Archive for Financial Planning

PRIVATE ALERT – MARKET CORRECTION from Paul Ferraresi

To: Our Valued Readers

From: Paul Ferraresi, Founders Group

PRIVATE ALERT: 401(k), IRA and Personal Investment

Recently, we have been concerned about the over valuation in the stock market. All valuations methods show the market is in a “frothy” condition that cannot be justified by any logical methodology. This condition has transpired by the irresponsible easy money policies of the Federal Reserve with ultra low interest rates and an unbridled $4 trillion of money creation. An asset bubble exists in the stock and real estate markets. Can the stock market continue to go up? Yes. Forever? No.

The majority of the astute money managers we employ and other well regarded managers have moved to a 20% – 25% cash position in anticipation of a correction.

A top may be approaching as all the institutional and professional managers have been selling while the public is on a buying binge.

Timing the markets is a fool’s game.

Too many investors have over subscribed to passive indexed investing. Which, in general, holds Large Cap stocks. When the public tries to head for the exits in panic selling as the markets correct it will be very nasty.

ALERT
For these groups:

• 401(k), 403(b) and TSP Investments:
Make sure you are up to date with your “Optimizer” program to enjoy the gains yet avoid the losses.

The Optimize program will signal when to move to cash and will preserve your capital. When it is time to reenter the markets you will get another signal to buy in.

• IRA and Personal Brokerage Accounts:
Make sure your risk level is up to date. Use your advisor to select the Tactical Money Manager that will move to cash as the markets turn down and then reenter as the markets turn up.

*Remember Mutual Funds and ETFs cannot move into 100% cash by their prospectus and will take a beating as in 2000 and 2008.

If you need more information on how to safeguard your investments contact us.

Founders Group, Inc.
(713) 871-5919
Jamie@fgmci.com
www.foundersgroupusa.com

RULES OF THUMB FOR ESTATE PLANNING Recommended by Paul Ferraresi

I found this great article on estate needs by Russell W. Hall in the Bellaire Buzz, July 2017

To save you a phone call, I’m going to share my rules of thumb.

College students don’t need wills; they just need to give their parents a medical power of attorney. Free ones are available at texasprobate.com/consumer-forms/disability-planning-forms/.

College grads need a will and business and medical powers of attorney. Use a real lawyer, one that explains beneficiary designations. The first day on the job, HR is going to have the new hire designate beneficiaries that may control life insurance and retirement benefits for the rest of the employee’s life. Get it right.

Newlyweds need new will and powers of attorney. If children are even remotely possible, include contingent trusts. Update all beneficiaries according to the attorney’s instructions. Never designate minor children as contingent beneficiaries.

How much are you worth dead? If as much as $1 million per child, it’s time for new wills, with lifetime generation-skipping transfer tax planned trusts for descendants.

Are you married and worth $5 million? Add tax-planned trusts for the surviving spouse. If not, and one spouse is not a U.S. citizen, do it anyway.

Are you asset rich, but cash poor? This happens to entrepreneurs and real estate investors. Children cannot eat real estate. An irrevocable life insurance trust might be the ticket to add liquidity. For normal people, it’s overkill.

Do you have more money than you need? Give it away. This is where the family limited partnership comes in. If you own the general partner, typically a limited liability company, you can maintain control even while you give the kids the other 99 percent. Five million dollars in assets is a reasonable minimum to form a family limited partnership.

Finally when disability is imminent, or at least feared, consider a revocable intervivos trust, so-called living trust. Asset management is easier than with powers of attorney.

RESETTING YOUR INVESTMENT STRATEGIES by Paul Ferraresi

John Maynard Keynes had a great quotation: “A speculator is one who runs risks of which he is aware, and an investor is one who runs risks of which he is unaware.”

So which are you?

Americans for more than 200 years have participated in the stock market as “passive investors”. A more common term used is a “buy and hold” investor. Over a long period of time this has proven to be a good way to accumulate wealth. Mind you, not an optimal way, but rather, a good way. Just set it, leave it alone, add to the account on a consistent basis and deal with the inevitable ups and downs.

Wall Street pundits continue to sing this happy tune of buy and hold as the only way to invest (you see if you took another approach then they would have to “resell” you each time in order to get you back into the market after each correction). Many people do not have the knowledge or time to produce better results, hence, they stay passive investors.

