Client Update

Chances are, you’ve already heard or read endless predictions about…everything.  The direction of interest rates.  Market returns and whether the markets will go down or up.  When the next recession will hit.  The movements of the cryptocurrency markets.

If the market gurus were being honest, they wouldn’t give us definitive answers to any of the questions that are posed to them.  Does anybody really have a working crystal ball?  If they did, would they share what they’ve seen in it?

A recent article in the financial services press offered up some realistic answers to the questions that financial journalists and cable tv hosts typically ask.  Here are some examples:

Would you like to lower the volatility of your investment portfolio?  There’s an easy solution.

No, the solution we’re thinking of is not to retreat to cash—which, even in times of low inflation, is a strategy doomed to steadily lose the buying power of your portfolio.  All that does is guarantee a downside.

Diversification will only get you so far.  Downside risk doesn’t go away just because you’re holding multiple asset classes, as everyone learned all over again in 2008-9.

The actual answer is: look at your portfolio less often.

Come again?  Volatility is actually a time-based concept.  Your portfolio goes up or down literally several times a second during every day, and of course you would go crazy if you watched it second-by-second.  So maybe instead you check daily.  But why daily?  Why not monthly?  Or, since you know it’s a bad idea to sell out when the markets go down, why tempt fate and look even that often?

Here’s a trick question: what is the biggest danger to your long-term investment results?  If you answered something like “market downturns” or “downside volatility,” you’re not only missing a bigger danger, you may be missing the way investment markets work.

There have been a lot of market setbacks since 1896, and yet the overall trajectory of the market (as you undoubtedly already knew) has been a steady rise.

So, what’s a bigger danger than something awful like the Great Recession?  Investment experts talk about a human failing called “policy abandonment,” which is a fancy way of saying that the investor bailed on the markets, generally at the wrong time.  Suffering a significant decline in the Great Recession was temporarily painful, but what about the people who abandoned their portfolio allocations and retreated to cash at or near the bottom, because they just got too nervous about what the market would do the next day or the day after?  They locked in those losses, moved to the sidelines and found themselves with permanent—rather than temporary—portfolio losses.

The stock market in the long-term is driven by the intelligence, creativity, innovation and hard work that people working in various companies put into their jobs every day.  The value of companies tends to rise but fear sometimes makes people sell their stock at lower prices which, up to now, have always recovered to reflect that growing value.

The recent turmoil in the markets is certainly unsettling, but it’s nothing compared with the Great Recession, the Great Depression—or, probably, the next significant bear market, whenever it comes.  That next downturn will present us with the illusion of danger (a temporary market decline) and some will take the opportunity to embrace real danger—the danger of “policy abandonment” that makes temporary losses permanent.

We’re about to enter that exciting time of year when all sorts of market predictions are made by people who are mostly claiming that they knew the future and have accurately predicted it over a great track record.  If you’re smart, you’ll turn off the TV or move on to the next article.

The truth is that none of us can accurately predict the movements of the markets.  If we could, then we would always make trades ahead of market moves, and it wouldn’t take long before that amazing prognosticator with the working crystal ball would have amassed billions off of his or her stock market trades.  Have you read about anybody doing that lately?

Most of these people are employed at think tanks or sell their predictions to credulous investors.  Would they need that salary check or your hard-earned subscription dollars if they had the ability to make billions just by checking the ‘ol crystal ball a couple of times a day?

A recent article by frequent blogger Barry Ritholtz offers some rather amazing data on people in the prediction business.  You may know that the cryptocurrency known as “bitcoin” is now worth about $3,500—way WAY down from the start of the year.  So how well did the people in the prediction business foresee that downturn?

Not well.  In his article, Ritholtz noted that Pantera Capital predicted that Bitcoin would be selling for $20,000 by the end of this year.  Tom Lee of Fundstrat was more bullish, forecasting that bitcoin would breach $25,000 by now.  Prognostications by Anthony Pompliano, of Morgan Creek Digital Partners, were still more bullish, predicting bitcoins worth $50,000 by the end of this year.  John Pfeffer, who describes himself online as “an entrepreneur and investor,” anticipated $75,000 bitcoins by now, and Kay Van-Petersen, Global Macro-Strategist at Saxo Bank, one-upped everybody with his prediction that bitcoins would be worth $100,000 by December 31 of this year.

