Tag Archives: savings

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.

Read More

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.

Read More

5 Ways to Save for Retirement When You Have Student Loan Debt

Graduation caps have landed, tassels have been switched to the other side, and mom has all the pictures she could ever want. Graduation day is one of the most memorable occasions in a person’s lifetime, but as seventy percent of new grads know, it also starts the countdown to one of life’s most-dreaded evils: paying back student loans. Recent research suggests millennials are now spending one fifth of their annual salaries on student loans alone, and now expect to be making payments well into their forties. At the same time, most millennials know they need to start saving for retirement in their twenties – from their first day at their first job if possible – but when Sallie Mae comes knocking it can seem impossible to both pay back debt and save for retirement on an entry level salary.

 

So how can you manage your student loan debt and also make sure you have enough to retire comfortably?

 

Here are a few tips to get started:

1. Create a budget

Your first step should be to come up with a plan outlining your long-term financial priorities, including everything from paying off student loans and contributing to retirement to having immediate funds for an emergency. You can’t focus on realizing long term goals when you’re trapped lurching from one immediate crisis to the next. Take some time to breathe and focus on the future.

 

2. Manage your payment plans

While getting out of debt can seem like a more urgent priority, make sure you are on track to meet your retirement goals before accelerating your student loan debt payoff date. According to a Morningstar report, every dollar of student loan debt creates a 35 cent decrease in retirement savings. Try to put at least 10-20 percent of your income throughout your working years aside for retirement. This enables you to take advantage of compounding interest and the time value of money, so you’ll actually end up with more money by the time you retire. Automation makes managing this process easier, so you don’t need to think twice about it!

 

3. Take advantage of employer matching policies

Does your employer match contributions or participate in a pre-tax retirement saving plan? You could be earning a higher rate of return by making sure you’re participating in and capitalizing on those policies. New company, new plan? No problem! Look into rolling over your 401(k) to maximize your benefits. Sometimes money does grow on trees.

 

4. Refinance your existing debt

If you have good to excellent credit and a steady cash flow you’re a prime candidate for loan refinancing. Look for a new loan with a lower interest rate, and make sure you use all the money from the new loan to pay off the old one. Some banks and loan providers also offer loyalty and automation discounts, so you should also make sure you’re familiar with all the options available to you before you sign on the dotted line.

 

5. Keep an eye on pesky fees

Three in four Americans have no idea what they’re paying in 401(k) fees, and nearly 40 percent believe they’re not paying any fees at all. When’s the last time you checked what you’re paying in fees? It’s not enough to just save money if you end up losing thousands of dollars in fees you don’t even know you’re paying. Signing up for Blooom’s 401(k) robo-advisor to manage your 401(k) and minimize those pesky fees costs a flat fee of $10 per month, no matter how much you have saved. No small print, no tricks.

 

Still feel like you’re drowning in debt? Check out blooom’s free 401(k) checkup tool to see how you’re doing with your retirement savings plan.

Read More

What Kind of 401k Lover Are You?

Valentine’s Day puts a lot of focus on being in a relationship. If you’re reading this blog it probably means that you ARE in a relationship with your 401k, which is great! But just because you’re in a relationship doesn’t mean everything is perfect.

Odds are you fall into one of these six kinds of relationships with your 401k. Let’s put them under the microscope and see what’s going well and what flaws might exist.


The Giver

You are constantly contributing to your 401k. 10%, 15%, or 20%―it doesn’t matter. Anything to keep your 401k by your side all the way to retirement. You don’t care what funds you’re in or whether you get an employer match.

Pros: Contributing is numero uno when it comes to a happy relationship with your 401k, and giving all you’ve got to your 401k can cure a lot of ills.

Cons: The $$$ you put in your 401k should be working for you and not the other way around. Throwing your hard earned cash into a money market account or a high fee investment that doesn’t do anything for you can lead to heartbreak.

Things you might say to your 401k: Oh, you only had a 2% rate of return this year? It’s not your fault. Let me just up my contribution level to make you feel better.


The Taker

You set up your 401k… isn’t that enough? Why do you need to check in on it? It should just be grateful that you contribute a few bucks every paycheck.

Pros: Not looking at your 401k and over thinking it can be a virtue.

Cons: If the foundation of the relationship isn’t there, or if you’re not properly invested, this relationship could be going nowhere.

Things you might say to your 401k: Stop complaining, I could be spending my money elsewhere.


The Controller

One look at you and anyone can tell you care about your 401k. You are very attentive, but somewhere in all that effort you’re putting towards your 401k, you may start to suffocate it with your demands and restrictions.

Pros: You care, you really REALLY do. Attention is important after all, it’s your retirement we’re talking about.

Cons: Too much attention can lead to irrational reactions.

Things you might say to your 401k: What do you mean, your balance is less this statement than last statement? This relationship is OVER!


The Enthusiast/Thrill Seeker

You are always looking for something new. Investing in the same funds just doesn’t do it for you. You’re willing to be a little reckless if it means your portfolio is different from others.

Pros: You live on the edge and are likely to take on more risk in your investments, which can net out.

Cons: 401ks are a long term deal, so changing it up constantly and seeking out the new can lead to betting it all on a potentially bad choice – see bitcoin.

Things you might say to your 401k: Bonds? What are those? Hey baby, let’s time the market.


The Overlooker

You know your relationship with your 401k has problems. Maybe you’re under-diversified or have a high expense ratio, but it’s not “that bad”.

Pros: You’re aware. As they say: knowledge is half the battle.

Cons: Close only counts in hand grenades and horseshoes. This is your retirement and every dollar counts. Every opportunity you miss to fix what you know is wrong is money left on the table.

Things you might say to your 401k: I’ve been with my financial advisor for years. Who cares if he charges me too much to rebalance you?


The Jealous One

You are constantly looking at other people’s 401ks and seeing what they have that you don’t – better funds line ups, more money, rate of return, etc.

Pros: You want your 401k to be the best. That’s why you’re always looking around.

Cons: Not all 401ks are the same and neither are individual financial situations. Measuring your 401k against someone else’s is a fool’s errand and can get you off track or distracted.

Things you might say to your 401k: Bob’s 401k grew 15% this year. Why did you only grow 12%?


Want to take your 401k relationship to the next level? Start with a free analysis with the experts at blooom.

 

Start Your 401k Analysis

Read More