, , ,

The Sequence of Returns

A look at how variable rates of return do (and do not) impact investors over time. 

What exactly is the “sequence of returns”? The phrase simply describes the yearly variation in an investment portfolio’s rate of return. Across 20 or 30 years of saving and investing for the future, what kind of impact do these deviations from the average return have on a portfolio’s final value?

The answer: no impact at all.

Once an investor retires, however, these ups and downs can have a major effect on portfolio value – and retirement income.

During the accumulation phase, the sequence of returns is ultimately inconsequential. Yearly returns may vary greatly or minimally; in the end, the variance from the mean hardly matters. (Think of “the end” as the moment the investor retires: the time when the emphasis on accumulating assets gives way to the need to withdraw assets.)

An analysis from BlackRock bears this out. The asset manager compares three model investing scenarios: three investors start portfolios with lump sums of $1 million, and each of the three portfolios averages a 7% annual return across 25 years. In two of these scenarios, annual returns vary from -7% to +22%. In the third scenario, the return is simply 7% every year. In all three scenarios, each investor accumulates $5,434,372 after 25 years – because the average annual return is 7% in each case.1

Here is another way to look at it. The average annual return of your portfolio is dynamic; it changes, year-to-year. You have no idea what the average annual return of your portfolio will be when “it is all said and done,” just like a baseball player has no idea what his lifetime batting average will be four seasons into a 13-year playing career. As you save and invest, the sequence of annual portfolio returns influences your average yearly return, but the deviations from the mean will not impact the portfolio’s final value. It will be what it will be.1

When you shift from asset accumulation to asset distribution, the story changes. You must try to protect your invested assets against sequence of returns risk.

This is the risk of your retirement coinciding with a bear market (or something close). Even if your portfolio performs well across the duration of your retirement, a bad year or two at the beginning could heighten concerns about outliving your money.

For a classic illustration of the damage done by sequence of returns risk, consider the awful 2007-2009 bear market. Picture a couple at the start of 2008 with a $1 million portfolio, held 60% in equities and 40% in fixed-income investments. They arrange to retire at the end of the year. This will prove a costly decision.

The bond market (in shorthand, the S&P U.S. Aggregate Bond Index) gains 5.7% in 2008, but the stock market (in shorthand, the S&P 500) dives 37.0%. As a result, their $1 million portfolio declines to $800,800 in just one year. Its composition also changes: by December 31, 2008, it is 53% fixed income, 47% equities.2

Now comes the real pinch. The couple wants to go by the “4% rule” (that is, the old maxim of withdrawing 4% of portfolio assets during the first year of retirement). Abiding by that rule, they can only withdraw $32,032 for 2009, as compared to the $40,000 they might have withdrawn a year earlier. This is 20% less income than they expected – a serious blow.2

Two other BlackRock model scenarios shed further light on sequence of returns risk, involving two hypothetical investors. Each investor retires with $1 million in portfolio assets at age 65, each makes annual withdrawals of $60,000, and each portfolio averages a 7% annual return over the next 25 years. In the first scenario, the annual portfolio returns for the first eight years of retirement are +22%, +15%, +12%, -4%, -7%, +22%, +15%, +12%. In the second, the returns from year 66-73 are -7%, -4%, +12%, +15%, +22%, -7%, -4%, +12%. (For simplicity’s sake, both investors see this 5-year cycle repeat through age 90: three big advances of either +12%, +15%, or +22%, then two yearly losses of either -4% or -7%.)1

At the end of 25 years, the investor in the first scenario – the one characterized by big gains out of the gate – has $1,099,831 at age 90, even with yearly $60,000 drawdowns gradually adjusted 3% for inflation. In that scenario, the portfolio losses are fortunately postponed – they come three years into retirement, and six of the first eight years of retirement see solid gains. In the second scenario, the investor sees four bad years out of eight from age 66-73 and starts out with single-digit portfolio losses at age 66 and 67. After 25 years, this investor has … nothing. At age 88, he or she runs out of money – or at least all the assets in this portfolio. That early poor performance appears to take a significant toll.1

Can you strategize to try and avoid the fate of the second investor? If you sense a market downturn coming on the eve of your retirement, you might be wise to shift portfolio assets away from equities and into income-generating investments with little or no correlation to the weather on Wall Street. If executed well, such a shift might even provide you with greater retirement income than you anticipate.2

If you are about to retire, do not dismiss this risk. If you are far from retirement, keep saving and investing knowing that the sequence of returns will have its greatest implications as you make your retirement transition.

