Category: blog

Looking Back on the First 5 Months of 2020 and Looking Ahead

The S&P 500 index has rallied more than 30% from its low on March 23—reinforcing the adage that it usually pays to stay invested over the long term instead of selling out during the dips.

Even with the recent uptick in the market, it is important to realize that the economy has quite a distance to go before it gets back to where it was at the beginning of the year.  We remain cautious but optimistic.    

The economy was shut down temporarily in response to the coronavirus pandemic.  The market reacted by dropping precipitously, with the Dow Jones Industrial Average losing 10,000 points in a month.  What started out as a medical concern became a financial crisis.   

Those that felt the economic impact the most included people like restaurant workers, retail employees, barbers and hairstylists, and other similar modestly paid workers.  Many small business owners found themselves unable to even open their shops because of a government edict.  Investors felt the impact when they saw their investment portfolios decline sharply.  Everyone has a financial pain threshold, and it becomes increasingly difficult to remember your long-term objectives when faced with increased levels of short-term pain.

The media focused on every bit of bad news.  A seemingly endless streak of negative statistics were highlighted.  There is no denying that shutting the economy down to reduce the spread of the infection had a massive economic impact.  Unemployment shot up.  Air travel and rail freight plummeted.  Restaurants, theaters, hotels, convention centers and sports venues closed.  Corporate revenues plummeted.

The government reacted by enacting the $3 trillion (with a T) dollar CARES Act that distributed relief checks to the vast majority of Americans.  The same legislation distributed money to small businesses via the Payroll Protection Program to encourage small businesses to continue to keep people employed.  There is talk about another round of stimulus – equally as large if not larger — to continue stimulating the economy.

We are not sure when or if the economy will resume its former track.  There is a very fundamental reason why this economic drop is different from any other.  This one was caused by a government decree based on medical fears rather than a structural economic problem.   Government decrees can be reversed nearly as quickly as they were implemented.  How the economy will react remains to be seen.  There will undoubtedly be lingering aftereffects.  But the stock market is a leading economic indicator.  The rapid recovery of the stock market thus far indicates that investors view the future with more optimism than the merchants of gloom.

The Benefits of a Modern Retirement Plan

If you are like most people approaching retirement, you are probably wondering if you’re financially ready. You may have a pension. You plan on collecting social security. You may have put money into your employer’s 401k plan. You and your spouse may each have an IRA and some money in the bank. You may have some life insurance or an annuity or a long-term care policy.  

Does that mean you can retire when you want? The answer is: it depends.

There are lots of things that can happen in the 20 to 40 years you will be retired. Here are a few things that may cause you to ask questions.

Question #1: Is your Social Security safe? 

The Social Security trust fund is currently projected to be able to pay full benefits until 2035. How will it affect you if the funds run out? A retirement plan should answer that question.

Question #2: Is your pension safe?  

Company and public employee pensions are underfunded. What happens if your company, city, or state goes bankrupt? It could happen.

Question #3: How long will your retirement savings last?  

You may be planning on your investments continuing to grow at the rate they have in the past, but what if they don’t?  

Question #4: How risky are the investments in your portfolio?  

Many people have been lulled into believing that all they need to do is put their money into a low-cost index fund. The index lost nearly 50% in 2009 and 34% in March 2020. If you’re still investing in stock index funds as you near retirement just because they’re “cheap,” you may be taking on way more risk than you realize.

Question #5: How much will it cost if you or your spouse need to go into a nursing home?  

Long-term care insurance may pay for it, but the insurance is not free.  For some people buying a policy makes sense, while for others it might not.  A financial plan can help answer whether a long-term care policy is right for you.

Question #6: What happens if inflation comes roaring back?  

Living on a fixed income after you retire makes inflation a much bigger threat than when you were working.  

Question #7: How does living too long or dying too soon affect your retirement plan?

Critical decisions are often made during the retirement process without enough consideration of how long you will live. While a plan can’t answer how long you’ll live, it can project how your plan will be altered if you live longer or shorter than you think.  

