This is the hard part.

Bear.jpg

It would be nearly impossible to ignore the volatility and recent downturns in the markets. It’s no fun for anyone. Trust me, it’s no fun for us either. Our retirement accounts and business revenues are impacted when the markets are down as well. This is the hard part we all knew would come eventually. Investors have experienced a great run since spring of 2009. It was easy to forget about the normal market cycles when things were, for the most part, going up, up, up. Now that we’re experiencing another market downturn, it’s especially important to remember a few basics about why we invest and what the research tells us about investing over time.

First, no one knows what’s in store for investors tomorrow, next month, or next year. That doesn’t mean there won’t be a countless number of articles written by anyone with an opinion. A few of them may get lucky and be right in hindsight, but that doesn’t mean that they’d get the next prediction correct, or the next. If there was someone that consistently got all the market predictions correct, they would have All. The. Money!

Not even Warren Buffet bats 1000. He’s been very forthright about some of his swing-and-misses. Do you recall Greenspan’s “irrational exuberance” talk? It was made in 1996. It was 4 more years before the market saw a down year. And 2002 when Bill Gross said the Dow would drop to 5000? Even in the middle of the worst market since the Great Depression the Dow never dropped to that level. Then there was Abby Joseph Cohen who was bullish in 2008, even as the crash was happening around her. They are all intelligent and successful people that have worked for decades in the details of economic and market movements and still couldn’t predict well.

So, we won’t try to predict. It may get worse before it gets better, or we may be able to think back on 2018 as just a bad market memory soon. No one knows for certain.

Second, it’s important to take a step back and realize that we can only control what can be controlled. What’s controllable? Our asset allocation, our continued contributions, keeping our fees to a reasonable level, and the information we consume.

We’re often our own worst enemies when it comes to investing. Our own human nature can easily get in the way of a perfectly rational portfolio strategy. It’s easy and normal to feel confident and willing to take risk when the markets are up. It’s also easy and normal to feel a bit of panic and hesitation when markets dip. It’s perfectly normal to feel that way– but acting on impulses rather than sticking with your strategy can hurt long-term results.

I half-joked with a client recently that my job during good times was to remind them it will get worse, and in bad times to remind them that it will get better. That’s obviously too simplified, but there is an element of truth to it. 

Third, remember why we invest. We invest because we want to at least earn a rate of return that exceeds the impact of inflation over time. If we’re willing and able, we can invest to target an even higher rate of return over a longer period of time. We know that risk and return are correlated in a diversified portfolio. If the long-term returns didn’t compensate investors for the risk taken, no one would ever invest.

We’ve all seen the risk tolerance questionnaires and charts. What many of those charts don’t show is the volatility that can occur at any given level of risk. One of our favorite reports does show that! We share it during nearly every client review. It shows a back-test of how the portfolio (or similar) would have performed in several of the last few market downturns. That creates a meaningful conversation, realizing that the future will never exactly replicate the past.

Risk can be measured by a number of metrics, but to keep it simple, we’ll just focus on the top driver: asset allocation. Generally speaking, the higher percentage of equities (stocks) we have in a portfolio, the higher the portfolio’s risk metrics will be, and the higher the long-term expected rate of return will be. By long-term, we mean 10+ years.

Very few investors are comfortable with 100% stocks – for good reason. The volatility that can be experienced is quite extreme and can shake the nerves of even the most risk tolerant among us. It’s true too that very few investors are wealthy enough to put all their money in a CD account and live on the interest, especially at recent rates. So, therein lies the rub. We must find the balance between the risk we’re comfortable taking, and the rate of return we need to realize our goals.

 Here are some statistics that were recently shared via Vanguard:

Chance of a positive return for different time periods:

One Day: 54%

One Week: 58%

One Month: 64%

One Year: 82%

Ten Years: 91%

From January 4th, 1988 through December 31st, 2017 based on Vanguard calculations from Bloomberg.

 

Also, timing the market can prove to be a challenge since volatility means big moves both up and down in short periods of time:

-          Twelve of the twenty best trading days occurred in years with negative annual returns

-          Nine of the twenty worst trading days occurred in years with positive annual returns.

Notes:

·        All investing is subject to risk.

·        Past performance is no guarantee of future results.

·        The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

From Vanguard based on S&P Index daily returns, Dec. 31, 1979 through Dec. 31, 2017.

With just these small insights, we know that the length of time being invested increases the likelihood of a positive return, and that short-term volatility doesn’t tell the whole story and it’s not always predictive. Even more, the best and worst days are often close together (for an example, see last week!).

What can we do with this information?