Examples are hypothetical and are not representative of any specific situations. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – blackrock.com/pt/literature/investor-education/sequence-of-returns-one-pager-va-us.pdf [6/18]
2 – kiplinger.com/article/retirement/T047-C032-S014-is-your-retirement-income-in-peril-of-this-risk.html [7/3/18]

,

The Turkish Currency Crisis

A look at why it matters so much to the world, and the risk of a domino effect.

The collapse of the Turkish lira has become a major financial story. You may wonder why the financial media is devoting so much space to this, as Turkey is not exactly China or Japan or Germany. The fear is that Turkey’s problem hints at a greater crisis.1,2

Globally speaking, Turkey is not all that minor. Its economy is the world’s seventeenth largest, and while it is seen as an emerging market, it is also in the trade orbit of the European Union. Turkey does not yet belong to the E.U., but it trades heavily with E.U. countries: it ranks fifth among importers to the E.U. and represents the fourth-largest E.U. export market.1,2

Stubbornness. Nepotism. Incompetence. These are the words associated with Turkish monetary policy of late. After his reelection, Turkish President Recep Tayyip Erdogan called interest rates the “mother and father of all evil” and made his brother-in-law the nation’s finance minister. Stunningly, the nation’s central bank then announced it would not raise interest rates, bucking a global trend. (A rate hike finally happened in July.) The Turkish lira has lost 40% of its value versus the dollar this year, and it fell 18.5% in a day following President Trump’s August 10 vow to double U.S. tariffs on Turkish steel and aluminum imports.3,4

Turkey’s current monetary policy is ill-timed. The dollar is getting stronger and stronger versus other currencies, mainly because the Federal Reserve is raising interest rates and unwinding its $4.5 trillion portfolio of government securities in response to a healthier economy. The majority of Turkey’s debt is dollar-denominated – and like many developing nations, it uses local currency to pay off dollar-backed debts.3,4

What if Turkey’s currency implosion is just the tip of the iceberg? This is the major question bothering economists and institutional investors. Argentina owns a great deal of debt priced in dollars. Did you know that the International Monetary Fund gave Argentina a $50 billion bailout in June? Did you know that the benchmark interest rate in Argentina is currently 45%? Its peso dropped to a record low in early August. South Africa, Russia, and Mexico have also seen their currencies slip recently.3

In the worst-case scenario, something like the 1997-98 global currency crisis occurs. In July 1997, Thailand had to devalue its currency, the baht, to a record low. Over the next year-and-a-half, Malaysia, the Philippines, China, Hong Kong, Indonesia, and South Korea all faced financial emergencies; the Dow had its two worst trading sessions in history, with drops of 554 and 512 points; leading Japanese banks and brokerages collapsed; the IMF had to loan $23 billion to Russia, $57 billion to South Korea, and $40 billion to Indonesia; Russia’s stock market cratered; Japan went into a recession for the first time since 1975; and according to the IMF, world economic growth was reduced by about 50%.5

You can see why investors, economists, and journalists might be concerned about the currency crisis in Turkey. It is worth pointing out that the U.S. came through that 1997-98 global crisis relatively unscathed, though, as always, past performance is no guarantee of future results.5

Hopefully, what is happening in Turkey will not prove to be the first act of a drama for the global economy. If it is, fast action may be required by the IMF, the World Bank, and central banks to restore confidence in the markets.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – nasdaq.com/article/market-slides-on-turkeys-troubles1-cm1007145 [8/14/18]
2 – ec.europa.eu/trade/policy/countries-and-regions/countries/turkey/ [4/16/18]
3 – money.cnn.com/2018/08/14/investing/turkey-lira-emerging-market-crisis/index.html [8/14/18]
4 – marketwatch.com/story/3-reasons-why-the-selloff-in-turkeys-lira-matters-to-global-markets-2018-08-10 [8/10/18]
5 – pbs.org/wgbh/pages/frontline/shows/crash/etc/cron.html [11/17/15]

, ,

The Snowball Effect

Save and invest, year after year, to put the full power of compounding on your side.

