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Posts from the ‘Investing & Savings’ Category

13
Jan

Revisiting the 4% Rule

Saving for retirement is not easy, but using your retirement savings wisely can be just as challenging. How much of your savings can you withdraw each year? Withdraw too much and you run the risk of running out of money. Withdraw too little and you may miss out on a more comfortable retirement lifestyle.

For more than 25 years, the most common guideline has been the “4% rule,” which suggests that a withdrawal equal to 4% of the initial portfolio value, with annual increases for inflation, is sustainable over a 30-year retirement. This guideline can be helpful in projecting a savings goal and providing a realistic picture of the annual income your savings might provide. For example, a $1 million portfolio could provide $40,000 of income in the first year with inflation-adjusted withdrawals in succeeding years.

The 4% rule has stimulated a great deal of discussion over the years, with some experts saying 4% is too low and others saying it’s too high. The most recent analysis comes from the man who invented it, financial professional William Bengen, who believes the rule has been misunderstood and offers new insights based on new research.

Original research

Bengen first published his findings in 1994, based on analyzing data for retirements beginning in 51 different years, from 1926 to 1976. He considered a hypothetical, conservative portfolio comprising 50% large-cap stocks and 50% intermediate-term Treasury bonds held in a tax-advantaged account and rebalanced annually. A 4% inflation-adjusted withdrawal was the highest sustainable rate in the worst-case scenario — retirement in October 1968, the beginning of a bear market and a long period of high inflation. All other retirement years had higher sustainable rates, some as high as 10% or more.1)

Of course, no one can predict the future, which is why Bengen suggested the worst-case scenario as a sustainable rate. He later adjusted it slightly upward to 4.5%, based on a more diverse portfolio comprising 30% large-cap stocks, 20% small-cap stocks, and 50% intermediate-term Treasuries.2)

New research

In October 2020, Bengen published new research that attempts to project a sustainable withdrawal rate based on two key factors at the time of retirement: stock market valuation and inflation (annual change in the Consumer Price Index). In theory, when the market is expensive, it has less potential to grow, and sustaining increased withdrawals over time may be more difficult. On the other hand, lower inflation means lower inflation-adjusted withdrawals, allowing a higher initial rate. For example, a $40,000 first-year withdrawal becomes an $84,000 withdrawal after 20 years with a 4% annual inflation increase but just $58,000 with a 2% increase.

To measure market valuation, Bengen used the Shiller CAPE, the cyclically adjusted price-earnings ratio for the S&P 500 index developed by Nobel laureate Robert Shiller. The price-earnings (P/E) ratio of a stock is the share price divided by its earnings per share for the previous 12 months. For example, if a stock is priced at $100 and the earnings per share is $4, the P/E ratio would be 25. The Shiller CAPE divides the total share price of stocks in the S&P 500 index by average inflation-adjusted earnings over 10 years.

5% rule?

Again using historical data — for retirement dates from 1926 to 1990 — Bengen found a clear correlation between market valuation and inflation at the time of retirement and the maximum sustainable withdrawal rate. Historically, rates ranged from as low as 4.5% to as high as 13%, but the scenarios that supported high rates were unusual, with very low market valuations and/or deflation rather than inflation.3)

For most of the last 25 years, the United States has experienced high market valuations, and inflation has been low since the Great Recession.4-5) In a high-valuation, low-inflation scenario at the time of retirement, Bengen found that a 5% initial withdrawal rate was sustainable over 30 years.6) While not a big difference from the 4% rule, this suggests retirees could make larger initial withdrawals, particularly in a low-inflation environment.

