Q&A: Can I Realistically Retire When I Want To?

Ric Edelman is a co-founder of Edelman Financial Engines. The following is taken from his weekly radio call-in show.

Question: I’m married with two children and am thinking of retiring when I’m 58. I have a portfolio with a value of about $2 million. My home is worth $500,000. I won’t receive a pension, but I’ll get Social Security in my 60s. Can I realistically retire at 58 and maintain my present lifestyle — which requires about $150,000 a year — without touching the $2 million principal?

Ric: Initially the answer would appear to be no. You have to plan to live another four decades. If you need $150,000 a year, the rate of withdrawal from your investments would have to be 7.5% a year, which is not sustainable for that long. And because of inflation, in 20 to 25 years you might need $300,000 to equal the purchasing power of $150,000 today.

But the prognosis isn’t as scary as it may seem. Just because a 7.5% withdrawal rate isn’t sustainable doesn’t mean your retirement idea is a failure or that you’re financially at risk. You’re probably closer to your goal than you think.

Here’s why:

You began with the premise that you don’t want to touch the $2 million principal. Every retiree says that. It seems to have become the 11th Commandment: “Thou shalt not touch principal.” But that’s unrealistic and unnecessary. The reason you worked so hard to accumulate this money is to let it provide for you at some point. So it’s OK to spend it on yourself.

Let’s instead analyze it from the standpoint that you’re willing to allow the $2 million to be spent over the course of your lifetime. Can we generate $150,000 a year in that scenario, adjusted for inflation? We can’t do the math in 30 seconds [on the radio] for a reply here, but I’d say the odds are high the answer would be yes, you’d probably be OK.

With more analysis, we can be definitive. We might find that, instead of retiring at 58, you might need to work until 60 or 62. If you’ve been earning $150,000 a year, your Social Security benefits will be more than $2,000 a month, not counting your wife’s benefits. That brings you even closer to your goal.

Next, even if we discover you must work an extra couple of years, that doesn’t necessarily mean full-time employment. It might mean working part-time, earning just $20,000 or $30,000 for a few years.

And that’s not all. You assume you’ll spend $150,000 a year (in present dollars) for the rest of your life. But I seriously doubt you’ll spend at age 90 as much as you do at 58. Thus, you probably don’t need to sustain such a high level of income for as long as you thought.

Finally, we haven’t considered the value of your home and how much it might appreciate over the years. (People often don’t consider the fact that the value of their homes is an asset that can help them enjoy their retirement lifestyle.) The house might not grow as fast as other assets (real estate usually doesn’t), it may not grow at all, but even if it didn’t and instead remained at $500,000, it represents another large asset that can generate income for you.

Thus you are probably in far better shape than you think. I say probably because to be certain you need to discuss everything with a financial advisor, who can examine the money you have, how much you need to spend, when you need to spend it, how long you will need to continue spending it, your goals and your risk tolerance. Once you do that, you’ll have the definitive answer to your question.

AM1101559

 

Q&A: Calculating Social Security Benefits for Older Workers

Ric Edelman is a co-founder of Edelman Financial Engines. The following is taken from his weekly radio call-in show.

Question: You told a caller to your radio show that Social Security benefits will be locked down at age 70, but I don’t think that is the case for some people.

It is my understanding that the benefit amount is based on the highest 25 years of income out of 35 years of work income. My SS office told me that for someone who has not had 35 working years by age 70, the benefit might potentially rise.

I have worked for less than 25 years. I cannot reach the total of 35 working years even if I work until I’m 70. I was told that even if I reach 70 and start getting my “maximum” benefit, by continuing to work I could increase the benefit amount every year.

I could do that by changing my years of zero income to some income. Any income is higher than zero. This info is applicable to many immigrants, I think. I have a lot of zero-income years. I plan to work longer to offset them and build up my final benefit.

Ric: Actually, we’re both right — just about different things!

I was talking on the air about the Delayed Retirement Credit (DRC). Here’s how that works: When you reach your full retirement age (about age 66 for many), you are entitled to your full retirement benefit. If you begin to receive benefits earlier (as young as age 62), you get less per month.

If you wait longer (until you’re as old as 70), you get more per month. That’s the DRC. And the longer you delay starting, the more you get each month when you finally start — until age 70, that is. After that, there’s no further increase from waiting. Thus, there’s no reason to wait past 70 to begin collecting Social Security retirement benefits.

But you are referring to the benefit amount (not the delayed credit) and how that is calculated. So, you’re right too: The benefit amount could increase past 70.