 

In the past, retirement planning was a static process. Planners took the information supplied by their clients and provided a book of charts and graphs designed to show their financial condition for decades in the future. The technology limited what you could do.  

New computer programs allow Financial Planners to run thousands of tests to analyze a number of different scenarios. The new planning process also allows people to check, update, and re-review their plans as time passes and conditions change. These programs allow scenarios to be run in real-time and can be generated for a modest cost by Certified Financial Planners™ (CFP®s) who specialize in retirement planning.

Financial Decision Making in a Crisis (COVID-19)

The Coronavirus (COVID-19) is both a medical and a financial crisis. There is no question that the arrival of this virus and its effect on the entire world has had a dramatic effect. It recalls a famous poem by Rudyard Kipling:

“If.”

If you can keep your head when all about you

Are losing theirs and blaming it on you,…

Yours is the Earth and everything that’s in it,

And—which is more—you’ll be a Man, my son!

 

Most humans overreact to bad news; it’s human nature. We don’t want to minimize a global pandemic but we are surrounded by viruses all the time and live to tell the tale. Most of us lived though the Swine flu, the Zika outbreak, Ebola as well as the annual flu for which we get shots yearly. In the 2017 – 2018 season the seasonal flu killed 61,000 people.

But this time, reacting to predictions of millions of deaths, government officials around the world shut down entire countries. 

The market reaction was immediate and sharp. Within three weeks the Dow Jones Industrial Average dropped 10,000 points. Economists are almost unified in predicting that we’ll see a recession during the second quarter.

There are a few important things to keep in mind.

  • Declines in market prices are perceived as losses. They are not, unless you sell. Then you lock in a loss and you’ll be out of the market when it rebounds as it always does.
  • Uncertainty, not fear of losses, is the largest driver of investor markets. When uncertainties are removed, confidence returns.
  • Avoid TV “Experts.” Remember that the networks are in the advertising business and they grab your attention with scary stories not to inform you but to sell you, the viewer, to their advertisers. 
  • Successful investors take a long view. Market panics are an opportunity to buy investments when they’re on sale.  

People hire financial advisers for their expertise and for a strategy aimed at reaching their goals. Having a strategy and sticking to it in good times and bad removes emotion from the investing equation. We create portfolios that will weather temporary storms like this.

Bear Markets are Painful but Markets Rise Over Time

A “Bear Market” is defined as a decline of 20% from recent highs.  By the time you read this, we may be in a bear market or we may have recovered from a mere correction that began in February.  For people seeking a better return on their savings than what the banks offer, the ups and downs of the stock market are a natural part of the investing process.  It comes with the territory in return for the long-term growth rate that defines owning a piece of American industry.

Bear markets can be painful, but overall markets are generally positive over time. The last 90 years of market history have been defined as bear markets for about 20 of those years. In other words, stocks have been on the rise 77% of the time.

From 1926 through 2019, the average annual stock market return was 10.2%.

For the five years ending 2019, the Dow Jones Industrial Average (DJIA) returned 12.2% annually (accounting for dividends).  Over that same time, the yield on CDs – after factoring in taxes and inflation – lost purchasing power.

One of the reasons our phones don’t ring off the hook when markets decline is because most of our clients have seen it before.  This isn’t their “first rodeo,” as they say in country songs. For those who are new to investing and who may get nervous, here’s a bit of history:

  • There have been 26 market corrections since World War II.
  • Those declines have averaged -13.7% over 4 months.
  • It took the markets an average of 4 months to recover from those declines.

To smooth out that ride, professional investors create diversified portfolios of stocks and bonds, domestic and international, creating portfolios that allow them – and their clients – to sleep well at night.

Registered Investment Advisors (RIAs) offer these money management services to individuals, families, and businesses who want help.  We are Certified Financial Planner™ professionals and have worked with hundreds of people just like you to grow and maintain their wealth.

We invite you to schedule a meeting to visit with us, have a cup of coffee and a chat.  We promise no sales pitches and honest answers to your questions.    