Evaluate your current circumstances. If you have a solid plan in place now, realize that this too shall pass - eventually. That can feel really tough sometimes! We’re not suggesting completely ignoring the portfolio. Over the last couple of weeks we’ve rebalanced many portfolios and taken some strategic losses (if you have a loss, you may as well take it and save a little on taxes if you can!). It simply means don’t try to out-think the market.

Or, if you’re willing and able to take a little more risk, downturns can offer an opportunity to purchase investments at a lower price.

Either way, stay consistent with the financial basics: keep an emergency fund, reduce or eliminate the interest expense of debt, contribute to savings goals, make the most of employee benefits, be tax efficient, keep a positive cash flow, and monitor needed changes for estate planning and insurance needs.

If you fundamentally feel that your current plan isn’t where it needs to be, and it’s more than just the normal volatility and downturn jitters, then it’s time to create a better plan for your future. We can help with that, and it would be an honor! We love what we do, even in challenging times.

 

 

 

None of the information provided here is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. The information should not be relied upon for purposes of transacting securities or other investments. Please work with professional advisors to determine the best course of action for your circumstances.

 

Are You Ready for A Market Downturn?

Are you ready iStock-828158748.jpg

Don’t be alarmed by the title. We do not attempt to, nor could we, predict the short-term or even mid-term direction of the market. But History 101 would tell us that a downturn of some kind will eventually happen; and considering that the current bull market is the longest in history, now is as good a time as any to be sure we are prepared.

Preparation does not include keeping most or all of your money in cash. Again, we are not market timers, but keeping too much money in cash erodes its value over time due to inflation. Think about what your parents spent on a gallon of milk, a car, or even a house 25 years ago. That will give you a good idea of what happens to your purchasing power if you try to buy the same amount of goods and services today compared to what it would have purchased then. Therefore, parking all of your money in a savings account earning little to no interest or hiding it under the mattress are not good options. For money you might need in the short-term, maybe. Otherwise, there must be a better avenue to prepare for an eventual downturn.

Preparation also does not include panicking. Panicking causes investors to make costly investment decisions at the worst possible times. If investors pull out of the market altogether, not only do those decisions cause losses when the market is near a bottom, but then they lose out on the recovery and rally that has historically followed every bear market. The S&P 500 Index dropped roughly 50% during 2007-2009; however, afterwards from its low, the index has gained over 400% and counting. Selling off without a strategy can also cause tax consequences if the transaction incurs short-term gains to be taxed at higher rates than if left to be categorized as long-term capital gains. There are times and situations where it is warranted, but as always, we would recommend you consult your CPA for the best tax advice.

Complacency is the opposite of preparation. It is an enemy of our success when we allow it to keep us paralyzed and non-proactive. Ron Chernow correlates complacency with our finances when he says “You don’t want too much fear in a market, because people will be blinded to some very good buying opportunities. You don’t want too much complacency because people will be blinded to some risk.” Not doing anything and hoping things will work out when it comes to our financial future is not preparation.

 PLANNING is the best preparation! And that is exactly what we do as fee-only fiduciary financial planners. We learn about your values, life story and future goals to help you make wise financial life decisions that allow you to feel more confident in your financial future. Are you overexposed to overvalued areas of the market? Are you diversified among different sectors of the market? Do you have an appropriate blend of U.S. verses international equity and fixed investments? What about large growth stocks/funds vs small value stocks/funds? Do you have too high a percentage of your portfolio concentrated in the stock of your employer? Are you managing the correlations between investments in your portfolio? At Bridge Financial Planning, we help determine what asset classes, allocation ranges and risk profiles are acceptable for your specific needs, risk level and time horizon. We guide you in developing a strategy that you are comfortable with to weather the ups and downs of the market.

How long has it been since you stress-tested the entirety of your financial holdings? We use this tool to illustrate what a downturn in the market could do to your portfolio. This gives insight to tailoring a plan that brings peace of mind with the uncertainties of life. One needs to take reasonable steps to mitigate the effects of a downturn while maintaining enough of an equity mix to negate a loss of purchasing power in the long run and meet long term goals. And that looks different for each individual person and/or family as they plan for their future and strategize to meet their unique goals. But the key is planning and preparation.

So what is your plan and how will you navigate the volatility and unpredictability of the market? We can build a comprehensive plan and investment strategy that connect your goals for tomorrow with today. As fee-only financial planners, you can be confident that you will receive professional advice as well as planning and investment management services that are flexible to meet your needs. Then when the market downturn happens, and it will happen sometime in the future, you will be PREPARED.

 

Investing: The Wind in your Savings Sails

iStock_17275515_SMALL.jpg

Many articles on investing assume you’ve invested before.  But what if you haven’t? Sometimes, it’s best to start from scratch!

So, why do we invest?

