A1A Wealth Management, Inc.

January 3, 2011 Comments off
Spend more time doing what you love!
 A1A Wealth Management, Inc. is an independent fee-based financial planning and business consulting firm located in Fernandina Beach, Florida. 
Mark Dennis
Certified Financial Planner™ 
A1A Wealth Management is a Registered Investment Adviser in the state of Florida.



Tips for Improving Your Credit Scores

October 17, 2013 Comments off

Visa_CardAmericans have become more informed about certain aspects of their credit scores, but many still don’t know enough about the risks associated with low scores and alleged “credit repair” services.1

While a majorty of consumers know some of the basics about credit scores, many are still unclear about some of the most important facts. For example, a majority of respondents knew that mortgage lenders and credit card issuers use credit scores. However, less than 40% knew that many other service providers also use these scores, including landlords, home insurers, utility companies, and cell phone companies. A sizable minority also falsely believe that credit scores are influenced by their age (43%) and marital status (40%).

What You Can Do

A typical credit score will range between 300 and 850 points. Although all lenders make decisions based on the particulars of the lending situation, generally speaking, the higher your score, the lower the perceived risk to the lender, and the more attractive the interest rate you will be offered. A score of 680 or lower will make it more difficult for you to get approved for credit and will probably increase the interest rate you are offered.

Here are some tips for raising or maintaining a higher credit score:

  • Pay your accounts on time. Lenders are looking for a proven track record of making timely payments. Payment history determines about 35% of your credit score.
  • Keep your balances low. About 30% of your score is determined by what the industry refers to as your “credit utilization ratio,” which is the amount you owe in relation to the amount of credit available to you. If that percentage is more than 50%, your score will be lower.
  • Open a credit card account. While many Americans are turning to prepaid credit cards or debit cards to help them better manage their finances, this can work against your credit score. Without any credit history, you could be considered “unscoreable” and may have difficulty in obtaining credit.
  • Don’t open too many credit lines in a short period of time. Each time you apply for a loan or credit card, the lender will make an inquiry into your credit score, which typically knocks points off of your score.
  • Hold on to older, unused accounts. The longer an account has been open and managed successfully, the higher your score will be.
  • Don’t default on your payments. If you default on a loan — such as when you file for bankruptcy or a bank forecloses on your home — it can knock up to 100 points or more off of your credit score.
  • Maintain a diversified credit mix. If you hold an auto loan, a home mortgage, and credit cards that are well managed, you will generally have a higher credit score than someone whose credit consists mainly of finance companies.
  • Beware of credit repair companies. The Consumer Federation of America warns consumers away from these companies, saying that they overpromise, charge high prices, and perform services, such as correcting credit report inaccuracies, that consumers could do themselves by simply contacting the lender and the credit bureaus.
Best regards,
Mark Dennis, CFP®
(904) 491-1889  
It’s not too late!  You can still download your 2013 “Last Chance” Financial Planning checklist.  Use it to remind you about important facts and deadlines concerning taxes, investments, retirement, insurance, and other important milestones you should pay attention to before the year ends.
Please don’t keep us a secret!  Feel free to share this information with friends, family, and colleagues.
Source/Disclaimer:1Source: The Consumer Federation of America, Credit Score Knowledge 2013, May 2013.

Required Attribution
Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2013 S&P Capital IQ Financial Communications. All rights reserved.

What Are Your Rights as the Beneficiary of a Trust?

October 15, 2013 Comments off

Magnifying glassIf you have been named as a beneficiary of a trust, you probably have many questions about what comes next. Trust beneficiaries are usually entitled to income from the trust. The trustee who is in charge of the trust is responsible to make sure that assets from the trust are invested well and productively. The following are some of your rights.

