What Should I Know About Bonds?

Our Quarterly Report

“You make most of your money in a bear market, you just don’t realize it at the time.”

Rewald, Sebranek, & Frawley An Independent Firm

2015 Index Returns (Year-to-Date)

Major Stock Indices S&P 500

Dow Jones Industrial Ave MSCI EAFE

MSCI Emerging Markets

(As of 6/30/2015)* +1.23% +0.04% +5.52% +2.95%

Major Bond Indices Muni Bond Index

Emerging Markets Index Corporate Hi Yield Index

U.S. Treasury

(As of 6/30/2015)* +0.11% +2.76% +2.53% +0.03%

*Source: MSCI Net Returns, Bloomberg and Barclays Capital

When an investor decides to allocate their portfolio, they are encouraged to use diversification and asset allo-cation. Bonds or fixed income generally represent the side of the investment portfolio that fluctuates less. By fluctuating less, bonds can provide a cushion that can soften the blow of the next upheaval in the stock market. Typically, the cushion of bonds is two folds: 1) bonds put the investor in a better position to maintain/stick with their investment plan through various market cycles and 2) bonds allow investors the ability to rebalance or use this capital to live off from until the stocks in their portfolio recover.

When Joel started his career 35+ years ago, money market funds were paying over 16%. Today one would be thankful to get 0.05% on that very same money market. Oh how times have changed! Thus in today’s environ-ment, bonds can be compared with a loaded gun. In the right hands, a gun is a wonderful tool. In the wrong hands, it’s a weapon and can do a tremendous amount of harm.

When we were children, we would play on teeter-totters with our friends. When we clambered aboard, the teeter-totter was parallel to the ground. Simi-larly, at issue, the price and interest rate of a bond are at equilibrium. In the picture on the right, the price of the bond is on one end and the interest rate is on the other end. In this example, the issuer will receive $1,000 for the bond in exchange for a 2.4% interest rate—which is the going rate for a 10 Year U.S. Treasury. On the date that the bond matures (July 2025), the issuer will pay the $1,000 back to the bondholder (assuming they don’t default on the bond in the interim).

Between the issue date (July 2015) and maturity date (July 2025), the teeter-totter will go up and down according to interest rates. There’s an inverse relationship between bonds and interest rates. Sitting here today, our main concern is what happens in a rising interest rate environment. When I was a kid, sometimes I would play on the teeter-totter with a not-so-nice friend. When I was at the top and he was at the bottom, my friend decided to play a trick on me and jump off the teeter-totter. All of a sudden, I came crashing to the ground. The diagram above shows what would happen to the value of that 2.4% U.S. Treasury bond if interest rates for 10 year bonds went to 4%. Sort of like a friend jumping off the other end of the teeter-totter, eh?

We cannot predict the rise and fall of interest rates any more than we can predict the rise and fall of the stock market. However we have positioned our portfolios in a manner that our bond duration is closer to the fulcrum of the teeter-totter so that when interest rates rise, our backsides won’t hurt as much when our friend (higher interest rates) jumps off the teeter-totter. Remember, the longer the duration/maturity of the bond, the farther the price will fall when interest rates rise. As Joel routinely states “return of my money is sometimes more im-portant than return on my money.” This is a hypothetical example and is for illustrative purposes only. No specific investments were used in this example.

Actual results will vary. Past performance does not guarantee future results.

Financial Planning with Terry Terry Sebranek, Financial Advisor

Don’t Do This!

What shouldn’t you do? Well it is none other than an elderly parent adding a child as joint owner on their

banking accounts. Over the years, you wouldn’t believe how many people we have come across that have done

this unfortunate act even though they had paid an attorney to prepare the proper end-of-life/estate planning

documents. They didn’t do this at the advice of their attorney or in conjunction with their estate plan; rather

they likely did this because the teller at their local bank said it was the easiest/quickest solution. As they say

“some of the worst things imaginable have been done with the best intentions.” Why is this such a bad thing?

