The stock market has done well, but investors are not euphoric about stocks....and this is good!

Some investment professionals are comparing the current bull market to what happened in the 1980s. In August of 1982, the U.S. stocks begin to climb three months before the recession of the early 1980s ended in November of that year. Institutional investors did not really warm up to stocks until 1985, which was several years after it began. Separately, individual investors remained overly conservative until 1987, but it was the 13% jump in stock prices in January of 1987 that got them interested.

Surprisingly, 8/1/1982 through 12/31/1999 was one of the greatest bull markets of all time, and the S&P 500 had a 19.87%/year average annual compound return. 

The chart below is showing a similar pattern, even though the U.S. stock markets have been in bull market territory since March of 2009, current investor sentiment regarding stocks is still below the norm.

                       

Ironically, investors have been reluctant to fully embrace this bull market for similar concerns they faced in the early 1980s. 

Today, just like the early 80's, there are concerns about the direction of the Federal Reserve's policy, sovereign debt issues and geopolitical risks, just to name a few. In the 1980s, the Democrats railed against budget deficits and today its Republicans. Latin American was the site of sovereign debt problems and today its Europe. 

Due to the brutal downturn of 2008, there has been a tug of war of emotions regarding the desire for higher returns and fears of another bear market, which has kept many investors on the sidelines. 

As a result, some institutional investors believe the current bull market is only in the fourth or fifth inning. Also, there are three main factors to support this enthusiastic view: 

  • Liquidity: The Federal Reserve has pumped plenty of money into the market, and it does not appear it will tighten too quickly. 
  • Valuations:  By several metrics, U.S. Equities are not considered overvalued, even after the recent highs. 
  • Sentiment: As noted above, investor sentiment for stocks is still below historical averages. 

Adding to these positive factors is the fact that we are beginning to see an "American Industrial Renaissance. 

  • U.S. labor costs are becoming more competitive versus other markets such as China, where inflation is increasing and the appeal of outsourcing is diminishing.
  • Lower energy costs in the U.S.
  • The U.S. has greater political stability compared to most other industrialized nations and especially when compared to emerging markets.
  • In many instances, U.S. companies are grabbing market shares from their overseas counterparts. 

 

Bottom line, if investors are still reluctant about stocks, then there is still plenty of money either on the sidelines or that may be reallocated from other sectors. As such, the current bull market may still have plenty of room to run, but that will not be without some volatility going forward. 

School is just around the corner and now may be the time to revisit your college savings plans.

529 plans were first authorized by Congress in 1996. Known officially as "qualified tuition programs," 529 plans are so named because they are governed by section 529 of the Internal Revenue Code

529 College Savings Plans 

Section 529 college savings plans are tax-advantaged college savings vehicles and one of the most popular ways to save for college today. Much like the way 401(k) plans revolutionized the world of retirement savings a few decades ago, 529 college savings plans have revolutionized the world of college savings.  As of June 2012, assets in 529 college savings plans totaled $157.3 billion (Source: College Board's 2012 Trends in Student Aid Report). 

Tax advantages and more 

529 college savings plans offer a unique combination of features that no other college savings vehicle can match:

  • Federal tax advantages: Contributions to your account grow tax deferred and earnings are tax free if the money is used to pay the beneficiary's qualified education expenses. (The earnings portion of any withdrawal not used for college expenses is taxed at the recipient's rate and subject to a 10% penalty.)
  • State tax advantages: Many states offer income tax incentives for state residents, such as a tax deduction for contributions or a tax exemption for qualified withdrawals.
  • High contribution limits: Most plans let you contribute over $300,000 over the life of the plan.
  • Unlimited participation: Anyone can open a 529 college savings plan account, regardless of income level.
  • Professional money management: College savings plans are offered by states, but they are managed by designated financial companies who are responsible for managing the plan's underlying investment portfolios.
  • Flexibility: Under federal rules, you are entitled to change the beneficiary of your account to a qualified family member at any time as well as rollover the money in your 529 plan account to a different 529 plan once per yea rwithout income tax or penalty implications.
  • Wide use of funds: Money in a 529 college savings plan can be used at any college in the United States or abroad that's accredited by the Department of Education and, depending on the individual plan, for graduate school.
  • Accelerated gifting: 529 plans offer an excellent estate planning advantage in the form of accelerated gifting. This can be a favorable way for grandparents to contribute to their grandchildren's education.  Specifically, individuals can make a lump-sum gift to a 529 plan of up to $70,000 ($140,000 for married couples) and avoid gift tax, provided the gift is treated as having been made in equal installments over a five-year period and no other gifts are made to that beneficiary during the five years. 

 

Choosing a college savings plan 

Although 529 college savings plans are a creature of federal law, their implementation is left to the states. Currently, there are over 50 different college savings plans available because many states offer more than one plan. 

