Can Stocks Predict The Election Outcome?

Can Stocks Predict The Election Outcome?

Can stocks predict the election outcome? What about back-to-back bear markets? How big was the stock market drop in dollar terms?  We’ll cover these tidbits and more.

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A select few...

The stock market was down 34% earlier this year and it made a complete recovery. The recovery was led by a small handful of companies.

As of August 28, almost one-third of the stocks in the S&P 500 are still down at least 20% for the year.

That's a lot of money...

On February 19, the total value of the US stock market was $36.1 trillion. On March 23, at the bear market low, the US stock market was worth $23.4 trillion. $12.7 trillion evaporated into thin air over that timeframe. Most of that has come back, and we’re all glad for it.

can stocks predict election
Can stocks predict the election

Back-to-back bears?

We’re still dealing with this COVID-19 pandemic, and the economy isn’t back to full strength yet. There are some concerns that there will be some lingering effects. One of those concerns is a double-dip recession. The other is another significant drop in the stock market.

Over the last 75 years, the shortest time between the end of one bear market and the beginning of the next is two years and two months. The S&P 500 fell 22% during a bear market which ended on October 7, 1966. The next bear market, an 18 month long tumble of 36%, began on November 29, 1968.

It can happen quickly. Two years is the record. We may or may not see that record tested.

Can the Stock Market Predict The Election?

The S&P 500 was up 7.19% in August. It was the best August ever.

We found this interesting tidbit on the website MarketWatch. This is from Julian Emanuel of institutional investment management firm BTIG. “At first glance, August strength plays well into Donald Trump’s reelection. In the three months prior to November elections, positive S&P 500 returns have accompanied incumbent party presidential victories 85.7% of the time.”

“Going back to 1928, when stocks rose 5% or more in August, and the June to August return was in the top quartile, the market often struggled in September and October. When the S&P 500 was down from the end of August through the election, the incumbent party lost the White House on all six occasions.”

Could the stock market performance over the next couple of months predict the outcome of the election? It will be interesting to see if that comes true or not.

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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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The 2020 Bear Market is Over!

The 2020 Bear Market is Over!

The 2020 bear market is officially over. Today: 

  • we’ll take a look back at what happened.
  • We’ll tell you what it means to patient long term investors.
  • We’ll talk about the implications going forward.

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Transcript: The 2020 Bear Market is Over!

The 2020 bear market officially ended last week. It started February 19, when the market set an all-time high at 3386. Over the next 33 days, stock prices fell 34%. On March 23, the market closed at 2,273. Since then, the market increased 51.5%. On Tuesday, August 18, It closed at a new all-time high of 3,389.

2020 Bear market Over
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How Does This Compare to Previous Bear Markets?

2020 Bear Market is Over
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When we look back at the major bear markets, we think of the “dot com” bust and the Great Recession. During the “dot com” bust, stock prices fell 49%. It lasted almost three years, and it took about 56 months for prices to completely recover. The Great Recession didn’t last quite as long. Prices dropped 57% and it took about 49 months to recover.

This one happened a whole lot faster. If we look at drops of similar size, there are two to consider, 1968 and 1987. In 1968, prices dropped 36%. It took 543 days to go from top to bottom. And, it took 21.7 months to recover.

Bear market 2020 over
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What does this mean to patient, long-term investors?

Since 1946, we’ve seen 14 bear— or near-bear—markets. All are slightly different. The details about why they started, how far they fell, and how long they lasted, differ. But when you step back and look at each of them, they’re all basically the same. Every bear market is a short-term interruption to the long-term advance of stock prices.

2020 bear market over
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What are the implications of this going forward?

The first thing we need to remember is there’s another bear market coming. It may be sooner than we like. We’re still dealing with the impact of the coronavirus pandemic. The virus is still present. We have high unemployment. Businesses continue to struggle to get back to normal. That could all be a catalyst to the next bear, and it may happen faster than we want.

It may be several months before the next bear starts. We have no idea when it will happen. We also don’t know how far it will drop or how long it will last.

Now’s a great time to check the risk reward part of your portfolio. We all depend on stocks for the growth they provide over the longer term. Growth we need to achieve our goals.

If this last one made you extremely uncomfortable, it’s time to have a conversation. You should talk about the amount of short term risk you are taking for the pursuit of that long term growth.

It’s a better time to make adjustments to the stock allocation of your account. Selling stocks when prices are near their all-time highs is better than selling in the midst of a bear market. Remember, we want to buy low and sell high—not the other way around.

2020 bear marketover

Now is a Great Time To Evaluate Risk and Reward

Pursuing modest growth means you face difficult times.  We have a way to help you measure how you feel about those downturns.  It’s called a Risk Number.  Click the button to find out more.

Thinking about bear markets is a good reminder of one of my favorite sayings about stocks. 

We never know what the direction of the next 20% movement in prices will be. But we are pretty sure what direction the next 100% move will be.