Below are five issues that Andrew Rice, an Alabama CPA, discussed in a recent article about this very subject.

Issue Number 1: Full Withdrawal Rights

Each person on a joint bank account is legally considered a full owner when it comes to withdrawing money

from the account. This means the child can draw out the money at any time without the parent’s consent.

Issue Number 2: Creditor Issues

Once a child is added on a joint bank account, it becomes an asset for both parties. So if a situation arises

where the child has a creditor win a judgment against him or her, that creditor could garnish the entire bank

account, regardless of the parent’s involvement in the creditor claim.

Issue Number 3: Divorce or Legal Issues

As noted above, any assets in this assumed bank account are deemed as owned property by the parent and the

child. What if the child’s spouse files for divorce? That divorcing spouse could be entitled to a portion of the

joint bank account funds. Or what if that child runs a stop sign and hits another car or person or damages

someone’s property? Any lawsuit claim/judgment settlement for money will include this account as part of the

child’s assets.

Issue No. 4: Bypassing the Will

As you probably know, joint accounts or any asset registered jointly with rights of survivorship bypass the will

of a deceased person. So in this case, the will does not impact the money in joint bank accounts. This might

not be an issue if the child is the only beneficiary of the parent’s estate. If not, it can create a major feud

among other beneficiaries, as the dividing process is not that easy after the fact. Furthermore, should the

parent’s will include specific trust provisions related to their estate planning goals, this change in ownership of

the bank account could have drastic and irreversible effects on everything from inheritances, taxes or other es-

tate expenses, since this account would bypass the will’s provisions.

Issue No. 5: Gift Taxes

Most clients are not aware of the gift tax issue, as the laws are pretty infringing and complex, tying back into

each person’s inheritance tax exemptions, etc. Adding a child to a parent’s bank account is indirectly making a

gift, which may or may not be subject to gift tax for the parents. Furthermore, depending on the amount of

money in the account and how many children are added as owners, all plays into the gift tax issue. Neverthe-

less, it is still important to note that a possible gift tax issue could be a problem for some parents.

If you are concerned about who’s going to pay your bills, then use tools such as a durable power of attorney or

a trust. We’ve ran into numerous horror stories and wouldn’t like to see them be replicated. A majority of the

time these individuals have done great estate and end-of-life planning but their mistake was not using these

planning documents properly and instead opting to try and take a shortcut. If you or someone else you know

has a joint account with a child, please relate to him or her the concerns and disadvantages of doing so.

Financial Planning with Terry Terry Sebranek, Financial Advisor

Today Versus Tomorrow

A few weeks back Kaleb and my personal values collided. The situation was we were discussing charitable

acts in conjunction with the use of a donor-advised gift fund with a client-friend. Kaleb’s belief is to help a lit-

tle today but stack more so it can grow and thus more can be given in the future. My counter was my recent

trip to Vietnam. In the last newsletter I gave a brief overview of our trip but I would like to take some time to

focus on one very meaningful part for me and my wife. After that, let’s follow up on our “disagreement.”

We travelled to Vietnam through a non-profit group called Children of Peace International. Before we left U.S.

soil, we made the decision to purchase 35 bicycles for children so that they could continue their education.

When a child in Vietnam gets to be about 10-12 years old, rural parents often must require their children to

stay at home to work on the farm/rice paddy because of the value of the labor the child brings to the farm,

since walking 3-4 kilometers each way to school takes up much of the day in addition to their school work and

studies. So with a bicycle, that child can ride to school, get their school work done, ride home and still have

time to do their chores and farm work. For about $65 per bicycle, a child can continue their education – often

times their only hope for bettering themselves and making a better life for their own family someday. A local

social worker assisted us in qualifying and determining which families would be the best candidates to receive

the bicycles. In addition to leaving behind the bicycles for the children, we also helped provide medical and

dental care to over 2,000 patients over the trip that lasted three weeks.