Thoughts on the Coronavirus

The Coronavirus has been in the news for a while now and fear in the press has started to spill into the financial markets as the disease spreads out of China.  If the virus lingers much longer, it could accelerate the move of production from China to other countries, maybe even encouraging American companies to bring manufacturing home.  Over the long term it could actually help our economy.

But what about the short term?  Here’s some commentary from First Trust that we think makes a lot of sense.

Time to Fear the Coronavirus?

Monday, fear over the Coronavirus finally gripped investors, as both the Dow Jones Industrial Average and the S&P 500 index fell over 3% – the largest daily declines in two years. These drops wiped out all the gains for the year.

Frankly, it’s amazing to us that the market had been so resilient! Maybe it’s because recent history with stocks and viruses is that markets overreact leading to significant buying opportunities along the way. Over a 38-day trading period during the height of the SARS virus back in 2003, the S&P 500 index fell by 12.8%. During the Zika virus, which occurred at the end of 2015 and into 2016 the market fell by 12.9%. There are other examples, but they all passed, and the market recovered and hit new highs.

Will this happen again? Our view is that it is highly probable.

We aren’t trying to be immunologists, and that may make our points moot, but there aren’t that many immunologists in the world and the World Health Organization says this is not yet a true pandemic. We’re just economists, but looking at the data, and having perspective is always important.

This whole thing is a human tragedy and we would never take human life and suffering lightly. And looking at data can make people appear cold, when in reality all they are trying to do is understand the situation. There are currently 80,088 confirmed cases and 2,699 deaths from the coronavirus COVID-19 outbreak as of Monday. This is a big number and is still growing, but the pace of growth looks to be slowing.

Much of the pessimism surrounding the virus focuses on the Chinese under-counting the number of infected to save face. However, it’s important to note that a shortage of specialized test kits has caused health officials in many countries to rely on observable symptoms for diagnoses, and because coronavirus mimics the flu and pneumonia in its early stages, it’s also possible that authorities may be over-counting as well.

Instead of looking at it from a total confirmed case perspective, we think the number of total active cases provides a better look into what is happening. This measure takes total confirmed cases and subtracts deaths and recoveries. This gives the total amount of people who have the potential to spread the virus further.

According to Worldometer, which aggregates statistics from health agencies across the world, total active cases peaked about a week ago at 58,747 and have since been declining. Even with all the new cases we are seeing in South Korea, Italy and Iran (where data is suspect). There have been 30,597 cases with an outcome (2,699 deaths and 27,898 recovered). In other words, the total active cases now stand at 49,923, a drop of 15% from the peak on February 17th.

One death is too many, but to put that number into a little bit of perspective, according to the World Health Organization, in the United States alone for the 2019-2020 season, there have been at least 15 million flu illnesses, 140,000 hospitalizations and 8,200 deaths. Imagine if everyone with an internet connection followed the spread of this annual flu, case by case, hour by hour.

It’s true that the death rate from Coronavirus appears to be around 2% in China, which is much higher than the death rate from the normal flu, but like the flu increases with age. However, outside of China the death rate is far less than inside China, roughly 1%. And, there is already a drug that will combat COVID-19 moving toward first phase clinical trials. It took three months for this to happen in 2020, versus 20 months for SARS back in 2002/03 – a testament to advances in drug technology.

From a macro-economic point of view, the real question is how will this impact the US economy over the coming year. In short, our view has not changed. The US we believe is relatively insulated, with a fantastic health system. The US started the year with solid economic data and so far, nothing has changed. In fact, with all the data we already have on hand, we are expecting around 2% growth in Q1. Most of the impact to the US from the corona virus will come in Q2.

Capital goods exports to China along with imports from China are sure to be depressed given the struggles to reopen factories abroad. Most Chinese factories are still only operating at about 50-60% of capacity. Shipping giant Maersk has already said it has cancelled more than 50 trips to and from Asia. With China being home to seven of the world’s busiest container ports there is bound to be some impact. Inventories in the US will be depleted more rapidly, but once the virus subsides, expect faster accumulation of inventories in the second half of the year.

