Monthly Archives: April 2016

Investors in a Market Meltdown

The global economy is sluggish. Falling consumer demand is dragging down commodity prices, which has hit energy companies and emerging countries especially hard. A slowdown in China’s expansion has led to a severe correction in its stock market, which is now spreading to other markets around the world.

It’s human nature to get emotional about your money when you hear about a market meltdown and see your account balances shrinking. But one way to counter fear is with faith — in this case, faith that things will eventually calm down and that when they do, you’ll be well positioned to succeed. To that end, here are some “commandments” to follow in the midst of market volatility to maintain your sanity and preserve your portfolio for the long run

Thou shall not sell

Some investors panic and sell all or most of their holdings at the first sign of trouble. This simply makes no sense. We expect markets to “correct” and to underperform at times, so we should sit tight and stick to our plan. We invest in stocks to get a return, but that return is highly correlated with volatility. Therefore, if we want higher returns, we must be able to accept the downturns along with the upswings.

The stock market has been overvalued for some time. Unfortunately, no one knows when and how it will ultimately correct. It may come as a large crash or as a prolonged period of lackluster returns. As the economist John Maynard Keynes famously said, “The market can stay irrational longer than you can stay solvent.”

That is why market timing is so difficult. You must be right twice — once when getting out and once again when getting back in. Most people who converted to cash in 2008 did not reinvest in the market until it was well into its recovery. They missed months, if not years, of appreciation

Thou shall not have unrealistic expectations

Market cycles are normal. However, over the past few years, the U.S. stock market appeared immune to a downturn. At the beginning of this year, the S&P 500 Index, a proxy for large company stocks in the U.S., had not experienced a correction of 10% or more in over three years. The higher-than-average returns we experienced in the past five years cannot be extrapolated into the future. It is unrealistic to think the market will deliver double-digit annual returns indefinitely. In fact, because of current valuations, most analysts expect far lower returns of approximately 4% (before inflation) over the next 10 years.

In addition, returns are neither uniform nor constant. There will be swings, both positive and negative, around average returns. The variance can be quite large. Consider this statistic: From 1928 to 2014, the average annualized return for the S&P 500 was 9.6%. Guess how many years the actual return for the year was within 25% of that average — meaning, between 7.2% and 12.0%.

Interest Rates

As 2009 neared a finish, I thought that interest rates, which had been dramatically suppressed by the Federal Reserve, would start to rise sometime in 2011. Boy, was I wrong. Being in the majority of professional opinion at that time didn’t matter either.

Now it is the summer of 2015 and we’re still waiting for our Federal Reserve to raise short term interest rates which will have an influence on longer term rates. Who knows when that will happen and I’ve stopped predicting and making recommendations based upon my personal view.

I thought it was important to remind readers of the effects of rising interest rates, so here goes:

  1. When interest rates go up, the market re-prices the value of bonds and bond funds down to reflect a better return in newer fixed income securities. Fixed means the rate promised remains the same.
  2. The bonds and bond funds (remember there are many different types of bonds) currently owned still produce the same amount of interest income unless there is a default or non-payment. If you hold the individual bond to maturity it pays you back your initial investment. Bond funds just replace maturing bonds with newer, hopefully, increased return bonds, and the fund slowly rises in value (market price) to reflect these transactions.
  3. Now I’ve set the scene, what are the strategies we’ve previously recommended or are now considering recommending in the near future:
  4. Floating rate bank loan portfolio funds. These funds feature variable rate loans usually credit rated B or better. You pay a professional mutual fund manager to select the holdings.
  5. TIPS. Treasury Inflation Protected Securities. These are US government bonds (and many providers have TIPS bond funds) that provide a return of stated coupon rate plus a variable cost of living adjustment (COLA). If interest rates, and then inflation increases, these will become a more popular security or fund.
  6. Bond ladders. Individual bonds that sequentially mature in a pattern like $10,000 at the end of one year, $10,000 at the end of two years and $10,000 at the end of the third year. The bonds will be re-priced down if rates rise, but since the maturity is short we know with a high degree of certainty we will get our money back plus interest along the way.
  7. Other alternatives? Of course. Just wait and the financial services industry will be hard at work to sell you on the “fear” emotion of loss of principal by offering you lots of products and funds that will make them lots of money and maybe you too. Bonds and bond funds will be like stocks for awhile rising and falling in value based on actions in the interest rate sensitive markets.

End to Fix Up Your Finances

Can you believe we’re well over halfway through 2015? It’s amazing me how quickly things move. In just a few months, you’ll start to see a lot of articles full of end-of-year financial advice. That December 31 deadline is always a powerful motivator — not to mention it makes for good headlines!

