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Puerto Rican Bonds And The Small Investor

Puerto Rican Bonds And The Small Investor

The TV ads flash the noble faces of American retirees and urge Washington to help protect their savings. The back story is kept rather vague. It’s that many older people invested in Puerto Rican bonds. The U.S. territory’s economy is in deep crisis, and it has begun defaulting on this debt.

The question here: What prompted ordinary investors to put their savings into Puerto Rican bonds? But first let’s look at who is running the ads.

No, the retirees haven’t pooled their Social Security checks to make their case. These ads are being run by hedge funds and other big Wall Street players who made their own bad bets on Puerto Rico’s debt. They are now hiding behind the average Joes to press Washington for a bailout.

The obvious solution to this crisis is to let the island restructure its debt under U.S. bankruptcy rules — alongside a federal oversight board that would keep a close eye. States are allowed to declare bankruptcy, but as a U.S. territory, Puerto Rico needs congressional approval first. A bankruptcy would not cost the U.S. taxpayer anything.

This approach would also be the most humane. The setbacks for investors pale next to the trauma being suffered by Puerto Ricans. The island’s government has already raised taxes and cut spending on social services to the bone. Thousands, meanwhile, are fleeing to the U.S. mainland.

Turning the language around, the big financial interests are now calling the bankruptcy route a “bailout.” It’s not the first time they’ve forgotten the clause in capitalism saying that when an investment goes sour, the investors are expected to lose money.

Many average buyers of Puerto Rican bonds didn’t quite know what they were getting into. The bonds may have been rated as fairly safe at the time, but they were not something to put in a drawer and forget about.

In 2012, Morningstar issued a warning after the rating agency Moody’s downgraded Puerto Rico’s general obligation debt to just above junk bond level. “Moody’s does not believe that Puerto Rico enjoys the same level of fiscal stability as any of the official 50 states,” Morningstar wrote. “Even lowly Illinois GO debt is rated firmly within the investment-grade spectrum at A2.”

Study after study shows that the general public poorly understands the nature of risk. Small investors scooped up Puerto Rican bonds because they offered higher yields than U.S. municipal bonds and were exempt from local, state and federal taxes. When an investment with super tax advantages offers an unusually good yield, there’s a reason: It comes with risk.

Again we see the limitations of the “ownership society,” the doctrine that Americans should be managing their own money for retirement rather than relying on Social Security to send monthly checks.

Remember President George W. Bush’s push to let workers direct some of their Social Security taxes to stock funds and other privately run accounts? Skeptics questioned whether ordinary Americans had the expertise, but Bush assured them in fatherly fashion that he wouldn’t let them do crazy things with their money. There would be a list of acceptable investment vehicles.

Fortunately, the plan never got off the ground. In 2008, the market tanked, humbling the most conservative stocks alongside the high fliers. One shudders to think of the pitchfork parades that would have descended on Washington had people lost significant sums on their privatized Social Security accounts.

Yes, we should all save and invest, albeit with great care. At the same time, let us give thanks for boring old Social Security. It’s something to fall back on, just in case.

Follow Froma Harrop on Twitter @FromaHarrop. She can be reached at fharrop@gmail.com. To find out more about Froma Harrop and read features by other Creators writers and cartoonists, visit the Creators Web page at www.creators.com.

COPYRIGHT 2016 CREATORS.COM

Photo: Puerto Rico’s Governor Alejandro Garcia Padilla addresses the audience at the capitol building in San Juan, February 29, 2016. REUTERS/Alvin Baez

How Your Ego Is Sabotaging Your Retirement

How Your Ego Is Sabotaging Your Retirement

By Gina Horkey, GOBankingRates.com (TNS)

As diligent as you have been about saving for retirement, your ego might have been quietly working against you the whole time. Even the best-laid plans fail, and your retirement plan is no exception. Here are three ways your ego is rearing its ugly head and how you can regain control of your financial plan before you retire.

UNREALISTIC EXPECTATIONS

Many newly retired people find that their reality doesn’t live up to the grandiose dreams they had for their retirement. As you save for retirement, you should periodically give yourself a reality check.

