Info

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.
RSS Feed Subscribe in Apple Podcasts
Financial Symmetry: Balancing Today with Retirement
2020
November
October
September
August
July
June
May
April
March
February
January


2019
December
November
October
September
August
July
June
May
April
March
February
January


2018
December
November
October
September
August
July
June
May
April
March
February
January


2017
December
November
October
September
August
July
June
May
April
March
February
January


2016
December
November
October
September
August
July
June
May
April
March
February
January


2015
December


Categories

All Episodes
Archives
Categories
Now displaying: Category: Investing
Nov 2, 2020

While the FAANG stocks have been the most obvious enviable stock positions over the past decade, there are always success stories readily available to raise feelings of doubt and FOMO in even the most disciplined long-term investors.

Video recap: https://youtu.be/FN4xHoe8mHE

For example, investors who purchased $100,000 of Zoom stock at its IPO price of $36/share in April of 2019 would have earned a cumulative rate of return of about 590% and built a nest egg of ~$650k.

Zoom is one of the most recent examples of a company whose stock performance has exceeded expectations so wildly over the past 18 months that it is tempting to wish we were a part of the action and predict that those results will continue in the future, making us very wealthy in the process. After all, the path to extreme wealth is often created through very concentrated positions in individual companies. Examples include Bill Gates, Elon Musk, Mark Zuckerberg, Jeff Bezos, and many others. What made them so lucky? And why shouldn’t we be able to identify companies that will post results like these?

While individual stocks might not kill us, they do pose catastrophic risks that have the potential to be detrimental to our wealth. The nature of individual stock returns was studied in detail in Hendrik Besseminder’s 2018 study in the Journal of Financial Economics, “Do Stocks Outperform Treasury Bills?” which covered stock performance from 1926-2015. These are some of the key findings:

  • A minority of common stocks have a positive lifetime holding period return, and the median lifetime return is -3.7%
  • Only 3.8% of single-stock strategies produced a holding period return greater than the value-weighted market, and only 1.2% beat the equal-weighted market over the full 90-year horizon
  • Just 42% of common stocks have a holding period return greater than one-month treasury bills

While the data is compelling that the odds are stacked against us on individual stocks, often the allure is just too strong. There is no reward without risk, right? Some of us may still want to take advantage of the growth potential of an individual stock position for any number of reasons. Maybe you want to have ownership in the company you work for or do business with frequently. You may have also inherited or been gifted individual stock positions. These might even have sentimental value for your family. Or you may just have a feeling about that company. If you find yourself in one of these situations, we recommend setting a decision-making framework for how you will buy, hold, and sell these positions:

  • Perform a portfolio Deep Dive. If you are holding a portfolio of diversified mutual funds or ETFs, it’s likely you already hold a position in the stock(s) you are considering. This means you have already been riding the wave of success and benefiting from the stock’s stellar performance. It has simply been less visible, and the return was muted by subpar performance in other areas. Diversification means you will always hate something in your portfolio, but it also gives you the best odds of long-term success.
  • Decide how much. If after performing your portfolio analysis you still decide you want to buy an individual stock, you will need to choose a prudent amount. We recommend individual stock positions account for no more than 5-10% of your portfolio. You don’t want to be overexposed to a position that has the potential to kill you, even if it might make you a killing.
  • Consider Taxes. While we never want to let taxes guide our investment strategy, it is prudent to consider how tax-efficient the position will be. If the outsized returns you expect come to fruition it may be beneficial to purchase the position inside your Roth or Traditional IRA for tax-free or tax-deferred gains. Conversely, you may be in a high tax bracket now, but expect that to fall in a few years when you retire. This may present the opportunity to realize any capital gains at a lower rate or even 0% in the future. Take a peek at your financial plan for context.
  • Set target prices for buys and sells. Often the stocks that feel most attractive are those with fantastic recent past performance. They are also often very expensive relative to their peers and the broader stock market. Researching the company’s current and historical price to earnings ratio as well as estimates of fair market value is informative for making buy, hold, sell decisions.
  • Ask: What if I am wrong? Our natural tendency when faced with the prospect of incredible return potential is toward overconfidence. Make sure your answer to #2 is an amount you are willing to say goodbye to if the outcome is not what you hoped for.
  • Ask: What if I am right? If your hopes and dreams come true with a winning stock pick it is important to set rules around trimming that position back to target to periodically take profits, diversify, and reduce risk. Recognize that dabbling in individual stocks is a form of gambling, and it is important to know when to walk away.

For further reading on creating a decision-making framework and avoiding common investor pitfalls, we recommend Daniel Kahneman’s “Thinking Fast and Slow,” and“Decisive,” by Chip and Dan Heath. If you find yourself called by the Siren Song of an individual stock or deciding how to manage positions you may already own, please contact us to discuss the best approach for your personal situation in more detail.

