Market and Financial Thoughts – Late Summer 2021

Blog post #490

Market and Financial Thoughts – Late Summer 2021

This year has been strong for most asset classes and stock indices. Despite the ongoing pandemic, most major US stock market indices are within a stones-throw of their all-time highs. This shows that markets are driven and highly correlated to earnings and future projected earnings.

Should current stock levels change your current or future investment perspective?

We think the answer is no. We do not believe you should change your long-term investment policy just because some US market indices are near their all-time highs.

What is our view of the current markets and what is our outlook?

While no one can accurately predict what will occur in the next few weeks, months or years, there are strong reasons to remain rationally optimistic for remaining invested for the long term.

As we discussed in our blog post dated April 29, 2021 (Investing at Market Highs), historical financial data shows that when the S & P 500 has reached highs in the past (for data from 1926-2018), the S & P 500 went on to provide positive average annualized returns over the one, three, and five years following new market highs. And those returns were significant, averaging over 14% during the subsequent one year and around 10% over the subsequent three and five-year time periods.

This means that even if certain stocks or sectors may seem high, there is solid justification, based on historical financial data of almost 100 years, that new market highs today are NOT a sign of negative returns to come over the next 1-5 years, on average.

While some asset classes may be at high levels, other asset classes may not be over-valued or have valuations which are significantly below the valuations of US large stocks. This is where our discipline of broad diversification and planning can benefit you.

While we are optimistic about the long-term, there are always issues that confront financial markets and investors in the short-term. Here are some issues that will be discussed and analyzed over the coming months:

  • Will interest rates rise? When and by how much?
  • What will happen with inflation in the coming months and years?
  • How and when will the Federal Reserve change their very accommodative policies that have been in place due to the pandemic?
  • Will tax increases be passed by Congress, and if so, what will the new income and capital gains rates be?
  • What will happen with the pandemic and the Delta variant, in the US and globally? How ill that impact various companies and economies?

We do not have a clear crystal ball to be able to confidently answer these questions. The economy and the future cannot be accurately forecast and financial markets (stocks as well as interest rates) cannot be timed. We know that our philosophy of not developing our investment strategy by trying to make predictions about issues such as these has remained consistent and disciplined since we founded our firm in 2003.

We strive to develop a financial plan and individual asset allocation policy for each client, based on your personal circumstances. If one of these topics (or other type of change) impacts your specific situation, we will address that as the issue becomes clearer. We don’t develop financial policy based on outcomes that are unknown.

One of the key concepts we want to stress relating to stocks: declines are temporary on the long-term upward trend of stocks.

There has not been a decline in US stocks of 10% during 2021, and even in several months prior to that. That is not normal. We want to remind you about the expected volatility that is normal with investing in stocks. While we cannot predict when the next decline will occur, we know it will happen at some point. We want you to be mentally prepared for a such a decline, so you will continue to maintain your appropriate stock allocation.

You should expect in most year’s there will be a decline of around 10% in stock values, from an intra-year peak. This does not mean that the full year will be negative, it just means that at some time during most years there are declines of around 10% and then recoveries. This is the normal volatility we must endure to reap the longer-term rewards of investing in stocks.

There are periods of major market declines of 30% or more, usually every 3-5 years, since World War II. These may be fast (as occurred in February – March 2020 at the onset of Covid) or take a few years to go down and many years to recover. These major declines are normal and should also be expected.

If you can handle the volatility, the positive news is that you don’t need to be able to time the financial markets to have a good investment experience. Over time, capital markets have rewarded investors who have taken a long-term perspective and remain disciplined in the face of short-term noise.

By focusing on the things you can control (like having an appropriate asset allocation, being diversified and managing expenses, turnover and taxes), you can be better positioned to make the most of what global stock markets have to offer.

We hope that information like this, as well as our other guidance, can provide you with a greater sense of security and comfort in dealing with uncertainty and all types of market conditions.

 

Talk to us. We want to listen. We want to assist you, your family members and friends.

If you would like to read our previous blog posts, click here.

Let us know what you think. If you would like to contact us, please email or call Brad Wasserman (bwasserman@wassermanwealth.com) or Keith Rybak (krybak@wassermanwealth.com); or 248-626-3900 (or visit the Contact Us section of our website).

~ Developing Relationships by Doing the Right Thing ~

Wasserman Wealth Management, 31700 Middlebelt Road, Suite 130, Farmington Hills, MI 48334

www.wassermanwealth.com

Large Social Security Increase Projected for 2022

Blog #489

Large Social Security Increase Projected for 2022
There is expected to be a 5-6% increase in Social Security benefits beginning in January 2022, which would be the largest benefit increase in years. The increase would be due to high inflation since last summer.

