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.
During these extraordinary times, many people have found themselves out of a job. This often leaves people feeling helpless, especially if it is the first time this has happened. Here are some things you can do to help make the transition and tasks ahead feel a little less daunting.
Apply for unemployment benefits. Applying for unemployment benefits can help you financially while you search for another job. While unemployment benefits are usually less than you made previously, it can help provide essentials for your family. You can apply for unemployment benefits online or go to your local Department of Workforce Services office to apply in person. Up until July 31st, people on unemployment were receiving an extra $600 per week as outlined in the CARES Act that was passed in March. There are talks of a new bill being passed to extend the additional unemployment, but nothing has been passed as of the writing of this article.
Revise (or create) your budget. Now that you aren’t bringing in income, you need to make sure you stick to your budget. Do your best to cut down on unnecessary expenses, which often come in the form of recurring charges like Netflix, Hulu, Spotify, etc. If you weren’t previously using a budget, make one. Think of what is possible to cut from what you usually spend. Things like eating at home more often can make a more significant difference than you think.
Rework your resume. There are many free online resources and articles to help you make your resume the best it can be. I would also suggest having someone else look over your resume to make sure it all makes sense.
Begin your job search. Nobody enjoys the job hunt, but when you’ve been laid off, it becomes necessary. There are a lot of options for searching for jobs online like Indeed, Monster, and LinkedIn. Check those places, but don’t discount things like word of mouth and even newspaper listings. If you’re local, you can also check out jobs.KSL.com.
Stay productive. Many people often find themselves unproductive during times they aren’t working. Try to stick to a schedule that allows you to spend time on your hobbies, exercise, and job searching. Keep in mind that you should also plan to end your job search at say, at 5 o’clock. Jobs will still be there in the morning. Make sure to take care of your mental health in these trying times too.
Decide what to do with your 401k. You have a few options here: you can roll your 401k to an IRA that you manage yourself, or you can have a financial advisor manage it. You can also roll it into your new 401k when you get a new job. Each option has pros and cons.
If you have questions about this, we are happy to help. Please give us a call.
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.
No one can predict the future. Especially not me. On my LinkedIn page in March 2019, I posted: “I wouldn’t be surprised that we have some good growth in stocks for (2019). You usually have good growth right before a recession. However, 2020 could be a challenging year.” I had no idea it would be as challenging as it has been!
Even though I was right, I was not predicting the future. I was just following statistics and other economic indicators. Little did I know that a global pandemic would stall the U.S. (and world) economy and send it into a freefall. This yanked the 1st quarter into the red. Now, all we need to meet the technical definition of a recession is for the 2nd quarter to be negative as well.
Stocks are not the economy. There has never been a better example of this than the year 2020. The economy is hurting. Consumer spending is down double digits, and unemployment is near 20 percent.
Stocks, on the other hand, have been improving as the government has printed money. Some pundits think stocks have already bottomed and are just headed up from here. Others think we will head lower towards the mid-March bottom. Some have even suggested that this economy looks a lot like a depression. These are all conjectures. No one can predict the future.
This uncertainty leads people to question their financial future: Will I be able to pay my bills for the next 6 months? Will I be able to retire when I planned? Will my nest egg be enough to see me through retirement?
Years ago, questions like this led us at SFS to create a system that is simple yet powerful. It is designed for times like these. The goal is to provide an inflation-adjusted income for the rest of your life, regardless of the storms that may come. It helps remove a lot of the uncertainty around the security of your finances.
We call it a Lifetime Income Plan. The concept is simple: you segment your assets into time frames based on when you will need income. The assets set aside to generate income for the next 5 years should be conservative and protected.
The successive 5-year time segments should be moderate to aggressive, depending on the time frame and your personal risk tolerance. This system can be used whether you are already in retirement or just starting to save for the future.
While the design is simple, the application can be much more complex. As always, we recommend consulting with one of our Certified Financial Planners (CFP®) who are well versed in income distribution strategies.
