Long Term v. Short Term

Blog post #409

When we provide investment advice and write in these blog posts, we recommend to focus on the long term, especially with regard to investments in the stock market.

A client recently asked me how that “long-term” perspective applies to him, as he is “older” and feels that his time horizon is not as long as he once perceived it.

This is a valid question, so I thought it would make sense to address it.

Let’s start with a basic premise, that if you invest in the stock market, including a globally diversified portfolio as we recommend, you must be prepared for a significant loss of your money over a relatively short period, which could be anywhere from months to a year or two. Stock markets can and do drop quickly and significantly. In order to reap the benefits and gains of stocks, you must be willing to endure the down periods.

In real terms, you could see a decline (loss) of 10-20-30-40% or even more, of whatever money you invest in the stock market, at any point in time. This has happened before and it will happen again.

This is where your time perspective and the reality of the stock market come together. We encourage you to view stock market losses as temporary, and not permanent losses. If you don’t sell at the bottom or during down periods, you should be able to recover from the temporary losses in the stock market, depending on your situation and your timeframe.

As you can see from the following chart, each major loss of greater than 20% of the S&P 500 since 1926 was fully recouped within a few years. For each period, for down and up markets, the chart shows the number of months and the percentage loss and gain over the respective time period. For example, the tech meltdown that started in 2000 resulted in a downturn of 45% in the S&P 500 and occurred over 25 months. Over the next 61 months, the S&P 500 gained 108%.

Please note that this chart is presented for illustrative purposes, to help you understand that stock market losses are temporary and not permanent. We recommend portfolios that are much more diversified than just the S&P 500 (which includes US based large companies only and the companies in the Index have changed significantly over time) so the performance of a portfolio that we recommend may have done better or worse during these specific time periods, but the concept would still be valid. Losses are temporary, not permanent, if you can be disciplined and patient.

The client who posed this question asked me how we factor his “shorter” time perspective into his planning.

When we determine the allocation of a portfolio – how much is invested in stocks v. how much is invested in fixed income (bonds, CDs and cash, which are considered safer and not as volatile as stocks), we focus on your need, ability and willingness to take risk.

And this is where the time perspective begins to take part in the planning and advice that we provide. This is very personal and may be different for each person. For someone such as this person, he may feel he does not have the willingness to take on as much risk, due to his or her age. But we also have to factor in the need for growth in the portfolio, which can really only come from the stock allocation. We also consider his ability to handle the risk, which is likely a factor of age, as well as each persons’ emotional ability to handle volatility. Thus, we would hope that we can recommend a portfolio that has an allocation to stocks that will enable each client and their family to be able to meet their lifetime financial goals and desired cash flow, as well as be at a level of stocks that they can handle emotionally.

Since any money invested in the stock market is subject to loss, we account for someone’s shorter time perspective by adjusting (reducing) the percentage of the portfolio that is invested in stocks.

As we said above, a key part of our philosophy is that stock market losses are temporary, not permanent. But you have to remain invested in stocks, in order for them to recover….and you can’t know how long the recovery will take, especially in the midst of a market crash, such as occurred in 2008-09, or even last fall and through December, 2018.

For most people, this type of analysis and planning is in respect to their retirement portfolio. In this case, your life expectancy is what should drive your time perspective. Based on Social Security life expectancy data, for which 2016 is the most recent published, someone at the respective ages in 2016 should live, on average, to the following ages:**

Male Female
60 Year Old 82 85
70 Year Old 84 87
80 Year Old 88
90

Also, keep in mind, that this means that half of the population is expected to live longer than the above figures and half will live less. These are the mid-points. Further, it is clear that for people who are better educated, wealthier, and presumably have better access to good health care, they would be expected to live longer than the average. However, as we all know, the only statistic that counts are yours, and the ones you love, not the averages.

But for planning purposes, unless you have a specific medical condition that you have shared with us, we would rely on this type of data. Thus, for someone who is around 60, we would view them as having at least a 20-30 year time perspective. For someone who is 70, we would want to plan for a 15-25 year time perspective.

This is really important. You may be in your mid-60s and not feel that you can think long-term as it relates to stocks. But we encourage you to think long term, as we view it. We have many clients who are well into their 80s and 90s. I’m sure that each of you know people like that. We need to plan so that your money can last for a very long time while you live in retirement.

There are other situations, such as college savings plans or certain employer incentive programs, which have specific timeframes or ending periods, where the money will or should be distributed. In these cases, we would plan very differently than for someone’s retirement funds, as these situations may really have only a 5 or 15 year ending point. In these cases, we would recommend that the closer one gets to the end of the time period, or closer to the college years, the money in this type of account should get much more conservative, reducing the stock allocation to 10-20% or even less, in the final year or two.

As your advisor and guide, we can help you deal with these varying, emotional and financial issues.

