Month: December 2019

If you have planning to invest your money in the stock market, you need to read this carefully. It cannot be denied that every investment has its own risk. Today’s article gives an overview of the situation in the stock market today and the prediction about what will happen in the future.

Client meetings over the past year have been quite sanguine. Investments and assets are up. People seem to feel better about job security. The housing market is slowly recovering, and retirement projections look rosier. Strong stock market performance is good, in that it gets us closer to our goals; however, it can also breed a false sense of complacency.

Valuations are high and reaching points not seen since 2007, 1929, and by some metrics, even 2000.

Overvalued Stock Market

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Stock markets become overvalued when stock prices rise at a much faster rate than earnings, which is what has occurred for the past several years due to the belief that the Federal Reserve’s quantitative easing policies will continue to force investors into stocks in order to get a decent return on their money; low-interest rates punish savers and cause them to seek yield by investing in increasingly speculative investments. But even members of the Federal Reserve are warning about frothy segments of the market as they tiptoe toward shutting off the quantitative easing spigot.

debt is increasingly being purchased on the basis of yield rather than the careful evaluation of repayment prospects. John Hussman Hussman Funds

The Cycles In Financial Markets

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It is important to remember that financial markets move in cycles, and just because this multiyear stock market advance has been rewarding, it does not mean that it can continue indefinitely. In fact, the longer it persists, the greater the chance of a severe correction.

One way to evaluate whether or not the market is expensive is to look at the current PE10 or CAPE ratio. This valuation method was developed by Robert Shiller from Yale, and it historically has been helpful in forecasting market crashes as well as future rates of return.

This article in the WSJ “Yes, Virginia, You Can Time the Market” explains that, although no one can time the market with precision, using the Shiller PE as a method to modify your stock exposure by overweighting or underweighting by up to 30 percentage points has resulted in stellar returns since 1926.

The Prediction of Bubbles

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It is a strategy, however, that requires patience. A high CAPE ratio can persist for years. It tends to have a better success rate for predicting 10-year future returns and is less accurate in predicting returns less than 5 years out. In fact, in 2000 it was over five years early in diagnosing an overvalued market. The article acknowledges that extreme market timing by moving all of your assets in and out of the market based on certain parameters is very difficult and not a recommended strategy. Using Shiller’s ratio, though, can provide some guidance in dialing down equities when markets are overvalued and dialing up exposure when markets are undervalued, thus protecting investors from large corrections and enhancing long-range returns.  See the chart to the left.

John Hussman has been warning about stock valuations for years as the Shiller PE, as well as his additional proprietary methods, indicate that returns over the next decade will be roughly 2%, before inflation. His weekly commentaries are a must-read.

He makes this powerful assertion in, Yes, This Is An Equity Bubble:

Make no mistake – this is an equity bubble, and a highly advanced one. On the most historically reliable measures, it is easily beyond 1972 and 1987, beyond 1929 and 2007, and is now within about 15% of the 2000 extreme. The main difference between the current episode and that of 2000 is that the 2000 bubble was strikingly obvious in technology, whereas the present one is diffused across all sectors in a way that makes valuations for most stocks actually worse than in 2000.

The question a rational and prudent investor should as himself is this, “ is it prudent for me to take additional risk in the stock market at this juncture, given such dismal future returns?” This is a particularly important consideration for those people who are looking to retire in the next 7-10 years, as well as those how have recently retired.

For more information on the Shiller PE and market valuations you may want to read the following:

Market Valuation Overview- Yet More Expensive

The Mystery of Lofty Market Valuations by Robert Shiller

Is the CAPE Ratio Good at Predicting Future Returns? (Yes) Is it Perfect? (No)

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If you know that you are not in complete control of your life, it is a good idea to listen to the discussion in the following article. Life is hectic. Day to day chores, work, and family obligations can keep us from our longer term aspirations. We may have goals that we set up at the beginning of the year or a timeline that we want to accomplish as we move through certain stages of our life, but these targets can seem elusive, if we do not occasionally take a realistic assessment of our progress. Perhaps, a quick 10 minute financial audit is a good place to start.