Social Security retirement benefits are calculated by adjusting your lifetime wages to today’s wages. Add up your highest 35 years of wages and divide by 420; this produces your Average Indexed Monthly Earnings (AIME). Missing years count as zero, and future years count as if they represent a high year.

The Social Security Administration then applies a formula to the AIME to determine your primary insurance amount. That’s what you get at your full retirement age.

So, as you said, if you continue to work past 70, even if you’re collecting Social Security, your benefit could go up if you replace some missing wage years (currently counted as zero) with current wages (that are above zero).

Indeed, here’s what Social Security’s website says: “Your benefits may increase when you work. As long as you continue to work, even if you are receiving benefits, you will continue to pay Social Security taxes on your earnings. However, we will check your record every year to see whether the additional earnings you had will increase your monthly benefit. If there is an increase, we will send you a letter telling you of your new benefit amount.”

So, we’re both right — just about different things!

AM1101559

Q&A: How Do I Get Back in the Market After Reacting Emotionally?

An advisor can help you with this decision.

Ric Edelman is a co-founder of Edelman Financial Engines. The following is taken from his weekly radio call-in show in 2018.

Question: Your comments about keeping emotions out of investing during an election year came a little too late for us. We’re ashamed to admit that we are among those who made changes to their portfolios based on concerns and fears about the candidates. We pulled about two-thirds of our assets out of the stock market. Could you give me some advice on how and when to get back in?

Ric: Your situation illustrates why investors should work with a fee-based financial advisor. When you’re saying, “This is awful! This is terrible! I’m in a panic. Get me out!” your advisor can say, “Let’s talk about this. Let’s think it through.” He or she can provide the handholding you need — at the very moment you need it — to prevent you from doing the wrong thing at the wrong time for the wrong reason.

Advisors can serve as a valuable sounding board, helping you think twice before you make an investment decision that may not be in your best interest. I believe there’s value in that. So, if you don’t think you can keep your emotions in check, you might consider getting professional help.

Now you know why I have a personal trainer. I know I’m capable of working out, but I also know that I won’t. So, my trainer drags me out of bed, sits me down at the weights and says, “Lift.” And so, I do. And he makes sure my technique is correct, so I don’t injure myself. Thus, I get could get better results with a trainer than I would on my own — even though I’m using the same set of weights available to me either way. A financial advisor can help you in the same way.

My advice would be to put the money back into the stock market right now. Assuming your original portfolio was suitable for you and your situation, you need to stick with that long-term plan. That might be emotionally difficult for you, but the money you lost by getting out is simply the price you pay for the education you just received.
AM1115549

Coronavirus Information Resources

Financial Engines is providing you with this list of resources for COVID-19 (commonly referred to as the coronavirus). These sources offer you access to up-to-date news, data, and information. Just copy a web address into your browser to access any given site.

A summary of COVID-19 from the Centers For Disease Control can be found here:

https://www.cdc.gov/coronavirus/2019-nCoV/summary.html

You can view a global map, with frequent updates, of the locations with confirmed cases from the CDC here:

https://www.cdc.gov/coronavirus/2019-ncov/locations-confirmed-cases.html#map

Additionally, the World Health Organization is providing daily situation reports that you can read here:

https://www.who.int/emergencies/diseases/novel-coronavirus-2019/situation-reports/

The Center for Systems Science and Engineering at Johns Hopkins University developed an interactive, web-based dashboard to visualize and track cases reported in real-time. This technology provides researchers, public health authorities and you with a friendly tool to track the outbreak. The dashboard reports cases at the province level in China, city level in the United States, Australia and Canada, and at the country level elsewhere.

Web: https://www.arcgis.com/apps/opsdashboard/index.html#/bda7594740fd40299423467b48e9ecf6

Mobile: https://www.arcgis.com/apps/opsdashboard/index.html#/85320e2ea5424dfaaa75ae62e5c06e61

Confirmed and presumptive cases in the United States

There is no evidence of widespread transmission of COVID-19 in the U.S. currently. There are, however, some confirmed and presumptive positive cases in the U.S. that the CDC is tracking and monitoring. The CDC regularly updates its report Monday through Friday. You can view the latest report, including cases (confirmed and presumptive positive) along with a state map of these locations, and cases among persons repatriated to the U.S., including people from the Diamond Princess cruise ship here:

https://www.cdc.gov/coronavirus/2019-ncov/cases-in-us.html

How COVID-19 spreads

According to OSHA, without sustained human-to-human transmission, most Americans are not at significant risk of infection. The risk of contracting COVID-19 may be higher, however, for people who interact with potentially infected travelers from abroad, including those involved in:

  • Health care.
  • Death care.
  • Laboratories.
  • Airline and other travel operations.
  • Border protection.
  • Solid waste and wastewater management.
  • Travel to areas, including parts of China, where the virus is spreading.

