Inflation…Does it Affect the Stock Market?

A question that I have received more and more often from clients is “how will high inflation impact the stock market?”  Inflation has definitely been in the news lately, and it can be an alarming thing.   As you can see in the chart below, the inflation rate has increased from 1.2% a year ago, to 5.4% as of last month.  

Predicting the future is a hard thing to do, so I don’t know what the future will hold, but we do know that inflation has already taken a toll on our buying power as consumers.

Inflation’s Impact on the Stock Market

A big narrative in my industry is that high inflation is a bad omen for the stock market.  The problem is, looking at historical data, the numbers don’t really go along with that narrative.   This chart compares the yearly S&P 500 return (Large US Stock Market) to the inflation rate. 

There is no pattern that I can see.  Some high inflation years were indeed negative, but a bunch of them were huge positive years for the stock market.   

If we look into the actual numbers from the highest inflation rate years throughout history, there is further proof that no major correlation exists. 

More than 1/3 of these high inflation years produced a greater than 20% return from the stock market. 

Also, the average stock market return during these years was 9.4%, almost identical to the long term average of the S&P 500.

What not to do during High Inflation

The last thing you want to do with long term money during periods of high inflation, is pull your money out of the stock market, and put it in the bank/cash/CD’s.   Especially now, with interest rates so low, it is challenging to keep up with inflation if your money is just sitting there not really growing. 

The Best Hedge Against Inflation

In my opinion, the best hedge against inflation is to invest in stock based mutual funds that are extremely diversified and ride out any short term volatility.   Is it guaranteed to beat inflation?  No.  But it has a much better chance to beat inflation then a CD at a bank, or pretty much anything else for that matter. 

By Jimmy Hancock

References-

  1. “United States Inflation RATE2021 DATA: 2022 Forecast: 1914-2020 Historical.” United States Inflation Rate | 2021 Data | 2022 Forecast | 1914-2020 Historical, https://tradingeconomics.com/united-states/inflation-cpi.
  2. Posted October 24, 2021 by Ben Carlson. “Inflation vs. Stock Market Returns.” A Wealth of Common Sense, 24 Oct. 2021, https://awealthofcommonsense.com/2021/10/inflation-vs-stock-market-returns/.

How to Become a Millionaire on a $30k Salary

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.  It is achievable on almost any salary if you do it the right way.  There are over 8 million Millionaire households in America.  That’s more than 1 in every 20 households.  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 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.

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!

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. Boston Consulting Group. “Millionaire.” Wikipedia. Wikimedia Foundation, 17 June 2015. Web. 9 Feb 2017. <https://en.wikipedia.org/wiki/Millionaire>.

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



Considering Buying Gold? Read This First

gold2We have all seen the advertisements and headlines that keep telling us that investors need to flee to safety and buy gold.  They will tell us that the stock market is going to crash worse than last time, and that investors need a hedge to inflation with gold.  They will say it with charisma and inflict fear upon us as investors.  Even I have found myself a little fearful at times.

I have put in the research, and gold as an investment does not make sense for most investors, especially long term investors.  Gold as an investment may give some assurance to the leery, older investor, but the numbers just dont add up like you might think they do.

Show me the Data

The reason gold is not good as a long term investment is because the growth of the price is extremely low compared with stocks.   Check out this paragraph from article I found.

“Because of inflation, a dollar acquired in 1802 would have been worth just 5.2 cents at the end of 2011. A dollar put into Treasury bills at the same time would have grown to $282, or to $1,632 had it gone into long-term bonds. Held in gold, it would have grown to $4.50. True, that’s a gain even with inflation taken into account. But the same dollar put into a basket of stocks reflecting the broad market would have grown to an astounding $706,199.” 1

1 single dollar grows to almost a million dollars in stocks, but in gold it grows to $4.50.   That stat alone teaches us not only the weak gold price growth, but the extreme growth potential in stocks.

