## The Power of Compound Interest

A dollar is worth more today than it is tomorrow, and with the help of compound interest, that couldn’t be truer. This concept is often referred to as the “time value of money” and it shows us that those who are too hesitant to invest their money are in fact, choosing a negative investment.

It seems like discussing retirement is usually reserved for those who are older and approaching the end of their careers. For one reason or another, young people are seldom encouraged to open and contribute to investment accounts while the potential for growth couldn’t be greater.

What is Compound Interest?

To better understand compound interest, we can contrast it with simple interest. With simple interest, you can gain a return on your initial investment over any number of periods. If you invest \$1,000 and the return rate is at 5% annually, your account will earn \$50 year after year. The growth will be linear. At the end of the first year, your account balance would be \$1,050 and increase to \$1,100 and the end of the second year, then \$1,150, and so on.

On the other hand, compound interest allows the growth to be exponential. The 5% annual return rate is a percentage of the new account balance year after year. The return would increase every year instead of just being the same \$50. Because your account balance is higher each year, so is your return.   At the end of the first year, your account balance would be \$1,050 and increase to \$1,102.50 at the end of the second, then \$1,157.63, \$1,215.51, and so on.

The Power of Starting Early

Compound interest can be highly profitable, especially over the long run. To illustrate this, we’ll compare a set of twins, Simon and Duncan, who took slightly different approaches to investing and compare the results when they reach retirement.

Simon decided to begin investing as early and as much as possible. At age 27 he had zero dollars in his IRA but decided to dedicate \$6,000 per year until retiring at age 60. Over the 33 years, his highly diversified portfolio had an average annual return of 11%. When he retired at age 60, his IRA’s balance sat at \$1.65 million.

Duncan brushed off retirement savings when he was younger. He’s got so much time left, so why worry about it right now? So he opened up his retirement account 10 years later than his brother Simon. At age 37, Duncan began investing \$7,000 per year (\$1000 more than his twin) and received the same 11% annual return and retired at age 60 just like Simon. But his IRA’s balance only grew to \$638,000.

Those 10 years made a difference of over \$1 million! From age 27 to 37, Simon only contributed \$60,000 but those early contributions made it so that he was over a million dollars richer at age 60. Duncan did very well but could have earned so much more had he simply started a few years earlier.

This chart shows us that the total amount each of them invested was very close. But Simon’s early start gave his money more time to grow, making his balance down the line so much greater. And the huge financial advantage does not end there. During their retirement years, Duncan’s account would continue to grow at about \$70,000 per year, while Simon’s account would be earning about \$182,000 per year (assuming 11% avg. annual return rate). After 10 years in retirement, Simon will have earned over \$1.1 million more than his brother.

The purpose of this example is not to urge anyone to compare their numbers with anyone else’s. We all have unique financial positions. Rather, it is to help us understand the extreme potential in long term compound interest and the colossal effects of putting off investing. “We’re in a recession so it wouldn’t be good to invest when everything is crashing…There’s an election coming up that will crash the market…Stocks have been so green lately, I don’t want to buy in when everything’s high…” We can always come up with reasons to not invest in our futures. But what a mistake it would be to act as the slothful servant who buried his talent out of fear, instead of investing it like his brothers (Matthew 25).

By Brenton Walker

References

“Compounding and the Cost of Waiting.” Compounding and the Cost of Waiting – Wells Fargo, Wells Fargo, https://www.wellsfargo.com/financial-education/retirement/compounding/.

## Which Investment Account is Right For Me?

It can be daunting to plan out retirement when there is a seemingly endless number of rules, components, and factors to consider. Because of the complexity of it all, so many put off investing until much later in life, when the greatest potential for long term growth has already passed. As it is important to choose the right option depending on one’s unique financial position, here are the foundational elements of ten different investment accounts that will be discussed in more detail below.

