Election years are usually positive for stocks, and despite all that has happened in 2020, stocks could end this year positive again. It’s been so good that many have been conditioned to join the hottest trades. They are throwing caution to the wind as they mistake an irrational market for genius. This will not last forever.
An increase in risk impacts votes. Of course, 2020 could continue to surprise.
The Market May Predict the Next President of the United States
(1) Has there been a decline of 20% anytime in the election year? If so, the incumbent party loses.
(2) Are stocks lower on Election Day than the end of the incumbent’s party convention (Aug 27th)? If so, the incumbent party has never won.
Don’t let what you think about politics change how you feel about investing. As Election Day gets closer, many investors will consider moving their money to the sidelines until the uncertainty is over. This is a mistake.
Markets typically rise prior to the end of uncertainty, and they also have risen regardless of the party in the White House. So, while elections have winners and losers, investors who stay the course should be winners.
*Investing involves risk, including the potential loss of principal. The S&P 500 index is used to represent the overall stock market. One cannot invest directly in an index. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass.
Emotions are a dominating force that impacts every aspect of our lives. The decisions we make, the interpretation of our experience, even our very personalities are all primarily influenced by our emotions. We are neurobiologically wired to create, feel, and think by emotion. In so many ways, our perceived realities are governed not by facts, but by feelings.
Psychologists believe that emotions drive 80% of the choices we make, while practicality and objectivity only represent 20% of our decision-making. This is because our brain has two sides, the thinking side, and the feeling side. The thinking brain is slow, rational, and objective. It deliberately, methodically, and logically reasons through information. The feeling brain is much faster. It is impulsive, emotional, and unconscious. It is also our default decision-making system.
How often do we describe the reason for a decision by saying, “It feels right?” Yet strangely, the mechanism we rely on most when making decisions is so fickle that it can be greatly altered even by what we ate (or did not eat).
This is why Dave Ramsey said that personal finance is not a math problem, but a behavior problem. Investors are emotional. Thus, they judge investment decisions mainly by emotion. This can have expensive consequences.
Most investors go through a recurring cycle that follows the market. This emotional cycle often leads an investor to make the wrong decision at the wrong time. You have heard the saying, “Buy low and sell high.” Logically, this means buying when everyone is feeling despondent (selling) and selling when everyone is feeling euphoric (buying). This is so much easier said than done.
One of many examples: In 2018, when the S&P 500 lost 4.38%, the financial analytics firm found that the average investor lost more than double that, at 9.42%. Investors lost money because they acted on emotion when markets declined. A study that same year published in the Journal of Financial Planning found that investors who implemented strategies to remove emotion saw returns up to 23% higher over a 10-year period.
As accredited Behavior Financial Advisors and Certified Financial Planners, we can help remove emotion from the equation and make wise financial decisions. Whether it is investments, estate planning, or a large purchase, we can provide the expertise that can make a positive difference in your financial future.
There is a giant pendulum that swings ever so slowly. When it gets to one extreme, the gravitational force pulls it back the other direction. Because of the Great Depression and World War II, the pendulum of national debt rose to an astounding 106% of GDP* in 1946.1 The pendulum took until 1974, or 28 years, to swing the other direction and get down to 23% of GDP.
With the back-to-back economic crises of the Great Recession in 2008 and COVID-19 in 2020, the debt to GDP ratio has swung dramatically back in the wrong direction. We now sit at 100% debt to GDP with a projection to get to 106% of GDP by 2023.2
What will be the long-term impact? Undoubtedly, taxes will go up. I recently heard it said, “The politicians that are telling you they can cut taxes are just bad at math.” If you look at history, tax rates shot up to 94% in 1944 for the highest tax bracket.3 That’s right, 94%! This was done with more marginal tax brackets. There were 24 brackets back then compared to just 7 today.
In 1965, the highest rate declined to 70%. It stayed around there until 1982 when the highest rate became 50%. Currently, our highest tax bracket is 37%.
I’m not a doomsday predictor. I don’t believe a new tax bracket will send rates up to 94%. However, I do worry about taxes going up for almost everyone. You can’t tax the “rich” enough to cover the current deficit and make the pendulum swing the other direction.
Thankfully, I believe there are prudent tools we can use to help protect you against future taxes. If you aren’t retired, you can contribute to a Roth IRA or Roth 401(k), depending on your income. If your income is below $139,000 (single) or $206,000 (married), consider a Roth conversion from your IRA or 401(k). If you are over age 70½, you can make tax free donations to a charity from your IRA.
These are just a few options to help protect against future taxes. For our clients, we will continue to review your personal financial plan to make sure you are prepared for the future regardless of what may come. If you want to schedule a review appointment, please contact us.