If you’re the kind of person who likes to worry, then October has given you plenty of stimulus.  After a dip in the popular S&P 500 index for the month, all the gains that we’ve enjoyed this year have been wiped out, putting the index slightly into negative territory. 

In times when the markets are dropping, even if they haven’t hit correction territory yet (that would be a 10% drop), the media needs to find a narrative, and you hear all sorts of theories.  Corporate earnings have nowhere to go but down.  The tariffs are slowing down economic activity.  Interest rates are rising.

All of that is true, but none of it has anything to do with why the markets are falling.  The only true headline, and one you will never read, is that stocks are falling because some people are losing faith in their investments and selling out to bargain hunters.  Sometimes this activity feeds on itself; when people see the market falling, they, too, begin to panic.

The stock markets periodically deliver losses for reasons which are not always obvious even after the fact.  Bear markets are a normal part of investing, and this is a good thing, because it allows real investors to periodically buy stocks at discounted prices.  Research has shown that there is a gap between the return that most investors get from their stock investments and the actual returns delivered by those stock investments.  This is, of course, because they sell this or that fund before it goes up – or sell out and then wait to get back in until the market has gone up past where they sold.  Getting the full return of the markets is relatively easy: just hang on during those periodic downturns.

Every year, the U.S. government changes a variety of investment and benefits thresholds based on the inflation rate.  But since inflation has been relatively tame, most of the changes have been modest these past ten years.

That changes this coming year. 

Start with tax-deferred savings thresholds.  The limit for 401(k) or 403(b) contributions will rise from $18,500 to $19,000—and employees 50 and older will continue to be able to contribute an additional $6,000 as a ‘catch-up’ provision.  The overall limit for defined-contribution plans increased from $55,000 to $56,000.

Meanwhile, the IRS has raised the contribution limit for IRA accounts—that is, the maximum amount that can be contributed—for the first time in six years, from $5,500 to $6,000.  Traditional IRA contributions are tax-free (you get a deduction on your tax return) if you aren’t contributing to an employer-sponsored plan.  If you are, then the deduction for contributing is phased out starting at $64,000 in income (single) or $103,000 (filing jointly)—or $10,000 for someone married filing individually.

We are now in open enrollment on the government (39 states) or state health insurance exchanges (11 states and the District of Columbia)—so this is the time of year when consumers can buy health insurance coverage under the Affordable Care Act.  In most states, the enrollment season lasts six weeks—half as long as it used to—and many people are wondering whether the ACA is still viable.  Hasn’t the Trump administration taken steps to make it easier for healthy individuals to opt out of ACA and buy cheaper coverage that lacks certain popular consumer protections?  Doesn’t the economics of covering preexisting conditions require that all insurance buyers participate in the overall pool of insurance premiums?

There is no question that the alternative, cheaper policies endanger preexisting coverage in the long term, and many insurance carriers are publicly rethinking their rate policies.  But the Affordable Care Act has been surprisingly resilient so far, with 11.8 million Americans signed up for coverage.  Insurance companies, for the first time, have reinforced their commitment to the existing system by dropping their rates by an average of 1.5%—though there is wide variation among states.  Residents of Tennessee will see a 26% overall decline in the benchmark silver plans, while Pennsylvania residents will experience a 16% decrease.  In North Dakota, rates will rise an average of 21%.

In 15 states, insurance companies are returning or entering for the first time, and the total number of providers is up to 155, from 132 last year.  That means consumers will have more options.  Established insurers like Anthem, and startups like Oscar and Bright are providing coverage because, thanks to a big increase in premiums last year and the possibility that Congress will stall a full ACA repeal going forward, they believe they can scratch out a profit.

