Posts By Scott Weiss, CFP®

How Rebalancing Can Help Keep Your Portfolio’s Risk Profile In Check

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Everyone loves a winner. If an investment is successful, most people naturally want to stick with it. But is that the best approach?

It may sound counterintuitive, but it may be possible to have too much of a good thing. Over time, the performance of different investments can shift a portfolio’s intent as well as its risk profile. It’s a phenomenon sometimes referred to as “risk creep,” and it happens when a portfolio’s risk profile shifts over time.

Balancing

When deciding how to allocate investments, many begin by considering their time horizon, risk tolerance, and specific goals. Next, individual investments are selected that pursue the overall objective. If all the investments selected had the same return, that balance – that allocation – would remain steady for a time. But if the investments have varying returns, over time, the portfolio may bear little resemblance to its original allocation. (1)

How Rebalancing Works

Rebalancing is the process of restoring a portfolio to its original risk profile. There are two ways to rebalance a portfolio.

The first is to use new money. When adding money to a portfolio, allocate these new funds to those assets or asset classes that have fallen.(1)

The second way of rebalancing is to sell enough of the “winners” to buy more underperforming assets. Ironically, this type of rebalancing forces you to buy low and sell high.

As you consider the pros and cons of rebalancing, here are a couple of key concepts to consider. First, asset allocation is an investment principle designed to manage risk. It does not guarantee against investment losses. Second, the process of rebalancing may create a taxable event. And the information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult a professional with legal or tax expertise regarding your situation.
Periodically rebalancing your portfolio to match your desired risk tolerance is a sound practice regardless of the market conditions. One approach is to set a specific time each year to schedule an appointment to review your portfolio and determine if adjustments are appropriate.

▲Diversification Benefits and Forced Rebalancing

The left hand side of this page shows the benefits of diversification during the most recent stock market correction while the right hand side shows how the market itself can rebalance portfolios overtime.

Sources

  1. kiplinger.com/article/investing/T023-C000-S002-rebalancing-your-portfolio-to-reduce-risk.html
  2. 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.

4 Key Factors to Consider Before Filing For Your Social Security Benefits

Whether you want to leave work at 62, 67, or 72, claiming the retirement benefits you are entitled to by federal law is no casual decision. You will want to consider a few key factors first.

How long do you think you will live?

If you have a feeling you will live into your nineties, for example, it may be better to claim later. If you start receiving Social Security benefits at or after Full Retirement Age (which varies from age 66 to 67 for those born in 1943 or later), your monthly benefit will be larger than if you had claimed at 62. If you file for benefits at FRA or later, chances are you probably a) worked into your mid-sixties, b) are in fairly good health, and c) have sizable retirement savings. (1)

If you really need retirement income, then claiming at or close to 62 might make more sense. If you have an average lifespan, you will, theoretically, receive the average amount of lifetime benefits regardless of when you claim them. Essentially, the choice comes down to more lifetime payments that are smaller versus fewer lifetime payments that are larger. For the record, Social Security’s actuaries project that the average 65-year-old man to live 84.0 years, and the average 65-year-old woman, 86.5 years. (2)

Will you keep working?

You might not want to work too much, since earning too much income may result in your Social Security being withheld or taxed.

Prior to Full Retirement Age, your benefits may be lessened if your income tops certain limits. In 2018, if you are aged 62 to 65, receive Social Security, and have an income over $17,040, $1 of your benefits will be withheld for every $2. If you receive Social Security and turn 66 later this year, then $1 of your benefits will be withheld for every $3 that you earn above $45,360. (3)

Social Security income may also be taxed above the program’s “combined income” threshold. (“Combined income” = adjusted gross income + nontaxable interest + 50% of Social Security benefits.) Single filers who have combined incomes from $25,000 to $34,000 may have to pay federal income tax on up to 50% of their Social Security benefits, and that also applies to joint filers with combined incomes of $32,000 to $44,000. Single filers with combined incomes above $34,000 and joint filers whose combined incomes surpass $44,000 may have to pay federal income taxes on up to 85% of their Social Security benefits. (3)

When does your spouse want to file?

Timing does matter, especially for two-income couples. If the lower-earning spouse collects Social Security benefits first, and then the higher-earning spouse collects them later, that may result in greater lifetime benefits for the household. (4)

Finally, how much in benefits might be coming your way?

Visit SSA.gov to find out, and keep in mind that Social Security calculates your monthly benefit using a formula based on your 35 highest-earning years. If you have worked for less than 35 years, Social Security fills in the “blank years” with zeros. If you have, say, just 33 years of work experience, working another couple years might translate to a slightly higher Social Security income. (1)

A claiming decision may be one of the most significant financial decisions of your life. Your choices should be evaluated years in advance – with insight from the financial professional who has helped you plan for retirement.

