Sheila Bair | FDIC Chair, Author, Professor

Welcome back to our Blooom Brain Pickers series!  We’re picking the brains of the best in the biz to inform, entertain, and most of all, educate you when it comes to making personal finance decisions. Today we are honored to feature former FDIC Chair, Sheila Bair.

Sheila Bair has had a long and distinguished career in government, academia, and finance.   Twice named by Forbes Magazine as the second most powerful woman in the world, she is perhaps best known as Chair of the Federal Deposit Insurance Corporation (FDIC) from 2006 to 2011, when she steered the agency through the worst financial crisis since the Great Depression.  For her efforts to protect bank depositors and homeowners during the crisis, she received the Kennedy Library’s Profiles in Courage Award, and was named “the little guy’s protector in chief” by Time Magazine. A former finance professor and college president, Ms. Bair has been nationally recognized for her innovative initiatives to make college more accessible and affordable. She is a frequent commentator and op-ed contributor on financial regulation and the student debt crisis, as well as author of the NY Times Best Seller, Bull by the Horns, her 2012 memoir of the financial crisis.

Ms. Bair currently serves on a number of corporate governing boards, including Host Hotels, Bunge Ltd., and Fannie Mae, and on the International Advisory Board to the Santander Group. She also serves on the board of Paxos, a blockchain technology trust company, and as an advisor to several fintech startups.  She is a founding director of the Volcker Alliance, established by Former Federal Reserve Board Chair Paul Volcker to build trust in government and is the founding chair of the Systemic Risk Council, which advocates for financial stability. In addition, she is a Senior Advisor to the Peter G. Peterson Foundation on financial issues confronting young people.

Are there lessons from the Financial Crisis that could help us in our current situation? 

Get the help to Main Street. We didn’t do that with the bailouts of 2008/2009. Government support was highly concentrated on the financial sector. It didn’t trickle down. Even while Wall Street was reaping profits– and paying bonuses– by the end of 2009, it took about 10 years for most working families to recover.  This time around, the Fed is making yeoman’s efforts to reach the real economy but their current monetary tools are just not well equipped to do so. Their programs are still primarily helping big banks and big corporates. On the fiscal side, the small business programs and cash payments to households, including EIP payments are helping. EIP has boosted the consumer spending which underpins our economy. But the process of getting those payments to households has been slow and arduous.  Digital currency technology provides part of the answer. Giving all families a digital wallet where they could receive Fed-backed digital currency would be much faster and much more secure against fraud than our current system. The technology is there and could be in place within the next few years if we have the will to do it.

 

What is the best and/or worst financial advice you have ever received personally? 

Worst Advice: getting a credit card fresh out of college to “build my credit history”. I didn’t have the knowledge or skills to manage credit card debt, and quickly became addicted, eagerly accepting all those credit card offers banks were sending me.
Best Advice:  stick to one credit card.

 

What do you think should be done to improve financial literacy in our country?  

Start at an early age. Embed it in elementary and secondary core curricula like math.  Be serious about it, with quality content written by un-conflicted sources (unlike the industry literature that advised me to get a credit card.)  And don’t use it as an excuse for anti-consumer practices. One thing that really sends me up the wall is to hear industry officials trying to defend irresponsible financial products by saying we just need more financial education. 


You have paved the way for a lot of women in the banking/finance industry, what advice would you give to young women interested in banking/finance? 

It can be a great career choice. Financial services done right can be of huge benefit to families and Main Street businesses. Don’t forget that there are human beings on the other side of those services you are providing.  Treat them right. Research shows women tend to be more compassionate and a bit more risk averse when it comes to finance. We should be proud of those traits and use them to improve banking culture. 


As a children’s book author, what would your advice be to parents when it comes to teaching financial literacy? 

You need to be financially literate before you can help your children. So educate yourself and don’t be afraid to ask questions or “look dumb”. I hate to say it, but I think a lot of the esoteric terminology and complexity in financial services today are meant to intimidate consumers into not asking questions.  One of the reasons I write picture books for kids is in the hope that parents will read them with their children and learn something themselves.


In your time as FDIC Chair, what was the most challenging aspect of your role?  

Trying to get more help for homeowners. We had some success with mortgage relief, but the government should have done so much more.


In your time as FDIC Chair, what was the most rewarding aspect of your role? 

Giving people peace of mind about the safety of their FDIC-insured bank deposits. During the depths of the crisis, the late Bill Keane drew a Family Circus cartoon showing Bill peacefully asleep in his bed, with his piggy bank next to him, on which he had drawn “FDIC”. I had that cartoon framed, and it still hangs prominently in our home. 

