Return on Investment Capital

As an investor, you want to find a profitable home for your savings. So, what’s the best way to assess a company’s profitability?

Although a ‘gut feeling’ about companies probably plays a part in decisions for many amateur investors, it’s essential to have more objective measures to help you compare companies with one another. You may feel drawn to a particular company for personal or political reasons, but, even so, should know the likely profit from your investment, so that you can either go in or stay out with your eyes open.

Some tools for comparing companies’ profitability are in common use. The three main ones are known as ROE (return on equity), ROA (return on assets) and ROIC (return on investment capital).

‘Return on equity’ refers to a calculation that compares the company’s ‘net annual income after tax’ with its ‘equity’, or the total value of its assets less the value of its debts. That means that long-term borrowings are disregarded. The ROE measure makes it look as though the whole profit has been generated by the equity, ignoring the part played by borrowed money in financing the company. So the company may look more profitable than it really is if it has been highly ‘leveraged’, in other words, if it has borrowed heavily against its assets.

The ‘return on assets’ metric counts borrowed money in the calculation, but has the drawback that it doesn’t differentiate between assets like land or machinery, which are used to generate profits, and assets like stock-in-trade, which will not be held long-term. A company may be holding a high amount of stock-in-trade for valid reasons, such as to take advantage of fluctuations in wholesale prices, but the ROA calculation may make it look relatively unprofitable. Nonetheless, ROA is a helpful way of comparing different companies operating in the same sector.

The concept behind ‘return on investment capital’ arguably has fewer drawbacks than the other two measures. It defines ‘investment capital’ as ‘operating net working capital plus operating fixed assets’. Operating fixed assets are only those assets that are used to generate income in the long term, like land or equipment. Therefore, it leaves out of the calculation the value of short-term assets like stock-in-trade or excess cash. It includes the figure for long-term liabilities. Therefore, money that has been borrowed for use in the business is factored in.

The ROIC measure can be used to compare businesses that have differing amounts of long-term debts, and also across different industries and sectors.

Unfortunately, the ROIC isn’t something that appears ready-made in a company’s ‘official’ accounts. It’s necessary to work the figure out from the available raw data. That’s not necessarily an easy task for the layman to be confident about. It isn’t rocket science though, and if an amateur investor wants to understand his or her investment choices, then it’s worth getting to grips with the concept. It’s also important that private investors understand the terms that are used by professional advisers so that they don’t fall victim to mystification.

Social Security Survivor Benefits

Most people think of Social Security as a Federal scheme that provides basic pensions for workers. It does more than that, though. One extra benefit provided is the assistance it gives to surviving spouses and other dependents of deceased workers who have paid into the scheme through their wages. Dependent children or parents of the deceased can claim survivor benefit in some circumstances, but the calculation of benefit for surviving spouses is the most involved.

There are two kinds of survivor benefit available to surviving spouses of deceased Social Security participants, the first being simply a single payment of $255. The second kind of benefit, the ongoing income benefit, is less straightforward.

The income benefit is only payable from the date it’s claimed, so any unclaimed benefit will be altogether lost. There is no back-dating provision. However, that doesn’t necessarily mean that the survivor should claim as soon as possible.

The Amount You Receive Goes Up Between Ages 62 & 67

As for retirement pension, the amount of benefit you get each month varies according to the age you are when you first claim the benefit, and that differential continues for as long as you live. In the case of the retirement pension, the earliest age at which you can claim is 62, and the percentage of the full amount you receive goes up until you reach full retirement age, which is 65 to 67, depending on your date of birth.

For survivor benefit, the earliest age at which you can claim is two years earlier, at the age of 60. At that age, the survivor will receive the amount that the deceased spouse would have been entitled to in pension payments, less a deduction of 28.5%. That is a sizable deduction over a remaining lifetime which is likely to be another 25 years or so. The deduction reduces over the years in the same way as the deduction from full pension payments, until full pension age is reached.

If the deceased spouse was actually receiving a Social Security pension at the date he or she died, then the maximum available to the surviving spouse is the amount which the deceased spouse was getting. So, if the deceased person claimed his or her pension early, at the age of 62, then the surviving spouse’s entitlement will never reach the amount they could have had if the deceased had delayed claiming until the full pension age or later.

