Why this is so important

Blog post #474

One of the most important services that we provide for clients is preparing a written Investment Policy Statement (IPS) for them.

Developing a written Investment Policy Statement, along with a diversified portfolio, are critical for making the investment process more disciplined and systematic, and less emotional. For most long-term investors to meet their various financial goals and objectives, they need to be able to stay in the financial markets.

Having a written Investment Policy Statement can increase the likelihood that you will adhere to your plan (during both good and bad markets) and give you a better chance of attaining your financial goals.

An IPS document means you have a target for your asset allocation plan. You don’t just have a bunch of investments that are randomly thrown together. You have a written investment plan based on your current situation, your goals, needs, time perspective and tolerance for risk. This provides both you and us, as your advisor, with discipline to act rationally in a world full of unknowns and uncertainty. 

The IPS that we develop for each client states their overall asset allocation target, such as 70% stock / 30% fixed income, or 40% stock / 60% fixed income. It states what % of the stock allocation would be invested in the US and Internationally. It then identifies target allocations for various asset classes, such as US Large stocks, US Large value, US small and small value stocks, as well as for International asset classes and Real Estate.

For clients of our firm, having an IPS may seem logical as we have always used them.  However, some other brokers or financial advisors may not develop IPS documents or asset allocation plans for their clients.  If you don’t have a plan or target, how can you properly monitor the risk of your portfolio?

An IPS may sound like an impersonal document. But behind this Policy Statement is our understanding of your personal, family situation and your goals. We talk with you to learn and understand your objectives and concerns, before we prepare your IPS. Everyone is different and unique. Two people of the same age and assets may likely have different IPS’, as they are unique with different past experiences and different future goals. While the IPS is an unemotional document, preparing an IPS for each client is a very personal process.

Having an IPS allows us to manage portfolios in a rational manner. This means that we are not reacting to current events with guesses and predictions. We act and provide guidance in a disciplined manner. For example, during the onset of the Covid crisis last winter and spring, IPS’ provided us and our clients with the structure to buy stocks when markets fell, as we worked to maintain their stock allocations in the desired range. This enables us to help our clients maintain their stock exposures during times of great uncertainty and volatility, when your emotions may be telling you it’s time to get out of stocks.

Having an IPS with target asset allocations prevents your stock allocation from getting either too high or too low. When markets or specific asset classes go down, we would review buying more. This was mid-2020. When stocks increase, such as they have done very strongly in past months, we review client portfolios to see if their stock allocations have grown to exceed their target stock exposure. This is what we are doing now and have been doing over the past few months. This provides the discipline of buying low and selling high.

Your IPS would also clearly state that there will be times when your diversified portfolio will vary from major stock market indexes, such as the S&P 500. A diversified portfolio is very different than an index which is comprised of just US Large stocks. This means there will be periods, which could be months or years, when a diversified portfolio will underperform or outperform a major market index. We talk about this likelihood for portfolios to be different than major US indices with our clients in advance, to manage their expectations.

Your IPS can be revised. This is generally done because of changes in your financial situation over your lifetime, not usually due to changes in current financial markets. The goal is that the IPS is a long-term document that is not influenced by short-term ups and downs of the stock market. It is impacted (and modified) by changes in your life, your finances and your goals.

Isn’t the goal of investing to help you reach your financial goals? Then working with a financial advisor that uses a written Investment Policy Statement should be an important part of your financial planning.

 

Note: As a reminder, the blog will be emailed to you every other Friday going forward.

 

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

The Positive of 2020

Blog post #473

Despite the terrible pandemic and all the difficulties that it has caused this year, the financial markets appear to be finishing 2020 in a very positive manner.

Nearly all US and International asset classes have good returns for the year, some with very healthy gains that are far above their asset class’ historical annual average rate of return.

The 4th quarter (as of this writing, on 12/16/2020) may be one of the best quarters ever for many asset classes, even for asset classes that were underperforming earlier in the year. The fourth quarter of 2020 has produced significant gains across the board, and particularly for small and value stocks, both in the US and Internationally. International and Emerging Markets have outperformed US Large stocks in the last few months.

Thus, despite the hardships that many are experiencing due to the pandemic, diversified stock investors have been rewarded in 2020, on top of very significant gains in 2019.

