Zeus's Shield: Client-Centered Financial Planning for Life

Our Blog Has Moved

2011-11-27T16:25:00.001-08:00

Thank you for visiting. Please note that our blog has moved to the following location:

www.aeg isadvisory.com

We look forward to seeing you there!

Letter to Clients Regarding S&P Downgrade of Treasuries

2011-08-06T10:33:00.000-07:00

Dear Clients,

The credit rating downgrade of US Treasuries discussed in a previous communication has come to pass. Yesterday, S&P lowered the rating for US Treasuries to AA+ from AAA.

As noted in that earlier communication, it is likely that the impact of this action on the Treasuries market will be muted. Given that S&P has been warning about this action for some time it’s effect has been priced into the market so practically speaking we already have our answer regarding its impact. We will see on Monday how the Treasuries market will react further since the official announcement came after the market close yesterday. So far, yields on US Treasuries have been dropping as investors seeking security have increased demand for US debt. The conventional wisdom is that this rating downgrade, and the threat of further downgrades in the future, will reverse this trend and cause yields to rise as investors demand higher interest payments in return for incurring the relative increased credit risk that a AA+ rating reflects.

As you know, I do not waste time trying to predict what the market will do in response to events such as this. I focus on controlling what we can by implementing and adhering to an investment strategy that allows you to stay on course for achieving your goals in spite of periodic, and inevitable, market declines. With regard specifically to our strategy of using Treasury Strips to build bond ladders for those of you entering or in retirement, I see no reason for changing this. The reality is that these investments remain the safest in the world, as evidenced by their continued high demand throughout the debt limit crisis and subsequent stock market drops. My conviction remains that holding Treasuries to maturity to fund your retirement cash flow needs is a prudent strategy that will serve you well throughout your retirement years.

Market volatility, while stressful, presents disciplined investors with opportunities. We will therefore be looking to opportunistically rebalance your portfolios by buying stocks at depressed prices. We will also look at taking advantage of any increased bond yields when adding to your bond ladders since higher yields mean lower bond prices, decreasing the cost of building these ladders. These actions will effectively allow us to “buy low and sell high” and add incremental long term performance while maintaining an equity/bond exposure ratio appropriate to your needs and risk tolerance.

I hope the above helps to put things in perspective during these turbulent times. As always, I remain available to answer your questions and discuss your concerns, whatever they may be.

Thank you for your continued support and trust.

Best,

Joe

Letter To Clients Regarding Debt Ceiling Crisis

2011-07-30T21:46:00.000-07:00

A version of this letter was originally sent on July 24, 2011

Dear Clients,

I am sure that you have been following with concern the political drama unfolding in Washington around the issue of raising our nation’s debt ceiling. At this moment, it is not clear what the final resolution of this issue will be and it appears that negotiations have hit an impasse. The markets will start to vote shortly in Asia when exchanges open on their Monday. Our market will certainly react as well to these events and will continue to remain volatile as long as the impasse continues and we get closer to the August 2 deadline when fiscal debt is expected to exceed revenues.

I am also sure you are wondering how all this will impact your savings and investments. I share these same concerns as a fellow investor (and tax payer) following the same investment strategy that I have recommended for you and investing in the same assets that comprise your respective portfolios. Unfortunately, neither I nor the various pundits in the media possess a crystal ball to allow us to divine what will happen over the course of the next few days and weeks and, more importantly, how financial markets will react in response.

It is exactly this unknowability, however, that informs our investment strategy and policy of diversifying across a broad array of asset classes that tend to react differently to economic conditions. I believe that all of your IPSs reflect a prudent approach to the uncertainly and risk that is an essential element of investing. Your equity assets are invested in domestic and international markets, both developed and emerging, and are comprised of thousands of companies running the gamut of size and valuation. Similarly, your fixed income assets are invested globally, in high quality issues (AAA/AA), with maturities averaging less than 2 years. We have intentionally kept your fixed income asset maturities short as a hedge against inflation and to dampen the overall volatility of your portfolio.

In short, I believe that the work we have done together to prepare you for the risks inherent in the market will also prepare you for whatever may happen as a result of the current debt ceiling crisis. This is not to say that the ride will be an easy one. I do believe, however, that you are well-positioned to see this crisis through and remain on track to achieving your long term goals. As both your advisor and fellow market participant, I will be there with you and for you whatever may arise. I am therefore not recommending any changes to your respective strategies at this time.