One caveat is that current market valuation is extremely high: The S&P 500 index had a CAPE of 34.19 at the end of 2020, a level only reached (and exceeded) during the late-1990s dot-com boom and higher than any of the scenarios in Bengen’s research.7)  His range for a 5% withdrawal rate is a CAPE of 23 or higher, with inflation between 0% and 2.5%.8) (Inflation was 1.2% in November 2020.9) Bengen’s research suggests that if market valuation drops near the historical mean of 16.77, a withdrawal rate of 6% might be sustainable as long as inflation is 5% or lower. On the other hand, if valuation remains high and inflation surpasses 2.5%, the maximum sustainable rate might be 4.5%.10)

It’s important to keep in mind that these projections are based on historical scenarios and a hypothetical portfolio, and there is no guarantee that your portfolio will perform in a similar manner. Also remember that these calculations are based on annual inflation-adjusted withdrawals, and you might choose not to increase withdrawals in some years or use other criteria to make adjustments, such as market performance.

Although there is no assurance that working with a financial professional will improve investment results, a professional can evaluate your objectives and available resources and help you consider appropriate long-term financial strategies, including your withdrawal strategy.

All investments are subject to market fluctuation, risk, and loss of principal. When sold, investments may be worth more or less than their original cost. U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities fluctuates with market conditions. If not held to maturity, they could be worth more or less than the original amount paid. Asset allocation and diversification are methods used to help manage investment risk; they do not guarantee a profit or protect against investment loss. Rebalancing involves selling some investments in order to buy others; selling investments in a taxable account could result in a tax liability.

The S&P 500 index is an unmanaged group of securities considered representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results. Actual results will vary.

1-2) Forbes Advisor, October 12, 2020

3-4, 6, 8, 10) Financial Advisor, October 2020

5, 9) U.S. Bureau of Labor Statistics, 2020

7) multpl.com, December 31, 2020

2
Sep

The Bull Is Back… Will It Keep Charging?

On August 18, 2020, the S&P 500 set a record high for the first time since COVID-19 ushered in a bear market on February 19. The cycle from peak to peak was just 126 trading days, the fastest recovery in the history of the index, erasing losses from an equally historic plunge of almost 34% in February and March.1

Based on the traditional definition of market cycles, the new record confirms that a bull market began on March 23 when the index closed at its official low point. This also confirms that the February-March bear market was the shortest on record, lasting just 33 days.2

Although the strong comeback is good news for investors, there is a striking disconnect between the buoyant market and an economy still struggling with high unemployment and a public health crisis. The market is not the economy, but the economy certainly affects the market. So it may seem puzzling that the market could reach a record high not long after the largest quarterly decline in gross domestic product (GDP) in U.S. history.3

Optimism vs. exuberance

Whereas GDP measures current economic activity, the stock market is forward looking. The rapid bounceback suggests that investors believe the pandemic will be controlled in the not-too-distant future and that business activity will return to normal. Whether this optimism is warranted remains to be seen. The current economic situation remains tenuous, but there are hopeful signs.

A vaccine could be available in early 2021, later than anticipated but offering light at the end of the tunnel.4 In the meantime, the virus continues to suppress business activity. The 10.2% July unemployment rate represented a big improvement over the previous three months, but it was still higher than at any time during the Great Recession.5  Recent projections of corporate earnings suggest they will not contract as much as expected, but they will still contract.6 GDP is projected to make up ground in the third and fourth quarters but remain negative for the year.7

The extreme of market optimism is irrational exuberance, and there may be some of that at work in the current situation. The proliferation of low-cost trading apps has encouraged less-experienced investors to trade aggressively, which might be driving some of the market surge.8

Economic stimulus

The single, most important factor behind the market recovery is the deep commitment from the Federal Reserve to provide unlimited support through low interest rates and bondbuying programs. For some investors, the fact that the economy is still struggling has a strangely positive effect in guaranteeing that the Fed will keep the money flowing.9

Further support from the federal government is more uncertain, but the strong market suggests that investors may be counting on a second stimulus package.10

Nowhere else to go

Low interest rates make it easier for businesses and individuals to borrow, but they have reduced bond yields to the point that many investors are willing to take on greater risk in equities to generate income. Money that might normally be invested in the bond market has poured into stocks, driving prices higher. This situation has its own acronym: TINA, There Is No Alternative to Stocks.11

