Avoid These 4 Big 401k Mistakes in 2020

Avoid These 4 Big 401k Mistakes in 2020

One of the biggest factors in your long-term financial success is avoiding the big mistakes. Unfortunately, we see many of the same common errors that—over a person’s career—can cost thousands if not hundreds of thousands of dollars. Try to avoid these 4 big mistakes in your 401k in 2020

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Mistake 1: Not Maximizing Your Match

Many employers will match your 401k contribution.  If you put money in your account, your employer will too.  We typically see that amount range between 3% and 6% of your pay. 

Unfortunately, we see people who won’t maximize their employer’s match.  Not only are you not receiving all the pay you should, the long-term impact on your nest egg can be huge.    

Mistake 2: Not Saving Enough

Most financial planners suggest you should try to save between 10-15% of your pay for your future. In fact, the amount you save is the biggest factor in your long-term success.

Unfortunately, we see people who limit their savings level well below that. Often times, people will cap their savings in their 401(k) at the point where they maximize the employer match. For most of us, this probably won’t be enough to have the type of retirement we want.

Mistake 3: Not Pursuing Growth

A Nobel Prize winning economist once did a study that showed financial losses feel twice as bad as financial gains feel good. As a result, many people get more conservative with their savings than they should. This means they don’t put enough money in stocks.

Not being aggressive enough can lower your returns over time.  This actually adds more risk to your long-term plans.

Mistake 4: Withdrawing Money From Your 401k

Whether you change jobs or take an in-service distribution, withdrawing money from your 401k gets very expensive.

Most times we see this when people change jobs. Instead of rolling their balance to an IRA or their new employer’s plan, they withdraw the money. This results in taxes, early withdrawal penalties, and the loss of future compounded growth.

If your plan allows for in-service distributions, the costs will be similar.  Most of those distributions will be taxed and penalized.  The penalty applies when you are under age 59 ½.

How Much Will These Mistakes Cost?

How much will these mistakes cost you?  The numbers can be shocking.  The longer you have until retirement, the bigger the cost.  We have a special webinar where we illustrate the potential cost of these 4 mistakes. Click on the button to watch.

What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

Enter Your Question Here

Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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Big Changes to Required Minimum Distributions

Big Changes To Required Minimum Distributions

A new law that passed at the end of 2019 will bring big changes to our retirement savings. This includes changes to required minimum distributions. We’ll talk about what’s different right after this.

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After a major delay, the SECURE Act finally passed through the Senate. It was signed into law and will take effect in 2020. There are some major changes that will impact those trying to save for retirement. And likewise, there are some big changes that impact those already retired. Today we will focus on the changes impacting current retirees.

Changes to Required Minimum Distributions

The biggest alteration affects required minimum distributions. RMD’s have been a provision of the tax code for decades. It was a way to force people to start taking money from their IRA’s and retirement plans and pay taxes.

Under the old rules, you had to start taking money out of your qualified retirement accounts the year you reached age 70 1/2.

The SECURE act eliminated the half year and delayed the required beginning date. If you haven’t already started your RMD’s, meaning you aren’t already 70 1/2, you can now wait until the year you reach age 72.

But, if you’ve already started, you have to continue. You can’t suspend them.

The law will also change the table used to calculate the required amount. But those changes won’t take effect until 2021.

Death of the Stretch IRA

The second major provision is the elimination of the Stretch IRA. This impacts non-spouse beneficiaries of IRA accounts. Under the old rules, a non-spouse beneficiary could distribute their inherited balance over a long period of time.

Now the full account must be completely distributed in 10 years. There are a few exceptions, but this is significant.

For example, under the old rules, a 50 year-old could distribute an inherited IRA over 34 years. now they have to liquidate the account 3 times as fast. Here is the problem.  This also significantly accelerates the payment of income taxes on those balances.

Please keep in mind, this only applies to those accounts who belonged to someone who died after 2019. If you already have an inherited IRA account, your schedule will remain exactly the same.

Webinar: Death of The Stretch IRA

The Stretch IRA provisions for non-spouse IRA beneficiaries has been eliminated.  We have created a short webinar (7 minutes) that explains the changes in more detail.  

No Restrictions on IRA Contributions

If you are over age 70 1/2 and still working, you can now contribute to your IRA. The caveat is you have to have earned income to make that contribution. In years past, once you reached your required beginning date, you were no longer allowed to put money in a traditional IRA.