But you shouldn’t wait until the end of the year to get your finances in order. If you can find just one thing to improve right now, take action!

Here are a few things I’ve done that might inspire you to do the same:

Add to an HSA

A health savings account, or HSA, is a powerful tool that many people don’t know much about. If you have a qualifying high-deductible health plan, you can make tax-deductible contributions to an HSA, much like you do with a 401(k). The money also grows tax-free within the account and can be withdrawn tax-free for medical expenses. That’s a triple tax break you won’t find almost anywhere else!

As it turns out, an HSA can also serve as a fantastic retirement account, if you manage it correctly. That triple tax break is too good to ignore, and with the right provider, you can invest the money just like you would within an IRA. So I recently maxed out my HSA contribution for 2015, putting $3,350 into my account and investing it in low-cost Vanguard index funds. (The maximum contribution for individuals is $3,350 in 2015; for families, it’s $6,650).

Make a video for homeowners insurance

I encourage my clients to create a video record of their belongings, which serves two purposes if something were to happen to their home:

  1. It documents their personal possessions for insurance purposes, which increases their chances of getting fully reimbursed.
  2. It make it easier for them to re-create the home they love.

I recently realized, however, that I hadn’t taken my own advice. So I got out the video camera (phone), and took a slow stroll through my house.

It was especially important to me to document my dearest possession, a 16-volume pictorial history of the Civil War my grandfather gave me years ago. You could burn the rest of my stuff, and I might not care. But I wanted to be absolutely sure that I had this on record.

Objective financial advice

unduhan-9Finding quality financial advice can be a chalenge, especially if you’re already very wealthy. And offers of “free advice” almost certainly turn out to be sales pitches. But there are accessible, affordable financial advisors for the not-yet-wealthy.

Every day, members of the Garrett Planning Network provide truly useful financial advice, not cleverly disguised sales pitches, to people from all walks of lives. And who couldn’t use a little bit of competent, objective financial advice from time to time?

Hourly-based pricing

Garrett Planning Network members are bona fide financial planners who tailor services to your specific needs and circumstances. You pay for advice based on the amount of time involved. Services and costs are always agreed on in advance providing you with simple transparency.

To help minimize potential conflicts of interest all Network members are Fee-Only, which means the only compensation these financial planners ever receive comes from clients, no commissions, no referral fees. Garrett planners work solely for and always in the best interests of their clients.

Truly accessible

With affordable advice and over 300 Network members across the United States, anyone can find and hire an actual financial advisor. No financial planners located near you? Many Garrett planners provide long-distance advice by telephone, email, and virtual meetings on-line. Good financial advice often pays for itself many times over, and cost or geography should not prevent anyone from accessing such advice.

Unplugged financial planning

There’s a lot of fancy talk out there when it comes to financial planning. It’s a profession that loves its jargon, calculations, and software-based projections. When it gets down to it though, confidence in your financial plan boils down to two things, knowing where you are and where you’re going.

Knowing where you are

Simply put – you need a budget. Don’t frown. Let me explain. Budgeting is not about what you can’t do with your own money, but what you CAN do. Have you ever felt guilty about a purchase? Have you ever thought to yourself in the store “ugh, I should really hold off, we’re trying to be better about this”? Do you feel like all the effort and restraint doesn’t seem to be paying off in your checkbook from month to month anyways so why bother? Know what? A properly executed budget can free you from all that. Really.

To live a better life today and tomorrow, you need a sustainable budgeting process that accounts for your needs, funds your most important and enjoyable wants, and allows you to plan for your future with hope and confidence. Yes, a spending plan is the key to unlocking all of that. The best part is, YOU (along with a spouse if in the picture) are the Chief Financial Officer(s) of your household deciding where the money goes. You work too hard not to spend a bit of time each month telling your money what to do. Money is finite…’re the boss of it. Tell it where to go. Enjoy spending it according to your plan.

Knowing where you’re going

Save! Invest! Pay off debt! So much noise. Save where? Invest in what? Pay off which debt first? Psychologists call it “the paradox of choice”. Too many options and unknowns create anxiety and we end up spinning our wheels. I hate to break it to you, but you probably can’t accomplish all those goals at once. There’s only so much money. You need a plan that identifies what’s most important to you, puts a timeline and a dollar sign next to each of those, and then lays out the order of operations to get you there. In short, rather than getting bogged down by the myriad of options, identify what to do NEXT and then get after it.

You should spend your time focused on what’s most important to you. Spend a sliver of your time being intentional about your financial plan and you just made the important stuff in life that much better.