Big tech at the wheel

While the S&P 500 is generally considered representative of the U.S. stock market, the recovery has centered around technology companies, which have helped provide goods and services throughout the pandemic. The Big Six tech stocks — Apple, Facebook, Amazon, Netflix, Microsoft, and Alphabet (Google’s parent) — were up collectively by more than 43% for the year through August 18. By contrast, the rest of the companies in the S&P 500 were down collectively by about 4%. The Big Six tech companies now represent more than one-fourth of the total market capitalization of the S&P 500 and thus have an outsized effect on index performance.12

One question facing investors is whether to chase the winners or look to stocks and sectors that still lag their previous highs and may have greater growth potential. Chasing performance is seldom a good idea, but there are solid reasons why certain stocks have been so successful in the current environment.

Are stocks overvalued?

The most common measure of stock value is price/earnings (P/E) ratio, which represents the stock price divided by corporate earnings over the previous 12 months or by projected earnings over the next 12 months. The projected P/E ratio for the S&P 500 on August 18 was 22.6, the highest since March 2000 at the peak of the dot-com bubble. Big tech stocks were even higher, trading at 26 times their projected earnings, and the Big Six were higher still at more than 40 times projected earnings.13-14

A different measure of stock value compares the total market capitalization of all U.S. stocks with GDP. By this measure, the market was 77.6% overvalued on August 18, by far the highest valuation ever recorded. The previous highs were 49.3% in January 2018 and 49.0% in March 2000. This extreme ratio illustrates the current disconnect between the stock market and GDP, but a significant GDP increase during the third quarter could bring it down.15

In considering these valuations, keep in mind that these are extraordinary times, and traditional expectations and measures of value may not tell the whole story. If nothing else, the extreme volatility and rapid market cycles of 2020 have illustrated the importance of maintaining a diversified all-weather portfolio and the danger of overreacting to market movements. While new records are exciting, they are only signposts along the road to achieving your long-term goals.

The return and principal value of stocks and bonds fluctuate with changes in market conditions. Shares, when sold, and bonds redeemed prior to maturity may be worth more or less than their original cost. Investments seeking to achieve higher yields also involve a higher degree of risk. Diversification is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss. The performance of an unmanaged index such as the S&P 500 is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is not a guarantee of future results. Actual results will vary.

1, 3, 6, 8, 11, 13) The Wall Street Journal, August 18, 2020

2) CNBC, August 18, 2020

4, 9) The New York Times, August 18, 2020

5) U.S. Bureau of Labor Statistics, 2020

7) The Wall Street Journal Economic Forecasting Survey, August 2020

10) CNBC, August 14, 2020

12, 14) The Washington Post, August 20, 2020

15) Forbes, August 18, 2020

14
Jul

The Shape of Economic Recovery

On June 8, 2020, the National Bureau of Economic Research (NBER), which has official responsibility for determining U.S. business cycles, announced that February 2020 marked the end of an expansion that began in 2009 and the beginning of a recession.(1)  This was no great surprise considering widespread business closures due to the coronavirus pandemic and the resulting spike in unemployment, but it was an unusually quick official announcement.

The NBER defines a recession as “a decline in economic activity that lasts more than a few months,” so it typically takes from six months to a year to determine when a recession started. In this case, the NBER’s Business Cycle Dating Committee concluded that “the unprecedented magnitude of the decline in employment and production, and its broad reach across the entire economy,” warrants the designation of a recession, “even if it turns out to be briefer than earlier contractions.”(2)

Another common definition of a recession is two or more quarters of negative growth in gross domestic product (GDP), and it’s clear that the current situation will meet that test. The U.S. economy shrank at an annual rate of 5% in the first quarter of 2020 — a significant but deceptively small decline, because the economy was strong during the first part of the quarter. (3)

