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Friday Financial Five – November 1st, 2013

Friday, November 01, 2013


A lame duck situation at the Federal Reserve

We’ve all heard of a lame duck president. The Fed currently has a lame duck chairman, so it’s no surprise that nothing spectacular came out of Thursday’s Fed meeting. There is still a commitment to keeping interest rates low and continuing the bond-buying program. They did note that “the housing sector slowed somewhat in recent months”, showing there was some concern about the mortgage rate increase in the middle of the year.

The latest on the Case-Schiller index

While the Fed noted concerns in the housing market, the latest Case-Schiller index indicated that big cities are still humming. The 20 largest metro areas saw a nearly 13 percent rise from August 2012 to August 2013. Inventory has increased slightly due to increased mortgage rates, but houses for sale are expected to remain stable as fewer sellers bring their homes to market in the winter months.

A fiduciary standard for those advising 401(k) participants

A fiduciary agrees to put the client’s interest first, basically taking responsibility for a client’s financial well-being. Congress and the SEC have spent years trying to define this relationship in the personal investment advisory world, and now it’s on the table for those advising on 401(k) plans. Currently, financial services firms that administer 401(k)s are not held to a fiduciary standard, and “may recommend funds in which they have a financial interest rather than products better suited to the investor”, according to the U.S. Government Accountability Office.

Another comparison of Mutual funds and Exchange Traded Funds (ETFs)

An interesting study by Craig Israelsen of Financial Planning Magazine compared a mutual fund portfolio and an ETF portfolio, each using twelve different asset classes. He used the largest mutual funds in each class and the twelve largest ETFs in each class, all equally weighted at 8.33 percent. The results showed similar returns for a three year time period (8.13 percent for ETFs and 8.23 percent for mutuals), while the ETF portfolio was more tax efficient and less expensive.

The link between wealth and spending

The “wealth effect” in economics states that increases or decreases in wealth will have an accompanying increase or decrease in spending. Therefore, it stands to reason that the run up in the stock market would lead to greater spending, but our GDP numbers and forecasts indicate that isn’t the case. There are opposing forces in the current environment – excessive debt and a lack of retirement savings. Until those issues are addressed, stock market gains can’t be expected to prompt increased consumer spending.

Dan Forbes is a regular contributor on financial issues. He is a CFP Board Ambassador. He leads the firm Forbes Financial Planning, Inc in Providence, RI and can be reached at [email protected].


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