I am attaching a link to an article from one of my colleagues, Bert Whitehead, that I think sums up my thoughts as well.

As always, I am available to you at any time to discuss this or any issue of concern to you.

Thank you for your continued support and trust.

Best,

Joe

"The Debt Ceiling Fiasco" at http://bertwhitehead.blogspot.com/

Quoted In Chicago Tribune Article On Spousal IRAs

2011-06-08T10:38:00.000-07:00

http://www.chicagotribune.com/business/sc-cons-0602-started-20110603,0,7385908.story

Interview At The WSJ Online Regarding My Investment Approach

2010-11-22T12:26:00.000-08:00

http://blogs.wsj.com/financial-adviser/2010/11/22/voices-joe-alfonso-on-keeping-it-simple/

Quoted in Investment News Article on ETFs

2010-11-02T08:33:00.000-07:00

See my quote in Investment News

Aegis Financial Advisory Featured In Wall Street Journal

2010-09-20T08:41:00.000-07:00

See our mention in today's Wall Street Journal article regarding planning for young people.

http://online.wsj.com/article/SB10001424052748704206804575467810222109230.html

ACA Member Joe Alfonso Elected to NAPFA West Region Board of Directors

2010-07-16T19:02:00.000-07:00

FOR IMMEDIATE RELEASE
July 6, 2010 - Highland, MI –ACA member Joe Alfonso, CFP®, ChFC has been elected to the NAPFA West Region Board of Directors. He will begin his two-year term on September 1, 2010.

Mr. Alfonso looks forward to contributing to the current work of the West Region Board and adding his own perspective given his interests in new planner outreach, pro-bono programs and strategic marketing.

“As a long-standing NAPFA member, I feel that I have benefitted greatly from the support that the organization has given me and my practice,” said Mr. Alfonso. “I look forward to stepping up my effort at giving back and see membership on the Regional Board as a great way to do so. I also look forward to sharing the perspectives I have gained as an ACA member regarding the value of truly comprehensive and holistic financial planning.”

Mr. Alfonso is the founder of Aegis Financial Advisory, LLC, a Fee-Only financial planning and DFA-approved investment management firm in Santa Clara, California providing comprehensive wealth management services to families, individuals and small business owners throughout the San Francisco Bay Area. He has been an ACA member since 2008.

ACA is a non-profit 501(C)6 organization providing training and support to fee-only financial advisors with a passion for holistic financial planning. Its collaborative community continues to develop the next generation of holistic planning concepts and strategies. Currently ACA consists of more than 150 members serving 45 states across the U.S.

For more information about ACA, please contact Valerie Kriss at 888-834-6333 ext. 706 or valeriek@acaplanners.org.

Save Early, Save Often

2010-03-01T23:17:00.000-08:00

Investors fret about the performance of their portfolios. They worry whether they will be able to realize a rate of return sufficient to help them meet their goals and if they are taking on enough (or too much) risk to achieve this. While these are valid concerns, they are ultimately beyond anyone's control. Other than diversifying broadly to lower volatility and keeping investment and tax costs low to increase net gain, there is nothing we can do to determine the actual rate of return on our investments; the markets will ultimately decide this fate for us.

There is, however, something outside of investing that we can all do that is completely within our control and that can have a great impact on whether we achieve our life goals. Indeed, by forming certain habits early, we can help reduce the rate of return that we need to realize on our investments and even how much we need to invest in the first place. I am referring to the habit of saving.

Perhaps the greatest risk we all face is not saving enough to meet our long term needs. Saving as much as we can and beginning this practice early allows our money to grow exponentially with time given the magic of compounding. Just how significant an advantage one can reap from an early commitment to saving can be illustrated in the following example.

Ben and Jerry are twin brothers. Ben decides to begin saving at age 30 at a rate of $10,000 per year. He continues this practice until the age of 40, at which time he stops saving altogether. Jerry waits until he turns 45 to begin saving. He puts away $15,000 per year until retiring at the age of 65. If we assume both brothers earned the same 7% average annual rate of return, how much did each accumulate by the age of 65?

First, let's compare how much each brother socked away. Ben saved $100,000 in total over 10 years compared to Jerry who saved a whopping $300,000 over 20 years. In spite of having saved more over a longer period of time, however, it turns out that Jerry winds up with the smaller nest egg of the two. At age 65, Jerry's savings will have grown to about $615,000, certainly a significant sum. In comparison, however, Ben's savings will have grown to approximately $750,000, $135,000 more than Jerry in spite of Ben having only saved a third of what Jerry saved for half as long. This is the magic of compounding at work and a great example of why saving early is so beneficial.