The current understanding about how COVID-19 spreads is largely based on what is known about similar coronaviruses. COVID-19 is a new disease and there is more to learn about how it spreads, the severity of illness it causes, and to what extent it may spread in the U.S.

Information from OSHA can be found here: https://www.osha.gov/SLTC/covid-19/

Person-to-person spread

Infected people can spread COVID-19 through respiratory secretions, especially when coughing or sneezing.

According to the CDC, the virus spreads mainly from person-to-person:

  • Between people who are in close contact with one another (within about 6 feet).
  • Through respiratory droplets produced when an infected person coughs or sneezes.

These droplets can land in the mouths or noses of people who are nearby or possibly be inhaled into the lungs.

Spread from contact with infected surfaces or objects

It may be possible that a person can get COVID-19 by touching a surface or object that has the virus on it and then touching their own mouth, nose or possibly their eyes. However, this is not thought to be the main way the virus spreads.

Can someone spread the virus without being sick?

  • People are thought to be most contagious when they are the sickest (symptomatic).
  • Some spread of the disease might be possible before people show symptoms; there have been reports of this occurring with COVID-19, but this is not thought to be the main way the virus spreads.

How easily does COVID-19 spread?

How easily a virus spreads from person-to-person can vary. Some viruses are highly contagious and are easily spread easily, like measles, for example. Other viruses do not spread as easily. Another factor is whether the spread is sustained.

The virus that causes COVID-19 seems to be spreading easily and sustainably in the community (this is being referred to as “community spread” in some affected areas. Community spread means people have been infected with the virus in an area, including some who are not sure how or where they became infected.

Symptoms

Reported illnesses have ranged from mild symptoms to severe illness and death for confirmed cases, according to the CDC.

Symptoms may appear 2-14 days after exposure and can include:*

  • Fever.
  • Cough.
  • Shortness of breath.

*This is based on what has been seen previously as the incubation period of MERS-CoV viruses, according to the CDC.

What you can do to prevent and treat COVID-19

“So, first of all, let me assert my firm belief that the only thing we have to fear is … fear itself — nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance. In every dark hour of our national life a leadership of frankness and of vigor has met with that understanding and support of the people themselves which is essential to victory. And I am convinced that you will again give that support to leadership in these critical days.”

– President Franklin D. Roosevelt, March 4, 1933

President Roosevelt’s iconic inauguration address during the peak of the Great Depression seems all the more appropriate today. Whatever you do, don’t panic. You’re going to be OK and we are here for you. Recognize that some of the best and brightest minds in America are working on this problem right now. And countless heroes in science, technology and health care are laboring to treat confirmed and presumptive cases. Ultimately, these experts will find a vaccine for COVID-19. Now is a time to trust in the experts and believe that we’ll find a way forward.

During times like these, it’s important to be thoughtful about where you’re getting your information from and it’s critical to consider your sources. Most of the information in this resource center comes from trusted and reliable sources such as the CDC and World Health Organization.

To this end, below is a guide from the CDC to prevent and treat COVID-19:

Prevention

There is currently no vaccine to prevent this disease. The best way to prevent illness is to avoid being exposed to this virus. However, as a reminder, the CDC always recommends everyday preventive actions to help curb the spread of respiratory diseases, including:

  • Avoiding close contact with people who are sick.
  • Avoiding touching your eyes, nose and mouth.
  • Staying at home when you’re sick.
  • Covering your mouth with a tissue when coughing or sneezing, then discarding the tissue. If you don’t have a tissue, cough or sneeze into your elbow.
  • Clean and disinfect frequently touched objects and surfaces using a regular household cleaning spray or wipe. Make sure to clean and disinfect your cell phone.
  • Follow the CDC’s recommendations for using a facemask.
    • The CDC does not recommend that people who are well wear a facemask to protect themselves from respiratory diseases, including COVID-19.
    • Facemasks should be used by people who show symptoms of COVID-19 to help prevent the spread of the disease to others. The use of facemasks is also crucial for health workers and people who are taking care of someone in close settings (at home or in a health care facility).
  • Wash your hands often with soap and water for at least 20 seconds, especially after going to the bathroom; before eating; and after blowing your nose, coughing or sneezing.
    • If soap and water are not readily available, use an alcohol-based hand sanitizer with at least 60 percent alcohol. Always wash hands with soap and water if hands are visibly dirty.

