Stocks had another solid week stemming from positive economic news, an increase in consumer confidence, and expectations that Greece is close to finalizing a deal with its Euro partners. The Dow rose 1.16%, while the S&P logged an increase of 1.38% (up 24% since October). All of the major indexes are up over 6% year-to-date, but the pros are waiting for an impending pullback in what appears to be an overbought equity market.

Markets would actually benefit from a 3% to 5% pullback, which I believe will lead to the next leg in this prolonged rally. In her weekly Market Outlook, CNBC’s Patti Domm hosted Sam Stoval of S&P Capital, who stated that a “baby bear market” similar to the one we had last fall is usually followed by a rally of about 23% over a period of 6 months. The S&P has thus far generated 24% in 4.5 months. Therefore, I recommend taking profits in positions that outperformed the indexes, but do not try to time a pullback. Concurrently, I suggest that you patiently dollar cost average into equities on down market days because as the economy improves, I expect stocks will rise–unless, of course, economic or political news turns bearish.

An important economic issue investors must be wary of is the impact of 2012 gasoline prices. As tensions between the U.S., its allies, and Iran continue to increase, expect oil prices to to rise, ultimately negating the benefits of the recently passed payroll tax-break extension. People will travel less frequently to restaurants, reduce discretionary spending, and “staycations” will be on the summer forecast, which will ultimately have a negative impact on our fragile recovery. According to Chris Kahn, an Associated Press energy writer, a $0.25 increase in the price of gasoline over a one-year period will drain $35 billion from the U.S. economy.

Iran ratcheting up the anti-west political rhetoric is certainly not going to help.

One strategy to employ in playing increasing oil prices is to buy Chevron (CVX, 3.04% dividend yield), Conoco Philips (COP, 3.6% dividend yield), or the SPDR Select Energy Fund (EXL, 2.26% dividend yield). If you are in a gambling mood, you may purchase the more risky U.S. 12-month oil futures (USL).

A less risky play is in REITs and mortgage-backed REIT securities. Interest rates are expected to remain low for the foreseeable future, employment is on the rise, and we are in a weak to moderate recovery, which all supports REITs. I like the SPDR DJ Wilshire REIT ETF (RWR, 2.96% dividend yield), a position currently held in my recommended Portfolio #2. Another interesting option is to focus specifically on mortgage-backed securities. Consider Annaly Capital Management (NLY,) which supports a 13.7% dividend yield, and the iShares FTSE NAREIT Mortgage Fund (REM) that generates an 11.36% dividend yield.

Another alternative to generating a return through a higher dividend yield in an up market is to include a multi-sector bond fund in your portfolio. I have owned Loomis Bond Fund (LSBRX) off and on for over 10 years, and it currently offers a 5.71% dividend yield. This fund can invest globally in fixed income securities of any maturity or quality—including junk bonds. The fund is also highly correlated to the equity market, which means that multi-sector bond funds are likely to mirror the performance roadmap of equities over time.

At this point, 2012 appears to be developing into a strong year for equity markets.  Although it is reasonable to expect a near term-correction, investors are in a risk on frame of mind—seemingly regardless of potential issues with Greece, tensions in the Middle East, and the increasing price of oil. My recommendation is to maintain an overweight equity position in large caps offering dividends.  On the fixed-income side, it would be wise to concentrate primarily on short and intermediate term bonds.

Note that U.S. markets will be closed on Monday.

With Baby Boomers one year into retirement and another roughly 18 to go we are finally starting to see questions pop up on why some will be paying more for premiums than others.

Here is the latest, even though it is short, article on the subject from HometownAnnapolis.com

Hopefully enough financial professionals will take notice of this problem and adjust accordingly but from the latest article from MarketWatch there is room for a lot of worry.

The article titled “Boomers turn home equity into 401k funds” highlights how little is known on Medicare & income.

People who decide to do this, rip out all their equity from thier home & invest the cash into a 401k vehicle, must realize that when they start to liquidate these monies they will be classified as INCOME.

Is this a problem?

Only if you like paying anywhere from 50% to about 200% more on Medicare premiums so you can “invest” at a tax free rate now of roughly 20%.

As we have written numerous times, Medicare counts everything that hits a tax a return before deductions as INCOME and the penalties are high (See article here).

How high?

For a 65 year old who earns under $85,000 throughout retirement and lives to age 85 – they can expect to pay roughly $58,000 in premiums.

If they earn just $1 more over the course of retirement they will pay $80,000

If they earn over $214,000 then they can expect to pay roughly $182,000 FOR THE SAME COVERAGE.

