Financial Tips Archives | Financial Planner & Wealth Advisor Johns Island, SC

Should one Refinance their Mortgage

June 6, 2022 by Justin M. Follmer, MBA, CFP®, AIF®

As mortgage rates sit at decade record highs, it’s no surprise to see and hear countless ads on social media and the radio that one “should refinance their mortgage” before rates go higher. Even during periods of decreasing rates, one “should refinance their mortgage” to take advantage of lower rates. It’s obvious to us that mortgage companies want borrowers to consider refinancing their mortgages regardless of where rates are. We aren’t faulting them, but in our fiduciary opinion, one “should refinance their mortgage” only when it is in their best interests.

How to determine when one should refinance their mortgage

It’s important to understand how interest rates work within mortgages and their impact on the amortization schedule. With the help of an example, we can illustrate the effects of mortgaging your home. Let’s assume you are purchasing a $450,000 home, 20% down, at 4.75% annual interest over 30 years. This results in a $360,000 mortgage with a Principal and Interest payment of $1,877.93 per month.^[1]

The amortization schedule shows that $1,425 of the payment will apply to interest while $452.93 towards the principal of the loan. Each successive monthly payment will decrease the interest portion and increase the principal portion. The interest is front-loaded to the earlier years of the mortgage. And then vice versa towards the later years. It’s important to understand this because it can help determine when one should refinance their mortgage. And here’s why. If you pay this mortgage as agreed, then you will have paid $316,054.95 in interest over the life of your loan. That’s a lot of money not going in your pocket!

Why is this so important? Because each time one refinances their mortgage, it resets the amortization schedule. This can be a good or bad thing depending on how the numbers play out.

Holding all else equal, either refinancing from a 30 to a 15 year, refinancing to a lower interest rate, and/or adding additional payments usually have the effect of reducing total interest paid over the life of the loan.

On the other hand, holding all else equal, resetting from a 30 year to a new 30 year, using home equity to pay off consumer debt, or allowing forbearance programs to continue, usually have the effect of increasing the total interest paid.

There are, of course, exceptions to the above

We hear ads consistently tout the benefits of refinancing to pay off credit cards, student loans, and car loans. Because mortgage companies don’t have a fiduciary responsibility, they rarely must determine if that is in your best interests. It’s up to you to determine if it makes the most sense in your specific situation. Using equity to refinance credit cards, for example, won’t allow the mortgage interest on that portion of the loan to be deductible. It will also increase your balance owed and spread your payments over the life of the loan.

“But it’s at a lower rate!” That may be true; but behavioral finance can cause further problems if you don’t address why the balance of the credit card grew over time. If this is left unresolved, one risks allowing the credit card balance to continue to grow.

All credit card debt isn’t bad debt. It’s a great way of building credit that allows one to borrow at the best rates when used responsibly. Our job as advisors is to provide advice that is sometimes hard to swallow. But, that allows clients to better position themselves towards accomplishing their most important financial goals. It’s not always easy, but tiny adjustments now can have immense changes years later.

In the end, one must compare the total interest and costs paid over the current mortgage versus the new mortgage. This may include additional comparisons of consumer debt balances and total interest over the life of those loans plus the opportunity costs of these choices. You need to answer: does refinancing this debt put me in a better financial position when it’s paid back?

Navigating this challenging financial life is no casual walk in the park. The good news is that you don’t have to travel alone. We help clients of all backgrounds make challenging decisions like deciding when they should refinance their mortgage. If you’re tired of the confusion of doing it alone or if you have existing advisors that just aren’t cutting it, consider getting in touch today. We’re fiduciaries first, which means we’ll provide the advice that is in your best interests, not in the interests of us or the mortgage company’s bottom line.

^[1]Ignoring property taxes and homeowner’s insurance premiums

Where is the Value Premium?