New Laws Mean It’s Time to Review Your Plans

New laws mean you should do a quick review of your overall plans.  These changes could impact you and what you and your family want to accomplish over the long-term.  So be sure to discuss these new provisions and how they might impact you.

What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

Enter Your Question Here

Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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What Happens to the Stock Market in Election Years

In case you hadn’t heard, 2020 is a big election year. In fact, it is maybe one of the most polarized and heated presidential elections in quite some time.  And we don’t even know who’s running yet. It will likely have an impact on the investment world too. What happens to the stock market in election years?

We’ll take a look back at election years since 1948 and see if that offers any insight into what we could expect in 2020.

Watch: What Happens to the Stock Market in Election Years?

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History doesn’t always repeat itself, but it often rhymes. You can look at certain historical trends and form some fairly realistic expectations. For example, a year ago we looked at what happens the year after a down year in stocks.  In this case, the trend proved to be a solid guide for this year.

2020 is an election year. We thought it would be interesting to look at all the election years after World War II. What happens to the stock market in election years? We found a couple of interesting trends.

Trend 1: Incumbents Are Tough to Beat

The first one has nothing to do with stocks and investing. There have been 18 presidential elections since the end of World War II. It started with Truman’s win over Thomas Dewey in 1948. Ten of those elections featured an incumbent president running against a challenger. In seven of those 10, the incumbent won.

The losers:

  • Gerald Ford lost to Jimmy Carter in 1976.
  • Jimmy Carter lost to Ronald Reagan in 1980, and
  • George H. W. Bush lost to Bill Clinton in 1992.

Trend 2: Stocks Have Done Well in Presidential Election Years

What did the stock market do in all those election years?

  • The stock market posted gains in 16 of those 18 years. 
  • It also saw declines in two of those years.
  • The best election year was 1980 when the S&P 500 improved by more than 32%. And this includes the return from dividends. 
  • 11 of the 16 positive years, the stock market posted double-digit gains.
  • In 2008, the stock market was down 37%.  It was the worst return in an election year.
  • The other negative year was in 2000. That year the stock market decreased 9.1%
  • On average, the compounded annual return for these 18 election years is 8.8%
Click to Enlarge the Chart.

Forming Expectations

What does this mean for 2020? History tells us we should expect a positive year.  In addition, we currently have low unemployment, projected earnings growth, and a growing economy.  All of which would support the expectation for a positive year.

But things don’t always follow historical trends and the supporting data can change without notice.  The added drama of politics will make things a bit more turbulent and interesting in 2020. 

What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

Enter Your Question Here

Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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Were The Predictions Right?

With two weeks remaining in 2019, we review a couple of blog posts from 2018. Both were looking ahead to what might happen this year.  Were the predictions right?  Let’s take a look.

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After a Down Year for Stocks, What Happens Next?

Since 1950, there have only been 15 years when the S&P 500 finished underwater including 2018.  With the concerns at the time, most people were wondering if we would see another negative year in 2019. 

We went digging into the numbers to see how often the stock market posted back-to-back negative years, to see what we should expect.

The data showed in the 14 previous events, the stock market finished higher the next year 11 times. And not just positive a little bit. The average gain following a down year was over 17%

Were The Predictions Right

Was the Prediction Right?

It looks like we will be able to say the next year was positive 12 out of 15—barring a major meltdown in the next couple of weeks.  It also looks like the average gain the year after the down year will go up as well.

The Wall Street Crystal Ball

We also looked at how well the big investment firms could predict the future. In fact we even bought our own crystal ball to see if we could get in on the act. 

We showed 12 predictions from the some of the biggest names on Wall Street.  All 12 predicted gains for the stock market.  Here are some of the highlights.

  • The most pessimistic prediction for stocks was a 3% gain.
  • 5 of the 12 predicted single digit returns for the S&P 500, while 7 forecasted double digit gains.
  • 3 of these firms predicted returns of 20% or more.
  • The average guess for all 12 was a positive return of 14%.
  • And the most optimistic prediction was for a 26% gain.
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Were the Predictions Right?

With just two weeks to go, The S&P 500 is up well over 26% for the year. At least crystal balls at a handful of these firms were close.  That’s a pretty big improvement over 2018’s predictions.

What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

Enter Your Question Here

Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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The Financial Planners 2019 Holiday Gift Guide

What do you get the young adult child who already has everything?  How many gift cards do you really want to buy? Socks?  Really?  Fear not! We have created the Financial Planner’s 2019 Holiday Gift Guide.  And it is sure to be a big hit.   