Revenues and earnings from companies that are highly exposed to China will definitely be affected. China being shut down for a month will have a global impact. But lower earnings in the first half of the year should be made up by a strong rebound in the second half of the year with payback from lost months. Demand remains strong and there has been no visible impact yet on the job market as shown by initial unemployment claims. Supply disruption is the issue. We suggest looking through any earnings weakness as we expect it to be transitory.

One small nugget of good news is that many companies had already been shifting supply chains from China due to the Trump Tariffs. If they weren’t considering it before they will be now as they realize the importance of diversification. Expect this trend to accelerate moving forward.

The US consumer is on solid footing and will continue to be one of the key drivers to US economic growth in the year to come. We believe, just like all the other viruses we have seen over the past decades that have dissipated, the Coronavirus will be no different. Some have suggested that the 1918 Spanish Flu, which killed hundreds of thousands in the US could happen again. No one knows, but 2020, is not 1918. Technology and news move much faster and the US rebounded from the Spanish Flu when all was a said and done. We suspect that any drop in earnings or economic activity will be short lived, and more than made up for in the year to come. Don’t panic, stay invested.

Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Deputy Chief Economist  

Market Timing Is the Enemy of Investment Success

Let’s talk about the stock market. The bull market is currently over 10 years old.  Does that make you confident, seeing double-digit returns as a sure thing? Or does it make you worried that maybe we’re close to another market decline like 2007-2008?

The problem is that whether we start talking about the exuberance of the market or the exuberance of investors if we make wholesale portfolio changes based on either viewpoint, we’ve made a market timing decision.  The next Great Recession has been predicted ever since the market began climbing again in 2009.  Those who acted on those predictions at that time would have missed one of the biggest bull markets in recent history.

There is no shortage of money managers who insist that they can successfully time the markets. Many seem credible and some may even be able to cite specific examples of success they have had in doing so. They may truly believe that they have discovered a valid timing process.

But the line between luck and skill in money management is hard to discern, even for those doing the managing. There are many examples of money managers who were lauded as market geniuses after great runs of performance only to crash and burn. Once you start to play the market timing game, you set yourself up for almost certain failure.

What we need to do is to reframe the question entirely. We shouldn’t ask, is the market heading for a drop soon?  We know that stock markets don’t go straight up forever and that there will be a correction at some point in the future, after which the market will rebound again.  Instead, we should ask what is it that we control, and should we be making changes in the things that we can control? We can control how much we save and spend.  We can control how much risk we take.  And we can control our own investor behavior.

Asking someone what’s going to happen to the financial markets is an exercise in fortune-telling.  The best thing to do is to forget about trying to consistently accurately predict the direction of the stock market and start to think about risk.  Ask yourself if there’s a serious chance that you’re going to panic and sell your positions if the markets, and your portfolio, happen to drop 20% or 30%.  If the answer is yes, you’re taking too much investment risk.  At some point, we are going to get a stock market correction.  The question you should be asking yourself is “What would I do if it fell by 10%?  By 25%?  By 50%?  That’s a risk question.  Do you know how much risk you are taking?  Do you know what your actual risk tolerance is?  Do you know how much risk is really present in your current investment portfolio?  If not, give us a call to get your risk number and the risk number your investments are taking.  If they match up, then you will have a lot less to worry about the next time the stock market falls.  If they don’t, we can make recommendations to get them more in line so that you don’t panic the next time the markets decline.

When to Start Collecting Social Security Benefits

You have three main options:

  • Start collecting early
  • Start collecting at full retirement age
  • Start collecting after full retirement age

“Full Retirement Age” depends on your date of birth.

Year of birth

Full retirement age

1943-1954

66

1955

66 and 2 months

1956

66 and 4 months

1957

66 and 6 months

1958

66 and 8 months

1959

66 and 10 months

1960 or later

67

Full retirement age is the age when you qualify for 100% of your Social Security benefits.   You’ll want to consider several factors such as your marital status, your health, your plans for retirement and your retirement income sources.

  • If you begin collecting at age 62. 

You can start collecting between age 62 and full retirement age and receive reduced benefits.  The reduction can be up to 30% depending on your age.