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No more bear – Data update August 21, 2020

No More Bear! - Data update for August 21, 2020

We are no longer in a bear market, it ended this week.  We share some interesting data about that. We also share the updated Covid-19 tracker from First Trust Portfolios.  

No More Bear!

On Tuesday August 18th, the S&P 500 set a new high. This means no more bear!  We will have a lot about this on our next episode of Monday Morning Money.

No More Bear

Liz Ann Sonders from Charles Schwab (our soon to be custodian) posts some great data on Twitter.  Here are some interesting facts about the recovery… 

The “Awesome 8”

Eight companies have led the charge higher in the recovery.  And most of the rest of the companies haven’t done very well.

More evidence of a few big companies leading the charge.

Missing the Big “Up Days”

You always hear someone talking about missing the big up days.  It turns out many of them happen when the market is crashing.

Virus Data Update

Our friends at First Trust Portfolios have updated their virus data tracker.

Key Takeaways…

  • New positive tests and deaths continue to show a downward trend.
  • Progress continues on the development of a vaccine.
  • The US currently has some of the strictest social restrictions in the world right now. (green line).
  • This is nowhere near as deadly as the Spanish Flu in 1918.  And it isn’t as bad as the 1957-58 flu outbreak.
  • The number of states reporting increasing numbers continues to track lower.

“Fast Data” from First Trust

Fast data includes passengers being screened at TSA checkpoints and other data available weekly.  Below is some other data that shows an uptick in activity.

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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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Data Update, August 14, 2020 – Corona Virus and The Bear

Data Update, August 14, 2020

Coronavirus Data and the Bear Market

Today is our data update for August 14, 2020.  We share some data about the Coronavirus provided by First Trust Portfolios.  And we also provide an update on the Bear Market.

Covid-19 data update

This data sheet is provided by our friends at First Trust Portfolios.  It shows a variety of key data points about the pandemic in our country.  If you would like to download a pdf file of this, please click on the button.

Here are our key takeaways from this week’s virus data.

  • The trend of new cases flattened in the last week and began to show a slight uptick.
  • Two more vaccines entered phase 3 trials (up from 6 last week), and one more vaccine was granted approval for limited use. 
  • The “deaths per 1 million people” data is new this week.  

An article this week discussed the decreasing number of tests being conducted which will have some impact on the numbers. 

The 2020 bear market update: almost over...

Data Update august 14 2020
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So close.

For a brief moment, the S&P 500 Index flirted with a new all-time high.  Here are the relevant points in this Bear Market.

  • From February 19 to March 23, the index fell 33.9%. (It was the fastest drop of that magnitude, ever!)
  • Since then, the index has recovered more than 50% of the loss.  
  • At the market’s close on August 13, the market was less than 0.5% away from setting a new high.

We will have more thoughts on this in the coming weeks. 

Have a great weekend!

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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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How Will the 2020 Presidential Election Affect the Stock Market?

How Will the 2020 Presidential Election Affect the Stock Market?

How will the 2020 presidential election affect the stock market? That’s a big question on the minds of many. Today, we’ll dig into some numbers. We’ll show you what happened to the stock market in the three months before and after previous presidential elections.

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2020 election affect the stock market

This year is off to a crazy start. It started with the Coronavirus. That caused the stock market to drop by about 34%. From the bottom of the bear market to today, we’re now close to all-time highs. The stock market has increased by almost 50%.

The virus is still a factor in our lives. Now we get to add a presidential election to the mix. How will the campaign season influence the market?

Elections and the Stock Market: Historical Data

We are focusing on the three months before a presidential election. This means August, September and October. And we are looking at the three months after. This includes November, December, and January. We have nine election years going back to 1980.

The 3 Months Before

The average gain of the stock market for the three months before an election was about 0.75%. Stocks improved six out of the nine years.

The 3 Months After

For the three months after an election, the stocks gained 2.36%, on average. It was positive in seven of the nine years.

The Outlier: 2008

There was an outlier. 2008 was a really bad year. From August to October 2008, the stock market dropped by about 23%. Following the election, the stock market continued to decline. It fell another 22.5%.

If you remove this outlier from the data set, the results look much different. 

Leading up to the election, the gain improves to about 3.5%. After the election, if you take out this outlier, the stock market improved 5%.

Will this year be more like 2008?

The election didn’t have the type of impact on the stock market that one might think. But you might be wondering right now, “Will this year be more like 2008?”

But there are also reasons to expect this rally to continue. Some data points to better things ahead.

Vaccine Progress

Companies are making progress on a vaccine. A lot of the optimism in the stock market relates to the optimism of a vaccine coming to market sometime next year. There are a number of companies now entering second and third stage trials.

The Big Question: Do Your Long Term Plans Depend on the 2020 Election?

It is hard to make big allocation decisions based on short term events. Most of the historical data points to the election not being a significant factor to stock market performance.

