November 2018 Market Letter

Not so Happy Halloween… all tricks, no treats…

As I wrote a couple weeks ago, we’re in the midst of a long-awaited correction in the stock market. October will doubtless end up being the worst month since the tumultuous financial crisis of 2008. All major averages swooned badly, and many portfolios experienced double digit losses. Markets always go down much more quickly than they go up, and the swiftness of October’s deepening trough has been a bit alarming. Volatility has increased, but not to overly dramatic levels. We may need to see more pain before calmer waters appear.

I don’t want to sound like the proverbial broken record, but corrections are perfectly normal. Repricing simply occurs from time to time on Wall Street. Unfortunately, selling tends to beget more selling due to electronic algorithm trading programs and margin calls. As long-term investors, we have to remain patient through these thankfully infrequent cycles, scary though they may be. None of us will ever need 100% of our money at once, and we must not heed the rumbles of cognitive dissonance.

It’s difficult to pin this correction onto one specific reason. Frankly, there seem to be several:

  1. Nervousness about the Federal Reserve raising interest rates again in December
  2. Imposition of stiff tariffs, particularly between China and the United States
  3. Anxiety about the mid-term elections
  4. Poor performance in international markets
  5. Sizable run-ups in tech stocks
  6. Brexit and the potential slowing down of the Chinese economy
  7. Greater attention being paid to America’s rising deficit

We’ll know about election results next week, and that piece of uncertainty will be over. However, the others should still be on the table, and the election may spur new angst. The markets may feel a bit like 2008, but the overall divisiveness in our country resembles 1968. The concentric circles simply repeat themselves.

However, as far as stocks are concerned, I see little resemblance to the debacle of 2008. Ten years ago, banks were closing and the housing market was in a massive bubble. Corporate balance sheets were bloated with debt, and the entire world financial system was on the abyss of massive disaster. In 2018, banks, at least in the US, have never been stronger. Balance sheets are flush with cash. Earnings continue to be solid in most sectors, though very company specific. Consumers are spending money. Yes, we’ve been in a tailspin for the last three weeks, but there doesn’t seem to be significant structural damage to the economy.

Market repricing is honestly where we are right now. The price/earnings ratio, or P/E, went from a slightly elevated 16.5 at the beginning of the month to a sub-normal 14.9 this past Friday. Logically, that should begin to signal a buying opportunity at some point, and many metrics are quite oversold. We’ve had a “dead cat bounce” or two, but not the kind of capitulation that we need for this correction to be over. Patience and antacids will be necessary for a while.

I have no idea when this phase will conclude, and neither does anyone else. Pundits have theories, but I’ve lived long enough to know that markets tend to act on their own. As the famous philosopher once said, “It will be over when it’s over.” In the meantime, it’s critical that we keep our wits about us. Now is a great time to discuss your scenario with us. RC, Kelley, and I are here to do everything from speaking logically to you about this correction to holding your hand if necessary. Making sure that your long-term plan is intact is always our first order of business.

Unexpected stock downturns just happen. They’re as much a part of the process as market upside. Our job is to calmly guide you through the storm. Please feel free to call or e-mail with any questions or thoughts that you have. It certainly doesn’t feel good out there right now, but this too shall pass. If I knew exactly when, I’d be working the state fair circuit guessing weights and ages.

Thanks as always for your continued trust and support. I look forward to hearing from you soon.

Sincerely,

Bill Schiffman

Registered Representative

 

The opinions expressed in this letter are those of William Schiffman and should not be construed as specific investment advice. All information is believed to be from reliable sources; however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results.  Diversification cannot assure a profit or guarantee against a loss. Indices are unmanaged and do not incur fees, one cannot directly invest in an index.

 

 

Mr. and Mrs. Unlucky – Understanding Sequence of Return Risk

Since March 9th of 2009, the U.S. stock market has taken off. Some have labeled this the longest bull market in history although FINRA technically gives that title to the 12 ½ years from October 1987 – March 2000. Many investors have reaped the benefits from strong equity markets over the last 9 years, but know the economy and markets are cyclical. What if the next decade isn’t as friendly to our bottom line? This question is especially relevant to retirees starting to withdraw from their investments to generate income. Understanding the impacts “sequence of return risk” can have on the life of one’s assets can be imperative to the success of a financial plan.

