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C.H. Robinson

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Managing Student Debt or How to Keep Your Kid From Living in Your Basement

Written by Jon Govin on .

Student loan debt is often times the first credit your children will have. Many students receive and sign a loan agreement, without an understanding of what they have just signed – by the way, parents can be just as guilty. And, like a credit card, the loan amount can build very rapidly. So before it builds too high, here are a few steps that can help your student (and parent) in managing the debt they are taking on.

Start with WHO you owe and HOW MUCH

Most student loans are federal student loans, but occasionally students or families take out private loans. After four years of taking out loans, you may not remember who you owe and how much. Adding to this confusion, student loans are often sold or transferred to new servicers, making it even harder to track them down.

Internet to the rescue. There are two tools you can use to find out what loans you and/or your child has and the current balance on each:

  • For federal loans you can visit the National Student Loan Data System (www.nslds.ed.gov). This is a database of loans and grants where you can see what debt you have and the status.
  • For private loans, you can find the loan servicer and status of the loan by checking your credit report for free at www.annualcreditreport.com. The credit report will show all of your loans and lines of credit in your name – we recommend checking this, in any case.

Calculate the payments and budget

Once you have identified the student loan servicers, you can find out the minimum payment your child will owe each month.

If you can locate the loan promissory note, it will outline the loan terms, including the minimum loan payment and length of repayment. Even if you can't find the promissory note, the loan company will send your child a bill with the minimum amount.

For private loans, you can contact the lender directly via their customer service line to find out the account status and minimum payment.

You can also use the Federal Student Aid Repayment Estimator (https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action) to estimate how much of the payment will go towards interest versus principal. This is a function of the website studentloans.gov and you will need to sign up to use the functions. By running the numbers with your child, you can show them how applying extra payments to the loans can save them hundreds of dollars over the length of their loan.

Research repayment options

If your child's starting salary is too low to keep up with the payments, or if they are still job searching, look at possible repayment options.

If they have federal loans, an income-driven repayment (IDR) plan may be a smart idea. Rather than the standard 10-year plan, the government extends the repayment term to 20-25 years with an IDR option. Monthly payments are also capped at a percentage of your child's discretionary income, so they may significantly reduce the monthly bill. In fact, it's possible to end up with a monthly payment of $0. At the end of the repayment term, if any debt is left over, it will be discharged but taxed as income for that year.

Private student loans are not eligible for income-driven repayment, but some lenders offer interest-only payments. Just remember to tell your child that they still have the principal to pay for private loans! Under these plans, your child will pay a much smaller bill each month that only covers the interest. It will take much longer to repay the loan, but it can give a young graduate more breathing room until their career takes off.

Consider other repayment options / refinancing

If the interest rates on the loans are high, you might want to refinance. By refinancing the current loans, your child can get a lower interest rate and new repayment term. That approach can reduce the payments and help save money over time. It can be difficult for a new graduate to get approved for a loan, however, so you can help your child by co-signing the loan.

Keep in mind that co-signing means you're responsible for the loan if your kid misses a payment, so it's important to work out an agreement with your child ahead of time. Only take this step if you're confident in their ability to be responsible with their payments.

An important note, there is no federal refinancing. But, if you find a lower rate on a private loan, you may consider refinancing by paying off the federal loan. Beware, the many various loan types, rates and terms can give you a false sense that you are paying less. Be sure to review the loan details with us, prior to refinancing.

There you have it. Your child's first foray into the world of consumer credit. A true feeling of independence. But, with this independence comes a great deal of responsibility. Student loans are a great way for parents to help their children get off on the right foot (and not have them living in your basement again).

If you have questions regarding your child's student loan debt—or you own, please ask your advisor for advice. This is part of what you pay us for, and we are here to help.

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The Things They DON'T Teach in School

Written by Bruce Primeau on .

A quote we frequently hear is, "Why don't our educators teach our kids the basics of finances – like balancing a checkbook, saving for items they want, minimizing the use of credit cards, etc. – in high school or college?"

We feel that's a fair question to ask and are in complete agreement that these topics should be part of the high school (or at least college) curriculum. I feel our educators do a good job of teaching reading, writing and arithmetic but seem to lack the wherewithal to teach our kids some of the more critical information they'll need as they move into the real world, for example:

• Saving / investing for what you want
• Employee benefits / insurance to ensure they are maximizing what they receive from their employment
• Credit card / debt management
• Renting versus buying a home or how to purchase their first home

Recently, several of our clients have asked us to meet with their college-age or recently graduated children to help ensure they get off on the right financial foot as they enter "the real world". The meeting typically lasts about 1 hour, and we discuss any specific financial questions they have, as well as provide some basic financial knowledge we feel they should have as they look to make short- and intermediate-term decisions regarding their finances.

