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Learning from History

Written by Brandon Grundy, CFP®.

Time flies when you're having fun. That saying seems to capture the feeling of the past ten years following the market turmoil of 2008. With a few bumps along the way, since the market lows of early 2009, the stock market has been on a tear.

Now that we're in March and the anniversaries of important Great Recession events approach, it's interesting to sift through market research and news stories from back then. Some of the analysis stands out as oddly prescient, while some of the events are still gut-wrenching to read about even today.

One such event was the fall of the now infamous investment bank Bear Stearns. It was this week, ten years ago, that the firm found itself without a chair when the subprime mortgage music stopped.

In early 2007, just a year before its ultimate collapse, Bear Stearns had been riding high on manufacturing and selling fancy bonds and derivatives based on subprime mortgages and other debt. Leverage was high, and nobody seemed to worry much about it. So long as everyone and everything involved continued to hum along, no amount of leverage seemed too great. Analysts touted the firm's earnings record and continually raised price targets for the company's stock to over $180 per share.

But a few short months later analysts started changing their tune. Troubles were percolating in the housing market and Bear Stearns began losing money after decades of profitability. That summer two of Bear's subprime mortgage-based hedge funds failed, costing billions. Keeping investors and depositors confident was huge for the firm. But confidence quickly eroded and that's when the wheels started coming off. The firm's share price started dropping, declining by more than half into the new year.

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The Do's and Don'ts of IRA Beneficiaries

Written by Brandon Grundy, CFP®.

Since we're in tax season and you might be paying more attention to the nuts and bolts of your retirement accounts, let's review some of the Do's and Don'ts when it comes to naming IRA beneficiaries.

I can tell you from personal and professional experience that this is one area that's easy to mess up. Maybe you meant to name a beneficiary on your IRA but haven't gotten around to it yet. Or, maybe you named your spouse years ago and now, unfortunately, this needs to be updated due to death or divorce. Or, another common mistake is thinking, hey, we set up our trust last year and listed the account in the trust document, so we're good, right? No.

There are so many potential pitfalls in this area that it makes sense to spend some time thinking about who your beneficiaries are, if they're currently set up the way you want and, if not, making the appropriate updates.

The following excerpts (emphasis mine) from an article by Christine Benz at Morningstar does a great job at summarizing the key areas. Given that many of these topics carry over to the 401(k) and life insurance realms, spending a few minutes brushing up on this will be beneficial.

Do

Check with your estate-planning attorney before naming your IRA beneficiaries.

What's on your beneficiary designation form trumps what's in your will, so it pays to ensure that your named IRA beneficiaries sync with both the letter and spirit of what's spelled out in your estate-planning documents. A qualified estate-planning attorney should also be able to direct you toward the most tax-efficient uses of your IRA assets and give a red flag to ill-conceived designations, such as naming a minor child or estate the beneficiary of an IRA.

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Retiring Somewhere Cheaper

Written by Brandon Grundy, CFP®.

Where do you want to retire and why? Those are important questions for anyone thinking about their retirement. For some it's an easy answer; they want to retire exactly where they are and do pretty much what they're currently doing, except more of the fun stuff. But for others, and for various reasons, deciding where to retire is just as important as when and how.

While there are numerous considerations when thinking of picking up stakes and moving in retirement, the cost of housing is often at the top of most people's list. If we could move somewhere cheaper, so the thinking goes, maybe we could retire earlier, live a little larger, have more fun, or maybe all three. And frankly for some folks, their best bet at a successful retirement is moving somewhere more affordable anyway. But where could you go? Is it all about finding somewhere cheaper? Where can you find that delicate balance of cost, weather, activities, lifestyle, etc?

While looking into these questions I stumbled across a recent report from WalletHub listing the 150 "Best & Worst Places to Retire". These lists pop up all the time, but this one seemed more robust than is typical. WalletHub gathered and scored 40 metrics to come up with an average score for affordability, activities, quality of life, and healthcare, for each city.

Much of the list contains cities you'd imagine, such as Tampa and Orlando, Scottsdale and Phoenix, Denver, and Austin. But the ranking of each was surprising. Some cities scored well on affordability, for example, but suffered from low quality of life and healthcare scores. This broader focus led to lesser-known cities scoring well overall, such as Pittsburgh and New Orleans, which both cracked the top 20.

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Credit Cards and Investing

Written by Brandon Grundy, CFP®.

We are all sometimes guilty of making false assumptions. One of mine has been that people know better than to use a credit card to buy an investment. Yes, I can understand the need to leverage a credit card in the short-term to help fund education or business equipment in a pinch. But buying stocks or something like bitcoin with your credit card? It turns out this has been more common than I thought.

As bitcoin was riding high last Fall and making national news, retail, or "small" investors started jumping on the bandwagon. And as is often the case, these investors wanted to get in on the growth of "crypto" at whatever cost. Just think about the potential thought process: What would you pay for an investment you knew was going to skyrocket in the coming weeks and months? If you didn't have the cash to invest, why wouldn't you put in on your credit card, or even take out a cash advance, and just pay it back after the investment soars? It's a win-win can't lose proposition, right?

Enabling this at the time were credit card companies, online brokerages, and "currency exchange" websites such as Coinbase. Investors could buy once or even establish recurring purchases, all using their credit card. Most major credit cards companies allowed this, except for Discover, which said no back in 2015.

Apparently, an unfortunate number of people did this as bitcoin and other cryptocurrencies rose in value. Most of these folks probably felt like geniuses, at least for a few weeks. Then, as prices began to fall precipitously into the New Year, many of these folks realized they now owed more to their credit card companies than their bitcoin was worth, plus interest.

According to a Wall Street Journal survey, roughly 18% of bitcoin investors used a credit card to buy the currency and 22% of these folks said they'd be carrying the balance on their card, presumably until the investment recovers. Perhaps it eventually will, allowing these late investors to turn a profit, or just get back to even. Until then, however, these folks are in a tough spot.

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When the Music Stops

Written by Brandon Grundy, CFP®.

Last Thursday the S&P 500, a typical benchmark for the US stock market, hit a technical correction by falling at least 10% from a prior high. In just less than two weeks the index seemingly went from happy and content to sad and disillusioned, leaving long-term investors' heads spinning.

Stocks recovered somewhat on Friday and through yesterday, but we're likely not out of the woods yet as bouts of volatility typically take at least a few weeks to burn off.

While there are always catalysts for market corrections, what's interesting about this one is the strange dynamic where inflation and interest rates were labeled as the primary culprits, but the real blame should be laid on the markets themselves. After more than a year of very low volatility the stock market was primed for a bout of profit taking, and that's what happened, although other issues helped spur sellers on.

Through last Friday the S&P 500 had grown almost 16% in the past 12mos, even with the correction. The Dow was up 23% in the same timeframe and foreign markets were up the same or more. And as we're all aware, these returns occurred during abnormally quiet markets. So, at the first whiff of anything negative many investors, especially short-term traders, were ready to flee with profits in hand. The result was the quick negative turn we've been witnessing, with major indexes giving back what they earned in January plus a little bit more. Year-to-date through this morning, the S&P 500 and Dow are both down less than 2%.

Wait, down less than 2% year-to-date? Doesn't that seem strange with all the volatility and headlines lately? Unfortunately, fast-moving markets are the "new normal" as computerized trading algorithms at large trading firms and hedge funds account for most of the trades each day. These firms can buy and sell so rapidly and so frequently that they can exacerbate market volatility. And trading isn't just during daytime market hours. Trading goes on very actively after hours and in foreign markets while we're asleep.