Taking the time to navigate the different options can save some consumers thousands of dollars.  For instance, many companies are offsetting their rising costs by offering high-deductible, low-premium plans along with health savings accounts (HSAs).  An HSA contribution is triple-tax-advantaged: it is deductible when you make the contribution, the money grows tax-deferred, and if you take the money out to pay for medical costs, it comes out tax-free.  Any money not used in a calendar year is rolled to the next.

At the other end of the spectrum, people who have developed a chronic condition, or who are older, might fare better with a low-deductible plan.  They pay a higher premium each month, but the lower deductible will reduce the amount they will have to pay out-of-pocket for medical procedures.  If you buy insurance through an employer, the low-deductible policy can be combined with a flexible spending account, or FSA, where a policyholder contributes pre-tax dollars to pay qualified medical expenses during the year.  Any FSA money left over will be forfeited.

High-achieving people will tell you that they sacrificed to get where they are, but what, exactly, did they sacrifice?  An article in Forbes magazine lists 18 things that high-achieving people routinely give up—and many of them are not what you would expect.

Number one on the list: a fear of uncertainty.  The article notes that there really are no guarantees in life, so when you start a new business, you aren’t really giving up certainty for the reckless unknown.  You’re giving up one kind of uncertainty for another—and the old one, which feels more certain, may be holding you back.

Two: Ignoring your feelings.  Your feelings actually give you a lot of clues about your situation.  Anger tells you where you feel powerless.  Anxiety tells you when something in your life is off-balance.  Fear tells you what you care about.  If you treat your feelings as messengers, you might learn what you need to do next to move ahead.

Three: Pretending your problems don’t exist.  The advice: make a spreadsheet of your debt, and list the habits you now are detrimental to your health. Think of who you owe apologies to and address your problems rather than sticking your head in the sand.

Four: Avoiding discomfort.  This is kind of like number one: if you build your life around just the things that make you feel at ease, that is a fast track to complacency.

We hear about how artificial intelligence is going to change the workforce, and how computers are taking over the world; but perhaps the biggest shift in our industrial lives has been flying under the radar: rather than making things, we will soon be “printing” them.

A new “metal printing press” developed by Desktop Metal, uses a variety of metal powders to lay down many thin layers of material in rapid succession, according to the specifications in a digital file, to build three-dimensional objects.  It employs more than 32,000 juts in conjunction with powder spreaders to jet millions of droplets per second, creating metal parts in minutes instead of hours.   The one-million-dollar printing device is designed to replace metal fabrication activities, many of which are currently handled by hand.  Among the early customers: Ford, Caterpillar and Google’s advanced technology and project group.  BMW has tested a steel prototype of a water impeller pump that costs $80 to make currently.  It can be 3D “printed” for just over $5, and the printed version is 50% lighter.

The goal is to have a “factory” of 3D metal printing units that can print parts and products on demand, with no minimum order size.  The parts will be lighter, cheaper and more efficient than what could have been fabricated in the past.  One analyst is forecasting that sales of industrial 3D printers could reach $18 billion by 2021.

This article was written by an independent writer for Brewster Financial Planning LLC and is not intended as individualized legal or investment advice. 

A roundtable of prominent CEOs was asked an intriguing question: what makes an irreplaceable employee?  How would you describe this person?  You might think their answer would cite extraordinary skills, a great educational background or industry certifications.  But instead, the CEOs listed three different attributes:

A drama-free personality.  The idea here is that people who create drama are essentially selfish, and low-drama employees typically have a high commitment to perform their job well without needing a lot of personal attention, without needing people to know what a great job they’re doing. 

Operational focus.  This means they are committed to great execution of whatever it is that needs to be done. There are people who talk about ideas, but ideas are everywhere.  There is a huge difference between coming up with thoughts and ideas, or having great intention, and actually getting things done.  The most irreplaceable employees know that nothing matters until it is implemented and achieving results.  They are masters of follow-through.

Confidence and internal motivation.  Okay, those are two things, but they kind of overlap.  The irreplaceable employees are confident enough to receive and internalize positive or negative feedback and alter their actions as a result.  They are self-motivated to be the best at whatever they’re doing, and they don’t allow anything to get in their way.