Take ten to reflect on your financial life and measure your financial “pulse” to see if you are in decent financial shape. Here are a few quick and easy questions for you to ask yourself to complete the review:

First, are you prepared for a catastrophe?

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We all have family members, coworkers, and friends who have experienced a job loss, death, or disability. We tend to think naively that a similar event would never happen to us; but unfortunately, we are not immune from hardship. Ask yourself the following specific questions.

  • Is your job secure? If not, do you have at least 6 months cash to cover your expenses until you can find employment?
  • If you or your loved one were to die, would there be sufficient insurance to cover your future living expenses such that you could maintain your current lifestyle?
  • Do you have an updated will and other estate planning documents or would there be chaos or confusion among your family members upon your death or incapacity?
  • If the primary earner was to become disabled, how would you cover the lost income from his or her salary?
  • If you have group disability, will the after tax benefit be sufficient to pay your monthly living expenses? (Disability benefits for which premiums are paid with pretax dollars are taxable, whereas benefits paid with after tax dollars are tax free).
  • Even if you were to cover the basics through a disability policy, would you be able to still save for retirement?

These are tough questions to ponder, but very important to consider, just in case the unthinkable happens. The probability of a disability is very real. Statistics show that just over 1 in 4 of today’s 20 year-olds will become disabled before they retire, and that of the 37 million disabled Americans(in 2013), 50% are in their working years (age 18-64).*

In fact, a typical non-smoking female, age 35, 5’4″, 125 pounds, who works in an office job with some outdoor physical responsibilities, and who leads a healthy lifestyle, has a 24% chance of becoming disabled for 3 months or longer during her career with a 38% chance that the disability will last 5 years or longer. The typical male has a 21% chance of becoming disabled with the same rate as females of a long term disability (38%).* Of course, the risks are higher for people who do not live a healthy lifestyle.

If you can’t answer the questions above, or you are concerned that you are not protected in the event of an unforeseen circumstance, you need to focus on risk management. You should immediately look into additional insurance coverage to protect against these events.

Second, are you moving closer to your important life goals?

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If you need to purchase a car or other large purchase in the near future, are you gradually saving money in a separate savings account so that you can pay for your purchase in cash?

Are you contributing annually to your kids’ college funding accounts?  It is best to start as early as possible so that you save less each year. If you wait until the kids are in high school, there are fewer years to save and the process will be much more onerous. Time and dollar compounding make the process easier requiring that you save less over time.

Are you saving at least 10% of your salary (not including your employer contribution) for retirement and are you on track to retire? (A basic rule of thumb is for a retiree to amass roughly 15 times their income by age 65. By age 50, you should have about 6 times your income saved; and at 40, 2.5 times your income saved.) If you are behind, you will need to save more than 10%.

Third, do you understand what your invested in and why?

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You should primarily be aware of how much exposure to the stock market you have and if that makes sense given your age, goals, and investing personality.  Ultimately, you should have a low cost, diversified portfolio of funds that you can stick with, even in the event of a very large market correction.

You should also not be paying high fees for investment management and for “active” funds. If you think you are paying too much or are worried you have too many accounts that are spread over several investment companies, you would likely benefit from cost reduction, consolidation, and simplification.

Finally, do you have anxiety over any aspect of your financial life?

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If there is something that is bothering you, it is important to address it quickly and thoroughly so that you can sleep better at night. Furthermore, if you are the kind of person that would find it hard to quickly pull together your key financial documents such as recent tax forms, investment statements, and insurance policies, you will likely benefit from some financial housekeeping and coaching. Awareness and intention are important elements for financial success.   To this end, you may find that working with a financial advisor or coach is a great way to improve and enhance your financial security.

The financial planning process is a great way to create a roadmap for your financial life. Working with a fee only CERTIFIED FINANCIAL PLANNERTM professional is a great place to start. The planner can put together a comprehensive plan and then meet with you to review the plan on at least an annual basis.  For my clients, each year I provide a color coded financial “report card” that measures progress toward specific financial goals in all areas of their financial life—insurance, cash flows, college planning, retirement planning and estate planning.

