A Stock Market Lesson to Remember: Confidence can quickly erode, but it can also quickly emerge.

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Undeniably, spring 2020 has tried the patience of investors. An 11-year bull market ended. Key economic indicators went haywire. Household confidence was shaken. The Standard & Poor’s 500, the equity benchmark often used as shorthand for the broad stock market, settled at 2,237.40 on March 23, down 33.9% from a record close on February 19. (1)

On April 17, the S&P closed at 2,874.56. In less than a month, the index rallied 28.5% from its March 23 settlement. And while past performance does not guarantee future results, there is a lesson in numbers like these. (1)

In the stock market, confidence can quickly erode – but it can also quickly emerge.

That should not be forgotten.

There have been many times when economic and business conditions looked bleak for stock investors. The Dow Jones Industrial Average dropped 30% or more in 1929, 1938, 1974, 2002, and 2009. Some of the subsequent recoveries were swift; others, less so. But after each of these downturns, the index managed to recover. (2)

Sometimes the stock market is like the weather in the Midwest.

As the old Midwestern cliché goes, if you don’t care for the weather right now, just wait a little while until it changes.

The stock market is inherently dynamic. In tough times, it can be important to step back from the “weather” of the moment and realize that despite the short-term volatility, stocks may continue to play a role in your long-term investment portfolio.

When economic and business conditions appear trying, that possibility is too often dismissed or forgotten. In the midst of a bad market, when every other headline points out more trouble, it can be tempting to give up and give in.

Confidence comes and goes on Wall Street

The paper losses an investor suffers need not be actual losses. In a down market, it is perfectly fine to consider, worry about, and react to the moment. Just remember, the moment at hand is not necessarily the future, and the future could turn out to be better than you expect.

▲ Impact of being out of the market

During periods of extreme market declines, a natural emotional reaction can be to sell out of the market and seek safety in cash. The results of this reaction can be devastating because often the best days occur close to the worst days during periods of market volatility. This chart compares an individual who was fully invested for the past 20 years in the S&P 500 to investors who missed some of the best days as a result of being out of the market for a period of time. Missing the top 10 best days will halve the annualized return; missing the top 30 days will result in a negative annualized return on the original $10,000 investment. Rather than emotionally reacting to or trying to time the market, adopting a disciplined long-term investment strategy may produce a better retirement outcome.

Sources

  1. WSJ.com, 2020
  2. USAToday.com, March 21, 2020
  3. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

Keep in mind that the return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Getting Your Affairs in Order Amid the COVID-19 Pandemic and the Mistakes to Avoid

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In times like these thinking or talking about your will is often the least likely thing we’d want to discuss. However, having one in place is important, especially now. As you review your situation here are some common and not-so-common estate planning mistakes to avoid:

Doing it all yourself.

While you could write your own will or create a will, it can be risky to do so. Sometimes simplicity has a price. Look at the example of Aretha Franklin. The “Queen of Soul’s” estate, valued at $80 million, was divided under a handwritten or “holographic” will. Her wills were discovered among her personal effects. Provided that the will was authenticated, it would be probated under Michigan law, but such unwitnessed documents are not necessarily legally binding. (1)

Failing to update your will or trust after a life event.

Relatively few estate plans are reviewed over time. Any major life event should prompt you to review your will, trust, or other estate planning documents. So should a major life event that affects one of your beneficiaries.

Appointing a co-trustee.

Trust administration is not for everyone. Some people lack the interest, the time, or the understanding it requires, and others balk at the responsibility and potential liability involved. A co-trustee also introduces the potential for conflict.

Being too vague with your heirs about your estate plan.

While you may not want to explicitly reveal who will get what prior to your passing, your heirs should understand the purpose and intentions at the heart of your estate planning. If you want to distribute more of your wealth to one child than another, write a letter to be presented after your death that explains your reasoning. Make a list of which heirs will receive collectibles or heirlooms. If your family has some issues, this may go a long way toward reducing squabbles as well as the possibility of legal costs eating up some of this-or-that heir’s inheritance.

Leaving a trust unfunded (or underfunded).

Through a simple, one-sentence title change, a married couple can fund a revocable trust with their primary residence. As an example, if a couple retitles their home from “Heather and Michael Smith, Joint Tenants with Rights of Survivorship” to “Heather and Michael Smith, Trustees of the Smith Revocable Trust dated (month)(day), (year).” They are free to retitle myriad other assets in the trust’s name. (1)

Ignoring a Caregiver with Ulterior Motives.

Very few people consider this possibility when creating a will or trust, but it does happen. A caregiver harboring a hidden agenda may exploit a loved one to the point where they revise estate planning documents for the caregiver’s financial benefit.

