Tag: investment

Categories
News News Feature

Getting Covered for Retirement

Photo: Julius Yls | Unsplash

Whether retirement is on the horizon or it’s quite a few years away, planning what your retirement will be like can be very exciting! This stage in life comes with a mix of emotions, but with planning, you can turn your savings into a source of income to cover your living expenses. Here are four important tips to help you plan for income in retirement.

1. Make a plan. 

The first step in preparing for retirement income is to have a comprehensive plan. A custom financial plan serves as a blueprint to inform your financial decision-making and helps ensure all aspects of your financial life are working together to achieve your goals.

2. Properly structure your portfolio. 

One of the best ways to generate income in retirement is to strike a balance between short- and long-term investment accounts. 

It’s recommended to maintain three to five years of living expenses in a short-term, semi-liquid investment account. A mix of bond funds works well, as it provides capital for opportunistic rebalancing as well as a monthly income. Having a short-term allocation to bonds can prevent you from being forced to sell out to equities at a loss when markets are low. 

It’s also important to continue growing your assets in order to help offset inflation and ensure you have enough income to last throughout retirement. You should consider investing any assets not necessary to fund your short-term needs in a diversified portfolio that focuses on growth and inflation protection. While this portfolio should be in line with your overall risk tolerance and investment objectives, it can be invested in riskier assets than your short-term account. 

3. Implement a tax-efficient withdrawal strategy. 

Ideally, you’ve been saving in multiple accounts with different tax treatments, such as traditional IRAs, Roth IRAs, 401(k)s, and taxable accounts. If so, you may have an opportunity to maximize your income by strategically withdrawing from different accounts in different circumstances. This is called tax diversification. 

• Taxable (non-retirement) accounts – These offer the benefits of tax-loss harvesting and have fewer restrictions on contribution amounts and fewer distribution penalties. 

• Tax-deferred retirement accounts, such as pre-tax IRAs and 401(k)s – Withdrawals from these trigger ordinary income taxes, as they’ve enjoyed tax-deferred growth.

• Tax-exempt accounts, such as Roth IRAs – These allow tax-exempt investments to grow for as long as possible, and qualified withdrawals are tax-free. 

There are two main withdrawal strategies to consider based on your specific goals, tax situation, and income needs. 

• Traditional approach – Using this, you would withdraw from one account at a time. Typically, the order of withdrawals is from taxable accounts first, followed by tax-deferred accounts and, finally, tax-exempt accounts. This allows the tax-advantaged accounts to continue growing tax-deferred and tax-free for a longer period of time. However, it may result in uneven taxable income.

• Proportional approach – This strategy establishes a target percentage that will be withdrawn from each account each year. The amount is typically based on the proportion of retirement savings in each account type. This can help ensure a more stable tax bill from year to year and can also help you save on taxes over the course of your retirement. 

The benefit of following a disciplined approach is that you won’t be tempted to spend more than you can afford in any given year (or less than you’re able to!). This practice can help you maintain adequate assets to last a lifetime, regardless of market volatility. An advisor can assist you with creating a distribution strategy aligned with your financial needs and tax bracket on a year-by-year basis.

4. Regularly revisit and readjust. 

Given the potential longevity of retirement, periodic reviews of your financial plan and income strategy are essential. Work with a qualified wealth manager who can help you understand how regulatory and market changes may impact you and adapt your plan as needed to align with your evolving goals and needs. 

Gene Gard, CFA, CFP, CFT-I, is a Partner and Private Wealth Manager with Creative Planning. Creative Planning is one of the nation’s largest Registered Investment Advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning, and risk management. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.

Categories
News News Feature

Five Ways to Overcome Roth Contribution Limits

Photo: Alexander Grey | Unsplash

Roth IRAs can be a powerful tool to accumulate post-tax retirement savings, achieve tax-deferred investment growth, and receive tax-exempt withdrawals in retirement. However, contribution limits can make it difficult to maximize savings and access a tax-exempt source of retirement income.

