Dow Nearing 30,000: The Implications

Blog post #429

The Dow Jones Industrial Average (DJIA) is close to the 30,000 mark for the first time in its history, as it exceeded the 29,000 level in mid-January.

This is historic because it represents the continued increase in the worth of large US companies and their respective stocks.

It has taken only 3 years for the DJIA to increase from 20,000 to nearly 30,000, though there is no way to know when it will reach 30,000, as it is now trading below 29,000, as of Wednesday, January 29, 2020. Last week, prior to the reports of the Coronavirus outbreak in China and other parts of the world, the DJIA was above 29,300.

The DJIA first crossed 20,000 on January 25, 2017, a little over 3 years ago. While that is very fast for a 50% rise, from 20,000 to nearly 30,000, the increase was not straight up…there were a few significant, sharp periods of decline in the past three years.

However, it took almost 18 years for the DJIA to double from 10,000 to 20,000, which was a 100% increase. The DJIA first closed over 10,000 in March 1999. It went back and forth 33 times above and below that 10,000 level until August 27, 2010, the last time it was around 10,000. This emphasizes the patience which is needed to reap the rewards of investing in stocks.

While the DJIA and US stocks have risen dramatically since 2017, it is important to remember some of the key factors which cause stock market changes: changes in real earnings and future earnings expectations. Stocks have also been helped over the past decade by continued very low interest rates.

We encourage you to understand the perspective of the DJIA nearing this milestone. The DJIA is composed of only 30 stocks. The DJIA at times may perform similarly to the S&P 500, an index of 500 US based large companies, but these two major indices may perform differently for many reasons.

The DJIA gets a lot of media attention, so it is important for that reason. However, the DJIA is calculated in an old-fashioned manner which is not considered an accurate representation of how investors are really doing.

The DJIA is calculated based on share price, not based on a stock’s market capitalization. This means that an increase or decrease of $1 in the share price of Apple, with a share price of around $325, impacts the DJIA approximately 2 ½ times more than a $1 increase in the price of Proctor & Gamble, which is priced around $126. Thus, stocks with higher share prices affect the DJIA more than the price changes of lower priced stocks, such as GE today.

As the DJIA gets to even higher levels, we want to encourage you to put DJIA “number headlines” in the proper perspective. If the Dow is at 30,000, a 100 point increase or decrease is only a 0.33% change. A 250 point change would be less than 1%, at 0.83%. So even a 250 point increase or decrease is really not that significant.

  • When the Dow was at 10,000, a 250 point daily change was over a 2.5% change.
Please keep actual DJIA point moves in the proper perspective. It is better to think of the changes in percentage terms, which are more relevant.

What do these levels mean to you? With various US major stock indices reaching new highs in January 2020, we want to remind you that we focus on long term global portfolios and your personal investment plan. We recommend a globally diversified portfolio, which includes both US and non-US stocks, with a tilt towards small and value stocks.

We regularly monitor your exposure to stocks and we will rebalance (sell or buy stocks) if your stock allocation increases (or decreases) significantly from your agreed upon stock allocation.

In real terms, if you have a $3 million portfolio with a 60% stock allocation, your stock holdings target would be $1.8 million. If because of stock market increases, your total portfolio grew to $3.4 million with $2.2 million in stocks, your stock allocation would now be 65%, which is more risk than we agreed was necessary for your risk tolerance or to meet your financial goals. We would review and likely sell about $160,000 of stocks, to bring the stock allocation back to 60% (based on tax and other considerations). This is how we are disciplined and rational in our long-term approach to investment management.

Stock market indices nearing new highs gives us confidence in our long term approach to investing, by maintaining consistent and appropriate allocation to stocks.

Talk with us. If you know of family or friends who could benefit from this type of advice and guidance, please share this post with them, and let them know we are available to help them as well.


Talking About Your Family’s Financial Future

Blog post #428

If you are a client of our firm, you have decided there is value in having a financial advisor.

We are pleased that more than 130 individuals and families in 18 states have made the decision to work with our firm, for guidance in investing and comprehensive financial planning.

We help you with investing.

We can assist in guiding you through many decisions and the financial complexities you face.

We can help to provide you with a sense of comfort, in an unpredictable and constantly changing financial world.