Statistics show that you should lower your expectations and save more aggressively. According to a survey conducted by the Insured Retirement Institute, only 27 percent of baby boomers are confident that they will have enough money to last through their retirement (which is down from 33 percent a year ago).

If you find yourself part of this 27 percent, you will want to ensure that your confidence is not unfounded. One way to make sure that you are adequately prepared is to calculate your projected expenses — the costs to maintain your current home, transportation, health care, and other predictable expenses — and determine whether any changes to your current budget are necessary.

Don’t let overconfidence wrongly convince you that you don’t need to downsize your lifestyle. Few people have the ability to replace 100 percent of their preretirement income, but by eliminating nonessential expenses and saving for monthly bills and emergencies, your likelihood of building a substantial nest egg is greatly increased.

NOT MAKING TIME FOR TOUGH CONVERSATIONS

Doting on your grandchildren is easy. Having an honest conversation with your adult children about what your financial transition into retirement will really look like can be difficult.

It’s hard to go from raising your children to discussing finances with them — and perhaps even heeding their advice — but it helps to be candid with them. If your situation looks bleak, they might be able to help.

According to the Pew Research Center, nearly 23 percent of adults with retired parents contributed some sort of financial assistance during 2012, and 72 percent of those adult children said their contributions were for ongoing expenses. Regardless of your comfort level with your retirement account balances or your and your family’s busy schedules, you need to make these conversations a priority. In the event that you’re not as ready for retirement as you think, or the market unexpectedly goes south, you might be faced with looking to your adult children for some form of support, whether it’s financial or logistical.

FEAR OF DIVERSIFICATION

Just because you’re heading toward retirement doesn’t mean you have to settle for the same low-risk investments that everyone else seems to be chasing since the recent market downturn. You also don’t want to expose yourself to unwarranted risks that you won’t have time to recover from, however. A 2015 report from Fidelity Investments showed that baby boomers are keeping too much of their assets in the stock market — in fact, 10 percent of people ages 55 to 59 have all of their 401(k) assets in stocks.

To maintain a comfortable standard of living and maximize your retirement benefits, it is beneficial to seek out low-cost investments that offer steady returns while minimizing short-term risks. Consult a financial advisor about the benefits of diversifying beyond traditional stocks and bonds. Options like index funds, exchange-traded funds and blue-chip dividend stocks can provide adequate returns along with favorable expense and fee structures that make them viable alternatives for boomers.

Gina Horkey writes for GOBankingRates.com (), a leading portal for personal finance news and features, offering visitors the latest information on everything from interest rates to strategies on saving money, managing a budget and getting out of debt.

© 2015 GOBankingRates.com, a ConsumerTrack web property. Distributed by Tribune Content Agency, LLC.

Photo: 401(K) 2012 via Flickr

The Journey: Simplifying Investment Portfolio Is Key To Financial Stability

The Journey: Simplifying Investment Portfolio Is Key To Financial Stability

By Janet Kidd Stewart, Chicago Tribune (TNS)

Q: We are 80 years old, retired, with assets of $1.5 million. I was an accountant and a practicing lawyer and handle all our investments. Despite spending what we want, our portfolio has grown every year. We are fully invested, mostly in equities but about 25 percent in bond funds. I have life insurance of $250,000. What should I guide my wife to do if I predecease her? I want her to be protected.

Financial planners want a percentage of our assets, but I’m happy with the income we’re earning now on these investments and don’t want her to pay a percentage of the assets for advice. Should I look for a planner who charges by the hour who could look at these investments to determine what changes she should make?

A: It’s hard to argue with success, but I’ll try.

Managing to live only on portfolio income in such a low-interest rate environment has been difficult in recent years, to put it mildly. The investment risk you are likely taking is quite high, however, and as you age the potential for your own mental decline and the increased risk that you’ll leave your wife a portfolio that’s extremely difficult to manage grows substantially.

Finding a planner who charges by the hour is relatively simple, and the Garrett Planning Network is a good place to start, but that’s not to say your task is easy.