Your long term plans aren’t likely to change based on the outcome of this election. This makes it very difficult to make a decision based on that outcome.  .

The election concerns many people. There’s a very big divide between the two sides. It’s very contentious and very emotional. This creates a desire do something. Some think if “Candidate A” wins, things are going to go downhill. And if “Candidate B” wins, things are going to be great. But we don’t know what that outcome will be.

Making big decisions based on short-term events, creates more chances to make mistakes. That’s not a real good way to do things.

You need to base your asset allocation decisions on your long term plans. You shouldn’t base them on what happens in a presidential election.

Have Questions?

If you have questions about your situation or would like to discuss how the pandemic and bear market have affected you, click the button to arrange a call.

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June 2020 Client Letter: Investment Math

June 2020 Client Letter: Investment Math

Investment math can be complex. If a stock dropped 10% this quarter and gained 10% the next, you might think you have recovered the loss. Unfortunately, you are still down 1%. To recover the loss, the stock has to increase 11%.

The bigger the decrease, the more it takes to recover. A 20% loss means you need to earn 25% to break even. If you lose 35%, you’ll need to make 54% to erase the red ink. A 57% drop like we saw during the great recession requires a whopping 132% increase to completely recover.

Investment math isn’t addition and subtraction. It’s multiplication.

Investment Math

The 2020 Bear Market

From February 19 to March 23, the stock market dropped 34%. In the 99 days that followed, it gained over 38.6%! It didn’t erase all the losses, but it was a strong start.

Investment Math

Download Now: Investment Math

Download a pdf copy of our June Newsletter.  In this issue we cover:

  • Investment Math
  • Some RMD Relief
  • An above the line tax deduction for charitable contributions.

Panic Selling

In mid-June, Fidelity made a shocking announcement. Earlier this year, one-third of all their account holders, age 65 and older, sold all their stock positions. Nearly one out of every six account holders—regardless of age—sold all their stock positions.

It is possible a few sold before the market crashed. But remember, we went from an all-time high to 34% lower in 33 days. More than likely, most of those sales happened after the damage began.

Sitting on the sidelines means the investors who sold missed the incredible gains. They wanted to limit further damage, but doing so limited their ability to recover. Remember the investment math. If your account drops 20%, you need to earn 25% to break even. Those who sold their stocks will have trouble doing that in a money market fund or CD.

Bear markets are extremely unpleasant. But when they happen, one of the worst things you can do is move to the sidelines. Bottoms happen without notice. Often times the first few months after produce incredible gains. Missing those gains makes recovering the losses difficult at best.

Investment math

What's Next

Uncertainty remains a common theme. The coronavirus is still a part of the story, and it looks like it will be for the foreseeable future. An ugly and intense election season will start soon. Being a patient and disciplined investor is an ongoing challenge.

Over the long term, we remain optimistic. We believe the great businesses will continue to not just survive, but thrive. But in the short term, anything is possible. The next several months could be a very bumpy ride.

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Judging by the data, our ask a CFP pro show has been very popular.  We need your help to keep it going.  Click the picture below to send us a question.  We’ll answer it on an upcoming show.

Investment Math

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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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Halftime! A Wild Start to 2020

Halftime! A Wild Start to 2020

The coronavirus dominated the headlines.  It disrupted our lives, the economy and the stock market.  Today we’ll take a look back at what happened in the first quarter.  One thing is certain, It was a wild start to 2020.

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Episode outline:

Stocks

  • Both the first and second quarters were extreme
  • The first quarter:  Bad
  • The second quarter: Good, but not good enough
  • Stocks are still down year to date

Bonds

  • It’s where investors go when stocks struggle
  • Remember, when interest rates and yields go down, bond prices go up.
  • Long term bonds have bigger moves—much bigger

Gold

  • Gold is the “fear asset”
  • It shined in the first half

Pictures!

Stocks

US Stocks and International Stocks featured some extreme moves in the first half of 2020.

Bonds

Investors perceive bonds as a “safe haven” when there is trouble in the stock market.  Interest rates and yields dropped significantly in the first half, which means bond prices go up.  It was a good period for the bond market.

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Gold

Many people consider gold a fear asset. As a result, demand for the metal helped push prices higher in the first half.

Wild start to 2020

Comparing Year to Date Results

Bonds and Gold all generated positive results in the first half of 2020.  Unfortunately, stocks did not. 

A Wild Start to 2020
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Ask a CFP Pro: What Happens to Stocks if President Trump Loses?

Ask a CFP® Pro: What Happens to Stocks if Trump Loses the Election?

What happens to stocks if President Trump loses the election?  We’ll tackle that one and six others on this week’s Ask a CFP® Pro show.  Scroll down for a timeline of this episode, some useful graphs, and the full transcript of today’s show.