The best estate plans are clear in their language, clear in their intentions, and updated as life events demand. They are overseen through the years with care and scrutiny, reflecting the magnitude of the transfer of significant wealth.

▲ Use this checklist to help you create an estate plan or update your existing estate plan.

Sources

  1. detroitnews.com/story/news/local/oakland-county/2019/05/20/lawyer-says-3-handwritten-wills-found-aretha-franklin-home/3747674002/

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

What’s the Difference Between a Pullback, a Correction and a Bear Market?

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The COVID-19 outbreak has put tremendous pressure on stock prices, prompting some investors to blindly and indiscriminately sell positions at a time when the entire market is trending lower. Worried investors believe “this time it’s different.” When the market drops, some investors lose perspective that downtrends – and uptrends – are part of the investing cycle. When stock prices break lower, it’s a good time to review common terms that are used to describe the market’s downward momentum. (1,2)

Pullbacks

A pullback represents the mildest form of a selloff in the markets. You might hear an investor or trader refer to a dip of 5% to 10% after a peak as a “pullback.” (1)

Corrections

The next degree in severity is a “correction.” If a market or markets retreats 10% to 20% after a peak, you’re in correction territory. At this point, you’re likely on guard for the next tier. (1)

Bear Market

In a bear market, the decline is 20% or more since the last peak. (1)

All This is Normal

Pullbacks, corrections, and bear markets are a part of the investing cycle. When stock prices are trending lower, some investors can second-guess their risk tolerance. But periods of market volatility can be the worst time to consider portfolio decisions.

Pullbacks and corrections are relatively common and represent something that any investor may see in their financial life, from time to time – often, several times over the course of a decade. Bear markets are much rarer. What we are experiencing now represents the start of the ninth bear market since 1926. This bear market follows the longest bull market on record. (1)

How is This Bear Market Going to Affect You?

That’s a good question, but it’s something that you won’t fully understand in the here and now. The average bear market lasts 146 days for the Standard & Poor’s 500. (2)

A retirement strategy, formed with the help of a trusted financial professional, has market volatility factored in. As you continue your relationship with that professional, they will also be at your side to make any adjustments as needed and help you make any necessary decisions along the way. Their goal is to help you pursue your goals.

This chart shows historical recessions, their corresponding bear markets (a 20% market decline from the previous all-time high), what caused them, and the magnitude of the drawdown.

This is meant to illustrate that lofty valuations are not predictors of bear markets, but rather, bear markets are caused by external factors such as geopolitical conflict, monetary policy action and recession. (3) (Click chart for larger view)

Sources

  1. kiplinger.com/slideshow/investing/T018-S001-25-dividend-stocks-analysts-love-the-most-2019/index.html
  2. marketwatch.com/story/the-dow-just-tumbled-into-a-bear-market-ending-the-longest-bull-market-run-in-historyheres-how-those-downturns-last-on-average-2020-03-11
  3. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-the-markets/viewer

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Key Provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act

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Recently, the $2 trillion “Coronavirus Aid, Relief, and Economic Security” (“CARES”) Act was signed into law. The CARES Act is designed to help those most impacted by the COVID-19 pandemic, while also providing key provisions that may benefit retirees. (1)

To put this monumental legislation in perspective, Congress earmarked $800 billion for the Economic Stimulus Act of 2008 during the financial crisis. (1)

The CARES Act has far-reaching implications for many. Here are the most important provisions to keep in mind:

Stimulus Check Details

Americans can expect a one-time direct payment of up to $1,200 for individuals (or $2,400 for married couples) with an additional $500 per child under age 17. These payments are based on the 2019 tax returns for those who have filed them and 2018 information if they have not. The amount is reduced if an individual makes more than $75,000 or a couple makes more than $150,000. Those who make more than $99,000 as an individual (or $198,000 as a couple) will not receive a payment. (1)

Business Owner Relief

The act also allocates $500 billion for loans, loan guarantees, or investments to businesses, states, and municipalities. (1)

Your Inherited 401(k)s

People who have inherited 401(k)s or Individual Retirement Accounts can suspend distributions in 2020. Required distributions don’t apply to people with Roth IRAs; although, they do apply to investors who inherit Roth accounts. (2)

RMDs Suspended

The CARES Act suspends the minimum required distributions most people must take from 401(k)s and IRAs in 2020. In 2009, Congress passed a similar rule, which gave retirees some flexibility when considering distributions. (2,3)

Withdrawal Penalties

Account owners can take a distribution of up to $100,000 from their retirement plan or IRA in 2020, without the 10-percent early withdrawal penalty that normally applies to money taken out before age 59½. But remember, you still owe the tax. (4)

Many businesses and individuals are struggling with the realities that COVID-19 has brought to our communities. The CARES Act, however, may provide some much-needed relief. Contact your financial professional today to see if these special 2020 distribution rules are appropriate for your situation.