The Survivors Claim Can Come At A Younger Age

If an early claim for pension is made, the pensioner then dies and the surviving spouse also claims at the earliest age, 60, then the benefit will be subject to two separate deductions, one for the original claim at age 62, then for the survivor’s claim at age 60.

It should be noted that a divorced spouse can also receive survivor benefit, provided the marriage was longer than 10 years, unless they remarry before the age of 60, and remain married.

Surviving spouses who are disabled can claim from the age of 50 rather than 60, and a surviving spouse with young children can claim at any age.

Wall Street Investing Versus Using a Registered Investment Advisor

So you think you’re ready to invest. Maybe you scored a decent inheritance, maybe you finally sold that vacation home you never liked, or maybe you just made some smart business decisions. Whatever the case, it’s high time you put that money to use.

To a beginner, the investing world is downright paralyzing. The number of options is staggering. Once upon a time, investment was primarily done in the hallowed halls of Wall Street, where insanely rich (and occasionally crooked) investment firms handled your money for you. That all changed with the internet. The economy climbs and falls but information is becoming more available by the day. Your money is yours and yours alone, and choosing who to trust it to can build you a lovely nest egg or cost you dearly in the long run.

Registered Investment Advisors, or RIAs, have been growing in popularity in the past decade, coinciding nicely with a drop in faith in Wall Street’s integrity and abilities. This new breed of broker is bound by law and duty to put the client’s interests ahead of their own. They make a fixed percentage of their client’s cash and do not receive commissions. So while a Wall Street broker might prompt a huge, unwise investment from a client so that they can pocket their fee and run, an RIA suffers from no such conflict of interest.

Are RIAs trustworthy?

Well, they have to wade through a battery of tests, certifications, and registrations to even work in their chosen profession, including registration with the Securities and Exchange Commission. Are RIAs effective? It sure seems like it. Some estimates point the finger at them for a staggering 4.75 trillion dollar decline in funds handled by major Wall Street firms. It seems like the old guard has some competition.

And it looks like they’re taking notice. Firms like Vanguard and T. Rowe Price Group have shifted to a fee-based model and dropped commissions altogether, resulting in steadier profits and happier client relations. Investing is always a rough game, but at least now the incentive to separate a client from his cash is not so strong.

So what does Wall Street do well?

Well, as of now, it is still the biggest fish in the pond. Its market share is larger and its client base is more experienced. And it looks like it will continue to borrow tips and tricks from its RIA competitors. If nothing else, it seems like the commission-based model of investment is dying a slow death, so no matter where you take your cash, you’ll have the option to pay small amounts over a larger period of time, rather than dumping large fees for big promises.

And maybe the personal touch is important. RIAs are growing in popularity and small companies are taking bigger bites of the pie. Who wouldn’t relish the chance to be a part of a startup success story? Wall Street doesn’t need more cash in its mattress, that’s for sure. It’s a very big mattress. Very, very big.

Ways to Protect Your Nest Egg

After decades of tireless work and responsible saving, you’re looking forward to fulfilling your grand retirement plans. You’ve heeded the deluge of warnings from your financial advisor and built a nest egg that’s the envy of your closest friends. As retirement approaches, you might be tempted to sit easy until you’re able to live your well-deserved lifestyle. However, preserving your nest egg before and during retirement is just as crucial as building it. A vast number of retirees run out of money during retirement. Others lose their savings due to ill-advised loans to family and friends or poor investments. Scammers and volatile markets are also major factors that cripple savings. While there’s no perfect way to protect your nest egg, the following strategies will help to minimize loss and ensure you get the retirement you deserve.

Learn how to spot good and bad investments

Financial education might seem obvious, yet so many investors rely solely on tips from family members and rarely take the time to learn about good and bad investments. One surefire way to make a good investment is to avoid the bad ones. A reputable financial advisor could set you on the right path, but some financial knowledge would help you make informed decisions along the way.

Safe investments are not always safe

All investments involve some measure of risk, but some are safer than others. If you’ve piled your savings into a so-called risk-free investment, it doesn’t mean you won’t lose in the long run. Ask about loss of principle, the effects of inflation and illiquidity risks due to surrender charges. Many safe investments have maturity dates that are a long way off, so make sure you can access the funds, without charges, when you’re ready to retire.