We want to emphasize a few points:

  • This reinforces the importance of sticking with your stock asset allocation plan, regardless of what is going on in the world or your concerns (as valid as they may be).
  • By sticking with your investments over a long period of time, you are additionally rewarded by the effects of compounding. As your portfolio increases, additional gains added to them have an even greater effect. This is how wealth and assets can build over long periods of time.

As I was contemplating what to write this week, I read about the incredible charitable giving of more than $4 billion that was announced this week by MacKenzie Scott. This brings her pandemic related giving to almost $6 billion for 2020. I didn’t recognize the name MacKenzie Scott. I learned that she is the ex-wife of Amazon founder Jeff Bezos.

After their divorce in 2019, she received 25% of Bezos’ Amazon stock, making her one of the wealthiest people in the world. And the third wealthiest woman in the world. She promptly pledged in 2019 to give away the majority of her fortune over her lifetime.

Due to the pandemic, she has rapidly accelerated her charitable giving as she saw the great need. She announced this week that she has provided $4,158,500,000 to 384 organizations in all 50 states over the last four months (you can read about her incredible donations and the charities that she donated to here). She and her philanthropic advisors identified charities and organizations which provide basic needs such as food banks, emergency relief funds, as well as other issues which have worsened due to the pandemic.

As this difficult year comes to a close, I thought it was important to recognize that many of us are very fortunate and grateful, in so many ways. While we and our clients have incurred financial gains this year, many others are struggling.

While none of us can have the impact that MacKenzie Scott or Bill and Melinda Gates are able to, each of us can make a positive difference by donating to assist others who have been affected by the pandemic in some way, due to no fault of their own. We realize that charitable giving is very personal, but we hope this inspires you.

We hope that each of you and your families enjoy safe and Happy Holidays! We wish each of you the beginning of a Happy and Healthy 2021!

Note about the future of the blog: The blog will not be written for the next two weeks, as next Friday is Christmas and the following Friday is New Year’s Day.

The blog will resume on Friday, January 8th and continue every other week beginning in 2021, after writing weekly since June 2014.

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

 

Uncertainty, Change and Financial Guidance

Blog post #472

As the saying goes, the only things which are certain are death and taxes.

In providing financial advice, and for you to deal with your financial future, it is important to distinguish between things which should remain relatively permanent (which should not change), and things which are subject to change (and should be reviewed for changing).

What are principles and things which should not change?
  • You should strive so that your investments be low cost and the money be readily available (be liquid).
  • Your portfolio should be managed with your short and long-term goals in mind.
  • Your portfolio should be managed to be tax-sensitive, to strive to obtain solid after-tax returns. We strive to do this.
  • Your fixed income investments should be high quality. You should not utilize high yield or junk bond / low quality investments.
  • You should be broadly diversified across many asset classes. You should generally have some assets in International investments, as the US does not always outperform International asset classes.
  • Your allocation to stocks should not change due to your emotions or concerns about the financial markets. You should generally not make portfolio decisions based on your emotions or fears.
  • You should always be emotionally prepared for stock markets to decline at least 10% at some point during every calendar year and to drop more than 20-30% every few years. These types of temporary declines will repeatedly occur, often when they are not expected, as part of the stock market’s long-term trend to move higher.
  • Your stock allocation should be set at a level that you are comfortable with, to be able to handle these types of downturns. You should not change your overall allocations frequently.
  • Some advice should rarely change….you should not email your social security number or other sensitive personal data. You should not repeat passwords for important online accounts. You should always use strong passwords.
What are some principles and things which should change or be subject to change?
  • As your financial circumstances change over time, your asset allocation to stocks may change. As we plan with you, your need to take risk may change, which should prompt changes in your asset allocation.
  • You, or your financial advisor (us), should regularly monitor your portfolio for rebalancing. That is a good reason to make some investment changes (some adjustments).
    • When an asset class or specific investment does very well, you should likely take some profits and rebalance the money into other, under-performing assets. This helps to put in place the discipline of buying low and selling high.
  • If you own individual stocks, you should not be afraid to take profits, even if you must pay capital gains taxes. Very few investments go up forever. Don’t be greedy.
  • Estate planning and tax planning strategies should be subject to change, as the laws in these areas change quite frequently. You should consult with experts in these areas.
  • You should review your mortgage and interest rates frequently and be willing to change through refinancing. You should take advantage of opportunities when they are presented to you to refinance. Like now.
  • You should review your use of credit cards for rewards and cash back benefits. If you have premium or point rewards cards, you should review your spending and what cards are best to use. What was good in the past may not be best now.
    • Are airline miles the best way to get benefits from credit card spending? How can you earn the most points or cash-back for groceries? Are you getting at least 1.5% on everyday spending (non-restaurant or travel related) for your credit card purchases?
  • One major key to being financially successful is your level of regular savings. Are you saving money? Are you spending more than you earn? Are you contributing to retirement and college savings programs (as appropriate), as soon as you can? If you need assistance to change in these areas, please contact us.

