Will You Be Prepared When the Market Cools Off?

Markets have cycles, and at some point, the major indices will descend.

We have seen a tremendous rally on Wall Street, nearly nine months long, with the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average repeatedly settling at all-time peaks. Investors are delighted by what they have witnessed. Have they become irrationally exuberant?

The Major Indices Do Not Always Rise.

That obvious fact risks becoming “back of mind” these days. On June 15, the Nasdaq Composite was up 27.16% year-over-year and 12.67% in the past six months. The S&P 500 was up 17.23% in a year and 7.31% in six months. Performance like that can breed overconfidence in equities. (1,2)

The S&P last corrected at the beginning of 2016, and a market drop may seem like a remote possibility now. Then again, corrections usually arrive without much warning. You may want to ask yourself: “Am I prepared for one?”(3)

TIP #1:

Are You Mentally Prepared?

Corrections have been rare in recent years. There have only been four in this 8-year bull market. So, it is easy to forget how frequently they have occurred across Wall Street’s long history (they have normally happened about once a year).(3,4)

The next correction may shock investors who have been lulled into a false sense of security. You need not be among them. It will not be the end of the world or the markets. A correction, in a sense, is a reality check. It presents some good buying opportunities, and helps tame irrational exuberance. You could argue that corrections make the market healthier. In big-picture terms, the typical correction is brief. On average, the markets take 3-4 months to recover from a fall of at least 10%.(4)

TIP #2:

Are You Financially Prepared?

Some people have portfolios that are not very diverse, with large asset allocations in equities and much smaller asset allocations in more conservative investment vehicles and cash. These are the investors likely to take a hard hit when the big indices correct.

You can stand apart from their ranks by appropriately checking up on, and diversifying, your portfolio as needed. Thanks to the recent rally, many investors have seen their equity positions grow larger, perhaps too large. If you are one of them (and you may be), you may want to try to dial down your risk exposure.

TIP #3:

Do You Have an Adequate Emergency Fund?

A correction is not quite an emergency, but it is nice to have a strong cash position when the market turns sour.

TIP #4:

Are Your Retirement and Estate Plans Current?

A prolonged slump on Wall Street could impact both. Many older baby boomers had to rethink their retirement strategies in the wake of the 2007-09 bear market.

TIP #5:

Consistently Fund Your Retirement Accounts

Finally, a deep dip in the equity market should not stop you from consistently funding your retirement accounts. In a downturn, your account contributions, in essence, buy greater amounts of shares belonging to quality companies than they would otherwise.

A correction will happen – maybe not tomorrow, maybe not for the rest of 2017, but at some point, a retreat will take place. React to it with patience, or else you may end up selling low and buying high.

Sources.

  1. money.cnn.com/data/markets/nasdaq/ [6/15/17]
  2. money.cnn.com/data/markets/sandp/ [6/15/17]
  3. fortune.com/2017/03/09/stock-market-bull-market-longest/ [3/9/17]
  4. investopedia.com/terms/c/correction.asp [6/15/17]
  5. 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.

Should You Borrow From Your 401(k) if You Need Cash?

Thinking about borrowing money from your 401(k), 403(b), or 457 account? Think twice. Here are 6 reasons 401(k) loans are a bad idea.

REASON #1
Damages Retirement Prospects

A 401(k), 403(b), or 457 should never be viewed like a savings or checking account.

When you withdraw from a bank account, you pull out cash. When you take a loan from your workplace retirement plan, you sell shares of your investments to generate cash. You buy back investment shares as you repay the loan.

So in borrowing from a 401(k), 403(b), or 457, you siphon down your invested retirement assets, leaving a smaller account balance that experiences a smaller degree of compounding. In repaying the loan, you will likely repurchase investment shares at higher prices than in the past – in other words, you will be buying high. None of this makes financial sense.1

Most plans charge a $75 origination fee for a loan, and of course they charge interest – often around 5%. The interest paid will eventually return to your account, but that interest still represents money that could have remained in the account and remained invested.

REASON #2
Contributions Could Be Halted

May not be able to make additional contributions due to outstanding loans

Some workplace retirement plans suspend regular employee salary deferrals when a loan is taken. They can resume when you settle the loan.

REASON #3
Potential for Docked Pay

Your Take-Home Pay Could Be Docked

Most loans from 401(k), 403(b), and 457 plans are repaid incrementally – the plan subtracts X dollars from your paycheck, month after month, until the amount borrowed is fully restored.

REASON #4
A. May Have to Pay Back Immediately

30-60 Days: If You Quit, Get Laid Off Or Are Fired

This applies if you quit, get laid off or are fired. You will have 30-60 days (per the terms of the plan) to repay the loan in full, with interest.

If you are younger than age 59½ and fail to pay the full amount of the loan back, the IRS will characterize any amount not repaid as a premature distribution from a retirement plan – taxable income that is also subject to an early withdrawal penalty.1,2

Even if you have great job security, the loan will probably have to be repaid in full within five years. Most workplace retirement plans set such terms. If the terms are not met, then the unpaid balance becomes a taxable distribution with possible penalties (assuming you will not turn 59½ in the year in which repayment is due). If you default on the loan, the retirement plan may bar you from making future contributions.1

B. 5 Years To Repay

If Terms Are Not Met Unpaid Balance is Taxable

Even if you have great job security, the loan will probably have to be repaid in full within five years. Most workplace retirement plans set such terms. If the terms are not met, then the unpaid balance becomes a taxable distribution with possible penalties (assuming you will not turn 59½ in the year in which repayment is due). If you default on the loan, the retirement plan may bar you from making future contributions.1

REASON #5
You Get Taxed Twice!

