Market Summary: August 2019

Stocks close a volatile month down.

What happened.

August was a volatile month in stock markets around the world.  Large-cap stocks, measured by the S&P 500 Index, moved by over +/- 1 percent on 11 of the 22 trading days.  By the end of the month, all the major classes of stocks had fallen.  At home, large caps were down by 1.58 percent and small caps by 4.51 percent (S&P 500 and 600 indices).  International stocks were also down: developed-market stocks fell by 2.59 percent and emerging-market stocks by 4.88 percent (MSCI EAFE and Emerging Markets indices).  Interest rates were also down for the month, boosting bond prices, which rise when interest rates fall.  The Bloomberg Barclays Aggregate Index rose by 2.59 percent.

Why it happened.

One word defined the month in the markets:  trade.  As threats of tariffs, and then signs of international cooperation, bounced back and forth between the US and China, stocks lurched up and down.  In this month’s sidebar, we look at the effects of tariffs on consumers and companies.  Stocks respond negatively to the prospect of tariffs because they may eventually harm companies’ earnings.  On days when the news reported that tariffs were more likely, stocks fell, and on days when negotiations seemed likely, they rose.

Other factors affected markets in August.  The prospect of a global economic slowdown unsettled stock markets.  But signals that central bankers around the world would respond by lowering interest rates to strengthen their economies helped markets.  These signals also led interest rates to decline to unusually low levels:  the US Treasury 30-year yield (the rate the US government must pay to borrow for 30 years) fell to a record low.  Meanwhile, there was some solid data on the US economy, with unemployment at record lows and continued strength in consumer spending providing support for the overall economy.

What this means for you.

At Financial Engines, we build a portfolio tailored to your situation and preferences.  Your portfolio will probably have seen a negative return in August.  The higher the risk of the portfolio—which means a higher share of your portfolio invested in stocks—the more negative the return will have been.  With a lower-risk portfolio, you will have been less affected by the fall in stocks and will have benefited more from the rise in bonds.  It’s always good to use months such as August to make sure you’re comfortable with the amount of risk you’re taking in order to achieve your retirement goals.  What will happen in markets is unpredictable, but you can choose how much risk you are willing to take with your portfolio.  Log into your account or speak to your advisor to reassess how much risk you’re taking and make any necessary adjustments.

©2019 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. Past performance does not guarantee future results.
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There’s No Good Excuse for Neglecting This Financial Step

You don’t have to do it by yourself — just make sure it gets done.

Excuses, excuses. We all have them from time to time when we fail to do something we know we should do. Some excuses are legitimate, but most don’t stand up to scrutiny.

That’s especially true when it comes to one of the most important components of sound financial planning: acquiring enough life insurance to make sure your loved ones are protected if you die sooner than you expect.

You probably enjoy talking about investing, seeing your money grow, buying homes and cars, sending children to college, having enough to retire comfortably — but all of that is built on one basic assumption: that you will be alive to do and enjoy these things.

But what if you’re not? Will your spouse, partner or children be able to experience all that you hope for them? Making sure they can is what life insurance is all about.

Yet ownership of life insurance is at a 50-year low, according to the Life Insurance Marketing Association, which says that one in every four U.S. households has no life insurance, including 11 million households with children under age 18. And in 40% of households with children under age 18, the mother is the sole or primary wage earner. Women who own some life insurance have only 69% of the average coverage on men. Equally worrisome is the fact that the average amount of coverage for U.S. adults has dropped to $167,000, down from $300,000 a decade ago.

Lack of awareness isn’t the problem. According to the Life and Health Insurance Foundation for Education, 93% of Americans believe it’s important for people to own life insurance, and nearly 50% admit they need more coverage! That’s like saying, “I know I need it, but I’m not going to do anything about it!”

There are three reasons (excuses) people cite when explaining why they haven’t gotten the coverage they know they need, says LIMRA. Do any of these apply to you?