We also let each of them know that we are available to answer any questions they may have as they face making some decisions "on the fly" and may want some non parental advice about that decision before they commit. Best of all, this meeting is free of charge for all clients as we want to make sure your kids make informed financial decisions, with the best information possible.

If you are interested in having an SWA advisor speak to your child about the basics of finances, please let us know as we are certainly glad to help. After all, sometimes the best advice means more coming from an outsider than from a parent. I'm a parent so I understand completely!

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No Foolin'--Investing is Like Basketball

Written by Kay Strand on .

It's March Madness—and tax time. Coincidence? I think not. If you ask any accountant or anyone in the financial business, they would all agree it's madness in their offices right now!

When you think about it, basketball and financial advising are really similar.

With both, you have a team of professionals looking out for the player or investor. For the basketball players, that means coaches, trainers, team managers. But there is one head coach who makes sure the whole team of professionals is working together and moving the team in the same direction. For the investor, his or her team may consist of a CPA, an attorney and an insurance agent, but the head coach is the Financial Advisor who coordinates all the moving parts. That person is integral in making sure everyone is working toward the same goal: Winning or retirement.

Referees control the basketball game, and there can be a love/hate relationship between them and the coaches and players. The same is true in finances. Fortunately, for the investor, there is also someone controlling that industry as well. We all know from recent history what happens when financial advisors and/or their firms perform illegal acts. Investors can be assured that the SEC, FINRA and other governing agencies (the "referees") are watching and will penalize those advisors that choose to not play by the rules.

All teams hit roadblocks along the way—injuries happen, an upset takes place, players are penalized—and suddenly everyone is sitting in the bleachers or watching March Madness in a sports bar. It's at times like this that the head coach needs to keep the players focused and bounce back from the inevitable setbacks!

The same is true with investing—everyone has their goal in mind, be it early retirement, a second home, or paying for college. But blips happen along the way, i.e. life - illness, death, job changes, market dips. All good financial advisors have contingency plans for these events and can quickly get their clients back on track.

Whether you are at the tip off just starting your career or counting down the seconds of the final shot clock and ready to cash in your 401(k), working with a financial advisor will help you execute your whole game plan. They may not be able to help you pick that winning bracket, but they can help you stay on track to get what you want out of life so you can spend more time watching the final games of March Madness!

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No Offense, but Your Company Stock Probably Won’t Outperform the Market

Written by Matt Wright on .

Many employees have an affinity for their company stock, and at first glance this might seem to make sense. Who knows the company's prospects better than its employees? If you have pride in your employer and believe it will be successful, the desire to own company stock can be strong.

However, we have always counseled our clients on the potential risk of having too much invested in their company stock. After all, their financial lives may already be heavily tied into the company's success based on their wages, bonuses, profit sharing contributions, etc. Do you really want to put even more eggs into that same risk basket by loading up on company stock?

But there is more to it than that. The fact is that most individual stocks (and every stock is someone's employer stock!) will not outperform the stock market. A JPMorgan study1 covering 1980-2014 concluded that about 2/3 of the stocks underperformed the Russell 3000 index over the period. Even worse, 2/5 of all the stocks lost money despite the long holding period!

Even more recent research2 from this year shows that more than half of stocks since 1926 underperformed U.S. Treasury Bills, one of the safest and lowest returning assets you can buy. Since 1926! How is this possible? Don't we all know that stocks have dramatically outperformed T-bills over long holding periods?

Well, the answer is yes and no.

Yes, the stock market has done very well as this represents the aggregate performance of all stocks, winners and losers. But no, as it turns out that any given stock will have returns that vary dramatically from the market. But still, how is it that so many stocks can perform poorly and still have the stock market do well?

The answer is that a relatively small number of huge winners provide a substantial portion of the market's long-term return. Out of over 25,000 stocks analyzed since 1926, just 10 companies have produced 16% of all the wealth creation in the stock market (e.g., Exxon Mobil, IBM, Wal-Mart.) And 75% of the cumulative wealth creation came from just 282 stocks, a little over 1% of the total number.

Just consider Apple and Amazon over the past 20 years. Both stocks have gained more than 20,000% over this period, turning $1 of investment into more than $200 of gains. In comparison, an adept (or lucky) stock picker who managed to gain 10% per year (handily beating the market) would have seen $1 grow to a little under $8.

So what can we make of all this? What you'll hear from Wall Street's active management firms is that this is great news because their stock pickers are working hard every day to identify just the winners and avoid all of the losers. Unfortunately, history has shown that this endeavor fails more often than it succeeds, primarily due to the higher costs incurred. The other thing to consider is just how likely is it for a stock picker to hold onto one of the stocks long enough to achieve the massive returns? Very few investors hold onto a stock for decades and every stock goes through gut-wrenching drops over time that will test your tolerance.