Twitter: @SheilaBair2013

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Vaccinate your investments

Invisible enemies

For billions of years, virtually all living things have been fighting a war against constantly adapting and evolving, invisible enemies – viruses. Viruses are nothing new to humanity. Some of the greatest civilizations in the world have attempted to fight back, but only within the last century have we truly been able to develop and safely use effective weapons like vaccines, thanks to science. 

And yet, we know that every time scientists develop a new vaccine targeting one bad microbe or another, the next potential contagion will always be waiting for us, just around the corner. We don’t know where it will come from, what it will look like, or how harmful it may be, but we know it WILL come at some point.

We’re currently dealing with a global economic crisis while simultaneously fighting a global health crisis, both of which were sparked by a new invisible enemy – COVID-19. While the world’s greatest scientific minds race to create a vaccine to resolve our public health crisis, it is our job at blooom to help inoculate our clients and their investments from the invisible enemies of the investing world, knowing that the next new threat is always lurking right around the corner. No needles necessary!

“The reward for work well done is the opportunity to do more.”
– Jonas Salk, creator of the inactivated polio vaccine

 

Basic instincts drive investing behavior

As humans, our survival instincts are fueled primarily by two competing emotional forces within us all: fear and greed. Fear keeps us from doing overly risky things (or at least makes us think twice) that may cause harm to ourselves. Greed feeds our hunger to achieve, thrive, and generally seek more of what makes us happy, selfishly or not. 

Ideally, we would strive to live our lives each day with an appropriate balance between these two internal forces. But when it comes to investing, human beings are simply not wired for success. We’re actually wired to make terrible decisions when it comes to our investments. And yet, just as there are many ways to prevent contracting and spreading a contagious virus, there are also several ways investors can build immunity and help fight back against the battles our own biology will inevitably wage against us when markets get rocky.

“Be greedy when others are fearful and fearful when others are greedy.”
– Warren Buffett    

 

Prevention – Don’t touch!

Various studies have shown that, on average, most of us touch our own face around 16 times every hour. In the last several months we’ve all become far too familiar with just how bad this is for us when it comes to contracting contagious viruses, like COVID-19. 

Just as infectious disease experts have warned us all to minimize face touching as much as we possibly can, blooom advisors have been saying the same thing to our clients when it comes to long-term investment accounts, like their 401ks or IRAs. 

There’s no denying that a global economic catastrophe feels like the worst possible time to ignore what’s going on with your hard earned money, but that very simple “hands off” approach has proven beneficial time and again throughout the entire history of the stock market. 

If you have an appropriate long-term investment strategy in place for your retirement accounts, remember that our instinct of fear that tempts us to sell stock investments and wait out the storm is exactly what causes so many investors to consistently lock in losses and miss out on the robust recoveries that have followed EVERY single US stock market crash in history. That’s right, 100% of them.

This most recent stock market crash proves the point even better than most others. An initial 30% crash in a matter of just weeks has since been followed by a nearly 30% market recovery. Yet, who could’ve possibly predicted that some of the worst unemployment numbers in history would have the stock market sitting less than 10% away from all-time highs? Here is another friendly reminder that the stock market is not the economy and its short-term movements rarely make much sense in the moment. 

Unfortunately, we know for a fact that far too many ended up logging into their retirement accounts to sell out of their investments at the worst possible time, only to miss this quick, unanticipated rebound. 

Making adjustments to your long-term strategy based on short-term feelings of fear and panic is a temptation we all feel in times of crisis, but it tends to be a recipe for disaster when it comes to your investing goals. Taking emotions out of the equation by sticking to a proven strategy gives you the best chance of reaching your goals over time. While you may find your hands reaching for that keyboard, fight the urge to touch your retirement accounts by making these emotional decisions. Your future self will thank you.

 

Exposure

One way to develop future immunity from a virus is through exposure, whether intentional or not (this is not medical advice!). When exposed to a new virus, our bodies produce an immune response to fight back. While the battle can go on for weeks, those that were relatively healthy before exposure are often likely to recover without long-term consequences, or even death. For most viruses, those that survive and recover from the infection end up building antibodies that are designed to detect and prevent future infection from that same virus, at least for a certain period of time, typically several years.

When it comes to investing, sometimes the best way to protect yourself in the long-run is by learning the hard way in the short-run. In the last several months, industry data has shown a significant increase in brokerage transaction volume for many individual investment accounts, particularly among younger investors with IRAs and taxable brokerage accounts. This gives a strong indication that a lot of small balance accounts have been involved in frequent buys and sells of individual stocks and ETFs. Generally speaking, we don’t advise day trading individual stocks or ETFs due to the risk involved, but the temptation to do so is completely understandable, especially after a significant decline in the overall market.

