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The Independent Investor: Joint Business Is Jumping

By Bill SchmickiBerkshires Columnist

Today, more than 7 million Americans are no longer limping. Instead, they are trotting around with the assistance of artificial knees, hips or both. Every year another million of us will join the crowd, and that number is expected to grow as America ages.

Arthritis is the main reason for these surgeries, followed by obesity, which adds stress to the knees and hips. Everywhere you turn, Americans are told that they must lose weight. However, in order to do that, a less than virtuous circle has evolved for many of us. We are all striving to eat healthier and eat less while exercising more. As such, wherever you look, aging amateur athletes vie with the young on the ski slopes, the treadmill, hiking trails and wherever else one finds exercise. But this cult of weekend warriorship is demanding a high price.

It is bad enough that we Baby Boomers are wearing out our joints at a stupendous rate. However, the real growth rates in joint replacement are coming from those between the ages of 45-64. Joint replacements have tripled in that age group over the last decade, with nearly half of all hip replacements now being done in people under age 65.

In the past, orthopedic surgeons were reluctant to replace a knee or hip in patients under 65 since replacement joints typically only lasted 10 to 12 years. Today, thanks to advances in medical device technologies, a typical knee or hip can last 20-25 years. As a result, more Americans than ever are opting to get the surgery now, rather than give up their mountain bike or snowboard for less active physical pursuits. I'm one of them.

Six months ago, my knee began bothering me while doing my usual cardio fitness exercises. The pain increased to the point that I visited a doctor who informed me that my right knee "was shot." Decades of running, step aerobics, snowboarding and skiing had taken its toll on my body. Although the pain was moderate at best, I opted for surgery now rather than limp along until the pain forced me into surgery. I did not want to sacrifice my athletic lifestyle.

The procedure was successful thanks to my surgeon, Dr. Mark Sprague of Berkshire Orthopedic Associates, who is a true rock star. The staff and service of Berkshire Medical Center's orthopedic unit was exemplary as well. I guess you get what you pay for.

The cost of a joint replacement varies depending on where you get it done. A study by Blue Cross Blue Shield indicates a total knee replacement procedure, on average, costs $31,124, but could be as low as $11,317 in Montgomery, Ala., to as high as $69,654 in New York City. Hip replacements, on average, go for $30,124 but can be as much as $73,987 in Boston.

But there are whole lists of other services that must be paid for. Pre-surgery appointments, diagnostic studies, lab tests, the doctor's fees, anesthesia, postoperative hospitalization plus postoperative recovery including rehabilitation and physical therapy. Since my surgery was one month ago, I have not received a final total of the all-in charges. But when I do, I'll most likely write another column, since it is my understanding that the actual manufacturing cost of an artificial hip is about $350.

Yet, by the time the hospital purchases these sterilized pieces of tooled metal, plastic or ceramics, that same hip costs them $4,500-$7,500. From there the charges escalate. By how much, I am determined to find out — so stay tuned.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

     

The Independent Investor: College Savings Accounts Are Not Risk-Free

By Bill SchmickiBerkshires Columnist

A national debate over whether to tax "529" college savings plans has turned the spotlight on these plans and how they work. Do they really help parents save the money their kids will need for college? The answer depends on how they are invested and how they are managed.

Starting in 2001, the IRS offered tax benefits to middle-class families to cope with the escalating costs of college education. Thirty-four states (and the District of Columbia) also chipped in with tax breaks of their own. These savings plans work much like a 401 (K) or a Roth IRA. The after-tax money you invest in these plans will grow (or not) without being subject to federal income tax. Any money you withdraw from the plan will be tax-free as well, as long as it is used to pay for qualified educational expenses such as room and board, tuition and books.

Since the onset of 529 plans, tuition and fees at private, nonprofit four-year colleges have risen by an average of 2.4 percent per year. Over the same period (2002-2013) the inflation rate for these same colleges averaged 5.2 percent. Today's average cost per one year at a private, nonprofit college is $39,518. A Public University's cost for in-state tuition, fees as well as room and board, averages $17,860. Given those numbers, is it any wonder that 529 plans have accumulated over $244.5 billion by 2014, with the average account size of about $20,671. For those who can afford it, these plans look like a good deal.

However, before you jump on this educational band wagon, savers should be aware of some pitfalls in this scheme. Like 401(k) and other tax-deferred plans, the responsibility to manage those savings are on your shoulders unless you want to pay a fee for someone to manage that money. If you go through a broker the average annual fee is roughly 1.17 percent/year. Some charge higher, depending on the advice they give. If you go it alone, you still pay a fee, since most states charge an annual fee of 0.69 percent.

