A Slow Warm Up

Q1 2019 PastCast

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

  • Fear and market sell-off in December is a distant memory
  • Best start to the year for stocks since 1998
  • Brexit may never happen…or it might, but the impacts are impossible to predict
  • US economy continues to grow, although the pace slowed due to several unique factors including the longest government shutdown ever
  • Latest market jargon: “Inverted Yield Curve”
    All this really means is there may be an increased likelihood of the economy slowing down in coming years. “Typical” market behavior. Close to retirement? Here’s why you shouldn’t worry.

Let the good times roll!

It seems like just months ago we were talking clients off the cliff as the market seemed to be collapsing on a daily basis. That’s because it WAS just months ago, as 2018 closed out the year as the worst for the market since the crash in 2008. As we stated in our last PastCast, short-term market swings should be ignored by smart long-term investors. Paying too much attention can tempt investors to make very bad decisions with their hard-earned money.

So, what happened?

Just as investors began to panic and the sell-off of stocks accelerated, good economic news and the fresh start to a new year seemed to flip investor sentiment like a light switch. In a down year like 2018, where most investors experienced losses instead of gains, additional selling (usually by large institutional and high net worth investors) tends to pick-up toward the end of the year. Investors are trying to lock in losses that will help offset gains or reduce their taxable income for the year. In addition to that, we had a major mid-term election and a shift in power in D.C. Political gridlock seemed to spiral out of control as a result, and began what ended up becoming the longest government shutdown in US history. Yay us!

Unfortunately, the fear and panic caused by the widespread selloff toward the end of 2018 sent a lot of long-term investors to the sidelines (hopefully not you!), right as the market was hitting a bottom. What followed was the best January for US stocks in three decades, the best quarter for stocks since 2009, and the best start to any year for stocks since 1998. These past two quarters are a fantastic example of why trying to guess what the market is going to do in any short-term period is a losing game in nearly every example of a market decline throughout history.  

What’s this “inverted yield curve” everyone’s talking about?

While the first few months of 2019 have been terrific for the stock market, anxiety seems to be building among bond investors, thanks to a slightly alarming economic indicator known as the “inverted yield curve”. Here is what a normal yield curve looks like:

 

 

And an inverted one…

 

Though it sounds complicated (and looks complicated) there’s a pretty simple explanation to what we’re looking at here. “Yield” is just another term for “interest rate” essentially, and maturity is the length of time until the investor gets their money back. If interest rates on bonds are predicted to fall in the future, it means investors are anticipating a slowing economy. The reason this is particularly alarming now is that just about every single time this has ever happened, a recession has followed within two years. Sounds like a reason to dump your stocks, right? Per usual, our stance is a hard NO. It’s important for you to keep several things in mind with this:

Reasons NOT to panic:

  1. The economy and the stock market are not one-in-the-same and historically speaking, even if we are in for a recession (we always are at some point), recessions have occurred anywhere from 8-24 months following an inverted yield curve, so it’s anyone’s guess exactly if/when a recession may occur this time. Meanwhile stock market performance often does not align with economic performance and short-term pullbacks have provided fantastic investing opportunities for patient stock investors in every single case throughout our history.
  2.  If you’re closer to retirement, this is why diversification is so important. Keep in mind that only a portion of your portfolio is dedicated to US stocks, while the rest is there to help you weather any potential upcoming storms in the stock market.

What’s next… Keep calm and carry on.

  • While the Brexit circus across the pond had several key deadlines pass without any real resolution, global markets largely shrugged off the chaos. Depending on how this all gets sorted out, markets around the world may see significant volatility, or renewed upside. Either way, this is not something long-term investors should be focused on.
  • Trade talks continue between the US and several of its largest trading partners, including China. A looming deal/no deal between the US and China will certainly impact markets, but global diversification of your portfolio will help mitigate any short-term volatility. This will likely provide further opportunities for long-term investors that stay focused on what really matters – tuning out the noise and focusing on the bigger picture.
  • 2020 Election season is starting to heat up. Get ready for more political gridlock, dramatic debates, and tons of talk about how unique this election is compared to others. It may seem that way now, but they ALWAYS do. Remember this – there is hardly anything our stock market and economy have not been through already. Severe recessions, a Great Depression, multiple World Wars and costly ongoing international conflicts, political scandals and the resignation of a President, terrorist attacks, long periods of inflation and mortgage rates over 20%. We could go on and on…