In 2023, individuals can contribute up to $6,500 per year to a Roth IRA ($7,500 for those age 50 and older). The maximum contribution is reduced for individuals whose modified adjusted gross income (MAGI) is more than $138,000 ($218,000 married filing jointly), and no Roth IRA contributions are allowed for individuals with a MAGI of $153,000 or more ($228,000 married filing jointly).

Similarly, Roth contributions to an employer-sponsored retirement plan are limited to $22,500 in 2023, with an additional $7,500 permitted as a catch-up contribution for those age 50 and older.

If you find your options restricted by Roth contribution limits, there are still several strategies that can help you optimize your retirement savings.

1. Consider a backdoor Roth IRA.

If your income exceeds the limit for direct Roth IRA contributions, a “backdoor” Roth IRA strategy can be an effective option. This involves establishing a traditional IRA alongside your Roth IRA. You can make the same $6,500 ($7,500 for those age 50 and older) contribution to your traditional IRA on an after-tax basis. This means you don’t take a tax deduction in the current year for contributing to the IRA account. You then convert the funds from the traditional IRA to the Roth IRA.

Because there are no income limits for traditional IRA contributions on an after-tax basis, this allows high-income earners to contribute to a Roth IRA. Because the traditional IRA contributions were made with after-tax funds, this strategy is allowed by the IRS.

2. Consider a “mega” backdoor Roth.

This strategy takes the backdoor Roth IRA to a new level, allowing individuals whose income exceeds IRS limits to supercharge their after-tax retirement savings. The strategy involves two steps:

Make after-tax contributions to your employer-sponsored retirement plan, such as a 401k. And complete an in-plan conversion of the after-tax assets to a Roth IRA or Roth 401k.

In 2023, the IRS allows individuals to contribute up to $43,500 in after-tax assets to an employer-sponsored retirement account, assuming you’re not eligible for an employer matching contribution (if you receive an employer match, you’ll need to deduct any employer contributions from $43,500 to determine your maximum contribution amount). You can then convert those assets directly into a Roth IRA or 401k to help optimize your after-tax retirement savings.

3. Establish a spousal Roth IRA.

If you’re married and your spouse doesn’t make earned income, you may want to consider opening a spousal Roth IRA. This strategy allows you to contribute to a Roth on behalf of your spouse, essentially doubling your combined savings potential. Be sure you meet the income requirements and adhere to contribution limits for both your account and your spouse’s.

4. Take advantage of your Roth 401k.

While not a direct solution for overcoming Roth IRA contribution limits, contributing to a Roth 401k can be a viable alternative for high-income earners to accumulate after-tax retirement savings. Unlike a Roth IRA, Roth 401ks don’t impose income limitations. If your employer offers a Roth 401k option, it may make sense to max out your contributions to take advantage of tax-deferred growth and tax-exempt withdrawals in retirement.

5. Fund a Roth IRA for your child with unused 529 plan assets.

The Secure Act 2.0, passed in 2022, included a provision allowing unused 529 plan dollars to be converted to Roth IRAs for a beneficiary without incurring any taxes. The 529 account must have been open for 15 years, and the lifetime amount that can be converted from the plan to a beneficiary’s Roth IRA is $35,000. The amount converted per year is subject to the same eligibility rules as making outright Roth contributions.

It’s important to note these strategies present various financial complexities that, if not properly planned for, can lead to additional tax liabilities. Be sure to work with a qualified wealth advisor to execute them and protect your retirement savings.

Gene Gard, CFA, CFP, CFT-I, is a Partner and Private Wealth Manager with Creative Planning. Creative Planning is one of the nation’s largest Registered Investment Advisory firms providing comprehensive wealth management services to ensure all elements of a client’s financial life are working together, including investments, taxes, estate planning, and risk management. For more information or to request a free, no-obligation consultation, visit CreativePlanning.com.

Categories
News News Feature

Investing to Retire

Photo: Anukrati Omar | Unsplash

When I look at the approximate amount of money I think I need to retire, I calculate that I’ll need to save half my take-home income for 60 years so that I can plan for 30 years with the same spending after I stop working. How does anyone manage to save enough to retire?

