How Will Election 2016 Affect the Stock Market?

With Election Day almost (finally!) here, the most common worry I hear from many of my clients is, “How will the presidential election affect the markets?”

Market volatility before and after the election is a legitimate concern. For sure, this hasn’t been a typical election, and a victory for either party could affect the markets. Markets tend to react to good news and bad news. In the short-term, the stock market can be emotional and illogical. That’s because people drive markets and people– especially when investing their money–can be emotional and illogical.

Dimensional Fund Advisors (DFA) recently published a new study, “Presidential Elections and the Stock Market,” and included the following exhibit of the growth of a dollar invested in the S&P 500* over nine decades (since 1926) and 15 presidencies (from Coolidge to Obama). The study examined the growth of one dollar from 1926 through the end of June 2016. The outcome shows that through Democratic and Republican administrations, the stock market consistently grew, regardless of which party was in power. At times, though, the market was down or flat, too.

graph1

The other part of the study delved into shorter periods of returns previous and subsequent to presidential elections. Again the data showed there to be little or no differences compared to market returns of non-presidential election years. The takeaway: Trying to make an investment decision based on the outcome of an election was unlikely to generate any excess return for an investor. Any positive outcome based on using such a strategy is likely to be the result of random luck. At worst, it can lead to costly mistakes. We can’t predict the economy, and we for sure can’t outguess the markets.

You may be thinking, however, that this time is different. No doubt, with a 24/7 news cycle and nonstop election coverage, it’s easy to get on the roller coaster with the Wall Street hype and media pundits. Turn off your television sets and don’t panic. If history is any guide (and in my opinion, it’s the only guide we have), the outcome of this election should have little impact on the markets in the long-term.

*The S&P 500 Index is an index of 500 of the largest exchange-traded stocks in the US from a broad range of industries whose collective performance mirrors the overall stock market. Investors cannot invest directly in an index.

Disclosure: This information is provided for educational purposes only and should not be considered investment advice or a solicitation to buy or sell this security. This blog contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. Information was based on sources we deem to be reliable, but we make no representations as to its accuracy. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this article will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.

Do You Want to Retire to a “Happy” Country?

Retirement is habitually pictured and presented as a happy time in our lives. The phrase “the golden years” evokes images of carefree retirees golfing under blue skies or walking along the beach enjoying their newly found free time. I doubt if many of us visualize happy retirees wearing parkas and trudging through slushy streets. Most of us tend to associate a happy retirement with either moving to or vacationing in a sunny climate, certainly not retiring in colder, northern Scandinavian countries where the sun may not even rise for three months during the year.

However, when the United Nations (UN) ranked the 10 happiest countries in the world, 8 out of 10 were located in higher latitudes in the Northern Hemisphere, and five were in Scandinavia. Sweden was ranked #10 and Denmark was #1. (Sweden, by the way, is the best country in which to grow old). The two exceptions to the colder climates were Australia and New Zealand. The United States ranked 13th overall.

What makes these countries happy is multifactorial (and blue skies don’t seem to matter). The UN considered countries based on dynamics such as equality, per capita GDP, social support, life expectancy, perceptions of corruption, individual liberties and how citizens rate their own lives within their home country. Many of the top 10 share certain traits like generous social benefits including health care and education. The countries also are electoral democracies where civil rights are abundant and revered. Other traits are small populations and ethnic homogeneity.

Some economists think “happy” is too touchy-feely to define, so the Legatum Institute, a London-based nonpartisan think tank, set out to rank the happiest countries in the world through the creation of a prosperity index. Each country is ranked on 89 variables sorted into eight subsections: economy, entrepreneurship, governance, education, health, safety, personal freedom and social capital. And once again the Scandinavian countries of Denmark, Finland and Sweden led the pack equally with Switzerland and the Netherlands close behind.

In addition to reasons previous stated, the Legatum research found another important “happiness” factor which is key: the fostering of entrepreneurship and opportunity. Legatum’s researchers concluded that a country’s ranking in this area is the clearest proxy of its overall ranking in the index. This translates to low business startup costs, lots of cellphones, plenty of secure internet servers, a history of high R&D spending and the perception that working hard gets you ahead. Wow! To me, these countries sound like a Bernie Sander’s pipe dream.