###### (Numbers for 2022)

Individual Retirement Accounts (IRAs): Traditional vs. Roth

IRA accounts are the perfect place to periodically deposit money so it can continually invest and grow over many years to make retirement much easier. Most everyone qualifies to open an account and there are few barriers to entry. Here are the main differences between Traditional and Roth IRA accounts to know about:

Joint/Individual Investment Accounts

Custodial Accounts

SIMPLE IRAs

401(k)/403(b)

Roth 401(k)

Solo (Roth) 401(k)

These plans have all the same tax and contribution rules as traditional 401ks. But Solo 401ks are made for self-employed business owners who don’t have any other full-time employees. You also have the option to have a Solo Roth 401k plan, which would employ the Roth tax rules.

ESA

529

“This is a good choice for you if…”

Roth IRA: If you want to consistently contribute money over the long term to an account with major tax benefits that’s separate from any employment or other retirement program.

Traditional IRA: If you want to roll over a previous 401k plan or if you want to have a tax deduction with your contributions now instead of a tax break in retirement.

Simple IRA: If you are the owner or employee of small businesses.

401(k)/403(b): If you are offered this option through your employer.

Solo (Roth) 401(k): If you own a business, have no other employees, and want to contribute much more per year to retirement.

Joint/Individual: If you already max out your plan through work and max out a Roth IRA but want to invest even more.

Custodial: If you want to invest for expenses to benefit your children, or if you want your child to have some money for any use when they reach of age.

ESA: If you want to invest for your child’s education expenses.

529: If you want to invest more than \$2,000/year for your child’s education expenses.

By Brenton Walker

References

Kagan, Julia. “Simple IRA .” Investopedia, Investopedia, 26 Nov. 2021, https://www.investopedia.com/terms/s/simple-ira.asp.

O’Shea, Arielle. “529 Plan Rules and Contribution Limits.” NerdWallet, 19 Sept. 2022, https://www.nerdwallet.com/article/investing/529-plan-rules.

Williams, Rob. “Saving for College: Coverdell Education Savings Accounts.” Schwab.com, Charles Schwab, 24 Feb. 2021, https://www.schwab.com/learn/story/saving-college-coverdell-education-savings-accounts

## Cryptocurrency: Are you missing out?

Do you suffer from FOMO?  FOMO stands for Fear Of Missing Out.  Just about everyone suffers from this in one way or another.  Bitcoin and Dogecoin, among other cryptocurrencies have become household words and their popularity is exploding. So what is cryptocurrency, and is it something you should invest in?

What is cryptocurrency?

Cryptocurrency is a form of currency that only exists in numbers on a computer screen, rather than an actual coin or physical dollar bill. It is a form of international currency and it is the first decentralized digital currency in the world.   You can buy cryptocurrency from any online seller, by trading your dollars for whatever cryptocurrency you choose.  Bitcoin was the first cryptocurrency, but there are many other types of cryptocurrency now trying to surpass bitcoin in popularity.  As of right now, most people view cryptocurrency as an investment more than as an actual currency.

Why is Crypto so popular right now?

The price of 1 Bitcoin started out close to \$1 back in 2011, and now the price of 1 bitcoin is about \$38,000. Even just a few weeks ago it was around \$60,000!  That is some pretty extreme price fluctuation.  So yes, some people have made a fortune if they got in before it was cool.   Other types of Cryptocurrency like Dogecoin, and Etherium have also seen some decent growth recently in terms of price.   But the swings are pretty wild, with huge percentage drops following huge run ups.

Should you invest in (buy) Cryptocurrency?

Investing in cryptocurrency is much more similar to gambling, than it is to investing in diversified stock based mutual funds.   Yes, if you mortgage your house to buy Bitcoin now, you could be filthy rich in a year, but you could also be completely broke too.   There is so many regulatory issues that crypto has not made it through yet, and there have been several instances of price manipulation and fraud.   If a “bad guy” wanted to commit a financial crime and fly under the radar, cryptocurrency seems to be the easiest way to go.