A: The most obvious good news here is that you don’t have to replace your income. In this highly simplified case, if you are working for a lifetime with a 50 percent savings rate, you only have to replace half your income because you were living on half your salary the whole time! This example is extreme, but even when a typical worker considers things like their 401k contributions, taxes paid, and money spent on commuting and business attire, they realize there’s no need to replace 100 percent of nominal salary in retirement to have the exact same lifestyle as today.

It’s true that if you had to save every dollar you need for retirement before you retire, you would need to work for a very long time. We are very fortunate that today we enjoy the power of capital markets which allows us to buy stocks and bonds to earn meaningful, real returns after inflation. For the last 50 years, U.S. large cap stocks have returned about 10 percent per year, which was a tremendous tailwind to the balance of investment accounts. By staying invested during your working years, your portfolio can grow much more quickly than money in a savings account. In fact, by mid to late career, it’s common to see market gains in a typical year far exceed the magnitude of contributions into retirement accounts.

Note that we didn’t say stocks have yielded 10 percent a year. There’s a strong instinct among investors and particularly retirees to “live on the interest” by spending bond interest and dividend income but never touching the principal in their investments. That probably comes from a time when retirees could buy intermediate term bonds and enjoy 5 percent-plus yields, which is not the case today. Today’s lower yields, rise of stock buybacks, and relatively low capital gains tax rate mean that dividends might actually not be the most desirable way to enjoy retirement returns. Retirees should definitely not be concerned about selling a small portion of the investment portfolio to fund annual expenses.

But how much money do you actually need? Every situation is different, but a general rule of thumb is that you only need to save about 25 times your annual spending in order to retire. A famous paper, known as the Trinity study, suggests that in the first year of retirement a retiree can spend 4 percent of the value of their investment portfolio, then continue spending that same amount indefinitely, adjusted each year for inflation. Markets will go up and down, and spending in retirement will likely rise and fall at different times, but the paper suggests (and our Observatory process confirms) that using this approach means a retiree would have been very unlikely to run out of money during most historical periods with good available data that we can test.

To answer the question directly, people retire by living below their means, investing the extra money in diversified portfolios, and staying invested in a prudent diversified allocation throughout retirement.

Retirement can be an overwhelming subject, so the peace of mind from a well-tested financial plan can be just as important as the details of the plan itself. Rules of thumb are useful but don’t tell the whole story, so at Telarray, we are always excited to use our proprietary Observatory process to help show you what that process might look like for you. You might find that with good practices you won’t need to work nearly as long as you think!

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no-pressure portfolio review at letstalk@telarrayadvisors.com. Sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

Categories
News News Feature

Overconfidence in Investments

Photo: Adeolu Eletu | Unsplash

The body of knowledge now called behavioral finance has been developing in earnest since around 1980. The more we learn about the way we interact with money, the more we see that our instincts are often not as useful today as when humans were developing many years ago. Our natural misconceptions are somewhat predictable and fall into identifiable categories. One of the most common biases is overconfidence, which manifests in many ways when it comes to investing.

For example, we will feel most comfortable investing in things we know well, even if it means we’re undiversified. One great example is the tendency to maintain large positions in your employer’s company stock. Geographic home bias is a problem, too, in that we’re more confident in investments in places we know. U.S. home bias has outperformed for the last few years, but then again Japanese investors did great investing locally up until the 1989 crash, too. Thirty-plus years later, the price return of the Nikkei 225 average is still underwater! When AT&T broke up into seven regional companies, investors were found not to invest in the Baby Bell with the best investment prospects but rather almost always in the one they knew locally.

To be provocative, perhaps the most costly form of overconfidence is when investors think they can select individual stocks and outperform the market consistently year after year. Most busy people have a hard time picking up their dry cleaning, so the idea that a working professional with family obligations can have the time to be effective at selecting individual stocks and bonds over the long run is a stretch, at best. What’s worse is that sometimes investors think they are winning, but it’s only because they remember the winners and forget about the losers.