Things began to change for passive investors in the 1970’s as computers came onto the scene of investment management. Many people today do online investing with discount brokers or with their retirement accounts thinking they are being active. Yet, they are still passive investors, in that they go through the ups and downs of the markets. Funny these same investors get out of the market after it corrects. Conversely, as the markets reach new highs they start buying.

These activities confirm academic research which shows the small passive investor has obtained about a 2% return while the markets have averaged 10% – 12%. The results: passive investors, trading or trying to time the market does not work.

Today, worldwide trading is being done 24 hours per day. So while you are sleeping, markets, and your wealth, can be crumbling. Thus, the challenges for the passive investor will continue to increase in an exponential way.

Many passive investors who hold accounts at, say, Vanguard, Fidelity or others have their monies invested in good mutual funds and think they are safe. Unfortunately, as listed in the fund’s prospectus (you have read every page), it states that the manager can never move to more than a 10% – 12% cash position. Consequently, when the market corrects the small investor panics and sells their mutual funds. With only 10% – 12% of assets in cash, this forces the fund manager to sell more shares in a declining market which creates an even larger debacle in share prices.

An alternative to passive money management is known as Tactical Money Management (TMM). Here, selected professional money managers, using computer algorithms, not timing, move client’s money into and out of the market. This is not done on a daily, weekly or monthly basis. Rather, the moves are done when changes in money flow or activities in the market change (their “secret sauce” algorithms).

A Tactical Money Manager’s objective is to capture 70% – 80% of the market upside while eliminating 70% – 80% of the downside. They never pick the exact top nor the exact bottom. At anytime they can move your money into 100% cash or 100% in the market or some combination. The results compared to “passive investing” have been remarkable on the investors behalf.

So, if you think the market will continue to go up and up and never drop then stick with passive investing. If you feel there will be a correction, and a pretty severe correction then you may want to investigate Tactical Money Management.

I believe passive investment strategies will come under severe selling pressure in the coming years. Many investors have their core (and retirement) portfolios in these passive strategies. If you are prepared to ride out another 2001 – 2002 or 2008 – 2009 and then go through what I think will be and even longer and weaker recovery (until our debt issue is fixed), then stick with your passive strategies.

If you are looking for another option let me offer you one.

Contact us at (713) 871-5919 or at Jamie@fgmci.com and we will be pleased to educate you on the time tested successful Tactical Money Management strategies.

Here is to your safe wealth building strategies.

How To Use Life Insurance In Your Retirement Planning – Article Recommended by Paul Ferraresi

Investing in the market without taking losses — is it too good to be true? Not according to the University of Michigan’s head coach Jim Harbaugh. In August, University of Michigan helped Harbaugh become the top-paid college football coach in the nation, according to USA Today figures, by creating a deferred compensation package utilizing cash value life insurance called Indexed Universal Life Insurance (IUL).
Just like in Harbaugh’s case, IULs appeal to many executives and business owners because of the advantages they provide. IULs allow cash value within the policy to grow tax-free over time. IULs are funded with post-tax dollars which allow clients to withdraw money tax-free at any age, and provide financial security in the form of a death benefit for the family after the client passes.
One of the main advantages of IULs is that the cash value is protected from drops in the market. An IUL is a cash value policy that has both a death benefit and a savings portion. In an IUL the investments are not placed directly in the market where they would be subject to a loss. Rather, they are put into a strategy that mirrors an index such as the S&P 500, which allows the participant to realize all or most of the gains in the market. These gains are then locked in to protect against potential losses.
In addition, when compared to an IRA or a 401(k), IULs provide more flexibility. Unlike IRAs and 401(k)s, there is no limit on how much money can be added annually, as long as the added cash does not create a Modified Endowment Contract (MEC), which is taxable. An MEC is where the funding has exceeded the IRS limitations known as the “7-pay test,” which limits the amount of excess cash that can be put into a policy in any seven-year period before it loses its tax advantages. IULs allow for a high cash value at the beginning of the policy. There are no restrictions on when the money can be taken out, unlike an IRA. Also, the money inside an IUL can be taken out at any age by the client tax-free and without extra fees.