Change can be hard. We know that. We can help you deal with change, when it is needed.

We would be pleased to discuss any of these topics with you.

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

 

How was November?

Blog post #471

November was one of the best months ever for nearly all asset classes of public stocks, both in the US and Internationally. 

Many asset classes gained 10-15% in November 2020 alone, with several asset classes exceeding 15%.

Let’s put that into perspective. The expected return for a full year for US large company stocks is in the 8-10% range. In one month, nearly all asset classes exceeded the historical average return of a full year.

If you go back to October, things didn’t look quite so good. There was great uncertainty about the US elections. People were very emotional and concerned. Covid cases were growing and continue to grow. There was hope about vaccines, but no news at the end of October about the progress of vaccine trials.

If you had let your emotions control or influence your investment strategy, you may have wanted to pull money out of the stock market or waited to invest new money into the market earlier this fall.

Emotions don’t lead to good investment decision making. We have learned this repeatedly. It is hard to do….but being rational and reasonable is a better strategy than relying on what your emotions want you to do.

2020 has taught each of us many things. One major lesson of 2020 is that having a disciplined investment strategy is much better than having an emotional investment strategy.  

With all the change and uncertainty that exists, you can rely on our consistent investment philosophy.  The stability of our beliefs and advice should provide you with comfort.

We regularly encourage you to stay in the market and adhere to your asset allocation plan, regardless of what you are worried about or what is going on in the world. Talk to us if you have concerns, so we can discuss those issues with you. 

Last February and March, in the depths of the stock market downturn, no one could have predicted that stock markets would rebound so strongly and be at the levels they are at today.

Emotionally, the stock market gains since March 2020 may not make sense to you. The gains are logical. The stock market reflects the current and future earnings, and expected future cash flows, of public companies. The stock market does not directly reflect the misery of neighborhood restaurants and unemployed workers in certain sectors. The stock market looks forward. The economic data and corporate earnings of many public companies are quite positive.

As a firm, we don’t let our own emotions guide our investment recommendations and actions. When markets fell, we recommended clients to purchase stocks. We pro-actively placed trades to do tax-loss selling where we could, to save clients taxes.

Now, as markets have rebounded, we are looking to take some profits. We are reviewing client portfolios for rebalancing if their stock exposure has increased above their respective target range. These are rational and disciplined actions, not emotional reactions.

We are taking the disciplined steps that you expect us to be doing. Buying low. Selling high. Rebalancing. Making sure that you are not taking on more risk than you need to.

For most investors and clients, their primary long-term concern is about not having enough money to live comfortably in retirement. We understand this.

When markets plummet, as they did earlier this year, it may have been hard to stay the course and remain in the stock market.  It can be hard not to be worried and emotional, and still feel that you will have enough money and be comfortable for years into the future.  The gains of the past months, and November in particular, should make those hard months worthwhile.

This is another reason why you work with us. By being rational and non-emotional, our investment strategy strives to help you make progress towards your financial goals and provide those of you in retirement with comfort and financial security.

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

 

Giving Thanks – 2020

Blog post #470

For many of us, the Thanksgiving holiday will be much different this year due to Covid -19.

We hope that you can celebrate with those you love, either in person or remotely. Most importantly, we hope that you and your families are healthy.

As a firm, we are truly thankful and remain optimistic, and hope you are as well.