  • All aspects of investing and financial planning should include discussing your emotional ability to handle risk.
  • It should include evaluating what is the appropriate time frame for your investments. You may have differing bucket of assets with varying time perspectives.
  • We encourage you to think long term, especially in light of longer life expectancies. You may live into your 80s or 90s and we need to plan for that.
  • Based on this, if you have a 20-30 year life expectancy, you should have a long term time perspective to be able to recover from temporary stock market losses.

We hope this information is valuable and helpful to you.

If it is, please share this email with your friends and family members. We would be pleased to add others so they can receive these blog posts weekly, with their permission.

We hope you have a safe and good holiday weekend.

Source:

**”Life Expectancy Table,” https://www.ssa.gov/oact/STATS/table4c6.html, webpage as of 08/29/2019

 

Market update: August 2019

Blog post #408

The past 4 weeks have been full of financial news and events….
  • Stock markets have dropped and risen,
  • Interest rates have dropped significantly
  • Trade war tensions have continued to escalate
  • There is more talk of a potential future recession in the US.

Despite all this financial volatility, US large company stock market indexes are still within approximately 5% of their all-time highs.

If you are concerned about the news, these financial changes or market volatility, please contact us so we can talk. We can discuss these events with you and review how they may impact your financial goals, objectives and your portfolio.

Before we review some of the economic details, it is important to remember some investment principles that we believe are in your financial best interest:

  • You should focus on what you can control.
  • You should not panic or make reactive decisions. You should make financial changes and important decisions for the correct reasons, such as changes in your life or financial circumstances, not in reaction to short term events.
  • Not making major portfolio changes is a decision. Sometimes, inaction is actually a rational decision.

There has been more talk recently about recessions, either in the US or on a global basis. A recession is two quarters (6 months) where the economy declines, or fails to grow. A recession is a normal part of long-term economic cycles. There has not been a recession in the US in over ten years. 

We do not feel that the US is on the cusp of a recession right now. There could be one soon….or the next one could be years away. We know there will be another recession at some point in the future, we just do not know when. We know this just as we know that the stock market will reach new highs, but will also go down as well. We just can’t time when recessions will occur, just as it is extremely difficult to predict stock market tops and bottoms.

Based on actual, empirical economic data, the US is not in a recession today. Based on recent sales and earnings reports, it is clear that US consumer is still very strong. Retailers like Wal-Mart, Home Depot, Lowe’s and Target reported over the past 7 days that customers are spending more, not less. If we were in a recession, or heading that way, the reports would not have been anywhere as strong as they were.

The tariff and trade tensions between the US and China may be impacting US corporate spending and investment, as well as affecting the purchases of US products by companies based in other countries, but there is not clear evidence that a global recession is ongoing.

Normally, in a healthy economy, interest rates on bonds and other fixed income investments go up as their maturity’s lengthen. This is called a rising yield curve. For example….

  • a one year bond would pay 2%
  • a 5 year bond would pay 3%
  • a 10 year bond would pay 5%

After the Federal Reserve lowered short interest rates on July 31st, President Trump reheated the trade war with China. Since then, various economic moves have been made by central banks worldwide, as well as increasing purchases of US government bonds by foreigners, has resulted in very fast and significant drops in US interest rates.

The yield on the 10 year US Treasury Note dropped by almost 25%, from above 2% in late July, 2019 to around 1.55-1.60% in the past two weeks. In stark contrast, during late October, 2018, less than 9 months ago, the yield was above 3.2%.

As a result of these dramatic drops in interest rates over the past month, parts of the US government bond yield curve is inverted, meaning it is not steadily sloping upwards, parts are now sloping down.

As of Wednesday, August 21, 2019, the yield curve reflected:*

As a result of these interest rate movements, and the partial inversion of the yield curve, some feel that the bond market is signaling an oncoming recession. There is past evidence that an inversion of the yield curve has preceded all post-war recessions, but not all inversions signal imminent recessions.** And, sometimes these recessions took 18-24 months following the initial yield curve inversion to occur, so it is not like a flashing light that something will automatically occur in exactly 4 weeks. It is a blurry, potential signal, at best.

Global interest rates are very low and in many foreign countries interest rates are negative, in an effort to support their economies. This may be causing even more demand for US government bonds, which still pay positive interest yields. This increased demand for US government debt may be a significant factor in what is causing US interest rates to go even lower over the last month.

These may be some of the global causes of the inversion of the US yield curve. As interest rates are already so low and the yield curve so flat, the inversion may not necessarily be an imminent sign of an upcoming recession.

We do not think the US or the global economy is currently facing a serious economic event, such as what occurred around 2008-2009. However we cannot predict the future. We can just try to review the data, read and listen as much as we can, and try to provide you with guidance, clarity and explanations.

