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Beware the Alarmist

Written by Brandon Grundy, CFP®.

Investing is counterintuitive. You try to buy when prices are low, which makes good intuitive sense. But then you're supposed to hold while others are selling, which doesn't feel very good. You're also supposed to ignore, or at least not fall prey to, hyperbolic news headlines when prices are down. This can be hard too, especially when headlines start getting interesting. And yesterday, when the Dow was briefly down 1,600 points and the media nearly went berserk, it's just plain hard.

Making this even more challenging, the closer you pay attention the more you see the odd way markets react to news and economic data. So odd, in fact, that markets can react differently to the same type of news depending on the general outlook and sentiment of the day. Good can be bad, up can mean down, and, if you're not careful, confusion can reign supreme.

Take the current market decline as an example. Economic reports came out last week showing how our economy is continuing to expand and the growth trend is largely positive. Intuitively, you think great, economic growth is a good thing, is better than the alternative, so stocks should keep moving up, right? Well, this is where the counter intuitive nature, and even manic tendencies, of the stock market comes into play.

The market likes growth so long as is doesn't come with inflation and short-term interest rate increases by the Fed. Since all three ultimately go together, what the market really doesn't like is not knowing how much of each will be present and when. The market had become complacent about this and is now waking up and repricing itself accordingly. The bond market did so quickly because it had less distance to travel. During yesterday's decline sellers of stocks finally started buying bonds, which helped bond prices turn positive. Stocks, on the other hand, had run up so much lately they had farther to fall.

The Dow experienced its largest one-day point decline yesterday, finishing down 1,175 points. The S&P 500 also had a bad day. Remember, however, that both indexes are tallied in points, but the percentage moves are what's important. All told, yesterday the Dow was down 4.6% and the S&P was down 4.1%. Bonds were up 0.4%. What else was up? The VIX, a gauge of volatility and investor "fear", was up over 100% on the day.

Lots of volatility, over a year's worth, crammed into about a week. Ouch. If your head is spinning a bit, then you're not alone. Fast and furious seems to be the way of the markets these days, both on the upside and the downside. While the speed of markets can be disconcerting, it's nothing to worry too much about as ultimately this speed provides more liquidity and pricing transparency.

As markets reprice themselves there will be more volatility. Historically, the stock market stays volatile for at least a couple of weeks after a sharp decline. So, try not to panic and remind yourself that investing is a long-term business, market declines are normal, and can and do happen within a continued bull market.

Along these lines, the following short article from Bob Veres, a planning and investment industry guru, sets the right tone. It's a reminder that one of the worst things we can be while investing is an alarmist. The article was written last weekend referencing last Friday, before yesterday's decline, but is only more important now.

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Runups and Drawdowns

Written by Brandon Grundy, CFP®.

A common question lately has to do with the market runup and what to do about it. Since there's no indication of an imminent economic slowdown, the stock market could have the wind in its sails for a while yet. But as you're all aware, this can change on a dime. And since long-term successful investing has more to do with how we react to losses than gains, reminding ourselves of potential downside risk is important.

As major indexes continue to hit new highs, risk grows along with them. Think of it this way: With the Dow Jones Industrial Average (the Dow) currently at almost 26,600, a garden-variety decline of, say 1%, would mean a drop of 266 points. That could easily happen in one day and be normal. How about 532 points? That would likely freak people out but would only be a 2% decline. How about a 3% decline? While still in "normal" territory, such a drop would see 798 points shaved off the index. In a day.

I write this not to scare but to inform. Since markets have risen by a healthy amount lately, that increase makes for potentially shocking headlines about what might otherwise be ordinary declines.

For example, the largest daily point decline for the Dow was on September 29, 2008, when the index fell by 778 points (rounding up the change) when Congress failed to approve the Troubled Asset Relief Program, or TARP. Back then it was equivalent to a 7% decline. Compare that with today's market and the percentage change would be less than half that for almost the same point decline. And how about a 7% decline at today's values? 1,862 points on the Dow. Ouch.

The issue these days isn't, fortunately, a deep economic recession and near global market meltdown, it's markets being too quiet for too long. With a likely return to more normal levels of volatility sometime soon, and since this is the ten-year anniversary of the 2008 debacle, it's possible to see point declines like '08 making headlines for the wrong reasons.

The media would jump all over the superficial similarities, potentially magnifying investor fear. It's best to get mentally prepared for this so as not to be too caught off guard when it happens. And remember that it's entirely normal for markets to go through volatile periods, even as they continue higher.