The first official estimate for the second quarter will not be available until July 30, but the Federal Reserve Bank of Atlanta keeps a running estimate that is updated based on incoming economic data. As of July 9, the Atlanta Fed estimated that GDP would drop at a 35.5% annual rate in the second quarter.(4) By comparison, the largest quarterly drop since World War II was 10% in the first quarter of 1958, followed by 8.4% in the fourth quarter of 2008.(5)

Most economists believe that GDP will turn upward in the third quarter as businesses continue to open.(6) But with the extreme decline in business activity during the first half of 2020, it will take sustained growth to return the economy to its pre-recession level. In its June economic projections, the Federal Reserve Open Market Committee projected a 6.5% annual drop in GDP for 2020, followed by 5.0% growth in 2021 and 3.5% growth in 2022.(7)  The simple math of these projections suggests the economy may not return to its 2019 level until 2022.

By the letters

Economists traditionally view economic recessions and recoveries as having a shape, named after the letter it resembles.

V-shaped — a rapid fall followed by a quick rebound to previous levels. The 1990-91 recession, which lasted only eight months and was followed by strong economic growth, was V-shaped. This type of recovery would require control of COVID-19 through testing and treatment, a quick ramp-up of business activity, and a return to pre-recession spending habits by consumers. (8-9)

U-shaped — an extended recession before the economy returns to previous levels. The Great Recession, which lasted 18 months followed by a slow recovery, was U-shaped. If COVID-19 takes longer to control and the economy does not bounce back as expected in the third quarter, the current recession could be prolonged. (10-11)

W-shaped — a “double-dip” recession in which a quick recovery begins but drops back sharply before beginning again. The U.S. economy experienced a W-shaped  recession in 1980-82, when a second oil crisis and high inflation triggered a brief recession, followed by a quick recovery and another recession sparked by overly aggressive anti-inflation policies by the Federal Reserve. This type of recession could occur if a second wave of COVID-19 forces businesses to shut down again later in the year, just as the economy is recovering. (12-13)

L-shaped — a steep drop followed by a long period of high unemployment and low economic output. The Great Depression, which lasted 43 months with four straight years of negative GDP growth, was L-shaped. This is unlikely in the current environment, considering the strength of the U.S. economy before COVID-19 and the unprecedented economic support from the Federal Reserve. (14-15)

A swoosh

In the July Economic Forecasting Survey by The Wall Street Journal, which polls more than 60 U.S. economists each month, 13.0% of respondents thought the recovery would be V-shaped, 11.1% expected it to be W-shaped, 5.5% indicated it would be U-shaped, and none thought it would be L-shaped.(16)

The vast majority — 70.4% — believed the recovery would take a “Nike swoosh” shape, which suggests a sharp drop followed by a long, slow recovery.(17) This view factors in the possibility that businesses may be slow to rehire, and consumers could be slow to resume  pre-recession spending patterns. It also considers that some businesses may be impacted longer than others. Airlines do not expect to return to pre-COVID passenger activity until 2022, and movie theaters, beauty salons, sporting events, and other high-contact businesses may struggle until a vaccine is developed. (18)

Adding to the prognosis for a slow recovery is the fact that the rest of the world is also fighting the pandemic, including many countries where growth was already more sluggish than in the United States. And if the virus resurges in the fall or early 2021, the recovery may turn jagged with significant setbacks along the way. (19)

While the consensus suggests that the duration of the actual recession may be brief, it is much too early to know the true shape of the recovery. However, the economy will recover, as it has in even more challenging situations. All these projections indicate that a key factor in determining the shape of recovery will be control of COVID-19. Beyond that, the underlying question is whether the virus has fundamentally changed the U.S. and global economies.