Listen Now: Ask a CFP® Pro: What Happens to Stocks if Trump Loses the Election? (29:20)

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Episode Timeline

Today we talk about:
Here are the questions:
  • The money in my checking account isn’t earning anything, and I probably have too much in that account anyhow.  What can I do to earn a better return on my cash? (5:02) Click here to read

  • How will the Charles Schwab – TD Ameritrade Merger affect me? (9:31) Click here to read
  • If we are setting up a college account for a grandchild, do we have to open the account in the state in which they live? Can we set it up in Ohio even though they live in North Carolina? (11:28) Click here to read and for links

  • What are some of the things people with lower income, who are just getting started invest in? (13:41) Click here to read
  • How do you select dividend producing stocks? (17:03) Click here to read and for links

  • What happens to stocks if Trump loses the election? (20:45) Click here for pictures!

  • What is the best way to invest for retirement about 10 years before you retire?  Is it best to pay off your house before retirement? (23:59) Click here to read
What Happens to Stocks if Trump Loses the Election
what happens to stocks if trump loses the election

Transcript: What Happens if Trump Loses the Election?

The Stock Market in the first half (0:46)

The first half of the year has been absolutely crazy. It’s as crazy as we’ve seen in our careers. And we’ve been doing this for a couple days. We’ve been through the dot com bust. We went through the Great Recession and now we’re doing the whole coronavirus thing. And that was the big story that affected the economy, our lives and the stock market in the first half of the year.

A big drop…

The S&P 500 experienced a near 34% drop in 33 days, mid cap stocks dropped 42% and small cap stocks dropped 43%. And you would expect that for the year the stock market would be in a deep hole. Here are total returns through June 29th. The S&P 500, which are large-cap stocks, were only down about five and a half percent. Mid cap stocks, represented by the S&P 400, were down about 8% and the small cap stocks were down about 12.5%. 

A big bounce…

We’ve had a stunning rebound. The prices for the S&P 500 have rebounded over 36% in a little over three months. It’s not something that I can ever recall seeing by memory. But when I look back at some things, I found something somewhat interesting.

Stock market trump loses
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Prior Recoveries at 98 Days

The dot com bust which happened In 2000-2003, lasted about two years to go from top to bottom, Prices dropped 50%. And if you look at the same 98 days following the bottom that we’ve done now, prices rebounded about 18% back in 2003. In order for that bear market to completely recover, it took about 56 months.

During the great recession in 2007 to 2009, the stock market dropped 57%. And it took about 18 months to get there. If you look at the 98 days that followed the bottom in 2009, stock prices recovered 36.5%—like they have this time. I found that interesting. The Great Recession did take about four years to recover from the bottom to a new high.

We’re not quite to a new high yet—we’re getting close. But, to me, it’s been amazing how quickly things have recovered in the stock market.

Trump loses election stock market
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Relief for Required Minimum Distributions (3:07)

We’ve talked in the past about required minimum distributions. Those were waived for 2020. If you had taken your distribution in January, you were unable to return that money to your IRA as a rollover. Rollover rules state you must return any withdrawal within 60 days.

Last week, the IRS issued a ruling. It said any distribution taken in January or February can now be returned by the 31st of August.

A New Tax Deduction (3:44)

The next thing we want to talk about is something we missed in the CARES act. It wasn’t a real prominent thing. The act allows an “above the line” tax deduction for charitable contributions up to $300.

A few years ago when they passed the tax law, there was a new standard deduction. For couples, it’s $24,800, and for individuals, it’s $12,400. It made it nearly impossible for folks to itemize. If you can’t itemize your deductions, you cannot deduct your charitable contributions.

It’s estimated by the IRS that 90% of filers now claim the standard deduction. So you didn’t get any tax benefit for some of those contributions to charity.

Part of the CARES act creates this above the line deduction. This means it comes off the front page of your tax return. You don’t have to worry about itemizing.

You can take a tax deduction of up to $300. It’s not a lot, but something you find beneficial as we go forward.

What happens to stocks if trump loses the election

Question 1: How Can I Earn More on My Cash? (5:02)

The Question:  The money in my checking account isn’t earning anything. I probably have too much in that account anyhow. What can I do to earn a better return on my cash?

How much cash?

We have two issues here. The first is how much cash do you need to have on hand? And how can you improve the returns on the cash you do hold?

So “the how much cash” question to us comes down to time frames? What are you going to need cash wise in the next 24 months? Any significant expenses need to be in those safe cash-type assets. Because those accounts aren’t going to decrease in value.

This would include:

  • your emergency fund, which is three to six months of expenses,
  • any planned major expenses you have over the next two years. Things like a vacation. If you know you’re going to have major home repairs, or a car purchase.
  • Anything over $1,000 like insurance deductibles

Then after you cover those first two years, you can start looking at the next two to five years. That’s an area where you can reach for more return. But, you still want to have some stability in the value of those funds. You want to cover any planned expenses and some cushion for any unplanned costs you might incur.

