Are GNMAs Right for You in Today’s Environment?

You’re probably familiar with GNMAs, but how do you know if they’re a good investment?

The Government National Mortgage Association (GNMA) packages together mortgages and issues bonds (in denominations of $25,000) based on those mortgages. Investors in GNMAs are paid monthly distributions representing interest payments and principal repayments on those mortgages.

Many investors have a hard time scraping together $25,000, so they usually purchase shares of a mutual fund that invests in GNMAs.

GNMAs are backed by the full faith and credit of the U.S. government, meaning they come with a guarantee that covers timely principal and interest payments of the loans underlying the securities. But the price of the securities will still rise and fall. So how do you know if GNMAs are good investments?

The major price fluctuations of GNMAs are due to the risk of homeowners paying their mortgages early. And you can get an idea of how many homeowners will do that by looking at the economic environment.

When interest rates decline, GNMA funds may perform poorly because people with mortgages usually refinance at lower rates. As they do so, more money is returned to the GNMA pool, and GNMA fund managers are forced to reinvest that money at prevailing lower interest rates.

When interest rates rise, GNMA funds may also perform poorly. GNMA funds hold a portfolio of mortgages purchased at lower interest rates, and people who took out those mortgages have no incentive to refinance them because interest rates are higher.

So, when do GNMAs tend to perform well? In any other environment (specifically, when interest rates are stable or rising only modestly).

If you would like to consider GNMAs for your portfolio, it might be worth a conversation with us. We can point you in the right direction given your individual financial circumstances and goals. Call or email us today.

Assessing the Performance of Your Portfolio

When markets are down, it’s easy to think your mutual fund is underperforming. But assigning a term like “underperforming” to a fund must take many factors into account.

First, should you be in the fund in the first place? A fund that has returned 10% over a certain period may seem “better” than a fund that has returned 3% over the same period, but the better-performing fund may have earned those higher returns by taking on risk that you can’t tolerate.

Second, how is the fund performing relative to other funds in its peer group? Different asset classes can be expected to perform differently because they have different risks. Even the performance of securities in the same asset class can vary. For example, government bond funds perform differently from corporate bond funds.

Third, how is the fund performing relative to its benchmark? Every mutual fund has a legal mandate that limits its investment options. For example, if a stock fund’s mandate is to invest 80% of its portfolio in stocks, portfolio managers cannot move more than 20% of assets to bonds or cash, even in a bear market. Because of this, the standard for measuring mutual fund performance is not positive returns but an appropriate index.

These factors are particularly important to remember after a decade in which double-digit annual returns were the norm because today’s investors tend to have unrealistic expectations.

Do you need help assessing the performance of your portfolio? We can review your portfolio and make suggestions. We’re just a call or email away, and we’re always here to assist.

Let’s Talk about Debt (Including How to Get out of It)

Americans’ debt is growing. Should you be concerned?

We are a nation in debt. According to the Federal Reserve’s most recent report on household debt and credit, total American household debt increased by $87 billion in the third quarter of 2020.

From a macroeconomic perspective, higher debt levels can be positive because they indicate that banks are comfortable lending; they can also lead to increased consumer spending, which drives economic growth.

As an individual, however, you should generally seek to lower your debt, especially as you near retirement, when you may want to live more modestly.

If you are in debt, you may want to look into ways to pay it down. High interest rate debt, such as credit cards, should generally be paid off first. Low interest rate debt, such as mortgages, should generally be paid off last (especially if the interest is tax-deductible, as mortgage interest often is).

Many people struggle to determine if they should pay off debt or save for retirement first. There is no one-size-fits-all answer, but the conventional wisdom is that you should pay off debt first if the interest rate on it is higher than the income you can earn by saving and investing. The “magic number” will vary by individual.

Some people also ask if they have extra money, which should they do first: pay off debt or invest? If the interest rate on your debt is low and you can get a higher rate of return by investing, you may want to consider investing before paying off your debt. You could also use some of the extra money to pay off debt and some to invest.

If you’re concerned about debt, call us or email us for some professional input. The more information you have, the better prepared you can be, and we are always here to help.

5 Compelling Reasons to Invest in Small-Cap Stocks

Small-cap stocks appeal to some investors because of their potential for strong growth. But are they right for you, right now?

Small-cap stocks are easy investments to understand. The market capitalization of a company is its stock price times the number of shares it has outstanding. While the definition varies, small-cap stocks may include companies with $250 million to $2 billion in market capitalization.

