financial plan

  • Investing

    POLITICS AND INVESTING

    With all of the ups and downs in the stock market lately, and the multitude of different news headlines you see trying to explain it away – tariffs, potential interest rate cuts, rising or falling inflation, etc. You would be forgiven for worrying how the decisions or tweets made by those in the government will affect the stock market and your investments.

    Maybe you think that having Republicans in charge leads to stability so that businesses can plan and make investments for the future, and that’s better for the stock market than when Democrats are in power. While your neighbor is sure that the complete opposite is true because of the economic stimulus that flows from all of the liberal spending projects. I have heard both types of comments over the years, and I’m betting you have heard them or know someone who has blind faith in one party or the other as well.

    In 2010 I had a co-worker who was sure that the decisions congress and the federal reserve were making after the financial crisis were going to lead to runaway inflation, a recession, and another stock market crash, and was invested based on these outcomes.  Unluckily for them and their portfolio, but luckily for the rest of us none of those situations has come to pass and the S&P 500 has almost tripled from then till now.

    I’ve also heard people during the market drawdown at the end of 2018 say that they sold out of the stock market and wouldn’t invest again until “that bozo” was out of the white house. Right now, it is too soon to tell but the stock market did recover at the end of 2018 and has posted great performance through the first 2.5 years of this presidential term.

    While it may feel like the government has a big effect on the economy and the performance of the stock market, I’m here today to tell you that it’s hard to see much of a difference based on who is in charge. And there are many other things you should be focusing on instead.

    Democrats – Running up a deficit and that’s bad for the country and the markets… right?

    People tend to believe that since Democrats want to increase spending and expand social programs like Medicare for all that the US spends more money when they are in charge. Depending on who you talk to, experts will say that the spending is good because it can help stimulate the economy, while others will say that the increased spending is bad because it generates more debt we will have to pay back later.

    But either way, since the 1980s when Ronald Reagan was president the yearly budget deficit has tended to increase under Republican presidents and decrease under Democratic Presidents. So, maybe it’s Republicans who are spending and propping up the economy/saddling us with debt? Not exactly what you’d expect based on the stereotypes huh?

    Republicans – The party of business… or not?

    Experts also argue that the economy and the stock market both do better with a Republican president. After all, the GOP is considered the party of big business, which definitely leads to certainty and stability and a stronger economic outlook for the future. Except that’s not the case either.

    Looking at the economic data starting after WWII, America’s GDP has grown 4.4% per year when Democratic presidents were in office versus 2.5% per year for Republicans. While the stock market has performed similarly returning 9.7% annually for D’s versus 6.7% annually for R’s during roughly the same time period.

    And if certainty and stability from a business point of view is what you expect from a Republican president, you’d have a hard time making a successful argument that there is anything remotely stable about the decision making going on in the current White House. But, even with that all of that instability and the corresponding inability for America’s CEOs to make accurate plans for the future, the S&P 500 is still up over 30% from Jan 2017 to September 2019.

    What you should actually focus on, instead of which political party is in charge.

    Rather than pulling your money out of the stock market based on what happens next November, or any other gut related feeling you might have, focus on these three things that you can control.

    1. Maximize your cash flow (Income – Expenses = Savings). Spending less than you earn is step number one towards successfully saving for the future. Maybe you can predict the stock market’s moves based on the daily political moves, but if you don’t have any savings to put to work as your investments then you still won’t get very far.

    2. Build a plan. What are you saving and investing for? How much do you want to have in savings for emergencies, how much do you need each month to pay for your mortgage and student loans, how much do you need for retirement? Think about these questions and put a plan in place. It is much easier to achieve a goal when you have a realistic expectation of the money/time/effort it will take to reach it.

    3. Understand your appetite for risk. Investing in the stock market has been the best strategy to achieve those long-term goals, but the stock market has good and bad days and everyone’s temperament is different. Having an idea of how you will react to stocks losing 20, 30 or 40% before recovering will help you build a plan that you can stick with for the long haul and see to completion.

    By focusing on these aspects of your financial life, instead of the day to day movements of the stock market or the election by election movements of the government, you put your focus on things that you can control, rather than worrying about things in life that no one can predict.

    If you’d like some assistance building a financial plan or understanding your risk tolerance and the decisions you should make to achieve your financial goals contact a financial planner today. At Steady Climb Financial Planning we have openings to bring on new clients in the fall. Schedule your free initial consultation today!

  • Investing, Saving

    MARKET CORRECTIONS ARE HEALTHY AND NECESSARY

    Looks like we’re in bear territory now!