Treatment

There is no specific antiviral treatment recommended for COVID-19. People with the virus should receive supportive care to help relieve symptoms. For severe cases, treatment should include care to support vital organ functions.

If you think you may have been exposed to COVID-19, you should contact your health care provider immediately.

Coronavirus disease (COVID-19) advice for the public

In addition to the above tips, we encourage you to review resources from the WHO by clicking the link below. You can find videos, brochures, infographics, tips and advice on:

  • Implementing basic protective measures against COVID-19.
  • Washing your hands frequently.
  • Maintaining social distance.
  • Avoiding touching your eyes, nose and mouth.
  • Practicing respiratory hygiene.
  • Seeking medical care early.
  • Staying informed and following advice given by your health care provider.
  • Practicing protective measures for people who have recently visited areas where COVID-19 is spreading.
  • Protecting yourself and others from getting sick.
  • Coping with stress during the outbreak (more on this below).
  • Practicing food safety.
  • Staying health while traveling.

More information from the World Health Organization can be found here: https://www.who.int/emergencies/diseases/novel-coronavirus-2019/advice-for-public

8 Tips to take care of yourself

Here are tips from the WHO to help take care of yourself:

  1. Focus on mental health. It’s OK to feel sad, stressed, confused, scared or angry during a crisis. Talking to people you trust can help. Contact your friends, family and your planner.
  2. Maintain a healthy lifestyle. This includes eating a healthy diet, getting adequate sleep, exercising and maintaining social contacts with loved ones by email and phone.
  3. Avoid tobacco, alcohol or other drugs to deal with your emotions. If you feel overwhelmed, talk to a health worker or counselor. Have a plan, know where to go and how to seek help for physical and mental health needs, if required.
  4. Get the facts. Gather information that will help you accurately determine your risk so that you can take reasonable precautions, but avoid panicking. Find credible sources of information you can trust such as WHO, CDC, and your local or state public health agencies.
  5. Reduce worry and stress by lessening the time you and your family spend watching or listening to media coverage that you perceive as upsetting.
  6. Draw on skills you have used in the past that helped you to manage previous adversities and use those skills to help you manage your emotions during this challenging time.
  7. Keep to regular routines and schedules as much as possible or help create new and healthy ones in new environments.
  8. Work with your children. Children may respond to stress in different ways such as being more clingy, anxious, withdrawing, angry or agitated. Respond to your child’s reactions in a supportive way, listen to their concerns and give them extra love and attention.

COVID-19 myth busters

Unfortunately, rumors run rampant during health crises. And sadly, conspiracy theories and myths are often pushed through social media and other channels. Here is a list of myths about COVID-19 that have been debunked by scientists and health care professionals from the WHO:

Are hand dryers effective in killing the new coronavirus?

No. Hand dryers are not effective in eradicating COVID-19. To protect yourself, you should frequently clean your hands with soap and water or an alcohol-based hand sanitizer. Once your hands are cleaned, you should dry them thoroughly by using paper towels or a warm air dryer. And make sure to moisturize with hand lotion!

Can an ultraviolet disinfection lamp kill the new coronavirus?

UV lamps should not be used to sterilize hands or other areas of skin as UV radiation can cause skin irritation.

How effective are thermal scanners in detecting people infected with the new coronavirus?

Thermal scanners are effective in detecting people who have developed a fever (i.e., have a higher than normal body temperature).

However, they cannot detect people who are infected but are not yet sick with fever. This is because it takes between 2 and 10 days before people who are infected with the virus become sick and develop a fever.

Can spraying alcohol or chlorine all over your body kill the new coronavirus?

No. Spraying alcohol or chlorine all over your body will not kill viruses that have already entered your body. Spraying such substances can be harmful to your clothes, eyes and mouth. Be aware that both alcohol and chlorine can be useful to disinfect surfaces, but they need to be used under appropriate recommendations.

Is it safe to receive a letter or a package from China?

Yes, it is safe. People receiving packages from China are not at risk of contracting the new coronavirus. From previous analysis, scientists know coronaviruses do not survive long on objects, such as letters or packages.

Can pets at home spread COVID-19?

At present, there is no evidence that companion animals or pets such as dogs or cats can be infected with the new coronavirus. However, it is always a good idea to wash your hands with soap and water after contact with pets. This protects you against various common bacteria, such as E. coli and salmonella, which can pass between pets and humans.

Do vaccines against pneumonia protect you against the new coronavirus?