(1-2), (8), (10), (12), (14) National Bureau of Economic Research, June 2020

(3), (5), (15) U.S. Bureau of Economic Analysis, June 2020

(4) Federal Reserve Bank of Atlanta, July 9, 2020

(6), (16-17) The Wall Street Journal Economic Forecasting Survey, July 2020

(7) Federal Reserve, June 10, 2020

(9), (11), (13) Forbes Advisor, June 8, 2020

(18-19) The Wall Street Journal, May 11, 2020

2
Jun

Think Twice Before Speculating on a COVID-19 Cure

As hundreds of companies race to develop vaccines and drug therapies that could help end the COVID-19 pandemic, news reports on successful or failed trials affect individual stock prices and can trigger swings in the broader market.(1) Understandably, this highly contagious virus — and its severe economic repercussions — has a knack for stirring up investors’ emotions.

By May 27, 2020, COVID-19 was responsible for more than 100,000 deaths in the United States and about 355,000 worldwide. (2) Investors are human beings first, and most of us are waiting anxiously for a cure that would stop the suffering and allow normal life to resume.

Governments and nonprofits have provided billions of dollars in support, and some red tape has been loosened, all to help speed a costly, complex, and time-consuming drug development process.(3) Even so, this influx of public funding — along with a concerted humanitarian effort — suggests that some of the most important discoveries may not generate profits for investors.

High hopes for a vaccine

A vaccine prepares the body’s immune system to recognize and resist a specific disease, preventing it from causing sickness and spreading to others. As of May 27, the World Health Organization (WHO) was tracking 125 experimental vaccine candidates globally, 10 of which had advanced to clinical evaluation. Another 115 candidates are still in the pre-clinical stage, which involves testing in cells and/or animals and waiting for regulators to review results and grant permission for human trials. (4)

Clinical studies are conducted in three phases. During Phase I, a small study of healthy people tests the safety and immune response of the vaccine at different doses. Phase II is a randomized, double-blind, controlled study of hundreds of people that further assesses safety, efficacy, and optimal dosing. If all goes well, clinical studies expand to include thousands of people in Phase III. (5) These larger studies can be challenging because they test how well the vaccine works in an environment where the virus is spreading. (6)

Despite the urgency, COVID-19 vaccine candidates can’t skip any of these crucial steps, but timelines have been accelerated. (7) Health officials have said it could take 12 to 18 months before a vaccine may be available. (8)

The U.S. government has struck supply deals with several pharmaceutical companies to support research into leading vaccine candidates and boost the manufacturing capacity needed to produce 300 million doses by fall of 2020, should a candidate prove effective. (9)

Other nations and well-funded nonprofits have made similar deals. Massive public investment allows drug makers to get a head start on manufacturing doses while waiting for human trials to conclude and approval to be granted. In return, at least one drug maker has promised to sell an approved vaccine without making a profit during the pandemic. (10)

A COVID-19 vaccine is not imminent — a point made by the fact that there is no vaccine to prevent HIV after several decades of research. Still, early progress on several fronts offers reasons to be cautiously optimistic. (11)

Testing old and new therapies

The development and approval process for experimental drugs is similar to the one for vaccines. Companies that develop successful treatments are likely to face the same manufacturing challenges and pricing pressures. In the meantime, doctors are testing existing therapies that might help COVID-19 patients. (12)

One existing antiviral drug was approved for emergency use by the U.S. Food and Drug Administration after it was determined to help hospitalized patients with severe COVID-19 recover faster. The pharmaceutical giant that makes the drug has ramped up production and is donating about 1.5 million doses as a public good. (13)

Scientists are also working on targeted antibody therapies, which depend on the identification of specific antibodies that bind with and neutralize the novel coronavirus. At high doses the right antibodies might prevent the disease from worsening in hospitalized patients, and at lower doses the same antibodies could provide short-term immunity for front-line workers.

