September 2020 Client Letter

September Client Letter

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Is Gold a Better Investment than Stocks?

Is Gold A Better Investment Than Stocks?

Is gold a better investment than stocks?  Wendy asks, “I keep hearing ads advising us to sell our stocks and buy gold or silver. For an older investor, is this a valid point?” 

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Gold Better Investment Than Stocks

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Gold Better iNvestment than stocks

Is gold a better investment than stocks?  

Gold is one of the ultimate fear assets. When things go haywire in the markets, people tend to turn to gold because it’s a tangible asset, and it has value everywhere.

We’re dealing with the possibility of hyperinflation. If that happens, gold could do very well. Another shutdown could increase the fear level of investors. Gold could also do well in that case. There are periods of time, like early 2020, where gold really shined.

Fact or Myth? Gold is safer than stocks

You have a gold bar locked in the safe. You paid $1,500 dollars for it. Unless you pay attention to gold prices, you know you have a gold bar and it has value. You may not know how much it’s worth, but it’s going to be worth something to somebody.

If you pulled it out earlier this year and thought to yourself, “I wonder how much this is worth?”, you discovered it was worth $2,000. Then, you put it back in the safe until next year. The next time you think about the bar, it could be worth $1,500. It could be worth $1,200.

Gold has extreme fluctuations in value, just like stocks. Let’s look at the last 13 years.

  • 2013 -28%
  • 2014 -2%
  • 2015 -10%
  • 2018 -2%.

Over the same timeframe, stocks were down

  • 2008 -37%
  • 2018 -4%.

Over 13 years, gold lost money four times, and stocks were down twice.

If you look at the last 48 calendar years, gold experienced declines 18 times. Stocks fell 11 times.

Gold is not a “safer asset” than stocks.

Is gold better than stocks?

Here is a link to a good article called, Gold’s Romantic Delusion. There’s a graph in that article which shows $10,000 invested in gold in 1980 versus $10,000 invested in stocks. On July 31 2020, the gold would have been worth about $36,000. Stocks would have been worth $761,000.

Is Gold Better Than Stocks

Source: Gold’s Romantic Delusion by Andrew Hallam.  Click here for the full article

Is it a better asset than stocks for older clients, or any client for that matter? In our opinion, no. The numbers say the opposite. Gold isn’t a bad investment, but I wouldn’t own gold instead of stocks.

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About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Should I Start Social Security at 62?

Should I Start My Social Security At 62?

This question is from Lloyd. He asks, “I’m planning to retire in the spring when I turn 62. Should I start taking my Social Security or should I wait?”

This is a big decision. The only decision we have when we’re looking at social security is when to file for our benefits.

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The impact of retiring early

The year you were born determines your normal retirement age. When you start Social Security before your normal retirement age, your benefits are reduced. If you’re married, the spousal benefit is also discounted. It also means a lower survivor benefit. The dollar amount of your cost of living adjustments will also be smaller. The percentage will be the same, but the dollar amount of the increase will be smaller.

A lot of people still signed up for social security early.

  • 31% of men and 27% of women sign up for their social security benefits at age 62
  • 6% applied at age 63
  • 7% filed at age 64
  • 10% applied for social security at age 65
  • 33% filed for their benefits at normal retirement age
  • 6% waited until age 70 to maximize their benefits

A little more than half of the recipients file for their benefits early.

A look at some numbers

You can do a lot of calculations to help determine when to start your benefits. Delaying your retirement can lead to thousands of dollars of additional benefits over your lifetime. But, you must live long enough to make it work. Generally speaking, you have to live until you are in your early 80s.

Here is how this can impact Lloyd. Let’s say his full retirement benefit is $2,300 per month. If he starts Social Security at 62, his benefit shrinks to $1,640.

At his full retirement age, his wife’s spousal benefit, if he’s married, would be half of the $2,300 or $1,150. At age 62, the spousal benefit will be, at most, $820. The combined benefits are nearly $1,000 less each month.

If Lloyd waits to start his Social Security, his discount isn’t as big.

  • By waiting a full year to apply for benefits, his amount grows by 7%
  • If he waits two full years, his benefit grows by over 14%
  • Should he wait until age 65, three years later, his benefit grows by 24%

A big decision

Should Lloyd take his Social Security benefits at 62?

It depends. Is he healthy? Is he married? Can he afford to retire without taking his benefits and not to put too much stress on his savings? There are a lot of factors, and it’s hard to say yes or no.

Here is what we typically see. People start their social security when they retire—regardless of their age. Most of the time, it’s because they need the money. The ones who retire and delay their Social Security have been good savers and have low expenses.

You need to consider your entire situation. You can’t make the decision about Social Security in a vacuum. There are many other factors involved in this process.

If you are unsure what to do, talk to a financial advisor before you make a costly mistake.

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About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Should I Use My Savings To Pay Off my Mortgage?

Should I Use My Savings To Pay Off My Mortgage?

This question is from Karen. She asks, “With interest rates so low, we aren’t earning anything on our savings. I’m also worried about another significant drop in the stock market. Should I take money from my savings to pay off my mortgage?”

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There are two parts to this. One is eliminating debt. The other is what is the better use of your money?

Paying off debt is never a bad thing, especially as you get closer to retirement. According to the Employee Benefits Research Institute, the largest annual expenditure for people 50 and older is housing. If you can pay off your mortgage before you retire, it can help you have a more successful retirement.

There is also a huge psychological boost to being debt-free. What happens if the economy shuts down again and you get laid off? Not having a mortgage payment can reduce your stress. It’s less stressful knowing you don’t have to come up with $1,000 each month when you’re not working. We cannot underestimate the value of being debt-free.