No one knows exactly how things will turn out with the Coronavirus and how large or long-lasting the impact will be. However, with careful planning, you can help prepare your financial future for any storm that comes.
Keep investing! The 401(k) implements an effective purchasing strategy called dollar- cost averaging. This strategy involves making regular and continuous fixed-dollar investments. But it is more than just a payroll deduction plan. Dollar-cost averaging removes the risk of trying to time the market.
By using dollar-cost averaging in a long-term investment account, the average cost per share ends up being less than the average price per share. This is because you buy less shares when prices are high and more shares when prices are low. In other words, volatility can work in your favor. So keep investing.
2. You are no longer working for the sponsor company but are employed elsewhere
You have some options.
(1) You can take a partial or full distribution. In most cases, this is a taxable event and may carry additional tax penalties. In rare situations, is this a good idea. Speak with a professional advisor before choosing this option.
(2) You can leave your 401(k) with your previous company. You can no longer contribute to it, but it will continue to perform based on the investments you have selected.
(3) If your new employer offers a 401(k) and you are eligible for it, you can roll your old 401(k) into your new 401(k) plan. This is a tax-free rollover, and you will need to select new investments based on what the new plan offers.
(4) You can roll the old 401(k) into an IRA. In most cases, this is what we recommend. An IRA gives the account owner more control, more investment options, and better planning opportunities than a 401(k). Like a 401(k), an IRA is a retirement account with annual maximum contribution limits and early withdrawal penalties. A rollover is not considered a contribution, and therefore any amount can be rolled.
3. You are no longer working for the sponsor company and are not employed
You have the same options as above, with the obvious exception of rolling to your new 401(k). If you are retired, however, the rollover option to the IRA may be even more appealing. When it comes time to take distributions from your retirement accounts, the IRA has some significant advantages. Some of these include better risk management strategies, tax-saving distribution strategies, and avoiding mandatory distributions from Roth accounts.
4. You need financial help due to COVID-19
The CARES Act allows some individuals to take early withdrawals from retirement accounts in 2020 without the early withdrawal penalty. If you have been diagnosed with COVID-19, have a spouse or dependent diagnosed with COVID-19, or have experienced a layoff, furlough, reduction in hours, have been unable to work, or lack childcare because of COVID-19, you may qualify. Withdrawals may impact your tax liability, so speak with a financial advisor before taking an early distribution.
I often include the phrase, “Past performance does not guarantee future results,” to remind us that uncertainty will always be an integral part of investing. I also repeat the words, “Long term,” frequently to help keep perspective in the face of uncertain times.
Warren Buffett understands uncertainty and long-term investing. He is one of the wealthiest individuals on the planet and one of the best investors of all time. Recently he gave us a glimpse into how he is viewing the extreme pessimism and optimism on Wall Street. On May 2, 2020, Warren Buffett conducted a virtual shareholder meeting. In the discussion, we learned that Buffett has been selling some and holding much of his investment portfolio during the Covid-19 pandemic. With around $137 billion in cash, many people thought Buffett would be buying aggressively. We also learned how he is viewing short-term and long-term investing now that he is 89 years old:
I hope I’ve convinced you to bet on America. Not saying that this is the right time to buy stocks if you mean by “right,” that they’re going to go up instead of down. I don’t know where they’re going to go in the next day, or week, or month, or year. But I hope I know enough to know, well, I think I can buy a cross section and do fine over 20 or 30 years. And you may think, for a guy, 89, that that’s kind of an optimistic viewpoint. But I hope that really everybody would buy stocks with the idea that they’re buying partnerships.
At the age of 89, Buffett is still thinking 20 to 30 years into the future. That’s an important lesson for all of us because the likelihood of making money increases with time.
