A New Savings Plan to Help the Disabled Attend College: 529A

Millions of students will enroll in college this year, many using money from a 529 tax-advantaged savings plan to help defray the ever-growing cost of higher education. These plans have been in existence, in one form or another, since the late 1980s and have become the cornerstone for college financial planning. Two of the greatest benefits of 529 plans are: account earnings grow free from federal income tax, and withdrawals are tax-free as long as the proceeds are used for qualified higher education expenses.

Young disabled man studying at the table at home

What if significant disabilities stand between your child and college?

What if Disabled?

But what if significant disabilities stand between your child and college? Any family with a disabled member will tell you: even if college expenses are not in the future, it doesn’t mean significant educational expenses will not exist. Fortunately for these families, a new tax-advantaged savings plan was introduced in late 2014, through the Stephen Beck, Jr., Achieving a Better Life Experience Act, known by the acronym ABLE Act.

Long List of Covered Expenses

The plan, referred to as 529A or 529ABLE, is similar to an education 529 plan in that earnings on the contributions are not taxed as they accumulate and are tax-free when withdrawn if they are used to pay for qualified disability expenses for the designated beneficiary. The list of qualifying expenses is long, covering a greater range than 529 expenses, and includes education, housing, transportation, employment training and support, technology and personal support services.

Easier than a Special Needs Trust

Having a 529A account does not disqualify an individual from receiving federal and state aid for the disabled, such as Supplemental Security Income or Medicaid, as long as the amount held in the 529A does not exceed $100,000. This account can offer an easier, cheaper option than a special needs trust.

There are significant differences between the 529 and 529A plans. Final regulations for the 529A plan will be issued by the IRS later this year, and should be reviewed to determine if this plan could be right for your family. In the meantime, you can find more information by visiting http://www.savingforcollege.com/529-able-accounts/

Bond Market Outlook and Strategy 2016

In our last blog we shared an overview of our current thinking about the economy and the stock market this year. Here we will share our thoughts on the bond market. As always, please feel free to share your comments at the bottom of the page.

Vintage Bond - Background

Low Interest Rate Environment

The U.S. Federal Reserve raised interest rates for the first time in 10 years in December 2015 by one quarter point (0.25%). This was the first increase since June 2006. The historically-low interest rate environment over the last seven-plus years has created a demand for risk assets — one of the key drivers to the continued growth of equity markets.

The Federal Reserve has kept this low interest rate policy due to lower than expected U.S. inflation which has fluctuated between a calendar year low of 0.1% (2008) to as high as 3.0% (2011) through 2016. The Federal Reserve’s stated goal is to keep core inflation (based on Consumer Price Expenditures, CPE) above 2% annualized. Today the CPE is at 1.6% through the 12 months ended June 2016, so still under the Federal Reserve’s stated target.

Interest in Raising Interest Rates

The Fed’s interest in raising interest rates has been tempered by low inflation, a sluggish global economy, low oil prices, and by conflicts in a variety of both developed and emerging market economies. A strong dollar has also been a challenge for U.S. companies in terms of higher prices for U.S. exports.

The current 10-year Treasury yield has fallen from 2.27% at the beginning of 2016 to its current yield of about 1.56% and touched 1.36% in early July — a historic record low. Bell has lowered its expectation for an increase in interest rates and expects the 10-year treasury yield to remain in a range of 1.5% to 2.5% over the next 12 months.

Economic and Stock Market Overview 2016

As we enter the middle of the third quarter of 2016, we thought we’d share an overview of our current thinking about the economy and the stock market this year. Our next blog will address the bond market.

Global equity markets have been in a “bull market” (market in which share prices are in an extended uptrend) for the last 7½ years, since March of 2009 with the U.S. performing best among global indices. The U.S. market (S&P 500 index) is now in its third longest bull market in history.

An abstract closeup of two gold cast statuettes depicting a stylized bull and a bear in dramatic contrasting light representing a financial market trends on an isolated dark background

We view the current bull market as being in the latter stages of its life cycle. The valuation of U.S. stocks can be described as extended (though not in bubble territory yet). While U.S. corporate earnings have declined for the last four quarters, and sales growth has slowed, there are signs of improving conditions with forecasts for earnings moving back to positive territory in the latter half of 2016. As a result, we are cautiously positive regarding the U.S. economy and for U.S. stocks. We continue to favor U.S. over both Europe and Asia except for an allocation to Japan. Global issues, including BREXIT, have caused uncertainty in global markets making it unlikely that the Federal Reserve will raise interest rates quickly, if at all, in 2016. We continue to favor U.S. stocks, particularly dividend-paying stocks, over the rest of the world and believe the U.S. market can move higher for the rest of 2016 and into 2017 based on strong momentum and technical market indicators. However, we also expect more market volatility in the form of small downturns and corrections of between 10% and 20% as part of a normal market environment.