Anything beyond five years, you can start investing for growth. And we talked about the five-year threshold. The reason for this is the last two bear markets. We talked about the dot com bust and the Great Recession. Both took between four to five years to completely recover. If we have a another significant pullback in stocks, you can expect to recover in that time frame.

Where should You invest?

Cash

Where should you hold your cash? That’s the second question. A bank account is the obvious place. One of the problems we’ve seen is interest rates were cut to near zero. Most of the local banks aren’t paying anything at all.

One of the things that we’ve done over the last several years is use some of the online banks. We’ve used Capital One for a long time.   But they’re not as competitive. Right now they’re paying about a half a percent on their savings account.

We’ve moved most of our accounts to Synchrony Bank, and they’re paying about 1.05%.  heir big competitor is Ally Bank who’s paying about 1.1%.

The interesting thing about these banks is all three of them are big credit card companies. They’re loaning money out at 18 plus percent. This allows them to pay you a little bit more. You would think they would pay you more than 1.1%.

You link those online banks to your local bank account. You’re able to transfer money back and forth via their website. But you have to be aware, there’s a two to three day lead time for most transfers. You’ll need to think ahead a little bit.

Intermediate Term Money (2-5 Years)

When you start talking about that two to five-year bucket, you could consider CD’s. But there’s not much with any returns out there. Many times we’re using short term bond funds. They can help push your yields towards 2%.

If you’re using an exchange traded fund, there are typically no transaction fees to buy or sell those. You can also use mutual funds, but we’ve run into some issues with some of those. Some funds have short term trading fees. This means if you need the money inside of 30 or 60 days, you may have to pay an extra to sell them. You have to be aware of that before you use them.

You could look at some bonds with longer maturities or even preferred stocks to boost yields. But that comes with a trade-off. That trade-off is price movement. Anything you do to reach for more return, you introduce more market value risk.

Long Term Money (5+ Years)

Beyond five years, you’re looking for growth assets. This means common stocks, preferred stocks, or even high yield or junk bonds. Because there’s more growth involved, and there’s also a lot more price volatility.

Question 2: The Schwab-TD Merger (9:31)

Will the Charles Schwab merger with TD Ameritrade affect me?

In the financial industry, this was big news. Schwab is the largest custodian and it is buying the second largest custodian. A custodian is a company who holds your investment positions and hold your accounts. They also execute trades. It’s an important relationship in the grand scheme of things.

At Fleming Watson, we do not have custody of our clients assets. We selected TD Ameritrade to do that when we did this back in 2016.

The deal will be closing later this year. The government did not object to the merger. And shareholders of both companies approved it. We’re being told it’s going to take somewhere between 18 and 36 months for most of the accounts to be transferred. We understand that there won’t be any new paperwork required.

How will this impact you? If your account is at TD Ameritrade, your statements will look different. If you check your account balances online, you’ll go to a different website. And if you have a retail account, you’ll have a whole new interface to get used to.

If your account is at Schwab, it probably won’t change much at all.

It will have a bigger impact on the advisors who use TD Ameritrade. We considered Charles Schwab and TD Ameritrade along with Fidelity in 2016. We settled on TD Ameritrade because we felt they were the best fit for us.

Now, we’re going to be moving to Schwab, who was our second choice at the time. We have to get used to something completely different. It will impact how we do trades and other things with our custodian. But for our clients, it’s really not going to have a big impact.

Question 3: Which State's 529 Plan Do I Use? (11:28)

I’m setting up a college account for one of my grandchildren. Do I need to open the account in the state where they live? Or can I set it up in Ohio even though they live in North Carolina?

This refers to 529 savings plans. Those accounts have some tax benefits when the funds are used for education expenses. There are some tax benefits when you’re making contributions as well. That comes in the form of a state income tax deduction.

If you live in Ohio, you can deduct up to $4,000 of your contribution per beneficiary. And if you live in West Virginia, that amount is up to $15,000 per beneficiary per spouse. This means a couple can deduct up to $30,000 from their state income.

For more information on Ohio’s 529 Plan, Click Here

For more information on West Virginia’s 529 plan, Click Here.

If you would like information about another state’s 529 plan, please contact us.

You can use any state’s plan you want. It’s not like the old prepaid tuition plans. With those, you were buying the cost of a credit-hour at an Ohio institution. You would then redeem them as a credit hour going forward. Whatever you put in the account has cash value and whatever the value is, it is. That’s what you use to pay for those qualified educational expenses.

When you use those 529 accounts for qualified educational expenses, the distributions are not taxed.

Get your deduction

But here’s the deal. If you use another state’s plan, you don’t get to take the state income tax deduction—if you live in Ohio or West Virginia. If you live in Ohio and you use North Carolina’s plan, you miss out on the state income tax deduction. If you live in West Virginia and use Nebraska’s plan, you miss out on that current tax benefit as well.