Sources

  1. CNBC.com, March 25, 2020.
  2. The Wall Street Journal, March 25, 2020.
  3. The Wall Street Journal, March 25, 2020.
  4. The Wall Street Journal, March 25, 2020.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Under the CARES act, an accountholder who already took a 2020 distribution has up to 60 days to return the distribution without owing taxes on it. This material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. Under the SECURE Act, your required minimum distribution (RMD) must be distributed by the end of the 10th calendar year following the year of the Individual Retirement Account (IRA) owner’s death. Penalties may occur for missed RMDs. Any RMDs due for the original owner must be taken by their deadlines to avoid penalties. A surviving spouse of the IRA owner, disabled or chronically ill individuals, individuals who are not more than 10 years younger than the IRA owner, and children of the IRA owner who have not reached the age of majority may have other minimum distribution requirements.

Under the CARES act, an accountholder who already took a 2020 distribution has up to 60 days to return the distribution without owing taxes on it. This material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. Under the SECURE Act, in most circumstances, once you reach age 72, you must begin taking required minimum distributions from a Traditional Individual Retirement Account (IRA). Withdrawals from Traditional IRAs are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty. You may continue to contribute to a Traditional IRA past age 70½ under the SECURE Act, as long as you meet the earned-income requirement.

Account holders can always withdraw more. But if they take less than the minimum required, they could be subject to a 50% penalty on the amount they should have withdrawn – except for 2020.

How to Keep a Cool Head While Staying Invested During This Market Crisis

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No doubt the market gyrations of the last several weeks have rattled the nerves of many investors.

Sharp market declines and volatility are built around uncertainty, whether it be in the financial system (e.g. 2008), terrorist events (2001), commodity price shocks (1970s), wars, or other surprises. It’s easy for investors to forget in hindsight that the very nature of these historical events did not lend themselves to certain interpretation or resolution while they were happening. This is why the ‘price discovery’ mechanism of markets can get off-track, divergent from the more predictable modeling of earnings, dividends, and interest rates. (1)

“In the short run, stock returns are very volatile, driven by changes in earnings, interest rates, risk, and uncertainty, as well as psychological factors, such as optimism and pessimism as well as fear and greed.”

– Jeremy Segal “Stocks for the Long Run 5/E: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies”

In times like this, though, when information is fluid, estimates are difficult. The severity of the downturn and market reaction will likely depend on a variety of factors. These include government action and fiscal stimulus to assist those out of work in the service and entertainment industries, and, most importantly, the progression of COVID-19 cases, and any signs of these peaking or decelerating. When financial markets move beyond rational pricing, non-financial indicators take on greater importance than they normally would. (1)

“It took just over 15 years to recover the money invested at the 1929 peak… And since World War II, the recovery period for stocks has been even better. Even including the recent financial crisis (2008), which saw the worst bear market since the 1930s, the longest it has ever taken an investor to recover an original investment in the stock market (including reinvested dividends) was the five-year, eight-month period from August 2000 through April 2006.”

– Jeremy Segal “Stocks for the Long Run 5/E: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies”

So, what should we as rational investors do to maintain a cool head amongst all this volatility and uncertainty?

5 Investing Principles for This Tumultuous Market

Dr. David Kelly, chief global strategist of J.P. Morgan Asset Management, recently suggested (2):

  1. Recognize that stocks are long-term investments – Historically stocks tend to overreact on both the upside and the downside and eventually recover.
  2. Recognize that the market has already de-risked investors – You may now have less equity exposure.
  3. Look at valuation gaps – Not every investment is equally priced.
  4. Think about income – The S&P 500 yield is greater than current Treasury yields.
  5. Active managers should do well during this period – Mutual Fund managers can help us navigate these choppy waters and help separate the potential winners from the losers.

The Markets Will Adapt

If you believe, like I do, that we will eventually recover from this crisis then we’ll need to lean into what we do know from past market (and investor) behavior. Here are four charts that help provide a better understanding (click charts for expanded view):

This chart shows intra-year stock market declines (red dot and number), as well as the market’s return for the full year (gray bar). What is clear is that the market is capable of recovering from intra-year drops and finishing the year in positive territory, which should encourage investors to stay the course when markets get choppy. (3)
The top chart shows the powerful effects of portfolio diversification. It illustrates the difference in movements between the S&P 500, a 60/40 portfolio and a 40/60 portfolio indicating when each respective portfolio would have recovered its original value at the peak of the market in 2007 from the market bottom in 2009. It shows that the S&P 500 fell far more than either of the two diversified portfolio and also took two or more years longer to recover its value. (3)

