Year End and New Year; Putting a Price Tag on Your Health and The Sequence of Returns
by rwilczek on Jan 22, 2019
Happy New Year!
I’m sure many of us are glad to say goodbye to 2018 for many reasons. In the world of investments, the S&P 500 was down 6.24% in 2018, the Dow Jones Industrial Average closed at negative 5.97% for the year, while the Nasdaq Composite Index finished down 4.38% for the year. What was especially hard to experience was that all three indexes plunged around 9% in December, as the Federal Reserve continued to tighten money supply, with a quarter point increase in short-term interest rates (Bloomberg 12/31/18).
Volatility came back as a surprise to many investors who are new to the market or who have forgotten its presence. In 2018 there were 110 market swings of 1% in the S&P (about 250 points in today’s market), compared with only 10 in 2017. That is still 35% below the annual average of 169 intraday market swings of 1% since 1962 (Ibid.) Clearly, we remember what we want to, and these numbers are a perfect example.
Nine out of eleven U.S. investment sectors were in negative territory at the end of Monday’s session. Health care and utilities end as the only two positive sectors for the year. To continue from Bloomberg, “…(A) broad set of concerns remained, including a grim manufacturing report out of China, slowing global economic growth, rising U.S. interest rates and a decline in oil prices.”
Now that we know what happened, the next question is what might happen in 2019? Jurrien Timmer, Fidelity Investments director of global macro, is quoted in Bloomberg on 12/29/2018 making a prediction that makes a lot of sense to me:
· U.S. earnings growth will slow to 5 percent to 7 percent in 2019, the Fed may raise rates once or twice more, and the price-earnings ratio of the stock market will start the year at a reasonable point.
· Bonds look all right in this environment. Stocks should do better than they did in 2018. The best opportunity should be in emerging market stocks, which have lagged far behind their U.S. counterparts.
· “If you add it all up, it’s not a bad story for stocks -- maybe not double-digits, but better,” Timmer said in a Dec. 13 interview.
We have a new Congress coming in a few days and perhaps that offers the opportunity for compromise and consensus to produce deals that both sides of the political aisle can live with. Winston Churchill is quoted as saying, “You can always count on Americans to do the right thing after they’ve tried everything else.”
Let’s make sure you are comfortable with your portfolio. Many clients have part of their portfolio in annuities that provide guaranteed income now or in the future for the very reason of being able to live with volatility and uncertainty. Keeping cash reserves so that you don’t have to spend down your assets when markets fall is part of being prepared for the eventuality of corrections and recessions whenever they happen.
One of the questions I’ve been hearing lately from clients in ordinary (non-retirement) investments is “How can I be receiving taxable capital gains distributions if most of my investments have gone down in 2018?” Mutual funds are constantly analyzing their stock and bond inventories for opportunities to sell at a profit to reinvest in positions with greater opportunity. That profit generates capital gains, which are then passed on to the mutual fund investors. This happens in years that the fund may decline in value as well as in years that the funds increase.
Want to have a conversation? Meeting in person or having a phone appointment makes it easy to double check that you are ready for whatever lies ahead!
Rita
Putting a Price Tag on Your Health
Being healthy not only makes you feel good, it may also help you financially.
Provided by Rita Wilczek
We constantly hear how important it is to maintain a healthy lifestyle. That is not always easy, especially in the face of temptation or the easy option of procrastination. For some, the monetary benefits of maintaining a healthy lifestyle may provide an incentive.
Being healthy not only makes you feel good, it may also help you financially. For example, a recent Johns Hopkins Bloomberg School of Public Health study determined that a 40-year-old who simply moves from being obese to overweight could save an average of $18,262 in health care costs over the rest of his or her lifetime. If that person maintains a healthy weight, the average potential savings increase to $31,447.1
If you’re wondering how your health habits might be affecting your bottom line, consider the following:
Regular preventative care can help reduce potential health care costs. Even minor illnesses can lead to missed work, missed opportunities, and potentially lost wages. Serious illnesses often involve major costs like hospital stays, medical equipment, and doctor’s fees. Preventative dentistry may help you reduce dental costs as well.