*************************************************

We are thankful for our clients, who have placed their trust in us. We do not take your loyalty for granted and it is greatly appreciated.

We are thankful for the referrals that our clients and others have made to people they care about, so we can assist them and help to improve their futures. We are grateful to those who became clients during the past year, some of whom we have yet to meet in person.

We are thankful that our clients understand the importance of focusing on the long-term and not on short term market swings. We are thankful that so many of our clients adhered to their investment plans and remained invested during this financially and emotionally difficult year. By focusing on your long-term goals and not on short-term market moves, you are more likely to be financially successful.

We are thankful for the clients who talked to us and requested our advice on matters beyond investing and financial planning, such as helping them with life transitions, estate planning, real estate transactions and other issues that were important to them.

We are thankful for our long-term business partners and relationships, which help us to be successful and operate our business effectively and efficiently. This was even more important this year, as we were able to seamlessly transition to working remotely.

We thank those of you and others in the community who are front line workers, who have helped our country to deal with the Covid crisis. We are especially thankful to the scientists and others at various pharmaceutical companies and research labs throughout the world working to create vaccines to fight Covid-19.

We hope that each of you can find reasons to be thankful during this challenging time in our lives. We wish each of you and your families a very happy Thanksgiving.

Note: As next week is Thanksgiving, there will not be a weekly blog post email next Friday, likely the only week of the year there will not be a post. The next email will be Friday, December 4th.

 

 

Post-Election Financial Outlook

Blog post #469

We plan for the long-term. We stress to focus on what you can control. We emphasize that your long-term goals are more important than short-term market moves.

But when major events occur, we want to provide you with our thoughts and analysis (without political opinions).

Stock market reaction:

US and global stock markets have risen significantly since the end of October, due to US election results and positive vaccine news from Pfizer’s phase 3 preliminary testing results. The S & P 500, consisting of US large companies, has increased almost 10% in November, through Wednesday November 11th. Even greater gains have occurred in US small company stocks, value stocks as well as International asset classes.

A major takeaway from the election outcome and the vaccine news is that the financial markets react immediately to new information, and generally much faster than you can take advantage of. 

Changes in stock market trends are difficult to predict in advance and can even be hard to explain why they occur. One trend that has occurred in the past month is that small and value stocks, both in the US and overseas, have significantly outperformed large and growth company stocks. This is a reversal of large and growth outperforming for a long period.

For all these reasons, we continually communicate the importance of staying invested according to your personal investment plan, as you don’t know when major market moves will occur. Likewise, we recommend very diversified portfolios, as no one knows which asset class or sector will perform best in the future.

How did US election results impact the stock market? US stock markets rose on the Monday and Tuesday of the election and additional gains came as the results of the elections became clearer. US and global stock markets rose as some of the uncertainty of the outcome dissipated. Financial markets rose on the anticipation of split government, with a likely Democratic President, a tighter Democratic majority in the House and the likelihood of a very slight Republican majority in the Senate. Control of the next Senate will not be determined until run-off elections in Georgia are determined in January 2021.

The split government, where no one party controls the Presidency and both parts of Congress, means moderation of many economic policies and an agenda that will require compromise or legislators working together to get measures enacted.

Personal and corporate income taxes:

If Democrats had won control of the White House and both chambers of Congress, expectations were for significant tax increases on both high-income taxpayers (income greater than $400,000) and corporations. Given the split election results, it is unclear what personal and corporate tax changes will be enacted and when. Some analysts now think the emphasis for 2021 will be more focused on dealing with Covid, economic stimulus and dealing with broader economic issues (industries and individuals impacted by Covid) than on tax law changes. This would be positive for the stock market.

There are no specific tax-related actions that we recommend as a result of the potential for split Congressional control. Individual and corporate tax rates are at multiple decade lows, so the trend would be for increases rather than for more cuts, but when and who they may impact cannot be determined now.

Capital gains taxes: Biden proposed changes in capital gains tax rates for those who earn more than $1 million. While that impacts very few people, it would have been a negative for the stock market. There is no way to know whether this proposal will gain legislative traction if Republicans control the Senate. If tax legislation is passed in a Biden administration, we would guess that changes in capital gain tax treatment would be less burdensome than predicted. However, one never knows how the legislative process will work and this may be part of many trade-offs that will be negotiated when tax laws are discussed. We will keep you informed. There is no reason to make any portfolio changes now related to potential capital gains tax changes.