No. Vaccines against pneumonia, such as pneumococcal vaccine and Hemophilus influenza type B (Hib) vaccine, do not provide protection against COVID-19.

The virus is so new and different that it needs its own vaccine. Researchers are trying to develop a vaccine.

Although these vaccines are not effective against COVID-19, vaccination against respiratory illnesses is highly recommended to protect your health.

Can regularly rinsing your nose with saline help prevent infection with the new coronavirus?

No. There is no evidence that regularly rinsing the nose with saline has protected people from infection with the new coronavirus.

There is some limited evidence that regularly rinsing nose with saline can help people recover more quickly from the common cold. However, regularly rinsing the nose has not been shown to prevent respiratory infections.

Can eating garlic help prevent infection with the new coronavirus?

Garlic is a healthy food that may have some antimicrobial properties. However, there is no evidence from the current outbreak that eating garlic has protected people from the new coronavirus.

Does putting on sesame oil block the new coronavirus from entering the body?

No. Sesame oil does not kill the new coronavirus. There are some chemical disinfectants that can kill the COVID-19 on surfaces. These include bleach/chlorine-based disinfectants, which should only be used according to manufacturer directions.

However, they have little or no impact on the virus if you put them on the skin or under your nose. These products are not intended for use on bodies; it can be dangerous to put these chemicals on your skin.

Does COVID-19 affect older people or are younger people more susceptible?

People of all ages can be infected by the virus. Older people, and people with preexisting medical conditions (such as asthma, diabetes, heart disease) appear to be more vulnerable to becoming severely ill with the virus.

People of all ages should take steps to protect themselves from the virus by following good hand hygiene and respiratory hygiene.

Are antibiotics effective in preventing and treating the new coronavirus?

No, antibiotics do not work against viruses; antibiotics only treat bacterial infections.

The new coronavirus is a virus and, therefore, antibiotics should not be used as a means of prevention or treatment.

However, if you are hospitalized for COVID-19, you may receive antibiotics because bacterial co-infections are possible.

Are there any specific medicines to prevent or treat the new coronavirus?

To date, there is no specific medicine recommended to prevent or treat COVID-19.

However, those infected with the virus should receive appropriate care to relieve and treat symptoms, and those with severe symptoms should receive optimized supportive care. Some specific treatments are under investigation and will be tested through clinical trials.

Coronavirus Disease 2019 additional resources

For more information, including up-to-date guidance and advice, please visit the CDC’s resource center here:

https://www.cdc.gov/coronavirus/2019-ncov/index.html

Sources:

Centers for Disease Control, Johns Hopkins University, U.S. Department of Labor, Occupational Safety Health Administration, World Health Organization

AM1113226

Market Summary: February 2020

A Bruising Close to February for Stock Markets

What happened.

After a positive start to the month, stocks fell sharply in response to growing uncertainties about the impact of the coronavirus on economies and companies around the world. Developed-market international stocks were hit the hardest, with the MSCI EAFE Index down by 9.04 percent for the month. U.S. stocks fell slightly less, with the S&P 500 falling by 8.23 percent. Emerging-market stocks, including Chinese stocks, fared slightly better, down by only 5.27 percent (MSCI Emerging Markets Index). However, Chinese stocks had fallen more in January, when investors saw the coronavirus as being an emerging-markets problem. Bond prices rose (meaning interest rates fell) as investors moved to less risky assets. The Bloomberg Barclays Aggregate Bond Index was up by 1.80 percent.

Why it happened.

It seems a long time ago, but earlier in the month, stocks were rising strongly, boosted by positive economic news. Then on Friday, February 21st, there was news of an increase in the number of people infected by the coronavirus in South Korea, and investors realized that the virus was now global. With little known for certain, markets reacted strongly to any news about the virus. The uncertainty continues, and markets will likely continue to be volatile. Nobody knows whether the news will be better or worse than markets already expect—and remember, it’s surprises that move markets. The question now is not whether the coronavirus will be global, it’s whether its impact will be more or less severe than markets expect.

What this means for you.

Volatility in the markets can be very unsettling but it’s important to remember that the big declines in stock markets reported in the news don’t mean your retirement income is experiencing a similarly large decline. This month’s sidebar gives advice on keeping your focus on your financial plan and your long-term goals. Having a diversified portfolio is key. At Financial Engines, we build you a diversified portfolio personalized to your situation and preferences. Your retirement accounts will have fallen this month and unfortunately on the road to retirement, there will inevitably be bumps along the way. Keeping focused on your long-term financial plan and resisting making abrupt changes are the most important things you can do right now. If you do have concerns or want to talk about how the markets are impacting your portfolio, please reach out to one of our advisors. We are here to help.