But if you live in Ohio and use Ohio’s plan, you get to deduct your contribution against your state income. And if you live in West Virginia, and you use West Virginia’s plan, you get to deduct even more.

If you can get the current income tax deduction, use your state’s plan. If your kids want to set up their plan in another state and make contributions that’s fine, too. They’re not limited to how many 529 accounts you can have for a single beneficiary. But it makes sense that you get the tax benefit for making the contributions if you can.

Question 4: Getting started as an investor (13:41)

How can someone with a smaller income get started with investing?

Low Costs

This is an excellent question. I’m glad you’re thinking about doing something for your future. The good news is the costs to invest have come down a lot. We now live in a world where there are no commissions on stocks or ETFs. That means you can buy one share of a company and it won’t cost you any transaction fees.

Years ago, the cost to buy stocks was significant, maybe $200-$300 to buy 100 shares of stock. And when I started in 1996, I think we were charging probably somewhere between $75 and $150 for a stock trade. If you didn’t have a lot of money, it was difficult to start buying individual stocks. And if you wanted to buy an odd lot, which is something that is not divisible by 100, there were additional fees.

This is before a lot of things got highly computerized. Now everything is computerized. Now buying and selling a single share is no big deal. If you want to buy one share of something like Southwest Airlines, for example, it will cost you around $30 to $35.

The Challenges of Buying Individual Stocks or ETFs

Now, the downside to buying stocks and exchange traded funds is having enough to at least buy one share. If you were looking at something like Amazon, it’s trading over $2,600. To buy one share of Amazon, you still have to have $2,600. Netflix is over $450. Google is $1400. And even something like the exchange traded fund which tracks the S&P 500(SPY) trades for over $300 a share. You have to watch what you want to buy. If you only have $50, you’re not going to be able to buy shares of Amazon. You’re not even going to be able to buy a share of the SPY ETF.

Buying fractional shares is something that’s coming. And there are a few startups who are diving into this. But it isn’t mainstream yet. I’ve read where Schwab is investigating fractional shares. When that happens, you’ll be able to then buy fractional shares of something like Amazon. If you have $200, you’ll be able to buy a tenth of a share. 

Mutual Funds

This means you turn to the old handy-dandy mutual funds. You have no-load funds from Fidelity or Vanguard. If you have $50 a month, you can put that into an ultra-low cost fund. You can buy fractional shares with a mutual fund. You may only buy .526 shares this month.

There’s other online services like Robinhood and Betterment. They make it very easy to get started for very little cost. The good news is it’s never been easier or cheaper to invest in stocks and get started in investing for your future.

Question 5: Picking Dividend Payers (17:03)

How do you select dividend producing stocks?

Generally where I start is I look at the dividend aristocrats list. Their criteria comes down to two things. It’s got to be in the S&P 500. So that means it’s a very large company. And the company has grown their dividend for 25 consecutive years. Right now there are 66 companies who qualify.

Here’s the reason I like starting here. When companies who pay a good dividend reduce their payout, the impact on their share price is bad. In our experience, we’ve seen what happens when some of the drug companies cut their dividend. Their share price will drop a lot. People’s Bank is another example. Their dividend has been up and down through the years. And if they reduce their dividend, their price value has dropped significantly.

We like companies who at least have been able to maintain their dividends. We prefer companies who’ve been able to grow their dividends over time. From there, we generally start looking at the ones that pay a 2.5% to 3% yield or more. Owning that dividend that pays 1% isn’t quite as attractive. So we’ll trim that list of 66 down to those companies that are paying a little bit more.

The Next Step

Next, we look at the payout ratio. The payout ratio is how much is the dividend of that company’s profits. If a company is earning $2 per share in profit and they’re paying out $2.10 per share in dividends, that’s a real problem. It’s not something that you can maintain. If something happens that reduces earnings, they may not be able to maintain their dividend.

We generally like when the payout ratio is two-thirds of its earnings (or less). So if a company has $1 in earnings, we prefer they pay $.66 per share (or less) in dividends.

The other factors

Then we’ll look at some other subjective factors. How expensive is the stock relative to its earnings? What does the company do? Do we understand what the company’s doing and what’s happening in their industry? We want to understand what we own and we also want to make sure that we’re not paying too much for that stock.

We don’t exclude companies that are on that list. But if I’m asked to find some, that’s where I’m going to start.

Snow or rain, it’s all water. 

There’s one saying that, that stuck with me for a while, “Snow or rain, it’s all water.” Increases in value, are as good as dividends. It all benefits you in some way, shape or form. There are some good companies out there who have generated a lot of wealth, and they don’t pay a dividend. (Or if they do, the dividend is small.) We talked about Amazon earlier. Amazon is a perfect example of that. The return for Amazon over the last 30 years is astounding, and they’ve never paid a dividend.