Outline of This Episode

  • [3:03] If others can do it, why can’t I pick a winner? 
  • [6:20] Industrial change can happen very quickly and cause a shift in industries
  • [10:02] Perform a portfolio deep dive
  • [12:36] Don’t choose an individual stock to make up lost ground
  • [15:02] Consider taxes
  • [17:16] Set target prices to buy and sell
  • [19:39] Ask yourself “what if I’m wrong?”
  • [20:39] Ask yourself “what if I’m right?”
  • [22:34] List the potential scenarios

Connect With Chad and Allison

Subscribe To This Podcast

Apple Podcasts <> Stitcher <> Google Play

Sep 21, 2020

Every 4 years it happens: an election comes along and threatens everything. Or so it seems.

Video recap: https://youtu.be/7SkvyKEXH6s

Regardless of how you feel about the candidates, we’re here to discourage you from making fear-based financial moves. Learn how to overcome your emotions so that you don’t derail your careful long-term investment strategy. 

The media won’t help you achieve your financial goals

It’s hard to get away from the drama of the election coverage. It’s everywhere you look: on the TV, in the newspapers, and even from the notifications on your phone. This kind of round the clock, in your face news coverage can heighten your anxiety about the state of the world and even make you worry about your investments. It is important to remember that the media is not there to help you. Its goal is to sell advertising, not to help you achieve your financial goals. 

While 2016 may seem like a distant memory, many investors were concerned at the time that a Trump victory would surely tank the stock market.  We fielded a lot of calls leading up to the 2016 election discussing if a more conservative approach should be taken, at least until we had more certainty.

While Trump’s victory was a surprise to many 4 years ago, it certainly was not devastating for the stock market.  In fact, the S&P 500 with dividends returned 21.83% in the following calendar year of 2017. 

Investors who moved into cash to await more clarity would have swiftly regretted their decision.  Check out the chart linked below which shows annualized returns for each president dating back to 1969 with the red and blue bars depicting results for Republicans and Democrats.

www.financialsymmetry.com/how-should-i-position-my-portfolio-before-the-election

How to stay focused on long-term financial results during an election year

Staying focused on your long-term financial goals can be a challenge when the short-term seems so uncertain. People often feel tempted to time the market when the world feels up in the air. It’s important to remember that the market is influenced by many other events, not solely the election. So even if it seems that the election is the only thing going on, you need to stay focused on your long-term financial goals, stick with your investment plan, and avoid market timing.

Focus on the facts to help you through uncertainty

One way to help you stay focused on your long-term financial goals is by looking at the facts. If you were thinking that this might be a good year to sit out the stock market, you may want to think again. On average, the stock market return in an election year is 11%, which is well above average.

Another surprising fact is that it doesn’t matter to your portfolio who is in the White House. There is actually no correlation between stock market performance and which party leads the country. Listen in to find out which two presidents saw the same economic growth during their first three years in the Oval Office, the answer will surprise you.

Focus on what you can control

In investing, there are many factors that are beyond your control. However, that does not mean that your entire financial life is uncontrollable. Actually, the factors that you can control have a lot more to do with your financial success than which investments you choose. Think about all you can control: your cash flow, when you need money, when you stop earning income, what your income sources in retirement will be, how you pay for healthcare, and your estate planning. These controllables are much more important to your financial well being.

Outline of This Episode

  • [1:42] We go through this emotional roller coaster every 4 years
  • [7:35] Sometimes the best thing to do is nothing
  • [10:24] Have an investment plan and stick with it
  • [13:14] Focus on what you can control
  • [14:44] Today’s progress principle

Resources & People Mentioned

Connect With Chad and Mike

Aug 24, 2020

We know how important it is to save for retirement, but at the same time, it’s important to enjoy life now. In this episode, we’ll walk you through how to set up a framework for your investment strategy.

Short Youtube Recap: https://youtu.be/LRcH7hwbUYY

You’ll learn how important your behavior is to your investment success, how to think through your asset allocation choices and finally how to select the investments themselves. 

Investment behavior matters more than any investment you pick

What is your investment approach? How you make decisions with your investments can make or break your investment success. You may think that your returns are solely based upon which investments you choose, but the reality is that your investment behavior figures into your returns much more than any specific investment that you choose.

Think about last March. What was your reaction to that volatile market? Did you buy, sell, or do nothing? Even though it’s challenging to know how to react in those moments, in a volatile market every move you make counts.