Good luck, though, if you want to retire to any of these “happy” cold climate countries. Most are homogeneous and discourage immigration because they don’t want to pay healthcare for older U.S. retirees. I know this because I had a retired client whose daughter and son-in-law moved to Australia, one of the happiest countries. My client wanted to move with them but could not because Australia did not want to pick up her healthcare tab.

Regardless if you live in a cold climate country or warm climate country, we know our happiness is much more than our day-to-day weather or having prosperity. In my profession, I’ve seen people with a lot of money live in lack and people with little money live in abundance. Happiness is ultimately about enjoying good health. After all, “health is wealth.” It’s having independence and being able to take care of yourself. I think we’d all agree, though, whether we’re donning snow boots or flip flops today, that happiness is as simple as having good times with your friends and family. In my next blog, I will discuss countries which welcome American retirees. Hint: the weather is warmer, and your dollar will stretch further!

Is a Reverse Mortgage Right for You?

Are you worried that you’ll run out of money during your lifetime? Are you uneasy about the flat stock market and low interest rates? Would you like a source of guaranteed retirement income in addition to your Social Security benefit and pension? If you answered “yes” to any of these questions, a reverse mortgage is an option that may be suitable for you.

Your home is often your most valuable asset, but until recently, it was an illiquid asset (an asset that is difficult to sell because of its expense, lack of interested buyers or some other reason) and provided you with money only after it was sold. A reverse mortgage helps tackle this issue. Simply, a reverse mortgage allows older homeowners to convert the equity in their primary residence into a liquid asset, be it a stream of income, lump sum or for deferred use. No repayment of the mortgage (principal or interest) is required until the borrower dies or the home is sold. Cash accessed through a reverse mortgage is tax-free and does not impact regular Social Security and Medicare benefits, although it may affect eligibility for other government programs such as Medicaid.

To be eligible for a reverse mortgage, you must be at least 62 years old and must either own the home outright or use the proceeds of the reverse mortgage to pay off the balance of the existing mortgage. You retain ownership of the home, are responsible for its maintenance and continue to pay your property taxes and insurance.

Here’s a simple reverse mortgage example for a 65-year old couple. Let’s say they own a home valued at $250,000 and have completely paid it off. If they choose monthly lifetime payments, they would receive about $672 per month or $8,065 annually. Again, this is tax-free income.

Another option is to defer receiving any income and receiving interest on the amount they borrowed. If that couple did so, based on current interest rates, their account would be worth $193,500 in 10 years. This option would be suitable for someone who does not need immediate income but wants some assurance that there will be income for them in the future.

Reverse mortgages are complex financial instruments, and you must carefully weigh the pros and cons before applying for one. Below is a list of pros and cons from Investopedia, the world’s leading source of financial content on the web.

Pros
• You can often choose how the cash is paid to you: a single lump sum, a regular monthly cash advance, a line of credit where you decide when and how much of your available cash is paid to you, or a combination of these methods.
• Regardless of how the cash is paid out, you normally don’t have to pay anything back as long as you (or any co-owners) live in the home as a principal residence.
• There is no required minimum income to qualify (because you don’t have to make monthly repayments).
• If you receive more payments than your home is worth (i.e., you “outlive” the loan), you will not owe more than the value of the home, according to the Federal Trade Commission.
• Cash advances are typically non-taxable.
• You maintain the title to the home (you remain the owner).
• If you have a federally-insured Home Equity Conversion Mortgage (HECM), you can live in a nursing home for up to 12 months before the loan becomes due.
• Cash advances typically do not affect your Social Security or Medicare benefits.
• After the home is sold and the lender fees are paid, any equity left in the home goes to you or your heirs.