The bottom chart shows 20-year annualized returns by asset class, as well as how an “average investor” would have fared. The average investor asset allocation return is based on an analysis by Dalbar, which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. (3) Carl Richards coined this the “Behavior Gap” in his book “The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money”
This chart shows historical returns by holding period for stocks, bonds and a 50/50 portfolio, rebalanced annually, over different time horizons. The bars show the highest and lowest return that you could have gotten during each of the time periods (1-year, 5-year rolling, 10-year rolling and 20-year rolling). This chart advocates for simple, balanced portfolios, as well as for having an appropriate time horizon. (3)
During periods of extreme market declines, a natural emotional reaction can be to sell out of the market and seek safety in cash. The results of this reaction can be devastating because often the best days occur close to the worst days during periods of market volatility. This chart compares an individual who was fully invested for the past 20 years in the S&P 500 to investors who missed some of the best days as a result of being out of the market for a period of time. Missing the top 10 best days will halve the annualized return; missing the top 30 days will result in a negative annualized return on the original $10,000 investment. Rather than emotionally reacting to or trying to time the market, adopting a disciplined long-term investment strategy may produce a better retirement outcome. (3)

Sources:

  1. LSA Portfolio Analytics
  2. https://www.thinkadvisor.com/2020/03/20/jpmorgans-kelly-5-investing-principles-for-this-tumultuous-market/
  3. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-the-markets
  4. https://www.amazon.com/Behavior-Gap-Simple-Doing-Things/dp/1591844649/ref=sr_1_1?dchild=1&keywords=the+behavior+gap&qid=1584981929&sr=8-1
  5. https://www.amazon.com/dp/0071800514/?coliid=I2TQ2AX89NOD8Q&colid=2ECH1J1LBJRKC&psc=1&ref_=lv_ov_lig_dp_it_im

How to Use a Bucket Strategy to Help Weather Market Volatility in Retirement

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Image by TRIXIE BRADLEY from Pixabay

The Bucket Strategy can take two forms.

1. The Expenses Bucket Strategy:

With this approach, you segment your retirement expenses into three buckets:

  • Basic Living Expenses – food, rent, utilities, etc.
  • Discretionary Expenses – vacations, dining out, etc.
  • Legacy Expenses – assets for heirs and charities

This strategy pairs appropriate investments to each bucket. For instance, Social Security might be assigned to the Basic Living Expenses bucket. If this source of income falls short, you might consider whether a fixed annuity can help fill the gap. With this approach, you are attempting to match income sources to essential expenses. (1)

The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contact. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies).

For the Discretionary Expenses bucket, you might consider investing in top-rated bonds and large-cap stocks that offer the potential for growth and have a long-term history of paying a steady dividend. The market value of a bond will fluctuate with changes in interest rates. As rates fall, the value of existing bonds typically drop. If an investor sells a bond before maturity, it may be worth more or less than the initial purchase price. By holding a bond to maturity an investor will receive the interest payments due, plus their original principal, barring default by the issuer. Investments seeking to achieve higher yields also involve a higher degree of risk. Keep in mind that the return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost. Dividends on common stock are not fixed and can be decreased or eliminated on short notice.

Finally, if you have assets you expect to pass on, you might position some of them in more aggressive investments, such as small-cap stocks and international equity. Asset allocation is an approach to help manage investment risk. Asset allocation does not guarantee against investment loss.

International investments carry additional risks, which include differences in financial reporting standards, currency exchange rates, political risk unique to a specific country, foreign taxes and regulations, and the potential for illiquid markets. These factors may result in greater share price volatility.

2. The Timeframe Bucket Strategy:

This approach creates buckets based on different timeframes and assigns investments to each. For example:

  • 1 to 5 Years: This bucket funds your near-term expenses. It may be filled with cash and cash alternatives, such as money market accounts. Money market funds are considered low-risk securities but they are not backed by any government institution, so it’s possible to lose money. Money held in money market funds is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Money market funds seek to preserve the value of your investment at $1.00 a share. However, it is possible to lose money by investing in a money market fund. Money market mutual funds are sold by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.
  • 6 to 10 Years: This bucket is designed to help replenish the funds in the 1-to-5-Years bucket. Investments might include a diversified, intermediate, top-rated bond portfolio. Diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if security prices decline.
  • 11 to 20 Years: This bucket may be filled with investments such as large-cap stocks, which offer the potential for growth.
  • 21 or More Years: This bucket might include longer-term investments, such as small-cap and international stocks.