You can join any state's 529 college savings plan, but this variety may create confusion when it comes time to select a plan. To make the process  easier, it helps to consider a few key features: 

  • Your state's tax benefits: A majority of states offer some type of income  tax break for 529 college savings plan participants, such as a deduction for contributions or tax-free earnings on qualified withdrawals. However, some states limit their tax deduction to contributions made to the in-state 529 plan only. So make sure to find out the exact scope of the tax breaks, if any, your state offers.
  • Investment options: 529 plans vary in the investment options they offer.  Ideally, you'll want to find a plan with a wide variety of investment options that range from conservative to more growth-oriented to match your risk tolerance. To take the guesswork out of picking investments appropriate for your child's age, most plans offer aged-based portfolios that automatically adjust to more conservative holdings as your child approaches college age.  (Remember, though, that any investment involves risk, and past performance is no guarantee of how an investment will perform in the future.)
  • Fees and expenses: Fees and expenses can vary widely among plans, and high fees can take a bigger bite out of your savings. Typical fees include annual maintenance fees, administration and management fees (usually called the "expense ratio"), and underlying fund expenses.
  • Reputation of financial institution: Make sure that the financial institution managing the plan is reputable and that you can reach customer service with any questions. 

 

Account mechanics 

Once you've selected a plan, opening an account is easy. You'll need to fill out an application, where you'll name a beneficiary and select one or more of the plan's investment portfolios to which your contributions will be allocated.  Also, you'll typically be required to make an initial minimum contribution, which must be made in cash or a cash equivalent.   

Thereafter, most plans will allow you to contribute as often as you like. This gives you the flexibility to tailor the frequency of your contributions to your own needs and budget, as well as to systematically invest your contributions.  You'll also be able to change the beneficiary of your account to a qualified family member (e.g., siblings, stepsiblings, parents, nieces, nephews, aunts, uncles, first cousins) with no income tax or penalty implications. Most plans will also allow you to change your investment portfolios (either for your future or current contributions) if you're unhappy with their investment performance. 

529 prepaid tuition plans--a distant cousin

There are actually two types of 529 plans--college savings plans and prepaid tuition plans. As of June 2012, assets in 529 prepaid tuition plans totaled $21.5 billion (Source: College Board's 2012 Trends in Student Aid Report).  The tax advantages of college savings plans and prepaid tuition plans are the same, but the account features are very different. A prepaid tuition plan lets you prepay tuition at participating colleges at today's prices for use by the beneficiary in the future. The following chart describes the main differences:  

College Savings Plans

Prepaid Tuition Plans

  • Offered by states
  • Offered by states and private colleges
  • You can join any state's plan
  • State-run plans require you to be a state resident
  • Contributions are invested in your individual account in the investment portfolios you have selected
  • Contributions are pooled with the contributions of others and invested exclusively by the plan
  • Returns are not guaranteed; your account may gain or lose value, depending on how the underlying investments perform
  • Generally a certain rate of return is guaranteed
  • Funds can be used at any accredited college in the U.S. or abroad
  • Funds can only be used at participating colleges, typically state universities

 

Note:   Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about specific 529 plans is available in each issuer's official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable tax benefits.

With so many plans available, feel free to contact us and will be happy to assist you in picking a plan that meets your specific objectives.

Taking skin cancer serious! 

In late June I noticed a mole on my back that seemed to have just come out of nowhere, and it was quite different in appearance. Normally, I would have just blown it off. However, the combination of my wife just coming back from visiting an out of town friend dealing with cancer and several clients mentioning that they've had skin cancer caused me to schedule an appointment with my dermatologist. 

The dermatologist examined the mole, which he labeled a dysplastic nevus. He felt it best that he remove it and send it to the lab to be examined. Two days later the lab results show pre-cancerous cells present. This was good news, because we caught it early enough before it could even develop into cancer. As such, two weeks later I had surgery to remove any traces of the pre-cancerous cells.  

When I shared this story with my doctor (general practitioner), he was pleased to hear this, especially since he had another patient who had a mole on his forehead for over a year and stubbornly refused to have it checked. Well, when he did, he found it that it was stage 3 cancer (melanoma). Not good at all and possibly completely preventable. 

As a result of my situation, I am renewing my friendship with sunscreen. In addition, the following is a link to an article regarding 10 signs that a mole can be cancerous. 

http://www.activebeat.com/your-health/10-signs-that-mole-may-be-cancerous/ 

I am not trying to be an alarmist, but since I was lucky enough to catch my situation before it became a problem, I feel it is important to share it with you. 

Quotes 

"Making money doesn't oblige people to forfeit their honor or their conscience." 

                   Guy De Rothschild 

"A child does not thrive on what he is prevented from doing, but on what he actually does."

                   Marcelene Cox 

"Only real friends will tell you when your face is dirty."

                   Italian Proverb

 

Tony Moeller, CPA 

The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.  

If you enjoy the commentary and believe others may benefit or find it of interest, please feel free to forward it on. Also, interested individuals can contact us, and we will be happy to add them to our mailing list.

 

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