    With the stock market’s historic growth that began after the recession in early 2009, many experts believe a 10% pullback would be a healthy sign for the markets going forward. This sort of drop is not horribly painful, especially by historical standards, and in order for the stock market to keep advancing there must be at least a risk of decline.

    Why is a market correction healthy and beneficial? After all, most people are counting on continued gains to be able to meet their goals. The main reason is that it prevents a stock bubble from forming. Bubbles occur when stock prices rise so far that they are clearly out of line with the earnings potential, and value, of the underlying companies. We saw the consequence of that in the awful 2000-02 and 2008-09 market wipeouts, when some people lost half their wealth or more.

    Certainly, market corrections never feel healthy when they occur. It seems people only think it’s a healthy correction when it is other investor’s holdings that are affected. People get fearful as the market declines, the media fan the flames by giving investors reason after reason to be afraid, and worries that this is the beginning of the next crash begin to develop.

    While many investors admit that a 5% pullback is manageably unpleasant, concerns expand when the market decline hits 10%. That’s what customarily constitutes a correction. In the most recent sell-off, at the beginning of this year from January 26th to February 8th of 2018, the S&P 500 index fell 10.2%. The market barley crept into correction territory, but then rebounded and went on to have several days of all-time highs later in the year.

    In a great post at awealthofcommonsense.com, Ben Carlson looked at the S&P data going back to 1950, and found 28 time periods when stocks fell by 10% or more. So, on average, the market has experienced an official correction every 2.25 years.

    S&P Losses of 10% or More Since 1950

    • Total Occurrences: 28 Times
    • Average Loss: -21.6%
    • Median Loss: -16.5%
    • Average Length: 7.8 Months
    • Greater Than 20% Loss: 9 Times
    • Greater Than 30% Loss: 5 Times

    As you can see, the average post-1950 market correction lasted just under eight months and the median total loss was 16.5%. But what about steeper declines?

    Out of the 28 times the S&P 500 decreased by 10%, the market went on to decline by 20% – the standard definition of a bear market – only nine times (32% of the time), and a loss greater than 30% only five times (18%). The data confirm that, although these types of large losses do occur, they really are the exception.

    Here are the past 12 corrections in the S&P 500 Index, according to Standard & Poor’s:

    Can you Stomach a Correction?

    Are you thinking: “I don’t think I can stomach a drop of 16.5%.” Then that’s where the wisdom of diversification and having a financial plan becomes apparent. Remember that the data above represents the historical performance of the S&P 500, an index composed of 100% stocks.

    Working with a capable financial advisor can help ensure you have an asset allocation mix of stocks, bonds and cash that reflects your tolerance for risk. A riskier portfolio tilted more heavily towards stocks will perform worse than a conservatively balanced one if you panic and sell when the market declines.

    Even for a younger investor, your portfolio likely shouldn’t consist of 100% stocks. The appropriate allocation for an average investor in their 30s or 40s might be closer to 80% stocks. This means that your portfolio should suffer a drop of around 13.2% during the median market downturn. If that number still makes you queasy, consider having a conversation with your advisor about the amount of volatility you are comfortable enduring within your portfolio.

    By making adjustments to your plan: boosting savings, changing goals, or altering time horizons; you should be able to construct an asset allocation that allows you to rest easier during these periods of market turbulence.

    Although the recent market pullback might create anxiety, media headlines and possibly fear, remember this: we’ve been here before.-source for market data included in this article: “When Stocks Fell 10%…” Ben Carlson. https://awealthofcommonsense.com/2018/10/when-stocks-fell-10/

  • Home Buying

    ARE WE MEANT TO BE HOMEOWNERS?

    Lately I have been spending more time on the home browsing site Zillow than I’d care to admit. Especially because we are renting our current home and plan to for another year or so, so we won’t be in the home buying market for a while. But I often find myself drawn back to the site, perusing the houses for sale in our neighborhood. While walking the dogs I tend to take different routes and walk down different streets, partly to break up the routine for the doggos and also to keep tabs on the real estate market in our area. What’s new on the market, what’s sold and those houses that are languishing unsold for some unknown reason.

    Most days I will see a few houses for sale and start contemplating what we would change if we bought one.

    “Oh, that one looks interesting, we could add a fence and it would be a perfect backyard for the kids and the dogs.”

    “Hey, this one has been on the market for almost two months? Maybe there’s something that is scaring people away and we could get a good deal on it.”

