Wealth Management

Starting 2017 with a Fresh Perspective and a New Motto

The 2017 new year: A time to refresh one’s perspective on the financial markets, both past and future. If you heard on the radio or saw on TV or a website that the Standard & Poor’s 500 Value Style Index was up 17% or more than 5% greater than the Standard & Poor’s 500 Index, would you expect your whole portfolio to have performed the same? If you read that the Standard & Poor’s 600 Index of U.S. small company stocks was up 26.5%, would you expect your total portfolio to be up 26.5%?

Hopefully, your answer is no because you understand that although your portfolio may emphasize value-style and small company stocks, they are only parts of the total portfolio.

Likewise, if you read that foreign developed market stocks were up 2.45%, would you expect your total portfolio to be up 2.45%? If you read that the Bloomberg Barclays U.S. Aggregate Bond Index was up 2.65% for the year but down nearly 3% in the fourth quarter, would you expect your total portfolio to have done the same?

In all cases, the answer is no because a broadly diversified portfolio provides a smoother ride and more comfort for investors by minimizing the peaks and valleys along the road. Your broadly diversified portfolio won’t top the charts in any given year, but it is designed to provide a competitive return above inflation to increase your purchasing power over five-year and longer time periods.

ACWI: Write it down or enter it in your smartphone or computer. It is the stock symbol for an ETF (exchange-traded fund) that tracks the MSCI ACWI IMI global stock market index. ACWI stands for All Country World Index, which includes U.S. and foreign stocks of all sizes. For the record, the ACWI was up 8.4% in 2016. We need to start a campaign to have TV, radio and internet outlets announce this index every day and not just the Dow, S&P 500 and NASDAQ, which are all U.S. large company stock indexes.

Calendar 2016 provided the swing in the pendulum that we have been waiting for in terms of superior returns for two of the factors we emphasize in our portfolios: value-style stocks and small company stocks.

Dividend growth has also rewarded stock market investors in 2016, albeit more modestly than in 2015. Companies increase their cash dividends as revenue and profits increase, and this rewards investors separately from share price changes. Stock dividend income has also proven to be a pretty reliable source of income and offers growth in income better than bonds.

Here are the annual dividend growth percentage increases for 2016 versus 2015 for commonly held mutual funds:

One Year Five Year Annualized
Vanguard Total Stock Market Admiral Shares: +7% +5.5%
Vanguard 500 Index Fund Admiral Shares: +5% +4.8%
Vanguard Dividend Appreciation Fund: +1% +7.8%

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Turning to the future, what is our outlook? Our crystal ball is no clearer than yours, and we do not make future forecasts. Nonetheless, some basic data serve as indicators.

Inflation remains low but perked up in 2016, measuring 1.7% for the 12 months ending 11/30/16, compared with 3% to 4% long-term historical averages. Inflation is projected to be about 2% annually over the next five to 10 years. Low inflation is good, but it can result in low interest rates for investors.

The S&P 500 P/E ratio is 25, which is high and indicates below-average future returns.

The S&P 500 dividend yield is 2.1%, which is low, but close to five-year U.S. Treasuries.

International stocks, both developed and emerging markets, provide better stock market valuations than U.S. stocks and therefore better future growth potential. Time will tell when the pendulum will swing back in favor of international stocks, and patience may be required over the next few years. The strength of the U.S. dollar versus foreign currencies continues to weigh down international profits converted back to U.S. dollars.

Emerging markets are particularly affected by low commodity prices in oil and metals.

Interest rates remain low, and any future increases are expected to be slow and modest.

The key benchmark for any investment portfolio should be inflation and maintaining and increasing purchasing power through price appreciation and increased dividend income.

With low inflation and a slow-growing economy, investment returns are likely to be lower in the years ahead. While historically inflation was 4% and investment returns of 6% to 8% were targeted, with an expected 2% inflation rate, portfolio investment returns of 4% to 6% will achieve the same result.

Our motto for 2017: Investors should adjust investment return expectations to be more modest but be confident that long-term goals are still achievable given low inflation.

Remember a few key lessons for 2017:

  1. Successful investing is a contrarian process. Sell high, buy low and be willing to do what your gut tells you not to do. Don’t follow the crowd.
  1. Successful investing requires a tolerance for volatility and a long-term focus.
  1. A strategic asset allocation in a broadly diversified, multi-asset portfolio emphasizing passively managed funds is a sound investment strategy.

As always, please contact us with any questions, news or comments.