Again, if the financial industry wakes up to this issue it won’t be an issue but from the looks of it a lot of people are going to be in big trouble.

The Dow posted its worst one-day drop in value since the beginning of the year, losing 89 points on Friday; however, reasons for optimism are clear. The stock market has been in a rally since October, the economy is showing signs of recovery, jobless claims are on the decline, and we are in an election year. Year to date, the S&P has rallied 6.76%, while the Dow is up 4.78%.

This bull market, which began over four months ago, has led to the strongest annual start since 1987, so the equity markets are due for a correction. Issues that may motivate the investment community to drive prices down include Greeks demonstrating in the streets against austerity measures, ongoing problems in the Middle East, 34 out of 37 Italian banks being downgraded by rating agencies, and poor Chinese trade data. Therefore, it may be wise to take some profits and then be prepared to put that cash back to work as markets pull back.

For example, I currently hold a position in Apple (a stock I recommended in the middle of 2011), but it is up over 8% in February, 22% year to date and over 28% over the last three months. Although I believe Apple could attain a $600 per share price tag by the end of 2012, I intend to take profits this week and re-invest proceeds back into Apple on a pullback. Should you also hold securities that have outperformed over the past several months, it would be prudent to take some profits.

Stocks to invest in on a pullback include Abbott (ABT, 3.46% dividend), Apple (AAPL, 0%), Conoco Philips (COP, 3.65%), Emerson Electric (EMR, 3.07), Home Depot (HD, 2.6%), Johnson and Johnson (JNJ, 3.49%), McDonald’s (MCD, 2.80%) and Weyerhaeuser Co (WY, 3%).

On the fund side of the ledger, you may want to consider Wisdom Tree Dividend (DTN, 3.11%), SPDR S&P 500 (SPY, 1.96%), iShares S&P Midcap 400 (IJH, 1.19%), Vanguard Small Cap (VB, 1.27%), Materials Select SPDR (XLB, 1.99%) and Energy Select SPDR (XLE, 1.45%).

Finally, there are a couple of new fixed-income funds that provide an improved level of inflation protection compared to the funds that have been available to investors. They include the PowerShares DB U.S. Inflation ETN (INFL) and the ProShares 30-year TIPS/TSY Spread (RINF).

Inflation is currently under control, but the injection of capital by the Fed over the last two years, as well as a recovering economy, will eventually have an impact on prices and inflation.
Bottom line: expect a near-term correction, but do not try to time the market. Instead, dollar cost average into equities on down market days, and by the end of 2012, you will be rewarded by taking advantage of an economic turnaround in the U.S.

The following is an update on the two slow and steady buy-and-hold portfolios I recommended as we entered 2012.

Portfolio #1 (50% equity, 40% fixed income, 10% cash)

Portfolio #2 (55% equity, 40% fixed income, 5% cash)

So far, 2012 has been good to investors. The S&P and NASDAQ have been up for five consecutive weeks, and the Dow has not lost over 100 points on any one day this year, which is quite a contrast from 2011.  As of the first trading day of the year, investors have been in a risk-on state of mind, resulting in the VIX (a volatility gage) falling to its lowest level since the summer of 2011

Risk-on investments such as growth stocks, basic materials, technology, junk bonds, and international equities have outperformed low risk securities such as high dividend-paying stocks and high quality bonds. SPY, which is a fund that tracks the performance of the S&P, generated a 5.5% return while, high dividend-paying funds posted market returns ranging from 1% to 4%.

The real surprise of the past week was the jobs report. Basically, the U.S. knocked the leather off the ball, with the unemployment rate falling to 8.3%. It appears that the labor market is improving, and global markets reacted positively by driving the performance needle to the upside. Interestingly, investors have ignored the prevailing economic and political risks and moved equity markets back up to the pre-recession levels of 2008. Conversely, Ben Bernanke and the Fed are clearly not as upbeat on the U.S. economy, and problems in Europe (Greece), the Middle East Iran, Egypt and Syria), and Washington still threaten to curtail the current rally.

There are a host of additional factors investors need to closely monitor prior to increasing equity exposure. Kristen Scholer’s articles on CNBC reveal that this past January has been the best performing January since 1997, but the volume on the New York Stock Exchange has been at the lowest since the fall of 1999. Equities have been in a 10-week rally without a pullback, and the NASDAQ is at its highest level since the 2000 tech bubble.