1. “It’s too expensive.”
2. “I just haven’t gotten around to it.” (procrastination)
3. “I don’t know enough about it to buy it.”

Are any of these excuses valid? Let’s see:

If you believe life insurance is too expensive, I ask you: compared to what? A big-screen television? Well, life insurance is a necessity, not a luxury. And it’s never been more affordable. Prices are at least 50% less than they were a decade ago. A 40-year-old, nonsmoking male in good health can buy a $1 million, 20-year, level-term policy for $73 per month. A healthy, nonsmoking female of the same age would pay even less.

If you have been procrastinating, consider this for your tombstone: “Here lies ________. His family is destitute because he was lazy.”

And if you think you don’t know enough about life insurance, well, that’s what independent financial advisors are for. You only need to know that you want the coverage for your family. They’ll help you do the rest — including figuring out how you’ll pay for it, if you’re not sure you can afford it. (See excuse #1.)

You need to protect your spouse, partner and children. September is Life Insurance Awareness Month — a good time to talk to a financial planner about your need for life insurance and how to get the coverage you need at the right price.

Originally published in Inside Personal Finance September 2015
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Should You Lend Money to a Family Member?

Don’t unless you are ready to sue

Like most people, you’d do just about anything for a family member. But what if a family member wanted to borrow money? Should you do it?

No — unless you are prepared to sue that family member.

Lending money to a family member is one of the quickest and surest ways to damage your relationship with that person. If the person can’t or won’t repay the loan, you’ll begin to resent him. If the person is a member of your side of the family, your spouse may begin to resent you. If you start to pressure the person for the money, he will avoid you. Other family members can become unwittingly caught in the middle, and before you know it, family gatherings become rife with tension.

And if the emotional implications aren’t enough, consider this: The only reason the person is asking you for money is because he couldn’t obtain a loan from a traditional source, such as a bank or credit card company. If these organizations don’t consider him worthy of getting a loan, why should you?

Get It in Writing

If you are still not deterred, then at least make sure you lend the money the proper way. This means you must handle the transaction as you would with a stranger. You must draft a loan agreement that will be signed by both parties. If the borrower is offended, or claims that your desire to put it in writing demonstrates that you don’t trust him, do not lend him the money. Any honest and reasonable borrower would be happy to sign a loan agreement. If they plan to pay you back, they will be happy to say so in writing. By the same token, anyone who is insulted over a request to commit to the transaction in writing never intends to pay you back at all.

In the agreement, state:

  1. The amount of money that is being lent. State this in numbers and letters, to avoid claims of miscommunication. Don’t just write $5,000. Print “five thousand dollars and no cents” on the document as well.
  2. The date the money is to be lent and returned. Be specific. “Sometime next year” or “after college graduation” doesn’t work. What if he never graduates?
  3. The interest rate you are charging for the loan. Yes, you must charge interest on the loan. Family members are allowed to charge rates below current market rates, but the IRS requires you to charge some rate of interest — and it must be reasonable. If you lend the money at no interest, the agency will consider the loan to be a gift — making you (the lender) liable for gift taxes.
  4. This gets even trickier if you lend a family member money to buy a house. Take John, for instance. He lent his son, Tim, money to buy a house, but he failed to charge interest. The IRS made John pay income taxes on the interest he didn’t get from Tim (but which he should have gotten), and because he should have paid interest, Tim was granted a tax deduction on the mortgage interest he never actually paid! To the IRS, it didn’t matter that Tim borrowed the money interest-free; he should have been paying interest, so he got the break anyway. Go figure.
  5. The payment schedule that the borrower must follow. State whether you will require periodic payments or a balloon payment, or some combination. Some examples:
    • Monthly payment of principal and interest. This is called an amortized loan, and works like your auto loan or home mortgage. In the early months, most of the payment is interest, with the bulk of the principal being repaid in the final months. Defaulting during the term of the loan means the borrower still owes most of the money he borrowed.
    • No monthly payments. The full loan and all interest are to be repaid at the maturity date. This is good when borrowers have little money or income now, but it’s a higher risk for the lender, since it requires the borrower to come up with a substantial amount of money at a later time.
    • Monthly payments of interest only. Known as a “balloon” loan, this is a hybrid of the above two. The monthly payments are smaller than the first example, but the final payment is smaller than the second example.
    • Or some other combination of the above. Just make sure it’s clearly spelled out in the document.
  6. Penalties for not meeting the above terms. You must state what the penalties are for missed payments and bounced checks. State the grace period, and then make sure you assess the penalty. Failure to abide by the rules of the agreement could cause the IRS to conclude that it is not a true loan agreement.