We also review their portfolio, and discuss market valuations and the very real and ongoing potential for markets to correct. This ensures that the client is mentally and emotionally prepared for market volatility and protects them against irrational behavior at market peaks and troughs. A tax checklist is also reviewed to see if there are opportunities to reduce taxes, both in the short and long term.

Annual reviews are an essential part of the financial planning process. They provide feedback on progress and direction in response to changes in financial markets and retirement and tax legislation. Most importantly, they provide moral support and encouragement for the client. The review forces clients to focus on their finances in an intentional way.

I once told one of my long term clients that since she had been coming in for years and her plan was in good shape, we could move to less frequent reviews, say every other year, if she wanted. She commented that she was happy to pay the fee for more frequent reviews, as it forced her to pull her information together and give it a good look every year. This annual exercise was meaningful for her and well worth the time and investment.

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At this middle age you might have thought about what you will become in 10 years, 20 years, even when you retire. However, for some people, they might just simply lead a life without a clear direction even if they are nearing their retirement age.

Many Baby Boomers are working long and hard in stress-filled jobs. After 20-plus years laboring in the same industry, performing the same duties day in and day out, they have gradually lost the passion they once had for their career. In a “flight or fright” response, they are reflexively expressing a desire to retire early and rid themselves of their daily toil.

This knee-jerk desire to tell their boss to “take this job and shove it” often occurs due to a lack of purpose and passion in their everyday life. Perhaps, rather than trying to retire at the age of “50 something”, these frustrated workers should instead consider redesigning their work life such that it aligns with their core values. In doing so, they may find work to be a source of pleasure and excitement as opposed to a continued source of stress. Their physical health may improve too, as studies show that continuing to work later in life can significantly improve physical and mental well-being.

This blog was inspired by a presentation given by Randy Gardner, JD, LLM, MBA, CPA, CFP(R) at the 19th annual Garrett Planning Network retreat which I recently attended. Mr. Gardner emphasized that many retirement plans, especially early retirement plans, fail because the retiree does not have his or her “next step” configured.

A retiree’s ext step— Ask what am I retiring to?

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A good question to ask oneself prior to retirement is, “what am I retiring to?” It is extremely helpful to envision a typical day, week, month in retirement. How will you fill your day? What is your purpose or passion? And, better yet, why can’t you instill that passion in your workplace today?

An early retirement can be hazardous to your health.

Gardner also cited research that suggests that an early retirement may be hazardous to your health, as calling it quits early is highly correlated to an increased risk of heart attacks as well as Alzheimer’s and dementia.

In a study by the Institute of Psychiatry at King’s college, London, researchers found that keeping the brain active later in life reduce the chances of an early onset of Alzheimer’s. In fact, there was a significant link between late retirement and delayed symptoms. The researchers found no link between education or employment and dementia risk, but found that those who retired later prolonged their mental abilities above the threshold for dementia.

Furthermore, mortality rates increase with a reduction in the retirement age.

In a study out of the University of Zurich researchers found that a reduction in the retirement age causes a significant increase in the risk of premature death – defined as death before age 67—particularly for males. According to the study, one additional year of early retirement, causes an increase in the risk of premature death of 2.4 percentage points.

Losing daily structure can lead to boredom, and chronic boredom is bad for your health.

Experts purport that the root cause of declining health in retirement is due to a lack of purpose. Having a long and successful career provides structure for the week and gives us all a reason to get out of bed in the morning. Losing that structure can lead to boredom, and chronic boredom is bad for your health.

In addition to these non- financial risks, the risk of longevity, increased taxation, legislative changes to entitlement programs, and poor market returns can hamper a retiree’s ability to receive adequate lifelong income.

Plus, let’s face it; the math of an early retirement can be daunting. It is hard to work for 30 years and live off of your savings for possibly the next 50 years.  There is a good chance that you will need to downscale your lifestyle in order to make your assets last.