Put simply, we invest because if we stack cash under a mattress (or almost as bad, in a savings account with little to no earned interest), we’ll lose money over time to inflation. Have you ever heard an older family member play the “remember when” game? Remember when gas was $0.50 a gallon, remember when bread was $0.25, etc. What they’re talking about is the effect inflation has on the buying power of a dollar over time. If they had put money under the mattress back then and believed that it would buy the same thing today, they’d be pretty disappointed!

While we are currently in a very low inflation cycle, in any given year inflation can eat away substantially at your savings. In 10 of the last 16 years, inflation was above 2%, and as high as 3.85%. So, your earnings and portfolio growth needs to match that number just to stay even. Just to give you an idea of what happens to your hard-earned money if you don’t match inflation: At 3% per year inflation rate, $1 million in today’s dollars will deflate to about $412,000 in 30 years.

In a nutshell, that’s why we invest.

Ok, how am I supposed to keep up?

Historically, over the long run the best place has been in the stock market. A broad index of the U.S. Large company stock is the S&P 500 Index. Over the last 50 years, it has returned an average of 9.7%.

Stocks are fairly liquid (easy to convert to cash, compared to real estate, for example). And if you put them in an IRA, 401(k) or other tax-advantaged account, it’s a strategy that is hard to beat. They can grow on a tax-deferred or tax-free basis, depending on what type of account you pick.

But, the stock market can also be fairly volatile at times. That’s why it’s important to have a long term time horizon for investing (10+ years), otherwise a bearish market cycle could wipe out some of your portfolio’s value. In any given year, the value of a portfolio can be sharply lower or higher (2008 saw a loss of 38%, while 1954 saw a gain of 45%).

You can also help make your portfolio more stable by including other asset classes, like bonds (see below).

Be sure that you’re receiving professional advice to help target the right portfolio for your risk tolerance and time horizon. Many investors don’t actually get the returns that are cited because their risk tolerance doesn’t match their portfolio choices and they get nervous and sell when the going gets tough. In that case, you miss out on the rebound as markets improve.

What actually happens when we invest?

Well, let’s break it down by stocks (equities) and bonds (fixed income). There are other asset classes but we’ll stick to those two today. Let’s talk stocks first.

When you purchase the stock of a company, you are giving them cash to use for their business. In return, you become a partial owner in the business. When they do well, the stock goes up.  When they underperform, the stock goes down. That’s why it’s also important that you don’t ever buy just one or a few stocks, but invest in a variety of different types (like index funds or target date funds offer). It’s better to have enough stocks to give you a balance, that is, where some go up while others go down. This helps keep your portfolio more stable.

For the bond side, it’s easiest to think of it as a loan that you’re giving the company (or government). You give them your cash, they tell you when you’ll be paid back, and give you interest payments in the meantime. There are plenty of variations on this theme, but that’s the vanilla version. The interesting thing about bonds is what happens to their value if you decide to sell them prior to their maturity. If rates have gone up, you could lose money. If rates have gone down, your bonds could be worth more than the value when you purchased them. 

How can I get started?

Anyone can invest anytime, but some accounts offer tax advantages for specific purposes like education and retirement savings. As soon as someone has earned income, they can start contributing to IRAs, and opening an IRA can be a great way to start investing. See the IRS table here: IRS.gov - IRA Contribution Limits.

Most people really start investing when they get a job with an employer sponsored retirement plan. A 401(k) is one version, but there are several variations on that theme. The great thing about those plans is that contribution limits are higher than IRAs and there’s no income limit on contributions, unlike Roth IRA’s or deductibility for traditional IRA’s. Also, many employers offer a match on employee contributions. Definitely take advantage of this opportunity if you have it!

For small business owners, you have some pretty good options too: SEP IRAs, SIMPLE IRAs and other accounts that are made just for you.

The most important thing…

The most important thing is to start. Back when a bottle of Coke was a nickel, most employees could rely on pensions. Those days are gone and you’re mostly on your own for retirement savings. The value of starting early is undeniable. Just check out this recent article. Some may need more for their financial goals, some may be happy with less, but the numbers speak for themselves when it comes to investing early.

If you need some help determining the amount you should invest, and which investments are best for you, please contact a professional.

Something for women to consider:

As women, we tend to live longer than men, earn less, and to be the ones who take time away from our careers to raise children or care for aging parents. We also make a lot of the household purchasing decisions. For us, it is even that much more important that we take the time to develop a plan to help us reach financial independence and stability.

 

 

All written content is for information purposes only. Opinions expressed herein are solely those of Bridge Financial Planning, LLC, unless otherwise specifically cited.  Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness.  All information or ideas provided should be discussed in detail with an advisor, accountant, or legal counsel prior to implementation.