Investigate sources of guaranteed income

Pension plans, annuities and social security are not technically investments but do they form part of your nest egg for retirement. These sources of guaranteed income ensure you have a monthly or lump-sum income to rely on when there’s a delay in your other investment payouts. Always include a source of guaranteed income in your retirement portfolio.

Keep calm in a financial crisis

Losing a job, unexpected medical bills, bailing a child out of a tragedy or some similar crisis increases your odds of making unwise financial decisions. If you find yourself in such a position, talk to family, friends or a financial planner. Don’t make rash decisions to withdraw from accounts where you’ll lose money to surrender charges. Avoid schemes that promise quick turnovers with high yields. Instead, arm yourself with information and look for ways to meet your current needs without compromising your long-term savings.

Monitor your investments

Keep a close eye on your investments and ask a lot of questions. Are they progressing as you expected? Do you receive regular statements on the progress? Look out for signs of decline, excess fees and poor growth. Monitoring your accounts for poor performance and switching to investments with higher yields will ensure your nest egg works to your advantage.

Practice these simple strategies and you’ll have your money when you need it most.

Protect Your Sensitive Financial Information

Flat Phil-revised for webNow more than ever, you must be protecting your financial information!  In October, hackers accessed the personal information of over 83 million JP Morgan Chase customers. Fortunately, the hackers weren’t able to access financial information or gain access to client accounts. However, they were able to access the names, phone numbers, addresses, and email addresses of any current or past customer who logged into Chase.com, JPMorganOnline, Chase Mobile or JPMorgan Mobile. [i],[ii] This unprecedented cyber-attack on a major American financial company naturally raises questions about the state of security in the financial services industry.

While there are a lot of questions still being answered, there is some good news to take away from this incident:[iii]

  •  No money was taken from client accounts and it doesn’t appear that financial databases were accessed at all. No fraudulent transactions have yet occurred using client information.
  • S. law enforcement and intelligence services are working closely with financial institutions to glean information and prevent future attacks.
  • This serious attack is a wake-up call for the whole industry that a coordinated hacking attack, possibly with the tacit support of foreign governments, can have a major impact on financial institutions. This realization will likely result in some major changes to security protocols at financial institutions.

Financial data theft is a major problem that can affect anyone. Though statistics on this type of data breach are scarce, it’s safe to say that millions of Americans are at risk. Fortunately, there are many ways that you can protect yourself from identity theft and fraud. Most of these actions are common sense, but they’re worth passing along to your loved ones:

  1.  Be wary of emails or social media messages asking you to log into a financial account. Your bank, mortgage company, investment account, or the IRS will never request personal information by email. Never click on links embedded in those emails; instead, always log into your accounts by manually typing the web address into your browser.
  2. Never give out personal information in response to a phone call from someone claiming to represent the IRS or a financial institution. If you get a suspicious phone call, hang up and call the organization directly for more information.
  3. Protect your sensitive information by collecting mail promptly and shredding documents containing account numbers, credit card numbers, or your Social Security number.
  4. Never use the same PIN or password for multiple accounts or websites. Doing so increases the risk that a single attack could compromise your identity or result in fraud.
  5. Monitor your financial and credit card statements carefully to identify suspicious activity. If you find fraudulent transactions, report them to the relevant institution immediately to reduce your financial liability.
  6. Check your credit report each year at each of the three reporting agencies. You can check your report for free at AnnualCreditReport.com. If you find fraudulent accounts or activity that you don’t recognize, immediately file a report with all three agencies and place a security freeze on your account to prevent more accounts from being opened.

We take security very seriously and are committed to protecting our clients’ personal information in the following ways:

  • We partner with major financial institutions that use industry-recommended encryption to protect your data;
  • We never share any personal or financial information without your explicit knowledge and consent;
  • We regularly participate in audits of our internal procedures to help ensure that we are always following industry best practices;
  • We regularly update our knowledge and attend specialized training about security.

If you’re worried about protecting your sensitive financial information and how you may have been affected by a data breach or have questions about protecting your sensitive personal information, please give our office a call. We are happy to be a reassuring source of information and assistance.