Cons
• You must be at least 62 to qualify.
• You must go through (and pay for) mandatory mortgage counseling.
• Loan origination fees and closing costs can be expensive (these fees can be rolled into the loan and financed).
• You may be charged monthly servicing fees during the term of the mortgage.
• Most reverse mortgages are variable interest rate loans tied to short-term indexes.
• Your debt increases over time as interest is added to the loan balance.
• You cannot deduct the interest until the loan is paid off.
• The loan can become due if you fail to pay taxes, homeowner’s insurance or other expenses.
• There are limits on how big a mortgage you can get, and how much you can borrow during the first year.
• Reverse mortgages use up equity in your home, leaving you and your heirs with fewer assets.

Before exploring a reverse mortgage, you need to ask yourself, “How much home equity do I have?” If the answer is “not much,” then you’d want to look into other options. However, if you’re of the right age without a lot of cash flows and sitting on substantial home equity, a reverse mortgage can be a sweet deal.

If you think you may need access to your equity, talk to a housing counselor or a trusted financial advisor sooner rather than later. A good financial plan created by an advisor keeps you from making hasty financial decisions in an emergency and is designed to give you options–like a reverse mortgage–in your retirement.

Bonds that Go Boom!

Let’s talk about bonds! You scarcely hear or read much about bonds. The stock market, especially in recent days with the Brexit, grabs the headlines all the time. Bonds just aren’t glamorous, but they’re an important part of your retirement portfolio. They provide safety, stability and steady interest payments—three things that will help sustain your lifestyle during retirement. One thing, though, that most bonds don’t offer is inflation protection. And, as you well know, the cost of living tends to rise almost yearly. But there is one kind of bond that adjusts for inflation: Treasury Inflation-Protected Securities or more commonly referred to as “TIPS.”

You see, our economy is managed with mild inflation as part of its strategy, with 3% being the target rate. Think about what a new car, your weekly grocery bill and cable TV cost 20 years ago. I guarantee you that just about everything costs more today. A $50 bag of groceries, for instance, now costs $77 because of inflation. TIPS are unique because they are guaranteed to keep pace with inflation as defined by the Consumer Price Index (CPI), offering more security during your retirement.

To compensate for issue costs, TIPS have two components: the first is the coupon (guaranteed interest rate of the bond) and the second is the inflation premium. To illustrate, if a $1,000 regular government bond was issued with a 3% interest rate, the bondholder will receive a $30 interest payment. However, if there was a 10% rise in the CPI, that bond would have no inflation protection, but TIPS would compensate for the increased cost of living. Now let’s compare the previous bond with a TIPS bond issued with a lower interest rate of 2% and 10% inflation. The TIPS bond holder is given the interest plus a 10% inflation premium which is added to the face value ($1,000) of the bond. So the bond is now valued at $1,100, and the bondholder is paid 2% of that amount or $22 of interest earnings. In this case, the TIPS bondholder out earns the regular bondholder.

Just like there are no perfect people, there are certainly no perfect investments, and this applies to TIPS as well. Some disadvantages are:

• TIPS are issued at lower interest rates than comparable bonds.
• The inflation boost when added to the face value of the bond is taxable (unless you hold TIPS in a tax-favored account).
• If the Fed raises interest rates, but there is no inflation, TIPS will not go up in value.

If you’re diversified, though, TIPS can be an attractive part of your retirement portfolio. In designing a portfolio, you want to have a mix of assets that can move inversely under different market conditions; bonds and stocks work in concert with one another in your portfolio. If you don’t include enough risk (think stocks), your investments may not earn an adequate return to meet your goal. However, with too much risk (think not holding enough bonds), the money may not be there when you need it.

Having the right mix of stocks and bonds can reduce your portfolio risk, your potential losses, and–with TIPS–offer you inflation protection. Sure, bonds aren’t glamorous, but they can play a significant role in achieving your financial goals and a successful retirement.

“I Wish You Were My Financial Advisor”

My clients and other people may think that I spend my work day watching the stock market and making trades. I actually do neither. My job is to help my clients achieve their personal and financial goals, not to outguess the markets. After all, I’m a financial advisor, not an astrologer. Besides, neither daily stock market analysis nor trading add any value to my clients’ accounts. Sure, I may occasionally tweak my clients’ accounts, but more often than not, I spend my days caught up in the minute details of my clients’ accounts. It’s certainly not the most glamorous part of my job, but it’s a very important one.