That said, painful but important investing lessons tend to result from times of crisis like this. After all, we are all human and sometimes we simply have to experience the pain of letting our emotions win out in order to understand the bigger picture and have a better perspective next time around. This particular crisis has likely taught far too many the valuable lessons of the difficulty of trying to time the market by selling after a steep decline only to miss an unexpected and robust recovery.

Nearly every successful investor has had to learn a hard lesson along the way, which likely involved them succumbing to their own emotions a time or two. Learning these lessons early can provide a lifetime of immunity that can not only help protect you and your own future, but those around you as well. 

As cliche as it may sound, when it comes to investing, if you are humble enough to admit you don’t have a crystal ball that can predict market movements, what doesn’t kill you will very likely make you a much stronger investor over time. Yet, just as a doctor would be unlikely to recommend intentional exposure to a deadly virus, we are not about to suggest that you intentionally try to teach yourselves these lessons the hard way. That’s what we’re here for. But if you happen to make a mistake, as we all have, make sure that mistake becomes the antibodies you need the next time around.

 

Vaccination

Science has shown that the single best way to prevent infection and spread of a virus is by development of, and widespread vaccination against, that virus. Some vaccines are developed for seasonal viruses, like the flu, which mutate and evolve each year. These vaccines aren’t guaranteed to prevent infection from all flu strains, but they have been shown to at least help reduce recovery time and contain the spread to a more limited population.

With investing, there is no magic potion or vaccine to protect you from your natural instincts or the constant noise of stock market media hype. But that doesn’t mean you can’t greatly reduce your risk of making mistakes that could take years or decades for your portfolio to recover from. 

The greatest threats investors face are probably most comparable to the seasonal flu. Each year different strains of the flu evolve which require new vaccines to protect against. Likewise, investors can expect a brand new, often unanticipated threat to attack their investments year in and year out. The best thing you can do as an investor is to understand that the threats against you are always evolving and that there are time-tested methods to protect yourself, or at least help mitigate our risks. Ask your advisor questions (if you have one). Stay focused on the long-term. And tune out the distractions of the financial media. 

 

Seek the best primary care

Finding a doctor you can trust can be difficult, but those that do tend to live healthier, happier lives. Knowing that you have someone in your corner is essential when it comes to opening up about your own health issues, as they arise. While many of us try to avoid going to the doctor until we absolutely must, we know that in most cases they will be able to give us the best medical advice or treatments for whatever is ailing us.

Inoculating your investment portfolio means taking emotion out of the equation using technology and automation, implementing a proven long-term investment strategy that’s appropriate for your age and risk tolerance, and finding an ally you can trust in the fight to keep you on track when times get tough, at an affordable price. Each of these are the very reasons blooom was created in the first place. 

While humanity races to defeat this Pandemic, know that you and your investments don’t have to succumb to internal forces inside of us all that often work against our financial well-being in times of crisis. Uncertainty is the greatest certainty there is when it comes to investing. And it’s actually that uncertainty that tends to reward those that fight through their natural instincts to guess the market’s next move. Sometimes all it takes is the comfort of a conversation or knowing that you have a plan in the first place. 

If you feel lost when it comes to your retirement investments, have been stressed by the recent ups and downs of the stock market, are unsure if you’re investing appropriately right now, or just need to talk to someone about a better strategy going forward, don’t hesitate to reach out to our advisors. We’re here to help you!

 

The information is provided for discussion purposes only and should not be considered as advice for your investments. Investing involves risk. Your investments are subject to loss of principal and are not guaranteed.

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Recessions Happen, What do I do Now?

This global pandemic has one question on a lot of people’s minds: how often do recessions happen? Since the Great Depression ended in the late 1930s, the U.S. economy has experienced a recession about every four years.

Because the last recession ended in 2009, people have been chattering for years about the country being well overdue for another. But even though history can help us recognize overall patterns in the economy, no one can predict exactly when recessions will happen or how long they will last. Bottom line? Recessions are simply an inevitable part of the economic cycle, and their frequency and duration vary.

Recession Definition

Before we go much further, let’s first define what exactly the word “recession” means. A recession is officially defined as two or more consecutive quarters of negative economic growth. So in theory, a recession could last as little as six months—or it could go on for years, as with the Great Depression and the Great Recession of 2007-2009.

Are We Overdue for a Recession?

As mentioned earlier, financial modeling is influenced by previous events. As history has shown us, recessions usually occur about every 4-5 years. Fortunately,  history can also tell us a lot about economic expansions, too!

