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Financial Symmetry: Balancing Today with Retirement

When considering retirement, do you wonder what financial opportunities you may be missing? Busy lives take over and years pass without taking advantage. In this retirement podcast, Chad Smith and Mike Eklund unveil financial opportunities, to help you balance enjoying today so you are ready to retire later. By day, they are fiduciary fee-only financial advisors who answer questions about tax savings, investment decisions, and how to save more. If you’ve been putting off your financial to-do list or are just not sure what you’ve been missing, subscribe to the show and learn more at www.financialsymmetry.com. Financial Symmetry is a Raleigh Financial Advisor. Proudly serving clients in the Triangle of North Carolina for over 20 years.
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Now displaying: February, 2019
Feb 25, 2019

Money and relationships don’t always go hand in hand. Making you wonder if you and your partner are speaking the same financial language. If money is causing stress in your relationship, you are not alone. 31% of couples say that the biggest cause of stress in their relationship is money. We want to help you communicate better with your partner about money. On this episode, Allison Berger joins us to discuss four common financial disagreements in couples. Listen in to learn how to better your relationship with your partner and with money.

You spent how much on that?

Does one person in your relationship spend more than the other? Oftentimes one partner feels that the other spends too much. This is so common since opposites attract in relationships. Our partners help to balance us out. So what can you do if you feel that your partner spends too much? Communication is key. It is important to be on the same team and make sure that you have the same financial goals. You can create a financial plan to keep you in check and keep you both on the same page. This way you can see if you are meeting your financial goals. Having a financial advisor can also be a great way to get a 3rd party’s view on the situation. The advisor can help take an objective opinion when there are arguments about spending that arise.

Saving and investing takes coordination

One spouse generally enjoys security more than the other and the other prefers to spend more money. When you have a financial plan in place, you can coordinate how best to save and invest for your specific objectives. Paying yourself first is a great first step. Automating your savings makes life so much easier. One way to easily increase your savings is by doing so when your income goes up. You can simply increase your 401K contribution whenever you get a raise. Another way to save more is to look for opportunities to increase your savings. If you pay off a car you can use the money you used to pay each month for savings instead.

Deciding on how much risk to take with Investments

The most common question we hear centers around people wondering if they will have enough? To best answer this question, the amount of risk in your strategy will play a tremendous role. Everyone has a different risk tolerance when it comes to investing. Sometimes one partner prefers to take risky investments and the other prefers to play it safe. Once again communication is key to understanding how your partner feels about investing. First, you should think about what your financial goals are as a couple. Open communication and education can help you understand each other’s feelings about risk tolerance. Learning about investments can also help you feel more comfortable about investing.

Differing philosophies on debt

Debt can be an unnerving issue for some causing some to lose sleep at night. Understanding your feelings on debt as well as your partner’s feelings can help defuse arguments before they even pop up. People have different feelings about money based on past experiences. Often our concerns about money manifest in childhood. Learning both why you and your partner feel the way you do about money can help you better communicate your needs and come up with a financial plan that you can both agree upon.

Outline of This Episode

  • [1:27] The biggest cause of arguments in relationships is money
  • [3:22] What are the biggest disagreements with couples related to money?
  • [6:12] Does one person in the relationship think the other is too spendy?
  • [12:14] How much to save and invest and how much to spend?
  • [17:33] What is the best practice on the difference in risk in investment strategy?
  • [21:18] There can be a lot of emotions around debt

Resources & People Mentioned

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Feb 11, 2019

Our listeners and clients often ask: Is now a good time to invest? Or what should I invest in? We give feedback on both these questions in our 2019 Investment Outlook episode. Be sure to check out the show notes for this episode in particular as we provide detailed charts to help demonstrate our discussion. If you are curious as to whether now is the time to jump into the stock market, what role bonds play in your portfolio, or what the experts say about the future of the markets then you'll want to listen to this episode.

2008 Review

After logging strong returns in 2017, global equity markets delivered negative returns in US dollar terms in 2018.  Common news stories in 2018 included reports on global economic growth, corporate earnings, record low unemployment in the US, the implementation of Brexit, US trade wars, and a flattening US Treasury yield curve. 