    I even find myself playing around with a home loan excel spreadsheet, plugging in today’s interest rates and the home prices in our neighborhood to get a feel for what the monthly payments would be.

    I’ve been doing this even as we are more than happy renting for the near future and know the prudent financial move, as well as our plan, is to definitely not buy a house yet. We are still getting to know the area after only living here a little over 6 months.

    But these feelings, along with conversations I’ve had with my wife have me wondering. Are some of us just meant to be homeowners and others renters, or is something else at play? Maybe I’m letting my feelings get in the way of rational decision making and I need to take a step back and look at the issue from a different vantage point. I know that the sound financial decision for us right now would be to keep renting, so I spent some time really thinking on it to see if I could come up with some possible reasons that I keep being drawn back to those home search sites.

    Change is hard

    This is the first house we’ve lived in over the past nine years, that we haven’t owned. That’s a pretty big change from the way we’ve been operating. Some of the things about it are great. I don’t feel at all bad about calling the property manager when something breaks so that someone else can come fix it. We haven’t had any major repair issues, like the AC going out, that we’ve had wait a long time for a fix. I know how to lay mortar to re-set tile and replace a leaky toilet, but I was happy enough to have somebody else do it. Along with not having to do the repairs, we also don’t need to budget for them either. Being a renter means you don’t have to pay more than your monthly rent and utilities, and hopefully your kids and dogs puke on the hardwood floors instead of the carpet, that way you get your security deposit back at the end of the lease.

    You also have to take the bad that comes with renting along with the good. Since we don’t plan on staying in this house for more than a few years, sometimes it’s hard to make it feel as “homey” as we’d like. I have plenty of friends who were happy to have something other than white walls in their new homes after years of apartment living. We try to hang pictures and decorate to make the house feel like our place as much as possible, but there are lots of little things we’d change to make it feel more like “our place” if we owned it.

    Feeling unsettled (or, change is hard part 2)

    Along with the change of going from owning a home to renting, is the additional change of moving 2,000 miles away from where we lived before. This has been a big adjustment for us. Getting used to a new place, meeting new people, finding new schools for the kids. It is a lot for anybody to deal with. We love Boise and our neighborhood, and are working on making new friends for us and the kids, but I wonder if subconsciously my mind thinks buying a place will make us feel more settled in and secure here. These feelings will probably fade as we live here longer, but for now I wonder if my mind is trying to cling to something it recognizes as normal with so many new things going on around us.

    FOMO

    In general house prices have been increasing, and every city and state is different, but here in Boise the real estate market has been on fire. House prices recovered from their recession lows and have been on a tear for the last 4-5 years. Boise is one of the fastest growing cities in the country and new home construction is having a hard time keeping up with the demand. If you talk to anyone in town they will probably tell you that we are near the top in prices, but that they thought the same thing two or three years ago and they’ve only kept going up.

    Even with our plans of renting for a year or so, it is easy to get swept along in the frenzy that goes with a hot market. After all, that’s how you get the dot com bubble, or the housing market that lead to the financial crisis in ‘08. When you see prices do nothing but go up it becomes hard to resist joining along with the crowd. I will catch myself thinking, “well maybe we should buy one of these houses now, before the prices go up by another 8% next year”. This is a situation where it is best to have a financial plan to refer to, preferably written down, otherwise we could easily get caught up in the euphoria of the market and make a terrible decision. Our plan is to rent for 1 ½ – 2 years so that we are sure about the area we want to live and don’t end up with a house we need to sell in less than five years. If we made a rash decision and then had to sell a year later, even if the housing market still went up 8-10% we would at best break even after factoring in all the costs that come with buying and selling a home.

    We are committed to staying in our rental home for another year, as much as my subconscious might try to get us to leave for something different. We will see what the future holds in the next year. Will we come to enjoy even more the ease of living in a rental and not worrying about home improvements, or will we chafe under the feeling of not being able to change the house to suit our style if it belonged to us? Are we temporary renters, destined to be forever homeowners, or will this experience change us into renters for life?

    Either way, letting your emotions take the lead is usually a recommendation for trouble when financial decisions are involved. I’m doing my best to stick to my plan, until some new information comes along that causes me to re-evaluate it.

    I’m interested to hear if you have thoughts out there on owning vs renting. Are most people temporary renters, until they can finally buy? We have friends here whose parents have only ever rented, which is very different from our experience where most everyone owns their home. Let me know where you stand, you can send me an email or post in the comments. I’m curious to hear your thoughts.