A point in favor of investing in Europe, Asia, and emerging markets in the future: An end to the bull market in U.S. stocks does not necessarily mean the end to the global bull market. Stocks are generally cheaper in nearly every locale outside the United States. Therefore, future weakness in U.S. stocks could simply mean a shift of investor focus from U.S. stocks to foreign stocks in search of more reasonable valuations and growth potential. We continue to look for investment opportunities outside the U.S. for signs of this transition.

Money Market Fund Reform

Driven by the 2008 financial crisis, the U.S. Security and Exchange Commission (SEC)SEC bldg has, in the last few years, implemented multiple rounds of reform regarding money market funds. These changes have been developed in an effort to increase fund liquidity and protect investors.

Financial institutions offering money market funds are required to implement the latest of these reforms by October 2016. The reforms involve:
1. A possible imposition of a liquidity fee of up to 2% and/or a redemption gate,
(which is a temporary suspension of redemptions for up to 10 business days)
2. The possibility of the share price dropping below $1
The rules vary somewhat among the three newly-established categories of funds:

Retail Prime and Retail Municipal Money Market Funds
Investors deemed to be “natural persons”, certain types of trusts, participant-directed retirement accounts, etc.
1. Funds are subject to a liquidity fee and/or a redemption gate.
2. Accounts are eligible for the constant price of $1 per share.
(Schwab will continue to seek to maintain a constant price of $1 per share).

Institutional Prime and Institutional Municipal Money Market Funds
Corporate accounts, certain types of trusts, non-participant-directed retirement accounts
1. Funds are subject to a liquidity fee and/or a redemption gate.
2. Price fluctuates and could drop below $1 or could be priced above $1.

Government Money Market Funds
For both retail and institutional accounts
1. Schwab does not plan to implement redemption fees and gates at this time.
2. Accounts are eligible for the constant price of $1 per share.

Charles Schwab, the custodian of Bell Investment Advisors’ client funds, began implementing the changes required by the SEC on June 1, 2016. No action is required by Bell or by our clients. If you have any questions, please contact us at 510.433.1066 or go to:


When Your Portfolio Isn’t Making Money

While preparing for our next gathering of The Women’s Roundtable later this month, “Keep Calm & Invest On: Taking the Emotion Out of Your Money”, where we plan to discuss investor behaviors and risk evaluations, we began to wonder what inherent reaction investors have in a market environment like the one we are experiencing  now — a highly volatile, low return environment. Let’s explain further.

Image of young businesswoman looks stressful with red stock exchange background

Safe or in Danger
As humans, we are built to perceive ourselves as either safe or in danger, and this concept can be applied to the markets. In years when the market is moving higher, investors perceive themselves to be safe and perhaps make poor decisions such as moving to a more aggressive strategy than his or her risk tolerance allows. When the market is moving lower, like it did to start this year with a correction of more than 10%, investors perceive themselves to be in danger and perhaps make poor decisions such as selling positions low.

The Question
This begs the question — how do investors perceive themselves when the market is rather flat and aimless?

The markets have done little since the beginning of 2015, with the MSCI All Country World Index declining -2.36% in 2015 and returning +2.30% YTD 2016 through June 3. Frustration with this lack of trajectory appears to be a common feeling among investors and advisors alike. Jeffrey Saut, Chief Investment Strategist at St. Petersburg, Florida-based Raymond James Financial Inc., which oversees $500 billion, was quoted in the Washington Post on May 23, 2016: “The past 19 months have been the most difficult stock market I have ever experienced in more than 50 years of investing,” In bear markets, “at least we knew stocks were going to go down. However, over the past 19 months the up one session, and down the next, has been extraordinarily frustrating.”

Frustration vs. Patience
This frustration may lead some investors to make poor decisions, just as the perception of being safe or in danger can. As maddening as slightly negative to slightly positive returns can be, years like these are not rare and can be expected about 10% of the time, according to the CNBC article “S&P 500 is Having a Dull Year, and That’s Good for Investors”, dated August 2015: “Going back to 1918, there are 11 instances of calendar years in which the S&P 500 was up or down by 3 percent or less, according to S&P Capital IQ.” Moreover, “In the subsequent calendar year, the market rose an average 13.3 percent and gained in price 82 percent of the time (nine of 11 instances), according to data from Sam Stovall, chief investment strategist at S&P Equity Research Services.”