Watch: 2019 Holiday Gift Guide

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Free Download: The Financial Planner's 2019 Holiday Gift Guide

For that last minute shopper, here is our Financial Planner’s 2019 Holiday Gift Guide.  We cover the basics of Roth IRA’s and 529 Plans.  We’ll also show you—and the lucky recipient—what kind of impact your gift can make on their life.  Click on the button to download your free copy.

The Struggle is Real!

As December rolls around each year, it is always a struggle to come up with gift ideas. And I thought maybe you were having similar problems. So I decided to come up with the financial planners holiday gift guide.

Do you have younger adult children or grandchildren? Tired of buying gift cards to restaurants they hate or ugly socks?

The Perfect Solution: A Roth IRA

What could be a better gift than years of tax free compounded growth? That’s right folks, a Roth IRA makes a perfect gift for that young adult in your life.

Just imagine the riveting conversation you’ll have sitting around the tree. You can talk about compound interest and how “You may not appreciate this now, but one day you’ll be glad you have it. Shoot I wish my parents had started a Roth IRA for me for Christmas. Instead, I got a garage door opener.”   

True Story…

One year, as a twenty-something, my parents bought me a garage door opener.  Not only was it a surprise, it was one of the best gifts I’ve ever received.  You don’t appreciate it until you have to get out of your car in a driving rain storm to open the garage door!

Cam Hardiman

This is Jim’s great grandson (and Neal and Susan’s grandson).  Cam Hardiman was born on November 3rd, 2019.

For the Young Child: Tax Free Growth, for College

We’ve all watched these kids tear into boxes like a tornado. Only to see them spend more time playing with the boxes.

Not this year.  No boxes.  No hermetically sealed plastic packaging you can only open with a blow torch. 

What could be better? You guessed it, a 529 Plan.  This means tax free growth—FOR COLLEGE! 

 

Seriously Good Gifts

Roth IRA’s and 529 plans make terrific Christmas gifts. They aren’t exciting, and you may actually be able to hear  eyes roll.

But, at some point, they will be far more useful than that pair of socks, the remote control car or even a garage door opener.

A Roth IRA offers your kids or grandkids tax free compounding for their retirement. It may not be much today. In thirty or forty years they’ll look back and say, “Wow! Mom and Dad (or grandma and grandpa) did this for me. And look at it now.”

Same thing with 529 plans. The costs of college won’t be coming down anytime soon. At some point. someone will appreciate it more than you may ever know.

Here. We'll show you what we mean.

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Click to enlarge
2019 Holiday Gift Guide
Click to enlarge

What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

Enter Your Question Here

Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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Earning Compound Interest

Earning compound interest can make you money.  Potentially it can make you a lot of money.  Today we’ll show you two examples of how you can benefit from compounded returns.

This is part 2 of our Compound Interest Series.  Part 1: Paying Compound Interest, can be found here.  

Watch: Earning Compound Interest

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Free Download: Earning Compound Interest

Compound interest is a tricky subject.  We created a download  you can use to help better understand how you can benefit from compounded returns.  Click on the button to download your copy .

Paying Compound Interest

Earning Compound Interest: The Basics

There are two key components. First is the return you earn. When we are saving and investing, we have many choices. Some investments have greater earning potential than others.

The second key component is time. The longer you can let your money compound the better.

Here is our first example. This is something as a financial planner you learn on day one.

You contribute $2,000 per year at the beginning of every year, and you do this for 40 years—$80,000 total. And you earn the long-term average return of the stock market, which is 10%. It grows to nearly a million dollars.

This was the “pitch” you learned to convince someone to make an IRA contribution. But let’s take a look at how the returns you earn impact the totals.

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The Impact of Time and The Cost of Waiting

We said earlier, time matters. In fact, time might be your biggest asset as a saver. Here is another example from day one of financial planner school.  And it illustrates the cost of waiting to start saving.

Investor A: Save Early

Investor A starts saving $2,000 per year at age 25. She continues that for 20 years and stops. And her future returns average 10% per year.

click image to enlarge

Investor B: Wait To Save

Investor B doesn’t start saving until he reaches age 45. He uses the same investments and earns the same 10% average return.

click image to enlarge

Waiting to start saving means you have to save more to achieve the same result.  In this example, Investor A saved $40,000 total and reached $850,000.  Investor B had to save $13,500 per year, or $270,000 total, to accumulate $850,000 at the same time.  