My main suggestion when it comes to cryptocurrency is to only use money that you absolutely do not need and could live without to invest in it.  If you like thrill rides and want to try it out, go right ahead, but not with grocery or retirement money.

I have personally been watching the prices of the popular cryptocurrencies over the last few months, and the price swings have been pretty extreme on a daily basis.  The price volatility seems to be about 10 times more extreme than the price volatility of the stock market.

For me there is still far too much uncertainty when it comes to investing in cryptocurrency.  I don’t personally own any, and I advise clients, friends, and family to stay away when they ask me about it.

The prudent way to invest in cryptocurrency, is by investing in a globally diversified stock portfolio.  In this way, you are in turn investing in lots of companies that buy, sell, and accept cryptocurrency.  In this way you take a lot of the risk out of it, and get more steady returns.  Your Fear Of Missing Out thirst might not be quenched, but you will be able to sleep better at night and still get a pretty good long term return.

By Jimmy Hancock

References

1. Ramsey Solutions. “What Is Cryptocurrency and Should I Invest in It?” Ramsey Solutions, Ramsey Solutions, 13 May 2021, www.ramseysolutions.com/retirement/investing-in-cryptocurrency.
2. “Yahoo Finance – Stock Market Live, Quotes, Business & Finance News.” Yahoo! Finance, Yahoo!, finance.yahoo.com/.

## Short Selling, Stock Picking, and GameStop

At this point most everyone has heard of the craziness surrounding GameStop stock over the last few weeks.  There are several things we can learn from the madness.  First I will try to explain as simply as possible, what actually happened.

Retail stock market traders banded together in the Reddit forum “WallStreetBets” and decided to buy, and encourage others to buy, GameStop Stock.   The main reason they did it was because they knew many Hedge Fund managers had shorted the GameStop stock.  Shorting a stock is basically betting that the stock is going to go down.  In slightly more technical terms, it means they borrowed money to then sell the stock, in hopes to buy it back later at a lower price.   The higher demand for the stock increased the prices, which caused the hedge funds to buy the stock to decrease their risk before the stock price went even higher. This caused prices to shoot up even faster.  This compounded and went viral which caused the stock price of GameStop to go from about \$40 per share, to almost \$500 per share in just a few days.   Many Hedge Fund managers lost Billions.  On top of this, due to the volatility, RobinHood and a few other retail trading platforms would not allow retail investors to buy into the stock for a few days.   And now, the GameStop stock has continued a free fall back to reality, and the thousands of people who tried to jump on the bandwagon, have most likely lost a large chunk of change.  From the peak of almost \$500 per share, to now under \$60 per share.   That’s an over 80% drop from just a few days ago.

What can we learn?

First and foremost, short selling is not a good idea.  Short selling always involves borrowing money, selling a stock, and then you have to buy it back.   The risk is literally infinite, because there is no “max” stock price, it can just keep going up forever and ever.   Many hedge funds and riskier mutual funds use this tactic.  We have never, nor will we ever use this tactic, as it turns investing in the stock market into full out gambling.

Secondly

Playing the Individual stock ownership game is very risky.  Yes, a few people officially “got rich quick” if they were able to get in on Gamestop at the exact right moment and get out at the exact right moment.  But a majority of retail investors got in after it was in the news and now the price is already lower than it was when they got in.   Everyone thinks they can be the one to buy at \$40 and sell at \$500, but all too often stock pickers are the ones buying at \$500 and selling back at \$40.

If you pursue a stock-picking strategy, you are almost certain to lag the market.

Stock pickers always underestimate the number of variables that are involved in the pricing of stocks. There are literally trillions of variables that could occur on any given day that could change the price of a stock instantly. Stock prices are based on every single investor which all have different feelings about companies, reasons for investing, and regional bias.

The big problem for investors is that even though stock-picking is very risky and usually hurts returns, it’s extremely interesting and makes for a great conversation.