Each bucket is set up to be replenished by the next longer-term bucket. This approach can offer flexibility to provide replenishment at more opportune times. For example, if stock prices move higher, you might consider replenishing the 6-to-10-Years bucket, even though it’s not quite time.

A bucket approach to pursue your income needs is not the only way to build an income strategy, but it’s one strategy to consider as you prepare for retirement.

FINAL-2019-GTR-2_22_HIGH-RES-37
▲ Structuring a portfolio in retirement – the bucket strategy

Experiencing market volatility in retirement may result in some people pulling out of the market at the wrong time or not taking on the equity exposure they need to combat inflation. Leveraging mental accounting to encourage better behaviors–aligning a retirement portfolio in time-segmented buckets–may help people maintain a disciplined investment strategy through retirement with an appropriate level of equity exposure. The short-term bucket, invested in cash and cash equivalents, should cover one or more years of a household’s income gap in retirement–with the ideal number of years determined based on risk tolerance and market conditions over the near term. A ‘cushion’ amount should also be maintained to cover unexpected expenses. The intermediate-term bucket should have a growth component, with any current income generated through dividends or interest moved periodically to replenish the short-term bucket. The longer-term portfolio can be a long-term care reserve fund or positioned for legacy planning purposes, and pursue a more aggressive investment objective, based on the time horizon. (2)

Sources

  1. kiplinger.com/article/retirement/T037-C000-S002-how-to-implement-the-bucket-system-in-retirement.html
  2. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

A Smart Investor’s Antidote to Corona Virus Fears: Diversified Asset Allocation

Image by Thomas Gerlach from Pixabay

Financial markets have been especially hard-hit, with reports of new coronavirus (COVID-19) cases appearing in South Korea, Italy, and Iran. The uncertainty over transmission and fears of a global pandemic—and resulting slowdown in economic/financial activity—has led to the sharp negative response in risk markets.

Of course, there is still much about the medical side of this that is unknown, related to level of contagion, transmission mechanisms, incubation periods, and development of a vaccine. Commentary on these issues would only speculation at this point. Financial markets, as we have said many times, can adapt when conditions are certain (even if the news is terrible, prices will sharply discount themselves accordingly). However, higher levels of uncertainty create a wider path of probabilistic outcomes, which make it more difficult to pinpoint what various assets are worth at a single moment. This process of market price discovery is important, and can be thrown off-track temporarily by events like this.

As seen in the chart below, equity market indexes have typically experienced an average of a half-dozen to a dozen or more days per year when prices rise or fall by at least +/- 2%. But, we haven’t experienced such a day since last August, and the last several years have been far less volatile than average. So, we’ve likely become far more sensitive to ‘normal’ market volatility. As in the past, these uncertainties have tended to pass, problems are solved, the current worry moves on to a new one (as global trade fears have moved to this), and human conditions generally improve over time. This results in economic growth, rather than decline, and also explains why risk assets like equities have tended to win more than lose over history.

In the near term, how unpleasant this hiccup becomes is yet to be determined, and perhaps we’ll have to endure more down days. In a global environment already suffering from slower growth and looking for catalysts for improvement, the timing of a one-off event like a virus is far from optimal. China has already been impacted through quarantines, and by store/factory closures that have a direct impact on shutting down economic activity. If this spreads further, other regions could also be similarly affected. But, at some point, normal business and consumer activity will resume.

The best course, as we believe is always the case, is an adequately diversified asset allocation.

It’s an important reminder, that while segments such as bonds do not look exciting from a forward-looking return perspective, especially considering the high correlation between starting bond yields (currently low) and forward-looking multi-year total returns, these prove their worth during times of crisis. Over time, periodic equity ‘resets’ also help keep equity valuations in check, potentially preventing excess exuberance that could eventually result in worse outcomes down the road if the most optimistic predictions prove unsustainable. A skeptical market is likely a healthier one.

Corona Virus Fears Hit the Market

Financial markets have fallen sharply on concerns of the coronavirus, a respiratory illness first identified in Wuhan, China, spreading globally. While the headlines have been worrying, and no loss of human life is insignificant, it is important to understand the facts. The framework we have adopted for discussing this virus is to consider the three components of a pandemic—contagion, severity and treatment—and how the evolution of those components can shift the market narrative.

The Three Components of a Pandemic:

1. CONTAGION

As of January 30, there are approximately 9,776 confirmed cases. While China is the epicenter of the virus, there have been 118 confirmed cases outside of China in 22 different countries and regions. As a point of comparison, the SARS (severe acute respiratory syndrome) outbreak in 2003 lasted about 9 months, from November 2002 to July 2003, with cases spanning 29 countries. While Chinese authorities have responded by placing over a dozen cities on lockdown, there have been a number of challenges in preventing the spread of the virus:

  • Chinese New Year: Inception of the illness occurred just before Chinese New Year, when an estimated 400 million Chinese take approximately 3 billion trips over the 40-day festival period.
  • Incubation: The virus could have an incubation period of up to 14 days, meaning it could take up to 2 weeks before an infected individual presents symptoms, making policing the spread of the virus challenging.
  • Airborne nature: The virus spreads via droplet transmission (coughs, sneezes etc.)