How can a generation of burnt out Boomers respond to these ongoing pangs for an early retirement?

“Purpose perhaps is more important than exercise.”

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Rather than retire early, Gardner suggests that burnt-out workers instead instill purpose in their lives. In fact, he believes that purpose is “perhaps more important than exercise.” Frustrated workers of all ages owe it to themselves to design a career that engages them in the things that they are passionate about. Since only 20% of workers find their jobs to be engaging, they need to commit to strategies that improve their work responsibilities and environment.

Mr. Gardner recommends that people engage in “job-crafting.” Job-crafting is the process of redesigning your job in order to engage in tasks, relationships, and intellectual pursuits that engage, excite and interest you.

Here are some tips I put together based on the job crafting concept that will hopefully help you get started in creating your purposeful career and life.

Find out which tasks you enjoy and try to incorporate them into your work.

If you would like to write, start a blog or newsletter for your company or industry. If you enjoy working in a team or competitive environment, see if there is an opportunity to join a task force in your company. If you enjoy working with your hands to create things, start a small business that allows you to do this or add these activities to your weekend to do list. During your vacations, engage in the pursuits that energize you. This will refresh you when you return to work.

Determine which relationships are most important to you and try to build these within your work day

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It could mean that you need more time with peers whom you work with, or perhaps, you crave a connection with a more experienced mentor.  You may need a study group or network of people outside your company but within your trade or industry to connect with. Increasing these connections can make you feel part of a larger group and also help you build bridges with colleagues across the country.

You may crave relationships that are outside of the workplace during the week, so you should take the time to meet with friends for lunch or dinner after work in order to get a break from the people you work with every day.

Maybe you work by yourself in a home office and you need to be more intentional about getting out and connecting with other professionals like yourself. The point is that with some soul searching, you can identify the things that frustrate you about your job and try to refine them so that they work for you.

Although I am a solo practitioner, I really value the relationships I have built over the years with other financial planners and industry professionals I have met through the Garrett Network. They make me feel like I am not alone and less isolated. I connect and engage with them through webinars, study groups, and our annual meeting.

Re-engineering your work functions could give you a renewed perspective.

Finally, we are driven by curiosity and intellect toward various careers or pursuits; periodically we need to be stimulated to nurture our creativity and sharpen our intuitive skills. Performing our job functions in the same way day in and out can make our skills stale. Re-engineering your work functions can give you a renewed perspective. Mentoring a younger employee new to the organization may also provide you with a fresh outlook on your job as well as foster camaraderie.

Complete This “Passion” Exercise

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In order to create you ideal career and personal life, I encourage you to:

  • Create long list of all of the things that you are passionate about. Compile this for all the areas of your life.
  • Pick the top ten things you are most passionate about from the list
  • Ask yourself—why do I enjoy this pursuit? Mr. Gardner encourages people to be as specific and exhaustive about what aspects of their passions they enjoy, as opposed to focusing on the activities themselves.  This particular step can provide rich insight into what really excites us and makes us tick.
  • Create a long term plan to infuse your life with elements from your passion list. We tend to get bogged down in short term thinking, which can make us irrational and depressed when we don’t reach our goals quickly. People who are able to think and plan longer term tend to be more optimistic about their situation. In short, create a plan for the next few decades as opposed to the next 365 days.

A valuable tool I recommend to my clients which helps them identify their passions, is the Highlands Ability Battery test. Its premise is that the skills or abilities that come naturally to you, tend to be the ones that you enjoy. The function of the Highlands Ability Battery test is to define each of your abilities and then determine the patterns or “clusters” into which they fall. Armed with this knowledge, individuals are able to avoid stress and achieve satisfaction with work.

Finally, remember that some stress can be a good thing. Stress is a necessary emotion and intermittent stressful events are probably what keep the brain more alert and enable you to perform better. Here is a related article on how successful people manage their stress.

Don’t plan your retirement to fail; instead, plan for passion. Not only will your work seem like play, but it will also help you achieve the financial independence you now crave.

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