The impact of compound interest isn’t linear. It’s exponential. And when you understand how it works, you can alter your future for the better. Teaching younger people to save early in life is critical.

What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

Enter Your Question Here

Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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Is Gold A Good Investment?

Is gold a good investment?  We answer a listener question about the shiny metal.  We will discuss:

  • Where gold really shines
  • Some potential costs
  • And things to consider when deciding if it is right for you.

Watch: Is Gold A Good Investment?

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Today, Jerry asks this question, “With all of the wild moves in the stock market, a political mess, and these low-interest rates, should I be using gold?”

All that glitters is gold, or is it? As an asset class, the shiny metal tends to get a lot of attention.  In most cases, it rises to popularity when the doom and gloom sets in. And when pessimism is high, it’s not uncommon to see and hear a lot of advertisements for it.

But is gold a good investment? It’s beauty is in the eye of the beholder.

Where Gold Really Shines

At times gold, does well when stocks don’t. For example, during the dot com bust in 2000-2002, gold generated a total return of a little over 20%. US stocks declined more than 37% over that same three-year time frame.

In 2008, the US stock market was down 37%. Gold increased by 5%.

So it can be a good investment for diversification.

Is Gold A Good Investment
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Where Gold Loses its Luster

But there are a few drawbacks. Many people we talk to believe gold offers a level of safety. The data paints a different picture. Like stocks, gold has some extreme declines. The most recent one happened between 2013 and 2015. During those three years, gold dropped more than 37%. It isn’t as safe as people want to believe.

Is Gold a Good Investment-1315

Be Aware of the Costs

The other issue with gold stems from how you buy and sell it. If you wish to buy coins or bullion, transaction costs can eat into your returns. Those fees and commissions have decreased through the years, but they are still a factor.

One way to reduce those costs is to use an exchange traded fund designed to track the price of gold. Some funds own the metal. And we know of one fund who will actually deliver the metal to you when you redeem your shares.

The internal costs of these funds are small. In addition, the major discount brokers now offer zero commission trades for ETF’s. That also can keep your costs lower.

Buying gold in an individual retirement account can also be a hassle or result in extra fees. Not every custodian will hold the physical metal. And those who do will charge fees for storage and other services. Again this is where using ETF’s can make things much simpler and cost-effective.

Is Gold a Good Investment for You?

Gold can be a good part of your nest egg, as long as you understand the whole picture. It can be a buffer against stock market volatility. But don’t expect it to be completely safe either.

And you have to decide how you want to invest. Buying the actual metal adds costs and complexities to your situation.

After you’ve done your research and understand the ins and outs, you can make the choice.

What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

Enter Your Question Here

Financial Planning

About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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Stocks climb a wall of worry.

What does this mean? 

Today, we talk about:

  • The news always seems bad
  • Recessions, trade wars and now impeachment dominate the headlines.
  • But the stock market? What has it done.

We’ll talk about it on this episode of Monday Morning Money.

Watch: Stocks Climb A Wall Of Worry

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Listen Now: Stocks Climb A Wall of Worry

You can also watch this on our YouTube Channel.

We would love to answer your question on a future episode

Do you have a question about money or personal finance? Submit your question using the form below or send an email to neal@flemingwatson.com

Stocks climb a wall of worry.

What does this mean? Think about all the stuff which has circulated in the headlines over the past year.

A Looming Recession

We continue to deal with the threat of a recession. A major economic slow down can lead to higher unemployment. It can also impact businesses big and small. In some cases, a recession can mean a bear market.

The talk of a recession tends to darken the mood though, and people’s attitudes tend to sour on things like stocks.

Trade Wars

We are still in the midst of a trade war with China. Something many experts feel could contribute to our economic woes. Both countries are taxing goods imported from the other. This serves to drive prices higher for the consumer.

Officials from both countries continue to talk. Unfortunately, nothing has happened, yet.

Impeachment

And now we can add the possibility of impeachment to the list of big things affecting the mindset of the American public. Regardless of where you stand on this issue, it casts a dark cloud over the future.

What the impact will be? Nobody really knows. Since the 1920’s this has only happened twice, with presidents Nixon and Clinton. Nixon’s problems started in late 1972.  The stock market in 1973 and 74 declined nearly 50%.

Clinton’s problems happened in 1997 and 1998.  In both years, the stock market was up over 20%.

So we don’t have a lot of data to help guide us on what to expect.