The Dow Jones index is made up of 30 stocks, so it’s not a comprehensive example, but it is perhaps the oldest index. Over the last 100 calendar years, the probability of a positive return in any given year was 69%. That’s not bad, but that means that 31% were negative. Now that’s uncertainty. At the extremes, the Dow lost over 50% (1931) and gained 63% (1933). That’s what we call short-term.
I would define long-term as 10 years or more. It makes a big difference. The Dow was positive 83% of the 10-year periods and 96% of the 20-year periods. Only during the Great Depression were the 20-year numbers negative, but any investor who could have stayed invested would have done well in the latter half of the Depression and in the decades to come. Through these 100 years, the Dow averaged a 5.7% annual return (and that does not even include dividends).
So, while uncertainty will probably always be difficult to embrace, time can be our ally. Warren Buffett is choosing to think this way at the age of 89. I firmly believe that the same perspective will be beneficial to us as we continue through the 2020 Coronavirus pandemic and beyond.
*The Dow Jones index is often used to represent the U.S. stock market. One cannot invest directly in an index and of course, past performance does not guarantee future results.
Back in March, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed. It was designed as a stimulus bill that would provide relief and assistance to millions of Americans affected by the pandemic. Here are three things you should know about the CARES Act.
No Required Minimum Distributions for 2020 This year, you will not have to take out a required minimum distribution from your qualified retirement accounts. The waiver for this year also includes any inherited retirement accounts.
We know many of our clients also like to take advantage of qualified charitable distributions to donate their required distributions directly from their IRAs to a charity, tax-free. If you are over age 70 ½, you can still do this in 2020. It may even be advantageous for you to donate money from your IRA to a charity. This year, since you won’t be required to take money out, it will require more evaluation than in previous years to determine if it is still beneficial for you.
Unemployment Benefits Unemployment benefits have been expanded, and individuals will be eligible for an additional $600 weekly benefit through July 31, 2020. Additionally, individuals will also have 13 weeks of federally funded benefits through 2020 for people who exhaust their state benefits. Another added benefit from the CARES Act is for people who would not normally qualify for unemployment benefits like independent contractors, part-time workers, and self-employed individuals. They will now also be eligible for benefits.
Penalty-free Withdrawals from Retirement Accounts The 10% early-distribution penalty tax that normally applies to distributions made before age 59 ½ is waived for distributions up to $100,000 relating to Coronavirus. You must be impacted by COVID-19 for the waiver to apply; this would include being diagnosed with Coronavirus, being unable to work due to lack of child care available, or being furloughed, laid off, or have reduced hours.
While you will still have to pay income tax on any withdrawal, you’ll be able to spread the payment of those taxes over three years. If you decide to repay the withdrawal back into your account within three years, you will not owe income tax, and it will not be counted toward yearly contribution limits.
*Remember to speak to one of our wealth advisors before making the decision to tap into your retirement account.
When asked, “When are they going to retire?” Most people reply with a specific age or date, something they have pinpointed and are looking forward to with anticipation. Unfortunately, only 53 percent of retirees leave the workforce based on their planned time-frame. Forty-seven percent are unexpectedly forced into retirement at an early age. This staggering number supports the importance of having a retirement plan that prepares you for all outcomes, those you anticipate, and those you don’t.
In a Federal Reserve study of non-retirees, 40 percent responded they feel their retirement savings are on track.
Sadly, 25 percent responded that they have not prepared for retirement and have no retirement savings. This can be due to many factors. They may work for a company that does not provide employees with retirement savings options such as a 401(k). Often they feel like they should do something but are overwhelmed and do not know how to start or where to turn for advice. If you are in this situation, please reach out to us for assistance.
The number of DIY investors with self-directed accounts changes as they reach their retirement years. This could be for a number of reasons. One is the complexity of turning a lifelong savings plan into an income-producing plan. Like climbing a mountain, the greatest risk comes on the way down. The same is true with retirement savings. Many fear taking on the wrong type of risk and jeopardizing their future income.
Source for all data: Federal Reserve Bank of St. Louis