Mikal B. Aune Vice President of Wealth Management
*GDP or Gross Domestic Product is the total output of the economy for one year. SFS and its representatives do not provide tax advice; it is important to coordinate with your tax advisor regarding your specific situation. (1) https://www.washingtonpost.com/opinions/2020/05/27/this-is-not-your-grandfathers-debt-problem/ (2) https://www.bloomberg.com/graphics/2020-debt-and-deficit-projections-hit-records/ (3) https://fred.stlouisfed.org/series/IITTRHB
Your decision to retire may be one of the hardest you will make. A lifetime of preparation comes down to a single day when you leave the familiar day-to-day routine – not to mention the regular paycheck – and embark on a new adventure.
That nest egg you have been accumulating will need to provide a large portion of your monthly income along with Social Security and your pension, assuming you have one.
Imagine that you planned to retire in 2020. Should you retire in a year when markets are experiencing extreme volatility, and there seems to be an abundance of uncertainty when looking at the economic picture? What will happen to your retirement income if your nest egg balance drops?
Your fear is based on sequence risk. You are concerned that the market will continue to drop right at the point when you are hoping it will increase. Sequence-of-returns risk, or sequence risk, is the risk that an investor will experience negative portfolio returns very late in their working years, or early in the retirement years. The fear of losing money can cause an investor to become risk-averse in the short-term, discounting future opportunities for growth.
This chart illustrates the impact market returns can have on an investment portfolio. One illustrates negative returns early in retirement and the other positive returns early in retirement. Consequently, the average return in both cases is 4%.
Sequence risk is a real threat but can be managed in a retirement portfolio. Our Lifetime Income Plan diminishes sequence risk without locking investors into illiquid products with high fees and minimal flexibility.
The key is managing risk throughout retirement. Determining how much money you will need at different intervals is the backbone of the Lifetime Income Plan. Knowing these key points helps us to ascertain how much risk should be taken with an investment.
Let’s say you need $42,000 each year to supplement Social Security and other income. We would invest enough money to cover the income for five years in a very conservative investment. In this case, we are more interested in the security of the money than potential return.
This continues in segments through retirement, generally in 5-year increments. With each segment, we determine how much money will be needed and increase risk accordingly. The assets that will be used ten or more years out typically have a greater amount of risk.
The Lifetime Income Plan helps diminish the impact of volatility on your income and emotions. This helps you stay invested and gives you a greater opportunity to participate in market growth over time.
One thing is certain; risk is inherent to investing. If managed correctly, it can help you outpace inflation and maintain your lifestyle in retirement. For more information on how a Lifetime Income Plan can benefit you, contact an SFS Wealth Management consultant.
Graphic from RetireOne: hypothetical illustration does not represent the results of an actual investment. It does not reflect any investment fees, expenses, or taxes associated with investments. An average annual return of 4% is reflected for both investors. Annual withdrawals of $5,000 are taken at the end of each year.
Red-hot housing prices have impacted anyone looking to buy a home recently. Many people have wondered if they should buy now or wait. The answer depends a lot on the national real estate market, the local market, and your personal needs.
Real estate ebbs and flows, just like the stock market.1 Some national trends are making homes hotter in 2020:
(1) The pandemic: “More than half of the nation’s 100 largest metropolitan areas are seeing increased interest in the suburbs.”2 For example, in Manhattan, the contracts on apartments plunged 80% in May, but the interest in the surrounding suburbs skyrocketed. This flight is partly to people working from home that would rather work in a roomy house with a private yard.
(2) Shortage of homes: The U.S. supply of homes has never been lower in the last 50 years. This factor seems likely to persist.
(3) Interest rates: The Federal Reserve has worked to lower rates for the entire economy and wants to keep them low. Those who can are “rushing to take advantage of record-low mortgage rates and possibly even purchase larger homes.”3 If or when rates do rise significantly, it could be devastating to prices.
There are also other hidden risks in housing. Unemployment is still above 8%, and many struggle to make rent and mortgage payments. The federal eviction moratorium ends on December 31, 2020.4 This does not help everyone, and if nothing more is done, “Up to 40 million Americans could be at risk of eviction by the end of the year.”5 Evictions could spill over into lower prices in the short term.
Residential real estate in Utah is doing well. The economy has not shut down and has only 5% unemployment. Many tech and construction companies are hiring. This drives up demand and housing prices. However, if the pandemic’s economic impact spills over, there could still be a slowdown. If that happens, this sellers’ market could turn into a buyers’ market.
