Insights: quarterly newsletter from RKL Wealth Management LLC (Spring 2016)
A Message to Our Clients
The first quarter of the year is a time of renewal. It begins with New Year’s resolutions and ends with the promise of a budding spring. This quarter also marked a renewal of sorts for our individual firms as Kuntz Lesher Capital and Sterling Financial Advisors celebrated a formal rebranding under one moniker, RKL Wealth Management.
As our firms experienced significant growth individually over the years, we recognized the opportunity that collaboration and mutual support presented. This rebranding is a way of formalizing a relationship that has been built on an informal basis over the past several years. By joining forces we now offer our clients a team of 19 professionals with a combined experience of more than 200 years in the financial services industry.
While this name change won’t impact the relationship you have with your current advisor, it does allow us to provide a broader array of services to our clients. A prime example of this is the Chicago Clearing Corporation (CCC), which you can read more about on page four. If you’re not already taking advantage of this opportunity, you’ll receive a related form in the mail, along with our annual Form ADV offering, in the next few weeks.
This quarter’s economic update highlights the extreme volatility of this past quarter, which ended up with the S&P 500 in almost the same spot it started.
Spring also marks the beginning of the Free Application for Student Aid (FAFSA) season for those households with college age students. Judson Meinhart provides some insight on student debt with a list of things to keep in mind with filling out your FASFA, and a few pointers for households who are just beginning the college search process.
We hope you enjoy this quarter’s edition of Insights. As always, if this recent spat of volatility has left you feeling like it’s time to review your portfolio, or you’ve experienced another life change that requires a review of your financial plan, please give us a call to schedule a quarterly review meeting.
Plan Now to Avoid Future Student Loan Debt Pitfalls
By: Judson S. Meinhart
It’s financial aid season, with college applicants and their families filling out the Free Application for Federal Student Aid (FAFSA) to find out how much federal student aid they’ll receive. For the majority of students, however, this aid will make up only a portion of the funding needed to cover higher education costs. Many will turn to student loans to cover the difference.
It is important that prospective borrowers and their families remain vigilant about borrowing for college in order to avoid the financial burden of large student loan debt down the road. Here are some key considerations to help manage student loan debt wisely.
Consider Price of Schools
There are a lot of factors that go into selecting an institution of higher education, but be sure to include price among them. Review all options with an eye for value, and consider an option that has worked out financially for many students: two years at a community college. Many credits can be obtained at a two-year school for a fraction of the cost, as long as they are transferrable. The price tag of a chosen school will impact the amount of loans that may need to be incurred.
Explore All Financing Options
There are ways to limit the amount borrowed, such as paying what is possible from existing savings or cash flow, applying for all possible scholarships, aid or grants, and using education tax credits when applicable. Students can help reduce the amount borrowed by earning or saving money while in school. For example, early graduation cuts down on tuition costs, work/study programs can help generate income during the semester, and room and board costs are eliminated if the student lives at home.
Recognize Types of Loans
For most students, loans are a necessary financial tool. There are important differences in the types of loans available, so make sure to consider federal loans first. These loans offer better terms than private student loans. Parents can also explore taking out a federal PLUS loan up to the full cost of the education. Keep in mind that PLUS loans typically carry a higher interest rate, and cannot be transferred from parent to child, which means the parent is solely responsible for repaying the loan. When exploring financing options, however, it is critically important that families avoid drawing down retirement funds. After all, students can take a loan out for school but parents cannot take out a loan for their retirement expenses.
Estimate Monthly Cost
To help students and families get a real-world sense of what loans will truly cost, break it down into monthly payments. Seeing how much will need to be paid back each month can help determine affordability. For instance, a $40,000 loan translates into a monthly payment for $410.52 at 4.29 percent over a 10-year fixed term.
Understand Impact of Student Loan Debt
Whether you are a recent college grad looking to purchase a first home or an empty nester looking to downsize, repayment of a student loan can have a negative impact on your credit worthiness. Lenders utilize a metric called debt-to-income ratio (DTI) to measure credit worthiness. DTI is calculated by dividing total monthly debt payments by gross monthly income, which include student loan, auto, and minimum credit card payments in addition to housing costs (mortgage and property taxes or rent). As a rule of thumb, a DTI of less than 36% is ideal, and a DTI of more than 43% can prevent you from being eligible to receive a qualified mortgage from certain lenders.