So what about more recently?  Let’s look at Gold’s return over the last 25  years

Over the last 25 years the real return(inflation adjusted) of gold was a measly 1.5%, and 4.1% before inflation adjustment.  2. Stocks as indicated by the S&P 500 over the last 25 years had a return of 9.62%. 3.  That is over 5.5% per year increase compared to gold.  Yes, that includes 2008 stock market crash.  If you understand the value of compounding, you know you can’t afford Gold’s return in a long term portfolio.

The current price of an ounce of Gold is $1,115.60.  This is a far cry from where it was just a few years ago when it reached its peak above $1900 in 2011. 4.  If you jumped on that bandwagon, you have hopefully learned a valuable lesson.

Gold as a hedge against inflation

A lot of people that invest in Gold do it knowing about the low long term returns.  The reason they give is it is a hedge against inflation.   I understand this side and its merits, but have 2 minor push backs to that.  First of all, how can you compare the inflation rate, a very constant thing year after year, to the price of gold, which bounces around on extremes year to year.   Second of all, how are stocks not a better hedge against inflation?  If the CPI goes up due to inflation, stock prices also increase.  We saw that with the huge growth rate of stocks back in the 80’s when inflation was very high.

One Case for Gold

The only reason I would ever advise someone to buy gold, is if they believe that a catastrophic, life altering event is coming in the very near future.  If you think we are going to go back to hunters and gatherers and that capitalism will disappear, then I suggest you buy gold.

Final Say

Past performance is no guarantee of future results, but in my opinion gold is not a good hedge against inflation, and it is not a good long term investment.  Investing in Gold is better than keeping all of your money under your mattress, but this is a good, better, best argument.  Invest in a globally diversified portfolio filled with stocks and short term fixed income.

-By Jimmy Hancock

References

1. “Investing in Gold: Does It Stack Up? – Knowledge@Wharton.” KnowledgeWharton Investing in Gold Does It Stack Up Comments. Wharton School of the University of Pennsylvania, 22 May 2013. Web. 15 Apr. 2014. <https://knowledge.wharton.upenn.edu/article/investing-in-gold-does-it-stack-up/>.

2. Carlson, Ben. “A History of Gold Returns – A Wealth of Common Sense.” A Wealth of Common Sense. N.p., 21 July 2015. Web. 18 Aug. 2015. <http://awealthofcommonsense.com/a-history-of-gold-returns/>.

3. “S&P 500.” Wikipedia. Wikimedia Foundation, n.d. Web. 18 Aug. 2015. <https://en.wikipedia.org/wiki/S%26P_500>.

4. “Yahoo Finance – Business Finance, Stock Market, Quotes, News.” Yahoo Finance. N.p., 18 Aug. 2015. Web. 18 Aug. 2015. <http://finance.yahoo.com/>.

Why Your Retirement Dollars Might Fall Short



inflation-2Predicting the future is a rough sort of business to find yourself in, especially with a world that’s been changing more and more rapidly with every passing day.  Unfortunately a lot of people planning for retirement find themselves having to do this  very thing, having to try and figure out what directions the world will be taking them in once they’re ready to stop working. Here are just a few of the ways in which retirement is changing in the next decades, to help you stay ahead of the curve:

1. Retirees are living longer than ever before.
Advancements in medical technology have increased the average life expectancy of individuals. Retirement planning is becoming more and more troublesome for both actuaries and future retirees (Smart Money, 2012). This increased longevity comes with a need to set up a matching retirement plan, particularly when some
retirements are expected to last longer than the amount of time the retirees spent working.  Rather than trying to predict how long your retirement is slated to last, be prepared for the longer estimate in response to these treatments and technologies.

2. Children are staying with their families longer, even after college.
According to a new study released by Oregon State University, young adults in the 18-30 age bracket are having a harder time than ever becoming financially independent from their parents (Journal of Aging Studies, 2012). This greatly affects those looking to retire while their children are still young adults, and can cause a domino effect that starts to influence generations to come. There’s no guarantee of the job market recovering or this trend changing in the next few years, so when looking at your retirement make sure to factor in all of your current familial expenses.