You may have decent odds at picking stocks that beat the total market before costs (just like a monkey you have a 50% chance), but it is much harder to do so after costs are added in. So lets say you happen to pick stocks well enough to boost your return by a couple of points, the expenses you rack up along the way (ie. research, trading costs, taxes, bid/ask spread) will usually more than offset your gain.

If you are trying to get rich quick, and have money to lose, then go for it.

The Opposite of Stock Picking

If you want to invest in the stock market in a way that is not similar to gambling, invest in a globally diversified portfolio managed by an investment coach that will help to educate you on the investing process. Instead of constantly turning the portfolio over by stock picking and active trading; buy, hold, and rebalance when necessary. Long term you will see the fruits of your decision.

By Jimmy Hancock

References

“GameStop Corporation (GME) Stock Price, News, Quote & History.” Yahoo! Finance, Yahoo!, 8 Feb. 2021, finance.yahoo.com/quote/GME?p=GME.

## How Much Will Your Social Security Benefit Be?

Understanding your social security benefit is a huge part of being prepared for retirement, and even the young generation should understand what they can expect to receive from social security.   It can be very confusing as there are many different rules and variables that go into the equation of estimating your social security benefit.

Basics

So let’s start with the basics.  Anyone who has worked 10 years or more, or is married to someone that has worked that long qualifies for a benefit.  The earliest you can start taking this monthly benefit is age 62, and the latest is age 70.   The monthly benefit is based on 2 main factors.  First, it is based on the amount of income you made throughout your working years (and thus how much you paid into the social security pot).   Second, it is based on when you choose to take your benefit, with a lower monthly payment if you start at age 62, continually growing until the maximum monthly benefit if you wait until age 70 to start your benefit.   Full retirement age, which I will discuss later, is age 67 if you were born after 1960.  If you were born in 1955 it is age 66 and 2 months, and increasing by 2 months each year until 1960.

Spousal Benefit

Spousal benefit is getting half of the Social Security benefit of your working spouse.  When you file to begin receiving social security, they will let you know if your individual benefit or your spousal benefit is higher, and automatically you will receive the higher of the two.  The spousal benefit maxes out when the non working spouse reaches full retirement age.  Thus it is not beneficial for a non working spouse to wait until age 70.

Real Numbers

You can actually run an estimate of your social security benefits on ssa.gov to see how much you could get in social security dollars.   I will give you one example I ran on the website with real numbers to show you an estimate of what you might expect with your social security benefit.

Ryder is 62 years old, and his wife Paisley is also 62.  He worked his entire life and made \$60,000 a year.  Paisley only worked for 9 years, thus she does not qualify for her own benefit.  If Ryder chose to start taking his benefit today he would receive \$1476/month.  If he waited until full retirement age, age 66 and 8 months, he would receive \$2064/month.  And if he waited until age 70 he would receive \$2627/month.

Now this is where it gets a bit confusing.  Time for some math.   If Ryder thinks he will die before age 78, he will receive the most total money from Social Security if he starts his benefit at age 62.  If Ryder thinks he will live past age 78 he will receive the most total money if he waits to start his benefit at age 70.     This is called the “break even” point.  The ages of 77 to 80 are almost always the break even years for any individual situation.

As for Paisley, if she chose to begin taking her spousal benefit at age 62 she would receive \$671/month.  If she waited to full retirement age she would receive \$1032/month.  And if she waited till age 70 she would still receive the same \$1032/month.

Other Factors

If you plan to work in any form and are receiving income, it is not a good idea to take your social security before your full retirement age (66 or 67).  Your social security money is decreased based on the amount of income you receive.   Once you reach full retirement age, you can receive your social security benefit and it will not be effected by any income you are making.

The File and Suspend Strategy that you might have heard about, is no longer in effect and cannot be used by anyone filing for social security that was under age 66 as of April 30th 2016.

If no changes are made by the government to the social security program, it is projected that by the year 2035, there will only be enough money to pay 75% of the scheduled benefit to retirees.  1.   So in short, the younger generation cannot really count on the amount shown in the example above.

