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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.
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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

millionaire

Total contributions     $12,000                $36,000

* assumes an 8% growth rate    2.

This visual further proves how important time and compounding is to your retirement account.  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.

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Now is the Time to Rebalance your Investments

With the big drop in the stock market last month, this is the best time to rebalance your investment portfolio.

Today we are going to discuss the topic of Rebalancing your portfolio and why it is so important.  I will explain to you how a continuously rebalanced portfolio is one that is constantly buying low and selling high.

“Rebalancing -The process of realigning the weightings of one’s portfolio of assets. Rebalancing involves periodically buying or selling assets in your portfolio to maintain your original desired level of asset allocation.”

Rebalancing for Dummies

Rebalancing can be very complex and confusing, but I will give a simple example to explain some of the benefits.

For example, lets say you have a retirement portfolio with $50,000 invested in stocks, and $50,000 invested in bonds. This is the 50/50 portfolio which is pretty safe and best for those close to or in retirement.  So you let it go 1 year and lets say it was like 2019 and stocks had a great year.   After 1 year you now have about $65,000 in stocks and $51,000 in the fixed portion.  You are no longer invested like you wanted to be, and are opening yourself up to way more risk than you originally planned on.   Rebalancing is then needed to sell off what is high, which is stocks, and buy into what is low, bonds.  The beautiful thing about it is, there is never a time when rebalancing forces you to buy high, or sell low.

Why doesn’t everyone rebalance?

Rebalancing never seems like the right thing to do at the time.  For example in 2008, or like we have seen in the last few months, when stocks were plummeting, rebalancing is selling safe fixed income to buy stocks.  If you think about it though, you are buying low and selling high.   Buying stocks low in a market like we have today can give you a huge advantage long term.

So by rebalancing a portfolio, what you are really doing is lowering the risk and keeping to your individual risk preferences.  That is really the main goal of rebalancing, but an added benefit is being able to consistently buy low and sell high.  This can help over the long term to increase your return as well.

The Proof

Take a look at this chart by Forbes which visually explains all of this.

 

Rebalancing chart forbes

 

You can see from the chart that rebalancing really does its work when the downturns in the market come.  The chart shows that the rebalanced portfolio made more than the portfolio that was left alone, and with much lower risk.

Make sure that your money is invested with an investment coach that has a scientific and predetermined way for rebalancing your hard earned money.

The portfolio’s we use with our clients are automatically rebalanced quarterly at the beginning of each quarter.

By Jimmy Hancock

 

References

1.”Rebalancing Definition | Investopedia.” Investopedia. Investopedia US, n.d. Web. 17 Sept. 2014. <http://www.investopedia.com/terms/r/rebalancing.asp>.

2. Brown, Janet. The Impact of Rebalancing. Digital image. Forbes.com. Forbes, 16 Nov. 2011. Web. 17 Sept. 2014. <http://www.forbes.com/sites/investor/2011/11/16/does-portfolio-rebalancing-work/>.

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What to do during a Stock Market Crash

So the stock market has hit “bear market” territory over the last few weeks which is a 20% drop from the previous high.  And many people are panicked!  But panicking after a big drop in the market can be very bad for your long term retirement account.  Especially if that panic involved pulling your money (20% less than you had 4 weeks ago) out of the stock market.

This might sound weird but I actually got excited when the stock market took it’s big tumbles over the last few weeks.  I have been waiting for a good opportunity to “buy low” in the stock market.   Yes, now is the best time to put extra money into your retirement investment account.   Buying shares in a time like this is like when your favorite store has a 20% off your entire purchase sale!  Basically, you get the same items for a lower cost.

There are a few reason why I don’t panic when the stock market goes down.

First, I understand that the stock market has always come back from corrections and crashes to reach new highs.   Along with that, I know that the stock market as tracked by the S&P 500 has made about 10% per year on average over the last 30 years.   I often get asked by people, what if it just keeps going down and I lose all my money?   Investing in a diversified mix of over 12,000 stocks makes it very unlikely for you to lose all of your money.  What are the odds that 12,000 companies across the world in different sectors providing different products all go bankrupt at the same time?

Second, I know I am in this for the long haul.  Every investor is at a different place and will use their money for different things.  If you are needing the money you have invested in the next few years, you should definitely not have a vast majority of your money in stocks.   Even throughout retirement,  why wouldn’t you stay invested and give your money a chance to grow and keep up with inflation.  Smart people look at investing as a lifelong thing.

Third, I don’t believe that me or anyone else can accurately predict the future.  This is a big one.  I get asked all the time innocent questions about investing and the stock market from clients and others that are all based around predicting the future.  Questions such as, is this going to end up being a crash?  Do you think stocks are overpriced?  How much do you think a diversified mix of stocks will make this year?  When I answer this question by saying I cannot predict the future, people are usually not satisfied.   The great thing about it is that you do not need a prediction about the future to be a successful investor and make money in the stock market.

Lastly, I believe in the phrase, buy low and sell high.  It is usually the hard thing to do at the time.  When the stock market is crashing down and you see the headlines say, this is the biggest drop in the Dow in its history, it isn’t necessarily an easy thing to buy stocks on that day.  On the opposite end, when the market is up for 2 straight years and the economy looks great and the headlines say, this is just the beginning for stocks, it isn’t easy to rebalance your portfolio and thus sell stocks.

Ultimately, we know there are going to be stock market ups and downs in the short term, but if you have a low cost diversified mix of stocks you will be doing alright in the long term.

