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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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
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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 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?”

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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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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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How Lower Interest Rates Affect Your Retirement

How Lower Interest Rates Affect Your Retirement

Lower interest rates create some obvious problems for retirees. Things like savings accounts and CD’s just aren’t earning much. But there is a longer-term problem with these low yields. Today, I’ll discuss how lower interest rates affect your retirement.

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How Lower Interest Rates Affect your Retirement

For many, bonds are a significant part of your retirement nest egg. And, in my mind, there are three reasons to use them.

Reason 1: Less Volatility

Bonds reduce volatility. Think about what happened in March. The stock market fell over 30%. If you were 100% invested in equities, your account went down a lot! If you had 40% in bonds, the drop was much smaller.

Reason 2: A Place to Invest Your Future Income

Bonds give you a source of funds to generate your income. Selling stocks when they are down 35% to get your monthly check isn’t ideal. Putting your future income in bonds solves this problem.

Reason 3: A Way to Rebalance

Bonds give you a source of funds to buy stocks at better prices. Let’s say we get another big drop in the stock market in the next few months. I’m not saying we will, but if we do, you have a source of funds to buy stocks at those lower prices.

How Lower Interest Rates Affect Retirement
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Lower Risk, Less Return

Owning bonds will reduce your future long-term returns. They just don’t generate the results stocks do. For example, the Vanguard Total Stock Market Index fund has averaged just over 9% per year over the past 15 years.  The Vanguard Total Bond Market Index fund has averaged 4.3% over the same time frame.  Adding more bonds reduces the impact of a bear market.  But it also reduces your future returns.

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Low Yields Translate to Lower Future Returns

Last week, we talked about lower expected returns for stocks and how that impacts your retirement.   The current low yield environment also means we should expect lower future returns for bonds too.

In fact, Vanguard recently said we should expect bonds to generate returns of about 1-2% per year over the next decade. 

So if we expect stock market returns of 6.5% and bond returns of 2% here’s what happens.

This is a real challenge when you need your savings to create income and grow to keep pace with inflation.

Lower interest rates and yields could have a major impact on your retirement plans.  It’s worth having a conversation with a financial planner to see how it could affect you.

What do you think?  Add your comments below!

Lower Interest Rates Affect Retirement

 

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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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What if Future Stock Returns Are Lower?

What If Future Stock Returns Are Lower?

How many times have you heard this, “The long term average return of the stock market is 10% per year”?  What if future returns for the stock market are less than average?  How would that impact your retirement?

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What if....

One of the things we all set out to do is use our retirement savings to create income. That income has to last as long as we do, and it needs to grow over time to keep up with inflation. Historically speaking, owning stocks has been the best way to help us do that.

Future returns using historical data

A lot of people create retirement projections using historical return data. They might use 10% for stocks and 4% or so for bonds. In that scenario, you should expect an account with 60% stocks and 40% bonds to earn 7.6% per year. A 50/50 mix should earn 7%. A more conservative 40% stock, 60% bond mix should earn 6.4%.

What if future stock returns are lower?

But what if over the next decade, stock returns were well below historical averages? Say only 6.5%? How does that impact how you plan?

Now that 60% stock, 40% bond portfolio would only have an expected 5.5% return. The 50/50 portfolio projects to earn 5.25% and the 40% stock 60% bond mix earns 5%.

That changes things quite a bit when you start looking at the income you can take and the risks of running out of money.

How likely are lower future returns?

Companies like Charles Schwab, BlackRock, and Vanguard all believe future stock returns will be below the historical averages.

Schwab believes future stock market returns over the next decade will be around 6.3%. Vanguard believes the returns will be similar at 6.5%. BlackRock projects 6.9%. 

Of course, they could all be wrong. Returns from stocks could be closer to the long-term numbers. But, you need to prepare for the possibility they are correct. And you also have to realize their guess about the future could also be too optimistic.

By and large, I’m an optimist. I expect stocks to act like stocks. But as a planner, it is important to prepared for something like this, especially if you are nearing retirement or just recently retired.

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Is The Bear Market Over?

Is the Bear Market Over?

On March 23, the S&P 500 closed 34% lower than it’s all time high. Since then, we’ve seen prices rebound nearly 27%. It has many people wondering,  “Is the bear market is over?” Today we’ll pose 4 questions that will help us determine if the new bull market has started.