[i] http://www.nytimes.com/2014/10/04/your-money/jpmorgan-chase-hack-ways-to-protect-yourself.html

[ii] https://www.chase.com/services/customer-notice-faq

[iii] http://www.nytimes.com/2014/10/04/your-money/jpmorgan-chase-hack-ways-to-protect-yourself.html

Understanding Mutual Funds Versus Stocks

If you’re looking to invest for the future, piling your money into a traditional saving account won’t provide enough money for retirement. Most serious investors consider two main options for future savings – mutual funds or stocks. Mutual funds let investors participate in the market without the need for extensive research and knowledge, thus providing a passive form of investing. A fund manager guides the investor and ensures the best yields for the fund. If you’d like to have an active role in your investment, which includes some research and management of your portfolio, then individual stocks are the way to go. Both mutual funds and stocks provide higher returns on investments but carry specific advantages and risks. Consider the differences below.

Mutual Funds

If you’re just starting out with investing, mutual funds might be just what you need. Consider mutual funds as a diversified basket of investments that contain stocks, bonds and cash equivalents from various sectors – think finance, technology, children’s products and foreign indexes. Since the fund contains a large number of stocks, each equity contributes (or takes away) only a small percentage from the overall portfolio. For example, if one company suddenly does well on the market, there’s no guarantee of the fund growing as that specific equity might account for just a small percentage. The movement, o r lack of it, is both a benefit and a downside with mutual funds.

Mutual funds are ideal for long-term investments as they allow for slow and steady growth. Monitor the market to purchase shares when the prices drop and you’ll benefit from significant growth in your investment. You can also reinvest your dividends automatically to purchase more of the same shares, and you’ll avoid both capital gains tax (associated with cash dividends) and a brokerage commission for purchasing extra shares. Two real disadvantages with mutual funds are the fees and the tendency to follow the market up or down. Fees vary by account but generally include a fund manager fee, early withdrawal fees, initial purchase fee and a back-end fee among others. Index funds are passively managed mutual fund options that eliminate some of the fees common to traditional mutual funds.

Stocks

Stocks are riskier than mutual funds. However, the greater risk means a higher potential for returns. Before you pursue the high yields, remember the potential for loss is just as high as the returns. Also, stocks do not allow for diversification like mutual funds. If you don’t mind researching your stock options and managing your portfolio, after purchasing the stocks through a brokerage, you’ll pay fewer fees than those associated with mutual funds.

Like mutual funds, you can reinvest the dividends to avoid capital gains tax. Monitoring your stocks could be an emotional roller coaster if you’re new to this type of investing. Experienced investors offset the risks by building a strong portfolio to safeguard against the market’s volatility. Where mutual funds involve a passive approach, you must take an active approach to stocks by learning the terminology, rates of interest, commodity prices, earnings, potential for loss and much more.

Consult a financial advisor before committing to stocks or mutual funds especially if you’re uncertain what type of investment would meet your short and long-term goals.

When Do Annuities Make Sense?

In its simplest form, an annuity is an agreement to pay a sum of money in exchange for monthly payouts later down the road. It is an often misunderstood insurance product that requires you to make a lump-sum payment or a series of monthly payments in advance. The tax-deferred money grows at a fixed or variable rate for a set period, and then, the insurer makes periodic payouts for the rest of your life. Most annuities include a death benefit where your beneficiaries receive a guaranteed minimum or a payout based on the value of the annuity. On the surface, annuities seem to be an ideal investment but there are several drawbacks. Consider the pros and cons below.

Taxes

One of the biggest advantages of annuities is the opportunity to save large amounts of money and defer taxes. Your investment grows tax-deferred, and you can withdraw funds tax-free up to the amount contributed to the annuity. The regular income tax rate applies to any interest earned on the investment.

There are no contribution limits for annuities, which means you can put away more money for retirement especially if you need to catch up with your retirement planning. While annuities present a distinct tax advantage, you should only consider them as secondary retirement investment vehicles since IRAs and 401(k) plans provide similar tax benefits without the drawbacks.

Fees

Insurance agents peddle the money-making potential of annuities, but they rarely divulge information on the fees that slice into the profits. The agent’s commission deducts as much as 10 percent in some cases. Variable annuities attract yearly fees of more than 3 percent for insurance riders plus extra for management fees and annual insurance charges.

