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Market Commentary: Be Proactive to Enjoy Real Peace of Mind This Holiday Season

MarketCommentary2016-croppedLet’s say you’re about to take a long drive to visit an old friend, and you’re looking forward to it. You plan to take a scenic route, listen to music, and enjoy the trip as much as the visit. Now, let’s say that a couple days before you’re set to leave, your car starts making a funny noise. A day later, it stops. Now, you have a choice to make. Do you take the car into the shop and get it looked at, possibly delaying the trip you were looking forward to? Or do you risk it: take the trip and simply hope the noise doesn’t come back or lead to a possible breakdown?

That analogy reflects a dilemma many people have with their finances at this time of year—especially this year, considering the dramatic turn the financial markets took in October. Most of us look forward to the holiday season, and we want to enjoy the coming weeks of parties, celebrations, and time with family and friends as much as possible. We don’t want our holiday season marred by distractions or worries of any kind, especially financial worries. But sometimes the ability to achieve that goal comes down to a choice.

We can just assume everything in our retirement plan and portfolio is still in good working order, and hope that assumption alone will be enough to keep all worries at bay in the coming weeks. Or, we can play it safe and take the car into the shop (metaphorically speaking) so we know we’ll be able to fully focus on what’s important during the holidays, completely free from nagging concerns like: “Is my financial plan still sound?” or “Is my money really safe?”

Be Sure, Not Hopeful

This is exactly why our office makes a point every November and December to offer second opinions for people who haven’t had the benefit of meeting with us throughout the year. We consider it a great holiday gift we’re able to offer every year: the gift of peace of mind. Yes, it takes effort to attend the meeting and review finances than it does to simply assume all is well and hope for the best. But, as we’re sure you’ll agree, hope and certainty are not the same thing. The latter is always much better than the former, especially where your money is concerned.

This isn’t to say, of course, that any financial strategy is 100% certain, any more than a car is completely immune from mechanical defects. But you can increase your odds of safety and reduce your financial risk by making periodic adjustments to your portfolio when needed—just as you can reduce your odds of car trouble with routine professional maintenance.

That’s because circumstances and situations in your own life and in the financial markets are constantly changing, and those changes can sometimes mean that a strategy or allocation that was best suited to your goals a year ago may no longer be best. Those changes could mean that new opportunities to maximize your retirement income may have emerged, or that certain assets may no longer be as well-insulated against market volatility as they once were.

Getting back to the analogy, you might think of all the volatility the market experienced in October as the “funny noise” your car was making. After trending mostly upward all summer, the stock market took a major turn last month. In the last full week of October, the Dow Jones Industrial Average sank by 9% from its high for the year, while the Nasdaq and S&P 500 both fell by more than 10% and officially entered correction territory before partially rebounding.*

Disconnect Continues

These slides occurred amid strong third quarter earnings reports and an estimated GDP growth rate of 3.5% for the quarter. That’s down from 4.2% in the second quarter, but still indicates a healthy, growing economy temporarily boosted by the Trump Administration’s tax cuts. If Wall Street’s failure to celebrate all the positive recent data seems odd, keep in mind that for years we’ve been explaining how quantitative easing by the Federal Reserve has created a disconnect between market performance and economic fundamentals. So just as the stock market soared for all those years (thanks to artificial stimuli) while the economy was slow and sluggish, it should come as no surprise to see the market struggling while the economy is—by many indicators—actually booming.

The underlying reality is that Big Investors know the current boom could, as many analysts believe, be a temporary “sugar high” from the Trump tax cuts, and that growth could be further undermined by the intensifying trade dispute with China, fears over inflation and interest rates, the skyrocketing federal deficit, and a host of other factors.

So even though the markets got back on track at the end of the month, meaning that the troubling “funny noise” your car was making suddenly went away, ask yourself this: wouldn’t you still take it in for a checkup before a long trip anyway, just to be safe?

In our experience, we know the answer to that question for most people is “yes.” In fact, most people would get their car checked out before a long trip, noise or no noise, because they know the potential downside of not taking that precaution outweighs the upside. Think about it: the upside is a successful trip, but one marred by worry. The downside is that your car dies on the road and you end up with a towing bill, plus a much bigger repair bill than if you had caught and fixed the problem when it was still minor. You might not even make it to see your friend.

Now, think about that in terms of your portfolio as we head into the holidays…and make the right decision!

*“Another Wild Selloff; Dow Sinks 546 Points,” CNN Business, Oct. 11, 2018
**bea.gov, Oct. 26, 2018

**bea.gov, Oct. 26,

Wall Street opens higher after China rally, Italian budget relief (source: Reuters)

Screen Shot 2018-10-22 at 9.17.37 AM.png(Reuters) – U.S. stocks opened higher at the start of a busy week of earnings on Monday, riding a wave of gains in global stocks due to hopes of economic stimulus in China and easing tensions over Italy’s debt.

The Dow Jones Industrial Average rose 47.80 points, or 0.19 percent, at the open to 25,492.14.

Click here to read the full article: https://www.reuters.com/article/us-usa-stocks/wall-street-opens-higher-after-china-rally-italian-budget-relief-idUSKCN1MW1LR

Seven ways midterm elections could impact investors (US News)

retirementrealityBy Wayne Duggan
US News Contributor

Pollsters think Democrats will make gains in Congress.