Yet, the major market indexes like the Dow and S&P 500 currently sit just below all-time highs…To quote Warren Buffett, “All (of the above events) engendered scary headlines; all are now history”

Fun Fact! The average investor’s portfolio declined nearly 10% in 2018, amid market turmoil. Meanwhile, the S&P 500 index only declined about 4% for the year. (According to this article.)

The lesson? Investor portfolios tend to underperform the overall market year after year. That’s because investors are constantly making investment decisions based on emotion and the short-term. (According to this article.) In other words, market timing. History has shown that being patient, ignoring scary headlines, and focusing on maintaining your disciplined long-term approach to investing, is the most consistent recipe for investing success.

 

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Tax Benefits of Your 401k

Though benefits of saving for retirement may seem years away, there are some shorter-term positives that could have you doing a happy dance.

Saving money for your retirement has obvious long-term benefits. You’ve probably been lectured ad nauseum about how saving today will help your future self, and, while you may tire of hearing the message, it does make sense. Depending on how you view your time in retirement, it may mean not going to a full-time job, thus, not receiving a full-time paycheck. So the money you save today in your workplace retirement account will be there for you to use and to live on in those wonderful golden years. Super.

But, focusing on something that seems like it won’t come around for eons is frustrating. In the wise words of Janet Jackson, ‘What have you done for me lately?

I’m not trying to take away from the obvious long-term retirement savings benefits of being able to eat, have shelter and, hopefully, do things to enjoy those years in retirement. Those things are great. But there are also some possibly not-so-obvious nearer-term positives to retirement saving that should get you on your feet and boogying to the beat of the 401k contribution sound today. (Okay, I’ve been told that ‘401k contribution’ is not a musical genre, but it just felt right.) What I’m trying to say is that you don’t have to wait decades to reap the benefits of retirement contributions. There are some benefits to enjoy in the short term.

 

Pre-tax Contributions

Using an employer-sponsored retirement plan, like a 401k, to save for your retirement may allow you to take advantage of something called pre-tax contributions. Why is this a good thing? Pre-tax contributions are pulled out of your paycheck before Uncle Sam gets his income tax share, which may lower the amount of your wages in which you are subject to federal and state income tax. Depending on your situation, that may equate to paying less income taxes. [Sweet dance move here] In 2019, 401k contributions are deductible up to $19,000. If you’re age 50 or older you can add an additional $6,000 to that number for a total of $25,000 in deductible contributions. (If you’re contributing to a Roth 401k, it has different tax implications you’ll want to check out.)

 

Tax Deferred

Another advantage – postponing the taxes paid on any earnings in your retirement account. If you have a regular taxable investment account or a savings account, every year when you do your taxes you have to include any interest you’ve earned that tax year from those accounts. With your workplace retirement account it’s considered ‘tax deferred,’ meaning, you don’t pay taxes on the earnings until you take the money out of the account.

 

Retirement Saver’s Credit

And ANOTHER advantage – the Saver’s Credit. Depending on your adjusted gross income, you may be eligible to take a tax credit for your contributions to either a workplace retirement account or an Individual Retirement Account (IRA). To see if you’re eligible for this additional tax credit check out the IRS site for more information.

So while the long-term benefits of retirement savings may get all of the love (and the lectures), there are additional benefits that you can enjoy in the moment. So get out your dancing shoes and cut a rug in honor of those contributions. You’ve earned it!

 

 

Blooom does not provide tax advice. Consult a tax expert for tax-specific questions and to determine how retirement contributions may affect your personal situation.