The dominant determinant of long-term, real-life financial outcomes isn’t investment performance; it’s investor behavior. –Around The Year with Nick Murray

Asset allocation is also important to your investment strategy

The second driver to success in investing is your asset allocation. Asset allocation is simply the measure of how your portfolio is dispersed. How much do you have invested in stock and bonds? What percentage of your stocks are US-based? What percentage are international? Asset allocation also takes into account whether your stocks are large-cap, small-cap, etc. Your asset allocation is an important part of realizing your investment returns.

How we pick investments 

It’s important to have an independent mindset to help you pick your stocks. You don’t want to just follow the pack and do what everyone else is doing. There are several key areas that help us choose stocks at Financial Symmetry. The areas are ethical company culture, low costs, evidence-based, tax-efficient, and whether it is repeatable. We continually ask questions about the investments we choose. And if we don’t like the answers, we don’t invest in those companies. 

Do you have an investment plan in place?

What is your investment plan? Think about the strategy that you have used to make decisions about investing. An investment plan includes more than investments, it encompasses behavior and asset allocation. If you don’t have one consider working with a fee-only financial advisor. Having an investment plan could be the difference between a successful retirement and an uncertain one. What is your investment strategy? Try taking the quiz in our blog post to determine your investment composure.

https://www.financialsymmetry.com/do-you-ask-these-questions-when-selecting-investments/

Outline of This Episode

  • [2:25] Investment behavior matters much more than any investment that you pick 
  • [5:28] How to pick investments
  • [9:41] Active funds vs passive funds
  • [14:41] Process is important
  • [19:50] Think about the strategy that you have used to make decisions about investing
  • [20:12] Progress principle of the day - take the quiz

Resources & People Mentioned

Connect With Chad and Mike

Subscribe To This Podcast

Apple Podcasts <> Stitcher <> Google Play

Jun 29, 2020

No one can argue that the stock market has been tumultuous lately. During times of market uncertainty, investors seem to become even more certain about their predictions of the next stock market moves. 

Short YouTube Recap: https://youtu.be/ShmeDGPQ3l4

As people make these predictions over time the stakes get bigger and bigger. Listen to this episode to hear what steps you can take to fight this prediction hubris. 

Wealth isn’t determined by investments selected but by investor behavior

When markets become more volatile, the desire to control our outcomes becomes stronger. Our instincts pressure us to make predictive moves of what we feel is going to happen. This is when the ability to stay disciplined can have the biggest impact.

Otherwise, we find ourselves sweating out extreme buy and sell decisions that could cause you to miss the biggest market moving days. There was a good chance of this with our latest examples over the last 3 months, when you saw 3 of the worst 25 single day losses and 2 of the largest 25 day gains, happened in the S&P 500.

This is why we created a thought exercise to help you reflect on your investment strategy during times of market stress. We’re calling it the “R” Plan, where we provide five steps to fight the inevitable prediction hubris that occurs during these periods.

 The R plan 

  1. Remember your past predictions. Think about the predictions that you made over the past few months. How did those turn out? Do you remember that overwhelming fear we all felt in March? Do you remember 2008? How about the tech bubble? How did your stock market predictions turn out during those tricky times?
  2. Regret - The decisions you make in the short term can have a big impact on your long-term wealth. The day to day swings can be huge when the market is volatile. Retirees often feel that they don’t have the time or ability to make up for losses and many decide to sell and flee to the safety of cash. But deciding not to ride the wave can lead to serious regrets. 
  3. Resilience - We often forget how resilient the stock market is over time. People don’t acknowledge the fact that stock market declines are always temporary and that they advance 75% of the time. It’s also good to remember that bear markets are shorter than bull markets. Declines are temporary but gains are permanent
    1. Be more conservative if you are uncomfortable with the thought of losing half of your asset value.
    2. Diversify - we may have mentioned this a few times before.
    3. Hire a professional an investment planner as well as a financial planner
    4. Consider all your options
    5. Implement an investment strategy based on your financial goals
  4. Review - When markets are volatile take the opportunity to reflect on your portfolio. Think in dollar figures rather than percentages to make potential losses more real to you. Consider these tips as you review your portfolio
  5. Reward - Staying invested in a balanced portfolio with equity exposure has provided long-term rewards. Also, returns are strongest after the steepest declines. Sticking through the rough periods to get to the rewards is the hard part. Because it’s rarely a smooth ride. Returns in any given year have ranged from as high as 54% to as low as -43%. In fact, the S&P 500 had a return within plus or minus 2% points of this 10% average in only 6 of the past 94 calendar years, according to Dimensional research.

