Eye on Japan's Recovery Within a Recovery

Just days before the Great Tohoku Earthquake, Japan’s central bank was expressing optimism that the nation’s economy was returning to a moderate growth path after a bout with chronic deflation that has dragged on for two decades.1

Now the Japanese government is estimating that the damage caused by the 9.0 temblor and the resulting tsunami and nuclear accident that devastated Japan’s northeast coast on March 11, 2011, may surpass $309 billion. That price tag — more than double the damage from Hurricane Katrina, which ravaged the U.S. Gulf Coast in 2005 — would make this the costliest natural disaster on record.2

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Although Japan has been in the economic doldrums since the early 1990s, suffering from an aging population (it was the only major nation not to experience a baby boom after World War II), the country plays a critical role in global commerce. Its nearly $6 trillion economy is the third largest, behind China and the United States, and accounts for nearly 9% of global economic output.3–4

The human toll of the disaster is heartbreaking, with perhaps 10,000 confirmed dead, nearly twice that number still missing, and hundreds of thousands displaced.5 Yet this event could serve as a turning point for Japan’s economy. Rebuilding could create investment opportunities, help break the cycle of deflation, and provide a paradigm-shifting jolt that may help a new Japan emerge from the rubble.

But in the near and medium term, Japan will face many challenges that could send ripples through the global economy.

Stabilizing the Yen

In the days after the quake, the Japanese yen surged in chaotic trading, hitting an all-time high on March 16. Two days later, the G-7 nations staged an unusual intervention to help bring the yen’s value down against other currencies.6

A similar currency spike occurred after the 1995 Kobe earthquake, when insurance companies had to buy yen to pay claims, driving up the value. This recent surge may have been driven by speculators who anticipated the yen would rise in the aftermath.7

A strong yen is seen as harmful to Japan’s export-driven economy. Prices for Japanese goods are expected to rise because they have been made more scarce by the country’s lost productivity. The combination of a strong yen and higher prices could cause Japan’s exports to lose market share to lower-priced competitors.
Supply-Chain Interruptions

Japan is a key supplier of equipment, mainly related to transportation and machinery. It supplies 14% of the world’s automotive exports and is an important source of parts for U.S. car makers.8 A shortage of just a few parts can bring an assembly line to a halt. This could lead to temporary plant closings while new supply chains are established. If Japan can’t restart production on key exports, it could create openings for its competitors.

Japan is the world’s biggest steel exporter. A drop in production is anticipated but unlikely to affect the world steel market because there is still slack capacity from the Great Recession. Major mills in 64 nations are operating at 82% capacity.9 Again, this could create an opening for Japan’s steel-making competitors.

Japan is the source of 60% of the world’s silicon wafers, a building block for computer chips. Two factories wiped out in the disaster accounted for 25% of world supply.10 Japan also supplies 90% of a special resin used to make printed circuit boards.

The risks associated with investing on a worldwide basis include differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. These risks may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost.

High Saving Rate

Japan may be in prime shape to pay for rebuilding. It has an abundance of yen-denominated assets, as evidenced by its high personal saving rate, which has averaged almost 17% since 1980.12 The high saving rate may be due to the nation’s persistent economic woes, which have wrought low wages and deflation. (Deflation in particular creates an incentive to save because goods become cheaper over time.) This means that reconstruction may commence regardless of the near-term prospects for Japan’s economy, which is likely to slump.

Tragedies like the one unfolding in Japan may be unpredictable, but they are inevitable. It’s important not to overreact to such events, but to position your portfolio to withstand — and perhaps benefit — when they strike.

1, 4, 6–11) The Wall Street Journal, February 28, 2011; March 25, 2011; March 19, 2011
2) Associated Press, March 23, 2011
3, 12) Haver Analytics, 2011
5) NHK World, March 24, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from a Naperville Accountant or Naperville Investment Services advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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Why Realistic Expectations May Be Great Expectations

A survey of investors found that many have reduced their expectations for the stock market. A large majority expect annual stock market returns over the next one to five years to be no higher than 8%.1 This is down from the 12% return investors expected from stocks in 2010 and the 20% return they expected in 2009.2

Despite scaling back their investment expectations, 87% of investors still expect to reach their long-term financial goals, even though four in 10 made no adjustments to their investment strategies during the previous two years.3

Positive thinking can be a powerful force, but there’s a fine line between optimism and unrealistic expectations.

Possible Pitfalls

The most obvious risk of overestimating how your portfolio will perform is that you may not reach your goal on time. Major financial goals such as retirement and saving for college can take years to achieve. If you arrive at the expected date of your goal but haven’t accumulated the expected funds, there’s no starting over. You may be forced to postpone your goal or make do with less money.

A less obvious risk is that, as you get closer to your target date and it appears as though you may not achieve your goal, you may be tempted to take on more risk than would be suitable for your situation in order to help close the shortfall.

Unrealistic expectations can also create a false sense of retirement security by leading you either to contribute too little of your income during your working years or to withdraw too much during retirement.