Estate taxes and planning: Based on the Senate being controlled by Republicans, major changes in estate taxes are now much less likely. Currently, each person gets around $11 million of estate tax deductions. For a married couple, this means more than $22 million. If your estate is far below these amounts, you don’t need to worry about incurring any estate tax until 2026, when the Trump law changes revert to prior law. If no changes are made before January 2026, the exemption amounts will return to $5 million plus inflation adjustments, per person. If your assets are at or above $5-11 million per person of estate value, you may want to discuss your situation with us or your estate planning attorney.

Remember, good estate planning is not just about tax avoidance. The more important aspect of estate planning is making sure that your documents properly reflect your wishes of what happens to your assets when you die. This may not be easy to deal with, but it is vitally important and should be addressed properly, and reviewed every 5 years or so.

Economic stimulus package due to Covid:

There still may be a stimulus package due to Covid passed in the future, but if there is one or more passed, they will likely be smaller than if the Democrats had won more seats in the Senate. It is possible some type of stimulus or aid package for individuals, industries, non-profits and municipalities will be passed, but no one can predict when and what they may look like. Additional stimulus measures would be positive for the stock market (as well as for those impacted by Covid), as this government spending or other forms of aid would translate into economic benefits to consumers and certain industries. Aid to municipalities would also alleviate stresses on state and local governments, which are of some concern to the municipal bond market. We are closely monitoring municipal bonds held by clients and promptly acting if there are any changes in their rating or financial situations.

Retirement planning legislation: It is possible that changes related to retirement funding and distribution rules may be passed in 2020 or 2021 that would be advantageous to clients, as bipartisan support may enable retirement legislation. There is no way to know what these changes may be, but they may eventually delay required minimum distributions from IRAs and other retirement plans (continue to move back the initial start date for required minimum distributions) and expand the ability to add to retirement plans.

Interest rates:

The 10-year Treasury Bill increased from around 0.75% in late October to around 0.9%- 1% as of Thursday this week. This increase is based on greater expected economic activity, mostly due to medical progress on vaccines. On a relative basis, that is a pretty large increase in about 7-10 days. The rate is still near historic lows. These rates were around 3% during much of 2018 but have been below 1% since the onset of Covid. Prior to 2008, these rates were generally well above 4% between 1960 – 2008.

Short term interest rates are generally controlled by the Federal Reserve. Short term interest rates are still very likely to remain at very low rates for years into the future. This is not good news for fixed income investors, but for those who have other debts or mortgages, we would advise you to refinance or discuss these with us.

Summary: It is important to integrate and review your financial, investment and tax planning, as market conditions and laws change frequently. We view this as one of our key roles as your financial advisor.

We will continue to monitor all the items above, as well as monitor your investment accounts for rebalancing opportunities, as certain asset classes outperform others. This is the discipline of keeping your exposure to risk in line with your desired risk tolerance (not allowing your stock % to grow far above your target stock allocation). This puts in place the goal of buying low and selling high, on an asset class level.

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

Positive outcome by sticking with your plan

Blog post #468

After Wednesday’s market close, November 4th, most US and developed International asset classes were up 4-5% for the month of November, after only 3 trading days. Emerging market were also positive, in the 3-4% range.

US markets are up an additional 2% on Thursday, November 5th midday, as I’m writing this.  If those gains hold, most US asset classes would be up 6-7% in only the first 4 trading days of November.  International markets have also been strong.

This is why we encourage you to remain invested in the market and adhere to your appropriate stock allocation plan. This is why we discourage attempts at market timing. You must be in the market to receive the benefits.

No one consistently knows in advance when the rewards will appear. And often, significant gains occur quickly and happen when investors don’t expect them. This is exactly what unexpectedly started in late March and April of this year, after the rapid declines of February and early March.

The market increases that have occurred this week alone represent a significant portion of the historical average annual gain for the broad US stock market.