The other critical element that must be remembered is that economies and stock markets are not directly tied to each other. Both are hard to predict. Even if you could predict a recession’s beginning and ending, it would not necessarily make you a more successful long term investor.

You will be much better off focusing on your long-term goals, remaining disciplined and adhering to your financial plan (Investment Policy Statement), than trying to predict or worry about the next recession or trying to time the stock market.

Sources:

*“US Yield Curve,” WSJ.com, as of August 21, 2019 and as viewed on August 22, 2019.

**“Recession Fears Are Overblown,” Wall Street Journal, page A15, Andy Puzder and Jon Hartley, August 21, 2019 (Opinion page)

We are excited to announce…..

Blog post #407

We are very pleased to announce that Wasserman Wealth Management has added a new member to our firm, to enable us to continue, and improve, the excellent guidance and service that we provide to our clients.

As we have grown over the years, we realized that we needed to expand our capabilities and depth to better serve our current clients, as well as to accommodate future clients.

After an extensive search, we are excited that Bradford Newsome, CFP®, joined our firm this month, having more than 10 years of extensive experience in the financial industry. Bradford will be an Associate Wealth Advisor (AWA), supporting our advisors, Brad Wasserman and Keith Rybak, as well as servicing and expanding his own client base.

Bradford holds the Certified Financial Planner™ (CFP®) designation, which represents extensive skills in areas such as investment planning, education planning, risk management, tax planning, retirement savings and estate planning. He graduated from Wayne State University’s School of Business with a major in Management Information Systems.

Bradford will be expanding our utilization of technology and software in many areas, including retirement and college planning, as well as working on client matters, such as trading, rebalancing and various research projects.

Bradford and his family, his wife Nina, their sons (ages 10 and 12), as well as their Airedale Terrier dog Max, live in Clinton Township, Michigan. They are very active in many sports, particularly basketball, baseball and football. Bradford enjoys coaching his sons’ basketball and baseball teams. Bradford has been a longtime member of the Central Macomb Optimists Club, including many years as a Board Member.

We look forward to you welcoming Bradford to our firm, as well as the benefits he will bring to our future interactions with you, our valued clients.

 

It’s that time of year……again

Blog post #406

Over the next few weeks, students will be going back to school. 

Two of my nieces will be leaving for college soon, starting in 10 days. Other children of the members of our firm will be returning to college, high school, elementary and middle schools shortly.

It used to be that nearly all schools, colleges or K-12, started after Labor Day.

Times have changed. Schools start earlier now.

And that is one of the key lessons for saving for college….start saving early.

We all know college is quite expensive and over past decades, costs have generally risen much more than inflation. College debt is now a major national issue for many young people.

If you have children or grandchildren, we recommend that you begin starting to save for college as soon as you are able to. Depending on what fits your financial ability, we recommend a regular savings plan.

Generally, the most optimal way to save for college education is using a 529 savings plan. These plans, offered by nearly all states, allow the money that is invested in the plan to grow tax-free, as long as the money is used for college-related expenses when withdrawn.

By using a 529 plan, you will avoid having to pay taxes on any dividends, interest or capital gains. Thus, it is advantageous to move funds intended for college savings into one of these plans, rather than incur taxes in a taxable account.

These plans allow for the money to be used at nearly any college or university, and permit families to use funds for other siblings, so there is built-in flexibility.

The 529 plans offered by each state will be different than those offered by other states.Some states provide a tax deduction for deposits made by residents of their states, but these are usually minor and probably should not be a major factor when selecting which state 529 plan to use.

Each state 529 plan uses different investments or mutual funds. Each plan will have different asset allocations and varying costs. 529 plans usually offer various investment options, such as 100% stock, 100% fixed income and age-specific choices. Within these choices, there may be vast differences between how the money is invested, such as how much large v. small stocks or how much International exposure the plan provides. The key is that you should review and understand how the money is invested, or have us review this for you.

Many people choose the age appropriate option, as a default option. It is simplest. As a child gets older, every few years the age based plans decrease the stock allocation and the fixed income allocation increases. Age based plans offer diversification, automatic re-balancing and the investment becomes more conservative as college gets closer.

This concept makes sense. We have found that many age based plans may be appropriately allocated between stocks and fixed income for younger children. However, many age based plans may get much too conservative for many of our clients’ children well before they near college age. It is important to gradually reduce the stock allocation as a child gets closer to college age, say by age 15-16, which is 3-4 years before you would initially need the money, but some plans may have stock allocations of well below 50% even before high school. As college lasts 4 years, and many students take longer, and some people save more money for graduate school, your actual time horizon for using/needing the money may be longer than the perspective of many age based college 529 plan asset allocations.

Thus, it is important that you review the asset allocation of the 529 plan at various ages to determine if the asset allocation makes sense as part of your family’s overall financial portfolio. We can provide valuable advice by reviewing this for you.