Along these lines, this week I also wanted to share some bullet points and charts from Bespoke Investment Group, one of my research partners.

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Shutting it Down

Written by Brandon Grundy, CFP®.

By now you've likely heard about the shutdown that wasn't, or at least that wasn't a lengthy ordeal. When last Friday ended without a spending deal in Congress, everyone knew the government was going into partial shutdown mode. This would mean federal workers being furloughed, national parks closing, and even much of the IRS being shuttered for who knew how long. While this kind of thing should be a rare and surprising occurrence, personally I wasn't shocked so much as embarrassed. I try to not "get political" in these posts, but it's hard watching so many smart people in Washington D.C. acting so dumb.

As frustrating as this situation is, or was, it's interesting that the stock market doesn't really seem to care about government shutdowns.

The government shutting down sounds like such a bad thing so it's natural for people to wonder how it would impact the markets. Perhaps surprisingly, the market barely budged on news of the shutdown and even ended up yesterday as the political impasse ended.

As it turns out, the shutdown was short-lived, having been resolved yesterday with yet another continuing resolution to fund the government, this time for just a few weeks until February 8th. But how can the stock market seem so blasé about the government shutting down and this level of political dysfunction?

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Planning to Not Retire

Written by Brandon Grundy, CFP®.

Strange as it may seem, there's a fair amount of folks out there who are planning to not retire. Yes, unfortunately for many this is a non-decision caused by the affordability issue. For others the decision to keep on working is driven by a variety of factors. But planning to not retire doesn't give one a pass on retirement planning. It's still just as important, even though the timeline might be different.

When I work with retirement-aged folks who don't plan on retiring (even when they can afford to), their reasoning is often that they are healthy, enjoy their work, and simply feel no reason to stop. Bucket list trips and personal to-do's? That's what vacations and weekends are for, right? When would they consider retiring? When they can no longer work, stop when they drop, pedal to the metal, etc, etc. Sometimes, it's enough for them to know that they can retire, which maybe makes it easier to get ready for work in the morning. If the boss gets on their nerves one too many times, they can Johnny Paycheck their way out of there and know they'll be fine financially.

If this sounds like you, here are some points to consider:

401(k) and Other Workplace Plans
You can keep contributing to your workplace retirement plan past "retirement age", as plans often allow employees to do this. This means continued tax-deferred saving and, assuming your employer offers it, matching dollars.

Additionally, should you continue working past age 70.5, you should be able to avoid taking Required Minimum Distributions (RMD) each year from your plan and having to pay tax on them. This is typically about 3.6% of your balance the year you're 70.5 and goes up each year after that, so keeping those dollars in your plan can save you money.

This would only be for regular employees, however, not those who own a chunk, or all, of the business. Also, putting RMDs on hold is only allowed for the workplace plan and not other old plan accounts (from former jobs, for example) or IRAs. One idea would be to roll eligible accounts into your current plan to delay RMDs entirely. But first ensure your current employer plan has good quality investment options and is reasonably priced. Workplace plans are notorious for being expensive and, depending on the dollars involved, extra costs could outweigh potential tax savings.

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Prognostications Roundup

Written by Brandon Grundy, CFP®.

With the new year in full swing it's the season when market analysts of all shapes and sizes reveal their educated guesses about what the markets and economy are likely to do in the year ahead. While many of these prognostications aren't worth the time it takes to read them, some come from very good analysts and are worthy of our attention.

There are several common themes for 2018 as I review reports from three groups I pay close attention to, Bespoke Investment Group, Vanguard's Investment Strategy Group, and Dr. David Kelly at JPMorgan. While none of these analysts would say they're predicting the future, they would likely all say how important it is to be aware of these key themes and how markets might react to them. So, let's look at my summary of their recent work.

Economic Growth, Unemployment, and Wages
Final GDP numbers for 2017 won't come in for a while yet, but assumptions are that the final number will around 3%. If so, this level of growth would be higher than the past few years but still stubbornly below the longer-term average of 3.25%. The expectation is for a growth boost in 2018 fueled by business investment and tax policy, followed perhaps by a tapering off into 2019.

This tapering, should it occur, is expected to be blamed on an increasingly tight labor market. As 2017 ended our main unemployment rate stood at 4.1%, a level most economists would agree is considered "full employment". Strangely, this metric is expected to fall further as businesses expand hiring, perhaps aided by new tax breaks, and hire the few remaining workers out there. But then they hit a brick wall unless a bunch of folks who are currently out of the labor market decide to jump back in. One of the potential outcomes of this would be a long-awaited boost to wages and ultimately a spike in inflation.