We of course cannot know if solid positive returns are just around the corner or the opposite, but what we do know is that investing in the stock market has been the best way to grow wealth over time. The market is a resilient thing. If you have a long-term strategy that abides your risk tolerance and the patience to fight the urge for drastic action when you feel safe, in danger, or just down-right frustrated, we believe you will benefit from staying the course.

The Women’s Roundtable
If you’d like to hear more about investor behavior and how to limit emotional reactions during market movements, please join us for The Women’s Roundtable wine and cheese gathering on June 29 at our office in downtown Oakland.

More on Investor Behavior
You can also access more on the topic from our website resource center and from this blog:

“Mind Over Money Matters: How Our Psychology Reduces Investment Returns”
Bell webinar, September 2015

“Why Momentum Exists: A Perspective on Investor Behavior”
Bell white paper, October 2012

“The Endowment Effect”
Bell blog post, October 2014

“Stress is Good”
Bell newsletter article from The Opening Bell, July 2014

“Building a Better Bunker Portfolio”
Bell newsletter article from The Opening Bell, April 2012

“Momentum Investing: How to Gauge the Market’s Opinion of the Future”
Bell white paper, September 2011

Tax Season: Important Actions to Take

Bookkeeper.Tax season is upon us! As you know, that means you must file your taxes by April 15, unless you file for an extension. However, April 15 is also an important deadline for other financial matters.

April 15 is the deadline for making contributions to a Traditional or Roth Individual Retirement Account (IRA) for the tax year — in this case, 2015. If you did not make a contribution by December 31, 2015, you still have time. Unless you are subject to contribution phase outs*, you may contribute up to $5,500 (and an additional $1,000 if you are over the age of 50) to a Traditional or Roth IRA as long as you do it before the April 15 deadline.

Traditional and Roth IRAs have their tax benefits, but they differ from one another. With a Traditional IRA, you are able to defer taxes paid on earned income today and allow that money to grow tax-deferred. This can be beneficial especially if you expect your tax rates to decrease when you are older and in your retirement phase. As for a Roth IRA, you do not receive the tax deduction on today’s earned income, but the benefit is that your contributions grow tax-free. Roth IRAs are the better choice if you expect your tax rates to increase when you are in retirement and need to access the funds. The one caveat with IRAs, like most retirement accounts, is that you cannot gain access to the funds penalty-free before the age of 59½, with a few exceptions*. Before you make a contribution for 2015, be sure that you do not need that money for your current living expenses.

The tax benefits of contributing to a Traditional or Roth IRA are great, especially over a long-term horizon and if you are making regular annual contributions. So when you are filing your taxes for the April 15 deadline, do not forget to consider contributing to an IRA for 2015.

*If you have questions regarding the contribution phase outs,
exceptions to withdrawing funds from an IRA, or any other tax issue,
please contact your CPA.

2016 Politics and Central Banks

2016 has brought into focus politics and central banks simultaneously. The 2016 U.S. presidential primary campaign is unprecedented, according to many of the pundits, and central banks in Europe and Japan are experimenting with negative interest rates. The February 20 issue of The Economist raises the question of whether or not central banks are out of ammunition. Because economic recoveries from the 2008/2009 collapse are weak and inflation is low, the concern arises whether central bank actions work at all.

The Economist points out that central banks are not designed to do all the work. Central banks control monetary policy, which relates to money supply, inflation targets, and interest rates. Monetary policy has a sister named fiscal policy, which is the responsibility of governments (politicians) who control government spending and tax rates. Currently, central banks are doing all the work, and politicians are not carrying their weight. Fiscal and monetary policies can be very effective when they work together.

With borrowing costs at historic lows, U.S. politicians need to have the guts to lock in low interest rates and borrow to build strategic infrastructure, create jobs, and increase public asset values through investment. Central banks have had to act because politicians are weak and incapable. Politicians need to work together on comprehensive tax reform and productive, job-creating deficit spending. The national debt is not so onerous when long-term interest rates can be locked in at 2% to 3%. Not only is it not onerous, it is opportunistic.

TRIP, an American transport think tank, estimates that potholed roads in 25 American cities cost more than $700 annually per vehicle. This largely defeats the benefit of low gas prices that are saving U.S. households at least $1,000 per year. Partisan mud-slinging has rendered the U.S. government ineffective, which is why this presidential primary season is so bizarre and alarming.