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401K Fees Decoded

 

401k Fees Decoded

At the end of every month, I sit down and catalogue my spending in an excel spreadsheet. I find it oddly calming (yeah okay, I’m a nerd). While I don’t have a strict budget in the traditional sense, I’ve found that tracking my spending helps me to see where I may be overdoing it. (This past month the gingersnap lattes put me over budget. So, no surprises there.)

I realized something in my latest catalogue though: there are certain expenses I have every month that actually never make it to my spreadsheet. Namely, the fees I pay associated with my 401k account, since they are taken out of the account itself rather than my checking or credit accounts. Without including these fees, I realized I wasn’t really seeing the full picture of my spending. I decided to start the year off by making sure I am accounting for those expenses along with everything else.

As I started to look into it, I found that these fees fall into three main categories: administrative/record keeping fees, internal fund expenses, and management fees.

Administrative/Record Keeping Fees

Least controllable.

The first category is the one that unfortunately we all have the least control over when it comes to our 401k accounts. Our employers choose the record keeper that houses our 401k and they set their own administrative fees which they charge automatically. Beyond petitioning your employer to change record keepers, there’s not a lot you can do about this one. Luckily for me, the record keeper that holds my 401k charges a flat fee that’s pretty easy to swallow: $5/month. Other record keepers may charge fees that are a little less straightforward. These fees should be itemized on your account statement or at least available in a fee disclosure within your account or on request. If you don’t know how much you’re paying, call your record keeper and ask!

Internal Fund Expenses

Slightly controllable.

The second category is one we start to have a little more control over (though less than we would in an IRA or traditional brokerage account, due to the limited fund line ups available in employer-sponsored accounts). Each fund you’re invested in within your 401k also charges a fee, typically as a percentage of the amount invested. I’m also lucky in this category that many of the options available to me within my 401k are low cost, so the weighted expense ratio of all the funds in my portfolio is currently about 0.07%. Market fluctuations make it difficult to get an exact dollar amount on this unless your record keeper provides one, but you can estimate using the following formula: [weighted expense ratio (keep in mind that my 0.07% would translate to 0.0007 for this calculation) / 12 months] * total account value at the end of the month. So for December, my internal fund expenses would have cost me about $1.46. Not too bad!

In comparison, let’s assume my weighted expense ratio was 1% higher, at 1.07%. This would have made my cost for December jump to $3.57. That still seems pretty low, but over a full year, that would have been an increase of over $25, and that amount only grows as the account does! Making sure your internal fund expenses are as low as possible can have a huge impact on your account growth over time. This is one area where it’s definitely worth reaching out to your HR department if your current options aren’t up to snuff. If you need help building a case, reach out to us! We’ve got your back.

Management Fees

Full control.

The last category is the one we finally have full control over. This is the amount we pay for help managing the account. If you’re a blooom client, you already know exactly what you’re paying in this category, because it’s a flat fee that came out of a separate funding source, rather than being buried in the other fees of your 401k account.A blooom client paying annually at a discounted rate of $99 year would pay $8.25/month.

If you’re paying for a traditional management service however, you’re likely in for some math again: these services typically charge by a percentage of the account’s value. So like we saw with internal fund expenses, that expense will only grow over time. Given that, the obvious choice is to go it alone and bring your cost down to $0, right? Well, maybe not.

A study by Financial Engines that looked at defined contribution plan participants from 2006-2012 found that the median return was 3.32% higher for those with professional guidance. According to this study, for a 45-year old, this could translate to 79% more wealth at age 65! This seems to suggest that getting some help with your investments is worth it in the long term, but there’s still no reason to pay more than you should. To save money in this category, look for low cost services that are up front about their fee structure and fit with your goals and risk tolerance.

The Full Picture

So looking at all of these fees together, I paid $14.71 towards servicing my 401k in December. But since the blooom subscription was already accounted for, it’s actually just the additional $6.46 that I’ll need to add to my spreadsheet this time around.  One study estimates that a typical worker — earning the median income and paying the average 401(k) fees over their lifetime — will be assessed a total of $138,336 in fees. And it’s estimated to be worse for high-income workers, thanks to the fee structure of the average 401(k) plan.The fees you uncovered in your own account might be higher or lower, but hopefully just the act of looking them up was empowering and eye-opening. In this case, ignorance is definitely not bliss! After all, it’s only once you know how much you’re paying that you can take steps to lower it.

