair, or contend with other stressful money dilemmas.

When these women were younger, did they envision such a meager future ahead of them? Probably not. More than a few probably wish they had understood money matters better or actively invested for retirement.

How much do you know about personal finance? The more knowledge you have, the more action you can take to define and pursue your financial goals and build retirement savings. You can also respond to a few financial realities common to women’s lives.

                     

The average woman spends 12 years out of the working world. So finds WISER, the non-profit formally called Women’s Institute for a Secure Retirement. Typically some of this absence is for parenting, some of it for caregiving. This means the average woman has 12 fewer years to pour steady money into that 401(k), 403(b) or IRA.²

Women live longer. According to the latest estimates from the Centers for Disease Control and Prevention, female life expectancy is at roughly 80.5 years versus about 75.5 years for males. The reality unnoticed in these numbers is that many women will live on their own for a decade or more after being divorced or widowed.³

Women face an earnings gap. On the whole, women do not earn as much as men. In 2009, the Government Accountability Office noted that women earn $0.78 for every $1 that men earn. Some people question this statistic, arguing that it reflects gender inequality in career paths rather than distinct salary discrimination. Regardless, the gap exists – and it is even more pronounced for women of color.⁴

At work, many women are worth more than the salaries they receive. Some women are reluctant to negotiate a better salary for themselves. Will it upset the equilibrium at the office? Will it be seen as too aggressive? The answers here are probably “no” and “no”. It takes confidence (and it may take a little research) to affirm your professional worth in front of your boss – and it should be done.

A rich spouse does not equal a retirement plan. It is nice to have a spouse whose wealth allows you freedom from financial worries. Yet even if you are blessed with a rich and attractive mate, there is no telling where that mate (and that money) might end up someday but for fate.

How do you plan to arrange a comfortable future for yourself? If you don’t want to end up dependent on Social Security, then see that you have the financial education that will let you make major money decisions with confidence. Study fundamentals of investing and read up on the basics of retirement and estate planning. Follow up by meeting with a financial consultant who can help you put a strategy into action.

Kip A. Hoover may be reached at 440-729-0036 or kip.hoover@lpl.com     

www.goodmoneycents.com

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty.

Citations.

1 - thehill.com/blogs/on-the-money/801-economy/126543-changes-to-social-security-could-negatively-affect-women [10/29/10]

2 - mainstreet.com/article/retirement/women-still-far-behind-retirement-plans [4/25/11]    

3 - nytimes.com/2011/03/17/health/17brfs-ART-AMERICANLIFE_BRF.html [3/17/11]

4 - civilrights.org/archives/2009/04/291-equal-pay-day.html [4/29/09]

5 - montoyaregistry.com/Financial-Market.aspx?financial-market=money-and-happiness&category=29 [6/5/11]

AUTO-ENROLL 401(K)s

AUTO-ENROLL 401(K)s

More companies are offering them. Will they fix our retirement savings blues?

Presented by Kip A. Hoover

The trend could become the norm. Human resources firm Aon Hewitt surveyed 120 large U.S. companies in 2010 and found that 60% of them automatically enrolled workers in defined contribution retirement plans such as 401(k)s. In Aon Hewitt’s 2006 survey, only 24% of companies had bothered to do so.¹

                     

Does automatic enrollment lead to plan participation? It seems to greatly encourage it. The Aon Hewitt study found that 85.3% of auto-enrolled workers were participating in the retirement plans, bringing overall defined contribution retirement plan participation to 75.8% of the workforce.¹

It may encourage growth investing. When you auto-enroll in a 401(k), you are often presented with a suggested asset allocation including target-date funds. Younger plan participants seem to be embracing this choice and ramping up their ownership of equities. A new Vanguard study shows that equity allocations for the typical 20-year old plan participant went from 40.7% to 84.7% between 2003 and 2010, and there was also a notable increase in equity ownership for plan participants aged 20-30 in that period. Last year, 61% of Vanguard plans offered workers default investment choices; 89% of these plan sponsors picked target-date funds as the default choice.²

Are the set contribution rates too low? Aon Hewitt found that 76% of auto-enroll plans had set contribution rates of 4% or less. This automation might be a hindrance: while employees in the auto-enroll plans deferred an average of 6.8% of their pay, workers who had actively enrolled in their company retirement plans put 7.8% of their salaries away.²

Will we see auto-IRAs? In 2010, President Obama proposed requiring any employer in business for more than two years with 10 or more employees to sponsor direct-deposit Roth IRAs, with 3% of employee salaries going into the accounts. The National Small Business Association (NSBA) called the idea “unfair” to small businesses and “very problematic". No momentum seems to be building for its revival.³

Is automatic enrollment “the answer”? Workers need to save more for retirement, and auto-enroll 401(k)s at least force them to be acquainted with the awesome potential of these retirement savings vehicles. The Aon Hewitt study seems to show a path from enrollment to interest to investment.

Kip A. Hoover may be reached at 440-729-0036 or kip.hoover@lpl.com

www.goodmoneycents.com

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty.

Citations.

1 - ir.aon.com/phoenix.zhtml?c=105697&p=irol-newsArticle_print&ID=1567166&highlight= [5/24/11]   

2 - blogs.smartmoney.com/encore/2011/05/26/a-retirement-savings-cure-all [5/26/11]        

3 - shrm.org/hrdisciplines/benefits/Articles/Pages/AutoIRAs.aspx [2/3/10]

4 – montoyaregistry.com/Financial-Market.aspx?financial-market=401k-companies&category=2 [5/30/11]