April Letter from Bob & Kerry: COVID A Year Later; Avoiding 7 Retirement Traps

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Happy April! We hope you are staying healthy and nourished as we move into Spring.

As we continue to talk with many of you during our reviews, it’s become clear that many of you are cautiously optimistic about the markets but also understand that the road could continue to be a little bumpy. In our April letter, we thought it would be helpful to share some thoughts on the last year, as well as a few thoughts for those of you near/approaching retirement.

In the coming week, we’ll also be sending out information for some additional live webinars. We received such great feedback from our Fall Nourish series, that we have decided to offer a modified version moving forward. So please stay tuned for that!

As always, please don’t hesitate to reach out if there is anything we can do to help you or your loved ones!

All the Best,

Kerry Meath-Sinkin, CFP® AIF® Partner & Wealth Advisor

Robert Meath, Founder & Wealth Advisor

Covid — A Year Later

This time last year, the World Health Organization recently had declared that the spread of Covid-19 constituted a worldwide pandemic.(1)

Stringent measures in the U.S. were being taken to slow the spread of Covid and “flatten the curve.” The lockdowns and shelter-in-place orders dealt a body blow to U.S. economic activity.

Investors, who attempt to price in economic activity over the next six to nine months, had no prior experience to handicap a shutdown and eventual reopening of the economy. It was as if we were driving through a dark and foggy night with no headlights to guide our path. These are the times when all we can do is rely on what history has taught us and move forward with sound financial planning principles.

Consequently, investor reaction was swift, and the first bear market since 2009 descended upon investors. Volatility was intense. In just one day, the Dow Jones Industrial Average lost nearly 3,000 points, or 12.9% (March 16, 2020 St. Louis Federal Reserve DJIA data).

That day accounted for over 25% of the Dow’s nearly 11,000 point peak-to-trough loss.

The major market indexes bottomed on March 23 (St. Louis Federal Reserve). The bear market lasted barely over a month, if we use the broader-based S&P 500 Index as our yardstick. It was a swift decline, but it was the shortest bear market we’ve ever experienced. (2)

The ensuing rally has been nearly unprecedented. Since bottoming, the S&P 500 Index advanced an astounding 77.6% through March 31. It’s 3,972.89 close at the end of the first quarter put it within 1.65 points of the prior March 26 closing high. And that is on top of a series of new highs since the beginning of the year. Since the end of the quarter, the S&P 500 has gone on to top 4,000.

If we review the six longest bull markets since WWII, the S&P 500’s advance over the first year tops all other prior bull markets. In second place at 72.4% is the bull market that began in March 2009. That run lasted into February 2020 (St. Louis Federal Reserve).

But as we know, past performance doesn’t always guarantee future results.

If we gauge the first year of the 1990s bull market, the S&P 500 had advanced 32.8% during the same period. While that’s excellent performance for a period that runs about one year, but it would place the start of the long-running 90s bull market in last place among the six longest periods since WWII.

Where are we headed from here? You’ve heard us say many times that no one has a crystal ball. No one can accurately and consistently predict what may happen to stocks.

Let’s look at what’s happened in the second year of bull markets that were born out of bear markets that saw the S&P 500 Index fall at least 30%.

Since World War II, there have been six other bear-market selloffs of at least 30%. In each case, the market posted strong returns in the first year, with an average gain of 40.6%. Gains ran into year two, with an average increase of 16.9%; however, the average pullback during those six periods: 10.2%.

All of that is to stay that we shouldn’t discount the possibility of a bumpy ride this year.

Treasury bond yields have jumped as the government has embarked on an expensive $1.9 trillion stimulus package and talk of new spending from Washington is gaining momentum. Further, bullish enthusiasm can sometimes spark unwanted speculation.

Might the economy overheat and spark an unwanted rise in inflation? Might rising bond yields temper investor sentiment? Up until now, investors have focused on the rollout of the vaccines, reopening of the economy and the benefits these are providing.

Today, momentum favors bullish investors, but valuations seem stretched, at least over the shorter term. When markets are surging, there is a temptation to load up on risk. Yet, we’d counsel against being too aggressive.

Just as investing principles take the emotional component out of the investing decision when stocks are falling, it also erects a barrier against the impulse to load up on riskier investments when shares are quickly rising.

Life changes, and when it does, adjustments may be appropriate. Ups and downs in stocks are rarely a reason to make emotion-based decisions in our portfolios. This brings us back to the importance of our M Guidance process, and our goal-based investment process. Understanding you, your goals, and your times frames, allows you to take advantage of growth opportunities, while also keeping shorter assets invested more conservatively. We find this helps bring you greater clarity, and more ease, and avoid knee jerk market reactions.

Table 1: Key Index Returns

MTD % YTD%
Dow Jones Industrial Average 6.6 7.8
NASDAQ Composite 0.4 2.8
S&P 500 Index 4.2 5.8
Russell 2000 Index 0.9 12.4
MSCI World ex-USA* 2.1 3.4
MSCI Emerging Markets* -1.7 2.0
Bloomberg Barclays US Agg Total Return Value Unhedged -1.2 -3.4

Source: MSCI.com, Bloomberg, MarketWatch

MTD: returns: Feb 26, 2021—Mar 31, 2021

YTD returns: Dec 31, 2020—Mar 31, 2021

*in US dollars

Avoiding 7 Retirement Traps

 

This month we wanted to highlight a few traps to keep in mind for those of you approaching retirement.
No matter how much someone prepares for retirement, it’s a huge change. You have saved and invested for decades and you are gearing up for retirement, or maybe you have already left your job. While the idea of leaving your career behind may be appealing, it is a monumental change that can often bring some anxiety, uncertainty and new questions. It’s rare for us to work with someone who doesn’t have at least a little anxiety. While we aren’t going to address everything here, we wanted to provide you with a few pieces that we consider with you.

