June 7, 2012

Initial public offerings (IPOs) are associated in investors’ minds with enormous profits. These profits, however, tend to be more for the founders of companies and for investment banks rather than for retail investors or even institutional investors. Market observers always call to mind a few “hot” IPOs where the share price provided double-digit returns in a single day.
But what happens after the initial excitement? Studies have shown that, in general, investors are better off owning shares of seasoned companies as opposed to new issues through an IPO. While we don’t know for sure why investors overpay for IPOs, research also indicates that investors overweight the probability of extreme growth of newly listed companies and therefore apply too high a value to these shares.*
That brings us to the recent Facebook IPO. We don’t know if Facebook is fairly valued or not. We generally believe that the market fairly prices liquidly traded securities and therefore we do not believe we have much edge or insight into the valuation of any one issue. Given our belief that large, liquid stocks are generally fairly priced, and because of the long-term underperformance of IPOs, as a firm, Wealth Enhancement Group did not participate in the Facebook IPO and we advised our clients against participation as well. In general, we advise against participation in any IPO.
Not having edge or insight into publicly traded stocks sounds like a bad thing, but it’s actually a good thing. When all market participants are working with the same information, it limits the ability of more-informed market participants to take advantage of less-informed participants, who unfortunately tend to be working savers or retirees. In the case of the Facebook IPO, there have been allegations that not every investor had the same information. According to press reports, certain investment banks changed their forecasts for Facebook and communicated those changes only to institutional clients, leaving individual investors—their retail clients—in the dark. The effect was that those retail clients may have paid more than they would have otherwise been willing to pay for the Facebook shares. While we don’t know yet what happened at Facebook, we do know that the more widely information is disseminated, the better for individual investors, our clients and the functioning of the market as a whole.
Wealth Enhancement Group
*Ritter, Jay, 1991, The long run performance of IPOs, Journal of Finance 46, 3-q7.


Ahhhh, 13,000!

March 1, 2012

“After bouncing up and down around the 13000 level for a week, the Dow Jones Industrial Average finally closed above that psychologically important mark for the first time since May 2008.”

That’s what The Wall Street Journal says in its online edition about the February 28 market close. But is closing above 13,000 really psychologically important?

The short answer is that for the pros, no, it isn’t. They’re busy drawing conclusions from the facts hiding behind the milestone. The twin specters of U.S. recession and European debt collapse are fading. The Dow is up 22% since October and 6.4% since the beginning of 2012, the strongest rise to start the year since 1998. Will it continue?

On the plus side, there’s another bailout for Greece, rumors of a renewed Federal Reserve bond buyback should the economy show signs of weakness, declines in borrowing costs for Italy and Spain, and a 12-month high in the Conference Board’s index of consumer confidence. On the minus side, the slowing growth rate of corporate profits, fears that China’s real estate bubble will pop, rising oil prices, and the plain fact that stocks have been rising for five months and could be due for a correction.

So the answer to “Will it continue?” is, as usual, maybe.

And if 13,000 isn’t psychologically important for the pros, is it for the Main Street investor? Probably it is. Consider the five-month run-up that led to 13,000. In the past few weeks it has finally brought the Main Street investor creeping back into the market.

Here are some ways the average investor can avoid letting the psychological component override the facts: 

  • Pay attention to valuations, the most fundamental measure that moves stocks.
  • Remain focused on broadly diversified portfolios with exposure to multiple asset classes.
  • Focus on long-term goals and stay invested.
  • Avoid the “herd mentality” of jumping on the most recent investment bandwagon.


James Copenhaver, Director of Investment Management


Sources: Optimism Drives Dow Past Milestone; Main Street’s $100 Billion Stock-Market Blunder

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Be It Resolved: Meet Your 2012 Money Goals

January 4, 2012

The time for those New Year’s resolutions is upon us.

In my opinion, making financial resolutions doesn’t have to be painful. If you follow some simple guidelines, financial and other resolutions don’t have to be overwhelming. Remember that the key to reaching any goal is to make it specific, achievable and measurable. Celebrate and reward yourself once you get there. And realize that it’s perfectly acceptable – and smart – to ask for a little help when needed.

Be it resolved: Health first
Before getting into financial resolutions, I want to mention how important it is to consider your health and make it a priority. This is a great place to start with resolutions because there are so many ways to improve health without spending much money. You can go for more walks, which are absolutely free. Or take an exercise class or buy (and use!) a cookbook that focuses on healthy foods. Try a healthy new activity and see if it gives you some extra energy and enthusiasm for your financial resolutions.

Be it resolved: Save and invest more
Based on my conversations with clients, family members and friends, saving more and spending less always seem to be the most popular financial resolutions. The two things go hand in hand and may sound simple, but many people find it difficult to build their savings to the level they desire. You need the right perspective and a specific, achievable savings goal in order to succeed.

Saving really boils down to paying yourself first. For most people, a realistic goal is to save 10 percent of your income. If your employer offers a retirement savings plan with matching contributions, resolve to make the most of it and contribute as much as you can. It is one of the best ways of boosting your savings. You may also want to open and begin making regular contributions to a Roth IRA, which allows you to make tax-free withdrawals of your direct contributions at any time.