July 6, 2018 by Justin M. Follmer, MBA, CFP®, AIF®

From 1928–2017 the value premium¹ in the US had a positive annualized return of approximately 3.5%². In seven of the last 10 calendar years, however, the value premium in the US has been negative. This has prompted some investors to wonder if such an extended period of underperformance may be cause for concern. But are periods of underperformance in the value premium that unusual? We can look to history to help make sense of this question.

SHORT TERM RESULTS

Exhibit 1 shows yearly observations of the US value premium going back to 1928. We can see the annual arithmetic average for the premium is close to 5%, but in any given year the premium has varied widely, sometimes experiencing extreme positive or negative performance. In fact, there are only a handful of years that were within a 2% range of the annual average—most other years were farther above or below the mean. In the last 10 years alone there have been premium observations that were negative, positive, and in line with the historical average. This data helps illustrate that there is a significant amount of variability around how long it may take a positive value premium to materialize.

Exhibit 1. Yearly Observations of Premiums, Value minus Growth: US Markets, 1928–2017³

LONG TERM RESULTS

But what about longer-term underperformance? While the current stretch of extended underperformance for the value premium may be disappointing, it is not unprecedented. Exhibit 2 documents 10-year annualized performance periods for the value premium, sorted from lowest to highest by end date (calendar year).

This chart shows us that the best 10-year period for the value premium was from 1941–1950 (at top), while the worst was from 1930–1939 (at bottom). In most cases, we can see that the value premium was positive over a given 10-year period. As the arrow indicates, however, the value premium for the most recent 10 year period (ending in 2017) was negative. To put this in context, the most recent 10 years is one of 13 periods since 1937 that had a negative annualized value premium. Of these, the most recent period of underperformance has been fairly middle-of-the-road in magnitude.

Exhibit 2. Historical Observations of 10-Year Premiums, Value minus Growth:
US Markets 10-Year Periods ending 1937–2017⁴

While there is uncertainty around how long periods of underperformance may last, historically the frequency of a positive value premium has increased over longer time horizons. Exhibit 3 shows the percentage of time that the value premium was positive over different time periods going back to 1926. When the length of time measured increased, the chance of a positive value premium increased. For example, when the time period measured goes from five years to 10 years, the frequency of positive average premiums increased from 75% to 84%.

Exhibit 3. Historical Performance of Premiums over Rolling Periods, July 1926–December 2017⁵

CONCLUSION

What does all of this mean for investors? While a positive value premium is never guaranteed, the premium has historically had a greater chance of being positive the longer the time horizon observed. Even with long-term positive results though, periods of extended underperformance can happen from time to time. Because the value premium has not historically materialized in a steady or predictable fashion, a consistent investment approach that maintains emphasis on value stocks in all market environments may allow investors to more reliably capture the premium over the long run. Additionally, keeping implementation costs low and integrating multiple dimensions of expected stock returns (such as size and profitability) can improve the consistency of expected outperformance. If you are reading this and are not sure what we are discussing, don’t worry; it simply means you haven’t had a chance to sit down with us to explore our Investment Philosophy. We manage clients’ financial lives and portfolios using an academic methodology – one of which is pursuing the value premium. Get in touch today to see how one of our Charleston Financial Advisors can help you.

The value premium is the return difference between stocks with low relative prices (value) and stocks with high relative prices (growth).
Computed as the return difference between the Fama/French US Value Research Index and the Fama/French US Growth Research Index. Fama/French indices provided by Ken French.
In US dollars. The one-year relative price premium is computed as the one-year compound return on the Fama/French US Value Research Index minus the one-year compound return on the Fama/French US Growth Research Index. Fama/French indices provided by Ken French. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.
In US dollars. The 10-year rolling relative price premium is computed as the 10-year annualized compound return on the Fama/French US Value Research Index minus the 10-year annualized compound return on the Fama/French US Growth Research Index. Fama/French indices provided by Ken French. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.
In US dollars. Based on rolling annualized returns using monthly data. Rolling multiyear periods overlap and are not independent. Fama/French indices provided by Ken French. Indices are not available for direct investment. Their performance does
not reflect the expenses associated with the management
of an actual portfolio. Past performance is no guarantee of future results.
Source: Dimensional Fund Advisors, LP with edits by Coastal Wealth Advisors, LLC

Tuning Out the Noise

June 5, 2018 by Justin M. Follmer, MBA, CFP®, AIF®

For investors, it can be easy to feel overwhelmed by the relentless stream of news about markets.