  1. A more conservative investment posture may be in order. There was little reason for concern when you were 30-years old and volatility struck. In fact, the idea of dollar-cost averaging and buying shares at a lower price may have been appealing. Besides, the market has a long-term upward bias, and it would be decades before you would tap into your 401k or IRA.

But today, market volatility can be much more disruptive. A big decline in stocks at the onset of retirement could create significant problems down the road. We’ll handle these conversations at your leisure, but a shift towards assets that are not as volatile may be more suitable.
It’s not that we want to completely avoid equities. Some may be tempted to exit stocks. That might not be the right choice either.
Instead, we want to take on the right level of risk. In most cases, some exposure to stocks is the best path. But the growth-oriented strategies of your youth that helped build your nest egg should probably be tempered in retirement.
This is where our M Guidance Retirement process helps us together discuss and develop a plan that is aligned with you goals and time-frame.

  1. Be careful taking Social Security too early. There are some reasons to opt for Social Security when it becomes available at 62. For many, however, that will reduce their lifetime earnings from Social Security.

Today, the full retirement age runs between 66 and 67 years old, depending on the year you were born.
Individuals who collect Social Security beginning at age 62 receive [[https://www.ssa.gov/oact/quickcalc/earlyretire.html 25% less in monthly benefits]] than if they had waited until full retirement age. This assumes a full retirement age based on a date of birth between 1943 and 1954.
Delaying Social Security until 70 allows you to receive the maximum benefit that’s available. It will provide you with an additional 32% over what you’d pocket at full retirement age, [[https://www.ssa.gov/benefits/retirement/planner/1943-delay.html assuming full retirement age based on a birthdate between 1943 and 1954]] (both examples are for illustrative purposes only).
Rules governing Social Security are complex, and the information we’ve provided is simply a general overview. When we work together with you, we lay out various strategies so that we can best position you when the time comes.

  1. Implementing a tax efficient distribution strategy. Optimizing distributions during retirement is more important than ever. Between the SECURE Act and Tax Cuts and Jobs Act, there are very real implications both for your lifetime and for your children, of setting up a tax efficient plan for retirement.

If all your retirement assets are locked up in a Roth IRA, taxes are much less of an issue when you withdraw for living expenses. However, many of us have our savings in a traditional IRA or 401k. Distributions will be taxed at your marginal tax rate. You may also be liable for penalties if you withdraw before the age of 59 ½.  In addition, required minimum distributions, which begin at age 72, makes the timing for decisions like roth conversions essential. You may also choose to take withdrawals prior to 72 as a way to reduce future RMDs and the potential tax implications of large withdrawals when they become mandatory.
This is a complex and confusing topic, and something we spend a lot of time reviewing so that you can maximize your benefits and minimize your costs.

  1. Spending too much or spending too little. When you retire, your lifestyle will change. You’ll have the opportunity to enjoy new experiences and enjoy them on your terms.

It becomes a new balance of finding the right spending plan to help you pursue your goals in a way that can bring you the highest confidence factor during retirement.We see both situations come into play at retirement. Some, overspend in the early years of retirement. In this situation it’s about recognizing that you’ll be living on a fixed income, and you have a finite ability to earn extra cash.
On the other side, some retirees can be too cautious about spending. They have ample reserves but sometimes guard them too closely. We applaud those who want to leave a financial legacy to their children, but balance that desire and have some fun in retirement.

  1. Be aware of scams. We won’t spend much time on this as we’ve written about fraud in the past and will gladly provide you with more information if you would like.

But be very leery of individuals and companies that prey on the elderly and their desire to grow their savings. Remember, if it looks to good to be true, it usually is.

  1. Watch out for medical expenses. You have Medicare and you probably have a supplemental policy. But deductibles and health expenses that are not covered by insurance are always a challenge.

It’s important to budget for insurance and medical expenses that will likely occur as you get older. It’s also important to have a plan for long-term care, something we’ve also written about a lot in the past.

  1. You may live longer than you expect. The most important piece here is to have a plan that can help bring you financial ease in retirement, and plan for a long and healthy life! Continue to plan as if you’ll be tapping your savings long after you have retired.

Lastly, stay active and volunteer. It will help keep you physically fit and mentally sharp. Just as we have a plan for your finances, it’s critical to have a plan that keeps you active and helps you enjoy retirement!

 

 

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ.
 
The NASDAQ Composite Index includes all domestic and international based common type stocks listed on The NASDAQ Stock Market. The NASDAQ Composite Index is a broad based index.
 
The S&P 500 is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
 
The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe and is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.
 
The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index represents 23 developed market countries.
 
The MSCI Emerging Markets Index is designed to measure equity market performance in global emerging markets. It is a float-adjusted market capitalization index.
 
The Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market.

The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein.  Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.  Past performance does not guarantee future results. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.

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