Historically, the US stock market has averaged around a 10% annual (calendar) return since 1926 (defined by the S&P 500, which consists of varying US large company stocks). However, as I wrote in 2018, When Average is Not Average, the S&P 500 has never actually earned between 8-10% in any calendar year since 1926.

This post is not about the election or its outcome. We are not trying to analyze the reasons for the strong gains of this week. In fact, the gains of Monday and Tuesday were significant and occurred prior to any election results even being known.

We know that it can feel hard to remain invested during a time of political uncertainty, especially in the midst of a global pandemic.

The key takeaway is that while the volatility of investing can be difficult, having the patience to stay the course can be rewarding.

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

Be Patient

Blog post #467

Voting for the 2020 elections must be completed by next Tuesday, days from now.

We may know some results late Tuesday evening, but there may be uncertainty on who will be the next President, as well as which party will control the Senate.

Our job is to focus on providing you with financial guidance, not to provide political commentary or our own personal opinions.

The next few weeks may be volatile for US and global stock and financial markets due to the political uncertainty, as well as the increase in Covid cases in the US and overseas.

We recommend that you remain patient, as these various uncertainties play out.

Once political winners are determined, you may have questions as to how campaign “promises” will impact your investments, taxes and estate planning.

One thing we know is that what candidates say during a campaign rarely become the specific laws that are later enacted. Pre-election promises may provide guidance and trends towards an outcome, but real laws and changes take time to pass.

As we have all clearly learned this year with the Covid pandemic, unexpected events that have nothing to do with politics can heavily influence financial markets, legislation and investment decisions.

As we learn what changes the election actually brings, and the trend of future legislative actions becomes clearer, we will provide you with guidance when it is relevant and reliable. 

If there are steps that you should take from an investment, tax or estate planning standpoint later this year, we will try to provide you with relevant guidance.

No one can accurately forecast market movements on a consistent basis. We believe this and it is a core principle of our firm.

From an investment standpoint, making major investment portfolio changes due to political outcomes is rarely a strategy for success. We invest for the long term. The stock market is driven by future news that is not already known. Over the long-term, future earnings and expectations of public companies is the key driver of the stock market, not who controls the White House or Congress.

Historical financial data clearly shows that stocks have done well and poorly during both Democratic and Republican presidencies. There are so many other events (think Covid, 9/11, financial crisis of 2008-09) that impact corporate profits and stock market movements than simply what party controls the White House and Congress.

We will be here for you to answer your questions and provide you with our guidance.

Be patient. We know that uncertainty can be very discomforting. But it is a reality that we all need to be prepared for.

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

 

2021 Social Security Benefit and Payroll Tax Increases

Blog post #466

Social Security is still vital for nearly all Americans. Annual benefit payments can be $20,000-$38,000 per year, which is the equivalent having an asset of $500,000 – $1,000,0000 and withdrawing 4% per year from the account annually.

Social Security recipients will be receiving a 1.3% increase in 2021 benefits, which is slightly less than the 1.6% increase in 2020. The percentage increase in gross benefits would be the smallest annual COLA change since 2017, due to lower inflation. This benefit increase will likely be offset by slightly higher Medicare health premiums next year.

A 1.6% COLA increase in 2021 would raise the average Social Security retirement benefit by about $32 to $1,543, from $1,523. The 1.6% COLA increase would also increase the maximum retirement benefit from $3,011 to $3,148 for someone at full retirement age in 2021. This would be an annual benefit of almost $38,000.

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.

In 2021, the maximum wage base subject to Social Security and Medicare taxes will increase 3.7%, or $5,100, from $137,700 to $142,800. This will cost employees and employers each an extra $316.20 more than in 2020. Additionally, all earnings, even those above the $142,800 Social Security maximum, are subject to a 1.45% Medicare tax. Plus, individuals with earned income above $200,000 and married filers with earned income above $250,000 pay an additional .9% in Medicare taxes.

As in many past years, the rate of increase for the taxable wage base has risen more than the change in benefit increase. This is because the maximum wage base is determined from an index which measures wage growth, whereas the benefit change is based on the Consumer Price Index.

The earnings limit for those who claim Social Security benefits before their full retirement age will increase from $18,240 to $18,960 in 2021. If this applies to you, you lose $1 benefit for every $2 earned in wages or earned income over $18,960.