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From February 1 to March 23 we saw the stock market reach bear market levels at a rapid pace. It was enough to rattle even the most disciplined investor. Since then, we have seen prices race higher. The gain has been roughly 27%. It has us all wondering, “Is the bear market over”

Bear Market Over - prices

Today the official answer is “maybe.” In my view, there are still 4 questions which need answered before we know if it is “officially over” or not

1. Has the Market Priced in the Bad News?

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The stock market is forward-looking—to a point. The price movements factor in a lot of projections about economic and earnings data. But how do you project something this extreme and unprecedented? We’ve never seen the economy forced to an almost immediate halt before now.

2. How Bad Will The Data Be?

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Standard and Poors projects earnings for the companies in the S&P 500 Index. Their most recent data shows an 18% reduction in profits for the first quarter of 2020. And that number was lowered from a week ago.  How much will the actual numbers differ from those estimates?

Gross Domestic Product—that’s the value of output from an economy—will almost certainly be worse this quarter. But how much worse? Some predict the worst quarter since the Great Depression. Will it be that bad?

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3. How Will Investors React?

Is the bear market over

As a group, investors rarely react the right amount. There is a tendency to overreact on both extremes. In the dot-com era, we saw prices pushed irrationally higher. You could argue prices fell too far during the Great Recession too. How will people react this time?

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4. How Long Do We Suppress The Economy?

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The longer we keep the economy in an induced coma, the longer it will take to revive it. When do we reach the point where there is significant long-term damage to our economy? This may be the most important question to answer.

The End of the Bear Market

The bottom of this bear market could have been on March 23. If it was, we can celebrate—we are on our way to recovery. But we need to brace for the idea the worst of this downturn is yet to come. The market could drop further. If the data is worse than expected, it could drop a lot further.

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The Best Reason To Not Sell Your Stocks Now

The Best Reason To Not Sell Your Stocks Now

If you haven’t sold your stocks at this point, you may not want to.  Sure, the market could drop further. But selling now could be a big mistake.  Today, I’ll share the best reason to not sell your stocks now.  (read more below)

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Why Sell Now?

The sole reason to sell stocks at this point is to keep your balance from shrinking further. We never truly know (in advance) where the bottom is. And we may not have seen the bottom of this bear market yet. 

Not Sell Your Stocks Best Reason
Click to Enlarge

But selling at this point could end up being a big mistake. Here is the best reason to not sell your stocks now.

Bear Market Math

The foundation of our reason is rooted in what we’ll call bear market math. How much return do you have to earn to recover all that was lost during the downturn?

The Best Reason To Not Sell Your Stocks
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Let’s say the market only dropped 20%.  To erase the losses, you would have to earn 25%.

Right now, the current bottom of this bear market is about 34% lower than the all-time high. From that point, you have to earn 51% to erase the losses.

And if this bear turns uglier and drops say 50% from its February high, you’ll have to earn a 100% return to break even

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"Safe Assets" Offer Very Low Returns

Selling those stock holdings now and moving to the so-called safe assets can be a big problem.  In today’s environment, the potential future returns for those types of investments are very low. You might find a 6 month CD with a yield of 1%. 12 month CD’s are only slightly better. And we all know most of our savings accounts don’t even pay that much. Those low returns make recovering your losses very difficult—if not impossible.

And those prospects look even worse when you consider what happens to the shares of those companies immediately following the bottom of a bear market.

Catching the Rebound

This is our 15th bear market since the end of World War 2.  Here’s what happened following the bottom of the bear markets:

Click the graphs to enlarge

  • The average price increase 1 month after the bottom was almost 31%.
  • When we look 6 months out from the bottom, the average price gain was nearly 26%.
  • 12 months after the low point, the average price increase was 39%.
  • And 2 years after a bear market bottom, the average price increase was nearly 60%.  

And remember, this is only price increases.  It doesn’t factor in the additional returns from dividends!

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It Happens Early...

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This is interesting.  Prices one month from the bottom were higher than they were 6 months later in every single recovery.  A major portion of the recovery happens very early.  Missing out on that could have a significant impact on your future.

These gains may not have erased all the losses in any of those bear markets. But the surge immediately following the bottom helped those who stayed invested–even if their accounts fell further—recover a lot faster than if they moved to “safer havens.” And this is the best reason to not sell your stocks now.

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Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.  This is now his 5th bear market.  Unfortunately, it won’t be his last.