By starting at a young age, you should benefit from compounding. The opposite applies if you start to save if your child is older. The later you begin to save, you will likely need to save much more each month or each year. We can help you determine how much you should begin to save based on the age of your children or grandchildren, the projected cost of the colleges that you think may fit for your child and family, and prepare projections to assist you in developing a college savings plan for your family.

If grandparents have the financial resources and it fits into their financial plan, providing money for college savings for their grandchildren can be a wonderful legacy and certainly helps their children and grandchildren. Grandparents can fund 529 plans as well as parents. If you think this may be applicable to you, please contact us.

College is expensive. Saving in the most tax efficient manner, choosing the most optimal 529 plan and monitoring how you should invest the funds are all services which we can provide to you, our clients and your families.

We can provide you with clarity in helping to save for college.

We can help you overcome confusing choices and overwhelming options.

Talk to us. 

And we would be pleased to talk to your friends and relatives about this or other topics.

Fed Lowers Interest Rates, Needed or Not

Blog post #405

After raising short-term interest rates from 2016-2018, the Federal Reserve voted to lower short term interest rates by .25% on Wednesday, to 2-2.25%. At least temporarily, this ends the Fed’s efforts to return short-term rates to more normal levels. Short term interest rates were around 5% in late 2007.

As we have explained before, the Federal Reserve has a dual mandate to foster maximum employment and price stability, which they define as inflation of around 2%.

Jobs gains have been solid in recent months and the unemployment rate is low, at a 50 year low in fact. Consumer spending is solid and growing, but the “growth of business fixed investment has been soft.”*

The Fed feels that inflation, other than for food and energy, are running below 2%. They feel this is not good enough, as if an economy was expanding and doing even better, market forces have historically caused inflation to grow at 2% or above. By cutting short term interest rates to stimulate the economy, they want to slightly increase inflation to 2% or above.

The Federal Reserve in their statement Wednesday cited “implications of global developments for the economic outlook as well as muted inflation pressures” as reasons for the rate cut.* We feel this means concerns about economies outside of the US, as well as negative effects of the ongoing trade tensions.

We are not sure if these actions were completely warranted by the Fed at this time, but they can be viewed as a preventative step to keep the economy strong and possibly to avoid any further weakening. I had written that sentence after the Fed’s written statement was released and later, in his press conference, Chairman Powell said “there is definitely an insurance aspect” to the rate cut.**

The Fed also said that “uncertainties about this outlook remain.”* This does not surprise us, as we feel there always will be uncertainties of some type. No one, including the Fed, can anticipate the future or what unpredicted events could occur that will impact the future of the US or global economy.

As the Fed’s outlook was uncertain, it caused them not to clarify or signal their future moves. What the Fed did not clarify, which the financial markets may find troubling, is guidance regarding future interest rate moves. Chairman Powell was not ready to confirm that more cuts are imminent, as if this was the beginning of a multiple rate cutting cycle. He said “that’s not our perspective now” in his press conference after the statement was released. This does not mean that there will not be future cuts, it means they don’t know yet if there will be more or how many. Powell viewed the Fed actions as a “mid-cycle adjustment” to monetary policy to help the economy perform as the Fed desires.**

In a technical move, the Fed will also stop reducing the bonds which they hold, two months earlier than they previously stated, which is also a loosening of credit policy.

US interest rates are quite low now, and longer term rates have been dropping. For example, 30 year fixed mortgage rates, which at one point neared 5% in the past year, are now around 3.75%.*** You should consider refinancing if you have a mortgage that is above these levels.

The US faces the challenge of lower interest rates throughout the rest of the world, as there are now at least $13 trillion of dollars of bonds issued outside of the US that have negative yields.**** This is one factor, though not stated, that may have impacted the Federal Reserve’s decision to lower short-term interest rates.

It is important to note that the Federal Reserve is supposed to act independently of any political pressure and make their decisions based on data they observe and their economic training. They are to act in the best interest of the US economy, to achieve their dual mandate stated above. Powell reiterated in his afternoon press conference that this move was not politically influenced.

We do not anticipate or recommend any changes to your investments or Investment Policy Statements as a result of these actions.

We hope this analysis is helpful to you, and provides you with clarity and information that is understandable and timely.

If you would like to discuss your specific situation, in lieu of this news, please contact us. That’s what we are here for!

Sources:

*Federal Reserve Policy Statement, Federalreserve.gov, July 31, 2019
**”Federal Reserve Interest-Rate Decision-Live Analysis,” wsj.com, July 31, 2019
***”Rates Already Cut-For Mortgages,” wsj.com, July 31, 2019 p. A8
****”The World Now Has $13 Trillion of Debt With Below-Zero Yields,” Bloomberg, June 20, 2019