China’s economy, the stock market and politics


(worried about investing?)

So far this year, checking your investment account balances could lead to an upset stomach, or worse. You are better off watching the historically unusual 2016 presidential campaigns. That way, you have enough to distract you from making a bad investment decision … even if Donald Trump or others upset your stomach.

What would a bad decision be? Here are several worries you may have, stated as “oh no,” along with a description of the potential bad investment decision:

“Oh no, stocks are too risky, I’m moving my money over bonds instead” – a.k.a., changing your portfolio allocation

If you (and your advisors) constructed a good long-term portfolio, then stick to the allocation in your portfolio. At present, the return on most bonds is less than the rate of inflation, after income taxes. The return on money markets is even less. So, unless you have amassed huge sums, you need the stock market returns to reach your financial goals.

That means you have to stay in stocks, and ride out the current downturn.

“But does that work?”

Let’s take the last big market dive of 2008 as an example. Measuring stock performance from 2008 through 2012, “the S&P 500 generated a cumulative return of 8.6 percent.”   See Went to Cash? Here’s the next Big Mistake You’ll Make.

Have you seen any bonds paying 8.6%?

“No.”

I didn’t think so.

True, there are alternate investments, such as hedge funds, precious metals, commodities and raw materials, which could perform better than bonds. However, each has different risks and expenses, and some of these have high barriers to entry. If any of these investments do belong in your portfolio, they are there to balance your other investments, which must still include stocks.

“Oh no, investing is too risky, I’m putting my savings in cash for now” – a.k.a., attempting to time the market

Pulling out of the market when it goes down and then putting all that cash back in just before it goes back up sounds great. However, the problem with market timing is no one can do it. Looking at 2008 through 2012, “If an investor missed the 36 percent drop in the S&P 500 in 2008 — or even worse, bailed on the markets mid-carnage — they probably also missed the 26 percent gain in the S&P 500 in 2009, and the next three positive years for the index that followed. See Went to Cash? Here’s the next Big Mistake You’ll Make.

So, you are thinking that 2008 to 2012 is an aberration.

“Yes, I still want to move to cash.”

 Then consider 1970 to 2016, where, if you missed just the best 25 days out of 11,620 trading days, “your returns would have gone from 1,910% to 371%, or [from] 6.7% a year to 3.4%. To give you an idea of how lousy that is, 1-month U.S. T-bills returned 4.9% over the same period.” See How missing out on 25 days in the stock market over 45 years costs you dearly.

The challenge of timing the market is capturing the best days. However, Nobel laureate William Sharpe “found that market timers must be right an incredible 82% of the time just to match the returns realized by buy-and-hold investors.” See Why you should stay in the stock market.

Are you that lucky?

“No.”

“Oh no, China is a total mess, this time is different, I’m am getting out of stocks forever” – a.k.a., attempting predict the future

True, the slowing of the Chinese economy is causing economic problems worldwide. But, in terms of the impact on stock markets worldwide, that is not dramatically different from the 1987 crash, only then it was Japan.

“Yes, but my friends are selling stocks …”

Did you know that the individual investor is a contrary indicator for the stock market?

“What does that mean?”

Historically, when individual investors are selling, that is a market low, a good time to invest. Similarly, when individual investors are putting everything into the stock market, that is a market peak and a time to sell the over-priced stocks.

By the time you realize that you are mistaken, you will have missed much needed performance. For emphasis, consider this:

From 1990 to 2005 a $10,000 investment would have grown to $51,354 had you just sat tight from beginning to end. However, if you had missed the best 10 days in that 15-year period, your returns would have dwindled to $31,994; if you had missed the best 30 days, you’d be looking at a mere $15,730. Why you should stay in the stock market.

Oh no, investing is too risky, I put my savings in cash” a.k.a., thinking short-term, another argument for going to cash

he stock market has to be risky, otherwise there would be no reward for investing.

“But I like cash!”

Cash is not volatile, but it is still “risky” – the return on cash – the interest earned – is less than the rate of inflation. Over time, investing only in cash puts you far behind, while long-term investing reduces the risks of stocks. The key is, you have to withstand the downturns to gain from the upturns:

A study by SEI Investments reviewed all the bear markets since World War II. According to the study, reported in The Wall Street Journal, stocks rose an average of 32.5% in the 12 months following the bear-market bottom. Yet, if you missed the bottom by just a week, that return fell to 24.3%. Waiting three months after the market turned cut your gain to less than 15%. Why you should stay in the stock market.