3. Social Security may not be around in the future.
Social Security has always been a problem politically since it has a foreseeable end; between longer life expectancies and the large baby boomer population, social security is anticipated to “face funding shortfalls in about two decades if nothing changes” (CNBC 2012). While it’s quite possible that the government will come to a viable solution to salvage social security benefits, it’s a good idea to plan for the ‘what ifs’ regardless. Plan for social security as less of a guarantee and more as a pleasant possibility so there are no unpleasant surprises down the road. Don’t have your retirement plan hinge on social security as it may crumble within the next few decades.

4. Inflation never stops

Inflation is a very big risk to your retirement dollars.  To the couple in their 20’s, inflation will nearly double the amount that they need to save in order to live comfortably by the time they reach retirement.  Inflation decreases the value of your savings each year, so it is important to invest your retirement dollars in a portfolio that will outpace inflation.  Savings accounts, CD’s, fixed annuities, and most bonds do not outpace inflation.  You have to put a portion of your money in stocks or you will be losing the long term battle to inflation.

Retirement is changing, but that doesn’t mean you can’t still build a healthy, strong retirement plan even with a moderately uncertain future. Your retirement is something that needs to be made to last a long time and you’re allowed to take your time putting the right amount of money into it. As long as you avoid the unnecessary risks in relying on social security, and avoiding inflation, and you prudently plan for a slightly longer nesting period for your children, and plan for your own longevity, you can avoid a few of the major pitfalls that your retirement plans may otherwise succumb to.

By Financial Social Media and Jimmy Hancock

 

References

1. http://www.smartmoney.com/retirement/planning/the-cost-of-living-longer–much-longer-1328897162395/

2. http://oregonstate.edu/ua/ncs/archives/2013/jan/no-more-%E2%80%9Cempty-nest%E2%80%9D-middle-aged-adults-face-family-pressure-both-sides
3. http://www.cnbc.com/id/100338122/Yes_We_Can_Fix_Social_Security_but_It_Won039t_Be_Pretty

Why Should you Rebalance your 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.”

Say What?

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 and money market accounts, aka fixed.  This is the 50/50 portfolio which is pretty safe and best for those closer to retirement.  So you let it go 1 year and lets say it was like 2013 stocks had a great year.   After 1 year you now have $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 stocks, and buy into what is low, fixed.  There is never a time when rebalancing forces you to buy high, or sell low.

Rebalancing never seems like the right thing to do at the time.  For example in 2008 when stocks were plummeting, rebalancing would have been selling safety to buy stocks.  If you think about it though, you are buying low and selling high.  During these times you need an investment coach to keep you off the ledge.

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.  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 portfolio is being rebalanced at least annually by your advisor.

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/>.

Is it Safe?

danger thin icePerhaps one of the biggest challenges that investors face is determining if “right now” is a SAFE time to invest (meaning not just the present, but any time). What makes it difficult for investors is a twofold issue: first, is a lack of historical knowledge and perspective, and second, their own emotions. Actually, if one looks back on an historical basis, it would have appeared that there was no safe period in which to invest. Investors are really funny in this regard (actually most advisors are really no better). In 2009 investors were in shell shock coming out of the 2008 financial debacle. By 2012 it was really too good and couldn’t last. Last year the market had been going up for four years and that was just too good to be true and something had to come crashing down soon. And this year, with all the election year rhetoric and world events swirling around us, the stock market now appears to be getting more volatile…? What investors are looking for is something that does not exist—ever—a “Goldilocks” market!

I’m going to take some historical facts and figures to provide some historical context that may enable my clients to feel more comfortable when faced with the ongoing question of I “is it safe.”
The first issue that investors must confront is that there is no such thing as a “safe” investment and this applies whether funds are invested in equities, bonds, government fixed income, gold, real estate, your mattress or in a coffee can in the back yard. Your money is always subject to one form of risk or another. For a more complete discussion on this subject read Main Street Money by Mark Matson. If you don’t have a copy let me know and I will get you one.
In this blog, I’ll confine myself to discussing equities and fixed income contained within a diversified portfolio that is periodically rebalanced, with dividends and capital gains reinvested, because that is what we do with our client’s money. Let’s take a decade by decade look at all the challenges investors have faced.