Many are still wondering why should we invest overseas given returns in the US have been so strong?  Investors should remember that non-US stocks help provide valuable diversification benefits, and that recent performance is not a reliable indicator of future returns.  It is worth noting that if we look at the past 20 years going back to 1999, US equity markets have only outperformed in 10 of those years—the same expected by chance. We can examine the potential opportunity cost associated with failing to diversify globally by reflecting on the period in global markets from 2000­-2009, commonly known as the “lost decade” among US investors. While the S&P 500 recorded its worst ever 10-year cumulative total return of –9.1%, the MSCI World ex USA Index returned 17.5%, and the MSCI Emerging Markets Index returned 154.3%. In periods such as this, investors were rewarded for holding a globally diversified portfolio.

Stocks

Are there risks today to invest in the stock market?  Yes.  Have their been risks in the past?  Yes.  Through all these risks the global stock market has gone from $1 to $59 from 1970 to 2017

History has found certain periods have resulted in higher returns than others.  Part of this can be explained by starting valuation.  Valuation is one of the best indicators of long-term returns (i.e. 10 years), but it is a horrible short-term timing strategy.  One popular valuation metric we’ve discussed in the past is the cyclically-adjusted price-to-earnings (CAPE) ratio.  Instead of dividing price by the past 12 months of earnings, the CAPE ratio divides price by the average inflation-adjusted earnings of the past ten years.  The idea is to smooth out the good and bad years created by the business cycle.

Is the CAPE Ratio a good predictor of future returns?  According to a study by Research Affiliates titled CAPE Fear:  Why CAPE Naysayers are Wrong, starting CAPE Ratio has between a 48% to 91% correlation to future 10-year returns across 12 countries.  So yes, starting valuations do matter over the subsequent 10-year period.

In addition, below Exhibit 4 is the average future 10-year real return based on starting US CAPE Ratio. As of December 31, 2018, below are the current CAPE ratios of the major equity markets:

  • US Stock Market = 29
  • MSCI EAFE (int’l developed) = 15.5
  • MSCI Emerging = 12.5

Source:  https://interactive.researchaffiliates.com/asset-allocation#!/?currency=USD&expanded=tertiary&group=core&model=ER&models=ER&scale=LINEAR&terms=REAL&tertiary=shiller-pe-cape-ratio-box&type=Equities

As noted in our recent blog, Crystal Balls and CAPE, when one market (US or foreign) was trading at a material premium (such as today), the other market stock market outperformed over the subsequent 10-year period.

What is the purpose of bonds in your portfolio?

Our belief is that high quality bonds in your portfolio provide the following benefits:

  • Balance – diversification from equities
  • Safety – capital preservation
  • Income – interest payments

Bond returns are largely driven by the term and credit quality of a bond.  Long-term bonds experience bigger price movements for a given change in interest rates.  Investor are expected to be compensated for taking that extra risk as a result.  The same can be said for lower credit quality bonds such as high yield bonds.  As the current time the spreads – the gap between the yield on credit and Treasuries – have remained narrow by historical standards.  For bond investors, that means the compensation for taking on credit risk is relatively low, and the upside from here could be quite limited.

Future returns of bonds are highly correlated to the starting yield. Therefore, as of 12/31/2018 the yield on the Barclays U.S. Aggregate Index was approximately 3.28% which is depicted in the exhibit below.  Therefore, over the next 7-10 years investors can expect returns similar to starting yield levels. Overall, bond yields have increased over the last couple years, but remain low compared to historical levels.

How about Cash?

The Federal Reserve raised rates four times in 2018 and nine total adjustments over the past four years.  The benchmark interest rate is in a range of 2.25% to 2.5%.  The benefit of this is many investors have seen higher returns from their bank accounts but borrowing costs have also increased.  What will the Federal Reserve do next?  I have no idea, but below are the current market/Fed expectations as of December 31, 2018.  You’ll notice the Federal Reserve and market is not expecting material rate increases from this point forward.

Summary 

To summarize, with low returns expected for US stocks and bonds many investors allocated primarily to US stocks will be disappointed with returns over the next ten years.  As a result, individuals may need to either work longer or spend less than expected to reach their financial goals.

For current savers a market decline should be viewed positively as it allows them to buy stocks at cheaper prices.  For existing or soon-to-be-retirees it is important to understand your risk capacity and risk tolerance and adjust your asset allocation accordingly.  You’ll need equity for long-term growth, but it is important to have high-quality bonds for current spending.

