Handling recession and interest rate fears

Blog post #387

The economy and investment worries are always changing. 

Last year, many feared the impact of trade wars and rising interest rates to their portfolio. 

Most investors had portfolios that declined in 2018 but have seen a strong rebound so far in 2019.

Recently, there has been growing concern that due to slowing economic growth, stock portfolios may be at risk if there is a recession. If the US or global economies continues to slow, that could worsen and turn into a recession, which means at least two quarters of decline in the economy. 

Interest rates have dropped recently, so that some longer-term rates are now paying less than some short-term interest rates. For example, the three-month Treasury bill is yielding 2.439%, while the 10-year Treasury note is yielding 2.374% as of Wednesday afternoon. This is called an “inversion” of part of the bond yield curve. Some forecasters feel this type of “inversion” is an early warning sign of a future recession.

Should you be worried about this?

If you are not working with an experienced team of financial advisors, you could be worried. 

If you do not get clear and timely information, you could be worried. 

Why we don’t think you should be worried.

If you get advice and guidance from a financial advisor such as WWM, you have a long-term investment plan in place which is based on sound philosophies, so we don’t think you should be worried. We plan with you for these types of occurrences, even though we cannot predict when they will occur.

Recessions are very hard to predict. And when recessions do occur, they usually do not last that long, ranging from 6 months to less than two years. Since the Great Depression in 1929-1933, which lasted 3 years and 7 months, the longest recession was 18 months, from December 2007- June, 2009.*

And there is not necessarily a direct correlation between the timing of recessions and the impact on your investments. The stock market can decline before a recession starts and rise before a recession ends. We do not feel that what happens in the next 3-6-18 months, to the economy or your investments, should impact your ability to reach your long-term financial goals, with sound financial planning and investment advice. 

A recession does not mean that the stock market will necessarily incur the huge declines that were experienced in 2007-2009. That is always a possibility, as major declines generally occur at least once every 5 years, but again, these types of downturns cannot be reliably and accurately predicted in advance. 

Thus, fears about a potential recession should not translate into a change in your long-term investment plan of action. In a CNBC interview on Thursday, March 28th, Warren Buffett was asked about a potential recession and the impact of that on his investment strategy. He reiterated his belief, which we agree with, that you can’t predict when events like recessions will occur and it would not change his long-term desire to buy and hold stocks.

If you work with WWM, you have an investment plan that is developed for your personal situation. We view these plans as long term, to cover your financial goals and objectives for many years. You would have a globally diversified asset allocation mix (the amount of stocks and fixed income investments) that is appropriate for your goals and risk tolerance. 

If you work with WWM and you are in retirement, your investment plan is designed for decades, to support your desired standard of living. 

If you are saving for college or retirement, your plan is intended to suit you for many years or decades, during both good and bad stock market periods. 

We understand that at times you may have concerns or worries. If you are still worried after reading this, that is what we are here for. Call us and let’s discuss it. 

Working with WWM, we strive to guide you through the always changing economy and financial markets with a solid investment philosophy.  We strive to provide you with advice, re-assurance and clarity. 

We don’t want you to panic and sell because of fear. That could be detrimental to your financial future. Selling because of fears and downturns could reduce, not increase, your long-term goal of financial success. 

We want you to understand what is happening in the financial world, so that you will have the fortitude to adhere to your long-term financial plan. We feel that sticking to a long-term plan that we develop for you is much more likely to lead you to financial comfort and success. 

If you are not working with WWM and not receiving our financial advice, we encourage you to contact us. See the difference that we can make in your financial life. 


* “List of recessions in the United States“, Wikipedia

Major Financial Plot Twist

Blog post #386

In December and the fall of 2018, the Federal Reserve played the role of villain.

They had raised short term interest raises for five consecutive quarters and were projecting more increases for 2019 and 2020.

As a result of these increases, the Federal Reserve appeared to be Grinch-like just prior to last Christmas, which contributed to significant stock market losses in 2018. See our blog post, Is the Fed acting like Grinch?, from December, 2018. 

But in January, the Federal Reserve began changing the plot in this economic story. They went from villain to hero, at least as far as global stock markets and investors are concerned. 

Since their late December meeting, Federal Reserve officials have signaled in speeches and meetings that further rate increases may not be needed in the near term. 