Social Security benefit increases are based on annual changes from September to September each year in the consumer-price index (CPI) and are announced annually in October. CPI data thus far has produced estimates in the 5% – 6.1% range, which would be the highest annual increase in Social Security benefits since 2008, per a policy analyst of The Senior Citizens League.**

The increases in 2021 and 2020 Social Security benefits were 1.3% and 1.6%, respectively. Over the last decade, cost of living (COLA) increases in Social Security averaged 1.4%. These were much lower than the 3% average increases in the preceding decade, between 2000-2009.

However, some of the benefit increase will likely be offset by higher Medicare health premiums next year. For those still working, the maximum wage base subject to Social Security and Medicare taxes will increase in 2022. These will be announced later in 2021.

Social Security is a vital benefit for most people, and we think this will continue for the long-term. For example, if a couple receives $20,000 per person, that is $40,000 per year. Using what was considered a historically safe withdrawal rate of 4% from a diversified stock and fixed income portfolio, the $40,000 per year income flow would be the equivalent of having $1,000,000 of assets.

If you are receiving more than $20,000 per year (the maximum individual benefit will be around $40,000 per year in 2022), or your future projection is to receive more than that, the equivalent asset base would be much greater than $1 million. This income stream should not be under-valued, especially as the benefits are risk-free and not subject to any financial market volatility. And since interest rates have been very low since around 2008, the value of the Social Security income stream may be even greater.

Even if you are many years from when you may begin to collect Social Security, this 2022 increase in benefits will be beneficial to you when you start to receive your benefits, due to future compounding. If there is no change in the future benefits calculation, someone who begins to collect Social Security 20 years from now will receive $1,600 – $2,000 more every year for the rest of their life, if instead of the projected 6% increase for 2022, it had been an increase of only 1.5% (assuming 2% subsequent annual increases in the future).

It is widely accepted that the true cost of living generally increases more than the COLA calculation of benefit increases from Social Security. This raises the importance of striving to maintain your purchasing power through having your assets grow over the long term at a rate that exceeds inflation. This is why we recommend having an appropriate long-term allocation to stocks (based on your specific circumstances), as the long term returns from stocks have far outpaced the rate of inflation.

While stocks are volatile, and will continue to be in the future, you should focus on the long-term benefits of stock ownership in a diversified portfolio. We plan so you can strive to have a solid “fixed income foundation” while you are in retirement, to provide stability for your near-term financial needs.

Though it can be difficult, patience and discipline are required to maintain your stock allocation, but it has been rewarding to do so over the long-term. Your focus should be on the long-term, not on the next few months or years, but on the rest of your life, and that of your spouse and other family members.

Social Security planning

If you are not yet receiving Social Security benefits, or are years from receiving Social Security benefits, you should verify your projections regularly at SSA.gov. Check your earnings and projected benefits every few years.

If you delay starting Social Security from your full retirement age (age 66-67, depending on your year of birth) until age 70, your benefits increase 8% per year, for each year you postpone beginning to receive Social Security benefits. This decision should be evaluated closely, based on your health, family life expectancy and your financial situation.

Benefits are based on a 35-year average of your earnings, which is weighted toward your later years of earnings. Also, it is important that you, and a spouse, earn credits for as many years as you can. For example, for 2021, you earn one credit for each $1,470 of earnings, up to 4 credits per year. You need to earn 40 credits, or 10 years of work, to be eligible for retirement benefits.***

Even if you or your spouse only work part-time for a significant number of years, there is still a long-term benefit of earning some amount of money, to earn these credits, and the resultant years of Social Security benefits later in life.

Social Security is a valuable benefit and should be considered in your long-term planning as a source of income that is not subject to financial market fluctuations.

Focus on the long-term. Adhere to your plan. Talk to us about your planning. Make good decisions.

As always, we are here for you, and family members or friends who could use our guidance and assistance. Talk to us.

 

Sources:

** https://www.aarp.org/retirement/social-security/info-2021/cola-2022-increase-forecast.html

***Data per Social Security website, SSA.gov.

 

If you would like to read our previous blog posts, click here.

Let us know what you think. If you would like to contact us, please email or call Brad Wasserman (bwasserman@wassermanwealth.com) or Keith Rybak (krybak@wassermanwealth.com); or 248-626-3900 (or visit the Contact Us section of our website).

~ Developing Relationships by Doing the Right Thing ~

Wasserman Wealth Management, 31700 Middlebelt Road, Suite 130, Farmington Hills, MI 48334

www.wassermanwealth.com