  • The right to an accounting of investments: Trustees typically decide how the principal of the trust will be used. As a result, the law requires that trustees act prudently with investments, diversifying so that all the assets of the trust are not in one place, which would put them at risk and could limit returns. If you have questions or concerns about the trustee’s decisions for the investments, you have the right to request an accounting of investments. This accounting report will detail every investment and its gains and losses.
  • The right to receive annual trust reports: Trust reports contain information that includes the income that was produced by the trust and expenses and commissions paid out. Traditionally, these reports should be mailed out annually.
  • The right to request a new trustee: If a trustee is being difficult, uncooperative, or refusing to do the job, you can request a new trustee. This typically requires a legal filing and a ruling by the court. If the reason for the request is because of large losses of principal, the trustee also may be required to repay the trust if he/she was found to be liable.
  • The right to sue the trustee: The trustee can be held liable for loss of trust assets and for income that would have been earned but for the wrongful conduct by the trustee. The trustee has a fiduciary duty to manage the trust with due care and caution and must be loyal and impartial to the beneficiaries.  
  • The right to terminate the trust: If all the beneficiaries on a trust are “adults of sound mind,” the trust can be terminated if the court determines that the intent of the creator of the trust has either already been accomplished or cannot be accomplished for reasons such as impossibility. All the trust beneficiaries must agree, including those beneficiaries of the trust that are entitled to the remainder of the trust assets after the trust would have naturally ended. Some trusts are difficult to terminate, such as spendthrift trusts where the settlor clearly intended that the trust assets be withheld and protected from the beneficiaries and their creditors.

Being named as a beneficiary of a trust is indeed a welcome event, but not without its complications and, if handled improperly, unfortunate consequences. For help understanding your rights and protecting your inheritance, it may be wise to engage the services of an experienced trust attorney.

The information in this communication is not intended to be legal advice and should not be treated as such. Each individual’s situation is different. You should contact your legal professional to discuss your personal situation.

Best regards,
Mark Dennis, CFP®
(904) 491-1889   
It’s not too late!  You can still download your 2013 “Last Chance” Financial Planning checklist.  Use it to remind you about important facts and deadlines concerning taxes, investments, retirement, insurance, and other important milestones you should pay attention to before the year ends.
Please don’t keep us a secret!  Feel free to share this information with friends, family, and colleagues. 
Required Attribution
Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2013 S&P Capital IQ Financial Communications. All rights reserved.

Interest Rates are Trending Up. So What?

October 11, 2013 Comments off

sunriseIf you haven’t already, you will soon be hearing alarming reports of the “dramatic rise of Treasury bond rates,” and the breathless implication in the articles and on the financial cable programs will be that this will have a disastrous effect on bond owners and the economy in general.  Higher interest rates!  More inflation!  Lower economic growth!  More interest on the ballooning federal debt!  More competition for the stock market, and therefore lower stock prices!

If you look at the recent rise in 10-year Treasury rates in isolation, as several commentators have done (see Chart 1), it does indeed look remarkable: a rise of more than 70% from a May 2 low of 1.63% to somewhere in the neighborhood of 2.90% as you read this.  If the Dow were to jump that far, that fast, it would have risen from 14,500 to more than 25,500.  Yikes!  Maybe the headlines are justified after all!

But if you put the recent rate rise into a longer-term perspective (see Chart 2), the recent “dramatic rise” looks awfully puny compared with some of the long-term swings in market history, and the current rate still looks quite reasonable.  The high percentage shift is more a reflection of how low rates had gotten than a rise to dramatic heights.

So what’s really going on here?  You probably know why bond investors are asking for an extra 1.3% a year out of their longer-term fixed income investments these days: nobody knows when the Federal Reserve Board is going to stop buying Treasuries, or what, exactly, will happen when the elephant jumps off of the see-saw.  The Fed’s most recent meeting minutes suggest that it will be cautious about winding down its QE bond buying program.  And you can bet that Fed economists will be watching the market for signs of impending damage, and curtail their curtailment if they seem to be causing a ruckus.  But that still leaves a bit of uncertainty about where rates will go.

All professional investors know for sure is that when a big buyer walks away from the marketplace, gradually or not, there will be less demand for whatever they were buying than there was before. Therefore bond issuers–including the U.S.–will have to pay more (i.e., higher yields) to lure in the fewer remaining buyers.

How much more?  In other words, how much higher will bond rates go?  How much will the bonds you own today lose value during the messy pullback from QE stimuli?  We can make this second question easier to answer by simply pulling money back away from longer-term bonds until the dust settles, leaving it to the experts and institutional buyers to make educated guesses and read the tea leaves.

But you have to answer the first question in order to know the answer to the obvious third one: what other consequences will rising bond rates have on your other investments?

When market forces get back in control of the bond markets, they will be responding to three things: how scary are the alternative investments (and therefore how much do I want to put in bonds)?  What is the current and expected inflation rate?  And finally: where do I want to be on the yield curve?  (Are the longer-term rates attractive enough to lure you away from the relative safety of shorter-duration bonds?)