The November U.S. midterm elections are coming up fast. President Donald Trump and a Republican Congress have implemented several market-moving changes since the last election, but polls suggest Democrats could regain a majority in the House of Representatives. Bank of America economist Joseph Song recently looked at what is on the line for investors this November and how it could impact the market.

Click here to read the full article:

https://money.usnews.com/investing/stock-market-news/slideshows/7-ways-the-midterm-elections-could-impact-investors

Market Commentary: Focus on Pitch Instead of Power When You Are “Behind the Power Curve”

MarketCommentary2016-croppedThere is an equation used by airplane pilots that goes, “Pitch + Power = Performance.” It occurred to us recently that this formula is a fitting analogy for a common problem we see in the way some people handle their finances. 

In flying, “pitch” refers to whether a plane is angled up or down in an effort to ascend or descend. Power, naturally, has to do with horsepower and whether the pilot is flying at full-throttle or has the throttle eased back. The plane’s “performance” is the balance between its speed and its rate of ascent or descent.

There is a particular speed at which the plane achieves maximum lift in relation to units of drag, which is known in aviation terms as L/D(max). Above that speed, a pilot can fly the plane in the way that is most intuitive: using power for speed (easing the throttle forward to accelerate and pulling back to decelerate) and pitch for ascending or descending (angling the plane up or down). 

However, when traveling below L/D(max), the pilot is flying “behind the power curve,” also known as the “region of reverse command.” It’s referred to as such because in this region the pilot must now fly the plane in a way that is counterintuitive: here, he uses power to ascend or descend, and pitch to change the plane’s speed—angling up to decrease speed and down to go faster. The pilot knows there are dangers and limitations to flying “normally” when he’s behind the power curve, so he uses the alternative strategy.

The Financial Power Curve

Now, here’s how all of this applies to investing: just as there is an optimal speed for a plane, there is an optimal amount of money each investor needs to meet his or her retirement goals. You might say any money in excess of that amount is ahead of the power curve, while money below that amount is behind the power curve. When people aren’t aware of this, they instinctively think they can put all their savings into “power-based strategies”—which in financial terms means investing for growth. While that might be okay for money ahead of the power curve, it doesn’t really work for money behind the power curve.

With that money, investors are better off resisting the urge to use power and instead using pitch—which, in financial terms, means investing for income. That’s because if it’s behind the power curve, it’s money you can’t afford to lose, and income-based options—as you know—are designed to protect principle while providing the opportunity for “organic” portfolio growth through strategic reinvestment.

The mistake many people make is thinking they can just “throw the throttle forward” with all their money and rely on risky growth-based options like stocks and mutual funds. That, of course, is the standard approach touted by many advisors and much of the financial media, but the problem with it is twofold. First, growth can quickly turn to shrinkage if the market drops, and when that happens the investor, who is focused on growth, can end up in big trouble. Equating it to flying, it’s similar to what can happen when a pilot impulsively throws the throttle forward to try to increase speed when he’s behind the power curve: he can send the plane into a spin, with devastating results.

The second problem is that the growth potential of an overvalued market, like the one we’re in now, is limited. Just as a pilot can’t increase his speed much by applying power when he’s behind the power curve, an investor typically can’t increase his return much by focusing on growth when the market is topped out; this is ignoring the fact that he’s also risking a potential 40 to 70 percent loss by chasing a 5 to 10 percent gain! Both the Dow Jones Industrial Average and S&P 500 recently hit new record highs, further disconnecting stock values from economic fundamentals and increasing the likelihood that the next major correction will be closer to 70 percent than 40. 

The Road Less Traveled

When a pilot is in the region of reverse command, he’s doing the very opposite of what he normally does to maintain the plane’s performance—thus the term “reverse”. Similarly, when you’re investing for income, you’re also doing the opposite of what you would instinctively do, and the opposite of what most people think you should be doing.

If that sounds familiar, it’s probably because you’ve heard us discuss how investing for income is like “taking the road less traveled”, or how being a good investor requires being a contrarian since the concept of “buy low, sell high” runs counter to most people’s instincts. For most people, when the market is low, their fear kicks in and that’s when they sell. Conversely, when the market is high their greed takes over and they’re reluctant to sell for fear of missing out on more growth. 

With that in mind, is it possible that once the next major correction occurs and the market has bottomed out that it might be okay again to focus more on growth, even with money that’s “behind the power curve”? In other words, might it make sense to switch back from pitch to power and fly more normally? For some investors, depending on their situation, it is possible. 

In the meantime, though, we believe using pitch instead of power (i.e. investing for income instead of growth) for money behind the power curve is a better way to ensure a safe, successful “flight” into retirement for many investors.

Tech, industrials lift Wall Street higher (Reuters)

sugarhigh(Reuters) – U.S. stocks advanced on Monday, led by gains in shares of technology and industrial companies, as a last-minute deal to save NAFTA as a trilateral pact raised hopes for progress in talks with other countries at the start of the fourth quarter.

Click here to read the full article:
https://www.reuters.com/article/us-usa-stocks/tech-industrials-lift-wall-street-higher-idUSKCN1MB2CA