I remember a TV show that did a tour of famous poker player Daniel Negreanu’s house outside Las Vegas. There was a large pool table in the basement, and the host asked him if he’s any good at pool. I remember he looked at her for a long moment and simply replied, “Well, I’m better than you are.” In the same way, with over a decade of daily experience in financial markets, several rigorous financial certifications, and a respected MBA, I suspect I’d be better at picking stocks than an average reader of this article. With that said, you might be surprised to learn that I think you would be foolish to ask me (or any other investment professional) to build a portfolio for you by picking a handful of individual stocks and bonds!

What value can an investment advisor add then? I don’t think an advisor can pick stocks to beat the market, but I do believe there are ways to beat the market in the long run without outguessing the market by picking the right kinds of funds. Aside from curating the investment portfolios, much of the value an advisor can add is behavioral. Talking clients off the ledge when they want to go to all cash almost always has been the right choice historically. Most people like to spend money on things and experiences, and a good advisor can get the signal from the noise and help determine if the time is right for a big purchase. Probably most importantly, advisors can figure out if those approaching retirement are likely to be okay or need to revise their plans.

If we were all like Star Trek’s Mr. Spock, then financial planning would be easy. We’re all fully human though, so you and advisors like me will have to continue to overcome our natural biases and emotions to make the best decisions amid uncertainty on our long-term financial paths.

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no-pressure portfolio review at letstalk@telarrayadvisors.com. Sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

Categories
News News Feature

Returns — Past Present and Future

Past returns can go only so far. (Photo: Towfiqu Barbhuiya | Unsplash)

Imagine a working career from age 20 to age 60 in a world of three investment options. Somehow you know with certainty all three will start at $10 per share and end up at $1,000 per share after 40 years. Investment A stays around $10 for several decades and jumps to $1,000 right at the end. Investment B jumps quickly to a high value approaching $1,000 and then stays relatively flat for several decades. Investment C marches up a consistent percentage every year on its way to $1,000. Which one would you want? Think about it for a moment before reading on.

If you want to retire at a typical age and have the most money possible, you would actually want investment A. You would have the chance to work a full career and save as many dollars as possible to benefit from that magic 100x bump near retirement. Flat periods in the stock market (and even downturns) are actually great for investors still working who have a chance to accumulate investments at lower prices. The problem is that even if there is a light at the end of the tunnel, it can be hard to stay the course even if a good eventual result is likely (but not guaranteed).

Investment C would be a great choice as well. A 100x return over 40 years doesn’t require as big of an annual return as you might think — only about 12.2 percent each year. That doesn’t sound too impressive but really adds up over time. If you wanted to retire early or have more financial flexibility throughout life, you would probably pick investment C. You could compound your early earnings to help replace your income and then continue to make consistent returns as you move into retirement and begin to spend.

If this imaginary world is anything like ours, the irony is that nobody would care a bit about investments A or C. Everyone would love investment B! The founder would be hailed as a visionary and a hero. There would be compelling YouTube videos of smart-sounding, confident people explaining why they’re putting their life savings into investment B, even though investment B’s attractive returns are all in the past. Sure, you might turn $100 into $10,000 while living in the basement as a student at age 20, but in the grand scheme of things that money will end up making almost no difference in your long-term financial trajectory. In fact, it would reinforce the wrong lessons and likely lead to much worse choices going forward.

When it comes time to pick investments in a 401K, most people just look down the performance column and pick what has done the best in the past. By doing that rather than focusing on the long-term drivers of market performance, you’re likely picking things that will end up a lot like investment B. There is variation in financial markets, but confidence in your financial plan and investment strategy can help you ride out the rough times and meet your goals rather than succumbing to the siren song of past performance.

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective portfolio review at letstalk@telarrayadvisors.com. Sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

Categories
News News Feature

Investing in Uncertainty

Photo: Andrii Yalanskyi | Dreamstime.com

As part of the Observatory (our financial planning process), our investors unsurprisingly end up with, well, investments. These allocations are based on client need, desire, and ability to take risk, and the allocations tend to not frequently change over time. A client’s portfolio here is not based on an assumption of all sunshine and rainbows, but rather a review of history, including market declines in March of 2020, 2008, 2000, 1987, and even more obscure disturbances like the events of 1997 and 1937.