Effective antibody drugs are easier to develop but more complex to manufacture. Thus, there is limited global capacity to produce the large amounts needed. Governments, nonprofits, and companies that are normally competitors are reportedly discussing ways to share manufacturing plants if one company’s antibody proves to work better than the others. (14)

Antibody treatments could help save lives as long as COVID-19 is a threat, but widespread vaccination could make them obsolete. If a successful vaccine materializes, many valiant efforts to develop beneficial therapies may never make much money.

More implications for investors

As of May 21, 2020, the U.S. government had invested at least $2 billion for the development of coronavirus vaccines and $300 million for antiviral and antibody therapies. (15) New biotechnologies, generous financial support, and unprecedented cooperation between governments and industry leaders could shave several years off typical development timelines. (16)

It’s rarely easy to predict which new products will perform well enough in multiple rounds of studies to earn regulatory approval. Moreover, the stock market’s mid-May rally and high valuations for biotech and pharmaceutical shares imply that success in developing COVID-19 treatments might already be priced in — especially for newsmakers. (17)

Headline-induced price swings suggest that investors are making decisions driven by hopes and fears, and possibly based on limited information, instead of a realistic assessment of an investment’s longer-term earnings potential. Now more than ever, it’s important to have a well-researched investment strategy based on your own goals, time horizon, and risk tolerance.

All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.

(1), (17) The Wall Street Journal, May 18, 2020

(2) Johns Hopkins University, May 27, 2020

(3), (5), (7), (8), (16) World Economic Forum, 2020

(4) World Health Organization, May 27, 2020

(6) Bloomberg News, May 7, 2020

(9), (10) The Wall Street Journal, May 21, 2020

(11) NPR.com, May 12, 2020

(12), (14), (15) Bloomberg Businessweek, April 20, 2020

(13) STAT, April 29, 2020

11
May

Coping with Market Volatility: Be Sure to Use Appropriate Benchmarks

Do you find yourself glued to the daily news reports on market movements wondering about your own savings and investments? Before you make any hasty decisions, be sure you understand how these reports relate — or don’t relate — to your individual portfolio.

The variance in the returns of different portfolios is largely attributable to their asset allocations. If you have a well-diversified portfolio that includes multiple asset classes (stocks, bonds, cash alternatives), be sure to compare its overall performance to relevant benchmarks, rather than the gains and losses reported throughout daily news cycles. For example, just because a particular stock market index, such as the S&P 500, may have dropped by a double-digit percentage doesn’t necessarily mean your entire portfolio is down by the same amount. If you find that your investments are at least matching relevant benchmarks, you might feel better about your overall strategy.

Asset allocation and diversification do not guarantee that you won’t suffer losses, of course, and they also can’t guarantee a profit. But they can help spread your risk. When the overall market declines, some asset classes and individual investments may be affected more than others.

Before letting daily headlines drive your investment decisions, consider whether your asset allocation is appropriate for your immediate and long-term needs and the risk you’re comfortable taking.

For help in determining appropriate benchmarks for your portfolio, give me a call. I am here to help.

All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.

Although there is no assurance that working with a financial professional will improve investment results, a professional can evaluate your objectives and available resources and help you consider appropriate long-term financial strategies.

27
Apr

Coping with Market Volatility: Be Willing to Take Advantage of Market Downturns

Anyone can look good during a bull market. Smart investors are prepared to weather the inevitable rough patches, and even the best aren’t successful all the time. When the market goes off the tracks, knowing why you originally made a specific investment can help you evaluate whether those reasons still hold, regardless of what the overall market is doing.

If you no longer want to hold an investment, you could take a tax loss, if that’s a possibility. Selling locks in any losses on an investment, but it also generates cash that can be used to purchase other investments that may be available at an appealing discount.  Sound research might turn up buying opportunities on stocks that have dropped for reasons that have nothing to do with the company’s fundamentals. In a down market, most stocks are available at lower prices, but some are better bargains than others.