Right now, inflation is pretty low, in part because the high joblessness rate is making it harder for workers to ask for huge raises, in part because the banks have a lot of money to lend and not a lot of people asking to borrow it.  A recent report notes that an astonishing 82% of the U.S. money supply is currently on deposit at the Fed, mostly in accounts held by large banks.  (To put that in perspective, the average percentage from January 1959 through the end of 2007 was 6.18%.)  By the laws of supply and demand, banks don’t have a lot of leverage to demand high rates of interest.

If you believe that the unemployment markets are going to tighten up dramatically in the fairly near future, and that somehow millions of people will want to borrow most of the global supply of dollars, then you can project a high inflation rate.  If not, then you should probably not worry about an explosion in the inflation rate for the foreseeable future.

When you’re talking about alternatives to bond investments, you’re mostly talking about stocks.  If we see another Fall of 2008 scenario, people are going to flock to government bonds and drive rates lower.  About the only thing we know about the Fed’s decision-making process, from its notes and internal policy debates, is that it is only going to start exiting its QE program when it thinks the economy is healthy.  If the stock market starts to look edgy, or the U.S. starts sliding back into recession, you can bet that the Fed will want to keep interest rates low and be a tad more gradual about ending its QE activity.

As to the yield curve, at the moment, short-term rates on Treasuries and most other fixed-income vehicles are about as close to zero as you will ever see them again.  The Fed has announced that its policy rate is 0%, and until the economy gets fully back on its feet and unemployment comes down dramatically, this is likely to continue to be its policy rate.  The spread between 3-month T-bills and 10-year Treasuries is currently about 2.8%, which is nearly twice as high as the 1.5% historical average.  Can it go higher?  Yes.  On two occasions since January of 1970, the spread has reached as high as 4%.

If you add up all these clues, you come out with something very different from the disaster scenarios you’ll be hearing in the news.  The Fed is planning to stop buying Treasuries at some point in the future, and let market forces take over–but only when it feels like the economy is healthy, and only so long as it can do this without harming economic growth or hammering the stock market.  The market forces themselves are unknown, but it’s hard to see how the ten-year Treasury bond will rise above 4%–or, to put THAT number in perspective, to the point where it is yielding about twice the dividend yield in the overall S&P 500 index.  That still looks like pretty weak competition for stocks.

So what we’re seeing in the bond market appears, if you can get away from the breathless headlines, to be nothing catastrophic.  Bond investors are demanding an extra 1.3% a year to compensate for all the uncertainty they face as they commit their money for the next ten years.  They may well ask for a bit more in the future.  Can you blame them?

 Best regards,
Mark Dennis, CFP®
(904) 491-1889


P.S. Please don’t keep us a secret!  Feel free to share this article with interested friends, family, and business associates.






Your Returns vs. the Market

October 3, 2013 Comments off

OLYMPUS DIGITAL CAMERAOne of the most misleading statistics in the financial world is the return data we are routinely given by the financial media, telling us how much investors made in the markets and in individual stocks or mutual funds over some time period. In fact, your returns are almost guaranteed to be different from whatever the markets and the funds you’ve invested in have gotten.

How is this possible? Start with cash flows. We are told that the S&P 500 has delivered a compounded return of about 7.8% from 1992 through 2011, which sounds pretty positive until you realize that this return would only be available to somebody who invested all his or her money at the beginning of 1992 and didn’t move that money around at all for the next twenty years. If you invested systematically, the same amount every month, as most of us do, then you would have earned a 3.2% compounded return. Why? A lot of your money would have been exposed to the 2008 downturn, and not much of it would have enjoyed the dramatic runup in stocks from 1992 to 2000.

In addition, there is the difference–only now getting attention from analysts–between investor returns and investment returns. Human nature drives investors to sell their stocks and move to the sidelines after their portfolios have been hammered–which is often the worst possible time to sell. And it drives people to start increasing their equity allocations toward the peak of bull markets when they perceive that everybody else is getting rich. That means less of their money tends to be exposed to stocks when the market turns from bearish to bullish, and more is exposed when markets switch from bullish to bearish.

This would be bad enough, but people also switch their mutual fund and stock holdings. When a great fund hits a rough patch, there’s a tendency to sell that dog and buy a fund that whose recent returns have been scorching hot. Many times the underperforming fund will reverse course, while the hot fund will cool off. The Morningstar organization now calculates, for every fund it follows, the difference between the returns of the mutual fund and the average returns of the investors in fund, and the differences can be astonishing. Overall, according to Morningstar statistics and an annual report compiled by the Dalbar organization, investor returns have historically been about half of what the markets and funds are reporting.