1920’s
• 1917-23 Russian Civil War
• 1922 Mussolini takes control of Italy (eliminates private ownership, total government control!! Hmm!)
• 1923 Hyperinflation in Germany
• 1926+27 Chinese Civil War
• 1929 Wall Street Crash
• 1929-39 Great Depression
A horrible period to be invested in the market—manic market followed by the 1929 crash. Yet a fully diversified portfolio had $100,000 growing to $135,000 at the end of the decade.

1930’s
• 1932-33 Holodomor Starvation
• 1933 The Nazi Party come into power
• 1933-45 The Jewish Holocaust
• 1935 US Presidential Candidate Assassinated (Huey Long)
• 1935-1936 Italian/Abyssinian War
• 1936-38 Stalin Purges (including Gulag Death Camps)
• 1936-39 Spanish Civil War
• 1937 The Hindenburg Airship Explodes
• 1939-45 World War II
Talk about a horrific period to begin investing? Probably the worst ten year period, economically we have ever experienced. Yet, $100,000 invested at the beginning of the decade grew to $152,000.

1940’s
• 1933-45 The Jewish Holocaust continued
• 1939-45 World War II continued
• 1945 President Roosevelt dies before the war ends
• 1945 Eastern Europe is dominated by Communist USSR
• 1949-1993 The Cold War
What could be a worse time to begin investing as Word War II was starting, followed by the beginning of the Cold War. Let me interject an investment factoid here. The renown international investor, Sir John Templeton made his initial reputation by borrowing $10,000 and buying 100 shares of every stock on the New Your Stock Exchange selling for less than $1 at the start of the war.
If you had controlled your anxiety, like Sir John, and invested $100,000 at the start of the decade, you would have been amply rewarded by seeing that investment grow to $336,000!

1950’s
• 1949-93 The Cold War continues
• 1950-53 The Korean War
• 1951 Mao Zedong takes power in China
• 1956 Suez Canal Crisis
• 1956 Russian quashing of the Hungarian Revolution
• 1959 The Cuban Revolution
• 1959-75 The Vietnam War
This was supposedly the boring decade under President Eisenhower. However, international events didn’t take a holiday and they continued to swirl about us creating many excuses for avoiding the assumption of any investment risk.
Nevertheless, investors who ignored events and invested $100,000 at the start of the decade had $393,000 in their portfolios at the end of the decade.

1960’s
• 1949-93 The Cold War continues
• 1959-75 The Vietnam War continues
• 1961 The Berlin Wall built
• 1962 The Cuban Missile Crisis
• 1963 JFK Assassinated
• 1964 China explodes its first nuclear bomb
• 1967 Six Day Israeli/Egypt War
• 1968 MLK and RFK assassinated—rioting in major cities
• 1969 Libyan Revolution—Khaddafi comes to power
This was the decade where we got to watch both national and international occurrences in almost “real time” thanks to the expansion of television and global communications. An event filled decade both home and abroad. Plenty of excused could be found as to why it was not safe to invest. Yet again, $100,000 invested at the start of the decade produced a portfolio worth $259,000 by the end of the decade.

1970’s
• 1949-93 The Cold War continues
• 1959-75 The Vietnam War continues
• 1970 The beginning of Terrorism in the world
• 1972 Kidnap and murder of Israeli Athletes at Olympics Games
• 1972 President Nixon resigns
• 1975-79 Khmer Rued in Cambodia (Genocide)
• 1979 Saddam Hussein comes to power
• 1979-1981 Iranian kidnapping of U.S. Embassy and diplomats
This decade begins with Vietnam, followed by the Nixon resignation, then the Iranian Embassy kidnapping, and ends with President Carter’s “malaise.” Gas lines, international problems, national embarrassment and a Russian bear looking more ominous.
Yet somehow if one was courageous enough to invest $100,000 at the beginning of the decade, it would have grown to $271,000.