©2020 Edelman Financial Engines, LLC. This publication is for informational purposes only and does not constitute investment advice or an offer to buy or sell any security. Future market movements may differ significantly from the expectations expressed herein, and past performance is no guarantee of future results. Edelman Financial Engines assumes no liability in connection with the use of the information and makes no warranties as to accuracy or completeness. Future results are not guaranteed by any party. Financial Engines® is a trademark of Edelman Financial Engines, LLC. Advisory services are provided by Financial Engines Advisors L.L.C. Call (800) 601-5957 for a copy of our Privacy Notice. Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith. All other intellectual property belongs to their respective owners. Index data other than Bloomberg is derived from information provided by Standard and Poor’s and MSCI. The S&P 500 index and the S&P SmallCap 600 Index are proprietary to and are calculated, distributed and marketed by S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC), its affiliates and/or its licensors and has been licensed for use. S&P®, S&P 500® and S&P SmallCap 600®, among other famous marks, are registered trademarks of Standard & Poor’s Financial Services LLC, and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. ©2019 S&P Dow Jones Indices LLC, its affiliates and/or its licensors. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used to create any financial instruments or products or any indices. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages.
An index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Investing strategies, such as asset allocation, diversification, or rebalancing, do not assure or guarantee better performance and cannot eliminate the risk of investment losses. All investments have inherent risks, including loss of principal. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies. Past performance does not guarantee future results.
AM1100533

 

Market Summary: January 2020

Coronavirus Impacts Stock Markets Around the World

What happened.

Stock markets around the world fell in January, hurt by news of the spread of the coronavirus. Emerging markets were hit most, closing the month down 4.66 percent (MSCI Emerging Markets Index). It’s worth noting that emerging markets are the riskiest type of stocks, and typically have a small weight in our portfolios. International developed markets were down 2.09 percent, less than half the amount of emerging markets (MSCI EAFE Index). At home, large-cap stocks were down only very slightly, falling 0.04 percent (S&P 500). Small caps, however, fell 3.97 percent (S&P 600). Bonds were a happy spot in the markets, rising as interest rates fell. The Bloomberg Barclays Aggregate Bond Index was up by 1.92 percent. The month was somewhat volatile for U.S. stocks. The S&P 500 moved by more than +/- 1 percent on three days.

Why it happened.

The outbreak of the coronavirus is first and foremost a human tragedy.  As news arrived of its spread across China and neighboring countries, and to other countries around the world, stock markets fell.  Stocks fell first in emerging markets (China is the largest market in the MSCI Emerging Markets Index) but spread to other markets as investors digested the news that the virus might spread beyond the region.  The coronavirus is an unhappy example of how what’s not expected affects markets.  The outbreak of tensions with Iran was another case of unexpected news shaking markets.  At the start of the month, tensions escalated, and stocks fell, but recovered as both sides appeared to back off from a full confrontation.  In contrast, Brexit day on Jan. 31, marking the end of the first phase of the Brexit process, was known in advance and didn’t affect markets.

Regardless of these global events, news about the U.S. economy continued to be largely positive.  Companies started to report earnings for the last quarter of 2019 late in the month.  Once again, most companies have beaten expectations.

What this means for you.

Given the drop in stock prices, your account value would probably have declined in January. Stocks represent a higher level of risk, and the more risk you’re willing to accept, the greater the decline would have been.

At the same time, the portion of your portfolio invested in bonds would have partly offset the fall in stocks. This is a good example of one of the benefits of diversification. As we discuss in this month’s sidebar, you can’t control the ups and downs of the markets. But there are things you can control.

At Financial Engines, we build portfolios that reflect your individual situation and preferences.  Please contact us if you’d like to understand the amount of risk you’re taking, or to make any adjustments.

©2020 Edelman Financial Engines, LLC. This publication is for informational purposes only and does not constitute investment advice or an offer to buy or sell any security. Future market movements may differ significantly from the expectations expressed herein, and past performance is no guarantee of future results. Edelman Financial Engines assumes no liability in connection with the use of the information and makes no warranties as to accuracy or completeness. Future results are not guaranteed by any party. Financial Engines® is a trademark of Edelman Financial Engines, LLC. Advisory services are provided by Financial Engines Advisors L.L.C. Call (800) 601-5957 for a copy of our Privacy Notice. Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith. All other intellectual property belongs to their respective owners. Index data other than Bloomberg is derived from information provided by Standard and Poor’s and MSCI. The S&P 500 index and the S&P SmallCap 600 Index are proprietary to and are calculated, distributed and marketed by S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC), its affiliates and/or its licensors and has been licensed for use. S&P®, S&P 500® and S&P SmallCap 600®, among other famous marks, are registered trademarks of Standard & Poor’s Financial Services LLC, and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. ©2019 S&P Dow Jones Indices LLC, its affiliates and/or its licensors. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used to create any financial instruments or products or any indices. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages.
An index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Investing strategies, such as asset allocation, diversification, or rebalancing, do not assure or guarantee better performance and cannot eliminate the risk of investment losses. All investments have inherent risks, including loss of principal. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies. Past performance does not guarantee future results.
AM1070356