Being bombarded with data and news headlines presented as impactful to your financial well-being can evoke strong emotional responses from even the most experienced investors. News headlines from the ”lost decade”¹ can help illustrate several periods that may have led market participants to question their approach.

May 1999: Dow Jones Industrial Average Closes Above 11,000 for the First Time
March 2000: Nasdaq Stock Exchange Index Reaches an All-Time High of 5,048
April 2000: In Less Than a Month, Nearly a Trillion Dollars of Stock Value Evaporates
October 2002: Nasdaq Hits a Bear-Market Low of 1,114
September 2005: Home Prices Post Record Gains
September 2008: Lehman Files for Bankruptcy, Merrill Is Sold

While these events are now a decade or more behind us, they can still serve as an important reminder for investors today. For many, feelings of elation or despair can accompany news headlines like these. We should remember that markets can be volatile and recognize that, in the moment, doing nothing may feel paralyzing. Throughout these ups and downs, however, if one had hypothetically invested $10,000 in US stocks in May 1999 and stayed invested, that investment would be worth approximately $28,000 today.²

News — Exhibit 1. Hypothetical Growth of Wealth in the S&P 500 Index, May 1999-March 2018. © 2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Not representative of an actual investment. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

When faced with short-term noise, it is easy to lose sight of the potential long-term benefits of staying invested. While no one has a crystal ball, adopting a long-term perspective can help change how investors view market volatility and help them look beyond news headlines.

THE VALUE OF A TRUSTED FINANCIAL ADVISOR

Part of being able to avoid giving in to emotion during periods of uncertainty is having an appropriate asset allocation that is aligned with an investor’s willingness and ability to bear risk. Take our free risk assessment here. It also helps to remember that if returns were guaranteed, you would not expect to earn a premium. Creating a portfolio investors are comfortable with, understanding that uncertainty is a part of investing, and sticking to a plan may ultimately lead to a better investment experience.

However, as with many aspects of life, we can all benefit from a bit of help in reaching our goals. The best athletes in the world work closely with a coach to increase their odds of winning, and many successful professionals rely on the assistance of a mentor or career coach to help them manage the obstacles that arise during a career. Why? They understand that the wisdom of an experienced professional, combined with the discipline to forge ahead during challenging times, can keep them on the right track. The right financial advisor can play this vital role for an investor. A financial advisor can provide the expertise, perspective, and encouragement to keep you focused on your destination and in your seat when it matters most. A recent survey conducted by Dimensional Fund Advisors found that, along with progress towards their goals, investors place a high value on the sense of security they receive from their relationship with a financial advisor.

Having a strong relationship with an advisor can help you be better prepared to live your life through the ups and downs of the market. That’s the value of discipline, perspective, and calm.

At Coastal Wealth Advisors, we believe that the right financial advisor plays a vital role in helping you understand what you can control while providing the expertise, perspective, and encouragement to keep you focused on your destination. That’s the difference the right financial advisor makes. If you find yourself more worried now than you have been in the past, give us a call; we’d love to sit down with you and learn about your unique life.

For the US stock market, this is generally understood as the period inclusive of 1999 – 2009.
As measured by the S&P 500 Index, May 1999–March 2018. A hypothetical dollar invested on May 1, 1999, and tracking the S&P 500 Index, would have grown to $2.84 on March 31, 2018. However, performance of a hypothetical investment does not reflect transaction costs, taxes, or returns that any investor actually attained and may not reflect the true costs, including management fees, of an actual portfolio. Changes in any assumption may have a material impact on the hypothetical returns presented. It is not possible to invest directly in an index.
Source: Dimensional Fund Advisors LP with edits by Coastal Wealth Advisors, LLC.