This change in the Fed’s stance, though caused by their concern that US and global economies are slowing in growth, are a large factor in the strong performance of major US and global stock indices so far in 2019.

To reap the long-term benefits of investing in a globally diversified stock market portfolio requires patience and discipline. If you were patient and disciplined in late 2018, and didn’t overreact to the 2018 stock market declines, you have likely been rewarded in 2019.

The Federal Reserve announced no new short-term interest rate changes this week and projects no increases for the remainder of 2019, after their recent two day meeting. The average member now expects a single .25% increase next year, in 2020, and no increases for 2021. 

This is a major change from their position in December, 2018, when Board members forecasted two .25% rate increases in 2019, which was a reduction from their projections earlier in 2018 for three 2019 increases.

The Fed reaffirmed its stance that it “will be patient” in determining future interest rate changes, based on observed economic data (past economic activity) and expected future conditions.

It is clear once again that economists are not able to accurately predict the future.The Fed is supposed to have some of the top economic experts in the country, yet their “dot plot” forecasts of future interest rate expectations have consistently been inaccurate over past years. 

How will the economy act in the future? Will the Fed play the role of villain or hero?

We know that the future story will likely not play out as currently forecasted. There will be events and changes that can’t be anticipated. No one really knows the economic future, how the trade issues will be resolved or the pace of growth. It is likely that the Fed’s current dot plot forecasts of future short term interest rate changes will be different than they predicted this week. We don’t know when or if they will raise or even reduce rates, or the pace of the actual future changes…from what they predict now. 

This reaffirms our philosophy of not investing based on interest rate predictions. This is why we believe in using laddered fixed income holdings, spread across various maturities, and not betting on interest rate moves. This is why we don’t make stock market investments and recommendations based on predictions. 

Fed Chair Jerome Powell still expects the US economy to “grow at a solid pace” in 2019, but at a slower pace than in 2018. This is causing longer term interest rates, such as the 10 year bond, to decline even further than expected. The rate was over 3.24% in early November, 2.77% in late December, 2018 and was 2.54% Wednesday afternoon, which was the lowest level since January, 2018.

We always stress that investors need to be focused on the long-term. Commenting about these Federal Reserve changes may appear that we are focusing on the short term. However, we feel that it is important to share our thoughts and analysis about current market news and actions.

You want investment and financial advice. You want reassurance and confidence, with a future that is uncertain.

We can provide you with clarity, perspective and solid answers. 

We can guide you through financial complexity and work toward increasing your changes of meeting your financial and retirement goals. 

Talk to us.

Investing and Brackets

Next week, much of the country will participate in the annual fun of trying to choose which college basketball teams will do best in the NCAA national basketball championship tournament.

They will get the brackets, print them out or make their picks online. Have fun! And hope for the best. 

Picking the winning teams can be like investing. There are many different approaches. Some make sense. Some don’t. Some are effective, some are not. 

We cannot help you to have the top, most successful bracket selections to win your basketball pool, but we want you to do well. To outperform all the other people in a basketball pool, you have to take risk, and likely a lot of risk at some point. You have to get lucky. You probably need to choose some long shots and try to predict some upsets that you hope will occur along the way. You have to take some chances, if you want to outperform all the other entrants. 

We work with realistic goals and we want to help you to succeed financially.  When we make investment recommendations and structure a portfolio for you, making you the absolute most money is not our goal. That would require taking on too much risk for most people. That is not our approach or our philosophy. 

Our goal, and we think yours as well, is to perform well. It means that we make solid decisions and use processes and philosophies that strive to set you up for the best chance of financial success, in an unknown and unpredictable world. 

We believe in globally diversified portfolios. We believe that utilizing low cost mutual funds is vital, as striving to minimize your costs makes a difference over the long term. We use tax managed funds when possible, to strive to reduce your taxes. 

When you fill out your brackets, you can use different approaches. 

You can choose teams that you know. You can base your selections on past winners or the team colors. You can choose against Duke, if you don’t like them, just because. All of these are emotionally based decisions, not a rational process for decision making. We use rational thinking, not emotions, when making investment decisions. 

You can go with the favorites. This would be quite logical, the vast majority of the time. The college teams are seeded by a group of people (the selection committee) that spends a huge amount of time to analyze the teams, their records and all sorts of other data. The committee seeds the teams in each of the four regions from 1-16. 