Repay with after-tax dollars AND Taxed on withdrawals

When you borrow from an employee retirement plan, you invite that prospect. One, you will be repaying your loan with after-tax dollars. Two, those dollars will be taxed again when you withdraw them for retirement (unless your plan offers you a Roth option).

REASON #6
Why Go Into Debt to Pay Off Debt?

It’s Better to Go to a Reputable Lender for a Personal Loan

If you borrow from your retirement plan, you will be assuming one debt to pay off another. It is better to go to a reputable lender for a personal loan; borrowing cash has fewer potential drawbacks.

SMART TIP:

Your 401(k) Plan is NOT a Bank Account

Always remember, you should never confuse your retirement plan with a bank account.


Sources:

  1. cnbc.com/id/101848407 [9/14/14]
  2. mainstreet.com/article/why-you-cant-borrow-your-401k-and-only-way-you-should [7/24/14]
  3. This material was prepared in part by MarketingPro, Inc.

Market and Economic Update for the Second Quarter of 2017

It has been an awfully good year in most of the capital markets so far. Just like a great summer day with blue skies and bright sunshine, most stock markets have happily been rising and the economy has been chugging along. Bonds of many types have been profitable. We open our account statements and we’re pleased with the progress.

2Q.2017.Chart

The Economy Has Been Looking Good

From an economic standpoint there has been much to be cheerful about. Corporate earnings in the first quarter came in above expectations and sharply higher than preceding quarters. Unemployment is very low and while we haven’t seen a dramatic uptick in wages we are seeing what looks close to full employment. GDP growth continues to show positive numbers even if the pace of growth is somewhat slower than we would like it to be. Good things haven’t been confined to our shores either; Europe’s economy, in spite of Brexit and some tough election cycles, has continued to firm, China continues to grow, even with concerns about banking and debt, India and other parts of Asia show steady progress, and South American economies continue to improve despite the political turmoil in Brazil and elsewhere.

No Signs of Recession Yet

There doesn’t seem to be any sign of recession on the horizon as yet; the Fed continues to be both transparent about and circumspect towards the execution of rate changes. Our government is promising lower taxes and less regulation, items that can cheer even the most gloomy business owner.

So What Could Possibly Go Wrong?

It’s important to remember (or perhaps re-remember) that markets don’t move in a straight line, not very often at any rate. We’ve had 16 periods of downward market movement since the bull began running back in early 2009! It is entirely possible that we are ready for another, and we think it a useful endeavor to remind ourselves of this every so often. Bear markets begin when markets or economies get pretty far out of alignment and while we don’t think we’re seeing any of that right now, the garden variety market correction can strike at any time.

Planning & Diversification

As always, our defense is two-fold, good planning and diversification. In regards to the former, we sure don’t want to get too excited about stock market gyrations that concern money we won’t be touching for a long time; we know we can’t really time the market and we also know that over the long-term stocks tend to give superior returns in spite of that very same volatility. We also know we don’t want to have to eat our “seed corn” and so shorter term money should be invested in other areas.

What Will The Second Half of 2017 Bring?

We of course don’t know if the second half of 2017 will be as productive as the first has been. As mentioned earlier, we don’t think we’re on the verge of a recessionary time and that bodes well for the economy over the short and intermediate term. US stocks appear a bit richer than average, but that has been the case for some time and that modest overvaluation has moderated a bit in light of the robust first quarter earnings.

We’re also cognizant of the fact that reasonable investment time horizons are often greater than many folks’ attention spans and this can create volatility once someone in the proverbial theater yells “fire”! Watching that sort of “running for the exits” is always disconcerting. It is the age old story: we tolerate shorter term volatility for longer term performance; it isn’t always fun but over time it works exceedingly well.


Source:

  1. Prepared by LSA Portfolio Analytics

How Much Money Will You Need For Retirement?

What is enough?

If you’re considering retiring in the near future, you’ve probably heard or read that you need about 70% of your end salary to live comfortably in retirement. This estimate is frequently repeated … but that doesn’t mean it is true for everyone. It may not be true for you. Consider the following factors:

FACTOR #1

Your Health

Most of us will face a major health problem at some point in our lives. Think, for a moment, about the costs of prescription medicines, and recurring treatment for chronic ailments. These costs can really take a bite out of retirement income, even with a great health care plan.

FACTOR #2

Your Heredity

If you come from a family where people frequently live into their 80s and 90s, you may live as long or longer. Imagine retiring at 55 and living to 95 or 100. You would need 40-45 years of steady retirement income.

 

FACTOR #3

Your Portfolio

Many people retire with investment portfolios they haven’t reviewed in years, with asset allocations that may no longer be appropriate. New retirees sometimes carry too much risk in their portfolios, with the result being that the retirement income from their investments fluctuates wildly with the vagaries of the market. Other retirees are super-conservative investors: their portfolios are so risk-averse that they can’t earn enough to keep up with even moderate inflation, and over time, they find they have less and less purchasing power.

FACTOR #4

Your Spending Habits

Do you only spend 70% of your salary? Probably not. If you’re like many Americans, you probably spend 90% or 95% of it. Will your spending habits change drastically once you retire? Again, probably not.

Will You Have Enough?

When it comes to retirement income, a casual assumption may prove to be woefully inaccurate. However it doesn’t hurt to get a rough estimate. Using an online calculator link the one listed here can help you get started. You can use CNNMoney’s Will You Have Enough to Retire? calculator.

You won’t learn exactly how much retirement income you’ll need simply by watching this video and using the online calculator. But you will be on the right path. You may want to consider meeting with a fee-only, CERTIFIED FINANCIAL PLANNER™ who can help estimate your lifestyle needs and short-term and long-term expenses


Sources:

  1. This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information should not be construed as investment, tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.