The rising contagion level is what seems to have triggered uncertainty among investors.

2. SEVERITY

There is no clear information on the actual severity of the virus. As of January 30, there are 213 confirmed deaths related to coronavirus; however, there are few details related to these deaths (e.g. age of patients, additional complications, how quickly they sought medical help). Historically, severity levels have varied dramatically. According to the World Health Organization (WHO), of the 8,098 global cases of probable SARS reported, there were 774 deaths, or a 9.6% fatality rate; meanwhile, the Swine Flu outbreak in 2009 had a much lower level of just 0.03%. Historical analysis related to pandemics is somewhat limited as each illness has its own unique components and considerations.

One promising sign is that there are 187 reported cases of patients who have recovered and were discharged from the hospital. If severity does begin to rise along with contagion, then investor concerns may mount further as potential loss of life and economic damage rises.

3. TREATMENT

Viruses, such as the coronavirus, are difficult to treat. It is possible to vaccinate against many viruses, but the development and roll-out of a potential vaccine can take time. At this stage, treatment options are relatively unknown, adding to investor uncertainty.

Economic and Market Implications

At this point, the market is reacting to contagion, as we have seen identified cases rapidly increase. What may exacerbate or alleviate the market reaction is how treatment and severity evolve.

What we saw back in 2003 with the SARS outbreak was that it had the most significant impact on air travel, tourism, and domestic demand in Asia. Hong Kong, for example, experienced some of the most severe economic impacts, with its GDP growth falling by -0.5% y/y in 2Q 2003, and its retail sales declining by -7.7% y/y that quarter. China’s growth slowed to 9.1% y/y, and its retail sales, industrial production, and fixed asset investment suffered. However, these rebounded quickly as the new cases dropped and the Chinese government offered supportive economic measures. As highlighted in the chart below, U.S. equities fared better than stocks in EM Asia when concerns over SARS were rising. However, Asian stocks rebounded once concerns about SARS abated. This indicates that prevailing market conditions and fundamentals have a more prominent influence on returns. Unfortunately, the current environment is one of slowing global growth and earnings.

The coronavirus is likely to impact the economy and markets in similar ways, although perhaps to a greater extent. In China, for example, the nature of its economy has changed materially since the SARS outbreak, shifting from an industrializing economy to a more consumer and service-oriented economy. To complicate matters, this outbreak coincides with the Lunar New Year in China, the most important holiday for travel and consumption. As mentioned above, the estimated 3 billion trips taken over this period are likely to be negatively impacted by travel restrictions for 35 million people, and others canceling their plans. Already, travel was down -28.8% on the first day of Lunar New Year compared to the first day last year, according to the Ministry of Transport. Additionally, last year Chinese consumers spent nearly $150 billion in just the first week of Chinese New Year according to the Ministry of Commerce, but this year, with many confined to their homes, consumption may also drop. A few major multinational companies are temporarily closing factories in the region or re-routing supply chains.

Impacts to the Chinese economy, which has already faced headwinds from slowing global and domestic demand and external trade pressures, are likely to be the most pronounced, and are likely to elicit a policy response from the Chinese government. However, for U.S. investors, markets may be more likely to stabilize, as we have seen few protracted market declines due to health crises, geopolitical risks, natural disasters or political turmoil.

How to Tolerate Market Turbulence When Investing For The Long Term

photo of white roller coaster
Photo by Element5 Digital on Pexels.com

Look beyond this moment and stay focused on your long-term objectives.

Volatility will always be around on Wall Street, and as you invest for the long term, you must learn to tolerate it. Rocky moments, fortunately, are not the norm.

Since the end of World War II, there have been dozens of Wall Street shocks.

Wall Street has seen 56 pullbacks (retreats of 5-9.99%) in the past 73 years; the S&P index dipped 6.9% in this last one. On average, the benchmark fully rebounded from these pullbacks within two months. The S&P has also seen 22 corrections (descents of 10-19.99%) and 12 bear markets (falls of 20% or more) in the post-WWII era. (1)

Even with all those setbacks, the S&P has grown exponentially larger. During the month World War II ended (September 1945), its closing price hovered around 16. At this writing, it is above 2,750. Those two numbers communicate the value of staying invested for the long run. (2)

This current bull market has witnessed five corrections, and nearly a sixth (a 9.8% pullback in 2011, a year that also saw a 19.4% correction). It has risen roughly 335% since its beginning even with those stumbles. Investors who stayed in equities through those downturns watched the major indices soar to all-time highs. (1)

As all this history shows, waiting out the shocks may be highly worthwhile.