In our Observatory process, we don’t model any sort of attempt to predict or avoid these events. Instead, we model a disciplined approach of staying invested and taking opportunities to rebalance into equity markets after drawdowns. This approach has worked well in the past, and our view is that it will continue to work in the future. Nevertheless, there’s a fundamental human desire to avoid risk at all costs, especially when things seem particularly risky, and there are always a few clients eager to “get defensive until the uncertainty subsides” in every market environment.

For our investors, we believe we preemptively position defensively through allocations to short- and intermediate-term bonds. Those bonds aren’t there for the good times — in fact, they are a drag on performance when stock markets are strong. Bonds shine after a serious stock market downturn when they possibly contribute some total return. More importantly, they serve as a source of cash to rebalance into equities (just when equities have declined and become more attractively priced). We believe selling stocks and adding to bond allocations or going to all cash after a big market decline is the worst time to do so.

I was listening to the radio recently, and the host asked a guest, “… but what’s the point of economic modeling at a time of such great uncertainty as this?” I couldn’t help but laugh out loud. The host was referring to the Ukraine invasion, and he seemed to be implying that a forecast made the day before Russia invaded would be much more appropriate than one made the day after since so much “uncertainty” would be introduced by the conflict. I laughed because all forecasts are equally based on ex ante information and therefore don’t incorporate the unknowable future. Forecasts made confidently when things seem certain are likely the worst forecasts of all! The situation in Ukraine has become more certain today than at any time in the last decade or so. The greatest unknown — the question of whether Russia would dare a full-scale invasion of Ukraine — is uncertain no longer.

Stepping back, when in the past was there not uncertainty? Markets have performed exceptionally well for many decades, but we know that only because of the prescience of hindsight. Following the 2008 financial crisis, the U.S. stock market bottomed out quickly in March of 2009 and has provided extremely attractive returns ever since, but we sure didn’t know that was going to happen back then. There were concerns that banks would fail, cash would stop coming out of ATMs, and life as we know it would grind to a halt. The last decade was an exceptional one for investors, but who could have credibly predicted that in 2010?

As Yogi Berra said, it’s tough to make predictions, especially about the future. We are certain that the future will contain some difficult times, and that’s okay. If we devote all our efforts to avoiding the bad times, we’ll miss the good times too. If history is any guide, the good times will continue to be good enough to offset the bad in the years and decades to come — but only if you stay invested.

Gene Gard CFA, CFP, CFT-I, is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your question at ggard@telarrayadvisors.com or sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

Categories
News News Feature

Up and Up? The Stock Market vs. Bitcoin

Is Bitcoin worth the investment? (Photo: Bermix Studio | Unsplash)

For many people, the stock market is a big casino. Stocks go up, stocks go down, and there’s no telling when it will happen or why. That’s true to an extent, but unlike truly random processes, there are many forces at work that reliably pull stock markets upwards over time.

Bitcoin is an example of a market that does not work like stocks. While some have suggested “fundamental” reasons that crypto assets rise and fall, at the end of the day they go up because more people want to buy them, and they go down when more people want to sell them. Given the nature of Bitcoin and other cryptocurrencies, the main reason people want to buy them is because they speculate others will want to buy more in the future and the price will go up. This leads to a speculative cycle of ups and downs that is exhausting.

Bitcoin as an investment is very similar to other “nonproductive” assets like gold, silver, oil, or art. While they might appreciate over time because people either need them or want them, they exist only to be consumed or owned.

Supply and demand influences stocks as well, but there is much more going on behind the scenes when you think about investing in a publicly traded company.

One way to think about a stock is that it is a black box. To get it started, you have to open up the box and put some money (capital) into it. Then, as long as everything goes well, money starts coming out of the black box — like an ATM — over time. You’re not just getting your money back. Over time, you can take out a large amount of money as profit and that initial capital can grow far beyond the amount you put in.

The income that flows out of the black box of a publicly traded company is special. It tends to increase over time as productivity, population, and GDP grows. It tends to rise as inflation increases. It benefits from technological advancements. If you diversify into a lot of these different black boxes, they can be a pretty reliable way to make money in the long run, even if sometimes the money slows down or even stops for short periods of time.