And then there’s the tax bite. Some mutual funds invest more tax-efficiently than others, and generate less ordinary income. Beyond that, if a fund is sitting on significant losses when you invest, you get to ride out its gains without having the tax impact distributed to your 1040. If the fund is sitting on large gains when you buy in, you could find yourself paying taxes on gains even if the fund loses money.

Best regards,
Mark Dennis, CFP®
(904) 491-1889

sources: http://www.forbes.com/sites/financialfinesse/2012/06/20/why-your-investment-returns-could-be-lower-than-you-think/



The Tax-Exempt Emergency Fund

October 1, 2013 Comments off

Tax-Exempt Emergency FundEverybody should have an emergency fund because, well, emergencies happen. You don’t have to tell that to the thousands of people who lost their jobs during the Great Recession, who suddenly had to pay their bills out of savings rather than a monthly paycheck. Cars break down, roofs and air conditioners need fixing, and there are probably a million other examples where you need money unexpectedly.

There’s an interesting debate among financial services professionals about how much money should be in that emergency fund. A rough consensus before the Great Recession was that everybody should have at least six months of living expenses in a cash account that is not exposed to the vagaries of the stock market. But so many people have been out of work for longer than six months, that there is a tendency now to recommend larger cash cushions.

At the same time, however, the cost of putting money on the sidelines has gone up in recent years. When money markets and short-term bonds were yielding 4%, putting a chunk of your portfolio into these sectors was far less painful than it is today. Many financial advisors are loath to recommend that you keep that much of your money in accounts that basically promise to give you your money back and nothing more. Professional advisors call this an “opportunity cost”–the difference between what you might earn in the stock market versus the fractions of pennies that money market funds are tossing their investors these days. The push and tug means that everybody is recommending a different amount of money to hold in reserve these days–and looking for a way out of the need-for-cash-in-a-zero-rate-environment dilemma.

One possible alternative making the rounds is setting up a Roth IRA and letting that gradually become your emergency fund. You can withdraw your contributions to a Roth back out again tax-free at any time, and the money can be invested in assets that actually generate a return without you having to pay any taxes on those gains.

There are several ways to do this. In 2013, you can make a $5,500 contribution to a Roth IRA, and unlike a traditional IRA, you will not get a tax deduction for the contribution. But also unlike a traditional IRA, you can withdraw that money back out again before you reach age 59 1/2. If you’re over age 50, then you can make a $6,500 contribution. Unless you’re living in a cave and foraging for your meals, that probably doesn’t equal six months of living expenses, but it does free up an equal amount from your cash account that can now be put to work in the markets. Gradually, a few years down the road, the Roth IRA account grows large enough that it can take over as your emergency fund.

Another possibility is to transfer some of your traditional IRA over to a Roth IRA–what is called a “partial rollover” among professional advisors. You have to pay taxes on the money that is rolled into the Roth, so this has to be handled carefully–there are conditions where you might pay more in taxes on the rollover than you would save in the long run. But in a year when you will be in a lower tax bracket, you might fill up that tax bracket by making a small partial rollover without triggering any higher taxes on your earnings, and over the years, this could raise the value of your Roth IRA to the point where it can be an effective emergency fund.

There are, of course, a few problems with this approach. First, if the Roth account is invested in the stock market, and the stock market goes down, so too will the value of your “emergency fund.” Over the long term, markets tend to go up, so this eliminates your opportunity cost, but if the markets drop, you should probably make up the difference in a side cash account, to be on the safe side.

A bigger issue is the pain your advisor will feel when you take money out of a permanently tax-deferred account to pay living expenses. Money in a Roth IRA is precious to anyone’s future; it represents assets that have been removed from the tax system, and can be passed on to heirs tax-free. If you have to dig into your Roth because you lost your job, a sensitive advisor might shed actual tears at the lost tax benefits.

Using a Roth IRA as an emergency fund is not a perfect solution to today’s market, because today’s market is so far from perfect. But it’s a solution you might consider exploring.

Best regards,

Mark Dennis, CFP®


(904) 491-1889




The Value of Education

September 26, 2013 Comments off

pencilsNow that the start of another college Fall term is upon us, you are no doubt hearing reports that young people matriculating from this or that prestigious alma mater last Spring are still having trouble finding jobs. The easy conclusion seems to be that a college degree doesn’t matter very much anymore in the new economy. But that, of course, is a short-term view; younger people have fewer job-related skills than people who have been employed for a few years, so they generally have trouble getting that first job no matter what their education level.