Retirement Plan

Your social security benefit will only be a small portion of what you will need to live on in retirement.  You need to have a retirement account to be your main source of retirement income if you do not have a work pension.  Whether it be a 401k, Roth IRA, or another type of account, most people need to have between \$500k and \$2 million saved in order to live a comfortable retirement comparable to how they lived in their working years.

By Jimmy Hancock

References

1. Goss, Stephen C. “Social Security Administration.” Social Security Administration Research, Statistics, and Policy Analysis, 1 Aug. 2010, www.ssa.gov/policy/docs/ssb/v70n3/v70n3p111.html.

## Health Insurance Options in Idaho for 2021

As the Open Enrollment Period for enrolling in a qualified health insurance plans kicks off for 2021, I thought it would be a good time to review some basics on how health insurance in Idaho works these days.

Open Enrollment Period

If you do not currently have a health insurance plan you have until December 15th to get signed up, or else you will most likely have to wait for 2021.   If you already have a health insurance plan, the deadline to switch to a different plan is the same day, December 15th.

Who Qualifies for a premium tax credit?

Options for Coverage in Idaho

Options are pretty slim in most states, including Idaho.  There are 5 health insurance carriers (Regence, Mountain Health Co-op, Blue Cross, Select Health, and Pacific Source) offering individual and family coverage both on and off the Idaho Exchange(must get coverage on exchange to get APTC).     With that being said, whatever your current situation is you might be able to save money by looking into all your options.  The prices vary so much with each company each year that it is usually not in your best interest to stick with the same company year over year.  Last year, Select Health had the lowest prices in East Idaho, and now for next year, Regence has the lowest prices in East Idaho.

Saving Money

For example, I helped a family save hundreds of dollars a month by switching them from being a spouse and children on a school district employer health plan, to a family plan off the exchange with Regence, separate from their employer.  Coverage for the actual employee is usually a very good price, but if your employer offers coverage for your spouse and children, it is usually more expensive then what you could get separate from your employer.

Another option to possibly consider, is the new “Enhanced Short Term” plans available through Blue Cross and Select Health.   These plans can be renewed up to 3 years and in general are quite a bit cheaper than the on exchange plans.   These policies go through underwriting, so your price is based on your health history.   You cannot use APTC to get these plans, but if you do not qualify for a tax credit, this is a more affordable option.  These plans are also flexible in that you can start them whenever, not just January 1st.

If you need help with your health insurance I am a licensed agent  and work with the Idaho health insurance companies both on and off the exchange.

By Jimmy Hancock

References

1. “Federal Poverty Level (FPL) – HealthCare.gov Glossary.” HealthCare.gov, www.healthcare.gov/glossary/federal-poverty-level-fpl/.

## Elections Impact on the Stock Market

2020 has obviously been a crazy year, and with the Presidential Election coming up, it is not about to calm down anytime soon.  The stock market has been a thrill ride ever since late February, with a big drop and then a steady climb.  Tech stocks and Large US stocks have already made it back in the positive territory for the year, while small stocks and international stocks are still lagging.

With that as the backdrop, I have gotten the question “How will the presidential election affect the market?” pretty often.   For questions like this I am glad I have my crystal ball with me at all times so I can tell my clients exactly what is going to happen.  O wait, I don’t have a crystal ball. But we can learn from history.

Historic Election Year Returns

Looking back at election years since 1928, the S&P 500 (Large US Stocks) has had a positive return 21 times, and a negative return 3 times (1).  I think most people would find that hard to believe.

Is there significantly better or worse returns during election years or the year after an election?