Wall of Worry
Stocks Climb A Wall

With all the uncertainty, the dismal news cycle, and overwhelming pessimism, what has the stock market done?

Last Monday – the 28th –  the S&P 500 set a new all-time high.

Stocks Climb a Wall of Worry

At that time the popular large-cap index was up over 23% on a total return basis for the year.

Climb a Wall

On the same day, The Dow Jones Industrial Average closed to within less than 1% of it’s all-time high.  

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This is what it means when people say, “Stocks climb a wall of worry.” The doom and gloom surrounds us. In fact, it is hard to imagine there is anything good happening in the world.  But yet, the stock market just quietly marches higher.

Beneath the noise are great businesses. Companies who find ways to improve profits and deliver value to their shareholders. And sometimes it leads to a pleasant surprise waiting for us when the dust settles.

Stay Informed.

Monday Morning Money is a podcast talking about current events which  impact your bottom line.  

If you would like to be notified when a new episode is released, sign up for our mailing list.  Just complete the form.

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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 typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

Our Most Recent Videos And Posts

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Earnings Matter

On any given day, a headline—or even a tweet—can move the stock market. And sometimes those moves are extreme. But what really drives stock prices over the long-term?  Spoiler alert: Earnings matter.

In this episode we discuss:

  • Do Presidential tweets move the market?
  • There is a lot of noise, but over time, profits drive the market.
  • There is a strong correlation between stock prices and earnings.
  • Business in America is good.

Video: Earnings Matter

Each Episode of Monday Morning Money is also broadcast on Local Radio, WMOA (1490 AM and 101.3 FM).  You can hear it at 11:07 every Monday. 

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In addition, you can also hear this episode on our YouTube Channel.  Please take a moment to subscribe, as it helps our analytics and improves our reach.  This also appears on Facebook and LinkedIn.  

Audio Only Version: Click Here

Tweets Moving The Markets

If you haven’t heard, our current president likes to tweet. A lot. Since 2016 the president has tweeted over 10,000 times. About 10% of those tweets are about something important to the financial world.

Some of the big firms try to track the impact of the tweets on the markets. JP Morgan found his musings have had a significant impact on the bond markets. And Merrill Lynch discovered his twitter activity has had a modest impact on the stock market.

But does it really move the needle on stock prices over the long term?

Earnings Matter

The real driver of stock prices and returns extends beyond headlines and tweets. In fact, that stuff is mostly just noise. Sure, it has a short-term impact. But over longer periods of time, people forget those things.

The real driver of prices and returns are corporate profits. When you buy stocks you are buying the future earnings of those companies. When earnings increase over time, the prices tend to follow. And when earnings decrease, you see the impact on stock prices.

In other words, earnings matter a lot.

Consider this:

  • Over the past 30 years, stock prices have increased 7.7% per year. And that doesn’t include the return from dividends. Corporate profits have increased 5.7%.
  • Over the past 20 years, prices have increased 3.8%, profits 6.3%.
  • In the last decade, prices are up 12%, earnings are up 34%.
  • And in the last five years, prices are up 8.5% and profits are up 5.75%.

If you look at a graph of stock prices and corporate profits, they tend to follow a very similar path.

(Click On the Images To Enlarge)

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30 Years
Corporate Earnings Matter
10 Years
Corporate Earnings
20 Years
Earnings matter
5 years

So why is this important to talk about now?

There has been a lot of noise lately. We have a trade war, talk of a recession, an election and political bickering. But what tends to get lost in the shuffle is how American businesses are really doing.

According to Standard and Poors, 498 of the 505 companies in the S&P 500 have reported earnings for the second quarter. Nearly three quarters of those who have reported earnings have beaten their estimates. Only 17% reported lower earnings than expected. The “misses” are well below average for the past several years.

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Click To Enlarge

Things Can Change (Without Notice)

Right now, the earnings news has been quite good.  But that may not always be the case. Profits go in cycles just like the economy.  There will be another period where earnings contract.  In fact, we are starting to see some predictions for a decrease in profits. 

Whether the contraction happens or not remains to be seen.  But that is the nature of the investment world.  We don’t know, in advance, what these outcomes will be.  And that adds to the challenges we face.

The financial world can be a noisy place. It is difficult to sort through what matters and what doesn’t. In our experience, earnings matter.  And like most things in the investment world, the future is very unpredictable.

Stay Informed.

Monday Morning Money is a podcast talking about current events which  impact your bottom line.  