Annuities are long-term investment products, so don’t plan to make withdrawals until you hit retirement. You should maintain the annuity for at least 15 years if you want the tax benefits to outweigh the overall costs. However, if you must withdraw money from the annuity, you’ll face surrender charges of up to 10% when you withdraw money within the first few years. Some annuities charge even more for early withdrawals, which is why it’s crucial that you read and understand the fine print before signing the contract.

When do annuities make sense?

If you’re in need of an investment product, consider mutual funds, stocks and similar investments. These types of investments produce higher yields than annuities, and the fees are much lower. By ruling out the middleman, the insurance company, you’ll have more money to invest in your retirement. Even if you were to use a financial consultant or a brokerage firm, it would cost a lot less than paying the insurance company to invest in the stock market on your behalf.

If earning a steady income during retirement is your primary goal, you should search for a product with no commission and no surrender charges. Seek out insurance providers that may be willing to eliminate or reduce their fees in order to secure your business, but don’t forget to examine the fine print before you sign the agreement.

What Happens To Your Bond Investments As Interest Rates Rise

Interest rates are constantly changing in the bond markets as a result of a number of things, such as overall economic conditions, inflation and exchange rates. All things being equal, when interest rates rise, bond prices fall, and when interest rates fall, bond prices rise. Although investing can occasionally seem complicated, with a few simple tips, it can turn into a walk in the park, or rather, to the bank. If you are considering investing in bonds or you recently purchased some, here are a few things you should keep in mind to maximize your investment.

One of the first things to consider when dealing with bonds is duration. Duration does not mean time in this case, it means the susceptibility of bond investments to change as market conditions and interest rates change. The higher the duration number, the more bonds are likely to fluctuate due to the effects interest rates have on them. At the moment, many experts agree that interest rates are at an all-time low and they will rise in the future. When interest rates start to rise, the value of bonds with low interest rates and high duration will fall. Consequently, if a bond has a lower duration, it will be less affected by the change in interest rates. In addition to duration, the bond’s coupon, or interest rate when the bond was first purchased, is another relevant factor to be considered. The lower the coupon, the greater the impact of an interest rate hike will be on the bond value.

For those who don’t like to take their chances with longer-term bonds, there are plenty of other options for investing. For instance, instead of choosing bonds with 30-year maturities, opt for 5-year maturities. Investors with shorter-term bonds are more likely to hold everything to maturity and their bonds are less susceptible to interest rate risks in case they sell them earlier. In other words, if investors hold on to the bonds until they mature, the rising interest rates have no effect on the income that is received. A 10-year bond with a face value of $1000 and a coupon of 5% earns $50 each year, and if held until maturity yields $500, plus the original $1000. If, on the other hand, the investor needs to sell before maturity and interest rates have risen in the meantime, the value of the bond is lower and a certain amount of money will be lost.

One final thing to consider is the fact that the higher the coupon rate of a bond, the less susceptible that bond is to interest rate hikes. What that means in practical terms is that rising interest rates make new bonds more attractive as their coupon rate is higher, bringing new investors into the bond markets.

To sum up, higher interest rates translate into long-term bonds with lower coupon rates losing value if sold before maturity. Due to the volatility of the market, and especially for novices, sticking to short-term bonds is the safest thing to do. For those who have not yet invested in bonds, waiting for the interest rates to rise before buying will result in bigger return on investment.

Will The Cost-of-Living-Adjustment Protect Senior Citizens Against The Rising Cost of Health Care?

Those relying on federal benefits were dealt a blow recently after the US government announced that their monthly payments would increase by just 1.7% from next year. The increase is known as the annual cost-of-living-adjustment (COLA) and is designed to protect those relying on social security payments against inflation. More than 70 million people rely on federal benefits including disabled veterans and federal retirees which equates to more than 20% of the entire US population. Many have expressed their disappointment in the small increase as it is the third time in a row that it has amounted to less than 2%. The government claims that this is due to the fact that inflation levels have been relatively low for the past few years with the cost of gas actually falling since the last year. However, critics claim that the COLA will not protect senior citizens against the rising cost of health care which accounts for the vast majority of their monthly expenditures.

How is the Cost-of-Living-Adjustment Calculated?