The average annual return of the S&P from 1928-2017 was 9.8%. The average return during election years and during the subsequent year were 11.3% and 9.9%, with plenty of volatility. If there was truth to the above speculations, we would consistently see extraordinarily high or low returns during election year followed by a reversal the following year. The data does not bear that out, and there is nothing in the above data that should lead an investor to make any tactical changes to their portfolio during or after election years. (3)

Republican vs Democrat

This is another interesting topic that divides people throughout the country, but is there any stock market effect based on which party gets into power?  The data actually surprised me.  From 1926 to 2019, we have had a Republican president for 46 years, and a Democratic president for 48 years.  The average annual return for the S&P 500 index when we had a Republican President was 9.12%. When we had a Democratic President, the S&P 500 averaged 14.94% per year. (2)

Whatever your political leanings are, this should give you solace knowing that average returns are over 9% long term no matter which party is in the white house.

False Patterns

The worst thing an investor can do is get caught up in trying to find and take advantage of patterns in the stock market.  It seems like a good idea, but trust me, it is not in your best interest.   For example, there is a super bowl stock market predictor, which states that if the team that wins the Superbowl is a team that had its roots in the original National Football League, then the stock market will decline.   There is another pattern showing that every mid decade year ending in 5 (1905, 1915, 1925 etc.) since 1905, has been an up year for stocks. (1)  These patterns are just random facts that people try to turn into something that seems important.

The Story of 2016

The 2016 election was a great example of this. Many financial experts and talking heads were predicting a decline in the market if Trump won. On Fortune.com, Katie Reilly reported that Citigroup predicted that a Trump win would have a negative effect on the stock market, believing the S&P 500 index would fall 3% to 5% if Trump was elected. Evelyn Cheng reported on CNBC the day before the election that JP Morgan, Barclays, Citi, and BMO all expected a Trump victory would have a negative impact on the stock market, with Barclays being as bold as saying the S&P 500 could potentially fall 11 to 13 percent. Some went even further with their market predictions.

In an interview with Neil Cavuto, noted billionaire Mark Cuban stated:

“In the event Donald wins, I have no doubt in my mind the market tanks,” Cuban said. “If the polls look like there’s a decent chance that Donald could win, I’ll put a huge hedge on that’s over 100% of my equity positions… that protects me just in case he wins.”

To the surprise of these pundits, the opposite occurred.  In just 2 months from November 1st through the end of the year, equity markets had a substantial growth period, with the S&P rising 6%, the Russell 2000 up 14% and the Russell 2000 Value increasing by 18%. (3)

In Conclusion

So the best and most honest answer to the question “How will the presidential election affect the market?”, is “I don’t know, but over the long term, stocks have made between 9 and 12% per year on average.”

By Jimmy Hancock

References

1.Anspach, Dana. “How Does the Stock Market Perform During Election Years?” The Balance. About Inc., 16 Oct. 2016. Web. 01 Nov. 2016.

2.French, Bob. “Are Republicans or Democrats Better for the Stock Market?” McLean Asset Management, 10 July 2020, www.mcleanam.com/are-republicans-or-democrats-better-for-the-stock-market/.

3. Gatliff, Kenny. On the Money, 23 Sept. 2020, on-themoney.com/2020/08/11/presidential-elections-and-the-market/.

## Stocks vs Real Estate

The comparison is often made between investing in Real Estate vs investing in the Stock Market.   There are many strong points to both arguments, but as an Investment Advisor, I am going to argue the side of why the stock market is a better long term investment.  Note, I am not inferring you should not buy a home, nor am I inferring that you should exclusively put all of your money in the stock market.  This argument is just in terms of where you should put extra money that you would like to grow for retirement or other purposes.

Here are 6 advantages of investing in stocks over investing in real estate.

1.Effort/Work

Whether you are flipping homes, renting properties, or developing land, there is a whole lot more hands on work and extra time as compared to ownership of stocks.  If you have an investment advisor, you could realistically spend absolutely no time “working” on your stock ownership and still get the growth of the market.   Lucky for you, stocks don’t have furnaces that break, or water pipes that leak.