Our conclusion is that it reaffirms the logic for a passive, low-cost investing approach. We humbly admit that we are unlikely able to pick the small number of firms that will drive the majority of market returns over the coming decades, yet we can still participate in their growth by owning broadly diversified stock funds.

So, back to the topic of buying company stock (or stock picking in general) – does it still seem to make sense? You may be right that your company is better than average, but as we've learned, that's not enough! Why take the additional risk when you may not earn any additional reward?

1 The Agony and The Ecstasy: The Risks and Rewards of a Concentrated Stock Position. J.P. Morgan
2 Do Stocks Outperform Treasury Bills? Hendrik Bessembinder

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Hedge Funds – Still Hedging Away Most of the Returns!

Written by Matt Wright on .

Have you looked at your paltry 0-1% savings account yield in the last few years and thought, "Gee, I wish I could get even less returns but with a lot more risk and give up access to my money for a multi-year period." No? Would it surprise you to find out that many investors are clamoring to do just that??

The HFRX Global Hedge Fund Index gained just 2.5% in 2016, but that's actually favorable to the 0.6% losses per year it has averaged from 2007-2016. Meanwhile, a low-cost, diversified portfolio of 60% stocks and 40% bonds produced returns closer to 5% per year over the same 10 years.

Hedge funds started out several decades ago and were initially a platform for a relatively short list of skilled money managers. Those managers had more control over their processes and strategies and were able to generate higher compensation for themselves than if they were working for a traditional investment firm.

As with any business model, success brought on new competition and the number of hedge funds grew significantly over the years. During the 90s bull market and even through the dotcom crash, the industry generally did well, producing returns similar to the stock market but often with less risk. And all the while the managers were taking in hefty fees for themselves that often dramatically exceeded what investors were charged in mutual funds or comparable programs.

So, of course, competition continued to intensify. Many of the newcomers were also highly skilled and used sophisticated techniques, but the nature of the financial markets was changing. The early hedge funds were able to exploit inefficiencies that disappeared over time as other investors came to see the opportunities. Nonetheless, they continued to perform reasonably well as stock, bond, and commodity markets all rose coming out of the dotcom bust.

The Global Financial Crisis was a turning point for the industry. The HFRX Global Hedge Fund Index lost 23.3% that year, which doesn't seem too hot considering a diversified 60/40 portfolio had similar returns, but many saw that as a success compared to the 37.0% drop in the S&P 500 Index. In addition, there were a number of notable hedge funds that bucked the trend and had substantial gains during this period by betting against subprime mortgages, bank stocks, etc. A flood of new money surged into hedge funds as many have spent years waiting for the next market collapse. So far, of course, that hasn't happened. U.S. stocks and bonds have done quite well, while the hedge fund industry has struggled. In recent years, a number of major institutions such as the California Public Employees' Retirement System (CalPERS) have been exiting the hedge funds space and their disappointing performance, but demand from other investors remains high.

Now, the first thing a hedge fund salesperson will tell you is that while the average hedge fund might not do so well going forward, they think they'll be one of the exceptions. Just keep in mind that a) that's what they say every year and b) every fund will tell you the same thing. In aggregate, the high fees of hedge fund strategies create a meaningful drag on potential performance. Given that there are over 10,000 hedge funds out there, some of them will of course do well, but what are the odds that you would pick the right ones? Access problems imply that your chances might not be very good. You see, there is some evidence that previous outperformers might continue to do well, but well established firms that you might want to entrust your money to most likely don't want your money at all. Some of them aren't taking new investors, while others have multi-million dollar minimums.

A niche area of the industry that gets past some of the access issues are the hedge fund-of-funds. These funds pool together money from many investors in order to diversify across a variety of managers and also meet some of the high minimum investments of in-demand managers. The downside is that this platform adds yet another layer of fees that make the hurdle of outperformance that much higher.

By this point, you can probably figure out that our conclusion is that hedge funds are not an ideal way to invest money, and we don't see any obvious reason why they might do better in the next decade than they have in the past. Competition will still be fierce, fees will still be high, and I didn't even get into the topic of undesirable tax consequences! All in all, we think it's more likely that all of your returns will be "hedged away" rather than your seeing significant outperformance.

North Metro: 763.355.5873
227 East River Parkway
Champlin, MN 55316-5873

South Metro: 612.987.9112
5871 Crossandra Street SE
Prior Lake, MN 55372-3337

West Metro: 763.639.3425
322 Greenhill Lane
Long Lake, MN 55356

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