These fees matter because in order to just keep up with inflation and college cost increases, you need to make at least 5-6 percent on your money per year just to stay even. That is no mean feat when you realize that the average return on the stock market per year over the last century or so is 6-7 percent. Given most savers' track records in investing their other tax-deferred savings accounts, the prospects are fairly low that the performance of these plans will tie, let alone, beat the market.

In 2010, nine years into these plans, most 529 plans had a negative performance record. Since then, many have at least recouped saver's initial investment amounts. Some have done even better. The point is that not all 529 plans are made the same.

For those who don't want to actively manage these funds, many plans offer target date funds that automatically shift from aggressive (mostly stocks) to conservative (mostly bonds) investments as the child approaches college age. The problem with target funds is that they do not account for market trends. Let's say your daughter is two years from college, so her target fund investment is now fairly conservative. In a rising interest rate environment, which most investors expect to begin this year, that fund, now top heavy with bonds, will do poorly just when your child can least afford losses.

Bottom line, without the tax-saving advantages of the 529 plan, there is no reason to open one. And even with the tax-deferrals, there is no guarantee that you will have the money you need by college time. That will depend on how astute an investor you are or, if you are paying a professional, how well they do on your behalf.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

     

The Independent Investor: The European Central Bank Delivers

By Bill SchmickiBerkshires Columnist

Thursday, Mario Draghi, the head of Europe's Central Bank, announced new steps in an effort to lift the EU from economic malaise. Investors wonder if it will be enough.

That's not unusual. There were many doubting Thomases in this country when the Fed first launched its quantitative easing program back in 2009. Japan, which is in the second inning of its stimulus program, also has its share of detractors.

At first blush, the expanded program of stimulus includes an asset purchase program of both private and public securities of up to $60 billion Euros ($69 billion) a month through the end of September 2016. That amounts to well over a trillion Euros in new stimulus. The markets were expecting roughly half that much.

What makes the move even more impressive is that the ECB prevailed in the face of heavy opposition from Germany's Bundesbank. The Germans argue that bond bailouts like this only encourage spendthrift countries to postpone economic reform. Greece is just one such country.

Greece is scheduled for national elections this weekend and Syriza, a popular anti-austerity party, is expected to win. The ECB's new stimulus program appears to include Greek debt but under certain conditions, most likely linked to Greece's willingness to continue economic reforms.

Unlike our own central bank that has a dual purpose of maintaining employment and controlling inflation in this county, the ECB has only one mandate — inflation. They have failed miserably in achieving their stated goal of an inflation rate of just under 2 percent annually. Last month, consumer prices actually turned negative, falling 0.2 percent. What concerns European bankers and governments alike is that the EU is at real risk of entering a deflationary, no-growth economic period similar to what Japan experienced for well over two decades. Once deflation infects an economic system it is notoriously difficult to cure. The hope is that the central bank's monthly injections of capital at this scale will stimulate growth throughout the 18-member countries and re-inflate the economy.

As a result of these actions, we are now in a peculiar place globally. While the United States has discontinued its stimulus programs, Japan, Europe and China, the largest economies in the world, are embarking on their own stimulus agendas. This does cause some strange disparities in interest rates and currencies however. Interest rates in Europe at this time are lower than here in America. The U.S. dollar is gaining strength while the yen and the euro continue to weaken.

We can expect these trends to continue as time goes by, but there are some benefits. Many currency traders expect that the euro will trade one-to-one with the greenback in the months ahead. The Japanese yen is already dirt cheap. If there was ever a time to book that European or Japanese vacations, now is the time.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

     

The Independent Investor: What's Happening to the Movies?

By Bill SchmickiBerkshires Columnist

Have you noticed that American movies seem to be long on bullets and increasingly short on words? That despite flop after flop at the box office, the same movies are coming out with sequels? Get used to it because, increasingly, American viewers are a distinct minority when it comes to the box office.

After agriculture, the second largest U.S. export is entertainment. Films account for well over $31 billion of those exports and the numbers are increasing exponentially. The international box office accounted for a small portion of overall revenues a decade or so ago, but times have changed. Now it's a 60/40 split in favor of foreigners. China, with a population of over 1.3 billion is the largest market for filmmakers in the world.

For a long time, foreign countries only allowed a certain number of American films to come into the country. The idea was that the embargo would allow local filmmakers a chance to show their stuff among the local audiences. In some locales that is still the case, but less so in the really big markets.