 

Market Update, Q4 2019: A Big Gain to End the Decade

Buoyed by resilient investor sentiment, strong labor markets, and solid corporate earnings, 2019 ended with a bang. Shrugging off the domestic political turmoil, Brexit drama, and international tensions, investors drove equity markets to new all-time highs. Large-cap stocks in the S&P 500 gained an impressive 9.1 percent in the fourth quarter. For the year, the S&P 500 is up 31.5 percent. Stocks of smaller companies, represented by the S&P SmallCap 600, posted similar gains of 8.2 percent for the quarter, and ended up 22.8 percent for the year.

International stock markets also posted big gains, with the MSCI Europe, Australasia, and Far East (EAFE) index rising 8.2 percent in Q4. For the year, international equities were up 22.0 percent. Once again, domestic equities outperformed non-US equities for the year.

With interest rates not moving much, bonds were mostly flat for the quarter. The Bloomberg Barclays U.S. Aggregate Bond Index gained 0.2 percent for the fourth quarter, bringing its year-to-date performance to a very respectable 8.7 percent.

The Financial Engines perspective.

The fourth quarter demonstrated the power of positive investor sentiment against a backdrop of mostly good economic news. However, it is important not to let recent history create unrealistic expectations for the future. 2019 will go down as a very strong year for world stock markets – well above long-term average returns. But history teaches us that recent performance says little about what the future holds. The coming year may bring below average, typical, or above average returns – but we don’t know which. Markets are inherently tough to predict. Maintaining a diversified portfolio consistent with your time horizon is the key to long-term success. Financial Engines advisors are always here to help.

AM1049395
©2020 Edelman Financial Engines, LLC. This publication is for informational purposes only and does not constitute investment advice or an offer to buy or sell any security. Future market movements may differ significantly from the expectations expressed herein, and past performance is no guarantee of future results. Edelman Financial Engines assumes no liability in connection with the use of the information and makes no warranties as to accuracy or completeness. Future results are not guaranteed by any party. Financial Engines® is a trademark of Edelman Financial Engines, LLC. Advisory services are provided by Financial Engines Advisors L.L.C. Call (800) 601-5957 for a copy of our Privacy Notice. Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith. All other intellectual property belongs to their respective owners. Index data other than Bloomberg is derived from information provided by Standard and Poor’s and MSCI. The S&P 500 index and the S&P SmallCap 600 Index are proprietary to and are calculated, distributed and marketed by S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC), its affiliates and/or its licensors and has been licensed for use. S&P®, S&P 500® and S&P SmallCap 600®, among other famous marks, are registered trademarks of Standard & Poor’s Financial Services LLC, and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. ©2018 S&P Dow Jones Indices LLC, its affiliates and/or its licensors. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used to create any financial instruments or products or any indices. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. An index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance does not guarantee future results.

Why Investment Risk Doesn’t Always Equal a Reward

Build your investment strategy with sound advice.

Does taking a higher risk with your investments guarantee a higher return? Most people seem to think so.

Teachers Insurance and Annuity Association (TIAA) posed that very question in a survey, and 53 percent of the respondents answered “yes.”

They’re wrong, of course. A higher risk guarantees only one thing: higher risk. (You might get higher returns from taking higher risks, but it’s far from guaranteed. Just ask anyone who’s ever bought a lottery ticket.)

If high risk can’t be relied on to produce higher returns, what can be? Well, 36 percent of the respondents in TIAA’s survey said the answer is found in how an investment performed last year.

Unfortunately, that doesn’t work either. Investments that perform best in a given year almost never perform as well in the following year. (If they did, the same investment would be best year after year. There would be only one investment, and every investor on the planet would own it.) This is why developing a sound investment strategy is such a highly complex undertaking. It’s also why so many consumers turn to professional financial planners like us to help them.