If you can wait to buy a home, you have some flexibility. You could build up your cash and use that for a larger down payment in a year or two. You could also use the time to watch for the house that you really want. As you look, it’s best to think of a home as a place to live and not as an investment.
What you should do depends on your future plans and finances. We would love to help you; give us a call.
(1) Investing involves risk, including the potential loss of principal. (2) https://www.cnbc.com/2020/06/18/coronavirus-update-people-flee-cities-to-live-in-suburbs.html (3) https://magazine.realtor/daily-news/2020/09/08/a-tale-of-two-markets-dream-homes-and-looming-evictions (4) https://www.federalregister.gov/documents/2020/09/04/2020-19654/temporary-halt-in-residential-evictions-to-prevent-the-further-spread-of-covid-19 (5) https://magazine.realtor/daily-news/2020/09/08/a-tale-of-two-markets-dream-homes-and-looming-evictions
When it comes to designating a beneficiary – everything!
It is hard to remember how many times we have named a beneficiary on a document or account. I would say it is even harder to remember who we named. The phrase “out of sight, out of mind” rings true.
The reality is the person or entity named as the beneficiary can trump your plans. Even after spending time and money creating a will and trust, you may have missed an important step. If the beneficiary is not named correctly or updated to meet changes in your plans, your desires will not be met.
Last month our Just for Women webinar focused on Wills and Trusts and featured Kent Brown of Strong & Hanni Law Firm. He shared several threats that can wreck an estate plan. One of those threats was naming beneficiaries. If you missed the webinar, you can view it on our website under Just for Women.
Here are some things to keep in mind when naming a beneficiary.
Naming one child as the beneficiary – We have experienced situations where a single child was named as a beneficiary. The intent was that the named child would split the money among the other children of the deceased. Unfortunately, the child often feels strongly that the money was intended for them alone and therefore does not distribute any money to their siblings. Do not assume a child will feel inclined to distribute the money as you wanted. If you intend that all your children will receive a portion of the account, name them all as a beneficiary and specify their portion. If your child splits the money as intended, they may have a problem with taxation. If the account was a qualified account, the full tax burden falls on the named child. This could push them into a higher tax bracket, reducing the amount distributed to siblings.
Naming a spouse and a child as primary beneficiaries – This often happens in error or because you believe your spouse will need help handling the money at your demise. Naming a spouse as the primary beneficiary gives them full access to the account. Including a child as an additional primary beneficiary does not make them a joint owner in the asset. Instead, it transfers the portion or share listed directly to them as an owner. They are under no obligation to share the money with the surviving parent. This can lead to serious financial consequences for the surviving spouse.
Naming a special needs child or adult– Receiving money as a beneficiary can impede a special needs individual from receiving benefits from assistance programs. A special needs trust can help ensure the individual gets the money intended for them and names someone to handle the money on their behalf, creating a layer of protection.
Not naming a contingent beneficiary – Unfortunately, your primary beneficiary may predecease you, or you may die in a common accident. If there is not a contingent beneficiary listed, the assets will have to go through probate. In essence, you have decided the asset will be handled according to your will, if you have one, or that the courts will decide how your assets will be divided. This can cost the executor of your estate a great deal of time and expense.
Not naming your trust – A common mistake after establishing a trust is neglecting to name the trust as the beneficiary or assuming the attorney has taken care of the change. You are the only one who can sign the document naming beneficiaries on your accounts.
Not updating beneficiary designations – There are so many accounts that require a beneficiary designation that is it easy to overlook an account when you have a significant life change. This could be marriage, divorce, death of a spouse, the birth of a child or newly adopted child, or the death of a named beneficiary. We have uncovered too many instances where the divorce took place years prior. However, the ex-spouse was still listed as the primary beneficiary on the retirement account at the employer. This type of error can cause unintended heartache and financial trouble for a surviving spouse.
Make it a priority to review the beneficiaries on your accounts now. Then each year, take a few minutes to review the current beneficiaries and make changes if needed.
Here are some of the accounts to consider when reviewing your beneficiaries:
I ran my first half marathon in August of last year. I have never been much of a runner, but when the metabolism starts to slow down, you have got to do something. I chose to run.
Before last year, my distance record was 5 miles. That record had been in place since 2003, and I thought it would always stand. Now, here I am with, six half marathons under my belt and another four scheduled for later this year. I find crossing a finish line after pushing myself harder than I thought physically possible to be very rewarding. It makes me happy. But what does running have to do with finances?
It often appears as though the system in which we live is driven by money. It is so easy to get caught up in account balances, market returns, and investment news. We have all heard the saying, “Money makes the world go ‘round.” In today’s world, it is hard to disagree with that.