Australia is experimenting with selling nautical ports and airports to private interests and using the money for other infrastructure improvements, creating jobs and improving asset values. One result is that the privately-run ports and airports are much improved, more productive, and more profitable.

Politicians in the U.S. and abroad need to engage in constructive actions with central banks, reform taxes, and invest in infrastructure. If the current partisan conflict and timidity continues, we may experience a devolution into fascism.

The United States’ Obsession with China

The main headline on the cover of the January 16, 2016 issue of The Economist reads: Everything’s under control: China, the yuan and the market. However, the accompanying cartoon image of a dragon plummeting downward with President Xi Ping holding the reins is far from reassuring. Why have the stock market, economic shifts, and currency in China come under so much scrutiny lately?

The tumultuous start to the year in the global markets has had many searching for its causation, and China has become a target. According to Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, at Charles Schwab, in the Schwab 2016 Market Outlook webinar of February 2: the link between the action on the Shanghai Stock Exchange and the U.S. markets is the strongest it has been since 2008. (The U.S. markets have also been closely correlated to the rise and fall in the price of oil, but that is fodder for another blog.)

The tight link between the Chinese and U.S. markets has been extremely detrimental to the U.S., given that the Shanghai Stock Exchange has fallen more than 20% in 2016 as of February 1. Also, we should mention the unfortunate shutdown of the Shanghai exchange on two days in January, which correlated with steep declines in the U.S. markets on those days. Trading halted for the remainder of each day when a 7% decline triggered circuit breakers. The People’s Bank of China (PBOC) is adapting to their role running the exchange, learning when to intervene and when not to, and although government intervention is very unlikely to cease, the circuit breakers have since been removed. This should relieve some of the market pressure on the Shanghai Exchange and, hopefully, reaction in the United States as well.

Many are concerned that the days of high single-digit or even double-digit growth in China are long gone and that this could result in a global meltdown. According to a CNBC article dated January 18, 2016, “China’s economic growth rate slowed to a 25-year low of 6.9 percent in 2015, as the world’s second-largest economy continues to shift away from its manufacturing roots.” As referenced, China is experiencing some transitional pains as it attempts to move from a manufacturing-based economy to a more service-based one like our own.

Are these concerns about the impact of China on global markets realistic? While a slowdown in China has some impact on the U.S. economy because multinational companies like Apple and Nike sell products there, the U.S. economy thrives largely because Americans are buying goods and services here in the United States. Outside of the multinational companies, the effect of a slowdown triggered by China’s economy is considerably muted. As James Surowiecki (staff writer for the New Yorker and author of the regular New Yorker column, “The Financial Page”) reports, U.S. exports to China are less than 1% of our GDP. Thus, the economic link between the U.S. and China is virtually absent, a fact which may come as a pleasant surprise to panicking minds.

We do not dismiss concerns about China not discussed here, including the weakening of China’s currency (the renminbi) and high levels of debt. All things considered, however, we believe that the reaction here in the U.S. is overblown. Certainly unwarranted is a reaction so strong that January marks the strongest link between our two markets since 2008.

Did You Make the Social Security Cut Before the Loopholes Closed?

You may have heard the chatter about some Social Security loopholes being closed as part of the budget deal struck by House Republicans and President Obama. This is a basic summary of what these changes are and how they might affect you.

The two key Social Security strategies that will no longer be available to most are “File and Suspend” and “Restricted Application”, which have been used by married couples for years to increase their lifetime Social Security benefits. Because these unintended loopholes have become very expensive for the Social Security Administration, particularly as more and more people have been taking advantage of them, the strategies are being dropped.

File and Suspend allows one partner to file for Social Security but then immediately suspend collecting it, thereby accruing a higher benefit for later and making the lower-earning partner eligible to receive spousal benefits during the period prior to reaching age 70 when the full benefit becomes available. The new ruling makes this strategy unavailable starting May 1, 2016 (180 days after the passing of the Bipartisan Budget Act of 2015). However, if a person turns 66 on or before April 30, 2016, they will be able to file and suspend and have their spouse claim a spousal benefit (given the spouse is 62 before December 31, 2015.)

Restricted Application allows the spouse with a lower benefit to restrict collecting their own benefits, which allows them to receive the spousal benefit instead. The new ruling makes this strategy unavailable for any spouse not reaching age 62 by December 31, 2015. A person turning 62 by or on December 31, 2015 will be able to file a restricted application for spousal benefits when he or she reaches age 66.