I do believe 2012 can bring markets to new highs, but a number of variables must fall into place, including continued growth of the U.S. economy, the willingness of our political leaders to work together, Europe, the Middle East and finally, the Chinese economy. With cautious optimism, I will continue to increase equity exposure on down market days, but I do not recommend chasing current market leaders.

Apparently even the main stream media has caught onto to the fact that those with aging parents will have their lives altered.

Fox News picked up this article from the Associated Press that highlights what is to come

Millions now manage aging parents’ care from afar

France, Italy, Spain, and six other European nations were downgraded by S&P on Friday; Greece is on the verge of collapse; Iran continues its threat to block the Strait of Hormuz; JP Morgan Chase missed its revenue target, and the weekly jobs numbers fell short of expectations, but the Dow still finished the week up 0.5%. Go figure. One theory is that the stability of equity markets during the first two weeks of the year appears to indicate that stocks are selling at a discount, and stock prices also reflect many of the problems facing our European neighbors.

The shortened week ahead is charged with earnings and economic news that could significantly influence the volatility needle. Citigroup, Goldman Sachs, Bank of America, Morgan Stanley, Wells Fargo, Charles Schwab, US Bancorp, Amex, United Health, Google, IBM, Microsoft, Ebay and GE will all be reporting fourth quarter earnings and future guidance. On the economic front, the focus will be on housing starts, mortgage applications, existing home sales, industrial production, Producer Price Index (PPI), and jobless claims.

By the end of the week, investors will be able to judge the health of our banking system, whether the housing market is actually experiencing a turnaround, and corporate forecasts for the first half of 2012.

Given the potential political and economic issues facing investors, a prudent, short-term investment approach is to remain cautious. Keep in mind that should the Iranian issue escalate, oil prices may exceed $200 a barrel, and the global economic impact could be catastrophic resulting in a major pullback in stock prices.

Nonetheless, equities are selling at a discount. Ten-year Treasuries are yielding 1.85% and the S&P is generating approximately 2% in dividends, exceeding the yield of ten-year U.S. Treasuries. The price-to-earnings (P/E) ratios of the S&P and Dow currently stand at 12 times earnings, versus an historical average of 15 to 17 times earnings. The PowerShares QQQ Trust, which mirrors the NASDAQ 100, is currently trading at 14 times earnings, well below its long-term average.

Therefore, if you do not plan to retire for 5 years or more and can handle potential short-term market declines, a diversified portfolio populated with a higher concentration of equity will likely generate attractive long-term returns. The key question prior to increasing exposure to stocks is whether you can sleep at night if equities fall 10%, 15% or even 25%. If you do have a high tolerance for risk, equities can offer exceptional long term upside opportunity.

The following is an update of my two model portfolios:

Model Portfolio #1: Moderate Risk (5o% Equity, 40% Fixed Income, 10% Cash)

Portfolio #1 has generated a year to date return of 0.76%.

Model Portfolio #2: Moderate Risk+ (55% Equity, 40% Fixed Income, 5% Cash)

Portfolio #2 has generated a year to date return of 1.40%

Despite the fact that Portfolio #2 has outperformed Portfolio #1 for a couple of weeks, do not assume it should be the preferred option. It takes several quarters to track an investment program’s progress, and Portfolio #2 does carry more risk. When (and not if) we experience a pullback, the less volatile Portfolio #1 will likely outperform its more aggressive counterpart. As mentioned above, the right mix of stocks, bonds, and cash equivalents is dependent upon your risk tolerance level and investment time horizon.

If you do not change, you will become extinct –

Words to live by from a book “Who Moved My Cheese” written by Spencer Johnson, MD, and if we draw a correlation to financial services industry, it is possible that a lot of financial professionals may be going the way of dinosaurs and VCRs .

In doubt?      Let’s take a look.

The job of a typical advisor is to examine a client’s finances and construct a sensible financial plan that will weather market turbulence and provide long-term stability.  A good advisor will meet regularly to re-balance portfolios based on market volatility and soothe client fears in times of calamity.  Hopefully, this approach will yield a steady flow of accumulation and distribution throughout retirement.

But what we are starting to see, especially in the current world economy, is that the traditional methods of doing business and “building plans” is going to lead to many people in the financial industry to extinction.

Why?

Because the typical clients between 46 and 64 earning somewhere in the low-to-high six figures are not simply planning for their own futures.  In fact, the Baby Boomers should consider re-naming themselves the                     Sandwich Generation.