A small difference in investment performance can have a tremendous effect over a long period. If you were expecting a 5% average annual return but actually earned 8%, you’d probably be pleasantly surprised. Imagine your disappointment if you were expecting the higher return but actually earned less. Investments seeking to achieve higher rates of return also involve a higher degree of risk.

It’s natural to hope for the best. But being realistic — and not overly optimistic — may put you in a better posi

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tion to pursue your financial goals.

1, 3) Investment Advisor, July 15, 2010
2) CNBC.com, December 21, 2009; December 31, 2008

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville Investment Services professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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How to Make the Most of the Payroll Tax Cut

Have you considered what you will do with the extra 2% in take-home pay that you will receive in 2011? The 2010 Tax Relief Act (H.R. 4853) not only extended the expiration dates of many current tax rates but also reduced the Social Security payroll tax by two percentage points for the 2011 tax year.

An extra 2% might not seem like much, but it could be an opportunity to make a difference in your financial future.

Eliminate Credit-Card Debt

Image by Getty Images via @daylife

Two-thirds of Americans who file for bankruptcy attribute the main cause of their financial problems to credit cards.1 If you have credit-card debt, consider how it might be interfering with progress toward your long-term goals.


The average variable interest rate on credit cards is more than 14%.2 Thus, a borrower with a $5,000 credit-card balance and a 14.5% interest rate would pay $1,872 in interest to retire the debt, assuming $125-per-month payments for 55 months — that’s about four and a half years!

If you have racked up some bills on your credit cards, consider using the extra 2% in take-home pay to help reduce or eliminate the debt, which could free up more of your future income to save and invest.
Increase Retirement Plan Contributions

Experts often recommend that you try to give your retirement plan a raise every year by increasing your contribution by an extra 1% or 2%. Putting the extra 2% you will get this year toward your workplace retirement plan is a relatively painless way to accomplish this objective.

For a worker earning $75,000 a year, the 2% payroll tax cut would be worth an extra $125 per month in take-home pay. By contributing $125 more each month for 25 years to an account earning a hypothetical 5% average annual return, a worker could accumulate an extra $74,440 toward retirement. Of course, this assumes the extra 2% contributions continue to be made even after the payroll tax cut expires after 2011. However, if the worker receives annual pay increases, he may be able to use them to maintain the higher contributions in future years without experiencing a reduction in take-home pay. This hypothetical example is used for illustrative purposes only and does not represent the performance of any specific investment. Fees and expenses are not considered and would reduce the performance described if included. Actual results will vary.

In 2011, the contribution limit for 401(k), 403(b), and 457 plans is $16,500 (or $22,000 for workers age 50 and older). If you aren’t making the maximum annual contribution to an employer-sponsored retirement plan, consider using the additional income to increase your monthly contributions. It could help you accumulate more for retirement.

Open an IRA

If you are already making the maximum annual contribution to a workplace retirement plan or don’t have access to such a plan, it might be time to open a Roth IRA or a traditional IRA. In 2011, you can contribute up to $5,000 ($6,000 for those age 50 and older) to all IRAs combined, as long as you have earned income. Contributions to a traditional IRA are generally tax deductible (subject to income limits if you are an active participant in an employer-sponsored retirement plan), whereas contributions to a Roth IRA are after-tax (income eligibility limits apply). Distributions from traditional IRAs and most employer-sponsored retirement plans are taxed as ordinary income. Qualified distributions from a Roth IRA (those made after the account has been in place for at least five years and after the original owner reaches age 59½) are free of federal income tax. Early IRA and employer-plan distributions (prior to age 59½) may be subject to a 10% federal income tax penalty.

Take Your Portfolio in a New Direction

If you are already doing everything you can to pursue your retirement objectives, you might consider investing in something that previously has been out of reach. Perhaps you are interested in an investment opportunity that is not available in your workplace retirement plan. Maybe you have always wanted to broaden your investment experience but never had the money. Remember that investments seeking to achieve higher rates of return also involve a higher degree of risk, so it’s a good idea to make sure you are using money that you won’t need in the near term.

Save for a Specific Financial Goal

The extra take-home income could be an incentive to open an investment account to pursue other important goals, such as saving for a child’s college education, a down payment on a home, a wedding, or a vacation. Because getting started is often the most difficult aspect of pursuing a new goal, using the payroll tax cut to open a new account may help you build momentum so that you will find other ways to keep the account growing.

If you simply plan to spend the extra income from the 2011 payroll tax cut, you could be passing up on an opportunity to adopt some new habits and put yourself in a better position to pursue your financial goals. Although the tax cut is temporary, it may be just the impetus to make a meaningful difference in your long-term financial situation.

1) Reuters, October 25, 2010
2) Bankrate.com, January 18, 2011 (average interest rate as of January 12, 2011)

Phone us today so we can discuss Naperville Investment Services.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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Looking Back to See the Present

With the unemployment rate remaining persistently high, it might be easy to become discouraged over the progress of the economic recovery. But if you are looking for signs of a recovery, the employment situation is the last place to look — literally.

Employment is typical of a class of economic indicators, called lagging indicators, that are poor at predicting how the economy will perform in the near future. However, when it comes to providing confirmation that a particular trend is in place — whether it be a recovery or a recession — lagging indicators can play a vital role. Here’s a roundup of some common lagging indicators and why they can provide useful information for investment decisions.