There also are other ways to reap some benefit from a down market. If the value of your IRA or 401(k)  has dropped dramatically, you likely won’t be able to harvest a tax benefit from those losses, because taxes generally aren’t owed on those accounts until the money is withdrawn. However, if you’ve considered converting a tax-deferred plan to a Roth IRA, a lower account balance might make a conversion more attractive. Though the conversion would trigger income taxes in the year of the conversion, the tax would be calculated on the reduced value of your account. With some expert help, you can determine whether and when such a conversion might be advantageous.

A volatile market is never easy to endure, but learning from it can better prepare you and your portfolio to weather and take advantage of the market’s ups and downs.

For more information on these strategies, contact us. We’re here to help.

All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.

Although there is no assurance that working with a financial professional will improve investment results, a professional can evaluate your objectives and available resources and help you consider appropriate long-term financial strategies.

To qualify for the tax-free and penalty-free withdrawal of earnings (and assets converted to a Roth), Roth IRA distributions must meet a five-year holding requirement, and the distribution must take place after age 59½ (with some exceptions). Under current tax law, if all conditions are met, the account will incur no further income tax liability for the rest of the owner’s lifetime or for the lifetime of the owner’s heirs, regardless of how much growth the account experiences.

21
Apr

Coping with Market Volatility: Cash Can Help Manage Your Mindset

Holding an appropriate amount of cash in a portfolio can be the financial equivalent of taking deep breaths to relax. It could enhance your ability to make thoughtful investment decisions instead of impulsive ones. Having a cash position coupled with a disciplined investing strategy can change your perspective on market volatility. Knowing that you’re positioned to take advantage of a downturn by picking up bargains may increase your ability to be patient.

That doesn’t mean you should convert your portfolio to cash. Selling during a down market locks in any investment losses, and a period of extreme market volatility can make it even more difficult to choose the right time to make a large-scale move. Watching the market move up after you’ve abandoned it can be almost as painful as watching the market go down. Finally, be mindful that cash may not keep pace with inflation over time; if you have long-term goals, you need to consider the impact of a major change on your ability to achieve them.

Having a cash cushion in your portfolio isn’t necessarily the same as having a financial cushion to help cover emergencies such as medical problems or a job loss. An appropriate asset allocation that takes into account your time horizon and risk tolerance may help you avoid having to sell stocks at an inopportune time to meet ordinary expenses.

Remember that we’re here to help and to answer any questions you may have.

All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.

Asset allocation is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.

Although there is no assurance that working with a financial professional will improve investment results, a professional can evaluate your objectives and available resources and help you consider appropriate long-term financial strategies.

14
Apr

Coping with Market Volatility: Could This Be a Chance to Rebalance at a Discount?

In a volatile market, it’s easy to allow your emotions to influence your investment decisions. But if you can keep your cool while those around you are losing theirs, you may be able to take advantage of potential opportunities.

One way to do that is by reviewing your portfolio to determine if it’s time to rebalance your asset allocation or modify your level of diversification.

Rebalancing means adjusting your portfolio to get it back to your original target allocation. In today’s market, it often makes sense to first determine whether that original target is still appropriate for your needs. If it makes sense to return to your original allocation or establish a new one, there are two ways to proceed. You can sell securities in some asset classes and invest the proceeds in others, and/or redirect new investment dollars into selected asset classes until the target allocation is reached.

If your current allocation is appropriate, but there are concerns with your overall level of diversification, it’s possible to shift some investments within a given asset class. Keep in mind that selling securities can have tax consequences, depending on account type.

Asset allocation and diversification can help manage investment risk and might better position your portfolio for the future. The silver lining to broad-based market turmoil is that you may be able to acquire some investments at a discount relative to what you would have paid when the market was up.

The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Asset allocation and diversification are methods used to help manage investment risk; they do not guarantee a profit or protect against investment loss.

Although there is no assurance that working with a financial professional will improve investment results, a professional can evaluate your objectives and available resources and help you consider appropriate long-term financial strategies.