There might be a lot of demand for Bitcoin in 10 or 20 or even 100 years — or there might not. It’s almost impossible to know whether or not interest will continue or the next big thing will come along and make it obsolete.

We can say with much more confidence that there will be interest in 100 years in stocks. Tastes change, but people are likely to always be interested in black boxes that create money! Black boxes of Bitcoin or gold might have more money in them when you open them in the future, but they don’t produce any sort of earnings.

There are no guarantees in investing — it’s easy to lose money in the short term. But in the long term, stock prices are not a random squiggle of lines representing a meaningless random process (like Bitcoin). There is an almost gravitational force that has pulled stock prices upwards over our lifetimes, and it’s likely those same forces will continue to pull stock prices up into our retirement years and beyond. Bitcoin, gold, oil, or art might make a lot of money for you, but in our opinion, a diversified portfolio prominently featuring stocks is the most reliable path to a secure financial future.

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your question at
ggard@telarrayadvisors.com or sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

Categories
News News Feature

Trust the Process: Don’t Let FOMO Dictate Your Investments

Photo: Pepi Stojanovski | Unsplash

One of the most frustrating things about investing can be FOMO — fear of missing out. Most new investors pick their positions by looking at the highest returns in previous periods and buying whatever did the best. Then they engage in an unfortunate game of leapfrog, getting drawn in by the next hot investment after it’s already gone up.

This outcome-oriented thinking not only produces poor returns; it’s also extremely discouraging. It’s the reason that after a setback, investors often start thinking about the markets as an unreliable casino and hang onto their cash, to their long-term detriment.

In a way, capital markets are a casino — but the rare one that is in your favor in the long run. Nobody can guess what will happen this month or year, but if history is any guide, it’s hard to be worse off in the markets as the years turn into decades and the growing earning power of thriving companies begins to manifest in your account.

It’s all about your mindset. Here are three simple statements that process-oriented — and successful — long-term investors tend to believe:

1. For any set of stocks or funds, just one will perform the best over any given period, and sometimes even the best one will go down.

2. Despite statement number 1, investors should stay invested and diversified through good markets and bad, even though much or all of their portfolio will miss that one best thing. They should not chase extreme performance no matter how tempting it may be.

3. Looking backward, investors shouldn’t regret number 2, even if they had a good guess about what would do best or if they see questionable choices of irresponsible investors rewarded with huge windfall profits.

While it’s difficult not to wish for a windfall, here are a few ideas that might help you avoid short-term regret once you’ve made the correct long-term choices:

1. Understand that the market outcome for a given period is just one of countless ways things could have turned out. A more conservative allocation might annoy you when everything is going up, but when things go wrong it can be a lifesaver. You never know, in advance, what will go wrong in the economy (COVID-19 anyone?).

2. To jump in and out of speculative bets successfully, you have to nail the timing perfectly, twice. You have to get in near the bottom and get back out at or near the top. Getting either decision right is hard. Getting both right is almost impossible. No matter what they say, your friends or people you read on the internet are not consistently successful at this in the long-term.

3. The kinds of investments that are likely to double or triple in a short time are also usually the kind that can go to zero very quickly. Believe it or not, if you can just average 20 percent returns a year, in the long run you will be one of the best investors in the world. There’s no reason to swing for the fences all the time.

4. Your investments are irreplaceable once you reach a certain career stage and age. A 20-year-old could lose their life savings on a speculative stock and make the money back in a matter of months. A 60-year-old looking at retirement would dramatically impair their lifestyle if they lost a big chunk of their nest egg. There’s just not enough time to accumulate money and get it working in the market to ever recover past a certain point.

Most new investors think the outcome is all that matters and compare their results to the hottest stocks and benchmarks to inevitable disappointment. A process-oriented investor can be confident they made good choices before even seeing the results. A process-oriented investing mindset can help you with the most important thing — staying in the race.

Have a question or topic you’d like to see covered in this column? Contact the author at ggard@telarrayadvisors.com. Gene Gard is Co-Chief-Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions.