Financial Planning Must Be Inspired by the Heart

With February comes the celebration of St. Valentine's Day, which leads us to highlight a financial planning belief that isn't commonly considered: Successful financial planning must be inspired by the heart. Financial planning takes time and effort and requires the sacrifice of today's pleasures for tomorrow's. Why would we do this? We do it because of our heartfelt desire for financial peace of mind for ourselves and because of our love for those most near and dear to us. Have you ever thought of financial planning this way?

What Does Your Heart Want?

There are many things we "should" do or "want" to do but, in reality, we only get done what we truly commit our hearts to accomplish. Think of the priority you assign to:

  • Your relationship with your spouse or significant other
  • Your relationship with your family
  • Your relationship with your friends
  • Your mental well-being
  • Your physical well-being
  • Your spiritual well-being
  • Your career or avocation
  • Your financial well-being

It's OK to Ask for Help

Some people can accomplish all they want on their own. Most cannot, due to limitations in expertise or time. Most people need some help from other people.

For example, some people enhance their physical well-being with the benefit of a coach or trainer or by being on a team for support. Since personal financial planning is confidential by nature, it is hard to achieve in a group setting. You can do financial planning on your own, but most people don't have the time or expertise. There are also behavioral finance obstacles that are best managed with help from another person's perspective. In other words, you may need another person's insight before you can see how you need to change your behavior.

A CERTIFIED FINANCIAL PLANNERTM professional is best qualified to serve your comprehensive personal financial planning needs.

Put your heart into it today. Your financial peace of mind will be greatly improved.

"Successful financial planning must be inspired by the heart."
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About Bruce J. Berno, CFP®
Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

High-Income Individuals Must Save Beyond Contribution Caps

Do you let the government set your goals?

It seems that when it comes to retirement savings, many people do.

Many individuals save 3% of their income for retirement because that's what the government recommends to employers as a "safe harbor" contribution. Yet it's important to know that the contribution level considered "safe" for the employer is not necessarily safe for the employee.

Other people save 6% of their income for retirement because that's what their employer will match. This percentage, however, more likely reflects what's required of the employer to remain competitive and attract qualified employees rather than reflecting the actual needs of their employees. So what does 3% or 6% have to do with your retirement security?

Evaluating Your Yearly Retirement Savings

The amount you should contribute toward your retirement every year is influenced by many factors:

  • Age when you start saving for retirement
  • Amount of debt you have
  • Stability and predictability of your income
  • Future growth in income
  • Current marginal income tax bracket
  • Standard of living, both now and in retirement
  • Total income level (which can be capped)

Limits on Defined Contribution Plans

Congress sets total dollar limits on the amount you can save in tax-deferred qualified retirement plans. For defined contribution plans, in general, these limits in 2013 are:

  • $17,500
  • $5,500 extra "catch-up" contribution if you are age 50 or older
  • $51,000 defined contribution limit for employee and employer total

Here's the kicker: The maximum compensation for defined contributions plans, in general, is $255,000 in 2013. Therefore, if your income is over $255,000, the contribution limits have even less merit as a guideline for adequate retirement savings.

One lesson rings clear: If your income is over $255,000, additional savings and investments beyond the contribution limit of a traditional profit-sharing 401(k) plan may be needed to provide you with a retirement that is in line with your accustomed manner of living.

The time to plan for achieving a comfortable retirement is now.

"A contribution level considered 'safe' for the employer is not necessarily the same for the employee."
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About Bruce J. Berno, CFP®
Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

Personal vs. Web-Based Financial Advice

Technology is a wonderful thing. It has dramatically improved our access to information. But is it a double-edged sword? Is information the same as advice? Can the web be a substitute for, or a supplement to, personal advice?

Ask yourself the following:

  • Would you see a doctor for medical advice or do a web search?
  • Would you consult an architect to design your house or pick a blueprint from a website?
  • Would you consult an accountant for a tax question or rely on the IRS website?

While you could rely on the web for any of the above, should you?

We live in a complicated world, but we are fortunate to have experienced, knowledgeable professionals in many specialties. The web can supplement, but not replace, personalized professional financial advice.

At Berno Financial Management, our goal is to give you the advice that you need, tailored to your specific situation, or to refer you to a specialist when needed and then coordinate implementation of that advice.

Personal, professional advice should always put your interests first. Can you trust the web for that?

About Bruce J. Berno, CFP®
Bruce J. Berno, CFP® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.