“Oh no, I need money to buy a house” – a.k.a., having the wrong investment strategy

What was your short-term investment doing in the market in the first place?

“I need my money to double so I can buy my dream house!”

Sorry, if you need that much then your dream is wrong.

For the stock market, anything less than 5 years is “short term.” If you have money set aside for a vacation, new car or other major purchase, like a house, those funds need to be invested more conservatively, taking less risk. Otherwise, while you could double your money in a couple of years, you could also end up with much less.

“Oh yes!” a.k.a., the conclusion, an important message – don’t forget it:

After watching investors for several decades, I know this to be true: you must create a good investment strategy and stick to it for it to work.

Even if do not have an optimum strategy, your investments will perform far better than someone who keeps altering their strategy.

“But the fund I have didn’t do as well as another fund last year, so I am selling ….”

Chasing after the last year’s star mutual fund usually works out poorly. You sell your current fund, paying fees and taxes, to buy the star fund, only to watch its performance return to the mean. Disappointed, you then sell the new star fund to chase another star performer, only repeat the same mistake with fees and taxes. After you repeat this a few times, you could end up with negative returns while someone who simply a bought and held a mediocre fund will have substantial gains.

If your investment strategy is better than mediocre, and it includes stocks, stick with it!

“Okay, I will.”

Good, the future you, sitting on a beach sipping drinks with paper umbrellas, will be so glad you did!

Investment advice on saving for retirement – now!

Start your investment plan – now! Your future portfolio will thank you

“There’s no time like the present”, especially when it comes to investing. Young adults have a great advantage over other investors: time.

Compounding – The benefit of time is that is allows for interest to compound, which is the ability of an investment to grow by reinvesting earnings. Consider that a single $10,000 investment at age 20 would grow to over $70,000 by the time the investor becomes 60 years old (based on a 5% interest rate). By comparison, the same investment made at age 30 would yield about $43,000 by age 60, and made at age 40 would yield only $26,000. The longer money is put to work, the more wealth it can generate in the future.

Matches – If your employer offers an employer-sponsored retirement plan, like a 401(k), we suggest you enroll in their plan. Not only is savings made easy through automatic payroll deductions, but your contributions are made with pre-tax dollars. Additionally, many employers offer 401(k) matches, which means they will contribute money into your account. If you don’t take advantage of this benefit, then you are leaving money on the table.

Resources – Another advantage young people have is there are now, more than ever, many low-cost services available to make saving and investing easy.

  • Consider the Acorns app. This app rounds up each transaction you make with your debit or credit card to the nearest dollar and invests the change into a diversified portfolio.
  • Robinhood is another useful resource. This app offers commission-free trading of listed stocks and ETFs. They run a lean company which allows them to operate for less. They make their money by accruing interested on investors uninvested cash balances and through fees charged in their upgraded version. This is a low-cost means of entering the investment world.
  • Check out Betterment.com, a robo-planner website for investing using ETFs that holds down fees. You use this to invest your taxable funds and your retirement plans, like IRAs.
  • Also check out earthfolio.com, a robo-planner for investing “with a social conscience.”

Whichever form of investment you decide to take, the earlier you begin, the better. Start building your wealth now! See also: Young people, don’t let this happen to you. Plan for retirement now!

 

[As we have stated in past posts, we recommend investing passively, using ETFs or index funds, so you save fees. You can buy a diverse set of ETFs, set up your portfolio and sleep until you rebalance next year.]

Seven Deadly Sins of investing

The single most important risk to a portfolio of investments is a poorly defined or constantly changing strategy. You must have a long-term approach to which you adhere over time regardless of the current favor of the particular strategy. You will need to resist the psychological pressures of investing:

Consider these “seven deadly sins of investing”:

  • //gluttony//– hoarding cash when you should invest or evaluating by only one category when you should look at the big picture;
  • //greed//– looking for big winnings when time and patience pay off;
  • //pride//– not selling your losers or old, familiar holdings when a new idea is better;
  • //lust//– listening to the information barrage and adjusting your portfolio constantly rather than filtering it out to stick with a plan;
  • //envy//– chasing fads or looking at a friend who has “winners”, making investing look more like gambling, when actually you should sell your best and buy trailing but good positions (as in the “dogs of the Dow” technique);
  • //anger//– not forgiving yourself for mistakes and moving on; and
  • //sloth//– changing beliefs to fit your decisions or portfolio rather than applying the lesson that you should review a portfolio intellectually and objectively and decide if you would still buy the holdings today.