There is no question that money is essential. Money provides stability and opportunity. I have chosen to make a career out of helping people make wise financial decisions because I believe it is important. It is good to have money and the things it can buy, but what I value most in life, money can’t buy.
We talk with you a lot about money. We review your finances and performance on a regular basis. We talk about markets, the economy, and your investments. We build a financial plan and update it often. But the reason for all of this is not money. What is most important to us is that you live the life you truly want to live. We want you to achieve your goals, and we believe it is our job to help ensure money is never an excuse not to.
Recently I completed a short race with my 5-year-old daughter. After crossing the finish line with her and seeing her excitement and joy, I realized at that moment I could not be happier. Doing what I love, with those I love, is what makes me happiest. This was another reminder that life is too short, not to be happy.
What is it that you want to accomplish? What do you want to experience? What makes you happy? If you do not have answers to these questions, I challenge you to find them. Maybe it is to run a marathon or to visit another country; maybe it is to buy a new home or to pay the current home off. Whatever it is, we want to know about it. And if there is a financial component, we want to help you achieve it. Whatever your goals and dreams are, make sure they are the focus. Make sure they are what makes your world go ‘round.
I love Warren Buffett’s metaphor about the tide going out. It’s hilarious and true. Jerome Powell’s response demonstrates the magnitude of the task at hand in 2020. Now, a confession: Jerome Powell never said he could stop the tide—at least not in words. However, he is trying to stop the economic tide from allowing struggling businesses to borrow more and more money until the current global healthcare crisis is over.
A little background: When the federal government exceeds its budget, it must borrow. There is only one government agency where this does not apply, the Fed. My favorite metaphor for the Fed is the hammer. To a hammer, everything looks like a nail. Whether we are in a real estate crisis or a global pandemic, the Fed has one response: create money. And because it does not have to borrow, there is no limit to the amount it can make. The Fed wields a hammer of infinite size.
Just as you may have projects at home that require other tools, it makes sense that a hammer cannot solve all of America’s problems. A pandemic seems like it may be one of these. It has not stopped the Fed from trying. In less than 3 months in 2020, the Fed created more money than it did during the previous 12 years combined. (That includes the 2008 Great Recession and the trillions of dollars to get out of it.)
A consequence of the unprecedented government intervention is a massive amount of wealth creation. The Fed’s money goes mostly into debt markets, which pushes prices higher and makes the owners of assets wealthier. The wealthiest 10 percent of Americans own approximately 80 percent of market assets, so there is an unintended consequence of increasing the wealth gap. This is not the Fed’s fault exactly. Remember, it may have unlimited amounts of money, but it is really limited in how it can spend it.
You may be wondering, doesn’t printing money create inflation? Why haven’t we seen it in the last decade? Inflation is rising prices. It has averaged only 2 percent despite the $7 trillion created by the Fed during the previous 12 years and the $27 trillion borrowed by the federal government, most of this over the last 20 years. Instead, let’s describe it as follows: “Inflation is when prices go up for the stuff you want.” By that definition, I think inflation has been higher than 2 percent.
So, will we see inflation get even worse? All it takes is for demand to grow faster than supply, but this hasn’t happened yet. Consider investors like Jeff Bezos, Bill Gates, and Warren Buffett. When the Fed pushes up the value of their investments, do they buy another home or a big-screen TV? The wealth creation that the Fed engages in is unlikely to turn into major inflation unless it creates a significant increase in demand. Once consumers get accustomed to rising prices, then further increases may follow.
If the Fed had written checks out to every American for $21,000, there would have been a massive increase in spending. Demand would have been way beyond supply, and the prices of homes, cars, and other items would have skyrocketed. The Fed cannot do this, and it wouldn’t want to. Stable prices and full employment are its two mandates.
However, I believe that a more mild increase in inflation may come in the next decade. While the Fed’s money went into financial assets, there was an effort by the federal government to help Americans more directly.
The CARES Act provided $1,200 in cash to most Americans, including approximately 70 million children and over a million deceased. In addition to this, around 20 million unemployed Americans received a $600 per week boost to unemployment benefits.
All this adds up to a lot of extra stimuli, and it has had a more direct impact on spending, saving, and even investing. Approximately 30 percent of all income is now coming from the government.
The federal government is $27 trillion in debt, which is well beyond the size of our entire economy. And there may be even more stimulus coming.
As this stimulus works its way into the economy over the coming years, we may see inflation begin to rise for the first time in a long time.
Another potential impact of the Fed’s actions is also unintended. We call it moral hazard. If we avoid the pain and devastation of recession, then when will we learn the hard lessons?