I could go on with the history lesson, but suffice it to say that the 80’s decade rewarded $100,000 by growing to $453,000. In the 90’s it grew to$338,000.
This last decade, which was sort of known as the “lost decade” because of the dot.com/tech bubble, the real estate bubble. This resulted in two severe bear markets. Still investors were rewarded by having their portfolio vastly outperform the underlying cost of living and inflation.
So the lesson for all is that if one pays attention to events, you can always find a reason why it is not a good time to invest—and historically, you would have always been wrong!! I will not say anything about the world we find ourselves in today because we have always found ourselves in difficult times both domestically and globally—there have always been challenges and there always will—it is just the nature of the species.
As to the basic question: Is it safe? I’ll let you draw your own conclusions!

By Jim Hancock

 
The blog came from two sources: Matson Money Investor Coaching Series—“But this Time it Really is Different” and Fred Taylor—Matson Coach, Atlanta, GA
Source of returns figures for the various asset classes utilized in the hypothetical portfolio: DFA Returns Software 2.0, Feb. 2011. Past performance is no guarantee of future results. Performance included reinvestment of all dividend and capital gains.

Tax Time IRA Answers

versesLet’s take down the age old question of “Should I invest in a Roth IRA or a Traditional IRA?”   Before I jump into this, you must know that neither one is a bad choice, and it all depends on your situation and goals.  Both accounts are considered “Qualified Accounts”, meaning they have tax advantages over a non qualified investment accounts.

Traditional IRA

Summary- A traditional IRA allows you to take the tax advantage in the year that you make contributions to the account.  It is used by people that need to lower their taxes now, and also by people who are in higher tax brackets.

Pro’s

  • – You get to write off your contributions you make each tax year from your Income.
  • – If you are not covered by a retirement plan at work, the income limit does not exist.  Meaning you can write off contributions no matter how much you make.

Con’s

  • – When you take the money out in retirement, you pay the full taxes on not only the money you put in, but the growth as well. (Assuming there is growth)
  • – You are required to take the money out and pay taxes beginning at age 70 1/2, this is called a Required Minimum Distribution.
  • – If you have a retirement plan at your work, you cannot write off contributions if your Adjusted Gross Income is more than $95,000.

 

Roth IRA

Summary- A Roth IRA allows you no advantage in the year of the contribution, but the money you take out in retirement or after death is completely tax free.   It is used by people with lower current tax rates and by those wanting tax free money in retirement or as an inheritance for their children/spouse.

Pro’s

  • – You get all of your money that you contributed plus all the growth of the account completely tax free after the age of 59 1/2.
  • – If you die, the money goes tax free to your beneficiaries.
  • – You have the option  of withdrawing up to the total of all your contributions made tax free at any age.

Con’s

  • – Your contributions do not lower your Adjusted Gross Income in the year contributed.
  • – If you make more than $191,000 as married filing jointly you cannot contribute to a Roth IRA.  ($129,000 for single or head of household)

 

Things to Consider

  • – You can open as many Roth IRA’s and Traditional IRA’s as you want, but be weary of annual fees.
  • – If your income is below $36,000 (Married Filing Jointly) then you probably qualify for the Retirement Savings Credit, which gives you up to 50% of your total contributions in the form of a tax credit.
  • – If you are married and your spouse is not working, you can contribute up to $5500 to an account for each of you for a total of $11,000 of tax advantaged investments for the year.
  • – If you believe your current tax bracket is significantly higher than it will be when you take the money out, then you should probably consider a traditional IRA.

The most important part of the decision should be your goals and priorities.  A Roth IRA will give you more long term assurance of tax free wealth, while a traditional IRA will help you to dodge big tax bills in the short term.   Also know that you have the option of having both a Roth and a Traditional IRA, and contributing to both each year.  It doesn’t have to be one or the other.

By Jimmy Hancock

 

Reference

IRS. “Retirement Topics – IRA Contribution Limits.” Retirement Topics – IRA Contribution Limits. IRS, 18 Feb. 2014. Web. 03 Aug. 2014. <http://www.irs.gov/Retirement-Plans/Plan-Participant%2C-Employee/Retirement-Topics-IRA-Contribution-Limits>.