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.

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

Source:

1. “Social Security announces 1.3% COLA for 2021,  InvestmentNews, by: Mary Beth Franklin 10/13/2020

Reasonable > Rational

Blog post #465

As investment and financial advisors, we often say that we are rational and not emotional, as we provide you with advice. We hope that is accurate, as we provide you with financial advice on the various matters that you deal with throughout your life.

As I continue to read The Psychology of Money, by Morgan Housel, he raises the concept of being rational v. reasonable.

As much as I have written in the past about us being rational….and striving to provide you with rational advice, I think that it is better to be reasonable, than to be completely rational.

Rational may mean that we only deal with the numbers, the hard facts of a situation or portfolio decision. Being rational may lead one to think that there is only one correct answer to some issues. Being rational may mean that advice and decisions should be made strictly based on only the facts and numbers.

Being strictly rational is not always realistic. People have emotions and attitudes….and these must be factored into our advice and your decision making. The world is constantly changing. Many decisions are gray, not clearly A or B. I don’t think we as a firm have provided advice that has been strictly rational, but thinking about “rational v. reasonable” provides some very good insights about each of our relationships with money.

During the financial crisis in 2008-09 and again during the major decline in February-March 2020 at the onset of COVID, nearly all our clients adhered to their asset allocation plans. That means that we, and our clients, were both rational and reasonable, as we had worked with you to set an allocation to stocks that we thought was both financially proper for your long-term financial interests and goals, as well as a stock allocation you could stick with during good and bad times.

However, for those clients that could not stick to their stock allocation and talked to us about making changes, we worked with them to make changes and develop what was reasonable for them during that time period. It is more important that you can sleep at night, as long as you don’t make financial decisions that we think would impair your financial future.

Since the onset of Covid, we have also had discussions with some clients who wanted to re-evaluate their asset allocations. Some have reduced their stock exposure, as we (us and the client) realized they did not need or want to take on as much stock market risk as they had. This is being both rational and reasonable.

The expected future returns for stocks is greater than the expected future returns for bonds (fixed income). Over the long term, you should expect to create much more wealth by having a 100% stock portfolio than a 60% stock /40% fixed income portfolio. A 100% stock portfolio may be rational based on financial history and data, but it is not reasonable for most people to endure and live through. Thus, we provide reasonable advice so that you can reach your financial goals without enduring the extreme volatility that would come with a 100% stock portfolio.

Past financial history teaches us that over the long term, meaning decades not years, small company stocks outperform large company stocks, International stocks outperform US stocks, and value stocks outperform growth stocks. Based on past history, and the assuming the same expected differences in future returns, it would be rational to structure a portfolio with the highest expected returns. This would mean structuring a portfolio consisting of primarily the smallest value company stocks in International and Emerging countries, as they have the highest expected future returns.

Such a portfolio, with the highest expected future returns could be considered rational, but not one we would recommend, as its not reasonable. Very few investors would be able to stick with such a portfolio.

As we have all experienced, markets and asset classes are not predictable. Asset classes may have expected future returns, but actual returns do not always show up in a consistent manner. Like with other financial recommendations that we provide to you, we recommend portfolios that make sense (are reasonable). And sometimes we change or adjust our recommendations and advice, as the world and financial markets change.

We rely on broad diversification among many different types of asset classes to develop reasonable portfolios. We still believe that factors such as small company stocks, value stocks and global diversification will provide long-term financial benefits. We structure portfolios that include these asset class factors, but importantly we recommend including other asset classes as well, so your stock portfolio will benefit from growth and value, large and small companies. This should help you reach your long-term financial goals and maintain your lifestyle (and be able to sleep well too!).

We feel that being broadly diversified for the long term is both reasonable and rational. Just as the “all small value company International portfolio” is not reasonable or rational, we do not think for most people a US Large company-only portfolio (such as the S&P 500), would be rational for the long-term. It may be reasonable for some, but we would not recommend it for the long-term.

Having a portfolio that you can adhere to and stick with through all kinds of financial markets and future events is most important. That is both rational and reasonable.

We look forward to providing you, and others that you care about, with reasonable advice that is also reasonably rational!