The CEOs were asked why they don’t just hire only people with these traits, but the problem is that they’re not easy to spot in an interview process.  Words, and saying the right thing, isn’t necessarily an indicator that the person sitting across the desk is drama-free, focused on operational excellence, confident and internally motivated.  Everybody pretends to have those traits; you only know if they do when they’re let loose in the workplace.  And those people, alas, also seem to be kind of rare.

It’s interesting to watch economists and tech prognosticators go back and forth over whether artificial intelligence, robots and other thinking machines will kill or create jobs.  Most recently, the McKinsey Global Institute and India’s Tata Communications have come out with reports that are more optimistic about our ability to earn a living in a world where machines are doing a lot of the thinking.

Today, a remarkable 61% of all businesses are implementing artificial intelligence, up from 38% in 2016.  The artificial thinkers are engaging in computer vision and creating natural language; they are becoming virtual assistants and facilitating machine learning and better decision making.  McKinsey expects the world to experience an additional 1.2% a year in GDP growth over the next ten years due to these enhanced business capabilities—equating to $13 trillion in additional wealth for the global citizens.  At the same time, skilled jobs will be in higher demand—and therefore, skilled workers will be able to demand higher income, and the companies will be able to pay it.

Tata’s report predicts that, just like software did, the AI-enhanced computers will create a lot of new ways of working—essentially meaning new jobs and careers. The McKinsey report basically agrees, but says that there will be a challenge for today’s less-computer-literate workers; they will need to be retrained to use or work alongside automation—called “reskilling” in the HR lingo.  Otherwise, their opportunities will fall to 30% of all jobs, down from 40% of all jobs today held by people who are not computer literate. 

To take an example, chances are you’ve waited in an endless line to return an item at your favorite store, and there was a lot of time and trouble once you got to the front of the line.  Now companies have staffers approach people in line with iPads in hand.  They can look up the customer’s purchase, instantly identify or scan in the item they’re returning, and even look up buying history and make recommendations on whether to exchange or get a refund.  The whole customer service model changes with technology.  The McKinsey report also talks about unexpected demand for skills.  Its previous report did not predict today’s massive demand for mobile app developers.

The picture of the world that emerges from these reports is similar to the changes that software brought about a generation ago: machines and people will collaborate to handle more data faster and in increasingly creative ways to innovate and solve problems.  The key skillset will be the ability to continually learn and adopt new skills.  For those who already have this important facility, it sounds like an exciting future.

The median retirement portfolio account balance for persons age 56-61 is just $25,000—which is obviously not enough for a healthy retirement and suggests that many Americans followed less-than-healthy savings habits.  In fact, this amount could have been accumulated simply by saving $6 a month in a 60% Stock and 40% Bond portfolio (or a “60/40”) from 1980 to the present.
 
 
A recent blog post by New York-based research director Michael Batnick calculates how procrastination impacts the amount that would have to be saved in order to afford that comfortable retirement.  He starts by noting that the 90th percentile pre-retiree has managed to save $855,000.  Then he imagines that a hypothetical person starts her work life in 1980, and invests in an evolving portfolio, 80% stocks, 20% bonds from age 22 through 39, a 60/40 portfolio from age 40 through 54, and 40/60 stocks/bonds until age 60, today.  To get to $855,000 today, this person would have had to save $159 a month in the first year and increased that savings each month commensurate with inflation.
 
 
What if she waited five years before starting to save for retirement?  Then she’d need to save $327 a month to achieve the same goal.  If she waited ten years to get started, the savings would start at $570 a month and rise with inflation.  The point of the blog: if you know somebody starting out or in early earning years, invite them to consider the potentially heavy cost of waiting before they start saving—or they could suddenly, unexpectedly, end up with the equivalent of $25,000 and retirement just around the corner.


This article was written by an independent writer for Brewster Financial Planning LLC and is not intended as individualized legal or investment advice, and any opinions expressed are solely those of the writer.  Past returns do not guarantee future returns.