Here are the facts: The average economic expansion in the U.S. usually lasts about 39 months, followed by a recession that lasts an average of 11 months. But the most recent expansion lasted from 2009 to February 2020, for a total of 127 months—the longest expansion in our country’s history. Clearly, the economy isn’t worried about following anyone’s watch.

The Benefits of a Recession

There’s no doubt about it; recessions can cause a lot of problems. People fear them for good reason. They often lead to higher rates of unemployment and the sinking value of assets. But the good news is that recessions have always improved, and they actually come along with some benefits. Yes–we really did say benefits!

The silver lining of recessions is they can help get rid of excess, balance economic growth, expand buying opportunities, and change the consumer mindset. Though it may be hard to accept, recessions aren’t 100% bad.

So Why Do Recessions Happen?

Though recessions don’t really happen because we’re “overdue” for one, it’s natural to think that a recession is more likely to happen the longer an economic expansion goes on.

In fact, in some ways, a recession is a self-fulfilling prophecy: The more Americans and their employers worry about the chance of a recession, the more likely it is to happen. Because when people are worried about a recession, they may sell their stocks, take money out of banks, spend less disposable income, and other behaviors that cause the economy to crumble.

The recession of 2007-2009 occurred in part because of a housing bubble, bad lending practices, and corporate greed. Other recessions have occurred because of the economic cycle, asset bubbles, and economic shocks. When the business environment changes rapidly and uncertainty sets in, companies must scramble to reallocate resources and limit production—and those actions can lead to a recession.

How Long Do Recessions Last?

As we mentioned before, it’s impossible to predict exactly when a recession will happen and how long it will last, but we can look to the past to make an informed estimate. Since the end of World War II, the average recession lasted an average of 11 months but could range from 6 to 16 months, or longer.

However, there are certainly exceptions to the rule. Our country’s most recent recession lasted longer than the historic average, dragging on from 2007 to 2009—a full 18 months. The Great Depression of 1929 to 1933 spanned more than twice as long, causing an economic depression that lasted for 10 years.

Difference Between a Downturn & a Recession

Sometimes we hear the terms “downturn” and “recession” used interchangeably, but in reality, they define two different states of the economy.

Downturn Definition

A downturn can happen any time major market indexes like the S&P 500 or Dow Jones Industrial Average drop. But a market drop doesn’t always mean economic activity has declined—a downturn might occur because news or politics cause fear and worry in the market. Once the bad news blows over, the value of the index may go back up quickly. 

When more serious downturns happen and indexes drop more than 20 percent, this is known as a bear market. This type of downturn could be caused by changing interest rates or other factors, and it can take longer to bounce back from.

Recession Definition

A recession happens when the economy has at least two consecutive quarters of negative growth. Though index values usually do go down during a recession, they aren’t the main factor in determining whether or not the economy is in a recession. It’s even possible to have index values going up while in the midst of a recession since the stock market is forward-looking and economic data is backward-looking.

Can a Downturn Cause a Recession?

Market downturns don’t always mean that there will be a recession, but some do. In these situations, the market downturn leads to a shortage of capital, which forces companies to lay off workers. Those workers have less money to spend or invest (i.e. restricting purchases to the necessities!), which in turn contributes to a possible recession.

What Industries Thrive During Recessions and Why

We already discussed some of the benefits of a recession. Here’s another silver lining: Even when economic growth is shrinking, some industries are still likely to thrive. It makes sense, if you think about. Recessions change consumer behavior, so there are naturally some industries that get an uptick when people are worried about money or trying to save.

Only time can tell which industries will thrive in any given recession, but we can make predictions based on the last recession.

In 2008, only a handful of stocks in the S&P 500 came out with positive returns. Some of those stocks included Dollar Tree, Vertex Pharmaceuticals, H&R Block, Walmart, and Ross Stores Inc. Most of the stocks on the list were discount stores or healthcare-related.

What Does the Government Do to Help During a Recession?

The government always steps in to lessen the blow of a recession, either by creating stimulus packages, sending checks to Americans, cutting payroll taxes, or creating government jobs. This is all known as fiscal stimulus. 

They also can coordinate policy with the Federal Reserve (the Fed), a central bank that was set up to keep unemployment rates low and stabilize prices.

There are many things the Fed can do to help the economy, such as lowering interest rates and capital requirements. The Fed can also create new money and use it to purchase securities such as government bonds, which slows deflation and lowers interest rates. Each of these actions fall under what is known as monetary policy, or monetary stimulus.