You can generate income from your investments without dividend or interest payments. Systematic withdrawals have been around for years. We’ve used them for our clients for years.

Dividend paying stocks aren’t the end all-be all of investing. Some people like them. Sometimes dividend stocks, at least the reliable dividend payers, don’t have as much volatility. But you shouldn’t make that the only thing you want to do with your investment portfolio. Growth of principal is a good thing too.

Question 6: What Will Happen to Stocks if Trump Loses? (20:45)

If President Trump loses the upcoming election? What effect will this have on the stock market?

We like to steer clear of politics. We don’t want to get into who will win or lose. The election will happen this year, and you can’t hide from it. Depending on who you support, you’re going to feel differently about any answer we give to this question.

In general terms, most people would view republicans as more pro-business. They are a party that prefers less regulation and prefers lower taxes. And most people would categorize democrats as not as business-friendly. They prefer more regulation, and they’re not afraid to tax corporations.

You would think that the stock market would do better when a republican controls the White House. But there’s something interesting and surprising. The opposite of that is true.

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Looking at the numbers…

We went back to 1949— or 70 years—and started with Truman’s second term as President. We went through the end of last year. Here’s what we found. Using calendar years, the average total return for the stock market when a democrat was in the White House is 14.4% per year. The average total return for the stock market when a Republican was in the White House is 8.8% per year.

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Click to enlarge

Does that mean the stock market will do better under Joe Biden than it will for Donald Trump? Nobody knows. Whoever takes over in January 2021 is going to be dealing with a lot of interesting things. We still have this Coronavirus thing hanging over our heads. The economy is a long, long way from recovering. It could be a difficult situation for whoever’s in charge.

There’s nothing that says if Biden wins, the stock market’s going to do great. And nothing says if Trump wins, the stock market’s going to do great. Nothing in these numbers should be taken as a forecast for the future.

I don’t know if the stock market cares who occupies the White House. It does well under both parties. Companies find ways to make money no matter who’s in charge. I wouldn’t sell because Joe Biden wins. And, I wouldn’t sell if Trump wins reelection either. Find good companies, have a long term outlook when you buy stocks, and things will have a tendency to work out over time.

Question 7: 10 Years Until Retirement. What should we do? (23:59)

We want to retire in about 10 years. What’s the best way to prepare for that. And is it best or is it a smart move to go ahead and pay off our house before retiring?

Still in growth mode

If you’re 10 years away from retirement, you still should be in growth mode. This means you’re more heavily invested in stocks. You’re looking to pursue higher returns.

Over the next decade, bonds aren’t going to help you a whole lot. You’re looking at 1% to 2% returns going forward based on current yields.

If there is a major downturn in the stock market, you have some time to recover from that. Even though we’re not out of this bear market yet, there could be another one in the future. You’re still going to be able to recover. If we do have that downturn again, it becomes a great buying opportunity. You may never find prices that low again.

Volatility shouldn’t be a significant concern at this point. As you get closer, when you’re five years away, that story may change. But, right now, you still have the ability to enjoy those compounded returns. If you can save and invest for higher returns, it should pay off for you in the long term.

I wouldn’t have any problems being 100% invested in stocks for the next four or five years, if I were you. I think the benefits will outweigh the long term risk. It could be tough to do. When you have those volatile times, nobody likes to see their balances go down. But again, I think the growth will be significant for you.

Eliminate Debt

Should you pay off your house before you retire? If you can do so in a reasonable fashion? Absolutely—yes! In fact, you should try to have all your debts paid off by the time you retire. That means car payments, your mortgage, and credit card debts. The fewer expenses you have, the better your retirement is going to be.

Retirement is all about cash flow. In our experience, the biggest reason people run out of money is because they spend too much. And debt payments are a form of spending. So the more you spend to pay debts, the less you have to do other things. Or it could mean you have to take more money from your nest egg than you should.

Eliminating debt can be a huge boost to your retirement plans as a whole.

Here are some other things that you want to do

Know your Social Security numbers…

Get your Social Security earnings record and benefit estimates. This is going to be a key component in helping you plan for retirement. It will help you make good decisions about when to start your Social Security benefits. And for most of us, it’s still a key part of our income.

Get organized

Get things organized. Understand where all your accounts are and how they’re invested. This allows you to create a better plan.

What does retirement look like?

It’s too soon to do detailed budgeting. But at the same time, you can start thinking about what your retirement is going to look like. You can think about what you want to do in retirement. Then you can see how much it will cost.

Health insurance

Have a good idea of what your health insurance is going to be if you’re going to retire before age 65. This is huge. If you have to go out and buy your own health insurance, that’s a big expense that you’re going to incur. You want to know what that’s going to be because it will have an impact on the numbers.