Let me give you an example. A recently widowed client came in for an appointment several months after her husband’s death so that we could review her financial security and change the beneficiaries of her accounts. We first addressed her financial security going forward, and I assured her she had enough money to last her the rest of her life. By the way, that’s my principal role in my clients’ lives—making sure they don’t outlive their money and can enjoy a worry-free retirement. Anyway, this widow had four different accounts, all of which her deceased husband was either the joint owner or the primary beneficiary. So the next task was changing the beneficiaries and ownership of these accounts. We wanted to make sure there would be a smooth transition of funds in case something happened to her.

What we did was a simple procedure that any good financial advisor would do. But a week later, we also performed a standard operating procedure which my firm employs. That is, confirming that the brokerage company we use entered all my client’s information correctly. Sure enough, we found several mistakes. For instance, we noticed that of one of the beneficiaries’ last name was spelled incorrectly and saw that another account’s beneficiaries hadn’t even been changed.

So I called the brokerage firm and told the service representative that we had discovered these two mistakes. She immediately corrected the two errors, and asked me if there was anything else I needed. I said I was good to go, and she said, “I really appreciate your attention to detail. I wish you were my financial advisor.” I thanked her for the compliment and then went about my mundane day, ignoring the gyrations of the stock market.

(This article was originally published on Paladin Registry: http://blog.paladinregistry.com/advisors-2/i-wish-you-were-my-financial-advisor/)

Sir Isaac Newton: The Emotional Investor

Sir Isaac Newton, as everyone knows, was a genius. His endless curiosity led him to tackle problems as minuscule as rug-peeing cats and as grandiose as humanity’s ultimate purpose in the cosmos. Naturally, we might think that a person this smart would also be a genius investor, someone who’s able to outguess the markets and become a multimillionaire with his investment acumen.

But Sir Isaac Newton was no outlier when it came to investing. He started out well enough by investing some of his money into the South Sea Company, a hot stock of the seventeenth century, and sold the stock for a handsome profit. But the stock continued to rise after he sold it. Initially, Newton resisted reinvesting his hard earned money back into the stock, but it continued to rise even higher, and that’s when the trouble began. As the stock price kept going up, Newton started to experience the all too human emotions of envy, regret and greed which often get investors into big trouble.

As the stock climbed, he plowed all his money back into the South Sea Company and shortly afterwards, the stock crashed, and he lost a fortune. By some accounts, he lost the equivalent of almost $3 million, adjusted for today’s dollars. Reflecting on his loss, Newton was quoted as saying, “I can calculate the motion of heavenly bodies but not the madness of people.” He blamed others instead of himself for his stock investing folly. But he simply let his emotions get away from him. He moved from being an investor to a speculator and a gambler. He gambled away a fortune, and as the saying goes: the house always wins.

If Newton had lived in modern times, he may have learned from social scientists that human beings are not wired to invest in the stock market. In times of stress, our primitive brain, which is responsible for survival behaviors such as flight or fight, kicks in. The primitive brain really starts to go haywire when we are losing money, or we feel like we are in danger. It for sure comes in handy if we smell smoke in our house, but it can cloud our judgment when it comes to our investment decisions.

Humans also have another behavioral bias called the “recency” effect. That is, we tend to apply a higher probability to things that have happened recently. Think back to earlier this year when the Dow Jones Industrial Average dropped over 1,100 points in less than a month. Many people thought that we were going to have a replay of 2008 when the market dropped about 40%, and they panicked. Of course, we didn’t go into another recession, and the markets recovered.

As Sir Isaac Newton proved, the smartest guy in the room is often not the smartest investor. Newton didn’t have discipline or a goal-oriented plan; he just kept jumping in and out of the market. Like Newton, our emotional behavior can blow up our plans. Worse, it’s almost impossible to identify this behavior in ourselves. Even if we could recognize it, we can’t turn our primitive brains off to think objectively. That’s why you should work with a trusted financial advisor who is not emotionally attached to your money and can think objectively. A good advisor will keep you disciplined and focused on your goals and not let your emotions drive your investment decisions. And unlike Newton, a good advisor won’t gamble away your money.