But what about your children? How are they managing their financial future?

How are they making their financial decisions?

Are they getting good advice? Are they making decisions on their own?

We can help them, as well as assist you.

If you have a significant legacy to be passed on to your children, are your children prepared to handle the decisions related to a future inheritance that you have built, and one day, will pass on to them?

We can begin working with your children today, to provide them with investing guidance which will be useful now and well into their future, as their assets grow.

Depending on the ages of your children, we can assist them with advice for the wide range of needs and issues they face. If your children are in their 40s and 50s, we can assist them with their retirement planning and how to best invest for retirement. We can provide guidance and help them manage their 401(k) retirement plan and IRA rollovers they may have from any prior jobs.

If you have younger children, they may be at a stage in their life where they have student loan debt, a mortgage and young children of their own. They may have some or all of these issues and challenges. They may have student loan debt, want to buy a house and want to be able to manage it all.

And, along with all of this, you and your children may want to save or help pay for college for their kids, in the most tax efficient method possible.We have experience in helping future generations with all of these issues, and many more financial planning topics.

Do you talk to your children about financial issues? Some of you may be comfortable with these types of conversations, and some of you may not be comfortable.

Either way, we can have conversations with your children (and even your grandchildren – depending on how old they are!).

Talk to us about your family. We want to help you, your children, (and even your grandchildren), with any financial matter that is important to you and your family.

If you know of family or friends who could benefit from this type of advice and guidance, please share this post with them, and let them know we are available to help them as well.

Getting Personal….Hope is not a plan

Blog post #427

I took some time this week and wrote a list of items that I called “2020s…Hopes and Thoughts.”

The idea to do this came from a set of lists I saw on Twitter around New Years, where many financial people that I follow posted lists of things they had accomplished or how their life had changed from 2010 to 2020.

I took that idea and wrote a list of things that I want to occur in the next decade, from now to 2030.

As I was sending this list to my executive coach for our monthly call, I realized that I had made a mistake.

The mistake was not in my list. The mistake was what I called my list.

The mistake was the title. I should not have called the list Hopes and Thoughts.” I should have called it “Plans and Thoughts.”

There is a big difference between “hopes” and “plans.” In reality, most of the things that I wrote are items that I can control, at least to some degree, so I can take future actions and plan to make it much more likely for each item to occur.

This is really a list of plans or goals, of what I want to do or accomplish, of what may happen if I do certain things and be pro-active.

This is not really a list of hopes. Hope does not imply planning or that I have any control about the outcome.

Hope means that you want and desire something to happen in the future. But hope, on its own, implies that you cannot influence the outcome.

I want to be financially secure. I want to travel extensively. Both of these are hopes, but I have a significant ability to ensure that both will be a reality. If I want to visit NewYork annually and go to London and Paris in the future, planning and thinking about this now, and again in the future, make it much more likely for these to occur.

While I cannot control how the stock market will do in the short term, which has a direct impact on my financial security, I am confident that in the long run, if I continue to save on a regular basis, that I will be financially secure.

One of the major changes for our firm this year, later this spring, will be the introduction of new comprehensive financial planning software, that will make planning, goal setting and then tracking each of our clients’ progress more of a reality. We want to do more to make your plans, as well as your hopes, something that together you will have a greater sense of control over.

One of the items on my list was to ensure that my wife and children are properly taken care of, if I die, as well as bequests to charities that are important to me. While I certainly hope I am living 10 years from now, I can make the financial security of my family a reality by regularly reviewing my estate plan and making sure that it reflects my wishes and the financial circumstances of my family members. I can also regularly review my asset allocation, my life insurance and the titling of my investment accounts, as tax laws change.

Plans can also change. Earlier this week, I made a list of some places that I want to visit over the next 10 years. And then at lunch with a client on Wednesday, he talked about the incredible experience he had visiting South Africa and the safaris he went on. I came back to the office and added this to my travel list.

My priorities just changed, days after writing my list. My priorities will continue to change in the future. That is a reality in life, as there are always new opportunities, experiences, uncertainty and adversity.

I am much more likely to accomplish these things and make these goals a reality, by having a list and by spending time thinking about the future.