Resources

Outline of This Episode

  • [2:06] How can you fight against your instincts of making predictions?
  • [7:04] The decisions you make in the short term can have a big impact
  • [10:21] The stock market is resilient
  • [14:54] Tips to fight stock market worry
  • [20:54] Focus on the reward

Connect With Chad and Mike

Subscribe To This Podcast

Jun 1, 2020

In times of crisis and uncertainty, the potential need to access our savings seems to rise to the forefront. However, many of the accounts that we utilize for our savings are tied to certain restrictions. For example, the age 59.5 restriction for retirement account withdrawals without facing a 10% penalty, or HSAs and 529 accounts which must be used for medical expenses and education expenses respectively. These unique accounts are great tools to efficiently invest our savings given the tax deferred or tax-free growth. The issue though is what happens when we need funds to cover items that don’t meet the parameters and restrictions set forth by these accounts.

COVID-19 has me pondering my own finances and how well equipped they are to be flexible in times of need. These circumstances we’re in have produced many implications to our finances and society with a big one being the impact of education from pre-school age all the way through college.

We’ve seen a shift to more online educational resources in recent years and this has only escalated with the impacts of COVID-19. College students have spent the better part of their spring 2020 semester living at home and completing their coursework online. While certainly not the college experience these students anticipated, they’re still able to receive a quality education without the cost of living in a dorm room on campus or 3+ meals per day at the campus dining hall. We’ve even seen some refunds returned to students which if were withdrawn from a 529 account originally, then that money needs to go back into the 529 account to avoid taxes/penalties.

So what does this mean for our college savings strategy? For my two 2.5-year-old boys I’ve been saving monthly in a 529 account since they were born with intention to provide a portion of their college education from the 529 account. However, I’ve reconsidered this strategy this week and am shifting to utilizing a couple other accounts for their future savings. At Financial Symmetry we had many discussions with clients about not over-funding college savings accounts given the high taxes and penalty if not used for education along with discussions about savings for the parents own retirement and financial independence.

Roth IRA

A great savings tool as the contributions can we withdrawn at any time tax-free, and the earnings grow tax free and can be withdrawn after age 59.5. This is the primary account I’ll now be using for future education needs for my twin boys as I’ll be able to withdraw the contributions for the education if needed. If for whatever reason they don’t need those funds for college then no worries as I can retain the Roth IRA for my own future financial needs. With a 529 plan though, I wouldn’t be able to do that as those funds would be restricted to education expenses.

Brokerage Account

I ran the numbers on the actual advantage 529 accounts do provide. Say my monthly contributions add up to $15k and earn $5k over the years to equate a $20k balance. Those earnings would be tax free in a 529 account for education expenses. If those funds were instead in a taxable brokerage account and assuming a 22% federal tax bracket this would be $1,100 of tax due on those earnings. You must weigh the flexibility of a non 529 account vs. the tax savings it can provide. Also consider that with proper tax planning in a brokerage account could mean even less taxes due given accessibility of tax efficient funds, tax loss harvesting, donating earnings to charity as ways to lower that tax bill.

So who should use a 529 account?

  • For those that already are maxing Roth IRA contributions, contributing a large amount to 401ks, and maxing HSA contributions.
  • Those who exceed the AGI limitation of Roth IRAs and are unable to utilize the back-door Roth strategy
  • High probability of attending private grade school as 529 accounts can now be used for earlier education than college.
  • If grandparents or others are making gifts to the child, then a 529 account is still a great vehicle to receive those gifts.
  • If you live in state with tax deduction for 529 contributions (North Carolina does not offer this).

Certainly nothing wrong with using a 529 account as you’re still saving for your children’s future needs, but just consider there are other vehicles that may be more appropriate given your financial situation. Also, depending on your financial situation there are other factors to consider such as financial aid.

Resources and Other Podcast Episodes

Best Tips for Your Young Child’s College Savings

Great Options to Save for Your Child’s College Education

Tax Breaks and Loan Options to Pay for College

My Best Spring Break Ever (The Cost of College)

College Planning Night

 7 Ways to Use Your 529 Plan

May 18, 2020

Why is the stock market doing so well when the economy is not?

Short Youtube recap here: https://youtu.be/QubNZjHHN04

With headlines about skyrocketing unemployment and an impending recession, how has the stock market rebounded so quickly? Despite the historic drops in March, the S&P 500 is only hovering in a range 10-15% from its overall highs. While the stock market and the economy are influenced by each other, there are key differences that emerge during market extremes.

The economy has taken a beating

We have all heard the negative news surrounding the economy. It seems to be one of the only topics that news channels talk about. GDP declined 5% in the first quarter and is expected to decline by 20-30% in the second quarter. Unemployment has shot up at a historic pace from 5% to 15% in just a few short months. However, the Federal Reserve and the CARES Act have helped keep people and companies on their feet.

Why is the stock market doing so well?