Maximizing Social Security benefits (average earner)

The age at which one claims Social Security greatly affects the amount of benefit received. Key claiming ages are 62, Full Retirement Age (FRA is currently 66 and 8 months for individuals turning 62 in 2020) and 70, as shown in the row of ages in the middle of the slide. The top three graphs show the three most common ages an individual is likely to claim and the monthly benefit he or she would receive at those ages, assuming average earnings at retirement of $70,000 (based on JPMorgan research). Claiming at the latest age (70) provides the highest monthly amount but delays receipt of the benefit for 8 years. Claiming at Full Retirement Age, 66 and 8 months, or at 62 years old provides lesser amounts at earlier ages. The bars represent the cumulative value of benefits received by the specified age. The gray shading between the bar charts represents the ages at which waiting until a later claim age results in greater cumulative benefits than claiming at the earlier age. This is called the “breakeven age.” The breakeven age between taking benefits at age 62 and FRA is age 76 and between FRA and 70 is 80. Along the bottom of the page, the percentages shown are the probability that a man, woman or one member of a married couple currently age 62 will live to the specified ages or beyond. Comparing these percentages against the breakeven ages will help a beneficiary make an informed decision about when to claim Social Security if maximizing the cumulative benefit received is a primary goal.

Note that while the benefits shown are for an average earner, the breakeven ages would be the same for those with other earnings histories.

Sources

  1. MarketWatch.com
  2. SSA.gov
  3. BlackRock.com
  4. MarketWatch.com
  5. 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.

Roth IRA Conversion in the Era of COVID-19: Is Now the Right Time for You?

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The COVID-19 pandemic has shaken up nearly every aspect of American life. To say it’s been a difficult time would be an understatement.

However, difficult times may open doors to new possibilities. Businesses are changing their ways of operating, and individuals are exploring new avenues for investment. It may be time for you to consider some opportunities, as well.

What is a Roth Conversion?

A Roth conversion refers to the transfer of an Individual Retirement Account (IRA), either Traditional, SIMPLE, or SEP-IRA, into a Roth IRA. With Roth IRAs, you pay tax on the money before it transfers into the account.

One benefit to having your money in the Roth IRA is that, unlike a Traditional IRA, you currently are not obligated to take Required Minimum Distributions (RMDs) after you reach age 72 (RMDs would be required to any non-spousal beneficiaries, however).

Another benefit is that since the money was taxed before going into the Roth IRA, any distributions are tax-free. Keep in mind that tax rules are constantly changing, and there is no guarantee that Roth IRA distributions will remain tax-free. (1,2)

Why Go Roth in 2020?

In the face of the market downturn after the COVID-19 outbreak, you may be in a unique financial situation. For example, suppose you have an IRA account that was worth $1 million before the downturn, but it’s currently worth $800,000.

Perhaps your income has also decreased, potentially putting you in a lower tax bracket. Maybe you own one or more businesses, such as restaurants, that have been closed. You may not yet know if these businesses will be opening again in 2020. Your income could hypothetically be considerably lower this year than last year.

But: this may present an opportunity. Less earned income may mean lower total taxes due on a Roth conversion, especially if the overall account value has dropped.

Keep in mind, this article is for information purposes only and is making an assumption on an IRA account’s value and applying a hypothetical drop in earned income. We recommend you contact your tax or legal professional before modifying your retirement investment strategy.

No Turning Back.

While this may be a good time for you to consider converting to a Roth IRA, remember that there’s no turning back once you do. The Tax Cuts and Jobs Act of 2017 decreed that Roth conversions could no longer be undone. (3)

A Roth IRA conversion is a complicated process, and it’s wise to involve your trusted financial professional.

▲ Evaluate a Roth at different life stages

The decision to make a pre-tax/deductible contribution to a Traditional 401(k) or IRA or an after-tax contribution to a Roth 401(k) or Roth IRA is based on the income tax rate of the individual at the time of making the contribution, and his/her anticipated tax rate in the future. The difference in tax rates can be caused by an investor’s personal situation and/or tax policy over time. This chart shows a typical wage curve and the general “rule of thumb” about what type of contribution may be most appropriate based on current income and the bracket in retirement. An additional consideration is to maintain a healthy mix of taxable, tax-free (Roth) and tax-deferred accounts so that you can have greater flexibility to manage your income taxes. The numbers on the chart specify situations in which contributing to a Roth option should be carefully considered.

Sources

  1. Investopedia.com, November 26, 2019.
  2. Investopedia.com, January 17, 2020.
  3. Congress.gov, December 22, 2017.
  4. https://am.jpmorgan.com/us/en/asset-management/gim/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. To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawal also can be taken under certain other circumstances, such as a result of the owner’s death. The original Roth IRA owner is not required to take minimum annual withdrawals.

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

Image by mohamed Hassan from Pixabay

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

Image by travis1776 from Pixabay

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

Image by Pexels from Pixabay

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.