Employment

Rising unemployment is usually one of the final signals that a recession has begun, and rising employment is among the last indications that an economy is recovering. In both situations, it’s difficult to miss the influence of human emotion in the business cycle. During a slowdown or a recession, employers may cut back on other expenses in order to avoid layoffs for as long as possible. And when conditions begin to improve, employers may avoid hiring until they are confident that the recovery is sufficient to justify additional labor costs.

Corporate Earnings

Earnings are a lagging indicator because they reveal past performance. Most publicly traded companies release their quarterly earnings one month or more after the quarter has ended. So even though stock prices are technically a leading indicator, actual corporate earnings performance may say little about what to expect in the future. However, if economic activity seems to be faltering, yet no recession has been officially declared, economists may look at earnings and other measurements of business revenue for confirmation.

The Conference Board Lagging Index®

Perhaps the most important lagging indicator, which actually gets little attention, is The Conference Board Lagging Economic Index. As with other lagging indicators, this index is most useful when compared with leading and coincident indicators. Coincidentally, The Conference Board also produces coincident and leading indexes, which makes comparisons convenient.

The lagging index tracks average duration of unemployment, manufacturing and trade inventories to sales ratio, labor cost per unit of manufacturing output, the average prime rate, outstanding commercial and industrial loans, ratio of consumer credit outstanding to personal income, and the consumer price index for services.1 Changes in these seven variables are averaged to arrive at an index value.

Although some experts consider the lagging index to be a lackluster source of information, economists tend to pay close attention when it shows something other than a confirmation of the direction of the leading and coincident measures. A divergence suggests that the stock market may have misinterpreted the direction of the economy.

Lagging indicators rarely make headline news, but they are an important source of information. We can help you keep an eye on these and other indicators.

Please contact me at 630-548-9600 regarding our Naperville Investment Services

1) The Conference Board, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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Socially Responsible Investing: Handle with Care

Weigh Personal Fundamentals Against Socially Conscious Aims

It seems as though everywhere you look, things are turning green. Terms like sustainable, environmentally friendly, and socially responsible have entered the national consciousness and are forming the basis for a growing number of personal investment decisions. For example, more than $1 out of every $10 under professional management in the United States is invested according to socially screened criteria.1

To be sure, many investment opportunities may appeal to your desire to do something socially responsible with your portfolio. And if you’re interested in steering your money toward a particular cause or away from organizations or practices that you disapprove of, that’s great. However, it’s also important not to allow this desire to outweigh the other factors that must be considered when making investment decisions.
Is It a Good Fit?

Investments that meet socially responsible criteria can be a positive addition to your portfolio as long as they are appropriate for your situation. For example, alternative energy is still a fairly young industry; many of the key players are start-ups that may not have a solid earnings record — or any significant earnings at all. These types of investments are generally more appropriate for investors with a high risk tolerance.

Like all investments, socially responsible investments entail risk, could lose money, and may underperform similar investments not constrained by socially conscious criteria. It’s important to consider your time horizon, net worth, and whether the potential return is worth the extra risk.
What Is It?

Billionaire Warren Buffett famously said that he invests only in companies that he understands. The universe of socially responsible investment opportunities is diverse, so it’s important to understand what companies are available and what their objectives are. Most socially responsible investments fall into one of these popular categories.

Green investments are associated with companies that develop products and services to help protect or improve the environment.

Faith-based investments tend to avoid companies with products, services, or practices that violate certain core beliefs or religious principles. Rather, they seek out companies that are more closely aligned with certain moral or ethical standards.

Community investing is focused on making loans and capital available to underprivileged communities for affordable housing, child and health care, and business start-ups.

If you are interested in socially conscious Naperville investment services, we can help make sure that your decisions are based not only on your beliefs but on sound investment principles as well.

1) Social Investment Forum Foundation, 2009

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2010 Emerald.

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BROKERAGE AND INVESTMENT SERVICES

Looking to build a stock portfolio? Naperville Brokerage Services can help. A broker is an officially licensed individual or company that will buy and sells stocks on the behalf of their clients. There are many different types of brokerage services. The type of service chosen should be related to how involved you want to be in your investments. Using Naperville brokerage services gives you the advantage of professional oversight on your personal investment strategy. A broker can also give you feedback on investments you are interested in.

The following services are given by a broker:
•Buy stocks
•Sell Stocks
•Buy Bonds
•Options Trading
•Mutual funds

Today, more and more people have been investing into stocks, bonds and mutual funds in an effort to plan for their own retirement. Due to the state of the social security system, this is one of the main reasons people are choosing different investment mediums. When choosing Naperville Investment Services it is important to shop around. By shopping around and interviewing different brokers you will be able to choose one that meets your financial needs. When looking for a broker, it is important to determine how comfortable you are with risk, and how much risk you are willing to accept.

You should ask yourself:
•Where do I want to be in “x” number of years?
•What level of risk am I comfortable with?
•How much can I afford to invest?

By answering questions like these, you will be able to choose the Naperville Investment Services company that meets your needs.

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