After I told this little story to our office’s miser Kaleb and our client-friend, it was pretty quiet. A couple thou-

sand dollars made a significant difference in many families’ lives today. Yes we could’ve helped more chil-

dren in the future but there is nothing more personally fulfilling than helping someone else and seeing them

reap the benefits while you’re alive.

Not only do we see this scenario in our client-friends when it comes to charita-

ble causes—do I give when I’m alive or dead and gone—but also when it

comes to financially assisting family members. We have many client-friends

that will leave substantial financial legacies to their heirs after they have passed

from this world but are hesitant to help their family and friends while they are

alive. Their main question and concern is always “how does one help without

hindering?” Many of our client-friends attribute their ability to accumulate fi-

nancial wealth due to the scrimping, delayed gratification and lessons learned

through enduring many of life’s struggles. If, like General Motors or some of

the banking institutions during the financial crisis, our client-friends would’ve

received a bailout from their parents or another relative, odds are they likely

wouldn’t have learned the value of a dollar or ever received the needed first-

hand real life experiences to be able to stand on their own two feet.

This is always a tough personal family discussion that needs to occur but we’re always willing to chime in and

discuss the pros and cons of both scenarios and perhaps offer a couple ideas on how to help without hindering.

As Luke 16:10 states, “whoever can be trusted with very little can also be trusted with much, and whoever is

dishonest with very little will also be dishonest with much.”

“….a very rich person should leave his kids enough to do anything but not enough to do nothing.” —Warren Buffett

The Parable of the Fishermen

Kaleb’s Corner Kaleb Frawley, Financial Advisor

Brian Wesbury, chief economist at First Trust Portfolios, introduced us to the following parable written by a fellow economist and New York Times best-selling author Paul Zane Pilzer. We think the parable does a great job explaining economic growth and what is right with the U.S.

Imagine 10 people live on an island. Each person catches two fish every day, which is subsistence living. There are no savings. Children, or immigrants who do not know how to fish, would be hard to absorb. The people would be desperate to increase production. But then, a miracle happens. Two of these people figure out how to make a boat and a net. They fish 200 yards offshore. The two of them catch 20 fish each day with this new technology, which replicates the daily GDP created by all 10 using the old technology.

At this point, eight people no longer need to fish and the island has a choice. The eight could grow corn, pick coconuts, fix the boat and the net, or trade some other good or service to their more productive neighbors. Liv-ing standards would rise. Abundance and plenty would be created. Children and immigrants could be ab-sorbed. Or….the eight without a boat could become envious and complain that a 10 fish-to-2 fish income ratio is unfair and that the rich fishermen should pay taxes. So, the island votes to institute an 80% tax on anyone that uses a net. Let’s assume that the fishermen with a boat continue to catch 20 fish a day. If so, the other eight would stop fishing and divide up the 16-fish tax between them. Everyone would still get two fish a day. Living standards would not rise. Kids and immigrants who did not know how to fish would be a burden. The benefits of the new technology would go to waste.

This is the problem with attempts by the government to be fair and socially just. This is also the problem with trying to spend our way out of economic pain. It doesn’t work. And even if we decide not to tax the fishermen, but instead borrow the fish and give them away, the same thing happens. Borrowing the fish, and then consuming them, does not create new wealth. It only puts a burden on the less productive that they will never be able to repay. This is what has happened in Greece and many other European countries. Govern-ment spending, whether paid for with debt or with taxes, under-mines job growth and wealth creation. Excluding defense, the US federal government is spending more today as a share of GDP than it ever has in history. It is also re-distributing more income than it ever has in history. We understand the impetus for this...we care about people too. But, the desire to help people does not always mean that what we are doing is really helping them.