Small-cap companies are agile. Small companies may have greater growth potential than larger companies. Generally speaking, smaller companies are generally more nimble than larger companies, so decisions about new products and services and adjustments when problems arise can be made and implemented quickly.

Small-cap stocks may perform well when markets are down and improving. It is generally thought that small-cap stocks can perform better than larger-cap stocks when markets have been down and are improving.

Small-cap stocks may perform well in rising interest rate environments. Small-cap stocks also tend to perform well in rising interest rate environments. Today, we are not in a rising interest rate environment, but that could change.

The time may be right for small-cap stocks. You probably know, however, that it is wise to avoid trying to time the market; it is generally better to choose an appropriate asset allocation for your risk tolerance and financial goals and stay the course. It’s always a good idea to have diverse investments in your portfolio.

Do you need help investigating small-cap stocks for your portfolio? I’m here for you. Please contact me today, and we can make sure that you aren’t missing anything from your asset allocation.

Why and How to Invest in Healthcare

With life expectancies rising and a pandemic that changed the healthcare landscape, healthcare providers, medical insurance companies, employers and individuals are scrambling to meet a new world order. But that doesn’t mean you should overlook the healthcare industry as an investment. In fact, now may be a better time than ever to consider this sector.

The case for healthcare as an investment stems from the aging of the population. According to the latest census figures (from 2010), there were more people aged 65 and older in 2010 than in any previous sampling. In fact, between 2000 and 2010, the population aged 65 years and older increased at a significantly faster rate (15.1%) than the general U.S population (9.7%). According to the latest figures, the 40 million Americans over the age of 65 comprise around 13% of the U.S. population.

And the Administration on Aging projects that this group will more than double in the next 36 years, reaching 88 million by 2050. That means that we can expect consistent demand for healthcare products and services. Indeed, according to the Centers for Medicare & Medicaid Services, healthcare spending is projected to grow at an average rate of 5.5% per year from 2018 to 2027 and should reach nearly $6.0 trillion by 2027.

The aging of the population and its need for healthcare has fueled growth among healthcare companies, which include medical device manufactures, pharmaceutical producers and home healthcare services, to name just a few. As a result, now might be a good time to look into adding healthcare-related stocks to your portfolio.

Before jumping in, however, you should understand the risks and rewards of investing in this sector, especially at this tumultuous time in the sector’s history.

We can help you determine if healthcare investments are right for you based on your individual financial circumstances and goals. Please reach out to us today.

The Ups and Downs of Investing in Real Estate

Most investors understand the importance of diversification, which is investing in a variety of asset classes to help ensure that when one is performing poorly, another is performing well. And one way to diversify is to add real estate to your portfolio. But doing so isn’t easy.

That is why some investors interested in real estate choose real estate investment trusts (REITs), which are securities that (a) invest in income-producing real estate or (b) make loans to businesses in the real estate industry. Investors in REITs earn income derived from rent; they can also participate in the profits from the sale of properties in the REIT portfolio. REITs often trade on major stock exchanges, so they are liquid.

In terms of diversification, many investors consider REITs for their historically low correlation with other asset classes. That is, they tend to perform differently from other investments, including equities, fixed income and cash. For example, in calendar year 2019, the MSCI U.S. REIT Index returned 25.84%. By comparison, the S&P 500 Index returned 30.43%, and the Bloomberg Barclays U.S. Aggregate Bond Index returned 8.72%.

Of course, REITs are not without risks and can be volatile. In the last calendar year (2020), for example, the MSCI U.S. REIT Index was down almost 20% (as of September 30, 2020) due to challenges presented by COVID-19.

If you are considering investing in REITs, then please reach out to us so you can get the best information that will help you determine if they make sense for your portfolio.

5 Tips to Help Create a Successful Retirement

You may think of retirement as a time that brings freedom from many responsibilities. Retirement, however, creates a set of its own responsibilities. Below are five such responsibilities and tips for managing them.

Budget. How much income will you obtain from Social Security, pensions, and other retirement savings? How much money will you spend? Ensure that the numbers are equal and revisit the budget frequently.

Allocate your assets. You probably shifted your investment portfolio more toward income as you approached retirement, and you will probably want to do so even more once you retire.

Do some estate planning. Estate planning is not just for the wealthy. It simply refers to getting your estate in order. Ideally, you will have a will, a power of attorney and a health care proxy, and you will keep beneficiaries on your financial accounts and insurance policies current. Be sure to discuss your estate plans with your family members so they understand your wishes and their responsibilities.