If you do this every year, and you base your picks on the seedings and choose the favorites until the Final Four, you will most likely do pretty well. You will probably not win a pool in any given year. But we doubt that you will be consistently near the very bottom of your pool most of the time. You will likely have far more success than failure, in terms of your overall long term performance. 

This is similar to the strategy that we adhere to for picking stocks. We don’t strive to pick the major upsets. We don’t pick individual stocks. We go with the approach that the “committee” is pretty smart and that will lead to good long term performance, better than most others over the long term. 

This is in contrast to people who actively try to pick and choose lots of upsets and underdogs. Who they think will do the best, even though the future is unknown. You can spend hours reading all sorts of “experts” on various websites or listening to other “experts” on TV or talk radio programs. You could even pay for access to certain websites or information, because you think they are really in the know. 

You can follow this type of advice, but do you know how they performed last year? Or the year before? And even if you identified an “expert” who did well in the past, how do you know that will lead to good (or outstanding) performance in this year’s tournament? It probably does not! They most likely got lucky one year. They picked a team that turned out to be hot and rode that to glory. Or, it’s just their job to be the “expert” and they are good at doing predictions and interviews in the media. 

So even if you find the best expert and follow their advice, wouldn’t others eventually also learn about them? Over a few years, if someone was really able to consistently be the best at tournament picks (which is highly unlikely), their advice would become so well known that the value of their advice would diminish. Information spreads rapidly and everyone has access to it. 

This is how the stock market and active money managers and mutual fund managers work. You pay a lot for their management with the hope they will deliver better performance, but in the long run, the vast majority underperform their benchmarks averages, which is the equivalent of the tournament committee’s seedings. 

We hope you enjoy the NCAA tournament and your picks are winners. It’s supposed to be fun. You can take some chances and risks. Your future is not dependent on it. 

But for investing, for your serious money and your financial future, we hope you understand the analogy here and follow our rational approach and investing philosophy. 

Let’s Talk

Checking up on things

While we regularly monitor our client’s investments, there are some things you should be regularly checking up on. Just like your annual physical, we recommend that you review the following on a regular basis.

Social Security….For most people, Social Security benefits are a key component of their retirement planning. If you have not yet started collecting Social Security, you should regularly review your Social Security information and future benefit projections. You should verify that the earnings data on record is accurate. You should review this information with your financial advisor.

Social Security stopped sending everyone annual paper statements a number of years ago. To review your data online, go to: www.ssa.gov/myaccount to establish your own Social Security account. Each individual needs to do this. It cannot be done as a couple. You will need to create a user name and password. SSA’s password requirements are very strong, which is good. Be sure to save it, and they require you to establish a new password every 6 months.

Credit scores…You should regularly monitor your credit score and credit report activity.

There are now many credit cards that provide you with your credit score for free, so this is much easier to obtain than it was years ago. It is a good idea to track your score, to monitor if there are changes, and especially declines. Again, if you are married, you should check the score for each spouse, as scores can be quite different.

Your credit score is not influenced at all by your income or assets. Credit scores are based on formulas which factor your total debt, the age of your various types of debt, how much of your credit you have used, the type of debt you have and your payment history, including late payments.

We recommend that every adult should have some credit cards in their individual name only, in addition to any joint credit.

You should review your full credit report at least annually. This way, you can review all of your current and past credit and to see if anyone has established credit cards or other debt that you did not authorize. Each spouse should review their own report, as they are separate.

The best website to obtain a free credit report is: http://www.annualcreditreport.com/. This site is governed by the Federal Trade Commission (FTC). You may also call 877-322-8228.  This site will provide you with a link to get your credit report and you will need to answer a number of personal questions, for identification purposes.

The Fair Credit Reporting Act guarantees consumers access to their credit report information from each of the three credit reporting companies, once per year, for free. The best and only way to ensure that you are getting this information for free is to use the above website, http://www.annualcreditreport.com/.

One member of our firm uses Credit Karma. Credit Karma can be accessed through their website, https://www.creditkarma.com/, or you can install the app on your smart phone. Credit Karma gives you free access to your credit scores, reports and monitoring. You can get your scores and reports from TransUnion and Equifax with weekly updates. The app is free to use.

We hope these are helpful reminders. 

If you have any questions on the information you gather from getting these reports, please let us know.