The U.S. stock market has recovered extremely well over the past seven years because of innovation and new technologies such as fracking, 3D printing, smartphones, cloud computing, robotics, etc. These technologies have generated higher productivity and efficiency gains which have led to record corporate profits. Since profit is a key component to stock prices, it’s no wonder that record profits have corresponded with all-time highs in the U.S. stock market. As The Parable of the Fishermen describes, as long as we take advantage of these new technologies and innovations, enormous wealth can be generated. All this has occurred in recent history de-spite having a burdensome, debt-laden government with countless taxes, regulations and inefficiencies to navi-gate. The good news is we invest in these innovating entrepreneurs/companies who create new technologies like boats and nets—not spendthrift politicians. We’re excited for what these companies will create next.

“The minimum wage law is not an employment law that says that everybody will be employed and they will be paid the minimum wage or higher, rather it is an unemployment law that says you cannot work unless

your productivity is above X amount. These laws hurt the poor and unskilled more than anyone else.”

Rewald’s Rant

Joel Rewald, Financial Advisor

Kaleb’s Corner

Disclosures:

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of the authors and not necessarily those of Commonwealth Finan-cial Network. Expressions of opinion are by financial advisors Joel Rewald, Kaleb Frawley and Terry Sebranek as of this date and are subject to change without notice. This information is not intend-ed as a solicitation or an offer to buy or sell any security referred herein.

Investments mentioned may not be suitable for all investors. Past performance may not be indicative of future results. You should discuss any tax or legal matters with the appropriate professional.

Securities offered through Commonwealth Financial Network®, member FINRA/SIPC, a Registered Investment Adviser.

There are special risks involved with global investing related to market and currency fluctuations, economic and political instability, and different financial accounting standards. These risks are discussed in the fund’s prospectus which should be read prior to investing.

Diversification does not ensure a profit or guarantee against a loss.

Inclusion of indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect investment performance. Individual investor’s results will vary.

Dow Jones Industrial Average is an unmanaged index of 30 widely held securities.

S&P 500 is an unmanaged index of 500 widely held stocks.

MSCI World ex. USA is designed to measure the equity market performance of developed markets, with the exclusion of the United States.

MSCI Emerging Markets Index is designed to measure the equity market performance of 21 emerging market country indices.

The Barclays Muni Bond Index cover the US Dollar denominated long term tax exempt bond market.

The Barclays Corporate Hi Yield Index covers the US Dollar denominated, non-investment grade, fixed-rate, taxable corporate bond market.

The Barclays Emerging Markets Index measures the performance of sovereign, local currency bond markets of emerging market countries.

Investing involves risk and investors may incur a profit or a loss. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The hypothetical examples are for illustration purposes only. Com-monwealth Financial Network is not affiliated with and does not endorse the opinions or services of any non-Commonwealth Financial Network associates. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.

Well it’s not to double check your CPA/tax preparer’s work. Rather it’s to check our own. This year for in-stance, we have discovered five tax reporting miscommunications that were attributable to annuity companies, our group or as one client-friend put it “I had a senior moment.” The errors ranged from a client not including a deductible IRA contribution to a client-friend forgetting that he could deduct his college savings plan contri-butions and long term care premiums on his Wisconsin state income tax return.

We aren’t tax preparers but having your previous year tax return on file allows us to see some planning oppor-tunities we may have overlooked in the past or maybe something we did had an unintended consequence that we need to avoid in the future. The latter may be something as simple as causing your Social Security to be-come taxable or a Roth conversion bumping you up into the next income tax bracket. If you haven’t received a tax return release form letter from us or provided us with a copy of your tax return, please let us know.

Why Do We Need Your Tax Returns?

Greece’s GDP (approximately $240 billion in 2013) is roughly equal to the Detroit Metro Area’s GDP ($224

billion in 2013). At the same time, European Union GDP is roughly equal to U.S. GDP. Yes, Greece has more

debt than Detroit, but why is everyone so scared of Greece? What is there to be scared of?

159 East Court St., P.O. BOX 420

Richland Center, WI 53581

(877) 647-3745

Securities and advisory services offered through Commonwealth Financial

Network®, member FINRA/SIPC, a Registered Investment Adviser.