The Rationale for Staying Invested

I am reading about the impact of Covid-19 as I push to get all client tax returns completed and filed by the deadline, which may or may not be extended. 

Everyone is concerned and I wanted to respond.

These are scary times, both for personal health for you and your family and for your finances.  We worry about who will get sick, possibly die, and who will be out of work and have major life changes.  

Much of the ultimate outcome depends on how quickly governments respond – “stop everything immediately” contains the infections and thus allows the economy to bounce back sooner, while delayed responses mean many more infections and deaths, with a prolonged, deeper hit to all economies.   

On investing, to those who ask, “should I cash out,” my answer is, “it’s already too late, the markets have already gone down far, and even if you had sold a month ago, knowing when to buy back in is so tricky that you would probably be worse off.”  The truth is, when so many individual investors ask if it is time to sell, that is often a signal to buy. 

Here is an excerpt from a Merrill Lynch research post (credited to Jared Woodard, Derek Harris, Chris Flanagan, Justin Devery and Jordan Young) that I received last week, which crystalizes my experience from the downturns I lived through as well as the downturns I have studied:

Why stay invested?

Not staying invested means missing most of the long-term market upside…it’s simply too difficult to time the market. A strong impulse to hide out in cash is often a sign that a buying moment is near:

• We know that the best days often follow the worst and this has been the sharpest drop into a bear market in history (Chart 3);

• Since 1929, in the 24 months following a bear market, S&P 500 total returns have averaged 20%. Excluding the Great Depression, the average gain was 27% (Chart 4);

• Since 1931, an investor who missed the 10 best days of each decade made 91% in equities. Staying invested meant earning 14,962%;

• In the 2010s, missing the 10 best days meant gaining only 95% instead of 190%;

• Over any 10-year period, the odds of ending with equity losses are just 4%;

Let me know if this helps.  And let me know if you want to talk.   

Again, I hope you and your family stay healthy!

Take care,

Steven

Coronavirus – concerns for your health and finances

This is my busy time, working long hours preparing income tax returns, but I wanted to respond to your concerns.

News of the coronavirus spread and its impact on the economy and stock markets is constant.

People ask: “can I get the virus from a package delivered to me from China” (the answer via the CDC is “no”).

As some say, it’s not “if” but “when” in terms of you being in contact.  That is upsetting.

At that same time, experts ask us all not to panic.  And financial people urge us to stay the course.

If you do not already have a plan, here is a good overview with links to CDC posts on making a plan with your family – NY Times prepare for coronavirus

As for the stock market, here is a good NY Times piece discussing the rationale for sticking to your long-term investment plan:  The Market Is Moving. Most People Should Sit Still.

Here is a more sobering assessment:  It’s a ‘Swimming Naked’ Moment: The Financial System Has a Real Test

In the end, if you developed a good long-term investment strategy, staying the course should be the best response as it was in the 2008 financial crisis.

Let me know if you want to talk and I hope you and your family stay healthy!

  • Steven

The real problem facing retirement plans? Not saving enough

Recently, two debates have been brewing over 401(k) plans. Specifically, are they too expensive and should we cap the amount Americans can accumulate in the total balance of their defined benefit and defined contribution plans as well as IRAs. Is that really where the debate should be?
A recent PBS.org retirement study revealed some alarming statistics about Americans’ retirement savings habits. Specifically 30% of workers have $0.00 in retirement savings and 40% are currently not saving anything for retirement. Even factoring in Social Security, the average savings shortfall of a U.S. household will be $250,000 at retirement.
For many, if they are contributing to their retirement plans, they are contributing too little. The current belief that contributing just enough to maximize an employer’s contribution will fund your retirement is irresponsible. Only a small number of Americans will amass $1million in their retirement plans by the time they retire. According to Don Phillips in his recent Morningstar article, Fighting the Wrong War, “At a 4% withdrawal rate, $1 million in savings will provide just $40,000 a year.”
While the cost of the plans and amount we can accumulate in our retirement plans can be interesting debates, they don’t address the real issue. Will we, as future retirees, be able to fund our own retirement?

Update on Roth conversions – to do or not to do?

In deciding whether to convert your traditional IRA to a Roth, there are many factors to weigh. At present, uncertainty about potential income tax reform makes the decision even more difficult: you are making a decision on what provides greater tax advantages, conversion or not, without confidence in the future tax impact.
Nonetheless, converting makes good tax sense if you expect your future marginal tax rate in retirement to be the same or greater than the rate on the conversion. However, if you expect your tax rate in retirement to be lower, then you will pay more taxes on conversion than you will in retirement.
There are other reasons to consider converting now:
> First, converting an IRA or other plan to a Roth account means that the assets are no longer subject to the Required Minimum Distribution (“RMD”) requirement reached at age 70½, thus allowing you to retain assets as long you wish. At death, your heirs must start withdrawing from the account, but the withdrawals will be income tax-free.
> Second, if you believe your IRA assets will grow significantly over time then it is advantageous to convert. If you convert now, you will have a lower conversion rate (less of the total will have been subject to income taxes). This calculation applies whether your current IRA assets are depressed or have yet to appreciate.
There is a reason not to convert now:
> If you’re single and the conversion puts your AGI over $200,000 (or you’re married and the conversion puts your AGI above $250,000), then the 3.8% Medicare surtax on unearned income may be triggered. However, you can avoid this (and other unintended consequences) by doing partial conversions over multiple years.
What if you err? If you convert and then your account value falls, you have until October 15th of the following year to undo the conversion, thus revering the income taxes paid.
Planning: If you’re considering a conversion, give us a call and we can help you make the right decision for you!