We leave you with this 401k fee advice:

May you have the strength to accept the things you cannot change (Administrative/Record Keeping Fees)the courage to change the things you can (Internal Fund Expenses/Management Fees), and the wisdom to know the difference (blooom’s here to help).

 

 

 

[source: https://www.usatoday.com/story/money/markets/2018/02/08/ask-a-fool-how-much-does-my-401k-cost/110041408/]
[source: http://corp.financialengines.com/employers/FinancialEngines-2014-Help-Report.pdf]
[source: https://www.americanprogress.org/issues/economy/reports/2014/04/11/87503/fixing-the-drain-on-retirement-savings/]

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An Open Letter From Our Co-Founder

I write to you, our blooom client, not as your investment advisor but as someone who cares deeply about you and your investing success.

I care about you because you (and 23,000 other retirement savers) cared enough about your own future to trust this little company called blooom with what very well could be your single most important retirement asset.  As one of the company founders, I will never be able to adequately share how much this has meant to us and the sense of pride we feel in being able to help this many people with something Kevin, Randy and I dreamed up back in 2013.  I want you to keep this in mind as you read through the rest of this.

For our clients that are under the age of 32, there is a very good chance that this recent drop in the stock market is the worst decline you have ever experienced as an investor.  I say this because it has been roughly 10 years since we last saw a drop in the stock market above 20%. Just recently we flirted with a stock market decline of roughly 20% from its all-time high just a few months prior.  But a decade ago we saw the stock market decline by OVER 50% from October 2007 through March 2009. So for all of you born after 1987 I want you to cut yourselves some slack – this is likely your first good ol’ fashioned butt whoopin in the stock market and you have every right to feel worried and possibly even scared.  BUT…I think this is important to keep in mind… it is totally normal and OK to feel scared, but it is NOT OK to act on that fear and make rash decisions with your money.

For the rest of you, born before 1987 (myself included) we have seen a few more of these market drops in our time as investors.  Not only do we painfully recall the Financial Crisis of 2008-2009 but many of you might also recall the dot-com bubble bursting in 2000, followed by terrible years in 2001 and 2002.  Going back a bit further, our clients over age 53 might painfully recall “Black Monday” when the stock market dropped 22% in one single day! Even though we have seen a few of these, all of us still to this day get worried and concerned too when the stock market drops like it has the past month.

I say all this in large part just to give a bit of context.  I think a big part of being a successful investor is being a good student of history and history has shown us that the stock market has had drops like we just recently experienced about 14 other times (by my count) since the end of WW II.  Yes, you heard me right – before this one, 14 other times the stock market has temporarily dropped by at least 20% and 3 of those times the market saw a drop of roughly 50% (half!) from peak to trough.

Moral of the story – market drops are a fact of life.  Every time they roll around it can and will be scary. Scary if you are experiencing a significant decline for the first time or scary if you are experiencing it for the 4th or 5th time.  I can promise you, each time it feels a bit different and the decline in the market is usually triggered by different sets of circumstances.

Now, having said all of this – here is the key takeaway….100% of the time after those 14 (now 15) significant market declines the stock market not only recovered everything it lost, it went on to make new all-time high levels!  I will say it again, after every single past drop in the stock market – 100% of the time the market has recovered. Not 90% of the time, not even 99% of the time….100% of the time the stock market has recovered everything it lost and then some.  

Unfortunately, now more than ever we live in a society where the news is in our face 24/7.  Social Media, the internet, round-the-clock cable news. All of those media outlets competing for our attention and advertising dollars.  Sadly, these sophisticated media outlets know all too well that by sensationalizing stock market drops we will tune in, stop scrolling and their advertisers will pay them more for your attention.  You don’t need to stop reading the news but PLEASE, PLEASE know that the media isn’t trying to help you make better decisions with your investments – they are trying to make themselves more money and they make more money if you click on their headline and watch their news.  The more they can sensationalize a story – the higher likelihood you will tune in. Think about it this way, if the stock market dropped 1,000 points tomorrow which headline would be more likely to grab your attention and pull you into their site where their advertisers lie in wait:

“Stock Market drops by 1,000 points but nothing to worry about”
or “Stock Market drops by 1,000 points signaling the beginning of what could be another Great Depression”

By now, as a student of stock market history you know that these stock market drops are nothing new and nothing unusual but the media needs your attention.  I think you get my drift.