Work on your current cash flow:

The last thing that I would suggest is get your current cash flow situation in order. Know where your money’s going. Know how you’re spending it. If you can rearrange things to focus more on saving and eliminating debt, you’ll be glad you did. You have to make those things a priority. When you do that, you’ll have some flexibility and freedom in your retirement.

what happens to stocks if trump loses the election
what happens to stocks if trump loses the election

 

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Financial Planning

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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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3 Ideas to Plan For Lower Returns

3 Ideas to Help Plan for Lower Returns

What we earn on our nest egg is a key component to our future plans. Over the past month, we talked about the potential impact of both lower bond and stock returns. What can you do to prepare for this? Today we’ll share 3 ideas to help you plan for lower future investment returns.

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3 ideas to help plan for lower returns

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3 Ideas to Help Plan for Lower Returns

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3 ideas to plan for lower returns

Check out the other episodes from this month...

All month long, we’ve talked about the possibility of lower future returns for both stocks and bonds.  

What happens if future returns are less than historical averages? Bond yields indicate the future results from those investments could be well below their averages. And many “experts” believe future stock returns could also be less. This combination creates some significant challenges as you head into retirement.

Here are 3 things you can do to plan for lower future returns.

1. Delay Your Retirement

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Delaying your retirement improves your Social Security and pension benefits (if you will receive a pension). This works three different ways.  It shrinks the discounts you face for early retirement.  It increases your primary benefit. Or, with Social Security, you can receive delayed retirement credits. 

Waiting to retire also helps solve a problem with health insurance in retirement.  You are eligible to receive Medicare at age 65.  This means you won’t have to buy an expensive individual health insurance policy. 

Delaying retirement also allows you to reduce debt, save more, and benefit from compounded returns.

2. Monitor Your Spending

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In my experience, the primary reason people run out of money in retirement is overspending. The more you withdraw from your nest egg, the higher the chance you deplete your savings. Take a good look at your retirement budget. Try to find expenses or costs you can eliminate.

3 ideas to help plan for lower returns

3. Own More Stocks

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Investing involves a trade off. Trying to earn more can mean the short-term shocks are more severe. But, it may be necessary to consider an allocation that provides more opportunities for long-term growth. This may be hard to do, considering we haven’t completely recovered from a pretty steep drop. But in the long-run, the risks could be worth it, even if it is for a short period of time.

Be Flexible

It is important to be flexible.  The plans you created may need to be adjusted as the world around us changes.  None of us know what future returns will be.  But we need to consider what happens if future returns are lower.  Making good decisions now can help improve your chances for longer term success.  And, if things turn out better than expected, everything will be fine.

3 ideas to help plan for lower returns
3 ideas to help plan for lower returns

 

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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 the 4 Percent Rule Dead?

Is the 4 Percent Rule Dead?

Over the past two weeks, we’ve discussed expected future returns for both stocks and bonds. Several experts feel the future results will be much lower than historical averages. So that makes us wonder, “Is the 4 percent rule dead?”

Watch Now: Is the 4 Percent Rule Dead?

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4 percent rule

Lower expected future returns for both stocks and bonds can affect your retirement. Many “experts” expect stocks to produce below-average returns over the next decade. They forecast somewhere in the neighborhood of 6.5% per year. They also expect lower returns from bonds—somewhere between 1 and 2 % per year.

Lower Future Returns and the 4 Percent Rule

If these lower returns happen, it can create a major challenge for retirees. If these predictions hold, a well-balanced portfolio would earn somewhere between 4% and 5% per year.

Is the 4 percent rule dead

For the past 20 years or so, we’ve been big believers in the 4% rule for generating retirement income. This rules says you can take 4% of your retirement savings as income. So if you have a $500,000 nest egg, that translates to $20,000 per year or $1,666 per month.

Why Do We Believe in The 4 Percent Rule?

We use this guideline because it reduces the risk of running out of money during your lifetime. This has been back-tested during some of the biggest bear markets, and it has a high rate of success.

When you use historical return data, you can see why. Historical data shows a 60% stock-40% bond portfolio should grow by about 7% per year. So if you only take 4%, you would expect your account to grow by 3% per year. That’s enough to help your income grow each year to maintain your purchasing power.

What if Returns are Lower?

But what happens if the experts are right? What if those returns are less than average? Does the 4% rule still work?

In theory, if you earn at least 4% per year, you can take that much income and still maintain your principal. But there are a couple of things that come to mind. First, your odds of success will decrease a little. And, your ability to grow your principal to grow your income is also limited.

The second thing: what if you need to take more than 4% from your savings?  A lower return environment going forward means you will increase the risk of running out of money during your lifetime.

Balancing Risk and Reward

Financial planners always talk about balancing risks and rewards. And the amount of income you take from your retirement savings is a perfect example. The 4% rule is simply a guideline to help you think about that risk. And even with lower returns expected in the future, it still has merit.

No matter what future returns are, one thing remains true. The higher your withdrawal rate, the more you risk running out of money. If you are unsure of how this impacts you, talk to a financial planner.

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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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