Have you been saving for retirement for a decade or more? if so, something terrific may likely happen with your IRA or your workplace retirement plan account in the foreseeable future. At some point, its yearly earnings should begin to exceed your yearly contributions.

Just when could this happen? The timing depends on several factors, and the biggest factor may simply be consistency – your ability to keep steadily investing and saving. The potential for this phenomenon is apparent for savers who start early and savers who start late. Here are two mock scenarios.

Christina starts saving for retirement at age 23. After college, she takes a job paying $45,000 a year. Each month, she directs 10% of her salary ($375) into a workplace retirement plan account. The investments in that account earn 6% per year. Thirteen years later, Christina is still happily working at the same firm and still regularly putting 10% of her pay into the retirement plan each month. She now earns $58,200 a year, so her monthly 10% contribution has risen over the years from $375 to $485.1

The ratio of account contributions to account earnings has tilted during this time. After eight years of saving and investing, the ratio is about 2:1 – for every two dollars going into the account, a dollar is being earned by its investments. During year 13, the ratio hits 1:1 – the account starts to return more than $500 per month, with a big assist from compound interest. In years thereafter, the 6% return the investments realize each year tops her year’s worth of contributions to the principal. (Her monthly contributions have grown by more than 20% during these 13 years, and that also has had an influence.)1

Fast forward to 35 years later. Christina is now 58 and nearing retirement age, and she earns $86,400 annually, meaning her 10% monthly salary deferral has nearly doubled over the years from the initial $375 to $720. This has helped her build savings, but not as much as the compounding on her side. At 58, her account earns about $2,900 per month at a 6% rate of return – more than four times her monthly account contribution.1

Lori needs to start saving for retirement at age 49. Pragmatic, she begins putting $1,000 a month into a workplace retirement plan. Her account returns 7% a year. (For this example, we will assume Lori maintains her sizable monthly contribution rate for the duration of the account.) By age 54, thanks to compound interest, she has $73,839 in her account. After a decade of contributing $12,000 per year, she has $177,403. She manages to work until age 69, and after 20 years, the account holds $526,382.2

These examples omit some possible negatives – and some possible positives. They do not factor in a prolonged absence from the workforce or bad years for the market. Then again, the 6% and 7% consistent returns used above also disregard the chance of the market having great years.

Repeatedly, investors are cautioned that past performance is no guarantee or indicator of future success. This is true. It is also true that the yearly total return of the S&P 500 (that is, dividends included) averaged 10.2% from 1917-2017. Just stop and consider that 10.2% average total return in view of all the market cycles Wall Street went through in those 100 years.2

Keep in mind, when the yearly earnings of your IRA or employer-sponsored retirement plan account do start to exceed your yearly contributions, it is still prudent to continue making them. You should keep the momentum of your savings effort going to maintain your compounding potential.

These are a hypothetical examples and are not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – time.com/money/5204859/retirement-investments-savings-compounding/ [3/21/18]
2 – fool.com/investing/2018/05/16/how-to-invest-1000-a-month.aspx [5/16/18]

, , ,

Should You Leave Your IRA to a Child?

What you should know about naming a minor as an IRA beneficiary.

Can a child inherit an IRA? The answer is yes, though they cannot legally own the IRA and its invested assets. Until the child turns 18 (or 21, in some states), the inherited IRA is a custodial account, managed by an adult on behalf of the minor beneficiary.1,2

IRA owners who name minors as beneficiaries may have good intentions. Their goal may be to “stretch” a large Roth or traditional IRA. Distributions from the inherited IRA can be scheduled over the (long) expected lifetime of the young beneficiary.

Those good intentions may be disregarded, however. When minor IRA beneficiaries become legal adults, they have the right to do whatever they want with those IRA assets. If they want to drain the whole IRA to buy a Porsche or fund an ill-conceived start-up, they can.2

How can you have a say in what happens to the IRA assets? You could create a trust to serve as the IRA beneficiary, as an intermediate step before your heir takes possession of those assets as a young adult.