“Sequence of return” risk is the threat of adverse return orders, particularly in the early years of retirement. The attached table shows it is possible for two couples to have the same average return with very different results.

 

Both the Lucky’s and Unlucky’s have beginning retirement balances of $500,000, a $50,000/yr spending need inflated annually at 3% and an overall average return of 5%. The only difference is the order the returns occur is the exact opposite. In this scenario, the Unlucky’s portfolio would be spent down to zero in only 9 years, while the Lucky’s would still have $186,714 remaining.

There are a variety of ways to hedge against “sequence of return” risk. Crafting portfolios with a more conservative asset allocation is arguably the most popular tactic. Let’s face it, there’s a reason most financial advisors don’t have their retired clients in 100% equity portfolios. It’s too risky. More balanced portfolio’s containing a 50/50 or 40/60 split of stocks to bonds can help smooth the ride in volatile markets. You may not reap the highest highs, but you’ll likely avoid the lowest lows.

Monte Carlo analysis also addresses sequence of returns. Monte Carlo’s often run 1,000 or more simulations, accounting for good markets, bad markets and everything in between to calculate a plan success rate based on the clients’ goals. This type of statistical analysis is widely accepted by academics and has proven much more reliable than the straight-line method.

Speaking of academics, William Bengen’s “rule of 4%” states that one can initially withdraw 4% of their assets – adjusting annually for inflation in subsequent years – and expect to not run out of money in a 30-year period. Fortunately, this rule is more of a guideline, as many retirees require higher withdrawal rates to meet their specific goals. Nonetheless, the “rule” can provide valuable perspective when deciding on retirement lifestyle expense.

Given the choice, we’d all prefer to be Mr. and Mrs. Lucky. The problem is, we can’t choose – or even predict – what the markets are going to do or when. What we can choose is to actively engage ourselves in the financial planning process and meet regularly to discuss life changes and market changes as they occur.

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification cannot assure a profit or guarantee against a loss. Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through Valmark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through Valmark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from Valmark Securities, Inc. and Valmark Advisers, Inc.

Mid-October Market Letter

This rare mid-month missive will be brief and hopefully to the point. We’re in the midst of a mini-correction that I’ve been predicting would happen for quite some time. The stock market had a brutal week, shedding all gains for 2018. Volume was exceptionally heavy, but orderly. The major averages are now between 6 and 8% lower than their all-time highs from late September. Markets always go down far more quickly than they rise, and this decline is no exception.

Corrections, no matter how steep or swift, are never pleasant. However, they happen occasionally and are cleansing overall for the market. I cannot tell you with any clarity how long this one will last or how much deeper it might be. I do, however, feel that there is absolutely no need to panic. The stock market may indeed be in a later portion of the nine year bull market cycle, but positive markets traditionally do not end when corporate earnings are strong. Some of the metrics are changing – higher interest rates and fuel costs, fallout from tariffs, angst over the mid-term elections. As I’ve mentioned countless times in the past, Wall Street hates uncertainty. The VIX, or Volatility Index, is embodying this nervousness as we speak. But, as the famous philosopher once said, this too shall pass.

Where should we go as investors? I’m staying put with my portfolio because I’m refusing to listen to cognitive dissonance. If the trough extends, I’ll think about putting more money to work. That being said, we’re all different, and so we as a team want to be attentive to your needs.

Market corrections are a great time for portfolio review and investment goal focus. Please let us know if you’d like to chat. As a long-time advisor, I like to think about the positives that can stem from a downturn. One important item is that we may be able to productively harvest stock losses in non-retirement portfolios. This will allow us to offset gains from earlier in 2018, and perhaps create a multi-year deferred tax asset. We had little or no opportunity to cull last year. If the markets won’t give us performance per se, we can at least enhance your tax scenario. Secondly, there are some new products that can give equities exposure with protection against negativity. We can talk about them with you if you like.

The bottom line is to breathe. It’s not comfortable out there, but it’s normal and to be expected. All of us have survived much larger corrections before by staying patient. Hang in there… try not to pay too much attention to Chicken Little. Kelley, RC, and I look forward to hearing from you.