By Jimmy Hancock



References

1. Matson Money. Separating Myths From Truths, The Story of Investing. N.p.: n.p., n.d. PPT.

Engineering Matters

Wednesday April 1, 2020 6:30 PM

The stock market is crashing, what should you do? When it comes to putting an investment portfolio together, Engineering Matters. In this class we will discuss the best way to put investments together to get the best return and take advantage of market crashes like we are currently having.

Dinner will be provided

The class is free to attend

 

Location- Stockman’s Restaurant, 1175 Pier View Drive, Idaho Falls ID. 83402

 

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Mon, 13 Jul 2020 04:23:32 +0000 last time: Wed, 01 Apr 2020 18:30:00 -0600

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New SECURE Act Signed into Law

On December 20, 2019, President Trump signed into law the Further Consolidated Appropriations Act, 2020.  This includes the Setting Every Community Up for Retirement Enhancement (SECURE) Act provisions previously passed by the House in April 2019.  There are quite a few changes that may effect you now or in the near future.  Most, if not all the changes are positive and allow you more flexibility in general.  Many of the changes have already become effective as of January 1st, 2020.   Below is a few of the provisions and a brief explanation of each.

Required Minimum Distributions (RMDs).  The age at which required minimum distributions must begin will be increased to age 72 from age 70 ½.

Explanation- If you were born before July 1st, 1949, this does not effect your RMD at all.  Even if you just turned age 70 1/2 last year you will still be required to take your RMD in 2020.  But for anyone born after July 1st 1949, you can wait until the year in which you turn age 72 before you are required to start taking distributions from your Traditional IRA or 401k.

Birth/adoption excise tax exception.  Penalty-free retirement plan withdrawals for a birth or adoption.

Explanation- Before age 59 1/2, you can take out money from your Retirement Account to pay for a birth or adoption and you won’t be charged the 10% penalty tax.

No maximum age for Traditional IRA contributions.  You can contribute to a Traditional IRA at any age.

Explanation- Previously, you could not contribute to a Traditional IRA even if you were otherwise eligible after the age of 70 1/2, now you can.

 

Changes for business owners setting up company retirement Accounts

Increased Tax Credits. For new 401k’s being set up, there is an increase in tax credits for the startup costs of setting up and running the plan for the first 3 years.

Deadline to Setup New Plan. An employer has until the due date of the company tax return (with extensions) to establish a new plan for the year.  Previously, the deadline was the last day of their business year. 

 

These are some of the major parts of the new SECURE act.   If you have any questions about these new rules or how to best take advantage of them, feel free to contact me.

-Jimmy Hancock

References

  1.  Neal, Richard E. “The SECURE Act of 2019.” Secure Act Section by Section, House Committee on Ways and Means, waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SECURE%20Act%20section%20by%20section.pdf.

Myths of Investing

Wednesday January 29, 2020 6:30 PM

What- Free Investing class for those interested in learning about some common myths you have probably heard when it comes to investing/retirement.

Where- Dixie’s Diner, 2150 Channing Way, Idaho Falls, ID 83404

When- Wednesday, January 29th, 6:30 PM

Who- Open to the Public

Cost-  Free

Why- Come enjoy dinner and education on how to invest your money to get the most growth for the least risk.

 

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Mon, 13 Jul 2020 04:23:32 +0000 last time: Wed, 29 Jan 2020 18:30:00 -0700

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Health Insurance Options in Idaho in 2020

As the Open Enrollment Period for enrolling in a qualified health insurance plans kicks off for 2020, 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 16th 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 16th.

Who Qualifies for a premium tax credit?

APTC, or Advanced Premium Tax Credit is when your health insurance premiums are significantly reduced based on your income.  Anyone who isn’t offered coverage from work and has income between 138% and 400% of the federal poverty line(FPL) based on their family size may qualify for the premium tax credit.  If spouses and children are offered coverage from work they are not eligible for APTC.   The 2018 federal poverty line for a family of 1 is $12,490 and goes up by $4,420 for each additional person in the family. 1.   So a family of 4 can make as much as $103,000 and still qualify for a premium tax credit by being under 400% of the FPL.  In many cases if you qualify for APTC, you can get a high deductible health plan for Free.   If you make below 138% of the FPL, you can qualify for Medicaid.

 

Options for Coverage in Idaho

Options are pretty slim in most states, including Idaho.  There are 4 health insurance carriers (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) , and 1 more that offers individual coverage outside the exchange only (Regence).   But then when you talk about price increases and deductibles that keep going up, there are really no “affordable” options for most people.   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.

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.   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.

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/.

Gearing Up for the Next Crash

Wednesday October 23, 2019 6:30 PM
 

Free Investing Class in Idaho Falls

Are you worried about putting all of your money in the stock market?  Have you heard the predictions of a crash coming soon?    Have you ever wondered the best way to invest your money during Stock Market Crashes?

Come to our free investing class in Idaho Falls and we will dive deep into the topics of investing, market volatility, and the best strategies to take during stock market crashes.

Who- Open to the public

What- Dinner and educational class

Where- Dixie’s Diner, 2150 Channing Way, Idaho Falls, ID 83404

When- Wednesday October 23rd at 6:30 PM

Cost- Free

 

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Mon, 13 Jul 2020 04:23:32 +0000 last time: Wed, 23 Oct 2019 18:30:00 -0600

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