If you would like to be notified when a new episode is released, sign up for our mailing list.  Just complete the form.

Join Our List Today!

* indicates required
Financial Planning

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

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Not As Bad As It Seems

In the investing world, things are often not as bad as they seem. The data doesn’t always match the headlines.  

Today we talk about:

  • August was not good, but was it really bad? It felt really bad.
  • The worst month for stocks (so far) this year is…
  • Have we even had a correction in stocks yet?
  • Don’t look now, but the US stock market is having a really good year.
  • So is everything else.
  • Things also aren’t as good as they look either.
  • The fourth quarter is the “money quarter” for the stock market.

Monday Morning Money: Not As Bad As It Seems

Each Episode of Monday Morning Money is also broadcast on Local Radio, WMOA (1490 AM and 101.3 FM).  You can hear it at 11:07 every Monday. 

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In addition, you can also hear this episode on our YouTube Channel.  Please take a moment to subscribe, as it helps our analytics and improves our reach.  This also appears on Facebook and LinkedIn.  

Stay Informed.

Monday Morning Money is a podcast talking about current events which  impact your bottom line.  

If you would like to be notified when a new episode is released, sign up for our mailing list.  Just complete the form.

Join Our List Today!

* indicates required

August Was Bad, But Not As Bad As It Seems

I’m a big Ohio State Football fan. I admire Jim Tressel who was the head coach for one of the more successful periods in school history. One of the things I can remember him saying in his press conferences, was “things are rarely as good or as bad as they seem.”

You can say the same thing about the investment markets. August seemed like an awful month. We had “headliner” down days of 767, 623, and 800 points. We were bombarded with the negative news. The trade war with china, the inverted yield curve, and the looming recession all dominated the headlines.

It felt like August was a dismal month. If I didn’t keep score, I would have guessed things were far worse than they were. On a total return basis, the stock market, as measured by the S&P 500, was down a little more than a percent and a half. It was not as bad as it seemed.

In fact, August wasn’t even the worst month this year. That distinction belongs to May when stocks declined more than 6%.

(Click image to enlarge)

The Headlines Make it Sound Bad, But It's Not As Bad As It Seems

If you only follow the headlines and sound bites, you may think we’ve had a difficult year. The maximum draw down in stock prices this year is less than 7%. That doesn’t even classify as the textbook definition of a correction. A correction is a 10% decrease in prices. And it is half of the average correction we have seen since 1980.

The endless parade of pessimism makes us think things are worse than they seem. August was not a good month. But, The S&P 500, which is the primary index we use to keep score, is up over 18% on a total return basis through the end of August. 

(Click images to enlarge)

Most of the Major Asset Classes Are Doing Well

In fact, most of the major asset classes we follow have had an outstanding year—so far. Bonds are doing well. Remember last week we talked about the relationship between yield and price. When yields fall, bonds prices go up. And yields continued to fall.

Gold is up more than 18% for the year. And Real Estate is up more than 27% for the year. International stocks are also up for the year.

(Click image to enlarge)

An Interesting Nugget

Over the past 25 years, October has been the 3rd best month for stocks. November has been the 2nd best. And December has been the 5th best. Combined, the fourth quarter has generated an annualized return of 4.3% per year.

Over the past 25 years, the stock market has averaged a gain of 8.9% per year. Nearly half of the return for the last quarter century was generated in the fourth quarter.

(click image to enlarge)

What's On Your Mind?

Do you have a question about what’s happening in the world of finance or investing?  Is there a topic that has you curious?  We’d love to hear from  you.

 We’ll do our best to answer it in a future episode.  To submit your question, fill out the form.  If you prefer, you can send us an email directly.  That email address is neal@flemingwatson.com

Enter Your Question Here

Financial Planning

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors  He typically works with people who are planning for retirement.  Fleming Watson is a Registered Investment Advisory firm located in Marietta Ohio.  Our firm primarily serves Marietta, Parkersburg, Williamstown, St. Marys, Belpre, Vienna and the surrounding communities in Washington and Noble Counties in Ohio and Wood and Pleasants county in West Virginia.

Our Most Recent Videos

How Bad Is The Impact To Our Economy?

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Watch Now

Should I Take Money From My 401k Plan

Should I Take Money From My 401k? “Should I take money from my 401k to help me get through these tough times?” That’s a question we received from a listener. 
Watch Now

The Best Reason To Not Sell Your Stocks Now

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Watch Now

Should I Rebalance My Accounts?

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