In other words, you name a trust as the beneficiary of your IRA, and your child or grandchild as a beneficiary of the trust. When you have that trust in place, you have more control over what happens with the inherited IRA assets.2

The trust can dictate the how, what, and when of the income distribution. Perhaps you specify that your heir gets $10,000 annually from the trust beginning at age 30. Or, maybe you include language that mandates that your heir take distributions over their life expectancy. You can even stipulate what the money should be spent on and how it should be spent.2

A trust is not for everyone. The IRA needs to be large to warrant creating one, as the process of trust creation can cost several thousand dollars. No current-year tax break comes your way from implementing a trust, either.2

In lieu of setting up a trust, you could simply name an IRA custodian. In this case, the term “custodian” refers not to a giant investment company, but a person you know and have faith in who you authorize to make investing and distribution decisions for the IRA. One such person could be named as the custodian; another, as a successor custodian.2

What if you designate a minor as the beneficiary of your IRA, but fail to put a custodian in place? If there is no named custodian, or if your named custodian is unable to serve in that role, then a trip to court is in order. A parent of the child, or another party who wants guardianship over the IRA assets, will have to go to court and ask to be appointed as the IRA custodian.2

You should also recognize that the Tax Cuts & Jobs Act reshaped the “kiddie tax.” This is the federal tax on a minor’s net unearned income. Required minimum distributions (RMDs) from inherited IRAs may be subject to this tax. A minor’s net unearned income is now taxed at the same rate as trust income rather than at the parents’ marginal tax rate.3,4

This is a big change. Income tax brackets for a trust or a child under age 19 are now set much lower than the brackets for single or joint filers or heads of household. A 10% rate applies for the first $2,550 of taxable income, but a 24% rate plus $255 of tax applies at $2,551; a 35% rate plus $1,839 of tax, at $9,151; a 37% rate plus $3,011.50 of tax, at $12,501 and up.3,5

While this may be a negative for middle-class families seeking to leave an IRA to a child, it may be a positive for wealthy families: the new kiddie tax rules may reduce the child’s tax liability when compared with the old rules.4

One last note: if you want to leave your IRA to a minor, check to see if the brokerage holding your IRA allows a child or a grandchild as an IRA beneficiary. Some brokerages do, while others do not.1   Due to the complex nature of a trust creation, you should seek the counsel of a legal professional.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.1 – investopedia.com/articles/retirement/09/minor-as-ira-beneficiary.asp [6/19/18]
2 – kiplinger.com/article/retirement/T021-C000-S004-pass-an-ira-to-young-grandkids-with-care.html [5/17]
3 – forbes.com/sites/ashleaebeling/2018/05/08/the-kiddie-tax-grows-up/ [5/8/18]
4 – tinyurl.com/y7bonwzx [5/31/18]
5 – forbes.com/sites/kellyphillipserb/2018/03/07/new-irs-announces-2018-tax-rates-standard-deductions-exemption-amounts-and-more/ [3/7/18]

, , , , , , , , , , , , , , , , ,

Menu of Services

CLICK HERE to check our Menu of Services

, ,

Congrats, Investors! You’re Behaving Less Badly than Usual

A fair argument can be made that investor behavior is among be the most important factors in the success of an investment strategy. Please enjoy the following article written by wsj.com

Congrats, Investors! You’re Behaving Less Badly than Usual

Investors tend to buy high and sell low. But new evidence suggests that may be changing… for now

By Jason Zweig

On the eternal treadmill of the financial markets, investors can’t even keep up with their own investments.

In what’s often called the behavior gap, investors underperform the investments they own, partly because they tend to buy high and sell low instead of vice versa.

New evidence suggests investors may be behaving better — but they aren’t turning into financial angels.

A study published this month by Morningstar, the investment-research firm, finds that the average mutual fund gained 5.79% annually over the 10 years ending March 31; the average investor, 5.53%. That gap of 0.26 percentage points is much narrower than in the past; over the 10 years through the end of 2013, investors lagged their investments by a horrific 2.5 percentage points annually.

What’s behind this puzzle?