The alternative is trying to time the market. That can be a fool’s errand. To succeed at market timing, investors have to be right twice, which is a tall order. Instead of selling in response to paper losses, perhaps they should respond to the fear of missing out on great gains during a recovery and hang on through the choppiness.

After all, volatility creates buying opportunities. Shares of quality companies are suddenly available at a discount. Investors effectively pay a lower average cost per share to obtain them.

Bad market days shock us because they are uncommon.

If pullbacks or corrections occurred regularly, they would discourage many of us from investing in equities; we would look elsewhere to try and build wealth. A decade ago, in the middle of the terrible 2007-09 bear market, some investors convinced themselves that bad days were becoming the new normal. History proved them wrong.

As you ride out this current outbreak of volatility, keep two things in mind.

One, your time horizon. You are investing for goals that may be five, ten, twenty, or thirty years in the future. One bad market week, month, or year is but a blip on that timeline and is unlikely to have a severe impact on your long-run asset accumulation strategy. Two, remember that there have been more good days on Wall Street than bad ones. The S&P 500 rose in 53.7% of its trading sessions during the years 1950-2017, and it advanced in 68 of the 92 years ending in 2017. (3,4)

Sudden volatility should not lead you to exit the market.

If you react anxiously and move out of equities in response to short-term downturns, you may impede your progress toward your long-term goals.

MI-GTM_4Q18-HIGH-RES-63
▲ Time, diversification and the volatility of returns

This chart shows historical returns by holding period for stocks, bonds and a 50/50 portfolio, rebalanced annually, over different time horizons. The bars show the highest and lowest return that you could have gotten during each of the time periods (1-year, 5-year rolling, 10-year rolling and 20-year rolling). This page advocates for simple balanced portfolio, as well as for having an appropriate time horizon.

Sources

  1. marketwatch.com/story/if-us-stocks-suffer-another-correction-start-worrying-2018-10-16
  2. multpl.com/s-p-500-historical-prices/table/by-month
  3. crestmontresearch.com/docs/Stock-Yo-Yo.pdf
  4. icmarc.org/prebuilt/apps/downloadDoc.asp
  5. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-the-markets/viewer

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Should You Care What the Financial Markets Do Each Day?

Photo by Andrea Piacquadio on Pexels.com

Focusing on Your Strategy During Turbulent Times.

Investors are people, and people are often impatient. No one likes to wait in line or wait longer than they have to for something, especially today when so much is just a click or two away.

This impatience also manifests itself in the financial markets. When stocks slip, for example, some investors grow uneasy. Their impulse is to sell, get out, and get back in later. If they give in to that impulse, they may effectively pay a price.

Across the 30 years ended December 31, 2018, the Standard & Poor’s 500 posted averaged annual return of 10.0%. During the same period, the average mutual fund stock investor realized a yearly return of just 4.1%. Why the difference? It could partly stem from impatience. (1)

It’s important to remember that past performance does not guarantee future results. The return and principal value of stock prices will fluctuate over time as market conditions change. And shares, when sold, may be worth more or less than their original cost.

Investors Can Worry Too Much.

In the long run, an investor who glances at a portfolio once per quarter may end up making more progress toward his or her goals than one who anxiously pores over financial websites each day.

Too many investors make quick, emotional moves when the market dips. Logic may go out the window when this happens, in addition to perspective.

Some long-term investors keep focus. Warren Buffett does. He has famously said that an investor should, “buy into a company because you want to own it, not because you want the stock to go up. (2)

Buffett often tries to invest in companies whose shares may perform well in both up and down markets. He also has famously stated, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.” (2)

In contrast with Buffett’s patient long-term approach, investors who care too much about day-to-day market behavior may practice market timing, which is as much hope as strategy.

To make market timing work, an investor has to be right twice. The goal is to sell high, take profits, and buy back in just as the market begins to rally off a bottom. But there is volatility in financial markets and the sale at any point could result in a gain or loss.

Even Wall Street professionals have a hard time predicting market tops and bottoms. Retail investors are notorious for buying high and selling low.

Investors who alter their strategy in response to the headlines may end up changing it again after further headlines. While they may expect to be on top of things by doing this, their returns may suffer from their emotional and impatient responses.

Nobel Laureate economist Gene Fama once commented: “Your money is like soap. The more you handle it, the less you’ll have.”