And yet nearly 30 percent of those surveyed who said they want to do a better job of managing their money didn’t include financial planning in their strategy. They said they “don’t make enough money to worry about it,” according to Allianz, which sponsored the survey.

Their view is wrong, of course: The less money you have, the more important it is to manage it effectively! (We can agree that Bill Gates can squander some of his money foolishly with no adverse impact on himself or his family. But that’s not the case for someone earning $50,000 a year.)

Fortunately, many respondents said they were open to getting help with their financial decisions. Good financial advice that’s in your best interests isn’t free, of course, but the cost should be compared to the long-term benefits the advice can provide.

AM946371

Q&A: How Do You Rebalance Your Portfolio?

Learn about a powerful way to take advantage of market fluctuations.

Ric Edelman is a co-founder of Edelman Financial Engines. The following is taken from his weekly radio call-in show.

Question: My wife and I follow your advice to own a well-diversified portfolio that fits our particular situation. You always say that investors should buy low and sell high and view stock market declines as good buying opportunities. But what money do we use to buy low? We don’t have extra money lying around to invest. Do we sell some of our investments in order to buy others, or what?

Ric: That’s a great question. You quoted me accurately: Buying low and selling high is a truism, and it’s good to take advantage of dips in the market to buy. But what if you don’t have any money to do that?

Well, here’s another truism that’s even more important: The best time to invest is when you have the money. If you don’t have any money, it’s a bad time to invest.

You seem to be saying that you don’t have any money because all of your money is already invested. You don’t have any cash in your pocket, a coin jar filled with quarters or $200,000 in excess cash reserves sitting in a checking account. You wish you did because prices are low, but unfortunately you don’t.

So here’s what you do: It’s called rebalancing. Rebalancing takes advantage of the buy-low/sell-high principle. During the dramatic drop in stock prices last August, many people — including the media — overlooked the fact that while the stock market was falling, the bond market was rising. Rebalancing takes advantage of situations like that. When bonds are up, you sell some and buy some stocks that are down. In that way you sell high (the bonds) to buy low (the stocks). And you would do the same regarding other asset classes. When you rebalance, you sell some of the overperformers and buy some of the underperformers.

You can engage in rebalancing on your own or hire a financial advisor who engages in strategic rebalancing to help you. Rebalancing can be done on a calendar basis (at certain times of the year — say, quarterly) or it can be done on a percentage basis.

The latter is how we do it: When certain assets in the portfolio drift beyond the allocated percentage originally set for them, we rebalance to bring them back to their desired allocation. We review our clients’ portfolios and rebalance as needed. Whether you choose to rebalance by calendar (which is less efficient) or by percentage as we do, make sure it gets done.

Investing strategies, such as asset allocation, diversification, or rebalancing, do not assure or guarantee better performance and cannot eliminate the risk of investment losses. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies. Funds and ETFs are subject to risk, including loss of principal. All investments have inherent risks. There can be no assurance that the investment strategy proposed will obtain its goal. Past performance does not guarantee future results.
AM946371

Q&A: How Do ETF and Mutual Fund Share Prices Work?

The way these instruments are priced is totally different from stocks.

Ric Edelman is a co-founder of Edelman Financial Engines. The following is taken from his weekly radio call-in show.

Question: I don’t know if this is true all of the time, but it seems that when I compare the share price of an ETF to the share price of a mutual fund of the same class — say, a large-cap fund — the ETF price is usually higher. Is that because of the underlying stocks that it owns?

Ric: No. Share prices for mutual funds and ETFs are actually irrelevant. For example, when a fund company brings a new fund to the marketplace, it literally invents the share price. It can be any number: $10 a share, $100 a share, $1,000 a share — that price is utterly irrelevant because all you’re doing is creating a basis, a starting point at which the trades will occur thereafter.

The company’s decision is strictly marketing: Would investors prefer to buy shares that are $10 each or $100 each? There is no difference, because buyers of $10 shares simply get 10 times as many shares as buyers of $100 shares. Don’t let the share price sway you when buying a mutual fund or ETF.

Note: This is different from stocks. Many so-called penny stocks (actually referencing any stock priced under $5) or “pink sheet” stocks (so-called because they don’t trade on any exchanges and traditionally had their prices listed on a document printed on pink paper) are highly speculative and sometimes even scams.

Aggressive brokers pitch penny stocks by claiming that your $10,000 investment can get you 200,000 shares of a stock priced at a nickel. If the price moves just a penny, your profit is $2,000! Or so the pitch goes.
In fact, the stock is unlikely to rise a penny anytime soon, if at all — because that’s a full 20% increase. Stay away from penny stocks.

AM946371