Let’s imagine a fund that starts with $100 million in assets and earns a 100% return from Jan. 1 through Dec. 31. Assuming that no one added or subtracted any money along the way, $100 million at the start of the year turns into $200 million at the end.

Attracted by that spectacular 100% return, investors pour $1 billion into the fund overnight. It thus begins the New Year with $1.2 billion. This year, however, its investments fall in market value by 50%.

After gaining 100% in year one and losing 50% in year two, an investor who had bought at the beginning and held until the end without any purchases or sales would have exactly broken even. (Losing half your money after doubling it puts you back where you started.)

Such rigid buy-and-hold behavior doesn’t describe what the fund’s investors did, however. Only a fraction of them were present at the beginning to double their money, while all were around in year two to lose half their money. As a group, they gained $100 million in year one — but lost $600 million in year two.

Adjusted for the timing and amount of inflows, the typical investor lost an average of about 43% annually — in a fund that officially reported a 0% return over the same period. The investment broke even; its investors took a beating because of their own behavior.

In real life, the gap between investors and their investments is rarely that extreme. On average, trying to do better makes you do worse: It feels great to buy more when an investment has been going up, and it hurts to buy more when an asset has gone down. So you tend to raise your exposure to assets that have gotten more expensive (with lower future potential returns) and to cut it — or at least not to buy more — when they are cheaper (with higher future returns).

When you chase outperformance, you catch underperformance.

Why, then, does the new Morningstar report find that investors’ behavior seems to be improving?

The stock market itself, which has risen for most of the past decade with remarkable smoothness, deserves much of the credit.

“Extreme volatility triggers emotional responses that lead you to screw up,” says Russel Kinnel, author of the Morningstar report. With so few stabs of panic in recent years, staying invested has felt unusually easy.

Fran Kinniry, an investment strategist at Vanguard Group, says investors have increasingly favored index funds, which hold big baskets of stocks or bonds, as well as so-called target-date funds that bundle several types of assets into one portfolio. Both approaches blunt the jagged fluctuations investors would suffer in less-diversified funds that focus on narrower market segments.

More financial advisers are seeking to keep their clients’ portfolios aligned with target allocations to stocks, bonds and other assets, says Mr. Kinniry. That means they automatically sell some of whatever has recently risen in price, using the proceeds to buy some of whatever has dropped. That’s a mechanical counterweight to the natural human tendency to buy high and sell low.

When Mr. Kinnel is asked whether these changes mean that investors and their advisers won’t bail out at the bottom during the next crash, he sighs.

“No,” he says after a long pause. “Advisers and individual investors still have an inclination to chase performance, to fight the last war, to panic a bit. People are still people. They’re still going to be inclined to make the same mistakes.”

And so they are. Spooked by recent poor performance, investors are pulling out of international and emerging-market stock funds, even though those markets are significantly cheaper than the U.S. Through June 26, investors have yanked $12.4 billion out of global equity funds, according to Trim Tabs Investment Research, putting June on track for the biggest monthly outflow since October 2008.

The more investors change, the more they stay the same.

Write to Jason Zweig at intelligentinvestor@wsj.com, and follow him on Twitter at @jasonzweigwsj.

This article was prepared by a third party for information purposes only. It is not intended to provide specific advice or recommendations for any individual. It contains references to individuals or entitles that are not affiliated with Cornerstone Wealth Management, Inc. or LPL Financial.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Investing in mutual funds involves risk, including possible loss of principal.

Asset allocation and diversification do not ensure a profit or protect against a loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.

An investment in a target date fund is not guaranteed at any time, including on or after the target date, the approximate date when an investor in the fund would retire and leave the workforce. Target date funds gradually shift their emphasis from more aggressive investments to more conservative one based on the target date.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

, ,

Mid-Year Outlook

The recently released LPL Research Midyear Outlook 2018: The Plot Thickens is filled with investment insights and market guidance to take us through the rest of the year. So far this year, the return of the business cycle has brought the fiscal policy changes that were expected to propel economic activity and the financial markets higher in 2018.

Policy remains a key theme to watch. Tax cuts, a more business-friendly regulatory environment, and increased government spending should support consumer spending, business investment, and corporate profits—key drivers of LPL Research’s economic and stock forecasts. The biggest risk to investor confidence this year has been around trade, including new tariffs. When comparing the fiscal measures with the potential impact of increased tariffs, however, the benefits appear to outweigh the costs. With these factors in mind, policy changes should have a positive influence on the economy and markets.