How a Recession Affects My Stocks

When the country is in the middle of a recession, stockholders get worried. But it’s important to remember that stock market performance is not the same thing as the economy. Stocks can gain positive returns during a recession, so it’s best to play it cool when the economy starts to look dicey. Instead, here’s what you should do! Use this as an opportunity to take advantage of a sale and follow the 3 “O”s of market uncertainty:

  1. Own your Emotions: You (should) have a long-term strategy in place. Stick with it. Whether you’re nearing retirement, or have years to go, you likely don’t need to be accessing all this money today.
  2. Obey your strategy: It’s not a loss until you sell. You’re at a fork in the road–you can sell and trigger a loss, or hold on and ride it out to recovery. 
  3. Operate like an expert: Facts: stick to ‘em. As history suggests, this too shall pass. 100% of past market declines have been followed by a full recovery and eventually new highs.

Diversify Your Portfolio

A recession is also a great opportunity to re-evaluate your portfolio and make sure it’s diverse enough to survive and thrive. If you’re decades away from retirement, your portfolio should be more heavily invested in stocks. Though there will be dips in the market, remember that you’re not actually losing any money unless you sell, and all market declines throughout history have only been temporary.

If you’re nearing retirement, you should have enough bond and cash exposure in your portfolio to help preserve the income portion of your account even in the midst of a recession. Think of your portfolio as one bucket for growth (stocks), and one for income and preservation (bonds and cash).

Do Recessions Always Turn Around?

Recessions have always turned around, since the beginning of U.S. history. The average recession lasts about four years, so try to be patient and focus on sticking to your strategy. Deep breaths!

Wondering If You’re Properly Invested for a Recession?

We’ve covered all the basics of recessions: We can’t predict exactly when they’ll happen, but we do know it’s not a matter of IF, but WHEN the next one will occur. 

They’re an inevitable part of the economic cycle, and smart investors are also prepared for when they happen. So don’t run from a good sale when you see one, and stay focused on your long-term investments. Sign up for Blooom today to stay prepared and afloat during a recession. Sticking to time-tested methods, we use a savvy market philosophy to ensure you’re making the most of your IRA or 401k. We’ve got your back!

Disclaimer: The information is provided for discussion purposes only and should not be considered as advice for your investments. Investing involves risk. Your investments are subject to loss of principal and are not guaranteed.

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How Rebalancing Your Investments during a Bear Market Works for Your Retirement

If you ask me, rebalancing has to be one of the Wonders of the World.  Ok, well maybe at least one of the Wonders of the Investing World.  The term “rebalancing” (or “optimizing” as we call it at blooom) gets loosely tossed around and often even taken for granted, but I hope to explain its elegance and how rebalancing investments can go such a long way to improving an investor’s long term rate of return.  More specifically, by leveraging the power of optimizing, especially in down markets, it is entirely possible to build more wealth in your investment portfolio over time.  

Now that I have your attention, let’s look under the hood at how this whole optimizing thing really works!

 

Take Emotion Out of It 

By far, one of the biggest enemies of the average individual investor is their own emotions.  Generally speaking, mixing high levels of emotions into financial decision making will generally turn out disastrous, regardless of how good the underlying intentions might have been. Emotions will lead us astray whether it is greed commonly experienced in periods of very strong growth in the stock market, or fear often experienced in periods of steep declines in the stock market.

The most effective way to counter the potential damage that managing your investments based on emotion can cause, is to just simply have a plan. Then, once you have a plan, to the extent possible, you should try to implement a strategy that “automates” decision making so that you minimize the chances that emotions can creep into your decision making. In fact, some of the best laid plans when it comes to investing are ones in which you have to make as few decisions as possible!

Let me explain.

 

3 Things You Should Do With Your Investments Right Now

When it comes to your retirement savings – either inside of your employer sponsored retirement account (401k, 403b) or your IRA – you need to commit to a well thought out strategy that has been battle tested not over the course of just the past few years, but over the past many decades.  When it comes to your retirement savings, because of the inherent long term time horizon that you should have, there are really just a few key things to get right.

  1. Make sure you have an appropriate mix of stocks and bonds given your time horizon to retirement and your risk tolerance.  With this, there is no “one right answer” but it is definitely possible to get this dead wrong.  (Example: 30 year old who wants to retire at age 60 with 90% invested in bonds)
  2. Make sure this mix of stocks and bonds is routinely adjusted to move slightly more conservative as you move closer and closer to retirement.
  3. Make sure you have enough diversification across your stock and bond exposure.  In other words, make sure you don’t have “too many eggs in too few baskets!”


Then, Don’t Touch It

Once you have this established, I can tell you confidently that you shouldn’t be tinkering too much with this set up.  In other words – get this dialed in and there is virtually  no need to be fiddling with it based on the inevitable ups and downs of the stock market.  This is where investment rebalancing comes in and starts to really shine.

