10 Things You Might Not Hear in the Current Financial Market
Wednesday, April 28, 2010
10 Things You Should Hear about the Current Financial Market
1. There's still no single regulatory body overseeing the financial markets
We have the SEC and FINRA (formerly the NASD), but there isn’t a professional standards-setting oversight board to watch out for unscrupulous advisors. While the CFP® standard is widely recognized as the most reputable for financial advisors, there is an alphabet soup of designations available in the financial services sector. A coalition of financial planning industry groups is proposing tougher standards for financial advising to create a “regulated” profession. When you’re lying on the operating table, you’d the like the person performing the operation to have M.D. after their name, right?
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2. There's still opportunity for another 'Bernie Madoff"
There has been neglect in the oversight of financial firms for such a long time that getting a handle on other misappropriations is going to take some time. Madoff was able to get away with his scheme for so long because of all the control he had over client money, while simultaneously handling the account reporting. If his kids hadn’t turned him in, who knows how long this could have gone on for? It’s important to know just how far reaching a financial advisor’s authority is.
3. Housing prices may take years to recover
People tend to speak in terms of what value an asset “used to have”. Just because a house was worth $650,000 two or three years ago and can be purchased for $450,000 today, there is no guarantee that it’s returning to its peak value any time soon. The interest rate environment and lower prices make it an attractive housing market for buyers, but look at the lack of recovery in the tech market after the bubble burst in the early part of the decade. Even at these depressed prices, people should get used to the traditional rate of return for real estate, which has been 6 to 7% historically.
4. You don't have to use a variable annuity if you invest in a 403(b)
Recent legislative change to make 403(b) oversight comparable to that of 401(k)s has done little to alleviate the big 403(b) problem – variable annuities!! Almost 80% of money contributed to 403(b) retirement accounts goes into variable annuities. These insurance products are often more expensive while allowing less flexibility and investment choice than a no-load mutual fund offering.
5. Gold is not a sure-fire investment
You can’t turn on the TV or radio without a company looking to sell this high-performing commodity that isn’t attached to our credit system. What you don’t hear is that while gold has performed well over the last few years, it still hasn’t returned to its high of almost 30 years ago. The performance of gold relies heavily on the weakening of the dollar and increasing inflation, not exactly sure things if the administration is able to revive the economy.
6. Your taxes are eventually going up
As you may have heard, the government is going on an M.C. Hammer-type spending spree and the deficit continues to rise at an alarming rate. While the White House emphasizes a recent tax cut for 95% of all Americans, the Bush tax cuts are set to expire this year and there’s no plan to reinstate them. This means the top tax bracket goes back up to 39% and top capital gains tax goes back to 20%. Most experts don’t think this is the end of tax increases because someone has to pay for all this spending, right?
7. You may need to protect yourself against inflation OR deflation
With the government printing money like it’s going out of style, the Fed has to keep a sharp eye out for signs of inflationary pressure. However, an even greater concern (a la 1930) is the prospect that consumers continue to sit on the sideline with this newly available money. If the mental state pervades “Why buy today when it will be cheaper tomorrow”, we could find ourselves in a deflationary state and turn this recession into a full-blown depression.
8. Your bonds may not be safe
Money has been pouring into bond investments at a record pace since the markets imploded a few years ago. While traditionally considered the “safe” investment, the current interest rate environment leaves your bonds in a precarious situation. Interest rates will eventually start to rise, and when they do, it’s a safe bet that the face value of your bonds and bond funds will decrease.
9. You should be contributing to your 401(k) even without a company match
The recession has forced some companies to remove their match to employee contributions. In turn, many have stopped putting money away into their retirement plan. This is a bad idea. First, if you stopped contributing, you may have missed the market rebound of 2009. Also, you may be saving 30 cents on every dollar you contribute in deferred taxation. And, lastly, you need to be putting money away for when you retire!
10. You may not want to convert your IRA to a Roth
In 2010, income restrictions have been removed from those that might convert their IRA accounts to a Roth IRA. Tax rates are almost sure to increase in the coming years, meaning the tax you pay this year and next might be less then when you eventually withdraw money from your Roth IRA, presumably after retirement. However, those converting have to have money available outside of their IRAs to pay the tax over the next two years. There are plenty of resources available to determine if converting makes sense for you.
Dan Forbes serves as GolocalProv's Financial Planning Expert. He is the CEO of Forbes Financial Planning and lives in Providence, RI. He can be reached at [email protected]