What is the best way to do this? Here are some factors to consider. These apply whether you’re using a lump sum or paying extra on your principal. 

Compare interest rates

The first thing is to compare your current interest rate to what you earn on your savings and investments. If your mortgage interest rate is high, 4% or more, and you’re earning 0.75% (or less) on your savings, this decision is easy. The difference in the cost of your money compared to what you’re earning is significant. Using your savings to pay down or pay off your mortgage makes a lot of sense. If your interest rate is closer to 3%, and you’re invested in something that has a potential to earn 8%, the math changes.

Your age

The second factor is your age. For someone under 40, the value of compounded returns from investing can be better for your future. If you are closer to retirement, the benefit to paying off that mortgage is more valuable.

use savings pay off mortgage
use savings pay off mortgage

How long will you live there?

Are you planning to stay in your house for a long period of time? If you’re planning to remain there for several years, paying off the mortgage makes more sense. If you’re planning to sell your home in the next 36 months, I’m not sure the answer is as clear. You may not want to pay off your mortgage if you plan to sell it in the very near future.

Tax costs

What are the potential tax costs to raise the funds to pay off your mortgage? Does that come from an IRA or a 401k? If it does, then the entire distribution can be taxable.

Here is an example. If you need $100,000 to pay off your mortgage, you may need to withdraw $133,000 from an IRA. The extra amount will cover the taxes. That is a very expensive way to pay off your mortgage.

Selling stock to pay off your mortgage can also result in a significant tax cost. Your sales proceeds are $100,000. You paid $50,000 for those shares. You will incur $7,500 in capital gains taxes and some additional state income tax. That is also an expensive way to pay off your mortgage.

If the money is in a savings account, there is no tax cost to use it for your mortgage.

Paying off debt is rarely a bad choice, but you need to look at it from all angles and make an intelligent choice.

use savings pay off mortgage

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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Is Doing Nothing The Right Thing To Do?

Is Doing Nothing the Right Thing to Do?

During a Bear Market, many investors are tempted to sell their stocks and move to cash.  Many financial advisors will tell them to sit tight, and ride out the storm.  Is “doing nothing” the right thing to do?  Today we’ll share some interesting data that shows that in the last market, doing nothing was better than panicking.

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We’ve already been through a lot this year. And we’re still dealing with a lot. We have an election coming up in a few weeks. The Coronavirus is still part of our lives. There are questions about another major shutdown. And there are some concerns with all the government help that there is going to be hyperinflation. There are a lot of things that could cause another bear market.

Doing nothing

When we have major turmoil, people want to do something to protect their nest egg. In every bear market, we’ve had people call and ask if they should go to cash. Our answer has always been no. Sit tight right through any storm we encounter.

We believe you will be better off if you don’t make an emotional decision. Doing nothing is hard to do. In fact, it’s the second hardest thing to do as an investor.

Inevitably, we will have someone who can’t take it anymore and bail out. During the “dot com” bust and the Great Recession, we had clients who sold their stocks within a week of the market bottom after the damage was done.

Cash panickers

Is doing nothing the right choice? Recently, Vanguard did a study during the bear market this spring. They looked at over 31,700 accounts, both retirement plans, like 401(k)’s, and retail accounts. They found that 0.5% of those accounts panicked and moved to cash between the market high on February 19 and the end of May.

They looked at two things. They looked at the actual returns of those clients at three different points: March 31, April 30th, and May 31. And they compared those to the returns those clients would have realized if they had done nothing. Here’s what they found.

By the end of March, 56% of those clients who went to cash were in a better place than if they had done nothing. This means they had a higher balance than if they stayed invested.

The stock market rebounded very quickly. By the end of April, only one third of those clients were in a better place.

By the end of May, only 15% of those clients had a higher balance by going to cash. 85% of those clients who panicked would have had better results if they did nothing.

85% of those clients who panicked would have had better results if they did nothing.

Selling low...

Why is that? Most of them didn’t guess the correct time to move to cash. You have to make that decision very early in the process, so you don’t take part in the downturn. A good number of them went to cash after a significant amount of the damage was done.

When the market turned around and moved higher, they missed a great buying opportunity. They didn’t participate in the rebound. Essentially what they did was sell low and bought at higher prices. This is the exact opposite of what you’re supposed to do.

Is doing nothing the right thing
is doing nothing the right thing
is doing nothing the right thing

The cost of being wrong

If you sell now thinking things are going to get bad, you have to be aware that they may not get as bad as you think. For example, let’s take the 2016 election. I woke up that morning and saw that Donald Trump won the election and immediately turned to CNBC. The futures that morning showed that the Dow Jones Industrial Average was in for a rough day. When I got to work I had two calls before the market opened. These clients were extremely concerned about what was going to happen in the stock market. They thought it was going to be ugly.

By the time the market opened, futures were positive. Over the next several months, we saw the stock market race higher. Had those clients gone to cash, they would have missed that rally.

If things do get as bad as you believe, you might be right for a while— just like the folks in the Vanguard study. But will you have the confidence to buy at lower prices?

Most people think things are going to get worse before they get better. Stocks are forward looking. The stock market will turn around long before the economy turns around. Stocks will begin to increase long before people believe things will get better. If doing nothing is the second hardest thing to do, then buying stocks in the middle of a bear market is the hardest.

Vanguard found only 9% of those 31,000 accounts bought more stocks during the bear market.

If you have to...

If you’re convinced you need to go to cash, do it early. Do it before things get worse. We’ve already seen a minor pullback. Don’t wait until things are down 20% or more to sell. And you need to have a plan to buy at lower prices. You must have courage to buy when things look like they’re going to get much worse.

If you can’t make the decision to do both of those things, then do nothing. Sit tight and ride out the storm.

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Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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