That’s because what you really seem to want is an investment manager to perpetuate the complex portfolio you’ve amassed, without her ever having to make a decision. From the many financial advisers I’ve interviewed over the years, I can tell you the likelihood of that plan turning out well is low. Most widows who weren’t involved in financial discussions with their spouses or advisers when the spouses were alive will end up finding someone else to manage the money, for better or worse.

Rather than trying to manage a portfolio from the grave, you might consider working with your wife to gradually streamline your investments into something that can be managed relatively easily if one or both of you has a health issue or begins to decline mentally. If you want to retain control rather than pay an adviser for ongoing management, consider consolidating your stocks and mutual funds at a firm that has access to low-cost, index mutual funds. Over time, you could migrate the money to fewer funds that offer broad access to the market sectors best for you.

The financial services industry has trotted out a smorgasbord of ways to manage money in recent years, with varying degrees of human interaction and automated services, and costs for all of it have been trending down.

“The complexity of his holdings could be a real problem, even with his background,” said Rick Mayes, principal adviser with Mayes Financial Planning in Carlsbad, Calif. “I think even if he’s going to continue to manage it primarily himself, they both will benefit by streamlining the portfolio.”

If you do go that route, an hourly planner could help you project your wife’s future income needs once she’s living on one Social Security check plus the investments. That might illuminate a need to lower the risk profile of the portfolio now, particularly if her health is good and she could live another 20 years.

Such a planner could also help simplify your holdings and make sure you have an income buffer in ultra-safe investments — Mayes likes three years’ worth of expenses — so that if something happens to you, your wife wouldn’t have to begin selling off investments immediately. If you both develop a good relationship with the planner, it might be something your wife sticks with after you’re gone.

“I would simplify now rather than wait,” he said. “I’ve had a number of clients come to me with inherited accounts that haven’t been touched in years. It kind of puts the survivor on a tough path if she’s not comfortable managing it the same way.”

—

Janet Kidd Stewart writes The Journey for the Chicago Tribune. Share your journey to or through retirement or pose a question at journey@janetkiddstewart.com.

©2015 Chicago Tribune. Distributed by Tribune Content Agency, LLC.

Photo: PRO401(K) 2012 via Flickr

Baby Boomers, Flush With Stock Gains, Drive Record Vacation Home Sales

Baby Boomers, Flush With Stock Gains, Drive Record Vacation Home Sales

By E. Scott Reckard, Los Angeles Times (TNS)

Bolstered by stock-market gains, affluent Americans bought more than 1.1 million vacation homes last year, according to an annual trade group survey — up 57 percent from 2013 and the most since the survey began in 2003.

The strong sales of second homes contrasted with a weaker year for purchases of principal residences, and also a decline in sales to investors.

Vacation home sales represented a record-high 21 percent of all home purchases in 2014, the National Association of Realtors said Wednesday.

California witnessed a contrasting trend, with the percentage of vacation home sales falling to just five percent in 2014 from six percent in 2013, according to a tally by the California Association of Realtors, which said sky-high housing prices impeded the sales.

Lotus Lou, a spokeswoman for the state group, said the methodologies of the surveys were similar.

The national lobbying group’s survey of about 2,000 homebuyers calculated that 2014 purchases by investors fell about seven percent to just over one million, and purchases by owner-occupants declined 13 percent to 3.2 million.

Aging baby boomers boosted the sales, buying homes they plan to retire to, often with help from investments in stocks whose value has jumped in recent years, said Lawrence Yun, chief economist for the real estate association.

“The steady rise in home prices has likely given them reassurance that real estate remains an attractive long-term investment,” Yun said.

The Realtor group said the typical vacation-home buyer in 2014 had a median household income of $94,380, up from $85,600 in 2013.

The median vacation home price fell 11.1 percent to $150,000. Yun attributed the trend in part to higher sales of condos and townhomes versus single-family homes.

Buyers also increased their purchases of distressed properties, and of homes in the relatively affordable South, while vacation home sales fell throughout the more expensive West and Northeast, the survey showed.

Photo: one2c900d via Flickr