Act Now!
If you are within six months of reaching your full retirement age and your spouse turned 62 by the end of 2015, there may be action you need to take ASAP — before you miss out on what could mean thousands of dollars in spousal benefits.

Talk to your financial planner today if you are not sure of your eligibility or how this change in ruling affects you. We are reaching out to our eligible clients to take action before the April 30, 2016 deadline.

Actions Speak Louder Than Words: The Visit of China’s President Xi Jinping to America

President Xi Jinping of China arrived in America the week of September 22 (during the same time that Pope Francis and India’s Prime Minister Narena Modi were touring the U.S.) His first stop was Seattle to meet with 25 major U.S. business leaders, including Warren Buffett, Tim Cook, Mark Zuckerberg, and Satya Nadella. The September 19 issue of The Economist previewed the meeting between Xi and Obama as “nothing to smile about.”

Growing Tensions
From the U.S. point of view, there are several growing tensions with China:

  1. The alleged hacking by Chinese cyber spies in April of 22 million personal records of U.S. government employees’ (including CIA) from the Office of Personnel Management
  2. Accusations that China is manipulating its currency to make Chinese exports cheaper
  3. China’s island building for military purposes in the disputed territory of the South China Sea
  4. The U.S. presidential election candidates contributing to a rise in “China-bashing”
  5. The botched attempts in August by the Chinese government to prop up the Chinese stock market
  6. Americans worrying about the excesses and deceptions of Chinese state capitalism, making the term “state capitalism” an oxymoron.

When Xi met with U.S. business leaders in Seattle, they confronted him about the rampant theft of intellectual property that continues to take place; they complained about the Chinese demand that U.S. companies doing business in China transfer their technology to their Chinese partners; and they protested the many ways China unfairly discriminates against U.S. business. The main services of Google and Facebook are blocked in China, which is why Mark Zuckerberg met with Xi in Seattle and was seated next to him at the White House state dinner. (Incidentally, Zuckerberg’s wife is a Chinese physician, and both he and his wife speak Mandarin.)

Xi and Modi contrasts/Internet
In his meeting with U.S. business leaders, Xi was unwavering on China’s tough internet control and censorship. The contrast with India’s prime minister could not have been more striking: Modi regularly uses Twitter and Facebook, and he is taking the world by storm with his “Digital India” campaign. He implores U.S. business to help make India an “Internet powerhouse.” Like China, the Indian government engages in censorship, but it pales by comparison with China’s complete blackout of many services.

Although U.S. business still covets access to China’s huge market, when Modi and Xi are side-by-side, India shows up as more attractive. U.S. business is beginning to realize that India today is like China five years ago, and with a progressive leader like Modi, India looks very positive with less political baggage than China.

Unfortunately, Xi refused to admit to any hacking and cyber theft by the Chinese government, in spite of compelling evidence, but he did pledge to cooperate with the U.S. on cybersecurity issues with a signed agreement that “neither country’s government will conduct or knowingly support cyber-enabled theft of intellectual property.” Xi agreed to informational exchanges and legal cooperation for investigating cyber-crimes, including regularly scheduled meetings between U.S. and Chinese officials on cyber security violations. The agreement also established a hotline between the two nations should there be an escalation of issues. Xi also agreed to participate in the United Nations effort to establish appropriate norms of state behavior in cyberspace.

All this is well and good, but the editorial staff of The Wall Street Journal, September 28, 2015, is right to point out that all these agreements are tied to each country’s “respective national laws.” From the U.S. perspective, the Chinese Communist Party is above the law as it regularly invents interpretations to advance its power and control.

On the Bright Side
On the positive side of the ledger:

  1. China helped broker the nuclear deal with Iran in April (not everyone agrees that this is positive).
  2. China is supportive of America’s concerns about North Korea.
  3. President Xi is waging a strong campaign against corruption in China.
  4. Beijing has agreed to put a cap on carbon emissions and put a price on carbon for Chinese industries (virtually every country is now offering to pitch in to help limit carbon emissions).

The U.S. Government and the Obama Administration should exercise and pursue to the max the informational exchanges and legal cooperation China has agreed to regarding breaches of U.S. cybersecurity and the theft of intellectual property, as well as participate fully in regular scheduled meetings.

  1. The U.S. should impose sanctions on Chinese business if cybersecurity violations are not resolved appropriately.
  2. The U.S. should check and monitor the Chinese territorial grab in the South China Sea by practicing international maritime access standards.

The overriding question is:  Will Chinese actions follow Chinese words?