Older workers, who have presumably more experience in the workplace, tend to have lower unemployment rates than their younger competition. A recession like 2008-2009 simply reinforced a long-term pattern; it made the jobs situation worse for everybody. Today’s difficult job market continues to allow employers to put a premium on experience.

Longer-term, however, a college degree does seem to confer huge advantages for getting employment. Consider the most recent jobless statistics, broken down by education level:

  • Jobless rate for persons who have not earned a high school degree: 11.6%
  • Jobless rate for high school graduates with no college training: 7.4%
  • Jobless rate for persons with some college training or an associate degree: 6.4%
  • Jobless rate for persons who have earned a bachelor’s degree or higher: 3.9%

Longer-term, people who are educated at every level tend to be less likely to be unemployed than those with lower educational attainment. The better-educated also tend to earn higher incomes over their lifetimes–the most recent statistics compiled by the Pew Research Center suggests that the average high school graduate with no further education will earn about $770,000 over a 40-year worklife, compared with $1.4 million for a worker with a bachelor’s degree.

Parents reading this article, and graduates who are paying off enormous student loans, are no doubt wondering whether Pew was able to factor in the upfront costs of getting the college degree, plus the opportunity cost of four years (or more) spent on campus rather than in the workforce. Even when these considerable costs are factored in, the net gain for a student who graduated from an in-state four-year public university is about $550,000 over a person’s worklife. There are also various disparities in yearly earnings at different ages; at age 25, the differences are not huge, but over time, college education begins to create significant income separation.

Bottom line? Ignore the gloomy reports of college graduates having trouble finding work. This has always been a problem, admittedly made worse by today’s weak job market, but not an indictment of the value of a college education. Education, as George Washington Carver once remarked, is still the golden key that unlocks the doors of opportunity.

Best regards,

Mark Dennis, CFP®
(904) 491-1889




Real Banking Reform

September 24, 2013 Comments off

OLYMPUS DIGITAL CAMERABanks seem to be hogging the lion’s share of the profits in the American economy–the banking sector rakes in almost a third of the total profits earned by all corporations, and the four biggest banks have nearly 40% of all deposits. The total assets of the six largest U.S. banks have grown from about 16% of U.S. GDP to 65% today.

These largest lending institutions have grown so large using an unfair advantage in the marketplace. Because it is widely perceived that the government will bail them out no matter what incredibly stupid thing their leaders might do, lenders are willing to let them borrow at lower rates than you or I could. (What are the chances that the government will bail either of us out if we encounter financial hardship?)

The Bloomberg organization has calculated that the “too big to fail” doctrine effectively gives $83 billion a year of taxpayer subsidies to the ten largest U.S. banks; $64 billion to the five largest.

Even politicians seem to agree that this is unfair. In a rare display of bipartisanship in Congress, Ohio Democratic Senator Sherrod Brown and David Vitter, a Republican Senator from Louisiana, have introduced a bill that would eliminate these government subsidies that put taxpayers at risk for large bank defaults. What are its chances for passage? When the duo crafted a resolution calling for essentially the same provisions that are written into the bill, it passed 99-0 in the Senate.

The bill calls for measures that are so simple, you wonder why nobody has proposed them before. First, every lending institution with more than $500 billion in assets would have to hold at least 15% of its assets in liquid capital. This would end the highly-leveraged bets that institutions made leading up to 2008, that were orders of magnitude more than the money they actually had on hand. Banks would still be able to create tricky off-balance-sheet assets and liabilities, but under the new proposal, those would be treated as if they were on the balance sheet for purposes of the capital requirements.

Finally, and perhaps most importantly, derivative positions–complex bets on everything from the solvency of individual investments to directions in interest rates–would be treated as if they are on the balance sheet, and would have to be disclosed and counted toward that net capital requirement.

Of course, the largest U.S. banks–JPMorgan, Chase, Citigroup, Goldman Sachs, Morgan Stanley, Bank of America and Wells Fargo–are all vehemently opposed to these new provisions, and are denouncing the bipartisan bill through their hired lobbyists and legal firms. One pundit has cynically suggested that the volume of their lamentations will most likely be in direct proportion to the hourly rate they bill their clients. But these will be lonely voices in a debate whose conclusion seems kind of obvious. Vitter has remarked on the Senate floor that “Just about the only people who will not benefit from reining in the megabanks are a few Wall Street executives.”

Best regards,
Mark Dennis, CFP®
(904) 491-1889