An Example Portfolio

For ease of explanation, let’s assume that based on your age, time horizon to retirement and risk tolerance, you have the following allocation in your retirement account:

$100,000 Portfolio

Stocks: 70% Target allocation = $70,000 

Bonds: 30% Target allocation = $30,000

Now let’s assume that the stock market gets absolutely clobbered, down roughly 30%.  Which by the way, is about the average decline the stock market has experienced in the past dozen or so Bear Markets since WWII.  Remember, Bear Markets are a totally normal and expected event that inevitably comes around from time to time either due to economic cycles, bubbles, or significant external events like what we are currently experiencing with the global pandemic.

In our example here, let’s also assume that while stocks were getting clobbered, the bond side of your portfolio largely held its value.  In this case, your allocation could then look like this:

Stocks: $50,000 – 62.5%

Bonds: $30,000 = 37.5%

Often times, investors are inclined to make emotional decisions out of fear (in this case) and might actually consider SELLING OUT of stocks after this big decline. BUT, this is where optimizing can swoop in and save the day.

If you are following a regular, recurring strategy of rebalancing your investments let me show you INSTEAD what would take place

Now that your portfolio has dropped in value to $80,000 and stocks now make up just 62.5% of the portfolio as opposed to the original target allocation of 70% that you originally established.  To then properly rebalance your account back to the original Target allocation into stocks you would need to SELL some of your bonds that had held their ground and BUY more stocks at these depressed levels.  PRECISELY WHAT INVESTORS SHOULD BE DOING!  It is amazing how in times where the stock market is chugging along making new highs, most investors jubilantly pour more and more money into their portfolios and then conversely, when the stock market goes “on sale” many investors’ emotions kick in and then all rational thought goes flying out the window and fear takes over.

But when you allow the power of an automated optimizing strategy to just do its thing, it prevents emotions from creeping in and taking over.  You are not having to make decisions at all during these times.  The automated optimizing process handles all the heavy lifting and by just doing math, it automates the process of proper decision making over and over and over, throughout the course of your investing career.  

Oh, and conversely – an automated optimizing strategy also works quite well in times of growth in the stock market.  As stocks and the stock market are making new highs, automated optimizing will trim some of the profits in stocks and add to bonds, or other kinds of stocks in your portfolio that have fallen a bit behind.  Again, just letting mathematics handle the decision making process in your portfolio.

 

See “Buy Low, Sell High” in Practice

What I love most about utilizing an automated optimizing strategy is that by default, it forces investors to follow that age-old practice of buying low and selling high.  Slowly and surely, over time, portions of your retirement portfolio are shifted from the investments or asset classes that have performed well over to the investments or asset classes that haven’t done as well.  Little by little over a long period of time this adds up to extra return in your account and most importantly, gets you out of your own way when it comes to emotional decision making.

 

Reap the Benefits of Rebalancing Your Investments with Blooom

Now that you have read why rebalancing your investments is important, consider optimizing your portfolio with blooom! Our goal is to give you a solid chance to improve the allocation of your account and maximize your portfolio. Sign up today for a free analysis and see how rebalancing your investments with blooom is a no brainer!

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Q1 2020 PastCast: Crazy Weather We’re Having?!

Here’s all you need to know. (If you’re in a rush.)

  • Coronavirus put an end to the bull market. – The longest period of uninterrupted US stock market gains (w/o a single 20% or more decline), ended VERY abruptly in March, thanks to the coronavirus pandemic.

  • Stocks fell over 30% – The end of February and March saw the fastest retreat of 20% or more from all-time highs, for US stocks, in history. From all-time highs on 2/19, to recent lows on 3/20, US stocks fell over 30%.

  • Banks cut interest rates. – In order to stabilize financial markets, central banks around the world made several emergency interest rate cuts. These cuts arguably failed to stabilize markets in the short-term, as March was one of the most volatile periods in history for global stocks.

  • We’re in a recession. – Consensus seems to be that we have already entered a relatively severe, but hopefully short-lived recession, as the economy has come to a self-imposed halt and recent weekly unemployment claims appear more like typos than reality, destroying previous records by the millions. 

  • Relief is on the way. – Governments around the world have enacted fiscal stimulus programs intended to provide short-term financial relief to the vast majority of workers that have been asked to isolate at home, in order to slow the spread of the virus. 

  • This WILL end. – And financial markets tend to recover well ahead of the actual economy. 