Develop a nonfinancial plan. With so much talk about financial planning, it is easy to forget that a happy retirement is about much more. It is important, both mentally and physically, for retirees to stay active and engaged. If you do not yet know how you want to spend your time in retirement, it is easy to become depressed, so make a plan.

Get advice. As a retiree on a limited budget, getting advice is important. This can help you maintain a steady income stream throughout retirement, lead to significant tax savings and ensure an efficient transfer of assets upon your death.

Creating a successful retirement can be challenging on many fronts, and you may benefit from advice. I am always here to help. Call or email me, and we can determine what is right for you and your goals and circumstances.

How to Plan Ahead for Your Long-Term Care Needs

We are all living longer, and that means more and more of us will need long-term care, such as care provided in a nursing home or by in-home services. The costs of such assistance can be overwhelming, but good planning can help you prepare. What does that planning involve?

First, you should understand what Medicare and Medicaid cover and what they do not. Medicare’s coverage for long-term care is limited. It generally only pays for about three months of nursing home care immediately following a hospitalization, and copays may apply. Meanwhile, Medicaid will cover some long-term care costs, but to be eligible, you must exhaust virtually all of your personal resources. If you are married, this could create complications for your spouse, who may not have the assets or income to live on if you enter a nursing home.

With that in mind, consider whether you need long-term care insurance. Bypassing long-term care insurance might be reasonable if you have significant assets, in which case you can likely afford to set aside enough money for years of care while still leaving enough to support a spouse. It might also be a reasonable choice if you have few assets, in which case you will qualify for Medicaid soon after entering a nursing home. If you fall somewhere between these extremes, however, you may want to consider long-term care insurance.

Please reach out today if you have any questions about whether long-term care insurance is right for you or you need assistance shopping around for a policy. I can help.

What Equity Allocation Do You Need in Retirement?

Financial experts often recommend that investors keep some amount of stocks in their nest eggs, even in retirement, because a measure of growth is important in order for a portfolio to keep pace with inflation. But I’m often asked if the risk is worth it. Let’s explore that topic.

Retirees who are getting by just fine on income from Social Security and savings may think it’s crazy to take on the risk of fluctuating stock prices for a little more growth. That’s understandable. The global financial crisis in 2008 showed us how easily the market can destroy the value of a nest egg. So what’s an investor nearing retirement to do?

On the one hand, if you are absolutely certain that you can live comfortably for the rest of your life on Social Security and savings and you don’t want to leave money to children or other beneficiaries, you have a good case for avoiding stocks. There is just no reason to take on the risk.

But the phrase “absolutely certain” is key. Are any of us “absolutely certain” at any time? What about unforeseen circumstances? Your living expenses could go up more than expected because inflation is unpredictable. Perhaps you take on some expensive hobbies (sailing, golf). Maybe you experience a costly medical crisis. You could even be the unfortunate subject of a lawsuit. Any of these predicaments could move your plan off course and do so drastically.

If those possibilities worry you, you may want a little extra cash on hand to absorb unexpected expenses. And if so, the growth potential of stocks may be appealing to you. A large allocation isn’t necessary: you just need enough to give your portfolio a little more growth potential.

If you would like to discuss your asset allocation, please reach out to me. I can help you understand your options, given your individual circumstances.

Is Gold a Good Investment in an Uncertain Environment?

The U.S. Federal Reserve is pumping money into the economy to stimulate it after the COVID-19-induced slowdown. That raises fears of inflation, and when people fear inflation, gold often becomes appealing.

Why? Historically, gold has been considered a safe haven in times of geopolitical and financial instability. Unlike financial assets and currency, gold cannot be printed at will. It also tends to perform differently from other assets, which is why investors often use it as diversification in a portfolio of stocks, bonds and real estate.

Might you want to consider gold now? Over the past 10 years, inflation has averaged less than 2% annually, but the recent monetary stimulus and rising national debt mean investors would be wise to prepare for a rise in inflation.

On the other hand, no investment is a sure thing, and gold is no exception. Its price can fluctuate widely. Gold was priced at around $250 an ounce in the 1990s and is close to $2,000 an ounce in September 2020. However, from the 1990s until today, gold prices have been volatile.

Moreover, investing in gold isn’t straightforward. There are many ways to purchase it. You can buy gold, stocks in companies that invest in gold, or even index funds that track companies that invest in gold or the spot price of gold. It can be a complex undertaking.

If you have questions about investing in gold, please give me a call. I would be happy to go over them with you.