In a way, staying healthy helps our potential to save for retirement. If your health declines to the point where you cannot work, that hurts your income and your ability to contribute to retirement accounts. The threat is real: the Social Security Administration notes that a quarter of us will become disabled at some point during our working years.2
Overweight workers may be subjected to wage discrimination. A LinkedIn study of almost 4,000 full-time and part-time workers found that the workers whose weights were greater than normal earned an average of $2,512 less annually than the others.3
Higher weight seems to be a factor in overall health care costs for many. Ask the Centers for Disease Control and Prevention. The CDC notes that per-year health care expenses are about 41% higher ($4,870) for an obese individual than for a person of normal weight ($3,400). The biggest factor in this difference: prescription drug costs.4
Some habits that lead to poor health can be expensive in themselves. Smoking is the classic example. A pack of cigarettes costs anywhere from $5-14, which means ballpark expenses of $2,000-5,000 or more a year in expenses for a pack-a-day smoker. Smokers also pay higher premiums for health, disability, and life insurance.5
By focusing on your health, eliminating harmful habits, and employing preventative care, you may be able to improve your self-confidence and quality of life. You may also be able to reduce expenses, enjoy more of your money, and boost your overall financial health.
Rita Wilczek may be reached at (952) 542-8911 or rwilczek@hirep.net
www.ritawilczek.com
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
3 - https://www.foxbusiness.com/features/employers-pay-overweight-workers-less-new-study-reveals [11/5/18]
4 - https://abcnews.go.com/Health/Healthday/story?id=8184975&page=1 [7/28/18]
5 - https://money.usnews.com/money/personal-finance/family-finance/articles/the-real-cost-of-smoking [11/20/18]
The Sequence of Returns
A look at how variable rates of return do (and do not) impact investors over time.
Provided by Rita Wilczek
What exactly is the “sequence of returns”? The phrase simply describes the yearly variation in an investment portfolio’s rate of return. Across 20 or 30 years of saving and investing for the future, what kind of impact do these deviations from the average return have on a portfolio’s final value?
The answer: no impact at all.
Once an investor retires, however, these ups and downs can have a major effect on portfolio value – and retirement income.
During the accumulation phase, the sequence of returns is ultimately inconsequential. Yearly returns may vary greatly or minimally; in the end, the variance from the mean hardly matters. (Think of “the end” as the moment the investor retires: the time when the emphasis on accumulating assets gives way to the need to withdraw assets.)
An analysis from BlackRock bears this out. The asset manager compares three model investing scenarios: three investors start portfolios with lump sums of $1 million, and each of the three portfolios averages a 7% annual return across 25 years. In two of these scenarios, annual returns vary from -7% to +22%. In the third scenario, the return is simply 7% every year. In all three scenarios, each investor accumulates $5,434,372 after 25 years – because the average annual return is 7% in each case.1
Here is another way to look at it. The average annual return of your portfolio is dynamic; it changes, year-to-year. You have no idea what the average annual return of your portfolio will be when “it is all said and done,” just like a baseball player has no idea what his lifetime batting average will be four seasons into a 13-year playing career. As you save and invest, the sequence of annual portfolio returns influences your average yearly return, but the deviations from the mean will not impact the portfolio’s final value. It will be what it will be.1
When you shift from asset accumulation to asset distribution, the story changes. You must try to protect your invested assets against sequence of returns risk.
This is the risk of your retirement coinciding with a bear market (or something close). Even if your portfolio performs well across the duration of your retirement, a bad year or two at the beginning could heighten concerns about outliving your money.
For a classic illustration of the damage done by sequence of returns risk, consider the awful 2007-2009 bear market. Picture a couple at the start of 2008 with a $1 million portfolio, held 60% in equities and 40% in fixed-income investments. They arrange to retire at the end of the year. This will prove a costly decision. The bond market (in shorthand, the S&P U.S. Aggregate Bond Index) gains 5.7% in 2008, but the stock market (in shorthand, the S&P 500) dives 37.0%. As a result, their $1 million portfolio declines to $800,800 in just one year.2
If you are about to retire, do not dismiss this risk. If you are far from retirement, keep saving and investing knowing that the sequence of returns will have its greatest implications as you make your retirement transition.
Rita Wilczek may be reached at 952-542-8911 or rwilczek@hirep.net.
www.ritawilczek.com
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1 - blackrock.com/pt/literature/investor-education/sequence-of-returns-one-pager-va-us.pdf [6/18]
2 - kiplinger.com/article/retirement/T047-C032-S014-is-your-retirement-income-in-peril-of-this-risk.html [7/3/18]