2. Diversification

Diversification is a very important concept.  The old saying is don’t put all your eggs in one basket.  Diversification in Real Estate would involve buying homes, apartments, commercial property, and farm land etc., all in different areas of the country.   You would have to have quite a bit of money to be fully diversified.  With the stock market, if you are invested in a Matson Money Fund, you can start with one dollar and be invested in about 12,000 stocks throughout the world.

3. Liquidity

Liquidity is how easy it is for you to sell.   Stocks are extremely liquid, with most stocks being sold within seconds of offering them for sale.   With Real Estate, it can take weeks, months, or sometimes years to sell or rent out a property.

4. Costs

The cost of owning property could include all or most of the following; real estate agent fee, property taxes, maintenance, utilities, mortgage interest, and insurance.   The cost of owning stocks usually only includes an investment advisor fee, and mutual fund management fee.

5. Debt

When investing in real estate it is almost always tied to taking on debt, because of the large amounts of money needed to buy a property.   Taking on debt automatically increases the risk level with any investment.   With stock based mutual funds, you can start with \$1, and never have any debt to worry about.

6. Return

There is a lot of variables that come into play when comparing returns of real estate investing vs stock based mutual funds.  You can really cherry pick numbers to make either side look much better than the other.  Just comparing actual long term growth in prices of real estate vs prices of stocks, stocks win that competition easily.  But if you include rental income, it can obviously increase your overall real estate investment return. With that though, you have to consider the risk of not being able to rent it out.

If you are looking for a way to get a high return with lower risk and little hassel, my opinion is that your #1 option is to put your money in stocks, via a diversified Roth IRA or 401k.

Feel free to comment with your thoughts.

By Jimmy Hancock

References

1. Kennon, Joshua. “Should You Invest in Real Estate or Stocks?” The Balance. N.p., 17 Oct. 2016. Web. 12 May 2017.

## Large Stocks vs Small Stocks: Does the Last 3 Years Change Things?

Looking back at the last few years, small stocks have been under performing by a big margin compared to large stocks.   Is this just a short term fad or is this a bandwagon that you need to jump on?

The S&P 500 is a grouping of the 500 largest companies in America.  It is a very popular thing to invest in for many reasons.  First of all, it is made up of incredible companies that we all know and love like Google, Walmart and Apple.

Here is a chart showing 2017-2019 average annual returns from these different US stock categories.

 US Markets Annualized Return (%) S&P 500 Index 15.27% Dimensional US Large Cap Value Index 8.46% Dimensional US Micro Cap Index 6.85% Dimensional US Small Cap Index 6.75% Dimensional US Small Cap Value Index 3.32%

Obviously the S&P 500 has done amazing, while the other categories have done below their long term averages.     This can sometimes lead to a problem called recency bias.   Recency bias is a form of timing the market and investing in what has done well recently.   We believe it can be detrimental to your long term investment strategy.

Different categories of stocks have returns that come at different times and for different reasons.   Our main job as investment coaches is to keep you diversified and disciplined during crazy times like this.   This has happened before, and it looked almost the same as it does in the chart above.

From 1995-March of 2000, the S&P 500 was the best category of stocks by a wide margin.  The next closest category was over 4% lower annually, with most of the other categories being 14% or more lower annually vs the S&P 500 during that time.     Then for the next 10 years starting in march of 2000, the S&P 500 was the only stock category that had a negative return.   Yes, it lost money over a 10 year period.  But International Small Value stocks were up over 14% per year during that same period and US Small Value stocks were up  over 11% per year.

The stock market is random and unpredictable in the short term.  It really does take patience to be a successful long term investor.  I know, just like you, how frustrating it is to see other people having great returns while I am not.

Below is a chart showing a longer term history, and the returns of each category, including international categories from march of 2000-through the end of 2019.

 Markets Annualized Return (%) Fama/French US Small Value Research Index 10.75% Dimensional International Small Cap Value Index 10.51% CRSP Deciles 9-10 Index 8.81% Dimensional International Small Cap Index 8.79% CRSP Deciles 6-10 Index 8.32% Fama/French International Value Index 7.53% MSCI Emerging Markets Index (gross div.) 6.99% Fama/French US Large Value Research Index 6.76% Dimensional International Large Value Index 6.14% S&P 500 Index 6.01% MSCI EAFE Index (net div.) 3.36%

You can see that the S&P 500 has been the second lowest category over this last 20 year period.