I encourage each of you to take an hour and think about the past 10 years and the next 10 years. Take 30 minutes for each, together, or at different times.

Look back over the past decade. Where did you live 10 years ago? What has changed? What did you accomplish? What have your kids done? Graduations, weddings, births, deaths? Where have you gone? Write it down somewhere.

Then look forward 10 years. What does that look like? What changes do you want to make? How can you improve your health? (Making time for more regular exercise and sleep are definitely on my list!). What is important to you? Are you doing it? What do you want to do? What do you want to stop doing? Write these down somewhere.

While past investment performance is no guarantee about the future, I can almost guarantee that if you do this, and look back 10 years and look forward 10 years, you will find this to be time well spent.

And you will find that hope is not a plan. Having a plan, or plans, leads to actions, accomplishments….hopefully, positive outcomes.

Talk to us. We want to help you with any financial matter that is important to you.

If you know of family or friends who could benefit from this type of advice and guidance, please share this post with them, and let them know we are available to help them as well.

The Value of having an Investment Plan

Blog post #426

If 2018 and 2019 taught investors anything, it is the value of having an investment plan and the importance of adhering to it.

In late 2018, the US and Global stock markets declined significantly, as the S&P 500, which consists of large US based companies, dropped by almost 20%.

What were you thinking then? Did you want to stay in the market or get out? Were you fearful or concerned?

Hopefully, with the advice and counsel of your financial advisor, such as our firm, you decided that it made sense to stay invested in stocks and adhere to your long-term investment plan.

For clients who remained invested, we viewed such a downturn as a buying opportunity and would have purchased stocks in late 2018 or early 2019. Buying stocks when others were selling and when markets look ominous takes discipline. That is one of the values of working with our firm, as we don’t react with emotion, we react with sticking to your long term asset allocation between stocks and fixed income.

By sticking to your plan, by remaining disciplined or allowing us the discretion to be disciplined for you, you were rewarded in 2019 with strong stock performance across asset classes, in the US and Internationally.

Stock markets do not have a memory. Don’t try to time the markets. Don’t try to figure out when to get in and when to get out. It is too hard to consistently be correct – and you need to be accurate twice, trying to time when to get out and when to get back in.

It makes much more sense to develop an investment plan, which we call an Investment Policy Statement (IPS).  An IPS provides for the allocation percentage to stocks that helps you reach your financial goals and the level of risk that you can be comfortable with, which enables you to remain invested during down markets and times of uncertainty (which is really always!).

It may seem easy today to invest or remain invested, after a year of significant gains in a diversified portfolio. But when volatility or an extended down period returns, we hope that you see the value of our advice and guidance.

Providing you with regular and timely information and guidance can help you to be a better long-term investor. Being out of the market for a few key days or during a quick upturn can have a dramatic impact on your long-term finances. As our blog post in November, 2019 showed, Importance of Staying in the Game, missing out on only the top 5 days of the S&P 500 between 1970 and August 2019, over 29 years, reduced the return of $1,000 invested in 1970 from $138,908 to $90,171.

That is incredible and reinforces the importance of remaining invested, regardless of the news, forecasts or other future concerns. There will always be uncertainties to deal with, such as politics, recessions or world turmoil. We will never know the best time to get into or out of the market because we cannot predict the future. That makes sense, as global stock markets offer you greater potential for returns than investments that don’t have as much risk and volatility. As the saying goes, risk and return are related. No risk, no reward.

So what should you do in 2020? These lessons and strategies are the same as we would advise in almost any year.

  • Be a long-term investor in a globally diversified portfolio.
  • Work with an advisor to determine a portfolio and a comprehensive financial plan that makes sense for your financial situation and goals.
  • Accept the market’s inevitable ups and downs, so you can reduce your anxiety about it, when the down times occur. And they will.
  • Stop trying to time the markets.
  • Try not to worry about current events and their potential impact on the markets. You can’t predict what will occur and how it will impact stocks.
  • Instead, focus more on your family, the people and things that you care about and you love to do.

Talk to us. We want to help you with any financial matter that is important to you.

If you know of family or friends who could benefit from this type of advice and guidance, please share this post with them, and let them know we are available to help them as well.

