October 5, 2010
Squeezing a Little Extra Out of Your Annuities
The Investment View from Prescott, Arizona
Fixed Rate Annuities issued in the last dozen years or so often have bonuses built in that are not paid automatically and are easy to miss out on.
These provisions are called Market Value Adjustments or MVAs.
Because annuity companies have to reinvest your annuity money, often into fixed rate bonds or mortgages, the value of the holdings backing your annuity may be greatly affected by interest rate levels in the markets.
Bonds and mortgages go up in value as interest rates go down, and down as interest rates go up. Think of a teeter totter with interest rates on one end and bond prices on the other.
MVAs are included in many annuities to protect the insurer if you decide to cash out your annuity during times of high interest rates. The bond they would need to sell to pay you off would likely be fetching lower prices (the bond price side of the teeter totter will go down as the interest rate side rises), so they would ask you to share the pain of selling in a down market with a penalty charge called a Market Value Adjustment.
MVAs are assessed in addition to normal surrender penalties.
However interest rates are at historic lows, so bond prices are at all-time highs and MVAs are usually a two way street. You can also share in the profits when some are made.
This creates opportunities for annuity holders to cash out and get a bonus as insurance companies make a profit selling bonds when interest rates are low.
Get out your annuity contracts and look for the term Market Value Adjustment to see if you might have an opportunity like this awaiting you. If you do, it could be worth many thousands of dollars to you.
Money withdrawn from annuities will need to be reinvested, but if you think of this as an opportunity to “sell high” it may make a lot of sense. If interest rates rise, this opportunity will quickly fade away.
Feel free to bring copies of your fixed annuities by the office if you need help determining if you have a policy with an MVA.
There could be gold in that paperwork.
How’s The Market Doing?
If we focused just on the news of the day, hiding out in money market funds would seem to be the thing to do.
We still have the specter of a double dip recession as parts of the economy decline from an already slow pace along with election mud slinging and a weakening dollar.
However, savvy stock market investors do not invest based upon today’s news regardless of what the pundits on TV would have you believe.
The stock market as a whole tends to look many months out in order to get in a position now to profit from what may happen down the road.
So when we see rising markets, like we have seen the past few weeks, it tells me that the sum total of all the thinking of the people with the money – who tend to be pretty smart, that’s why they have the money – is that things will be getting better, even if we can’t see the reasons right now. That is why they are investing their money right now.
In fact, if we wait until the media reports on why the situation is improving it is usually too late to use that information for investment gains.
Over the past few weeks, despite my earlier pessimism, the market has begun to move upward, and has broken out above the Fibonacci “retracement level” that I have written about several times and which had been holding the market back for almost a year. This is a good sign.
So, regardless of my personal feelings about the economy, politics or whatever, the market is saying “invest now” and I am paying attention to that.
Due to the many clouds on the horizon – deepening credit problems in Europe, continuing weakness in housing markets and signals from the bond market that often precede recessions – I am not getting complacent, by any stretch of the imagination.
But by many definitions (not all, however) the market is in an uptrend at the moment, and I like to be invested when the market is moving up.
Q: I am the shortest complete sentence in the English language.
What am I?
A: I am.
Yavapai Food Bank Needs Your Help
A few years ago, in a tongue and cheek effort to do some good, I set my chair on the sidewalk in front of my office beside a sign that said “Will Manage Money for Food”. I was offering to make a donation to the Food Bank for each new account opened.
My compliance officer told me I had to stop for reasons that never made much sense to me…the Scrooge.
However, I am still a supporter of the Food Bank, and I’m guessing you would feel good being one, too.
The Food Bank needs help all year. But with the economy limping along it needs help now, more than ever. For this reason I would ask you to consider making a donation to the Food Bank.
You can drop off donations of non-perishable food at the Food Bank, 8866 E. Long Mesa Dr, Prescott Valley, AZ 86314, or at our office and we will take them to P.V. for you.
The food bank can also use financial donations, to buy perishable foods when they need them. You can donate by sending a check directly to the Food Bank. That is what I am doing. They will even accept credit cards if you call them. Their number is (928) 775-5255.
Am I Meeting Your Expectations?
This newsletter does such a good job keeping you informed about what you own and what I think about the markets, that many clients are so comfortable with my newsletter they don’t feel much need for formal reviews, which is fine.
The thing that is missing when we don’t meet eyeball to eyeball as often is feedback from you. If you have expectations that I am not meeting or other financial concerns, then we do need to get together to talk about getting you what you really want.
Feel free to call the office anytime to schedule a call or meeting. 778-4000.
What We Were Saying a Year Ago
A year ago we were bragging about Hepburn Capital’s new web site that tech-guru Laurel Taylor had just finished for us.
The biggest upgrade to the site since then has been to the “In The News” section which lists all of the media mentions, quotes and articles about Hepburn Capital in the news in a format the captures the flavor of the original publication.
There are new articles being added every few weeks. Check it out to see what the national media has to say about us.
Life With A Diva
This past weekend, my wife Cathleen, was one of the stars of the Prescott Fine Arts Association production of “Divas and More.” She and several of her girl friends, all accomplished singers, got to strut their stuff for a couple of hours.
I have been fortunate to hear the gals practice at our house for the past six months. It was fun to finally see the production come together on the stage.
Cathleen heads up the vocal instruction department at Yavapai College and has performed all over the U.S, plus in several foreign countries. She can really bring it on when she opens up those “pipes”.
I hope you were one of the lucky ones and were able to get tickets. If not, you have another chance to hear Cathleen sing, this time on September 11, 2011 in Lincoln Center, in New York in a tribute to 9-11 by Rene Claussen entitled “Tribute.”
This production is going to be a big deal, so stay tuned for more on this event.
What’s Going On In Your Portfolio?
With the market finally breaking out above the Fibonacci resistance that had held it back for almost a year it was time to get our Careful Growth* accounts more invested in stocks.
Up until September 23rd we had 15% in growth stocks and another 15% in emerging market stocks. I added another 25% in growth stocks, and if the market keeps moving ahead, I will add some more. If not . . . well, you know what I will do if the market slides backwards.
Careful Growth* also has 20% in gold in an Exchange Traded Fund that holds gold bullion in Swiss bank vaults. Gold has a reputation for volatile price moves, but it has emerged into a very smooth uptrend over the past month, a good thing for investors.
Very smooth up trends are created when buyers move in with each minor dip in prices keeping sharper price drops from developing. It is a sign of strength in an investment.
There is no telling how long something like this will continue, but we can certainly enjoy it while it lasts.
Careful Growth* accounts also hold another 20% in high yielding preferred stocks.
Flexible Income* accounts own a couple of diversified bond funds, plus gold and preferreds as well as a currency fund.
All strategies are close to fully invested and the “Positions” report in the online reporting system many of you use is a thing of beauty. As of Friday, October 1st, every investment we own in our Careful Growth*, Flexible Income* and Balanced accounts* is showing a gain as the green numbers in the right hand column indicate.
Our Spotlight Strategy
With the Flexible Income Strategy we strive to outperform the U.S. bond market overlong periods while taking less risk.
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
** The S&P 500 and Nasdaq Indexes are unmanaged lists of stocks considered representative of the broad stock market. Investors cannot invest directly in the S&P 500 Index.
This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable, however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.