The stock market went through record-setting drops back in March but since then it has bounced in the 35-40% range off the lows. We are still nowhere near the all-time highs that preceded those March declines, but the S&P 500 continues to rise and has been trading in a range 10-15% below it's all time highs reach in February. This creates confusion for most in the face of terrible economic headlines. One reason is that companies and investors are constantly looking at what is to come. They aren’t making decisions based just on the next 6 months, instead, they are projecting the growth over the next 5-10 years. It’s also important to remember that for every distressed seller there is a buyer. Investors are considering their bets for the future and if they anticipate we've seen the worst, then better than expected potential outcomes can drive stocks higher.

The stock market recovers before the economy

Historically, the stock market tends to make a recovery before the economy. For example in 2009 the stock market hit its bottom in March, but the country continued in its recession until the second half of that year. World War II is another example. The stock market was up every year during that period, despite all the turmoil going on in the world and the restrictions that were put in place by the war.

What will happen in the stock market going forward?

Well, unfortunately, we don’t have a crystal ball. But there are plenty of opinions you can find from watching the headlines or talking to your neighbors. This type of information can be detrimental not only to your mental state but also to your pocketbook. Allowing your emotions to take the investing wheel, can leave you second-guessing your investment strategy. In fact, the next time you want to look at your investment statements, we'd suggest opening your financial plan instead. You’re better off focusing on what you can control, like your risk tolerance, your rate of saving and spending, and your tax situation. Evaluating how your personal economy has changed, can leave you better positioned for the long-term. This allows you to have the appropriate investment allocations, so your worry can be abated, no matter how wild the stock market or economy gets in the short-run.

Outline of This Episode

  • [1:27] Investments, forecasting, and good investments strategy
  • [5:14] The stock market looks forward
  • [6:24] What will happen with the economy and the stock market going forward?
  • [9:09] The stock market doesn’t trade on good or bad, simply better or worse
  • [11:43] Focus on what you can control

Connect With Chad and Mike

Subscribe To This Podcast

Apple Podcasts <> Stitcher <> Google Play

Mar 23, 2020

We’re all surprised at the speed of changes the coronavirus has brought in our lives. Working from home, school closures, and social distancing have become our new norms. Stock markets have fallen in to a bear market in less than a month. Uncertainty related to COVID-19 grows daily, as we all know the amount of new cases are destined to rise.

It can be hard to find positives through the barrage of more disappointing news each day. But there are steps you can take to prepare your portfolio during this bear market. In today’s episode, we share 7 tips to help ease your worries during this challenging time.

Behavior Determines Results

We all feel nervous about stock market drops. Despite bear markets happening an average of every 6-7 years, it never gets easier to handle emotionally. During these times, investment behavior determines your returns more than the investments themselves.

Having an investment plan beforehand adds discipline to your decisions amidst the turmoil. If you’re questioning what you should do, then referring back to your plan will remind you of your highest priorities.

When you think about it, you only really have 3 options to choose from.

  1. Sell and go to cash
  2. Hold tight and don’t do anything
  3. Buy and take advantage of the discounts

With the first one, being much more damaging long-term than the others. To cope with this, we’ve put together seven things you can do to help ease your worry so you are better prepared to make more sound financial decisions.

7 things you can do to prepare your portfolio during a bear market

  1. Don’t react to panic – Panic is the enemy of a sound investment strategy. In the heat of a decline, is not the time to rush into irrational thinking. Even though it’s difficult to fight your emotions, your investment behavior will determine your return more than the investments themselves.
  2. Write down how you’re feeling – Do you remember how you felt in 2008? With the passage of time, our brains rewrite our history. If you write down how you are feeling now, then you can reflect back and read how you really felt during that time period rather than reciting stories your brain selectively chooses to remember. This will help you more accurately temper or accelerate your risk once things start to look up again, depending on your situation.
  3. Take advantage of tax-loss harvesting – Help your future tax bill by making some moves now. Tax-loss harvesting is a strategy that is used by selling one holding that has a loss in a taxable account to buy a similar holding, so that your overall allocation doesn’t change. You can then use the realized loss to offset investment income (and up to $3k of ordinary income) in the future. Often there are a few investments that you may have been holding because of large capital gains. This may now allow you to exit those holdings and bank realized losses providing a nice silver lining.
  4. Roth conversions – If you were looking to convert money from a pretax IRA to a Roth IRA then this may be a good time to evaluate. With stock market values lower (currently over 30%), IRA accounts could be significantly discounted. If converted to a Roth IRA, the growth that occurs when the market recovers would then be tax-free. This maneuver takes careful analysis for your specific tax situation as the IRA conversion will be taxable.
  5. Could be good buying opportunity – This might be a good time to think about dipping your toes back into the water. The hardest times to buy are when you typically get the best returns. Depending on your cash flow needs, this could be a very attractive long-term buying opportunity. No one knows where the bottom will be, but by buying now you’ll be saving 30% from just last month.
  6. Focus on what you can control – You can’t control what’s happening in the stock market but you can control your spending. You can also think about other controllable actions like whether you have enough life insurance or if your estate documents in place.
  7. Having a financial advisor can help you – if you are struggling right now and doing it all on your own an advisor can help you talk through your feelings and use the tools you have in your toolbox.