Categories
Opinion

Worst In Its Class

There are two stories about “juicing” in the national news this month. One is about major-league baseball players who allegedly used steroids and human growth hormone to juice their statistics.

The other one got less attention, but, unfortunately, Memphis and Regions Morgan Keegan are at the center of it. It’s about a mutual-fund manager named James Kelsoe Jr., who juiced investment returns to Barry-Bonds-like proportions before the funds “crashed and burned,” as a columnist for Kiplinger.com put it this week.

A few days earlier, Morgan Keegan’s mutual funds were the subject of The Wall Street Journal‘s “Money & Investing” column headlined “Morgan Keegan Sued Over Mutual-Fund Woes.” The funds and Kelsoe were also written up in a Wall Street Journal page-one story on October 17th.

The lawsuit filed in U.S. District Court in Memphis on December 6th by Richard Atkinson and his wife Patricia seeks class-action status and names as defendants Morgan Keegan, Regions Financial Corporation, funds manager Kelsoe, and 13 directors of the funds, including Morgan Keegan co-founder Allen Morgan Jr.

Why are a southeastern regional brokerage firm and a couple of its mutual funds getting so much attention? Because the funds are “worst in class” at a time when the phrases “credit crisis” and “sub-prime lending” have become household words and moved from the financial news to mainstream news. In 2007, the funds lost 50 percent or more of their value, while other funds in their peer group either had positive returns or losses of 8 percent or less.

“Of 439 other intermediate bond funds and 253 other high-income bond funds, none suffered losses of this magnitude,” the lawsuit says.

It claims the defendants omitted or misrepresented important facts about the funds and made them appear less risky than they were. Morgan Keegan does not comment on pending litigation, a spokeswoman said.

Silence only whets the appetite of investors and reporters. The danger for Kelsoe and Regions Morgan Keegan is that they will become the symbol — à la Bernie Ebbers and WorldCom and the telecom crash, Mississippi lawyer Dickie Scruggs and class-action lawsuits against tobacco and insurance companies, and former Arkansas governor Mike Huckabee and evangelical Christians — for a regional story that becomes a national story. Fat chance, you scoff; this is just a one-day story. Well, three “one-day stories” in national publications in two months are pretty unusual for a regional financial firm. As The Wall Street Journal wrote last week, “Fund managers and others on Wall Street will be closely watching this case.” That’s journalese for “test case.”

Since its founding in 1969 by Morgan and James Keegan, Morgan Keegan has been a Memphis success story. In 1970, Morgan Keegan purchased a seat on the New York Stock Exchange. In 1978, the company attached itself to Federal Express by making the first trade when it became a public company. And in 1983, Morgan Keegan itself became a public company. Two years later, it moved into its downtown headquarters, which is still the centerpiece of the Memphis skyline. Morgan Keegan was bought out by Birmingham-based Regions Financial in 2001. Allen Morgan has announced that he is retiring at the end of this year.

The sub-prime story has legs, as we say. In other words, it will be around awhile. Class-action lawsuits — and the Atkinson lawsuit has not yet been granted class-action status — can take years to unwind. And that means more publicity as the plaintiffs and their attorneys (the Apperson Crump law firm in Memphis, plus outside counsel) and public-relations firms keep the story alive. Plaintiffs are seeking a jury trial.

The bigger story is homeowners, foreclosures, and a possible recession. Investors and their adventures are a part of that. Thousands of downtown condos and suburban homes in Memphis were financed with sub-prime mortgages with low teaser interest rates that will be reset to higher rates in 2008. Webb Brewer, a lawyer with Memphis Legal Services, said he believes there will be 12,000 to 15,000 foreclosures in Shelby County in 2008, with half of them related to sub-prime loans.

Regions Morgan Keegan isn’t the only one hurting. First Horizon, the last big independent bank with headquarters in Memphis, is down more than 50 percent in the stock market in 2007, and its dividend, now 7 percent, may be in jeopardy.

Why didn’t we all just invest in Hannah Montana concert-ticket futures instead?