If the borrower doesn’t pay you back, you are entitled to take a tax deduction as a “bad debt” on your tax return. But in order to win this deduction, the IRS wants to know that you’ve tried everything to get the money back — which may include taking the borrower to court. Are you prepared to sue a family member? If not, then you are not likely to be able to take this deduction.

Clearly, lending money to family members can be treacherous. If you are willing to do it when approached by a family member, the first thing to say is, “If we are to proceed, this must be handled as an arms-length transaction, as though I were a bank and you were the customer. I’m going to charge you interest and demand timely repayment — and everything will be in writing. Are you willing to accept these terms?”

If the borrower is not, then let him go elsewhere for the loan.

This material was prepared for informational and/or educational purposes only. Neither Financial Engines Advisors L.L.C (also referred to as Edelman Financial Engines) nor its affiliates offer tax or legal advice. Be sure to consult with a qualified tax or legal professional regarding the best options for your particular circumstances.
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The Most Important Chart on Investing You’ll Ever See

Understanding the ups and downs of the stock market.

Here is a basic truth: stock prices rise and fall. Of course, literally speaking, this statement is true. But it’s misleading. That’s because the statement is incomplete; it’s not really accurate to say that stock prices ”rise and fall.”

Oh, sure, on any given day, prices might rise or fall. But over long periods, it’s more accurate to say that prices in the overall stock market rise a lot but fall a little, as shown in the image. This chart clearly shows that when  prices are rising, they rise a lot and for a long time. When prices fall, they fall a little and for a short period. This explains the real reason why the stock market is able to exist.

Think about it. If stock prices were to only rise and fall, there would never be growth in the economy. It would force investors to decide when to buy and when to sell.

Imagine playing with a yo-yo. It goes down, then it comes up. Down, up. Down, up. If that yo-yo were a stock’s price, the trick would be to catch it and release it at the right time. But as the chart shows, investing in the stock market is like playing with a yo-yo while climbing a hill. Even though the yo-yo is still going down, up, down, up, the height of the yo-yo is constantly climbing, thanks to the hill’s incline.

Here’s another way to put it: The market doesn’t simply go up one point and then down one point. Rather, it goes up two points, then down one point. Then it goes up four, down one, up three and down one. Sure, sometimes the down is larger than the previous up, but over long periods, the stock market has always produced net profits. That’s why it’s wrong to be upset when stock prices fall. Instead of lamenting the current decline, focus on what is about to happen next. This point is particularly important following 2008’s terrible performance.

But if you had the opportunity to invest at the moment of your choosing, where on the chart would you choose? And where are we on that chart right now? When you notice that stock prices are declining, don’t be upset. Instead become excited about what lies ahead.

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. Originally published in Rescue Your Money
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Should You Buy Travel Insurance?

Yes, but not your parents’ travel insurance.

Remember when airports featured kiosks that let you buy flight insurance? You could buy $50,000 in coverage for a buck or two. The policies were cheap because it was unlikely that the plane would crash. Today, air travel is so safe you don’t see those kiosks at all.

Getting to that island isn’t worth insuring, but the vacation itself still might be. You buy airline tickets and pay for cruises or hotels months before the trip occurs. What happens if you are ill on the day of departure or if there’s a hurricane or a death in the family that precludes your ability to take the trip?