An IUL is beneficial to those who are looking to invest their extra money tax deferred after they have fully utilized their other retirement accounts, such as a 401(k). IULs are also beneficial to those who clients who do not qualify for a Roth IRA. IULs provide an opportunity for individuals to allocate premiums to flexible and accessible tax-deferred accounts. For younger clients, savings can be rolled over from a previous retirement plan. IULs can also help people who started retirement planning later, due to the fact that an IUL can be over-funded, unlike a 401(k) or IRA, which have strict contribution limits.
Along with tax-free wealth building, IULs provide a source of financial security to the family in the event of death or disability. In an event of the death of the policyholder, the death benefit is received tax-free by the beneficiary of the policy in a lump sum. Some policies can be constructed to include living benefits in the event of disability or chronic illness. In this way, IULs provide a way in which individuals can grow and protect their income, as well as provide extra funds for retirement.
In the case of coach Harbaugh, an IUL was used to save millions in tax-free retirement. This was possible due to the growth of the cash value inside of the policy that increased his retirement funds, which are accessible tax-free at the age of 70. Upon being hired at Michigan, Harbaugh entered a split-dollar loan agreement, in which the premium, cash value and death benefit is split between two parties. This split-dollar agreement was funded by cash value life insurance policy or IUL.

Under this split-dollar agreement, the University of Michigan agreed to pay seven $2 million loan advances into a life insurance policy. By implementing this policy, Harbaugh does not have to pay back the loan taken on the policy until his death, and his beneficiaries will receive the remainder of the death benefit. While he is alive, Harbaugh is able to borrow money out of the policy tax-free. Through this plan, it is projected that Harbaugh could begin taking $1.4 million per year out of the policy tax-free, beginning at the age of 66.
IULs are a popular choice amongst clients who would like the gains of the markets without the losses, as well as protection for their family after death. This makes IULs a comprehensive and flexible wealth building option.
Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms.

Jacob Alphin, Author, (May 11, 2017). How to Use Life Insurance in Your Retirement Planning. Forbes. Retrieved from https://www.forbes.com/sites/forbesfinancecouncil/2017/05/11/how-to-use-life-insurance-in-your-retirement-planning/2/#16adc1593b1b

Insurance You Should Have by Paul Ferraresi

Most people try to buy the least amount of insurance in all areas hoping to save on premiums. But penny wise may be pound foolish…

Here is a short article written by Russell Hall. I suggest you share this with friends and family.

Most discussions of insurance and estate planning focus on the value of life insurance to your heirs. Not this one. Instead, let’s consider insurance to protect your income and assets now, and to shield your executor later.

What happens if you’re in a car accident with serious injuries or death – and it’s your fault? Expect to be sued, and to pay a large judgment. Every driver is at risk of losing bank accounts, stocks, bonds, mutual funds, rental property, and other non-exempt assets to a lawsuit.

In Texas, you may keep your homestead, pension, retirement accounts, annuities, and life insurance. However, cash distributions are not exempt, and may go to the alert creditor. You may have substantial non-exempt assets, but what good are they if you cannot spend them?

As a rule of thumb, carry liability insurance equal to your non-exempt assets plus five to ten years of income. Suppose you have a home, an IRA, a modest checking account, and $300,000 in CDs. The home and IRA are exempt from creditors’ claims. The CDs are not. That suggests at least $300,000 in liability insurance. If Social Security and IRA income total $50,000 a year, another $250,000 to $500,000 in liability insurance is indicated. Even someone of modest means may want $500,000 to $1 million in liability insurance.

The typical automobile or homeowners’ policy offers no more than $500,000 in coverage. However, our agent can often provide an inexpensive umbrella policy from the same carrier with limits of $1 to $5 million, which is more than enough for most people.

Suppose you stop driving, pay off the mortgage, and die, judgment-free, without any liability insurance. Who cares at that point? Your executor should. An executor is a fiduciary with the most dangerous, thankless task known to law. They must collect all your assets, pay all your debts, distribute the remainder to your beneficiaries and make no mistakes. As one summarized it, “Whatever happens, it’s the executor’s fault.”

Both liability and property insurance will go a long way to protect the executor, and, ultimately, your heirs. New executors should review the estate with an insurance agent. Existing policies may be adequate. If not, the executor may obtain insurance at the estate’s expense. Better though, that you yourself review your insurance, and develop a plan to protect yourself in retirement. Doing so minimizes everyone’s risk, and leaves one less task to be done when you’re gone.