Another theme that may garner more attention this year is that certain economic and market indicators may have peaked, and that we may have seen the best out of this expansion. However, the context is critically important here. Reaching these points with a strong economic backdrop is expected and indicates the potential for continued growth; in addition, historically, we’ve seen an average of four more years of stock gains after triggering these market signals. So, although we are in the later stages of the economic cycle, it does not appear that a recession is looming.

Against this backdrop, LPL Research maintains the forecasts that were set forth at the beginning of 2018, following the passage of the new tax law. Expectations are for 3% gross domestic product growth for the U.S. economy, with tax cuts, government spending, and deregulation measures providing support. As expected, accelerating economic growth and rising interest rates continue to pressure bonds; thus, flat to low-single-digit returns are projected for bonds (as measured by the Bloomberg Barclays U.S. Aggregate Bond Index). However, it’s prudent to note that high-quality bonds may provide diversification benefits for investors’ portfolios.

Strong earnings are expected to remain the key driver of stock gains, thanks to the benefits of the new tax law. Given that we are in the later stages of this economic cycle, with factors such as increased trade tensions and geopolitical uncertainty at play, greater market volatility may be ahead. But it’s important to remember that experiencing these ups and downs is a normal aspect of our market environment. Also, within the context of steady economic growth and strong corporate profits, there is the potential for stock gains of 10% or more (as measured by the S&P 500 Index).

Overall, economic and market growth is expected to continue in 2018 and beyond, and the LPL Research Midyear Outlook 2018 is here to provide insightful commentary to help you navigate the year ahead. If you have any questions, I encourage you to contact me.

Cornerstone MYO 2018 Executive Summary

Important Information

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

All performance referenced is historical and is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly. Economic forecasts set forth may not develop as predicted.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a nondiversified portfolio. Diversification does not ensure against market risk.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS, and CMBS (agency and non-agency).

Additional descriptions and disclosures are available in the Midyear Outlook 2018: The Plot Thickens publication.

This research material has been prepared by LPL Financial LLC.

, , ,

Midyear Outlook 2018

The recently released LPL Research Midyear Outlook 2018: The Plot Thickens is filled with investment insights and market guidance to take us through the rest of the year. So far this year, the return of the business cycle has brought the fiscal policy changes that were expected to propel economic activity and the financial markets higher in 2018.

Policy remains a key theme to watch. Tax cuts, a more business-friendly regulatory environment, and increased government spending should support consumer spending, business investment, and corporate profits—key drivers of LPL Research’s economic and stock forecasts. The biggest risk to investor confidence this year has been around trade, including new tariffs. When comparing the fiscal measures with the potential impact of increased tariffs, however, the benefits appear to outweigh the costs. With these factors in mind, policy changes should have a positive influence on the economy and markets.

Another theme that may garner more attention this year is that certain economic and market indicators may have peaked, and that we may have seen the best out of this expansion. However, the context is critically important here. Reaching these points with a strong economic backdrop is expected and indicates the potential for continued growth; in addition, historically, we’ve seen an average of four more years of stock gains after triggering these market signals. So, although we are in the later stages of the economic cycle, it does not appear that a recession is looming.

Against this backdrop, LPL Research maintains the forecasts that were set forth at the beginning of 2018, following the passage of the new tax law. Expectations are for 3% gross domestic product growth for the U.S. economy, with tax cuts, government spending, and deregulation measures providing support. As expected, accelerating economic growth and rising interest rates continue to pressure bonds; thus, flat to low-single-digit returns are projected for bonds (as measured by the Bloomberg Barclays U.S. Aggregate Bond Index). However, it’s prudent to note that high-quality bonds may provide diversification benefits for investors’ portfolios.

Strong earnings are expected to remain the key driver of stock gains, thanks to the benefits of the new tax law. Given that we are in the later stages of this economic cycle, with factors such as increased trade tensions and geopolitical uncertainty at play, greater market volatility may be ahead. But it’s important to remember that experiencing these ups and downs is a normal aspect of our market environment. Also, within the context of steady economic growth and strong corporate profits, there is the potential for stock gains of 10% or more (as measured by the S&P 500 Index).