Travel insurance can help protect you. Policies reimburse you for money spent on nonrefundable airline tickets or hotel rooms, protect you from tour operator bankruptcy and arrange for medical services or evacuation if you suffer a medical emergency while traveling. They can even help if you lose your wallet or passport or incur legal problems abroad.

Policies are available through travel agents, online travel sites and travel insurance carriers. Insurance for a $3,500 trip can be as low as $120.

As with all insurance policies, use a licensed carrier. Study what is covered and how reimbursement is determined. And see if you already have coverage through your credit card or insurance company.

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Q&A: How Much to Put in 529 Plan?

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

Surprise, you can actually save too much in a 529 Plan.

Question: I find it confusing to figure out how much money to sock away in a 529 plan for our children’s college. It seems you have to make judgments based on many factors that are unknown or difficult to estimate — such as the future cost of tuition, the rate of return on the money and so forth. I’m wondering if you have a suggested ballpark figure for how much we need to save to send our kids to a good college 15 years from now.

Ric: We generally advise our clients to save no more than $50,000 to $60,000 in a 529 plan for children as young as yours. It may not fully fund college, but that’s by design: You do not want to overfund the accounts. (A lot of parents, of course, struggle with getting the 50 grand. That’s a separate conversation!)

If you accumulate too much money in the account, the child might not spend it all. If that occurs, withdrawals become subject to taxes and a 10% penalty. So you want to have only enough in the account to be able to withdraw funds tax-free to use for qualifying college expenses.

Another concern: We have seen people put so much money into college savings plans that they put their own retirement at risk. We want to make sure you are saving sufficiently for your retirement before you save for your children’s college.

Talk to a financial advisor to help evaluate whether you are on track with your retirement savings. Then you can examine what you should be doing for college.

This material was prepared for informational and/or educational purposes only. Neither Financial Engines Advisors L.L.C (also referred to as Edelman Financial Engines) nor its affiliates offer tax or legal advice. Be sure to consult with a qualified tax or legal professional regarding the best options for your particular circumstances.
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Q&A: Are Investments in Gold and Silver Certain to Rise in Value?

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

Question: We are constantly bombarded with radio and TV commercials from companies touting investments in silver and gold, which they claim are certain to go up in value. If that’s true, why wouldn’t they hoard the stuff for themselves?

Ric: This is precisely why those promoters are, in my opinion, nothing more than scam artists. The reason they promote gold and silver instead of real estate, insurance or securities is that they can do so without any licenses. The First Amendment lets them say whatever they want, outside the jurisdiction of SEC, FINRA, and state securities and insurance regulators.

Common sense ought to be enough to enable consumers to steer away from these pitches (as it has for you). Unfortunately, it seems that many lack common sense.

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Q&A: Fully Funded 529 Plan But Kids Aren’t Going to College

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

3 alternative ways to use the funds in your 529 plan.

Question: When I received my two 529 account statements at the end of the last calendar year, I was stunned at how much they had grown — and then I realized I have a problem. My son has decided he wants to be a plumber, and my daughter has decided she really doesn’t want to go to college. I have about $160,000 sitting in the two 529 accounts. What should I do?

Ric: Your situation illustrates why we get concerned about people overfunding 529 plans. Who knew when your children were 5 years old that they would grow up not wanting to attend college? Or they might win a scholarship and not need the money? Now you find yourself having to pay taxes plus a 10% penalty when you make withdrawals.

I have three possible solutions for you:
First, you could transfer these accounts to benefit your nieces or nephews. You might strike a deal with your brothers and sisters: You’ll retitle your two 529 accounts (with $80,000 in each of them), and they will give you $80,000 over the next few years in exchange (to avoid gift taxes).