And now for the long(er) version…

Things have changed…to say the least

Just three months ago, B.C. (Before Coronavirus), we were recapping one of the best decades in history to be an investor. But the longest period of uninterrupted US stock market gains in history, which began in March 2009, came to an abrupt end about a month ago. The first quarter of 2020 was as dark and stormy as it gets when it comes to weather metaphors. And the world has changed so much in the last month alone that there really isn’t much else to focus on in this PastCast than the current crisis we’re all in together.

You’d have to be living a pretty isolated life to have missed just how much the world has changed in the last couple months. But then again, and somewhat ironically, that is exactly what we’re all being asked to do these days thanks to the coronavirus. To say our lives have all changed dramatically would be quite an understatement. 

We’re dealing with an economic, financial, and societal shock unlike any of us have been through before. It’s impossible for us to address the current situation we’re in without recognizing that your investments are unlikely to be your greatest concern at the moment. 

We know that the health of yourself, your family, and your community are your priorities right now. So while we know that this is a scary, uncertain time, we hope at the very least, that our insights here provide you with some perspective that can help you stay focused on those things that matter most in your life right now, without stressing about the stock market and your retirement accounts, while we fight through this pandemic. So let’s start by answering a few key questions…

 

Why did the stock market crash?

The stock market hates nothing more than uncertainty. A global pandemic unlike most investors alive today have ever experienced, brought with it maximum uncertainty. At a time when stocks had been sitting at the highest levels of all time, any unexpected disaster or bad news event was likely to become the catalyst for a sell-off. However, while contagious disease experts around the world have been preparing for an event like this as an eventuality, American businesses, local governments, and the federal government were not prepared for the public health and economic implications of a widespread, highly contagious, deadly virus. 

As panic and confusion set in, businesses began to shut down and states began to close schools and order residents to stay home from virtually all group activities, including work for many of those on the front lines of this battle. 

The realization that we would need to intentionally shut down our economy for the greater good of public health meant small business and corporate earnings would suffer tremendously until we have made it through this, and some businesses in industries like travel, retail, and restaurants for instance, may not make it through to the other side at all. 

Months of little to no revenue and expected lower earnings revisions across nearly all sectors of the economy means companies are suddenly worth significantly less in the minds of investors, in the near term. When you combine that very simple fundamental aspect of stock valuation with the emotional panic of unprecedented uncertainty ahead, you had the perfect recipe for a bloodbath in the stock market. But history has always rewarded the investors that stay the course in these moments. We have no reason to believe this time will be any different.  

 

What has been done to try to prevent a prolonged recession, or worse?

Although we cannot officially identify a recession until we’ve actually seen several consecutive quarters of negative economic growth, virtually all economists agree that we have entered into a deep recession. Unemployment numbers that dwarf previous weekly records and a forced shutdown of a significant portion of all economic activity would strongly indicate that. 

Both the Federal Reserve and the Federal Government have stepped in with monetary and fiscal measures to mitigate the damage and hopefully shorten the duration of this recession. They’ve done this by slashing interest rates to near 0%, making it easier for both individuals and businesses to borrow and lend money, and passing $2 trillion stimulus legislation to help businesses and workers negatively impacted by this economic shutdown. It is yet to be seen whether these early steps will be enough to make this recession a brief one. But that is certainly the goal.

Curious how the stimulus bill could impact you and/or your family? We have a new calculator to help!

 

How is this different from 2008 and other historical crashes?

It’s been a while since we’ve seen declines like this in the stock market. For many it may be the first time in your career that you’re experiencing big declines in your investment accounts. 

Looking back throughout history, we see that every crash has ended with the same result – a full and sometimes very quick recovery for the stock market, and an eventual overall recovery for the economy as well. 

Yet, every crash has happened for a very unique reason. This time is certainly no exception. But perhaps what makes this particular crisis the most unique is that the financial impact is a direct result of a self-imposed global economic slowdown, the purpose of which is to flatten the curve, save lives, and thereby also shorten the ultimate economic impact around the globe. 

This downturn has a very clear and intentional reason as its catalyst. Perhaps we can take some comfort in knowing that it has an end. There are very clear and achievable goals (like developing a vaccine and safe treatments) based in science and public health that simply take time. This is not the Apocalypse. 

 

What can the past possibly teach us about something unique like this?

Every crash is unique. And every crash leads to a large portion of the population being convinced that this time the result will also be different. But perspective helps here. We like to remind our clients that in the moment, every crisis feels worse than ever before in some way, especially on a more personal level, but when it comes to the broader economy and the stock market, which is how this ultimately relates to your investments, we see no reason to believe we won’t overcome this, as we always have.