The government calculates the COLA by comparing the standard cost of living in July, August and September each year against the same period during the previous year. The cost of living is estimated by comparing any increase in the price of items such as food, clothing, transport, rent, energy and medical care. If the cost of living is more than the previous year, then the COLA should accurately reflect that increase. The cost of clothing rose by just 1% last year, and medical costs increased by 1.9%. However, the price of food increased by 3.1% with certain items such as meat, eggs and fish rising by 10%. The government keeps track of the rising cost of living through the Consumer Price Index for Urban Wage
Earners and Clerical Workers (CPI-W).

Will This Increase Protect Senior Citizens Against Inflation?

Although the overall cost of living has risen only slightly over the past few years, advocates for senior citizens claim that the COLA will not be not be enough to protect federal retirees from rising medical costs. Those who are signed up to Medicare, the government-run health insurance program, will not see any increase in their monthly premiums. Federal retirees, however, face an increase of 3.8% on their health insurance premiums over the coming year. People who suffer from serious illness or those requiring surgery can also find themselves facing large medical bills.

The COLA has been a legal requirement since 1975. The annual increase was less than 2% only three times in the first 35 years of the scheme. This year’s increase is a slight improvement on last year which saw an increase of 1.5%. Many economists remain critical of the method that the government uses to calculate the COLA for federal retirees and disabled veterans. Senior citizens often have to pay more for their medical carethan the rest of the population in the form of prescriptions, surgery and physiotherapy. Therefore, the government must come up with an alternative method of calculating the COLA that is more suited to those receiving federal benefits.

How Is Wall Street Changing?

Long considered one of the major financial powerhouses of the United States, as well as home to some of the richest tycoons ever to snack on caviar, Wall Street’s reputation looks to be on the decline. The financial crisis it helped create certainly hasn’t helped matters. Public opinion towards the institution is at its lowest point in 40 years. Films like “The Wolf of Wall Street” and “Wall Street” depict brokers as greedy, infantile, and nearly subhuman. Occupy Wall Street seems to have made its point. We Americans simply aren’t big on banks right now.

And now it seems like we’ve finally spoken enough truth to power. Wall Street firms are losing business to an upstart new brand of broker known as a Registered Investment Advisor, or RIA. The rise in RIAs has caused a significant siphoning of Wall Street cash flow. Nearly 4.75 trillion dollars has been pulled away from Wall Street’s four largest firms, with Morgan Stanley Smith Barney, Wells Fargo, UBS Financial Services, and Bank of America Merrill Lynch all reporting underwhelming profits, all thanks to a new brand of investor with a healthier, more impartial business model.

RIA’s Change With The Times

RIAs don’t operate on the usual commission-based model, meaning they’re under no impetus to sell you anything special. RIAs are legally bound to put client interests first and are by all accounts effective at it. They take a one or two percent fee that stays steady, win or lose, and Wall Street firms are tripping over themselves to adopt this bold new strategy.

Of course, the financial crash of 2008 cost them some serious goodwill in the public eye, and reforms have been few and far between. The most important reform attempt came with the Dodd-Frank bill, signed into law by President Barack Obama in 2010. In essence, the bill called for more oversight and transparency on Wall Street, which had been allowed to essentially self-govern up until that time. In practice, it’s been a mixed bag. As is usual in our hyper-partisan new world, many from one side of the aisle claimed the bill does far too little, whereas those on the other side claim it’s too much.

In theory, the bill makes sense. Many Wall Street firms have been deemed “too big to fail”, such that their closing would have catastrophic effects on the U.S. economy. The Dodd-Frank bill created several committees intended to monitor these companies and even break up ones that are deemed too massive and dangerous. Caps have also been placed on fees for mortgage brokers who might benefit from overselling property to misinformed consumers. While all this seems reasonable in theory, the actual execution of these powers has sometimes been suspect. In addition, smaller banks and startups have struggled to stay afloat in this new world of heightened caution. It’s a volatile time on Wall Street that will likely continue for years to come.

Be Wary Of Wall Street, Choose Your Investment Team Wisely

Basically, if you’re thinking of investing, keep a wary eye on Wall Street. These banks have cost us all a lot with unhealthy business practices and the attempts to reform them are a mixed bag. RIAs are a growing alternative. Consider pouring your money elsewhere, at least until Wall Street can do some serious housecleaning.