Where There’s a Will, There’s a Way

August 3, 2016 by Justin M. Follmer, MBA, CFP®, AIF®

We’ve all heard this phrase: where there’s a will, there’s a way. It’s typically said during difficult moments where success seems almost impossible; almost as if to say my determination will be enough to get through this trouble.

When we die, our troubles disappear for us…but not for those we love. Our loved ones inherit both the good and bad that accumulated during our lives. To make the life of your loved ones less troubling, perhaps you should think of this phrase a bit differently.

Where there’s a WILL, there’s a way.

A WILL is a legal document that transfers what you own to your beneficiaries upon your death. It also names an executor to carry out the terms of your WILL and a guardian for your minor children, if you have any. Your signature and those of witnesses make your WILL authentic. Witnesses don’t have to know what the WILL says, but they must watch you sign it and you must watch them witness it. Hand-written WILL s — called holographs — are legal in about half of the states, but most WILL s are typed and follow a standard format.

According to Legalzoom, it’s estimated that 55% of American adults don’t have a WILL or another estate plan in place. And that percentage is even worse among minorities – 68% for African-Americans and 74% of Hispanic-Americans.⁽¹⁾

Without a WILL, you die intestate. The laws of your state then determine what happens to your estate and your minor children. This process, called administration, is governed by the probate court and is notoriously slow, often expensive, and subject to some surprising state laws. Do you really want a court deciding vital family matters such as how to divide your estate and custody of your children?

So, who needs a WILL?

We believe the short answer is everyone! However, it’s imperative to make a WILL as soon as you have any real assets, or get married, and certainly by the time you have children. Your WILL should contain several key points in order to be valid. The following list are some of the items that your WILL should address:

Your name and address.
A statement that you intend the document to serve as your WILL.
The names of the people and organizations — your beneficiaries — who will share in your estate.
The amounts of your estate to go to each beneficiary (usually in percentages rather than dollar amounts.)
An executor to oversee the disposition of your estate and trustee(s) to manage any trust(s) you may establish.
Alternates to provide both executor responsibilities and trustee(s).
A guardian to take responsibility for your minor children and possibly a trustee to manage the children’s assets in cooperation with the guardian.
Which assets should be used to pay estate taxes, probate fees and final expenses

The answers to these points should give your WILL the necessary resources to address what you wish to happen to your estate. We believe it’s very important to seek the professional skills and guidance of an estate planning attorney who can take your answers and draft a WILL that is completely tailored to you. Estate laws change over time and establishing a relationship with a local estate planning attorney can help you keep your legal documents up to date.

Check out: You don’t know what you don’t know until you know it.

We’re not attorneys, don’t give legal advice, and don’t receive any form of referral fee, but, we help our clients quarterback this discussion with a competent estate planning attorney. In fact, we’re often the first person family members call on to do a lot of the leg work during the time of a loved one’s unfortunate death. When a WILL isn’t present, or doesn’t accurately address your current assets and liabilities, it can create a lot of uncertainty, stress for family members, and costs at a time when they are mourning the loss of you. Get in touch with us today to start the process of gathering the information to create your WILL. Where there’s a WILL, there’s a way; you just need the determination and help to get it done.

^1. http://info.legalzoom.com/statistics-last-wills-testaments-3947.html

Positive News Articles

June 15, 2016 by Justin M. Follmer, MBA, CFP®, AIF®

Where are all the positive news articles? Do you ever listen to the news and find yourself thinking that the world has gone to the dogs? The roll call of depressing headlines seems endless. But look beyond what the media calls news, and there also are a lot of things going right.

