Top of Mind (Q4 2016)

Each quarter, we will share three things that we are keeping Top of Mind

Here's our latest list:

1.)New year, new set of predictions for Byron

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Each year, veteran investor Byron Wien publishes ten market predictions (or surprises) for the upcoming year.  His latest list builds mostly upon trends that we already see in today's markets but also introduces some new concepts.  It provides for an enjoyable read and paints an optimistic picture of the year to come.  Here we go 2017!


2.) Rates are trending up.  What does it mean for your ?

"Federal Reserve Board raises rates a quarter point," "Interest rates are on the rise," "10-year treasury above 2.4%" - if you have heard or seen these headlines in recent months and are a bit confused as to whether this is good news or bad news for you and your money, you are not alone.  And the answer is - it depends.  Rising rates are oftentimes deemed favorable for savers (ie: you can earn more on a bank deposit or a newly purchased bond holding than you could a short time ago) and unfavorable to borrowers (ie: rates you pay for a mortgage, car loan, etc will rise).  

However, you must keep in mind the impact rising rates has on existing bond holdings (whether direct holdings or mutual funds) and the inverse relationship between the price of a fixed income instrument and interest rates.  As rates rise, the value of an existing bond falls (simple way to think of it - if you could buy a bond paying you 2% today and tomorrow, you can buy the same bond paying you 2.5%, which would you choose to?  The 2.5% bond - higher interest earnings are better.  That means that the 2% instrument now has to be "marked down" to entice you to still buy it despite the lower interest rate). 

So what does this mean for your existing bond holdings as rates rise?  Active management and a full understanding of the mechanics is essential.  When rates are falling, bond prices rise, producing a reasonable risk/return trade off.  Yet, existing bond market values falling as rates rise is a mathematical certainty.  As a result, there are many variables to consider when evaluating the role they will play in your portfolio on an ongoing basis and how best to position yourself.  Contact us if you'd like to learn more. 

3.) Credit Card Sign-up Bonuses - a Reward or a Danger?

There has been a lot of press as of late about the Chase Sapphire Reserve Card.   Beginning in 2016, Chase offered a sign-up bonus viewed to be too good to be true.  That may very well have been the case as Chase is now slashing that bonus in half.  Check out this New York Times article describing this and other reward bonuses and how they have evolved over time.

This got us thinking - do these rewards present dangerous temptations to those who don't understand the "rules?"  As you all likely know (but many applicants may not), credit cards carry significant costs if not used properly.  Failure to pay off your bill each month in full can lead to late fees, interest charges at incredibly high rates, and negative effects on your credit score (beyond late payments, carrying balances that represent a high percentage of your limit as well as multiple applications for credit cards (which trigger inquiries), can also lower your score.)  Further, these high reward cards carry high annual fees, that may or may not be worth the associated rewards.

Are these higher-than-normal rewards a potential danger, enticing people to apply and then carry balances?  Or are these simply marketing programs in disguise, meant to build customer loyalty and encourage debit-card carrying millennials to start using credit instead?  It's an interesting question and one that you should carefully evaluate for your own specific circumstances if you are considering adding and/or changing your credit cards.  No doubt these rewards are tempting and can benefit you - but as with most things, "buyer beware!"

Check back next quarter to find out what we're keeping Top of Mind