The moral of the story is that we are more in control of our financial destinies than we think. By deciding to save early and often, we can minimize the need to risk our money in the stock market since even modest rates of return over long periods of time yield impressive sums. The secret to getting rich is to do so slowly, saving as much as we can for as long as possible. So take matters in your own hands and get started, now!

The Impact of High Mutual Fund Turnover

2010-01-05T11:39:00.000-08:00

Morningstar recently issued a report regarding the performance of the CGM Focus mutual fund. They reported how this fund was the decade's best performing mutual fund, rising more than 18% annually, yet investors in the fund experienced a yearly loss of 11% during this same period. How could this be?

CGM Focus Fund illustrates the issues with mutual funds that have excessive "turnover". Turnover is the rate at which a fund's holdings change every year. A turnover rate of 50% means that half of the stocks held by a fund are completely replaced within one year. The typical managed mutual fund has a turnover rate of 85%. Index funds, which hold all the stocks in a stock market index and do not sell unless the index itself changes or in order to generate cash for redemptions, typically have turnover rates in the single digits. According to Morningstar, CGM Focus's turnover rate is an astonishing 504%, meaning that its entire portfolio is replaced five times over the course of a single year!

In addition to generating excessive taxable gains in non-deferred accounts and driving up trading related costs, high turnover funds are very volatile. Due to their volatility, the actual return experienced by fund investors is often lower than the internal return of the fund itself because the fund’s volatility increases the likelihood that investors will buy and sell at inopportune times.

When asked about the great disparity in fund versus investor performance, CGM Focus Fund's manager Ken Heebner replied, "A huge amount of money came in right when the performance of the fund was at a peak. I don't know what to say about that. We don't have any control over what investors do."

I would argue that, while a fund manager may not be able to control investor behavior, any fund manager realizes that increased volatility also increases the likelihood that investors will buy high and sell low, and pay more in the process. John Bogle, the Founder of the Vanguard Group, Inc., certainly feels differently than Mr. Heebner. In a recent interview, Mr. Bogle rails against "...funds (that turn) over at 100% or 200% annual rates, leading, among other things, to incredible tax inefficiency." He goes on to ask, "Would you do that with your own money? Do you think those managers would do that with their own money?"

Like Mr. Bogle, I feel that the best approach is to work with investments that are low cost, tax efficient and have low turnover as part of a long term approach aimed at achieving a fair, market rate of return. The issues raised with the strategy of funds like CGM Focus illustrate why a "market return" approach is appropriate for most clients and is in fact the only approach compatible with a fiduciary standard of care that places client's best interests first at all times.

Active Versus Passive Investing

2009-12-19T10:38:00.000-08:00

There exists a long-running debate regarding whether it is possible for individual investors to outperform the broader stock market consistently over time. On one side are those who believe that there are investors who have an inherent ability to outperform, add "alpha" is the expression, through shrewd stock picking and correct forecasting of future market trends. This camp believes in "active" management.

There is another group, led by academics such as Eugene Fama and Kenneth French, who believe in a "passive" investment approach. They feel that market data extending back to the 1800's shows that active management is not able to consistently outperform over time, especially when the real world costs of taxes and investment fees are considered. The passive camp argues for a "buy and hold" strategy and believes that owning a highly diversified portfolio designed to track the performance of the overall market is the most rational approach and the one that has been shown to outperform active managers even over shorter periods of time.

I am firmly in the camp of passive investing.

Buying into an active manager based on past positive performance is no different than buying high and selling low. The likelihood is that the manager will revert to the mean or even under perform. In reality, your likelihood of identifying a manager BEFORE THE FACT who will outperform the overall market over time is low to nil. And the percentage of managers who outperform over time is no more than what one would expect in a standard distribution of total performance. It is therefore hard to say that these manager's results were the result of inherent skill as opposed to luck.

Even if we assume that there are gifted managers out there like Peter Lynch and Warren Buffett, it is impossible to identify these managers before hand. Peter Lynch could not pick his successor at Magellan Fund to continue his own successful run (remember Jeff Vinik?). What chance does any of us have of doing better?