It’s true the world faces challenges in maintaining stable and well-functioning social, environmental, and economic systems. The legacy of the financial crisis is still with us, and concerns about climate change and sustainability are widespread.

Europe is grappling with a refugee crisis; China faces a difficult transition from an export and industrial-led economy to one driven by domestic demand; and the US is preoccupied with a sometimes rancorous election campaign.

But it’s also easy to overlook significant advances in raising the living standards of millions, increasing global cooperation on sustainability, and efforts to build greater transparency and trust in financial institutions.

Many of the 10 developments cited below don’t tend to make the front pages of daily newspapers in the form of positive news articles or the lead items in the TV news, but they’re worth keeping in mind on those occasions when you feel overwhelmed by all the grim headlines.

So here’s an alternative positive news articles bulletin:

Over the last 25 years, 2 billion people globally have moved out of extreme poverty, according to the latest United Nations Human Development Report.¹
Over the same period, mortality rates among children under the age of 5 have fallen by 53%, from 91 deaths per 1000 to 43 deaths per 1000.
In September 2015, all members of the UN set 17 sustainable development goals for 2030, including targets for eliminating poverty and hunger and lifting standards in health, education, water, energy, and infrastructure.
Global trade has expanded as a proportion of GDP from 20% in 1995 to 30% by 2014, signaling greater global integration.²
Global bank regulators recently announced that since the financial crisis they have implemented reforms to reduce leverage, address systemic risk, and build capital buffers into the banking system.³
The world’s biggest economy, the US, has been recovering. Unemployment has halved in six years from 10% to 5%.⁴
Global oil prices, while about 80% up from January’s 13-year lows, are still 50% below where they were two years ago. While bad news for the oil sector, lower prices also raise real incomes for consumers, increase profits outside energy, and decrease costs of production.
While fossil fuels still play a major role in the economy, renewable energy sources—such as solar and wind— accounted for nearly 22% of global electricity generation in 2013 and are seen rising to at least 26% by 2020.⁵
We live in an era of rapid innovation. One report estimates the digital economy now accounts for 22.5% of global economic output and projects digital technologies could generate $2 trillion of additional output by 2020.⁶
The growing speed and scale of data are increasing global connectedness and transforming industries as new discoveries are made in such areas as engineering, medicine, food, energy, and sustainability.

No doubt many of these advances will lead to new business and investment opportunities. Of course, not all will succeed. But the important point is that science and innovation are evolving in ways that can help mankind. The world is far from perfect. The human race faces major challenges. But just as it is important to be realistic and aware of the downside of our condition, we must also recognize the major advances that we are making.

Just as there is reason for caution, there is always room for hope. And keeping these positive news articles and trends in mind can help when you feel overwhelmed by all the bad news. Working with an investment advisor and financial planner can help you keep a perspective on the positive news articles that have an impact on your portfolio and long-term financial plan. Looking at the daily barrage of negativity through traditional media outlets as well as Facebook and other social media platforms can seriously dampen your mood. A constant state of depressed emotions and feelings can have lasting negative effects on the decisions you make with your money. One of the core investment philosophies of Coastal Wealth Advisors is keeping emotions in check – thereby helping to prevent our clients from making poor decisions at the worst times. Let us be your fiduciary; let us help you towards a more meaningful investing and planning experience. Get in touch today to learn about our unique financial planning process.

Image credit: Nitin Dhumal

1.”Human Development Report 2015: Work for Human Development,” United Nations.
2.”International Trade Statistics 2015,” World Trade Organization.
3.”Finalising Post-Crisis Reforms: An Update,” Bank for International Settlements, November 2015.
4. Bureau of Labor Statistics, May 26, 2016.
5. “Renewable Energy Statistics,” International Energy Agency, March 2016.
6. “Digital Disruption: The Growth Multiplier,” Accenture and Oxford Economics, February 2016
7. Authored by Jim Parker of Dimensional Fund Advisors. Original article here.