(This post was originally published on Paladin Registry: http://blog.paladinregistry.com/investing-2/the-emotional-investor-sir-isaac-newton/)

Navigating Market Storms and Wall Street Hype

When it comes to making predictions, everyone’s an expert. Apparently you just have to sound like you know what you’re talking about, and you’re considered credible.

This is especially true in the financial industry, where there tends to be a lot of machismo, particularly during times of market volatility. It seems like everyone has an opinion about where you should invest your money. But smart investors know to steer clear of the noise and stick to a disciplined and diversified strategy.

Athlete picks
Given the onslaught of “expert” advice, it came as no surprise (well, maybe a bit) when I saw that Jose Canseco was tweeting about negative interest rates and gold a few weeks ago. You may recall the Oakland A’s slugger with the Popeye-sized biceps from the 1990s. Yes, that Jose Canseco. He was one of the “Bash Brothers,” along with Mark McGwire. Now he’s hot for gold.

On Feb. 12, he tweeted, “not a surprise but everyone should be in gold.” Minutes later, he added, “$1500+ by Memorial day.” Mind you, this is coming from the same guy who famously had a ball bounce off his head and over the wall in right field at Cleveland Municipal Stadium, resulting in a home run for the opponent. Despite his lack of professional investing experience, he’s reacting like so many other “experts” to the recent turmoil in the financial markets. I may find his tweets amusing, but I’m certainly not piling my clients into the glittering metal.

Beating the pros
Canseco’s recent musings brought to mind Orlando, the “ginger feline” who made news back in 2012 by beating a team of investment professionals and a group of students in a yearlong stock-picking experiment. The cat picked his stocks by throwing a toy mouse at a grid of publicly traded companies. His human opponents used methods involving “research” and technical analysis. At the end of the year, Orlando’s picks had returned nearly 11% while the pros had gained just 3.5%. In comparison, the Standard & Poor’s 500-stock index rose 13% that same year. They all would have been better off just buying an S&P index fund.

More recently, MarketWatch reported that Wall Street’s most-hyped stocks lost big in 2015. In fact, they did worse than the stocks that the same highly trained, highly paid analysts said not to buy. Apparently, though, bad forecasting is customary among Wall Street analysts. In the article, Brett Arends reports, “Each year since 2008, analyst data supplied by Thomson Reuters and stock performance data from FactSet show that analysts’ bottom-10 stocks on average have beaten their top-10 counterparts by 10 percentage points.”

For fans of professor Eugene Fama, a Nobel laureate in economics, this comes as no surprise. He has long maintained that even when professional money managers do outperform their comparative indexes, luck plays a huge role in their superior performance. “I’d compare stock pickers to astrologers, but I don’t want to bad-mouth the astrologers,” Fama has been quoted as saying.

Stay diversified
Since the beginning of the year, we’ve seen a lot of turbulence in the markets and anxiety among investors. However, the best way that I know of to combat the fear of a down market is to look back in history. The stock market has so far been an upward-reaching entity. Yes, it occasionally takes a break, temporarily declining or hovering at lower elevations. But over the long run we have seen, and can expect to see, growth.

Yet, as our “experts” repeatedly demonstrate, it’s impossible to know which stocks will do best next week, next month or next year. That’s why my advice is always the same: Stay disciplined, goal-oriented and diversified with your investment strategy. It’s the surest way to navigate market storms, Wall Street hype and “juiced” home run hitters.

This article was originally published on NerdWallet.com (https://www.nerdwallet.com/blog/investing/navigating-market-storms-and-wall-street-hype/)

Why You Should Have Bonds in Your Portfolio

You scarcely read or hear much about bonds these days. The stock market, especially in recent weeks, grabs the headlines all the time. Bonds just aren’t glamorous. Sure, Michael Milken, “the junk bond king,” brought some glamour and headlines to bonds back in the late ’80s, but they haven’t received that kind of coverage since.