 

5 Money Saving Strategies to Avoid

moneyWe’ve all done it. Spent more than we wanted to all in an effort to get a great deal. With all the offers floating around promising to help you save money, here are 5 to avoid:

 

1. Buying in bulk. While buying in bulk can be a cost-effective budgeting strategy, often consumers end up buying more than they need, and paying more for it in the process. If there is a product or service that you use on a routine basis that you can get at a good price, great. But just be careful not to spend more for extra items that don’t fit into your budget or may end up going to waste.

 

2. Only purchasing discounted items. While it may look like you’re getting a great deal on a discounted product or service, sometimes you really do get what you pay for. Trying to save money upfront can end up costing you more in the long run. You may end up having to repair a problem that arises, or replace an item that just didn’t last as long as it should have.

 

3. Spending more for higher quality. Spending more for quality is something that can cause you to rationalize an expensive purchase. But spending more doesn’t always mean getting more. Before deciding to spend more money on a product or service, do your research. Find out if you are in fact paying for higher quality, or if you’re just paying more.

 

4. Always using that coupon that comes in the mail. Coupons are a great way to save money, but not if they prompt you to make an unnecessary purchase. Often, retailers send out coupons so consumers go shopping when they otherwise wouldn’t have. You may find yourself spending twice as much as you planned, all because you couldn’t pass up a deal. And buying something you don’t need at a discount is still a waste of money.

 

5. Buying at a discount now thinking you’ll use it later. Retailers may promote gift cards that offer to double your money if you pay upfront. This can be a great strategy to save money, but only if you planned on shopping at that retailer in the first place. Otherwise, you may not end up using the card. The next time you purchase a gift card at a great price, make sure it’s at a retailer where you are planning to shop.

Instead of investing in money-saving strategies that could potentially backfire, use discounts appropriately. Look for promotions on things you actually need and planned on buying. And don’t get sucked into making additional, unnecessary purchases in the process. Also, do your research before making any purchases to ensure you pay for the right thing at the right price.

Authored by Financial Social Media

Market Timing: The Myth

Bear MarketSo what is market timing and are you losing returns because your money manager is doing it?  Or even worse, have you been caught doing it all on your own.

According to Investopedia, market timing is “The act of attempting to predict the future direction of the market, typically through the use of technical indicators or economic data. ” 1.

If you have ever watched any of the financial channels on TV, or been on a financial website like Yahoo Finance, they are constantly promoting Market Timing.   Every day I check Yahoo Finance there is some new trend that somebody has predicted in the market.  One day they say, this bull market is just getting started.   Then the next day they say, indicators say that market is in for a huge downturn.   Which one should we believe, or would our retirement portfolio be better off if we just avoided the market timers opinion?

Academics and Research

Listen to what Investopedia has to say further about market timing…

“Some investors, especially academics, believe it is impossible to time the market. Other investors, notably active traders, believe strongly in market timing. Thus, whether market timing is possible is really a matter of opinion. ” 1. 

I am going to go with the academics on this one.   I have the data to prove that market timing does not work.

CATEGORY 1984-2013 Annualized Return
S&P 500 Index 11.10%
Dalbar Average Investor – Equity Fund 3.69%
CPI (representing Inflation) 2.80%

*2.

As we see here in this little chart, if an investor would have just been invested in the S&P 500 for the last 30 years they would have gotten over an 11% return.   But what did the average equity investor get?   3.69%.  That is just over inflation.

Why?

So why did the average equity investor lose over 7% annual growth in their portfolio?  A part of that is due to costs, but the vast majority is because of market timing.  Investors seem to almost always be wrong when it comes to deciding when to be in the market and when to take their money out.

Lets take 2008-2009 as an example.   The end of 2008 the market is taking a nose dive and what does everyone tell you to do.  Get out of the market.  So you take your money out because of the fear that it will never come back.  Ultimately you are selling low.  Then on March 9, 2009 the bottom finally hits and the market begins to take huge jumps upwards.  But you are not invested so you get none of that growth.  When you decided to get back in you were buying high.  The market today is reaching new highs and is way past where it was before the crash in 2008.