Keep in mind that we have not only seen pandemics before (however rare), but we have also seen an endless number of other periods of great fear and uncertainty, like the Great Depression, two World Wars, various other wars, terrorist attacks, political scandals, financial bubbles, and even what seemed at the time to be imminent and complete nuclear annihilation at several moments during the Cold War. And yet, while the stock market has generally always reacted negatively to the uncertainty of the short-term, it has recovered fully and marched to new highs EVERY. SINGLE. TIME. With a 100% track record.

You’re likely to hear a lot of comparisons right now to one of the darkest economic periods in American history, the Great Depression. While it’s true that the immediate severity of this recession could mirror or even surpass that of the 1930s, this is a completely different situation. Programs like unemployment insurance and social security didn’t even exist yet, and our Federal Reserve was actually making things harder on people and businesses by RAISING interest rates – the opposite of how monetary policy is supposed to be used to stimulate the economy. While the immediate response on the public health side of this crisis will be debated for decades to come, our government seems united for a change and quick to act with both fiscal and monetary policy solutions that should reduce the duration of this downturn. And again, this was all self-imposed. 

This particular situation has challenged the wills and discipline of even the most experienced and successful investors. But if you are convinced that this will be the first time in history that we are truly unable to overcome a crisis, your retirement accounts probably should be the very least of your concerns right now.

 

What can I do right now to ease the pain on my retirement investments?

As a general rule, our advice is to never make emotional, short-term reactionary decisions with your long-term investments. Doing so is not a winning strategy and it is actually one of the worst mistakes investors can ever make. Uncertain times can make anyone feel like they have no control, and making changes to your investments is the natural reaction that can ease the pain by giving you back some control. But while that immediate feeling of comfort can ease the pain in the moment, it almost always comes at a much higher long-term cost. 

Given that every single downturn in history has actually proven to be an opportunity for patient, disciplined long-term investors, the best thing you can do is stay focused on the strategy you have in place that should be built with the understanding that these downturns do, and will continue to happen, between now and when you retire. And in fact, they are the very reason that patient investors are rewarded over time for staying the course. 

The further you are from retirement, the more aggressive your approach should probably be, but that means even more pain in moments like this. But it’s often said that volatility is the price investors pay in order to participate in the long-term gains of the stock market. That painful, but temporary feeling of loss, has historically been rewarded with gains over the long-term, and that is the point, no matter how hard of a pill that may be to swallow in the moment. 

If you’re closer to retirement, your portfolio should consist of investments other than stocks, like bonds and even cash or cash equivalents.  The very purpose of this is to prepare you for moments like this. By including non-stock investments in your portfolio, you are isolating a portion of your portfolio from the short-term unpredictable ups and downs of stocks. And ideally you will have enough in this more conservative portion of your portfolio to provide you with stability or even income if you are to reach retirement before your overall balance has had a chance to recover.

At the end of the day, this is your money and if you are feeling overly stressed you likely need a better understanding of your strategy. That is what blooom’s team of advisors is here for. And you may also be realizing now that you are not comfortable with the level of risk you’re taking. That is ok too. Now may be a time to reassess your risk tolerance within your blooom profile. Just as long as you know that changes to your risk tolerance that coincide with market crashes can become a dangerous and detrimental habit.

 

The sun WILL come out again…but maybe not tomorrow 

This too shall pass. The news is already beginning to turn more positive as there is hope for some successful treatments, vaccines, and strict policies put in place by governments around the world are beginning to prove effective in flattening the curve. The death toll is already tragic and will continue to get worse in the coming weeks. Many of us will either know someone directly impacted by the loss of a family member, be infected ourselves, or at least have someone close to us infected, before this is all over. But one thing we can all be certain of is that we have the greatest minds on the planet working night and day to find effective treatments and vaccines.

The financial and economic toll will likely be enormous over the next few months and maybe longer, but attempting to guess how and when the stock market is going to react and eventually recover, is just a recipe for sleepless nights and ultimately a losing battle. We’re here to take on that burden for you and remind you of the time-tested lessons that can help keep you from making mistakes at the worst possible times. 

When it comes to your retirement investments, don’t let this distract you from the much bigger picture and draw you into making harmful investment decisions. We may still be in for more of a wild ride from here, but know that there is light at the end of it all. We will get through this. And blooom is in your corner. Lean on us when you need help with your finances. Know that we exist for times just like this. You have enough to worry about right now. Let us help you stay focused on what truly matters most in your life right now. Hang in there and please reach out to us for a conversation if you need it. We’ve got your back!

 

 

The information is provided for discussion purposes only and should not be considered as advice for your investments. Past performance is no guarantee of future results. Please consult an investment advisor before you invest.

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