This group not only has to prepare for retirement in an historically tenuous economy, but also simultaneously endure the burdens of assisting parents who are living longer while providing financial support for children who are having difficulty navigating through today’s unsteady job market.  This at a time when guaranteed pensions are almost obsolete and the cost of living—especially in terms of healthcare—is skyrocketing.

Let’s examine Mike, a typical client.  Mike is married, highly educated with a great job as Chief of Technology at a successful software company and an income sufficient to allow his wife to focus on taking care of the family. He also has 2 children who will soon be entering college.

Mike’s situation resembles the foundation of what was, at one time, a very attainable American Dream.

Everything seems fine for Mike, so much so that financial advisors would line up to take him on as their newest client—and why wouldn’t they?  From an advisor’s point of view, Mike needs extra savings in vehicles like mutual funds to keep ahead of inflation, 529 Plans for college (assuming he has not done so already), life insurance for both spouses, a properly balanced 401K, etc.  Mike’s needs can create a bevy of accounts—and commissions—for an advisor.

But the world…it is a changin’…

We forgot to add that both of Mike’s parents are in their late seventies and are slowly becoming unable to take care of themselves.  In fact, Mike’s mother was recently diagnosed with Alzheimer’s and was sent home with little hope for a cure—but a bill for $2,125.  Mike’s father has rheumatoid arthritis and the only medication that allows him to be functional, Enbrel, was recently taken off the Medicare D coverage list and now costs over $600 per month.  They subsist on the father’s small pension, Social Security, and some savings.

We also forgot to add that both of Mike’s children would like to attend private universities, and with Mike’s income, it is unlikely that either will receive much financial aid.  Of course, with the grim economy and the prospect for a turnaround seemingly light-years away, it is a pretty fair bet that one or both kids will be back home after graduation.

Feeling the squeeze?

So how can an advisor adapt to these changing times?  First, it will be important to realize that having multiple accounts scattered across the stratosphere is both confusing and time-consuming..  The concept of the traditional client having a checking/savings account at one bank, a mortgage at another, equity investments with multiple brokerage firms, and life insurance somewhere else while taking care of the parents’ accounts as well is too much to bear.  The successful and adaptable advisor will learn how to aggregate accounts by offering one-stop shopping that offers tracking of bill-paying and investments, as well as a long-term financial plan that covers the number one concern of Baby Boomers:  healthcare expenses.

Now what company can provide products for all of these needs? Right now – Fidelity.

Fidelity is, at this time, the only firm trying to tackle this issue at the client level by offering checking and saving accounts, funds, investments, insurance, and the one trump card that no one else the financial industry currently offers–healthcare expense planning—all under one roof. (Nationwide Press Release has actually just begun to address healthcare at the advisor level.)

Fidelity’s approach is going to revolutionize the financial planning industry, and those who don’t follow suit will be left behind.  Don’t believe that a paradigm shift of this magnitude can happen?

All we need to do is look at the Baby Boomers themselves.  This generation has changed the way games are played in all facets of American culture.

And now where is this generation headed?  To retirement, which will once again alter how the financial world does business… because there are 78 million Boomers out there, just like Mike.

Here is a breakdown of the costs for just Part A

Part A, better known as Hospital Insurance; 

Covers

• Inpatient care in hospitals
• Inpatient care in a skilled nursing facility
• Hospice care services
• Inpatient care in a Religious Non medical Health Care Institution

**Coverage only starts when a beneficiary is admitted as an inpatient; it will NOT cover outpatient procedures**

Most people do not pay a monthly Part A premium due to qualifying through Social Security taxes paid throughout their or their spouse’s career. As long as the beneficiary or spouse has 40 or more quarters of Medicare-covered employment completed by age 65 then Part A will have no premiums for coverage.

For those that have not met the specific requirements by age 65 there is still an opportunity to enroll at a cost

• Those only having 30 – 39 quarters the Part A premium is $248.00 per month.
• Those that who are not eligible or have less than 30 quarters the Part A premium is $451.00 per month

There is an annual deductible of $1,156 (2012) per year.

There is a cost for an extended stay per incident past the 60th hospital stay

• Days 61 – 90 will costs a beneficiary $289 per day
• Days 90 – 150 will costs a beneficiary $578 per day
• After Day 150 the beneficiary will incur all of the costs

 Skilled Nursing; After a 3 day inpatient stay along with a prescription by the attending doctor the costs are;

• For the first 20 days – $0
• For days 21 through 100 the cost is $141.50 for each benefit period.
• After day 100 all costs are the full responsibility of the beneficiary

Medicare will only cover the care a beneficiary gets in a SNF if they first have a “qualifying hospital stay”.