The most simple thing to say in investing is buy low and sell high.  Obviously it is not that simple to actually do.  Market timing is detrimental to your long term retirement goals.

– By Jimmy Hancock

References

1.”Market Timing Definition | Investopedia.” Investopedia. Investopedia US, n.d. Web. 16 June 2014. <http://www.investopedia.com/terms/m/markettiming.asp>.

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

Equities in the Last 30 Years: A Retrospective

bull marketLooking at a chart http://bit.ly/qSHuve covering the performance of the Dow Jones Industrial Average over the last century is a lot like looking at a chart of profitable business earnings at a cartoon enterprise meeting–it’s almost a caricature of itself, a steady upward slope punctuated by regular but far-between drops, always ending higher than it was before.

When an economy is in the thick of a recession, it’s hard to look at something like this and see anything positive, but now that the U.S. has been steadily creeping its way out of those lows it’s easier to see not only how markets react over the long-term, but also at how we’ve always reacted to the crises. In the short term a financial crisis always seems like the end of the world, but, as looking at the data would suggest, much like broken bones they always heal up stronger than ever. The following is a look back at the last three decades, and all of the crises and triumphs contained within. As The Economist noted in 2009, despite the criticism of advisors who used the past to predict the future during the economic downturn of the 2000s, there’s still some merit to taking a look at historical data once in a while to try and anticipate how markets will fare in the future.

The 2000s: The early 2000s recession and the Global Financial Crisis of 2007-2008.

The 2000s have been a tumultuous decade at best, between the turn of the century drops in 2000 and 2001 (April 14th, 5.7% and September 17th, 7.1%, respectively) and the abysmal 2008 performance of the Dow Jones, the drops were big and hit hard. Yet, it’s just as important to note that the U.S. economy was working with more money than ever before, and while that also means the drops were larger, it’s to be expected when working with such a large economy. The economy and markets have been on a steady mend since.

The 1990s: The Recession of 1990-1992.

Following on the heels of ‘Black Monday’ in the 1980s, the recession of 1990-1992 was almost more of an aftershock of the global recession than an isolated incident; arguably the 1990s recession was all but unavoidable after the U.S. escaped Black Monday relatively unscathed. The recession of the early 1990s was the “largest recession since that of the early 1980s” (http://bit.ly/PRlZjK), something that in the long view seems to imply a trend to recessions, equities markets, and economies on a whole.

The 1980s: The early 1980s recession and Black Monday.

The early 1980s, much like the early 1990s were hit hard by a bit of continued fallout from the global recession of the late 1970s, contributing to the savings and loan crisis, the recession itself lasted from July of 1981 to November 1982 (http://nyti.ms/lwDonQ). The early 1980s recession was similarly an influencing factor of Black Monday in 1987, where the global markets crashed and the Dow Jones declined by a remarkable 22.61% (http://on.wsj.com/12xHlhN). Needless to say this recession fed into the following decline in the early 1990s.

While this seems to be all doom and gloom, in this instance the negatives highlight the positive aspects of all of these recessions. The economy has always rebounded, stronger than ever. Much like the gradual upward spiking of Dow Jones over the last century, there will always be mountains and valleys, and it’s important to remind ourselves not to panic when sitting in one of these valleys.

Authored by Financial Social Media (financialsocialmedia.com)

http://stockcharts.com/freecharts/historical/djia1900.html

http://online.wsj.com/article/SB119239926667758592.html?mod=mkts_main_news_hs_h

http://www.nytimes.com/1981/01/05/world/federal-reserve-sees-little-growth-in-81-with-continued-high-rates.html

http://www.huffingtonpost.com/2011/08/05/dow-jones-biggest-drops-falls_n_919216.html#s323026&title=7_April_14th

http://bancroft.berkeley.edu/ROHO/projects/debt/1990srecession.html

http://www.economist.com/blogs/freeexchange/2009/09/does_the_past_predict_the_futu