In my opinion, the matter has been settled. A passive investment strategy is the only one that makes sense and that is consistent with a fiduciary standard. It is the approach that I take with my own investments and adhere to when managing the assets entrusted to me by my clients. This approach also recognizes that the main value that I provide comes from a comprehensive approach to financial planning and a focus on enabling clients to achieve their key life goals. In my opinion, that is the only kind of "alpha" worth pursuing.

Energy Tax Credits and Misleading Ads

2009-12-12T20:03:00.000-08:00

You’ve seen the ads for “huge savings” on central air conditioning systems touting a $1,500 federal tax credit. What these ads are referring to is the expansion of tax credits for heating and air conditioning equipment in The American Recovery and Reinvestment Act of 2009 (ARRA) signed into law on February 16 of this year. What these same ads do not state, however, is that not all systems qualify for the credit, nor do all taxpayers.

Only systems that meet certain efficiency ratings are eligible. Also, the credit itself is actually a credit for 30% of the cost of the installed system up to a maximum of $1,500. If the system costs less than $5,000, the credit will be less than the $1,500 maximum. Last but not least, the credit is “non-refundable”, which means that it is capped at the amount a taxpayer actually owes in taxes, reduced by other available credits. Lower income taxpayers who qualify for the Earned Income and other credits may see their energy credit limited.

Putting aside taxes, it seems dealers are inflating the cost of these systems to $5,000 or more in order to be able to claim that their products qualify for the maximum $1,500 credit. Overpaying for a product just to qualify for a tax credit which may itself be limited is not smart. Many dealers seem to be cynically using the tax laws to mislead buyers. Unless and until greater regulatory scrutiny is placed on these dealers, this is clearly an area where the buyer needs to be aware in order to avoid being ripped off.

IRA to Roth Conversions in 2010

2009-12-12T17:32:00.000-08:00

As you probably already know, the tax law is changing in 2010 to remove the current restriction for making traditional IRA to Roth conversions. Currently, individuals with modified adjusted gross incomes in excess of $100,000 cannot do a conversion without incurring a 10% penalty if they are younger than 59 1/2 years old. Additionally, taxes are due in the year of conversion on any pretax savings and accumulated growth. In 2010, the income limitation is being removed allowing anyone to make a Roth conversion without incurring the 10% penalty. Taxes would still be due as before however there will be an option to pay these in equal installments over the two years following the year of conversion.

Already, financial product salespeople are touting the advantages of Roth conversions in anticipation of 2010 by emphasizing the tax advantages Roth IRAs have over traditional IRAs. Unlike withdrawals from traditional IRAs, Roth withdrawals in retirement are tax-free. Another key advantage of the Roth is that there is no requirement to begin taking withdrawals after one reaches the age of 70 and 1/2, as is the case with traditional IRAs. This "required minimum distribution" (RMD) feature of the traditional IRA forces taxpayers to make taxable withdrawals from their accounts regardless of actual income need. Roth IRAs do not require RMDs, thereby allowing the taxpayer the option of leaving assets in the Roth to potentially appreciate over a longer period of time.

Unfortunately, financial product salespeople often do a better job promoting the potential advantages of Roth conversions than they do the more important job of assessing whether a Roth conversion is appropriate for an individual client. The answer is not clear-cut by any means and a careful analysis must be performed to make an informed decision. Factors that must be considered are current and anticipated future income tax brackets, the source of assets available to pay the tax due on the conversion, and projected income needs in retirement. This is not a straightforward analysis. Additionally, there is the element of the unknown with regard to future tax law changes that further complicates matters.

In many cases, the result of a careful analysis will be that a partial conversion is the optimal course of action, both for empirical reasons as well as a hedge against future tax law changes. The ability of a client to pay the taxes due upon conversion may also weigh in favor of the partial conversion strategy.

Clearly, this is an area fraught with traps for the unwary and no one-size-fits-all solution exists. Advisors seeking to maximize the business opportunity presented by this tax law change while failing to properly assess the appropriateness of a Roth conversion on a case by case basis do their clients a disservice. Undoubtedly, a tax planning opportunity exists for some in 2010. Advisors who truly put their client's interests ahead of their own, however, need to be prepared to tell some of these clients that a Roth conversion is not appropriate in their particular case. Those of us who understand that providing good advice, and not selling products, is the best value we can offer clients will be more likely to engage in the thoughtful analysis required by the Roth conversion opportunity in 2010.