Home Health Care;

The only cost is a 20% co pay for most Medicare-approved durable equipment after the Medicare Part B deductible for the year has been met.

Hospice Care;

• A copayment of up to $5 per prescription for covered outpatient prescription drugs for symptom control or pain relief
• 5% co-pay of the Medicare-approved amount for inpatient respite care (short-term care given by another caregiver so the usual caregiver can rest)
• All costs for room and board for hospice care in your home or another facility where you live (like a nursing home).

Blood;

If the beneficiary is an inpatient, needs blood, and the hospital has to buy the blood, each calendar year they would pay for the first 3 pints (the deductible) and 20% for any additional pints, unless you or someone else donates blood to replace what you use.

In most cases, the hospital gets blood from a blood bank at no charge and you won’t have to pay for it or replace it.

Still think Medicare is Free????

Part A is the one part that everyone gets automatically at age 65 and the word cost(s) appears 4 times alone.

Did You Know?

• 10,000 people reach age 65 and become eligible for Medicare each day.

• Healthcare & Wealthcare “Are two sides of the same coin. What good is growing a portfolio if you don’t protect it from events that are not only likely but can be catastrophic to an investment plan” —  Sean Dowling Pres. Dowling Group Wealth Management  

• Medicare is not free; A healthy 55 year-old couple can expect to pay roughly $11,480 for Medicare premiums by age 65 and $34,800 by age 80. – HVS Financial

• Medicare is an expense that will affect 100% of those that are retired and over the age of 65.

• According to the Employee Benefit Research Institute, Medicare only covers 51% of healthcare expenses, while clients are responsible for the other 49%.

• 70% of affluent investors named rising healthcare costs as their major concern. — Merrill Lynch Affluent Insights Survey, August 2011

• Medical expenses topped the list of concerns among those aged 65 or older. — 2011 Franklin Templeton Retirement Income Strategies and Expectations (RISE) survey

• Medicare premiums are tied directly to a retiree’s income.

• 92% of Americans lack a specific retirement plan that factors in healthcare costs. — Sun Life Financial Unretirement Survey – “Flying Blind”

• A 55 year old couple who plans to live until age 90 can expect to incur over $510,000 in costs for their healthcare in today’s dollars. - HealthView Services

• If they live in Florida it will be more like $521,000
• If they both have Diabetes it will be more like $558,000
• If they earn over $170,00 in income as defined by Medicare it will be more like $615,000
• If they earn over $428,000 in income as defined by Medicare it will be more like $996,00

The High Cost of Healthcare

It is no secret that healthcare expenses have grown astronomically over the past two decades, and there is is no end in sight to this trend. This means that the average 55 year old male living to 88 can expect to incur roughly $370,000 in healthcare expenses throughout his retirement. Unfortunately, few people, because they have spent their working lives enrolled in employee-sponsored plans, are prepared to meet the financial obligations of what will likely be the single largest expense in retirement.

In fact, it is estimated that most individuals will end up paying for approxiamtely half of their overall healthcare costs out of their own pockets.

What about Insurance?

Most Investors fail to realize that Medicare only covers roughly half of all health-related expenses while private insurance is costly and does not address every need.

The First Step to Taking Control

Your personalized HealthView Report is the first step toward meeting this challenge. It provides the personalized healthcare cost information needed for you to manage your financial future. 

 Paying For Healthcare in Retirement Out-of-Pocket

The following table shows how much it will cost an individual to pay for healthcare costs in retirement based on an annual 2% rate of return. The healthcare expenses are expressed in future dollars and based on a 55 year old male, retiring at 65, and living to 88. The male is in good health and has Medicare A, B, D, and Gap coverage. He makes less than $85,000 per year and lives in Ohio (close to national average).

Paying For Healthcare in Retirement Using a Mutual Fund

The below table details historic year-by-year performance of INSERT MUTUAL FUND NAME HERE (ABCDX).The use of a mutual fund can be extremely beneficial when planning for retirement due to the rate of return but also the lack of withdrawal limits. The historic returns below average out to a return of 11.68%, which is more than 9% higher than a CD rate.

Investing on Your Own versus Investing in a Mutual Fund

Funding your retirement at 55 years old is substantially less difficult when investing in a proven mutual fund. Opting to invest in INSERT MUTUAL FUND NAME HERE (ABCDX) may save an investor up to $202,750.