Collecting early means you receive benefits longer.  On the other hand, your benefits are reduced for you and your surviving spouse.

  • If you begin collecting at full retirement age.

At full retirement age, you receive 100% of your benefit for yourself and your surviving spouse.

Waiting to full retirement age gets you a larger monthly check from the Social Security Administration.  But you can increase your monthly check by waiting a little longer.    

  • If you delay past full retirement age. 

Delaying your benefit past full retirement age increases your benefits 8% annually up to 32% through delayed retirement credits.  Credits are available to age 70.

You have to weigh the pros and cons.  Waiting past full retirement age gets you a larger monthly payment.  However, you may receive checks for a shorter period depending on longevity.

Here’s a hypothetical example.  Let’s assume that your full retirement age is 66 and you are eligible for a benefit of $1000 per month at full retirement age.

If you start collecting at age

  • 62  you collect $750
  • 63 you collect $800
  • 64 you collect $866
  • 65 you collect $933
  • 66 you collect $1,000
  • 67 you collect $1,080
  • 68 you collect $1,160
  • 69 you collect $1,240
  • 70 you collect $1,320

Social Security benefits can get complicated, especially if you are married and you need to make decisions about spousal and widow benefits.  For more information, get our free brochure “Making Smart Decisions about Social Security.”

Do You and Your Spouse Bicker About Money?

I recently read an advice column about a couple who frequently bickered about money. The husband and wife disagreed about whether to pay off their mortgage. One wanted to pay it off faster and have the peace of mind that comes with reducing debt. The other wanted to take advantage of the tax write-off the mortgage interest brings while spending money on current needs and wants.

Money issues, unfortunately, are near the top of the list for why marriages fail. This is because money, and how it’s spent, affects our lives on a daily basis. Money and the things it can buy have a big influence on the way we view ourselves and, often, on how others see us. Which is more important to you, a new car or more money in the bank? A home with more bedrooms or a bigger retirement account?   

Marriage is often about compromise. Communication is often the key.  But in many cases, there is conflict and spouses can’t come to an understanding or agreement. One spouse may be so focused on frugality that the family is deprived of simple pleasures. On the other hand, spending beyond the family’s means often leads to unnecessary debt and, ultimately, financial ruin.

If this is an issue with you or someone you know, this may be the time to consult with a financial planner. Financial planners have the tools and training to help couples develop financial guidelines that will help them come to an agreement that both can live with. Creating a financial plan together may show a way for a compromise between parsimony and extravagance.

If you find yourself arguing over money, give us a call. We may be able to help you resolved your differences.

Becoming Rich Is Not the Same Thing as Staying Rich

What does the term “rich” mean to you?  Many of us are blessed with a great family, friends, good health and a lot of the things that make life worth living.  But as a financial advisor, my job is to help people achieve financial prosperity and keep it throughout their lives.  And that often means that the strategies they used to become “rich” in the monetary sense are not the same as the ones they need to stay that way.

Why Becoming and Staying Rich Are Different

Take the case of an entrepreneur.  Starting a business is inherently risky.  You typically have to commit your own capital or borrow it to get started.  Then, as the boss, you depend on yourself for a paycheck.  Successful business owners often find that they have become monetarily “rich,” but the majority of their net worth is tied up in the business.  If the economy or a competitor hurts their business, they can lose it all.

We have met people who have had very successful careers climbing the corporate ladder.  It’s not unusual to find that the successful executive is largely rewarded with company stock.  But being part of a successful corporation doesn’t come with a guarantee that the stock will retain its value.  Some of the best-known names in American industry have lost 50%, 75%, even 100% of their value over the last 50 years.

Both the business owner and the corporate executive become “rich” by focus and discipline.  To avoid losing part – or all – of their wealth requires a change in emphasis.  It means risk reduction via diversification.  It means finding a financial advisor who can create a portfolio that is robust enough to reduce the risk that the economy, competitors or unforeseen events destroy the financial future they have worked so hard to build.   

