If you have a runner in your family, you know how they can sometimes be a little obsessive about lacing ‘em up and heading out. It could be “too hot” or maybe it’s cold, dark and rainy, but still they have to get some miles in. “Why?” is a question often asked that rarely has a good answer.
I received the following from a Patagonia promotional email headed “Where can you go in an hour?” and wanted to share. It may be the clearest answer to the question I’ve ever heard.
Sometimes, an hour is all you get. Sometimes, an hour is all you need. But you need it–fundamentally, excruciatingly, and for those 60 minutes every question gets answered, and new ones get asked. Knots get untangled, and everything makes sense, even if you’ve forgotten it all by the time you get home.
Running has had a huge impact on my life. One way, in fact, was that I did a lot of knot-untangling about starting Ridgeview Financial Planning during long runs on our local roads and trails. There’s just something about solitude and natural beauty that inspires creativity and optimism (or maybe delusions of grandeur). But enough about that… let’s talk about investing in retirement…
Last week I laid out a framework for several posts about backing into your retirement asset allocation. As wonky as this sounds, if done right, the process will help get you through different parts of the market cycle while keeping your spending goals intact.
Asset allocation, or the process of finding and managing your optimal blend of stocks, bonds and cash, is challenging during retirement. The reason is that you’ve entered the decumulation phase after spending decades accumulating retirement savings. Everything seems backwards and it’s a difficult and complicated psychological transition.
The first step we’ll look at is projecting your spending needs for a typical year in retirement. Ideally, this would come from reviewing recent bank and credit card statements, or perhaps money management software like Quicken. You want this projection to be as accurate as possible because a lot will ride on it.
Market analysts love their metaphors because they help put very complicated issues into a clearer context. Liz Ann Sonders, Schwab’s chief market strategist, is no different. In her recent piece she and her team even quote from Louisa May Alcott’s Little Women, “I’m not afraid of storms, for I’m learning how to sail my ship”, to set the stage for their outlook: pleasant skies overhead with storm clouds on the horizon.
Being a bit of an armchair sailor myself, these “looming storm” metaphors resonate with me. Like we’ve discussed previously, there are a growing number of indicators signaling a coming recession, but if you look around today you probably won’t see them. As the article below indicates, consumers are still out there buying. Wages have been rising so much of this buying has been with cash versus credit. More workers are feeling comfortable enough to consider quitting their job for a better one. Businesses are reporting solid profits. Interest rates are at record lows. In general, the list of positives is long.
But the negatives, or the storm clouds on the horizon, are building. Eventually, also as the article indicates, we’ll be in a recession anyway because it’s simply part of the economic cycle. When will it happen and how bad will it be? Will it sink your ship or merely help you be a better sailor? Time will tell. In the meantime, check out the following excerpts for Liz Ann’s take on our position (emphasis mine).
With all the market volatility over the past few weeks I thought I’d touch on a few recent data points about the economy and markets.
Bottom line, we’re in a very mixed investing environment right now, so it’s natural to feel confused and even a little frightened about the variety of headlines coming at us.
The charts below come from my research partners at Bespoke Investment Group, but the commentary is mine.
The American Association of Individual Investors regularly publishes a survey of members to gauge sentiment. As you could imagine, investors frequently change their minds about whether they’re “bullish” or “bearish”. Known as a coincident indicator because it reflects what’s happening in the markets now, when markets are down investors typically report being negative on stocks (bearish) and positive (bullish) when the market is up. We want to watch for unnecessarily large shifts in sentiment. As we see in the following chart, the recent surge in bearishness has been pretty extreme (far right side - straight up versus a more measured increase).
Investor sentiment is also seen as a contrarian indicator because, frankly, individual investors tend to be reactionary and turn negative or positive at the wrong times. Extreme spikes in bearishness typically imply better returns for stocks in the near-term, but we’re kind of in uncharted territory given how much uncertainty is created by proclamations from the POTUS Twitter account. It will be interesting to see how sentiment changes in the coming weeks. But for now, individual investors are decidedly negative when it comes to stocks.
Asset allocation is all about trying to control what can be controlled when it comes to investing. We know, for example, that we have no control over how markets react to a topsy-turvy world full of headlines. We can’t control what the Fed does with interest rates or when the economy goes into recession. And we know we can’t control a publicly traded company’s success or failure.
But we also know we can’t simply avoid investing in stocks just because they’re risky (and sometimes pretty scary…). So, we turn to asset allocation, or the process of finding our optimal blend of stocks, bonds, cash and “other” investment categories, to help us be productive investors in an uncertain world.
Now, asset allocation for younger folks is fairly straightforward. You’d typically complete some sort of questionnaire to determine how much risk you can tolerate, match your responses to a suggested mix of investments, and then focus on saving. It’s hard enough to save anyway, right?
This works for your 20’s, 30’s and 40’s when you’re mostly focused on accumulating retirement savings, but starts getting more complicated in your 50’s. There’s another step up in complexity in your late-50’s and early-60’s as the retirement concept starts seeming a little more real. Then asset allocation takes on a whole new meaning when you’re actually retired. It’s at this stage where we leave the hypothetical conversations about risk tolerance and spend more time talking about “risk capacity”, the risk you can afford to take and need to take for your long-term plans to be successful.