Here are the 2 takeaways I hope you get from this:

  1. Historically the market has recovered every single time it has dropped.  EVERY. SINGLE. TIME.
  2. Investing in the stock market over a long enough period of time (think decades, not days) has produced higher returns than safe investments like bonds or cash.

Finally, I want to say this.  By rough estimates, there are about 100 million people (+/-) in this country that have money invested in the stock market earmarked for retirement.  Blooom is fortunate to help about 23,000 of them today, likely many more in the future. I can tell you for certain that a decent percentage of those 100 million people will get it wrong when it comes to their retirement savings.  Mainly because they get scared when the market drops and take drastic actions like stopping contributions to their 401ks when the market is declining or, worse, bailing out of their investments all-together. I wish there was a way for blooom to reach more of these people with messages like this but I at least want to speak to OUR clients and try my best to protect each of you from making mistakes like this.  

I got into this business in 1995 to help people make better decisions with their money.  At that time, I never dreamed I would ever be able to reach 10s of thousands, and potentially 100s of thousands of investors.  When my time is up in this career I just want to know that we reached the greatest number of people possible and armed them with this kind of historical perspective to HOPEFULLY protect them from making bad decisions with their money.  First and foremost, we want you, our blooom client to be protected from these common investor mistakes.

 

Chris Costello,

Co-founder of blooom

 

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December PastCast

When it rains it pours…
December was a historic month for stocks, and not in a good way. As the storm began to clear out and we rang in the New Year, we were left with the worst December for stocks since the Great Depression, and 2018 ended up being the worst full year for stocks since 2008. For only the second time in a decade, major US stock indexes closed the year lower than they started.

So, what happened?
There were several factors throwing a wrench in things last month. The Federal Reserve continued to raise short-term interest rates – something short-sighted stock investors do not like one bit, but something that ultimately tends to come as a result of continued strong economic growth. That said, there are indications that the Fed may ease up on its plans to continue raising rates in 2019, due to several economic indicators showing we “might” see growth slow globally this year. The combination of immediate rate increases and forecast of those increases slowing down in the near future caused a bit of a panic.

More drama in D.C.
With a shift of congressional power on the political horizon, a stalemate on the issue of immigration ultimately led to a partial government shutdown, that has now become the longest in US history. On top of that, trade negotiations with China hit several snags, leaving markets unclear on the longer-term global economic impact of the ongoing trade war. Uncertainty and a lack of confidence in Washington became yet another catalyst to accelerate the selling as the storm strengthened.

What else?
In years where stocks are down as December arrives, investors often accelerate those declines by selling shares in their taxable investment accounts (not 401ks or IRAs) to lock in losses, which can help to offset their tax liability for the year. For the first time in years, what’s known as tax-loss harvesting, may have also played a role in the sell-off.

Beyond that…
It’s tough and frankly kind of pointless to read too much more into the causes of these pullbacks, as things change so quickly that by the time you think you’ve figured it out, there’s a new reason tempting you to buy or sell. Our stance remains the same – Do whatever you can to ignore these events and do not let them tempt you to run away from investing. As an investor, severe pullbacks like we’ve experienced recently are maddening and discouraging, but just a little extra context can help all of us remember the bigger picture, and it’s quite a beautiful one.

As we officially entered into what Wall Street calls a “Bear” market (decline of 20% or more from a previous high) last month, just remember that every “Bear” market in our history has been followed by a “Bull” market. This proves why it’s so important to be the patient investor that views these times as opportunities. We’re here to not only remind you of that, but also to make sure you stay on track and have someone to talk you through the frustration. Stay calm during the storm!  

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