7
Apr

Coping with Market Volatility: Continuing to Invest May Help You Stay on Course

In the current market environment, the value of your holdings may be fluctuating widely — and it’s natural to feel tentative about further investment. But regularly adding to an account that’s designed for a long-term goal may cushion the emotional impact of market swings. If losses are offset even in part by new savings, the bottom-line number on your statement might not be quite so discouraging. And a basic principle of investing is that buying during a down market may help your portfolio grow when the market turns upward again.

If you are investing a specific amount regularly regardless of fluctuating price levels (as in a typical workplace retirement plan), you are practicing dollar-cost averaging. Using this approach, you may be getting a bargain by continuing to buy when prices are down. However, you should consider your financial and psychological ability to continue purchases through periods of fluctuating price levels or economic distress; dollar-cost averaging loses much of its benefit if you stop just when prices are reduced. And it can’t guarantee a profit or protect against a loss.

If you can’t bring yourself to invest during this period of uncertainty, try not to let the volatility derail your savings program completely. If necessary, to help address your concerns, you could continue to save, but direct new savings into a cash-alternative investment until your comfort level rises. Though you might not be buying at a discount, you could be accumulating cash reserves that could be invested when you’re ready. The key is not to let short-term anxiety make you forget your long-term plan. I am here to help and to answer any questions you may have.

All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.

Stay Safe,

Joseph A. Smith, CPA/PFS, J.D., AEP®
Member

24
Mar

Bear Markets Come and Go

The longest bull market in history lasted almost 11 years before coronavirus fears and the realities of a seriously disrupted U.S. economy brought it to an end.

If you are losing sleep over volatility driven by a cascade of disheartening news, it may help to remember that the stock market is historically cyclical. There have been 10 bear markets (prior to this one) since 1950, and the market has recovered eventually every time.

Bear markets are typically defined as declines of 20% or more from the most recent high, and bull markets are increases of 20% or more from the bear market low. But there is no official declaration, so in some cases there are different interpretations regarding when these cycles begin and end.

On average, bull markets lasted longer (1,955 days) than bear markets (431 days) over this period, and the average bull market advance (172.0%) was greater than the average bear market decline (-34.2%).

Bear Markets Since 1950 Calendar Days to Bottom U.S. Stock Market Decline (S&P 500 Index)
August 1956 to October 1957 446 -21.5%
December 1961 to June 1962 196 -28.0%
February 1966 to October 1966 240 -22.2%
November 1968 to May 1970 543 -36.1%
January 1973 to October 1974 630 -48.2%
November 1980 to August 1982 622 -27.1%
August 1987 to December 1987 101 -33.5%
July 1990 to October 1990 87 -19.9%*
March 2000 to October 2002 929 -49.1%
October 2007 to March 2009 517 -56.8%

*The intraday low marked a decline of -20.2%, so this cycle is often considered a bear market.

The bottom line is that neither the ups nor the downs last forever, even if they feel as though they will. During the worst downturns, there were short-term rallies and buying opportunities. And in some cases, people have profited over time by investing carefully just when things seemed bleakest.

If you’re reconsidering your current investment strategy, a volatile market is probably the worst time to turn your portfolio inside out. Dramatic price swings can magnify the impact of a wholesale restructuring if the timing of that move is a little off. A well-thought-out asset allocation and diversification strategy is still the fundamental basis of good investment planning. Changes in your portfolio don’t necessarily need to happen all at once. Try not to let fear derail your long-term goals.

The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Asset allocation and diversification are methods used to help manage investment risk; they do not guarantee a profit or protect against investment loss.

The S&P 500 is an unmanaged group of securities that is considered to be representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is not a guarantee of future results. Actual results will vary.

Source: Yahoo! Finance, 2020 (data for the period 6/13/1949 to 3/12/2020)

If you are losing sleep over volatility driven by a cascade of disheartening news, it may help to remember that the stock market is historically cyclical.