Economic Update: When Volatility Equals Fear, Don’t Panic
What a wild quarter. All markets across the globe seemed to be in free fall as U.S. stocks, international stocks, oil and other commodities kept falling lower. The only things going up were gold and government bonds — a classic selloff of risk assets and a flight to quality. At one point the S&P had declined 11.2%, only to rally back to break even on the year as of this writing, but it was by no means a smooth ride from point A to point B. Let’s recap:
- 12/31/15 – 01/20/16: -11.2%
- 1/20/16 – 02/01/16: +7.44%
- 02/01/16 – 02/11/16: -7.04%
- 02/11/16 – 03/17/16: +12.73%
We can point our fingers at many things around the world as to what caused this volatility: China’s economy slowing, renewed fears of a banking crisis in Europe, China’s devaluation of the Yuan, recession risk, etc. One interesting hypothesis focuses on the sovereign wealth funds of OPEC (Organization of the Petroleum Exporting Countries). For those that do not know, a sovereign wealth fund is a government owned investment fund that exists from the sale of national assets, the most common being oil. When OPEC and other nations sell oil to the world, they receive U.S. dollars as oil trades in U.S. dollars only. Instead of sitting on a pile of U.S. dollar bills, they will use those dollars to buy U.S. assets with them — mostly stocks, bonds and maybe real estate.
Some data suggest that much of the selling we’ve seen in 2016 was coming from sovereign wealth funds, many owned by very wealthy OPEC nations. And while some of those nations can produce crude very cheaply, they cannot fund their significant social programs (healthcare, education, etc.) without hefty profits. When oil profits drop, as they will do when crude prices drop, these countries must find other means for funding their governments. One easy way to make up for that shortfall is to sell off investments from your sovereign wealth fund.
Many people will argue that low oil prices should be good for the economy and the markets, so it doesn’t make sense that oil and stocks have become so highly correlated. It is true that users of oil, such as industrial and transportation companies, as well as consumers, benefit from lower oil prices. Only energy companies should be struggling, and since they only make up about 7% of the S&P 500 Index, it doesn’t seem like they should be driving equities. However, if the above is true, it makes much more sense of the recent correlation between stocks and the price of oil.
The magnitude and velocity of the recent selloffs and rallies create what is a classic “whip-saw” environment where the selloff is painful enough that it makes most investors want to sell at the wrong time, and the ensuing rally is enough to entice those who sold to get back in. Selling low and buying high is a really good way to lose your capital over time. This is why we always recommend not to panic or overreact to short-term market volatility, and stick to your long-term plan. You need to be aware that your emotions are not your friend when it comes to investing. Part of our job during these times is preventing you from succumbing to this and acting as a voice of reason.
While we seem to have gotten a reprieve from market volatility at the moment, we do not believe it is done for the year. In fact, short bursts of high volatility may start to become more of the norm over the next five or so years compared to the previous five years where volatility was low, and markets just trickled up. We do not feel there is recession risk here at home, but there is still plenty of uncertainty out there that will keep volatility elevated. We reiterate: stick to your long-term plan, and don’t let short-term volatility get the best of you.
RKL Wealth Management Partners with Chicago Clearing Corporation
Thanks to a recent partnership with Chicago Clearing Corporation (CCC), RKL Wealth Management clients can now benefit from enhanced securities litigation and recovery services.
Given the ever-increasing volume of litigation notices that clients receive and provide to their financial advisors at RKL Wealth Management, we sought to partner with a securities recovery firm with an unmatched track record in class action settlement. CCC met all of our criteria.
CCC is aware of every pending litigation regarding securities currently in process – a number that currently stands at 1,117. In addition, there are 982 cases that have moved from “pending” to “settlement.” In the short time that we’ve partnered with CCC, they have filed claims for seven different cases that were not on our radar.
There is no ongoing fee for their services. Instead, CCC receives 15% of any successfully filed claim. Since many claims go unfiled, we are confident that our clients will recognize the benefit of this value-added service. We hope you take the opportunity to “opt-in” so you may be included in this service. In the next few weeks, you will be receiving an “opt-out” form in the mail. We recommend that you opt-in, which you do not need to sign or return the form to do so. We welcome your questions about this service offered through CCC and RKL Wealth Management.