Outline of This Episode

  • [1:27] Don’t rush into irrational thinking
  • [5:58] Record how you feel now so you can reflect on it later
  • [7:23] Take advantage of tax-loss harvesting
  • [10:25] Roth Conversions
  • [14:26] Focus on what you can control
  • [17:36] Having a financial advisor can help you walk through your feelings

Resources & People Mentioned

Connect With Chad and Mike

Subscribe To This Podcast

Mar 6, 2020

Cornoavirus concerns continue to impact the financial markets, as have all the numberless crises that have gone before it.

While the potential human and economic effects are very unsettling, what actions should a prudent investor take given this new development?

Short Video Recap Here: https://youtu.be/Wsy6OTuY-yI

It remains impossible to predict when and how this problem will be resolved.  Likewise, it is impossible to know when and how the markets will anticipate (or react to) such a resolution. 

In this episode of the Financial Symmetry show, hosts Chad Smith and Mike Eklund, evaluate all the available information to determine how you should approach your investment strategy.

Market declines are a regular occurrence and happen frequently. Selloffs provide an opportunity for investors to absorb new information, squeeze out excesses and reset values to more attractive levels.

For existing retirees, we set-up portfolios to include 5-7 years’ worth of high-quality bonds/cash to absorb market declines.  For savers, market declines are great news as it allows you to buy stocks at lower prices through regular contributions.

We understand the desire to try to head off market declines by moving into safety. However, our view is that the only way to capture the full permanent returns of equities is to ride out their temporary declines.

The danger of trying to time the market is that you will sabotage your personal investment strategy by getting out at the wrong time and then compounding that by getting back in at the wrong time.

Summary

  • Fear is a natural reaction.
  • It's impossible to predict the future.
  • There is always uncertainty in investing.
  • Disciplined investing is hard.
  • If you are feeling uncertain, review your financial plan before your portfolio.

Other Helpful Links

The Financial Symmetry Podcast is an original podcast from Financial Symmetry in Raleigh, NC. To learn more about the show or the past 105 episodes, visit https://www.financialsymmetry.com/retirement-podcast/.

The hosts and guests in this video do not render or offer to render personalized investment or tax advice in this podcast. This podcast is for informational purposes only and does not constitute individualized advice or a guarantee that you will achieve a desired result. You should consult with appropriate tax and financial advisors for advice specific to your situation.

Jan 27, 2020

How do you best invest at all-time market highs? In this episode, we are walking through the strategies and disciplines you'll need to be a successful long-term investor. 

Short Youtube recap here: https://youtu.be/fEXnQ8GaCuk

Visit full article notes here: https://wp.me/p6NrVS-3i0

Short-term market forecasting is impossible to predict

We often get the question of whether people should continue to invest given the all-time market highs. Well, let’s take a look back to just a year ago. At the end of 2018, the U.S. stock market declined by 20% and everyone was worried about a potential bear market. But it turned out that 2019 was a fantastic year despite all the worries.

We can’t tell you when will be a good time to invest in the short-term. No one can. No one has a crystal ball that can predict those outcomes. It is important to formulate a decision-making process that is not outcome-based. Financial decisions should always be processed based instead. 

What does the long-term history of investing tell us?

Think about where you were in December 2009. You probably weren’t too optimistic about the economic future. But it turned out the S&P 500 was the best place to invest over the past 10 years. But in the 10 years preceding it was the worst place to invest. 

There is never an easy time to be an investor. Investing always involves risk and many see that risk as a reason not to invest. There is always a risk and plenty of reasons not to invest. But when you look back, you’ll realize recessions, while painful, happen quickly but the market rises over the long run.

A diversified portfolio will always include something you don’t like

After the S&P’s strong run the past 10 years many people wonder why bother to invest internationally or why they should hold any bonds in their portfolio. Even though the S&P 500 performed quite well over the past 10 years, it was the worst place to invest during the previous 10 years. To protect yourself, you’ll need to be diversified. Bonds can not only provide diversification but they can provide income and capital preservation as well. They may not be the most exciting, but bonds will ensure you don’t have all of your eggs in one basket. 

So what is the 2020 market outlook?