Wisdom that may benefit your strategy, especially during periods of market volatililty. (3)

Mutual funds are sold only by prospectus. Please consider the charges, risks, expenses and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.

▲ Diversification and the average investor

The top chart shows the powerful effects of portfolio diversification. It illustrates the difference in movements between the S&P 500, a 60/40 portfolio and a 40/60 portfolio indicating when each respective portfolio would have recovered its original value at the peak of the market in 2007 from the market bottom in 2009. It shows that the S&P 500 fell far more than either of the two diversified portfolio and also took two or more years longer to recover its value. The bottom chart shows 20-year annualized returns by asset class, as well as how an “average investor” would have fared. The average investor asset allocation return is based on an analysis by Dalbar, which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior.

Sources

  1. nytimes.com/2019/07/26/your-money/stock-bond-investing.html
  2. fool.com/investing/best-warren-buffett-quotes.aspx
  3. suredividend.com/best-investment-quotes/
  4. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-the-markets/viewer

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Are You Emotionally Ready to Retire? Four Questions to Ask Yourself Before Deciding

Image by LEEROY Agency from Pixabay

Retirement Is a Beginning

See if you are prepared to begin your retirement by answering four key questions.

1) Is Your Work Meaningful?

If it is emotionally and psychologically fulfilling, if it gives you a strong sense of purpose and identity, there may be a voice inside your head telling you not to retire yet. You may want to listen to it.

It can be tempting to see retirement as a “finish line”: no more long workdays, long commutes, or stressful deadlines. But it is really a starting line: the start of a new phase of life. Ideally, you cross the “finish line” knowing what comes next, what will be important to you in the future.

2) Do You Value Work or Leisure More at This Point in Your Life?

If the answer is leisure, score one for retirement. If the answer is work, maybe you need a new job or a new way of working rather than an exit from your company or your profession.

An old saying says that retirement feels like “six Saturdays and a Sunday.” Fantastic, right? It is, as long you don’t miss Monday through Friday. Some people really enjoy their careers; you may be one of them.

3) Where Do Your Friends Come From?

If very little of your social life involves the people you work with, then score another point for retirement. If your friends are mainly your coworkers, those friendships may be tested if you retire (and you may want to try to broaden your social circle for the future).

At a glance, it might seem that an enjoyable retirement requires just two things: sufficient income and sufficient return on your investments. These factors certainly promote a nice retirement, but there are also other important factors: your physical health, your mental health, your relationships with family and friends, your travels and adventures, and your outlets to express your creativity. Building a life away from work is a plus.

4) What Do You Think Your Retirement Will Be Like?

If you think it will be spectacularly different from your current life, ask yourself if your expectations are realistic. If after further consideration they seem unrealistic, you may want to keep working for a while until you are in a better financial position to try and realize them or until your expectations shift.

Ideally, you retire when you are financially, emotionally, and psychologically ready.

The era of the “organization man” retiring with a gold watch and a party at 65 is gone; the cultural forces that encouraged people to stop working at a certain age aren’t as strong as they once were.

Why you are retiring is as important as when you choose to retire.

When you are motivated to retire, you see retirement as a beginning rather than an end.

▲ If You Need Some Help Figuring Out How To Achieve A Satisfying Retirement Check Out This Book

How to Retire Happy, Wild, and Free offers inspirational advice on how to enjoy life to its fullest. The key to achieving an active and satisfying retirement involves a great deal more than having adequate financial resources; it also encompasses all other aspects of life — interesting leisure activities, creative pursuits, physical well-being, mental well-being, and solid social support.

Sources

  1. https://www.aarp.org/retirement/planning-for-retirement/info-2017/retirement-fear-fd.html 
  2. https://www.usatoday.com/story/money/personalfinance/2013/10/22/preparing-mentally-retirement/2885187/ 
  3. https://www.amazon.com/gp/product/096941949X/ref=ppx_yo_dt_b_asin_image_o02_s00?ie=UTF8&psc=1 https://static.twentyoverten.com/58e639ce21cca2513c90975b/3CK8UF2wC/Imagine-Your-Life-Without-Limits-Workbook.pdf 
  4. https://www.psychologytoday.com/us/blog/cutting-edge-leadership/201501/are-you-psychologically-ready-retire 
  5. https://www.marketwatch.com/story/why-youre-probably-not-psychologically-ready-to-retire-2019-05-21
  6. https://www.amazon.com/How-Retire-Happy-Wild-Free/dp/096941949X/ref=sr_1_2?crid=2N1K2XUGII9GT&keywords=how+to+retire+happy+wild+and+free+book&qid=1581466005&sprefix=how+to+reitre%2Caps%2C147&sr=8-2

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.