1. Wesletter
September 2011 Vol. No. 3 Investment and Planning Insights from Wesban
A Quick Guide to Home Equity Loans
money when needed via a credit card or special checks.
Similar to a fixed-rate loan, the outstanding loan amount
must be repaid in full at the end of the term. However,
unlike a fixed-rate loan, HELOC interest rates float up
If you as a consumer need an additional line of credit, a or down, generally adjusted based on the current prime
home equity loan, also known as a second mortgage rate. A HELOC is a convenient way to cover short-term,
where your home serves as collateral, is one of several recurring costs, such as quarterly tuition for a four-year
options that you can choose from. There are two major college degree.
advantages of home equity loans. First, the interest rate
on home equity loans is usually lower than credit cards
Although home equity loans do provide attractive rates
and other consumer loans. Second, you can usually
of financing, we caution consumers to think twice about
deduct the interest on home equity loans, unlike other
the reasons why one would need an additional line of
loans. There are two types of home equity loans—fixed-
credit. If you are thinking about using a home equity
rate loans and lines of credit.
loan for day-to-day expenses, one should examine
whether you are overspending and possibly sinking
A fixed-rate loan provides a single, lump-sum payment deeper into debt. If you end up taking out more money
to the borrower, and is repaid over a fixed period of time than your house is worth, the interest paid on the loan
at a pre-determined interest rate. This is useful if you above the value of the home is not tax deductible.
know how much you would need and when you would
be able to pay off the loan.
A home equity line of credit (HELOC) is a variable rate
loan that works like a credit card. Borrowers are pre-
approved for a specific spending limit and can withdraw
About Wesban
The Wesban Team
eric@wesban.com Wesban provides financial
205-995-7778 planning and conservative
www.wesban.com investment management
designed to help families and
small businesses grow, protect,
and transfer wealth.
2. Wesban Financial Consultants, P.C. Investment and Planning Insights from Wesban September 2011 2
Government Health-Care Spending:
Advantage. More details about these benefits can
be found in the attached table.
Medicare Original Medicare’s relatively high cost-sharing
provisions and lack of a limit on out-of-pocket
spending can leave beneficiaries exposed to
It is a well-known fact that the United States
potentially devastating expenses in the case of a
spends much more than other developed countries
serious adverse health event. For this reason, most
on health care, both in absolute dollars and as a
Medicare beneficiaries also carry supplemental
percentage of GDP. Two enormous, complicated
insurance. Employer-sponsored retiree health
programs, Medicare and Medicaid, account for
plans, though becoming less common, still cover
the majority of government health-care spending
approximately 30% of the Medicare population.
in the U.S. Both programs have been growing
20% of Medicare beneficiaries purchase
rapidly, which is expected to continue in the
individual supplemental policies, also called
coming years.
Medigap policies. Medicaid helps pay Medicare’s
premiums and cost-sharing for another 20% of the
Medicare and Medicaid were both created in the Medicare population. Only about 10% of
mid-1960’s as part of Lyndon Johnson’s Great Medicare beneficiaries are estimated to be
Society agenda. As of 1970, 62% of total health- completely without supplemental coverage.
care spending was still private, with out-of-pocket
spending the single most significant source.
During the subsequent forty years, however,
Medicare and Medicaid each expanded by more
than 11% annually due to benefit expansions and
demographic change, pushing public-sector
spending up to nearly 50% of total health-care
expenditures. During the same time, private-
sector spending also grew at a robust 8.7%
annually, as employer-sponsored insurance
became the predominant conduit of health-care
spending.
Looking forward, the Centers for Medicare &
Medicaid Services (CMS) project 6.5% annual
health-care spending growth over the next decade.
Public sector growth is again expected to outpace
private spending growth, with a 6.9% growth rate
compared to 6% for the private sector. Combined,
Medicare and Medicaid are expected to account
for 39% of U.S. health-care spending in 2019, up
from 37% in 2010 and 17% in 1970.
Medicare is a federal government program that
provides health insurance to people over age 65,
and people with certain disabilities. In 2009, more
than 43 million people received health insurance
benefits through Medicare at a total cost of
approximately $510 billion. Medicare benefits are
divided into three parts: Part A Hospital
Insurance, Part B Medical Insurance, and Part D
Prescription Drug Insurance. Part C created a
private version of Medicare, now called Medicare
3. Wesban Financial Consultants, P.C. Investment and Planning Insights from Wesban September 2011 3
Be a Better International Investor
than their U.S. counterparts. As a result, the
portfolio may take on an additional level of risk.
If you need to rebalance your overseas portfolio
International funds have received a lot of attention
to reduce overall risk, or seek more foreign
in recent years, and this should come as no
exposure, consider conservative foreign
surprise. For starters, it has become increasingly
investment vehicles. Aggressive international
common for investors to build multi-fund
investments have a higher probability of incurring
international portfolios rather than rely on
damage during a prolonged downturn. Investing
individual foreign offerings for all their overseas
in conservative foreign funds can help balance
exposure. Further, international funds have posted
this risk.
exceptional gains in recent years (except 2008).
This may sound good if a significant part of your
portfolio is devoted to international funds, but be
sure the popularity and performance of overseas
offerings hasn’t made you complacent.
In fact, it’s just as important to periodically
reexamine the parts of your portfolio that have
done well and reevaluate the portions that have
lagged.
If you do take on international funds, remember
to keep both your near-term expectations and your
overseas exposure in check. You can also consider
conservative foreign funds.
The first step is to set reasonable expectations for
the short- to mid-term prospects of international
funds. The superior relative gains posted by
various types of overseas offerings in recent years,
with the exception of 2008, may not be sustainable
in the long run.
Given the superior performance of overseas
offerings, check to see whether their overall
foreign exposure exceeds the upper end of their
international allocation range. A great portfolio
performer can take on a larger percentage than you
intended. Keeping an eye on your international
allocation can help lower the overall risk of a
portfolio.
The illustration paints a rather clear picture of this.
In 1970 this portfolio began with an equal
allocation to international stocks, U.S. stocks, and
U.S. bonds. However, due to the strong
performance of international stocks during the
1980s and 1990s, allocation to this asset class
jumped to 52%. While many might overlook this
shift in international exposure, keep in mind that
international stocks have historically been riskier