Source: This blog post was inspired by “The Market Has No Memory,” by David Booth, Executive Chairman and Founder of Dimensional Fund Advisors, dated January 3, 2020.

New Year….New Retirement planning and tax changes

Blog post #425

In late December, as part of major spending legislation, Congress passed what is called the SECURE Act, which makes numerous changes to retirement plans, particularly regarding distributions after an account owner dies.

There are many detailed items in this legislation. We will provide you with an overview of changes that will affect most people.

The SECURE Act did not change how much you can contribute to a 401(k), IRA or planning opportunities for those who own business or are self-employed. We encourage you to consult with us about your retirement planning, investment choices and related matters.

Changes to distributions….end of the Stretch IRA, mostly

If you inherited retirement assets from someone who died prior to 2020, the SECURE Act changes do not impact those inheritance distribution rules at all.

For someone who dies after 2019, fewer beneficiaries will be able to stretch the IRA/retirement assets over their life expectancy, as you could under the prior law.

Going forward, most beneficiaries, other than a surviving spouse, will have to take inherited retirement distributions by the end of the 10th year following the year of inheritance. If you inherit such assets, there are no required distributions for years 1-9, but you will need to distribute all the assets by the end of the 10th year.

There could be planning opportunities to evaluate, as the tax impact on when you take these taxable distributions could change depending on the year, your other income, and decisions like when you begin receiving Social Security. Thus, if this impacts you, this should be something to discuss and get advice from your financial and tax advisors.

If you are a surviving spouse, you will continue to be able to take retirement distributions over your life expectancy and you will not be subject to this new 10 year rule.

Have you named a Trust as a retirement beneficiary?

If you have not named people (such as a spouse, child or other relative), but have named a Trust as an IRA, 401(k) or other retirement plan beneficiary, or successor beneficiary, you should review this, as the SECURE Act may limit your distribution flexibility. It is possible a Trust may only provide for distribution in the last year, and not earlier, depending on your Trust document wording.

This could be a bad result, as it potentially limits the beneficiaries from being able to receive the inherited assets earlier, in years 1-9, even if they need the money.

If you have named a Trust as a retirement plan or IRA beneficiary or successor beneficiary, you should consult with your estate planning attorney.

Required Minimum Distribution Age change

Prior law was that you had to begin taking retirement plan distributions by April 1st after the year in which you turned 70 1/2. Yes, that’s simple and logical. Not really!

Under the new law, you must begin taking the required minimum distribution (RMD) by age 72. Simpler. But it’s actually by April 1st in the year after you turn age 72. And if you wait until the year after you turn age 72, then you have to take a 2nd RMD in that year, the year you turn 73. Again, more potential opportunities for planning, so talk to us about these issues.

And, if you turned 70 1/2 by December 31, 2019, you will follow the old rules, not the new age 72 rule. You would need to take an RMD for 2020 and years after.

Qualified Charitable Distributions (QCD) still allowed

For those who do not need all of their retirement money for their living expenses, up to $100,000 of your Required Minimum Distribution each year can be directed to a charity and it is not considered taxable income.

The SECURE Act keeps the age at which you are eligible to make QCDs at age 70 1/2, so if you fall within the 70 1/2 to age 72 group now, and have the financial ability and charitable intent, this could be planning opportunity for you.

Other Items

  • The new law removes the age limit for contributing to a traditional IRA. If you have earned income and are older than 70 1/2, you are now eligible for further IRA contributions.
  • If you incur birth or adoption expenses, you and your spouse, as applicable, will each be eligible for a $5,000 qualified distribution from a retirement plan or IRA. The distribution would be taxable, but not subject to the additional 10% early withdrawal penalty.
  • The SECURE Act changed the tax law related to the kiddie tax, lowering the tax rate back to the parent’s rate. The Act also reduced the threshold for medical expenses to be deductible, back to 7.5% of your Adjusted Gross Income for 2019 and 2020 only.

Concluding thoughts

As you can see, laws and rules are always changing, and these changes can impact your financial future. Change can lead to opportunities and pitfalls.

Please contact us if you have questions about any of these matters. That is what we are here for and the value we provide to you.

Also, please feel free to share this information with others who you think would benefit from reading this information, as well as our advice and guidance.