A second option is for you to go back to college — not necessarily for a degree, but for something like an archaeological expedition to Egypt. Many universities offer trips with an educational component, and you can use 529 accounts tax-free to fund some of them. You could even transfer the accounts to your parents if they are able and would like to go on such an expedition. You’ll need to change the beneficiary designations before making any withdrawals.

A third option would be to leave the money where it is, wait until you have grandchildren and then retitle the beneficiary designations into their names. There’s no expiration date on when the funds have to be used, so this can give you two more decades or so of potential growth.

Of course, by then college might be entirely free, thanks to exponential technologies affecting the delivery of higher education — but that’s a conversation for another day!

This material was prepared for informational and/or educational purposes only. Neither Financial Engines Advisors L.L.C (also referred to as Edelman Financial Engines) nor its affiliates offer tax or legal advice. Be sure to consult with a qualified tax or legal professional regarding the best options for your particular circumstances.
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Q&A: Advice for a 20-Something

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

It’s never too early to prepare for retirement.

Question: My 26-year-old nephew lives with his parents and is working at his first serious job since graduating from college. He grosses about $50,000 a year and has $15,000 in the bank. He pays about $2,500 a year in interest on student loan debt of about $82,000. His loans are made up of components with interest rates that vary from 3.25% to 8%. I pointed out to him that if he makes a traditional IRA contribution he will increase his tax refund by about $1,100. Or he could contribute the maximum to a Roth IRA and let it grow 40 or 50 years tax-free. The third option would be to apply that money toward the student debt. His parents and I would like your opinion on which is his best option.

Ric: None of the ideas you mention is a bad one.
I would recommend that he contribute to a Deductible IRA. I question whether the Roth IRA will be tax-free by the time he’s in his 70s. That’s 50 years from now — 25 Congresses and maybe six presidents into the future.

Can we really predict how they will treat the Roth IRA? You don’t have to worry or wonder with the Deductible IRA, because he gets the tax break this year (instead of merely the promise of getting a break some 50 years from now).

However, even after making that contribution, he still has extra money. So I would use it to pay down the 8% college debt. He should not be in a hurry to pay down the portion of the debt that’s costing him only 3.25%. (That rate is so low he can likely earn more through a diversified portfolio over the next few decades.)

If he is not permitted to apply his payments only to the higher interest portion of the debt but is instead required to apply the extra payments across all the loans, then I wouldn’t prepay at all. Instead, he should place all his savings into a diversified investment portfolio.

This material was prepared for informational and/or educational purposes only. Neither Financial Engines Advisors L.L.C (also referred to as Edelman Financial Engines) nor its affiliates offer tax or legal advice. Be sure to consult with a qualified tax or legal professional regarding the best options for your particular circumstances.
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Q&A: A Look at Market Behavior

Should you worry when “experts” say a crash is coming?

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

Question: Some “experts” are predicting a bigger-than-ever market crash in the near future. I’m retired and probably wouldn’t have time to recover from that. Is someone in your firm watching carefully the IRAs of persons like me who can’t afford a large reduction in funds to live on?

Ric: There are always “experts” predicting a market crash. They are usually hawking a book, seminar or newsletter — or worse, some crazy investment scheme.

That said, of course there will be another market crash! They occur from time to time. Big ones are called depressions, panics and crashes; smaller ones are called corrections and bear markets. Regardless, it’s not important that prices will drop. What’s important is what happens after. And this is where those pundits always get it wrong: they ignore the “after.”

Market declines are not in the shape of the letter L — that is, prices don’t stay down forever. Instead, markets look more like a U or V — and that’s what’s important. Over time, it all looks like a W tilted upward to the right.

Yes, you can expect that prices will fall at some point — and you can expect that prices will rise thereafter. As an investor, you need to do only three things: diversify, so some of your money doesn’t fall in value when the markets decline; rebalance, so you can buy while prices are down; and maintain a long-term focus, so you are able to participate in the eventual recovery (with the understanding that past performance isn’t indicative of future results).

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.
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