As a firm, we would like to introduce a new section to our newsletter that will cover financial planning milestones throughout each phase of an individual’s life. Topics include savings vehicles, contribution and distribution schedules, tax deductions and credits, benefit optimization, and retirement.
Financial planning is an exercise in both commitment and awareness. As the adage says, “proper planning and practice prevents poor performance”. Whether these plan- ning topics are an ongoing refresher course, a resource to share with your kids/grandkids, or a first-time passthrough, we plan to explore these topics in the next few newsletters.
Like the shifting phases of life which provided the solution to the Riddle of the Sphinx,
we find that most households tend to shift across four financial planning phases of life. The first of these phases could be generally described as “Building Your Wealth”. It is easy to ignore these issues and post- pone decisions. By working closely with an experienced financial advisor, it is often much easier to start off on the right foot.
In a year when statistics are flying around like an infielder’s drill in baseball, we thought it prudent to touch on the confusion often present in common statistics.
While often mistakenly attributed to Mark Twain, one can find the explanation in Wikipedia that “"Lies, damned lies, and statistics" is a phrase describing the persuasive power of numbers, particularly the use of statistics to bolster weak arguments. It is also sometimes colloquially used to doubt statistics used to prove an opponent's point”. In this article, we will focus on the hospital Intensive Care Unit (ICU) capacity riddle, stock market gyrations, the Covid-19 infection rate, and short-term investment performance. Another article in this news- letter will focus on the oft confusing Unemployment Rate.
The Federal Reserve is tasked with a dual mandate to provide stability of prices (i.e. control inflation), and to promote full employment. Thus, the government tracks many statistics related to inflation and employment figures to give policymakers and the public a sense of trends in the economy that can impact many areas from investment and purchasing decisions, hiring, or the movement of goods, services and people.
The phrase "irrational exuberance" was used by Alan Greenspan in late 1996 during the dot-com boom of the 1990s; it was interpreted as a warning that the stock market might be overvalued given an apparent disconnect between stock performance and underlying fundamentals, such as profitability. We may be experiencing Irrational Exuberance 2.0 right now, as our stock market has rallied back to near January 2020 levels, despite the highest unemployment figures since the Great Depression. While we are not in the business of making short term market projections, the sudden, sharp market increase has certainly grabbed our attention.
Summer greetings and our best wishes that you and your family are safe and healthy, and getting outdoors to enjoy the warmer weather. With all of the news and facts reported, we know that at times the information flow is overwhelming. This quarter we return to some basic, fundamental details about our investment process and underlying factors from which we begin our analysis, highlighting two areas: Timing and Demographics.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed on March 27th of this year, initiated a $2 trillion economic relief package for the American worker and business alike. According to the U.S. Department of the Treasury, "The CARES Act provides fast and direct economic assistance for American workers, families, and small businesses, and preserves jobs for our American industries." The package can broadly be broken into four main sections:
Dear Clients and Friends:
We know that you are dealing with many challenges at this time but please know that we are here to support you in any way that we can. With the recent volatility in the markets, we did hear from several clients who wanted to know “what they should do? ” given the market conditions. With that in mind and our research over the years on behavioral finance we wanted to reiterate our investment approach in the context of some of the more emotional aspects to investing that nearly all of us experience. Above all, take care of your health and be safe!
THE SECURE ACT was signed into law in late 2019 and makes numerous changes to tax favored retirement accounts. SECURE stands for Setting Every Community Up for Retirement Enhancement Act, and like many Congressional actions, the benefits of this new law are varied and some believe the rules have been changed midstream on retirees. Most notable are a delay in IRA required minimum distributions to age 72 for those eligible, and non-spouse beneficiaries must distribute inherited IRAs over a 10-year period, as opposed to the previous lifetime “stretch IRA” that was possible. We will be sending out a full synopsis of this new and complex rule via email later in January, after we fully digest the changes.
There is (almost) always a confusing set of economic data coming out, some indicating economic expansion, while others pointing to a contracting economy. When picked up by news or other market commentators such data is often spun into convenient 40 second sound-bites that fit into a narrative or time slot that the media business is looking to fill. I say “media business” intentionally as we do need to remember that whether one consumes news and information from Facebook or social media, or more traditional television or print media, nearly every outlet is a for-profit model looking to grow their audience, place ads and keep their audience tuned-in. None are fiduciaries tasked with the legal responsibility to act in your best interest, mitigate/eliminate any potential conflicts of interest, or disclose their compensation arrangements. (Recall that all those fiduciary duties DO APPLY to us.)
Late in the economic cycle, income-generating investments are viewed as an attractive buffer against stock market volatility. Real estate can be an income- generating option that has the potential to be a strong investment when held long-term. While not immune to the risks associated with economic downturns, adding real estate investments to a portfolio of diversified stock and bond assets can help manage a portfolio’s overall risk. Real estate values do not tend to move in a highly correlated manner with U.S. stocks, thus potentially reducing risk and smoothing overall portfolio returns during periods of stock market volatility.
In 2017, data security took center stage when Equifax fell victim to one of the largest data breaches of all time. Nearly one hundred and fifty million people had their personally identifiable information stolen, or fifty five percent of all Americans! Since then, additional data breaches have occurred and will likely continue to do so moving forward.
What are you to do? The burden is on consumers to protect their own personal data security. It is difficult to pinpoint what, if any, personal identifiable information has been compromised in the past. Unfortunately, the damage that has been done cannot be reversed; however, taking precautionary steps now, may prevent the need for future recourse.
With the first half of 2019 complete, financial markets have rebounded significantly from the poor showing in 2018, and the especially difficult 4th quarter. While Sterling Financial Group has focused on long-term results when making asset allocation and investment strategy decisions, and our investment choices reflect that outlook as a priority, we are not immune from the news distraction and market declines that occasionally occur. When experiencing volatility, most investors are very pleased to participate in the upside swings, but at times may be extremely anxious over downside volatility, which in reality is a fairly normal pattern and should not be feared. What volatility should we expect in stocks, and what is normal? Below we try and examine some of the facts and point to an example that hopefully illustrates the long-term nature of how companies have grown.
Time for a different allocation?
Volatility has returned to the equity markets, as evidenced by an increase in the VIX (a popular measure of the U.S. stock market’s expected volatility), from 12 in mid-April 2019 to over 20 in late May 2019. The traditional antidote to stock market volatility is long term Treasuries.
Unfortunately, yields on Treasuries (2.0% for UST 10 year) are disappointingly low and expected to stay “lower for longer”; the Federal Reserve has already signaled that they are willing to cut the Fed Funds target rate as needed to support the economy. With more volatility in stocks and relatively low bond yields, clients are seeking higher portfolio yields without taking undue risk.