You should review your asset allocation at least annually. A stock market rise will leave you over-weighted in stocks, meaning that you should sell out of stocks and buy into bonds and cash to maintain the allocation. If the stock market goes down, you should do the reverse. In fact, you should sell from your better mutual fund managers and buy the managers that have not done as well recently because those excelling and those lagging are both likely to return to the mean over time. Reallocating may seem wrong, especially when bond yields are low and CD rates are low. Nonetheless, history tells us to override the psychological urges, take “profits” from those currently doing well, and re-deploy them with assets that are more likely to provide future returns.

Adhering to a sensible investment strategy is how money is made over time. You may feel that you missed out compared to someone who is all in the right stocks now. However, you will also be glad to miss out when that person’s holdings go down faster than the market and you have non-stock investments that increase in value. Also, when there is a new influx of capital, you need to have a strategy so you can sensibly filter the barrage of information from people wanting to help you handle you finances.

Planning for the ever-changing Medicaid rules

The Affordable Care Act fills in current gaps in coverage for the poorest Americans by creating a minimum Medicaid income eligibility level across the country. Beginning in January 2014, individuals under 65 years of age with income below 133 percent of the federal poverty level (FPL) will be eligible for Medicaid.

For many of our clients, Medicaid coverage is not an option. Nonetheless, there are still important steps that one can take to guard assets, protect your estate, and prepare for the possibility that you or your spouse will need long-term care: purchase long-term care insurance or self-insure.

Long-term care insurance generally covers home care, assisted living, adult daycare, respite care, hospice care, nursing home and Alzheimer’s facilities. From a tax perspective, premiums paid on long-term care insurance product may be eligible for an income tax deduction and benefits paid from a long-term care contract are generally excluded from income.

Self-insuring fits if your investment assets are sufficient to earmark a portion of your net-worth to cover possible long-term care needs. Before you decide, keep in mind that, once a change of health occurs, insurance may not be available. As always with financial planning, the best time to think about your long-term care strategy is before you need it.

Finances and need for planning for young people or “millennials”

For many, when they hear the term millennial, they conjure up the image of an underemployed, tech-savvy twenty-something living in his parents’ basement. Many unfavorable stereotypes have been given to them, such as: entitled, lazy, and delusional.
In fact, millennials face many more financial challenges than previous generations. The average student loan debt of a 2012 college graduate is $29,400, while finding a decent paying job is difficult at best.
Just because you do not have great wealth, that does not mean you do not need sound financial planning and advice. No matter what your resources are, good financial planning and education are essential to long-term financial stability.
Unfortunately, millennials have not gotten this message. A study in the June issue of Kiplinger’s Finance Magazine found that only 40% of millennials have a retirement account and only 25% are willing to take investment risks in setting up a savings account. Many lack fundamental financial literacy, with little understanding of basic concepts like mortgage financing or inflation. More than 50% of millennials have used costly services, such as payday advances and pawnshops to obtain loans.
The good news is that there are many apps and online services available to help users plan and budget.
Spending and budgets: The Mint app tracks a user’s spending and income and provides an up-to-date snapshot of their current finances. There are also many budgeting websites, such as www.LearnVest.com and www.Mvelopes.com, which categorize expenditures and set target spending limits.
Saving and banking: There are apps available to help users save money and avoid ATM fees. SavedPlus.com, for example, automatically sweeps money from your checking account into your savings account every time you make a purchase. The MasterCard Nearby app allows you to search for nearby ATMs and filter your search based on criteria such as fees and 24-hr availability.
While there are many online resources available, none we found are comprehensive, and none actually provide the needed planning advice. Meeting with a trusted financial planner is always recommended.
As you read this, did think of your friends, your children, or your children’s friends, that is, does this apply to them? We hope to be addressing this with a dedicated site so all feedback is welcome.