Once again we find ourselves in a time of uncertainty. There’s the threat of war, a presidential election, and who knows what else could happen next. Given this time of uncertainty, what changes should we be making to our portfolios? The only sure answer is that you should only be taking as much risk as you can handle. Don’t let recent market performance lull you into taking too much risk.

Listen in to hear the outlook for 2020 and beyond. 

Outline of This Episode

  • [2:27] Short-term market forecasting is impossible to predict
  • [5:35] Let’s look at how the markets have performed in the long-term
  • [10:52] Take a look at bonds
  • [15:10] What has happened with consumer confidence?
  • [17:35] Why hold foreign stocks?
  • [20:15] What changes should we be making to our portfolios given the current climate?
  • [23:54] What do the experts predict to happen over the next 10 years?

Connect With Chad and Mike

Subscribe To This Podcast

Apple Podcasts <> Spotify <> Google Podcasts

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

Subscribe To This Podcast


Apple Podcasts <> Stitcher <> Google Play

Jan 1, 2019

2018 gave us a December to remember, with the S&P 500 index losing 9% for the month, locking in the worst December performance since 1931.

From peak to the most recent bottom, the S&P 500 has fallen more than 20%, marking the first bear market since 2008-09. Now the bear market is here, are you prepared to deal with it?

This most recent drop has given us all a scare. Does the drop have you worried? 

Did you prepare for the bear market beforehand?

Preparing for stock market drops prior to experiencing one, helps you digest results when it occurs. It doesn't change the fact that disciplined investing is difficult. And while you'll never be excited about stock market declines, you can be prepared. 

On this episode, we clue you in on the tricks for surviving a bear market. You’ll learn what a bear market is, the questions people typically ask when the markets drop, how to prepare for a bear market, and how to recognize a bargain when you see one. The markets are always changing, are you ready for what’s ahead? Listen to this episode to help you weather the storms that bear markets bring.

What do people ask when the markets drop?

In long and strong bull markets, overconfidence is plentiful as positive returns inflate our perception of our investing skill-sets. But when the markets drop, we are quick to question our investment strategy. People ask themselves:

  • Should I be doing something different?
  • Should I be buying?
  • Should I be selling?
  • Should I buy cryptocurrency or gold?

We feel the need to act when we see our nest egg evaporating. The biggest question people ask is: what do I need to do to preserve my money? If you feel like you need to sell and go to cash then you could be taking to much risk. Risk tolerance can be thrown out the window when things are going well. It’s when things go south, you learn your true risk tolerance levels. A poor decision in a bear market can often take years or even decades to recover from. Listen to this episode to help you learn how to make the right decisions in a bear market.

What is a bear market?

A bear market occurs when there’s a drop of 20% in a particular stock market. This differs from a recession which is declared after there are 2 consecutive quarters of negative GDP. Many people think there must be a recession to have a bear market, but not every bear market results in a recession. However, they do tend to work together. There’s about a 50/50 chance of having a bear market coincide with a recession. As painful, as bear markets can feel, they do happen much quicker than bull markets. The average length of your typical bear market is 1.4 years, contrasted with an average bull market at 4.5 years.

How can you prepare for a bear market?

Bear markets can be scary to watch and unfortunately, the news channels cover them constantly. People pay more attention to bear markets since they are sensationalized by the news media. The most important thing to remember is to follow your strategy. If you feel like you need to get out immediately and go to cash then you are likely taking too much risk. Unfortunately, we can’t follow our intellect and instinct when it comes to investing. Our instincts influence us to stop the bleeding and sell stocks to hold more cash. The problem with that strategy is big up days occur very close to big down days. So when volatility spikes, your time in the market matters than trying to time the market.

How do you recognize a bargain?

The silver lining of a bear market, is the buying opportunity they create. For many investors that are steadily saving in their investment accounts, bear markets present bargains for higher long-term returns. But how do you know the best time to invest more in stock? How do you ensure that you are not buying too early?  Studies show the best strategy is to invest a lump sum upon receiving, as your average long-term returns are higher with stocks vs. other alternatives. Our emotions tell a different story. Catching a falling knife is a risky game.  This is where personal circumstances matter most. What does your future income, spending and savings rates look like? When will you need your savings? Answering questions like these gives you a head start on the best choices for your life. Because “knowing” what will happen in the short-term is a fool’s game. Understanding the historical context can help, if it gives you the confidence to begin and stay invested through potential worsening conditions.

Warren Buffet once said, “widespread fear is your friend as an investor because it serves up bargain purchases. Personal fear is your enemy and it will also be unwarranted.”