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Still Not A Bear Market

Still Not A Bear Market, Yet

Right now, there is a lot of fear and panic on Wall Street. It looks and feels bad. Yesterday seemed to amplify those fears even more. The Dow fell over 2,000 points for the first time ever. It was a headliner type day.

You can’t brush a day like that aside and say, “It was no big deal.” It is a big deal. The 7.6% decrease was the worst day for stocks since 2008. And it was the 24th worst day ever recorded. And this comes on the heels of two of the wildest weeks I can remember in my 24 years as a financial planner.

It feels really bad. The “fear index” reached its highest level since the Great Recession. Volatility is extreme.

Still not a bear market

Still Not A Bear Market

But here’s the thing that hasn’t gained traction in the financial media. This is still not a bear market, yet. And “yet” is important. Year to date the stock market has dropped 15%. From it’s high in late February, prices have dropped 18.8%. We don’t find the bear until prices drop 20%.

I say “yet,” because we could easily find the bear’s den in the next few days. I believe it is more likely than not. But there is always a chance we don’t cross that line for a while, if at all.

STill Not a bear market

The Second Hardest Thing To Do...

This is the unpleasant part of being an investor. Riding through the waves of big down days and big up days. “It feels like we are riding The Beast at Kings Island,” as one client put it. That’s a pretty good analogy.

Unfortunately, it looks like this wild ride may continue for a while longer. The impact of the virus both to our health and the economy remains unknown. And now an oil price war adds to the hysteria. We have no control over the uncertainty or the attention. But we can control what we do.

Doing nothing is the second hardest thing to do in times like this. But it is often the best course of action. We can look back at the past 20+ years and find many reasons to sell our shares of great businesses. But those reasons can’t overshadow why we hold onto those positions.

Still Not a bear

What's The Hardest Thing To Do?

What’s the hardest thing to do in times like this? Buy more stock. The shares of these great businesses are on sale for a limited time. The prices might get better, but the sale won’t last long.  Remember, you are supposed to buy lower.  We may not see an opportunity like this again in our lifetimes.

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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.

Death of the Stretch IRA: Should You Convert to a Roth IRA?

Death of the Stretch IRA: Should You Convert Your IRA to a Roth IRA?

The SECURE Act killed the Stretch IRA. This could mean a nice tax bill for someone you care about. The big question that has come from this: “Should you convert your IRA to a Roth IRA?”

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Death of the Stretch IRA

In December, the federal government passed the SECURE Act. And one of the biggest provisions of that bill was the elimination of the Stretch IRA. This impacts non-spouse beneficiaries of your IRA, 401k or other retirement plan accounts. That means your kids, grandkids, etc. It doesn’t affect spouses.

Under the old rules, your kids could spread out the distributions from an inherited IRA over a long period of time. Now, your kids will have to liquidate those accounts within 10 years.

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Converting Your IRA to a Roth IRA

One strategy you can use to address this is to convert your IRA to Roth IRAs. This means you pay taxes on the amounts you convert now, and the money then grows tax-free. And when certain conditions are met, your kids won’t pay any taxes on their distributions.

Should you convert your IRA to a Roth IRA? The answer is very complicated and will be different for everyone. Here are the key considerations

1. Who Pays Higher Taxes?

Who has the higher tax rate? Converting your IRA to a Roth IRA means you pay the taxes. You have to understand who has the higher tax rate. If your tax bracket is the same as your kids, the conversion may not be worth it. But, if your kids pay taxes at a higher rate, the math changes.

State taxes also matter in this.  If your kids live in Florida where there is no state income tax, that needs to be considered.  Likewise if they live in a high-tax state—like New York—it changes the math.

2. Watch the Hidden Taxes

Pay attention to the hidden taxes? Converting your IRA could impact the taxes on your Social Security benefits. It could also trigger taxes on your Medicare premiums due to the income related adjustments. You’ll want to look at those elements too.

3. Can't Convert Your Required Minimum Distributions

If you are older than 72, you have to be careful. The rules won’t allow you to convert your required minimum distributions. You have to satisfy those before you convert.  This may make it more expensive than you think.

4. Know the Total Costs

Look at the total cost of your strategy. There are some complex strategies you can use to preserve some of the “stretch provisions.” They use some advanced trust planning. You have to weigh the cost of the trust, plus the tax costs of setting them up.

Should you convert your IRA to a Roth IRA? It’s a good question to ask and consider in your plans. But there are a lot of complexities. You should talk to a tax expert and a financial planner to help you look at all aspects.

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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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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

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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.

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