Sincerely,

Bill Schiffman

Registered Representative

 

The opinions expressed in this letter are those of William Schiffman and should not be construed as specific investment advice. All information is believed to be from reliable sources; however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results.  Diversification cannot assure a profit or guarantee against a loss. Indices are unmanaged and do not incur fees, one cannot directly invest in an index.

 

Mid-October Market Letter

This rare mid-month missive will be brief and hopefully to the point. We’re in the midst of a mini-correction that I’ve been predicting would happen for quite some time. The stock market had a brutal week, shedding all gains for 2018. Volume was exceptionally heavy, but orderly. The major averages are now between 6 and 8% lower than their all-time highs from late September. Markets always go down far more quickly than they rise, and this decline is no exception.

Corrections, no matter how steep or swift, are never pleasant. However, they happen occasionally and are cleansing overall for the market. I cannot tell you with any clarity how long this one will last or how much deeper it might be. I do, however, feel that there is absolutely no need to panic. The stock market may indeed be in a later portion of the nine year bull market cycle, but positive markets traditionally do not end when corporate earnings are strong. Some of the metrics are changing – higher interest rates and fuel costs, fallout from tariffs, angst over the mid-term elections. As I’ve mentioned countless times in the past, Wall Street hates uncertainty. The VIX, or Volatility Index, is embodying this nervousness as we speak. But, as the famous philosopher once said, this too shall pass.

Where should we go as investors? I’m staying put with my portfolio because I’m refusing to listen to cognitive dissonance. If the trough extends, I’ll think about putting more money to work. That being said, we’re all different, and so we as a team want to be attentive to your needs.

Market corrections are a great time for portfolio review and investment goal focus. Please let us know if you’d like to chat. As a long-time advisor, I like to think about the positives that can stem from a downturn. One important item is that we may be able to productively harvest stock losses in non-retirement portfolios. This will allow us to offset gains from earlier in 2018, and perhaps create a multi-year deferred tax asset. We had little or no opportunity to cull last year. If the markets won’t give us performance per se, we can at least enhance your tax scenario. Secondly, there are some new products that can give equities exposure with protection against negativity. We can talk about them with you if you like.

The bottom line is to breathe. It’s not comfortable out there, but it’s normal and to be expected. All of us have survived much larger corrections before by staying patient. Hang in there… try not to pay too much attention to Chicken Little. Kelley, RC, and I look forward to hearing from you.

Sincerely,

Bill Schiffman

Registered Representative

 

The opinions expressed in this letter are those of William Schiffman and should not be construed as specific investment advice. All information is believed to be from reliable sources; however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results.  Diversification cannot assure a profit or guarantee against a loss. Indices are unmanaged and do not incur fees, one cannot directly invest in an index.

October 2018 Market Letter

“Believe it or not, I’m walking on air… I never thought I could feel so free… Flying away on a wing and a prayer… Who could it be? Believe it or not, it’s just me…”

This is a stanza from the theme song of the 1980’s TV series, The Greatest American Hero. Joey Scarbury became a one-hit wonder with this tune, soon to be forgotten. More on Joey and others in a bit… let’s review what happened in September:

  1. Hurricane Florence caused record flooding in the Carolinas.
  2. The Federal Reserve raised interest rates another ¼ point, causing the 10 year Treasury to inch above 3%.
  3. The price of crude oil rose to its highest levels of 2018, making fuels more expensive.
  4. Political partisanship reached a new low during the televised hearing of would-be Supreme Court Justice Brett Kavanaugh.
  5. Tariff impositions by the US and many other countries escalated.
  6. Mid-term election advertising and rhetoric began to significantly ramp up.
  7. The Cleveland Browns won a football game for the first time since December 2016.

Despite all of these unusual (and mostly negative other than the Browns) occurrences, the stock market held its own last month. The Dow and S & P 500 had small gains, while the NASDAQ fell slightly. Since September is historically a poor month, it’s gratifying to see equities holding on to 2018 modest performance. Interestingly enough, I’ve heard more folks talking about a correction in the near term than at any time in the past couple years. However, markets historically climb the proverbial walls or worry during bull cycles, and that’s simply where we appear to be at the moment. The only bubble in equities that I see is in cannabis related issues. Other than that very small sector, the market has rewarded companies with strong earnings and guidance, and punished those with weaker outlooks.