Conventional wisdom in Hollywood has it that there is an insatiable international appetite for American-made genre movies, which are heavy on action, explosions, guns, special-effects and the like. They are correct. Foreigners love action movies, children's movies, sequels, Academy Award winners and big production budget films in that order, according to recent industry studies.

And stars are not as big a factor as they once were. To be sure, some late greats such as Stallone and Schwarzenegger can still command an audience but its more about the story line and what super hero is pounding whom.

We are also witnessing a great dumbing down of film content as a result. Universal themes rather than culturally specific ideas are what sell. Foreigners who do not speak English, do not want, nor can they follow long lines of subtitles that scroll across the bottom of the screen. Language, too, can often be nuanced to the point that the audience misses the concept. Besides, reading subtitles can be distracting and a lot of work when the typical viewer simply wants to have a good time and be entertained. Today's movies are crafted mainly to provoke a visceral, as opposed to an intellectual, response.

In the years ahead, you can count on American studios to become even more focused on what the overseas markets wants given the bottom line. Movies that may have bombed in this country have managed to turn a profit thanks to the benefits of foreign audiences. "Pacific Rim," for example, earned $101 million here but cost $190 million to produce. However, it was popular overseas to the tune of $411 million in worldwide earnings. Despite its failure here, a "Pacific Rim 2" is in the works and you better like it.

If we look at the more popular movies of 2014: "Transformers," "Guardians of the Galaxy," "Maleficent," "X-Men," "Captain America," "Dawn of the Planet of the Apes" and the "Hobbit," overseas revenues were greater than the domestic box office in every case.

Therefore, the next time you are going into a movie theater, after paying $50 for two tickets, wondering how you can be sitting through the same story line, bad acting, ear-splitting, special-effects and a predictable outcome, wrapped around the same title (only with a number 8, 9 or 10 tagged on the end), now you know.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

     

The Independent Investor: Think twice Before Co-Signing Student Loan

By Bill SchmickiBerkshires Columnist

Sure, we love our kids. Of course we want them to get ahead, so when your son, daughter, or nephew asks for your signature right next to theirs on that private student loan application it is tempting. But before you sign on the dotted line consider this.

When you consent to being a student loan co-signer you are in for the life of the loan. If the student fails to make payments, you must. If they are late, you get the notices, too. Their financial problems will impact your credit score and could haunt you the next time you apply for a car loan, home mortgage, or simply a credit card.

I know that putting aside your emotions is difficult at best in the decision-making process. Yet, you must, because there is real money on the line as well as a multiyear financial commitment. Approach the decision as if the relative were a potential business partner. As such, you must be a fairly good judge of character. Does the person asking for the loan follow through on his or her commitments? Do they have a history of making good, financial decisions or are they the type that just can't seem to save money? How practical are they in life's decisions?

If the answers still indicate a green light, decide how and when they are going to be able to pay back the loan. If your son is insisting on getting an art degree with absolutely no prospects of employment, co-signing a loan with him could be financial suicide. Today, many college grads who have a degree in occupations that are already overemployed, obsolete or pay minimum wages cannot repay their student loans. Just because your relatives are "following their heart" in acquiring a degree is no reason to support that decision financially.

By all means be supportive but at the same time, the best assistance you can give is to explain the realities of the workplace. It is their option to listen and agree or disagree. Do this before the student wracks up thousands of dollars of debt that will follow him or her for the rest of their life and possibly yours.

If after all this, the decision is still a go, then urge the student to first explore a federal student loan, which does not require a co-signer, whereas 90 percent of private student loans do. Federal Stafford Loans for undergrads have a fixed rate of 4.66 percent, if the student loan is taken between July 1 and June 30, 2015. This would be both the student's and your best option.

But if you are still not convinced or the private loan is till the only option than consider also that the amount borrowed is not the amount you will end up repaying. Deferment, forbearance and interest will add a substantial sum to that debt. Remember too that student loans are not subject to bankruptcy laws. It is nearly impossible to have student loans discharged. And don't think you can remover yourself from the loan once the student receives it. Lenders have a whole host of hoops you need to jump through to even consider removing you from the loan.

To be fair, only 7 percent or so of students actually fail to make good on their loans. In most cases, the student pays on time things and things go smoothly. It is only when they miss payments and the bank come to you that your relationship begins to change with the co-signee. It is you who will be the "bad guy" every month in hounding the student to make their payments on time. What was once a warm and affectionate relationship can quickly evolve into something else. Don't let that happen to you.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

     
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