Be it resolved: Pay off inefficient debt
If you are one of the many people who want to dump a debt burden this year, you need to know that not all debt is created equal.

Efficient debt isn’t so bad, but you will want to get rid of inefficient debt as soon as possible. Efficient debt works for you because it is tax-deductible and/or appreciates in value. Examples include a home mortgage or an investment in education that can increase your earning power. Inefficient debt includes high-interest credit card debt and debt used to buy things that depreciate and are not deductible, like automobiles and many other consumer goods. Resolve to pay off inefficient debt first.

Be it resolved: Consult a financial advisor
If you feel overwhelmed just thinking about financial resolutions, it’s the perfect time to consult with a financial advisor. A professional can help you get organized, identify goals, save time and find ways for you to maximize your financial efficiency this year.

Best wishes for a healthy and prosperous 2012!

Wealth Enhancement Group

Nearing Retirement?

January 12, 2010

Retirement planning has become more challenging in recent years. Aside from current market uncertainties, there are other more constant issues to consider, such as inflation and taxes. Investors planning for retirement have questions about how these factors will affect their retirement funding issues. Have I saved enough? What is a reasonable and sustainable withdrawal amount? Can I plan for retirement while also meeting other intermediate financial goals, such as educating children and paying off debt?

These and other questions weigh heavily on the minds of most retirement investors. What’s the solution? While it may be necessary to adjust your financial expectations for retirement or even postpone your retirement date, you can still achieve retirement security. But to do so, you’ll want to engage the services of a financial planning expert. Once retained only by the wealthy, financial advisors now assist all types of investors in making decisions about retirement. In fact, in a landmark survey conducted by the Certified Financial Planner Board of Standards, Inc., the most common reason for people to begin financial planning is to build a retirement fund. And among those who use a financial advisor as their primary source of guidance, a landmark 2004 survey found that 81% were extremely or very satisfied with the advisor.*

*Source: Certified Financial Planner Board of Standards, Inc., 2004 Consumer Survey.

Financial Fundamentals

January 7, 2010

Your options for what to do with your money seem as boundless as the prairie sky I grew up under. But in truth your options are limited, because you can really do only five things with money:

  • Spend it
  • Save it
  • Invest it
  • Pay taxes with it
  • Give it away

Slice the pie however you’d like, but those are your options – five pieces. Only two slices are mandatory: spending and paying taxes – for most people. We all have basic needs that require spending. I don’t know anybody, and have never heard of anybody, who is completely self-sufficient, who produces everything they need to live or makes enough of anything that they can barter for everything else they need. Everyone spends something.

Despite the talk of zillionaires that pay no taxes, it is almost impossible not to pay some income tax. Your income will almost certainly be taxed. But taxes are not as ironclad as many think either. The U.S. tax code provides many opportunities to reduce the taxes you have to pay. It is neither illegal nor unethical to reduce your tax bill in ways provided by the tax code.

The other three categories – saving, investing, and giving – are completely voluntary. Many people have chosen, to their detriment, not to cut their pie into that many pieces no matter how big or small the pie.

Few of us have the resources to do everything we would like with our money, so we need to establish priorities. We have to understand our options and how they interact, clearly. A bigger slice for spending reduces the size of all other slices, except paying taxes. On the other hand, less spending may increase the size of the investing or giving slices, which may also decrease the size of the tax slice. The objective of financial planning is to increase our control of the size of each slice.

Vacation Properties and Income – Part 2

September 14, 2009

Another way for retirees to generate income from a vacation home is to sell it. By using the federal capital gains exclusion in conjunction with the sale of your primary residence, you can potentially realize tax-free income. Here’s how it works. The basic capital gains exclusion rules state that you must have owned and used the home as your primary residence for at least two years out of the five-year period ending on the date of the sale. If you are married, the full $500,000 exclusion ($250,000 for single homeowners) is available as long as one or both of you satisfies the ownership test (two years) and you both satisfy the use test (primary residence).

Vacation Properties and Income – Part 1

September 10, 2009

If you have a vacation home, you’re already aware of the enjoyment it provides and the benefits it can offer at tax time. But you may not be aware of how vacation property can be used to generate income in retirement or how it can play into an estate plan. In fact, vacation properties offer retirees a number of different options in managing their finances and estate.
Vacation property may be used to generate income in several different ways. The first, and most obvious, is renting it. The IRS allows you to deduct mortgage interest on your primary residence and one additional property up to a limit of $1 million in combined mortgage debt for mortgages taken out after 1987. Current tax rules also allow you to rent out a second home for up to 14 days per year without having to report the rent as income. If you rent for more than 14 days, the home is considered investment property, and rent must be reported as income. Converting the property to an investment property, however, allows you to deduct rental expenses, such as insurance and utilities, if you have a net profit on the property (deductions are limited if you report a loss). You can still use an income-producing property for personal use while maintaining your tax advantages — but only for the greater of 14 days or 10 percent of the total days it is rented. Maintenance days do not count as personal-use days, but use by in-laws or other part-owners does, even if rent is charged.