October is the month where the most severe short-term corrections have been witnessed. Yes, we’re long overdue statistically for one, but that doesn’t mean that a trough is imminent. The American economy keeps perking along in the face of negative headwinds. Where things will shake out after the mid-terms is anyone’s guess, but Wall Street has turned the other cheek so far.

Lynne and I will get a chance to hear firsthand how folks in Eastern Europe feel about what’s happening here in the States. We’re leaving Thursday for eleven days in Hungary, Austria, and Germany. These countries are quite different other than geographic proximity. They have dissimilar leadership, economies, and ways of life. At the very least, it will be a pleasure to sail the Danube and miss all of those uplifting political television ads.

Even while overseas, I’ll be closely monitoring the markets. If you have any questions or concerns that can’t wait until I return mid-month, please call Kelley King or RC Arseneau. Our trio is working extremely well together, and Kelley and RC are more than capable advisors. The transition continues to be smooth, and we’re excited about the team concept.

Now, back to Joey’s song… most of us can think of a great American hero. Recently deceased Senator John McCain was one, and so are the women who have spearheaded the MeToo movement. Given his rather egotistical performance at the United Nations last week, President Trump undoubtedly thinks that he’s THE one. But the TV series hero was actually a mild-mannered teacher who had the ability to fly. He was a common man with an uncommon talent. That’s the stuff of heroes in my book.

Stocks have been great American heroes as well, and our portfolios are the better for it. Let’s hope they continue to fly.

As always thanks for your continued trust and support. I look forward to talking with you soon.

Sincerely,

Bill Schiffman

Registered Representative

 

The opinions expressed in this letter are those of William Schiffman and should not be construed as specific investment advice. All information is believed to be from reliable sources; however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results.  Diversification cannot assure a profit or guarantee against a loss. Indices are unmanaged and do not incur fees, one cannot directly invest in an index.

 

 

Filing the FAFSA for Divorced or Separated Parents

If you’re a dependent student filing the FAFSA, and your parents are separated and/or divorced, applying for financial aid is not difficult. However, there are a few steps you’ll need to take and additional paperwork you may need depending on several factors.

Contrary to what is sometimes assumed, parents “not living together” means that the two parents must have a separate legal address. This is true even when the separation is informal (meaning it isn’t “court approved”). In cases of informal separation where two parents still have one permanent address, parents would still have to file FAFSA as “married “or “remarried.”

If you’re a dependent student, the custodial parent is the one who needs to fill out the form. For FAFSA purposes, your custodial parent is the one you have lived with for the majority of the last year. Note that this is not over the last calendar year, but the last 12 months. In some cases, you may have lived with both parents equally. If this happens, the parent who provided the most financial support would be considered the custodial parent. *

Another question you may have is what to do if your custodial parent (the parent that you would report for your FAFSA) is remarried and you have a step-parent? In these cases, you would report your step-parent’s income as well. However, if a student’s custodial parent passed away, then you do not need to report the step-parent unless they legally adopted you after your custodial parent’s passing. *

So, what are non-custodial parents responsible for? According to the federal government, while child support received must be reported on the FAFSA form, the non-custodial parent is not required to help pay for a child’s schooling. Since the assets and income of non-custodial parents are not considered for calculating federal financial aid, you generally do not need to add any non-custodial parents nor non-custodial step-parents to your FAFSA. Some private schools so have additional requirements around this that may require coordination between divorced parents.

If your parents are legally separated or divorced, the date of your parents’ legal separation or divorce will be needed to complete your FAFSA. Some financial aid offices may also ask for additional documentation about the divorce. Make sure that child support is factored in as separate from alimony, which would be considered taxed income. **

Since the FAFSA uses tax returns from the previous year, recently divorced parents may have still filed taxes jointly that year. It’s always a good idea to coordinate with your school’s financial aid office to ask if you need to provide any additional information about your situation. Because the financial aid picture for separated or divorced parents has some additional steps and considerations, it’s important to start the conversation and begin the FAFSA process as early as possible.

 

*SavingforCollege.com

**FastWeb.com

Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through Valmark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through Valmark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from Valmark Securities, Inc. and Valmark Advisers, Inc.