Outline of This Episode

  • [2:27] What do people ask when the markets drop?
  • [5:48] What is a bear market in stocks?
  • [10:22] How can you prepare for a bear market?
  • [16:10] How do you recognize a bargain?
  • [20:36] 5 Points to remember in a bear market

Resources & People Mentioned

Connect With Chad and Mike

Subscribe To This Podcast

Apple Podcasts <> Stitcher <> Google Play

Feb 12, 2018

When it comes to investments, too many people take a haphazard approach when what they need is an investment decision process that makes the most of a number of different available resources. This episode of the podcast is aimed at helping you understand what goes into a good investment decision process and how the team at Financial Symmetry approaches investments for its clients. Chad and Mike discuss market indicators and how they impact a good investing strategy, how consumer sentiment figures in, and why it's important to make use of the technical data available. You're going to get an inside look into the way the Financial Symmetry team helps their clients make the best investment decisions possible.

A good investment decision process helps you avoid big mistakes that destroy long-term benefits

Too often, individuals make their financial planning decisions based only on what looks attractive in the moment. The fear of missing out is real. But there are many resources and data points available that take historical trends and other factors into consideration in a way that could enable your investment decision process to be much more helpful. One of the points that Chad and Mike make in this episode is that a good investment decision process can help you avoid the big mistakes that will sink your long-term strategy. It's those spontaneous decisions based on what looks hot at the moment that we're talking about, so make sure you listen and learn what you can do to avoid those kinds of pitfalls.

What IS a short-term market indicator and why does it matter?

One of the things that should be a part of every investment decision process in consideration of short-term market indicators. What are they? They are the things we can see at the present moment that give us clues as to where the economy might be headed. For example: Are we coming out of or going into a recession? What is the current consumer sentiment about the economy? Are there technical trends and stats that inform us of what may be coming? These are things the average person doesn't take time to look into or consider but are vital components of the investment strategy that the Financial Symmetry team brings to bear on its client's investment decisions. You can hear the unique approach that the team takes, on this episode.

It’s easy to sell fear - but it's not a sound way to make investment decisions

On many of the talk news programs and in some of the high-profile financial publications you hear talk about warning signs that the economy may be about to go down the tubes. Of course, they could be right with their predictions but making decisions based on fear is one of the weakest options for the smart investor. It's easy to sell fear, but it's not always the best way to determine how to invest your hard-earned money. In this episode of the podcast, Mike and Chad discuss why fear is not the best motivator for good financial decisions and how you can take a different approach that enables you to create a long-term strategy that actually works.

The best investment strategy won’t help if the rest of your financial life is a mess

Even though this episode is focused on making the best investment decisions possible through a good investment decision process, that process and strategy won't do you much good if the rest of your financial life is a mess. What are those areas? - Do you have enough life insurance? How are you spending compared to the spending plan you've made? Do you have an adequate estate plan in place? Are you being tax-efficient? These are only some of the fundamental questions you need to address before you get too involved in making a long-term investment strategy. If you don't, you can wind up wasting a lot of time with no benefit to show for it.

CHART TO GO INTO SHOW NOTES?

Outline of This Episode

  • [0:27] Investments, forecasting, and good investments strategy
  • [2:50] Summary of 2017: Extremely strong markets worldwide
  • [6:01] The process the Financial Symmetry team uses - it’s a bit unique
  • [9:08] Where are the different market indicators today (2/1/2018)
  • [12:05] How is consumer sentiment these days?
  • [17:14] How do we use the technical data to make better investment decisions
  • [21:11] Valuations: what are they and how do they work?
  • [31:07] What you really need to do is to focus on things you can control

Resources & People Mentioned

Connect With Chad and Mike

Subscribe To This Podcast

Apple Podcasts <> Stitcher <> Google Play

Dec 4, 2017

One of the most asked questions we receive centers around the HSA. It's also one of the largest missed opportunities for tax savings we see people are missing, if they are eligible. Health Savings Accounts, known also as HSA, are gaining more and more popularity. But there is still a lot of confusion on how this account is different.

Join us this week, as we break down the ins and outs of all you need to know about how an HSA can benefit you and your family. We address why so many are still not using these accounts to their full capacity. Also, we break down how the HSA provides triple tax savings, or the hat trick as Mike likes to call it.

What You'll Learn in This Episode

  • What is an HSA and why do I need one?
  • How do you know if you are eligible for one?
  • Why people confuse the HSA and the FSA?
  • The incredible benefit within an HSA that only 4% of people are taking advantage of.
  • Why the beneficiary matters on your Health Savings Account.
  • 4 out of 5 HSA accounts have been opened since 2011.
  • 7.3 million people who are enrolled in HSA-eligible plans haven't opened an HSA.
  • Only 48% of those with an HSA contributed to it.

For more, check out show notes here.

1