I mention all this because the economic and market situation is starting to look a little gloomy. Talk of potential recession abounds and we all remember just how nasty the last one was. If the next one is even close to that bad, how will that impact our retirement plans? Those living in retirement or those close to retirement are understandably nervous. Is it time to head for the hills until all this blows over? Hopefully (and obviously) the answer is a resounding no.
Instead, it’s time to refocus on shoring up your asset allocation and even starting to think about the subject more broadly. What I mean is that instead of simply thinking about your allocation as a natural outcome of taking a risk tolerance questionnaire, you should also back into it based on the details of your own plan. This kind of stress testing will help give you the best shot at surviving a prolonged market downturn.
This is a detailed conversation, so my thinking is to lay out the concept in this post and then elaborate over the coming weeks. Here are some of the issues we’ll cover:
Stress testing your allocation using the Great Recession and a garden variety downturn as benchmarks. If stocks are down and market sentiment is too, but you still want to take that trip or buy the car you planned on, where should the money come from?
When and how to take profits when the market is up. Strange as it may sound, this is often a difficult subject for people.
Different methods for calculating your “emergency fund” needs during retirement.
How to use bonds as insulation against prolonged bouts of market volatility. Yes, bonds are boring, but they could save your tuchus if used correctly.
How to reconcile these areas with your current allocation. In other words, what to do if you realize your investment mix is all wrong.
Hopefully by the end of these next few weeks you’ll be better informed about how to get your asset allocation “retirement ready”. And remember that it’s not all doom and gloom, it’s appropriate planning that makes the difference.
These are interesting times. Briefly this morning the yield on 30-year Treasury bonds was below the dividend yield of the S&P 500 as investors continued to plow money into bonds. This is a backwards situation that doesn’t occur very often. It’s right in there with the weirdness of the inverted yield curve we’ve discussed many times before. But as more of you ask about the yield curve and what it tells us about the likelihood of recession, I thought it would be good to hear from someone else on the topic.
There are few analysts that I always try to make time for, and Dr. David Kelly at JPMorgan is one of them. I’ve slimmed down his recent writeup discussing the yield curve, what it is and how it works, for your reading pleasure. One interesting tidbit is that he doesn’t think there’s a high probability of a recession starting within the next year, but he doesn’t speculate beyond that. Personally, I think it’s more likely outside of a year, but who knows. It certainly doesn’t feel like a recession is imminent, but the warning signs are there.
An important takeaway from the piece below is that inverted yield curves don’t cause recession, they’re simply an indicator. Read on and, as always, let me know of any questions (emphasis mine) …
In days of yore, the sight of seagulls wheeling over an inland forest or fields was taken as a sure sign of a storm at sea. Looking at it from the seagull’s perspective, there are no fish in forests or fields – so the only reason to be inland is to avoid something dangerous out at sea. In a similar vein, last week, many investors took the sight of an inverted yield curve as a sign of impending recession.
However, to understand what the yield curve is really telling us, there are at least five key points that investors should recognize, namely:
Why an inverted yield curve has predicted recession in the past,
Why it may not be such a good predictor right now,
How other factors are pointing to slower economic growth,
How an inverted yield curve doesn’t actually hurt the economy, and
How low long-term interest rates, while not boosting the economy, are supporting the stock market.
On the first point, the reason a negatively-sloped yield curve has been a good predictor of recession in the past is because it tells us something ominous about what investors expect from the Federal Reserve.
There are times when I wonder how I got to be so lucky. I have a wonderful family, good health and work that I truly enjoy. On top of that, this month I get to celebrate five years of being my own boss. While it’s been far from easy, it’s absolutely been fun, or at least mostly fun.
Back in 2014 my family and I had finally made the decision I’d been pondering for a couple of years – to go out on my own and start Ridgeview Financial Planning. Deciding to open your own business is tough anytime, but as the primary wage earner in our household with two young kids it was a huge risk. Fortunately, it’s been paying off and all the tension is starting to ease a bit.
But the first year or so was pretty rocky. Trouble started right out of the gate when I was sued by my former firm. In a strange twist, the lawsuit information showed up on our wedding anniversary in late-August, less than a month after having opened shop. I came to find out this was a pattern used by brokerage firms to, essentially, scare the crap out of anyone who leaves to start their own business. What followed was a year of back-and-forth that caused a ton of anxiety for my family and me but ultimately led to a whole lot of nothing (no money owed, no fault on my part, just lots of legal fees…).
While I was still going at full steam that first year, business really perked up once the lawsuit was settled. I moved into my first office after working from home, eventually moving into a slightly better office a year later. And then, after a couple of tries at working with virtual assistants, last summer I hired a real local person, Brayden, whom many of you have interacted with.
All told, it’s been a great five years and I’m eagerly awaiting the next five and beyond. To celebrate this anniversary, as well as our 20yr wedding anniversary (my wife is amazing for putting up with me this long), as I’ve done in the past, I’m taking a few weeks off from writing this weekly blog. We’re also taking a vacation! I’ll still be monitoring everything and will be accessible via email and phone if necessary, just won’t be setting any meetings.
I am extremely grateful for and humbled by the trust you place in me as your financial planner. It is my honor to be your partner on the journey and I hope to be so for many years to come.