Conclusion

Of course, this also applies to those people who have benefited from a general run-up in the stock market and have achieved a measure of financial independence but who are now concerned about holding on to what they have.  Be sure not to confuse luck with smart investing.  The last decade has been good to all investors.  It’s important to remain prudent and remember the first rule of making money is to not lose it.

Call us or use our contact page to find out how we can help you keep what you have worked so hard to get.

Fearing Retirement Failure?

Retirement planning is complicated.  It may not be rocket science, but there are a lot of variables that can affect how you are going to do financially 10, 20, 30 or even 40 years down the road.  As a result, too many people don’t do any planning.  Even worse, because they don’t have a plan they don’t give enough thought to saving for retirement.

Most Americans Have Little Saved For Retirement

A fifth of Americans don’t have even $5,000 saved.  Nearly half of all Americans now expect that they’ll have to work beyond the traditional retirement age.  Those numbers indicate that most people have put off retirement planning and saving, which brings to mind the old refrain “if you fail to plan, you are planning to fail.”   The truth is that you can do it, but most people need help.

There are so many variables in life that tend to make planning difficult.  How long will you live?  What will your health be like as you age?  What will returns be on stocks and bonds before and through your retirement?  How fast will the cost of living go up?  Will your income increase between now and your retirement?  How much income will you need when you retire?  What will the tax rate be in the future when you are retired?

Conclusion

That’s where having a financial planning advisor is so helpful.  They are not prophets, but they can create a plan with conservative assumptions that can be updated from time to time to provide guideposts and milestones on your way to retirement.  Advisors who specialize in retirement planning can begin a discussion with anxious individuals and couples and offer the appropriate level of support.   An advisor’s job is to help you create a path to financial success and to teach and encourage the behavior that helps get you to your goal.

A good advisor helps remove the fear of failure and encourages good financial habits.   Time is your most valuable asset and the clock is ticking.  Call us today or use our contact page to get started.

Don’t “Guess” Your Way to Retirement

Participants in a recent study answered that they arrived at the appropriate amount they’d need to fund their retirement by guessing.

Retirement is too important and too final to go into with guesses.

When you tell the boss that you’re leaving your position, you should have a plan for what comes next.  If it’s a promotion, another job for more pay, or something that gives you more responsibility and a clearer career path, that’s a good thing.  On the other hand, if you’re leaving to start your retirement, with years (or decades) without a steady paycheck, you had better know what you’re doing and have a clear plan.

Retirement comes with more than just leisure time.  We continue to age, visit the doctor more often, and our skills get outdated, making it more difficult to get another job if we find ourselves in need of additional income.

True story: I knew a retired rocket scientist who got a job in the tool department of a hardware store to supplement his retirement pay to maintain his standard of living.

A financial advisor who specializes in retirement planning can help facilitate discussions on several key issues, enabling genuine retirement planning to take place.

If you or someone you know is contemplating retiring, give us a call.  We’d be happy to sit down over a cup of coffee and discuss what you need to retire.

The Real Value of Financial Advice

Most investors who retain an elite financial advisor would agree that the value far exceeds the cost. They simply do not have the time and/or the expertise to navigate the complex financial world by themselves and see tremendous value in having a trusted, expert confidant who can answer questions and provide guidance when faced with uncertainty.

Clients often come to us with questions when they are making financial decisions. Should they take option A or option B? We frequently suggest that there may be other alternatives that they have not even considered. It’s gratifying to see a light go on when we explain that option C is better for them, they just didn’t realize it was there.

The Real Value of Financial Advice

A leading financial firm determined that “as much as 45% of the total value of an advisory relationship perceived by investors is derived from emotional elements, while the remaining 55% is derived from functional aspects of the relationship like portfolio management and financial planning.”

In other words, nearly half of the value of a financial advisor comes from services that have nothing to do with portfolio management.

Advisors have two primary tasks – helping people manage their wealth and helping people manage their emotions.

Korving & Company’s investment methodology is systematic and backed by technology that allows us to monitor hundreds of individual portfolios to keep then within their stated objectives. This allows us to spend more time with the subjective questions that our clients have. That’s where decades of experience in both finance and life help our clients to meet their own goals.

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