Finally, will all this help productivity and innovation or hinder it? Will we have to pay off any of this debt, or will we use inflation to make it less meaningful? Only time will tell.
Even with all the uncertainty, the Fed firmly believes it does not have much choice. Jerome Powell likes to describe the Fed stimulus as a bridge to keep Americans out of financial harm until this crisis has passed. This is what I would call the Great Financial Experiment of 2020. This is not only happening in the United States but all over the developed world.
The success so far has been stunning and without major unintended consequences, but it’s also still early–very early. So, as investors, we look for opportunities to participate, but we never forget the risks. Only time will show if the United States of America and the rest of the developed world successfully stopped the tide from going out.
By now, if you have accounts with SFS, you have received a new form called Customer Relationship Summary (CRS) from Securities America and an ADV Part 3 from Smedley Financial Services. So, why are you getting these forms, and what do they actually mean to you?
There is a new regulation that is designed to put your best interest first. It is called Regulation Best Interest, or Reg BI for short, and it went into effect on June 30th, 2020.
Reg BI requires an investment professional to act in your best interest and hold themselves to high standards of disclosing all important information, caring for their client, reporting any conflicts of interest, and maintaining strict compliance.
Form CRS is intended to explain the customer relationship with our Broker-Dealer, Securities America. This form clarifies the difference between investment services and advisory services and explains the difference between brokerage and advisory fees. It also details how the Broker-Dealer makes money and any disciplinary history for Securities America.
Form ADV Part 3 is specific to Smedley Financial. This form is intended to clarify the types of services we can provide, the fees you may pay, our fiduciary obligation to act in your best interest, any conflicts of interest, how we make money, and the fact that we do not have any disciplinary issues.
These forms are a good step forward towards putting a client’s best interest first. However, in my experience, most clients already expect this of their financial advisor.
The good news is that since the beginning, Smedley Financial has been a fiduciary and has always strived to put our clients’ best interests first. And we will continue to do so. For our clients, Reg BI should not have any meaningful impact. It should raise the bar for other “advisors” to make sure they hold themselves to the same fiduciary standard.
Reg BI also clarifies the sometimes-muddy waters of who can call themselves “advisors.” Professionals who just sell insurance or a product, or who only process trades as a stockbroker, cannot call themselves “advisors.” An “advisor” is someone who has the appropriate securities license to purchase stocks and bonds and is also licensed to give clients advice.
At Smedley Financial, we hold ourselves to an even higher standard by not only being investment advisors but also financial planners and life-centered planners. Our financial planning helps you figure out what resources you have, will have, and will need in order to meet your goals. Our life-centered planning helps you figure out how to live the life you want with the time you have left on this planet.
We appreciate you as clients, especially during these unusual times. If you have any questions regarding the forms provided or would like to review your plan, don’t hesitate to call us.
The last five months have been record-setting in more ways than we could have imagined. The impact has been wide-reaching – and I am not referring to the COVID-19 virus numbers.
Technology has provided opportunities that have businesses, including ours, to service clients and continue to run their operations while working from home. It allowed students to continue their studies remotely and check in with their teachers when needed. We have access to almost anything: news, shopping, connecting with family and friends, and investment markets, all of which are amazing. In fact, it is hard to imagine what we would have done without technology.
Newer technology has opened the doors for people to save and invest at entry levels without barriers, such as minimum investments. Apps have become popular among the DIY crowd, which are too often young and inexperienced investors.
Securities regulators have spent countless hours creating Regulation Best Interest, as explained in Mikal’s article. Regrettably, they have done little to educate and protect DIY investors who are not prepared for the leveraged risks and hidden fees of this new world. One of these investors even paid the ultimate price.
An app on a phone gives anyone fingertip access to investing. One of these apps offers game-like screen appearances, prompts users to place trades when looking up a stock ticker, and displays falling confetti to make them feel good when placing a trade. These apps even allow investors to leverage their investment through options – something professionals are required to have tested and trained for before offering them to their clients. What these apps do not offer is common sense or an advisor to help investors understand the associated risks of specific investments. They lack education and risk assessment before making speculative, high-risk investments.
We have heard disastrous reports of investors borrowing on credit cards and accessing home equity loans to invest, only to lose the lion’s share of their investment. As financial advisors, we find this very disheartening.
All investors should be educated about their investment options, risks, and costs. Smedley Financial makes a concerted effort to provide you with information and education regarding investing through our Money Moxie and Money Matters newsletters, regular webinars, seminars, and, most importantly, one-on-one meetings with clients. If you have questions or need more information regarding finances or investing, please reach out to our wealth management advisors.