Yet that’s no reason for investors to forget about this important asset class. Bonds are one of the three major asset categories — along with stocks and cash — you should have in a balanced portfolio. Investing in a mix of these assets is a good strategy for achieving your financial goals.

Having bonds in your portfolio can help reduce risk, which is a welcome proposition given the market volatility we’ve seen since the beginning of the year. Stocks tend to be more volatile than bonds — they go up and down further and faster — and that makes them a riskier proposition for the short-term investor. Think of stocks as cleanup hitters. They’re going to hit a lot of home runs, but they’re going to strike out a lot too. Bonds are more like leadoff hitters, the guys who can consistently hit singles and get on base. They can be a stabilizing force amid volatility.

Inverse movement
The stock market, like most things, tends to cycle. Right now, the decline seems to be a reaction to the dramatic drop in oil prices and the slowing of China’s economy. Bonds cycle, too, but they’re not as volatile as stocks. Instead, bonds often have acted as insurance by reducing portfolio volatility.

This is because bonds often move inversely to stocks, and this tends to be mostly true when stocks are falling. However, bonds are in an unusual place right now because of historically low interest rates. When rates rise, the value of bonds will go down. But this should not deter you from holding bonds in your portfolio because they are still less volatile than stocks, and if the stock market takes a big hit, bonds usually rise. This means bonds and stocks work in concert with one another in your portfolio.

In designing a portfolio, you want to have a mix of assets that can move inversely under different market conditions. Diversifying in this way reduces your risk and thus your chances of getting hurt.

Asset allocation
Asset allocation — holding the right proportion of stocks, bonds and cash for your situation — is important because it can impact your financial and personal goals. However, designing the best asset-allocation model or portfolio can be complex. You need to look at your time horizon and your tolerance for risk.

Your mix of stocks and bonds also should be determined in part by the amount of money you need and when you will need to withdraw it from your accounts. If you don’t include enough risk (think stocks), your investments may not earn an adequate return to meet your goal. However, with too much risk (think not holding enough bonds), the money may not be there when you need it.

For instance, an older person should have fewer stocks and more bonds in his portfolio. A 25-year-old, though, can have a higher ratio of stocks. She’s in it for the long run and can take more risk than someone who’s nearing retirement.

Stay diversified
We’d all like to know what will happen to our money in 2016. While we can count on the media to offer plenty of headlines and opinions about the economy and markets, the danger comes when we base our investment strategy on these headlines.

We can’t know what will happen to stocks or bonds, and we can’t outguess the markets. If I could, I’d probably have a cult following. But we do know this: The markets will go up, and the markets will go down. And some parts of your portfolio will do better than other parts.

Having the right mix of stocks and bonds will reduce your portfolio risk and your potential losses. So instead of trying to pick a bunch of hot stocks, investors should stay diversified and goal-oriented — and not forget about bonds.

(This article was originally published on NerdWallet.com (https://www.nerdwallet.com/blog/investing/why-you-should-have-bonds-in-your-portfolio/)

My Top 10 Predictions for 2016

With the recent market volatility, we all want to know what will happen to our money in 2016, and there are plenty of opinions in the media about what might happen in the economy and the markets. The danger, however, comes when you base your investment strategy on such opinions.  But if you insist on following forecasts, here is a list of my top 10 predictions that you can count on coming true in 2016:

  1. The markets will go up and the markets will go down.
  2. There will be unexpected news.  Some of it will move prices.
  3. Acres of newsprint will be devoted to the likely path of interest rates.
  4. Acres more will speculate on China’s growth outlook.
  5. TV pundits will frequently and loudly debate short-term market direction.
  6. Some economies will strengthen. Others will weaken. These change year to year.
  7. Some companies will prosper. Others will falter. These change year to year.
  8. Parts of your portfolio will do better than other parts. We don’t know which ones.
  9. A new book will say the rules no longer work, and everything has changed.
  10. Another new book will say nothing has really changed, and the old rules still apply.