What can you do about potential lower returns?  First, focus on what you can control (spending, taxes, estate planning, etc.) and your long-term financial plan.  If you don’t have a financial plan in place, it’s the perfect time to contact a fee-only financial planner such as Financial Symmetry.  Second, implement a long-term, disciplined investment strategy.  And no, buying the mutual fund/ETF/stock that has done the best over the last three years is not a strategy.  If you don’t have a disciplined strategy or want to learn more about our process click here to download our white paper.

Outline of This Episode

  • [1:37] Is now a good time to invest in the stock market?
  • [4:41] How do you evaluate when the best time to invest is?
  • [12:22] What is the purpose of bonds in your portfolio?
  • [16:53] What is the role of cash in a portfolio?
  • [18:20] What do the experts say?
  • [20:35] How do you prepare for lower returns?

Resources & People Mentioned

Connect With Chad and Mike

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Apple Podcasts <> Stitcher <> Google Play

Feb 1, 2019

What are the habits of successful investors? You may think that there are big differences between successful and unsuccessful investors. In the book Atomic Habits, by James Clear, he identifies the small habits that lead to success in life, these habits apply to investors just like anyone else. We all have intentions of doing the right thing, but there is a big gap between intention and action. Only about half of our intentions turn into actions. Join us on this episode to find out what sets successful investors apart from the rest of us.

See the Full Show Notes Here: 

https://www.financialsymmetry.com/6-habits-of-successful-investors-ep-77/

Small Habits Make a Lifetime of Difference

  1. Successful investors bridge the knowledge and action gap. They understand delayed gratification. Successful investors realize that small changes compound over time. The difference between success and failure is that the cost of good habits is in the present and the cost of bad ones is in the future. If you can delay your gratification to the future it will benefit you greatly down the road. This is true for exercise, eating well, saving, and investing.Successful investors don’t let emotions derail their strategy. In fact, successful investors find a way to deal with the boredom when most people don’t because the greatest threat to success is not failure, but boredom.
  2. Successful investors minimize the valleys of disappointment. These are the times when you don’t feel like you’re going anywhere. It’s a hallmark of any compounding process: the most powerful outcomes are delayed. Most people know that delaying gratification is the wise approach and all of us want the benefits of good habits, but those benefits are seldom top-of-mind at the decisive moment. For successful investors, that’s not the case.
  3. Successful investors possess the ability to implement their intentions. When one says they are going to do something, it’s not a general idea. The successful investor creates a specific plan with an actionable timeframe.
  4. Successful investors know how to track their habits. We all know that life is a balancing act. It is hard enough to balance work and family life. If you throw in exercise and fun then investing can quickly take a backseat. Tracking your habits can allow you to recover quicker after a time of difficulty. A good investor can compare their investing with planting a tree. You don’t go out and check on your tree daily to look for growth. Simply set up a system for care and watch it grow over time.
  5. Successful investors practice self-control. Self-control can be challenging in times of uncertainty. Luckily there are plenty of ways to automate investing. Hiring a professional is another way to help you practice self-control. You don’t have to try and be an expert at everything, put your investments on autopilot or ask for help.
  6. Successful investors refine and reflect on their strategy. Small changes can greatly improve your success at investing. When you make small changes it makes you more aware of your mistakes and opens paths to improvement. Small improvements now can lead to major improvements in the future.

Are you ready to implement these habits for success?

Making small changes can really make the difference in your life. When you bridge the gap between your intentions and actions you begin to change your habits and start on a path to success. Implementing these strategies can help to make you a better investor and they can be applied to many other areas of your life as well. Listen to this episode of Financial Symmetry to hear how you can create successful habits as an investor and these can bleed over to other areas of your life.

Outline of This Episode

  • [1:27] Half of all intentions actually turn into action
  • [5:45] Understand delayed gratification
  • [7:18] Minimize the valleys of disappointment
  • [11:00] Implement intentions
  • [13:14] Habit tracking
  • [15:20] Controlling your self-control
  • [19:11] Refine and reflect
  • [21:57] A recap of the 6 habits

Resources & People Mentioned

Connect With Chad and Mike

Subscribe To This Podcast

Apple Podcasts <> Stitcher <> Google Play

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