Overall, economic and market growth is expected to continue in 2018 and beyond, and the LPL Research Midyear Outlook 2018 is here to provide insightful commentary to help you navigate the year ahead. If you have any questions, I encourage you to contact me.

Important Information

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

All performance referenced is historical and is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly. Economic forecasts set forth may not develop as predicted.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a nondiversified portfolio. Diversification does not ensure against market risk.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS, and CMBS (agency and non-agency).

Additional descriptions and disclosures are available in the Midyear Outlook 2018: The Plot Thickens publication.

This research material has been prepared by LPL Financial LLC.

, ,

The Stock-Market Price Can Be Wrong. Very Wrong.

Researchers have caught investors in the act of wildly—and unnecessarily–overpaying for a stock

If you could buy the same stock in two different ways, one of which cost up to nine times as much as the other, you would pick the cheaper way.

Wouldn’t you?

Perhaps you shouldn’t be too sure.

In a new study, finance researchers have caught investors in the act of wildly — and unnecessarily — overpaying for a stock. In effect, investors paid as much as $9.07 for shares that they could have bought at the exact same time for $1 instead. That casts some doubt on the idea that financial markets are efficient. It should cast more doubt on whether all investors, including you and me, are as shrewd as we think.

The study is based on a peculiar transaction that occurred on the Euronext stock exchange in Amsterdam in 2014. That October, Dutch engineering-services firm Royal Imtech NV was struggling to survive. To raise capital, Royal Imtech announced a rights offering, enabling investors to buy new shares at a discount to the market price.

The rights offering worked like this: For each share they owned, stockholders who subscribed to the offering got the right to buy another 131 shares at only 0.01 euro apiece.

Yet, during the offering period, Royal Imtech stock closed as high as 0.1 euro per share. By purchasing shares on the market instead of buying them through the rights offering, investors were paying up to nine times more than they needed to. (Even if you didn’t already own the stock, you could obtain rights by buying them on the exchange from a Royal Imtech investor.)

Rights offerings are rare among operating companies in the U.S., with none since the beginning of 2017 and a total of only 11 since 2009, according to Dealogic. They are less unusual among closed-end funds in the U.S. and more common in Europe.

Shareholders often fail to participate in rights offerings, presumably because stocks are much more familiar and it takes a little effort to figure out what rights are worth.

As a result, many investors seem to have overlooked the Royal Imtech deal entirely; 48% of the rights offering went unsold, according to Martijn van den Assem, a finance professor at Vrije Universiteit Amsterdam and co-author of the study. Investors kept buying the stock the same way they always had, oblivious to the opportunity the rights gave them to buy it at a fraction of the market price.

That turned out to be costly; by late October 2014, investors who had paid up to 0.1 euro per share were left with stock trading at only 0.017 euro. Royal Imtech declared bankruptcy in 2015.

“If people avoid the unfamiliar and the uncommon and they aren’t perfectly attentive,” says Prof. van den Assem, then what happened with the Royal Imtech offering “isn’t super-puzzling.”

So are investors stupid or irrational? Neither: We are human. We have many demands on our time and attention, we hate thinking harder than we need to, and we chronically take mental shortcuts and leap to conclusions. A slightly more complicated way to buy a stock feels like a worse way. So we don’t bother with it.

Royal Imtech is only the latest violation of what economists call “the law of one price,” which holds that identical assets shouldn’t trade simultaneously at different prices, regardless of where they change hands.

In 1999, for example, 3Com Corp. spun off Palm Inc. You could buy Palm shares directly in the open market, or you could buy them indirectly by purchasing 3Com stock. For each share of 3Com, you would get 1.5 shares of Palm.

Yet on the offering date, you could get one share of 3Com for $82, with 1.5 shares of Palm thrown in for free — at the very same time as other investors were willing to pay $95 for a single share of Palm. (The risk that the deal might not have gone through, and the costs of betting against it, might explain part of the oddity.)