We keep our clients invested in the S&P 500, but we overweight towards small and value, because their long term returns have been higher.

Although the S&P 500 is popular, and has been up lately, that doesn’t mean you can forget the long term projections and academic studies that have proved again and again that an efficient diversified portfolio beats the S&P 500 in the long term.

By Jimmy Hancock

References

1.  Matson Money. Three warning signs you may be speculating and gambling with your money powerpoint. N.p.: Matson Money Inc., 29 June 2020. PPT.

## The Easiest Way to Become a Millionaire

Becoming a Millionaire used to seem like this totally unrealistic goal that would never happen unless I won the lottery or inherited a bunch of money from some distant relative.   As it turns out becoming a millionaire is not all that unrealistic of a goal. Becoming a millionaire just means that your net worth, or the amount of money and assets you own, is greater than \$1 Million.   It is achievable on almost any salary if you do it the right way.  There are over 11 million Millionaire households in America.  That’s almost 10% of all households in the United States.   1.

Is it Possible?

This is my 3 step guide to reach the status of millionaire: 1. Saving/investing at least 10% of your income, 2. investing prudently while taking proper risks, and 3. starting young.

1. Saving at least 10% of Your Income

I will show you an example of how a person making \$30,000 a year can be a millionaire by the time they retire.   A 25 year old, let’s say his name is Bayden, just graduated from college and got a job making \$30k year.  He decides to put 10% of that into a Roth IRA, which is \$250 a month.   As it turns out he stayed at that same job for his entire life and never got a raise, but continued to invest the 10%.   When he retires at age 67, with growth rate of 8%, he will have \$1,058,593 in his Roth IRA.  And the best part of that is the money is all tax free!  Obviously with a higher salary and/or frequent raises you could end up with much more than a million if you follow the 10% rule.  For most people that are out of debt and have an emergency fund, I suggest contributing 15% of their income towards retirement.

2. Investing Prudently While Taking Proper Risk

Time, and growth rate are the two most important factors in that equation.  An 8% growth rate is not anything too crazy, but you have to be invested long term, and have a vast majority of your money in stocks.  You cannot panic and take your money out if there is a crash.  You must trust in the market, and understand that stocks are the greatest wealth creation tool in the world.

3. Start Young

Starting young is a principle that everyone knows, they just don’t follow it.  The power of compounding interest is amazing, and the younger you start the more powerful it is.  Even if you can’t reach the 10% goal, if you have an income source, you should be contributing to a retirement account.  For those of you who don’t have 40 years till retirement, you will need to save more than 10% to reach a million.

Do you  really need \$1 Million Dollars?

Going back to the example of Bayden, when he retires at age 67, he will literally need every cent (and more) that he saved and earned while investing.   Just to live on the equivalent of today’s \$30,000 a year (\$103k assuming 3% inflation) for 20 years in retirement, he would need \$1.1 million.   And that is assuming a 6% growth rate on the money for those 20 years.   If you don’t have a pension at work, and you want to live on more than \$30k a year in retirement, then you better get to saving! Most people will need at least \$2 or \$3 Million to live comfortably in retirement.

If you can apply discipline in your finances and in your investments, you can become a millionaire by the time you retire.    That is my plan.

By Jimmy Hancock

References

1. “Market Insights Report 2018.” Record Numbers of U.S. Households Achieve Millionaire Status in 2016, According to New Spectrem Market Insights Report, 22 Mar. 2018, spectrem.com/Content_Press/Spectrem-Press-Release-3-22-17.aspx.

Matson Money. Who Wants to be a Millionaire Powerpoint. Mason, OH: Matson Money, 16 Jul. 2015. PPT.