Likewise, in the roaring stock market that preceded the great crash of 1929, it was common for closed-end funds to trade for double or even triple the per-share value of the stocks and bonds they held. Investors acted as if such leading stocks as Radio Corp. of America, Studebaker Corp. and Wright Aeronautical Corp. were worth two or three times as much inside a fund than outside it — on the illusory belief that skilled stock pickers could make diversification and high returns easier to achieve than investors could on their own.

All this is a reminder that market prices are shaped by the tension between sophisticated, informed and attentive investors, on the one hand, and naive, unknowing and uninterested investors on the other.

The same mechanism that overpriced Royal Imtech by nine-fold also fostered the internet-stock bubble that burst in 2000 and the crisis that nearly destroyed the global financial system a decade ago.

Markets are mostly efficient most of the time. They aren’t perfectly efficient all the time.

This article was prepared by a third party for information purposes only. It is not intended to provide specific advice or recommendations for any individual. It contains references to individuals or entities that are not affiliated with Cornerstone Wealth Management, Inc. or LPL Financial.

Past Performance is no guarantee of future results.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

, , , ,

Losing Your financial nest egg is linked to shorter life expectancy

One benefit of creating a financial plan is that the process puts into perspective the importance of collecting singles and doubles in a portfolio rather than swinging for the fences.

The following article is courtesy of the Wall Street Journal. Please forward to anyone you know who is going through a life or financial transition.

Many people lost their life savings in the last recession.

New research on the health damage done.

Is it worse to suddenly lose your financial nest egg or never to have saved any money at all? This question concerns many of us: A quarter of Americans watched much or all of their life savings evaporate during the last recession, while nearly half of U.S. families have nothing put aside for retirement, according to the Economic Policy Institute and federal data.

Either way, there’s no happy answer. Both scenarios can increase our risk of dying within the next 20 years by more than 50%, a recent study shows.

We’ve long known that a financial shock causes immediate distress. Suit-clad men leaping from buildings were dismal hallmarks of the Great Depression, and soon after a major recession began in 2007, there were notable spikes in clinical depression, substance abuse and suicides.

But what about the effects of such a shock over a more extended period? “Does the stress of losing one’s wealth also create a long-term risk?” asked Lindsay Pool, a Northwestern University epidemiologist and the lead author of the new study. Published last month in the Journal of the American Medical Association, her research investigated how losing one’s life savings in the short term might curtail one’s lifespan in the long term.

​To find out, the researchers analyzed how participants in the federally funded Health and Retirement Study fared over a 20-year period. When the study began, researchers selected a nationally representative group of people in their 50s and asked these roughly 8,700 men and women detailed questions about their daily habits, health and financial situation.

Every two years, from 1994 until 2014, the federal study’s investigators called each subject looking for any change in their status and especially for a signal event: the disappearance of 75% or more of a person’s assets during the previous two years. “The reason we look at 75% or more is that we’re looking for a sudden loss, one that’s high enough to be shocking. People are nearing retirement, and all of a sudden their wealth is gone,” said Dr. Pool.

The results showed how profoundly financial loss can damage us. Exactly how this happens at the physiological level is still being worked out, but we already know that stress unleashes hormones that constrict our blood vessels and make our hearts beat faster—thus increasing blood pressure and possibly spurring a future cardiovascular event. Coping with ongoing pressures we cannot control has also been linked to a shorter lifespan.

Loss of control was front and center for the 26% of those in the survey who had endured a wealth shock. They were 50% more likely to have died during the period of the study, compared with participants whose savings remained intact. The researchers statistically controlled for other causes of mortality, such as ill health, job loss, insurance loss and marital breakdown.

Interestingly, women were more likely to have experienced a wealth shock than men, but they were not more likely to die as a result. They were, in short, more financially vulnerable but more resilient physiologically.

The study can’t explain why losing your life savings can kill you, only that it does. But one of the researchers’ findings is clear: At 50%, the mortality risk of those who had lost their nest eggs was lower than for those who never accumulated much for retirement at all; those people were 67% more likely to die than savers. It may be cold comfort, but it seems that it’s better to have saved and lost than never to have saved at all.

This article was prepared by a third party for information purposes only. It is not intended to provide specific advice or recommendations for any individual. LPL tracking # 1-736613