What's Going on with Stocks?

What’s going on with the stock market? That’s a question several of you have asked in the last week. I thought I’d answer the question here as well since I’m sure others are also wondering. The short answer is that this is a normal bout of volatility that is part of getting good long-term returns. But since the slightly longer answer is usually more interesting, here goes…

Although stocks have logged decent performance of about 4% in the past 12 months, you’d be forgiven if you felt like it’s been a bit of a rollercoaster ride getting there. We had all that volatility to end 2018 when stocks fell almost 20%. Then we had a good upsurge to start 2019, only to be followed by stocks falling 6% in May. These gyrations are due in large part to several risks, some of which are new while some could be considered old (but persistent) news.

We’ve previously discussed how we’re nearing the end of the economic cycle that began during the Great Recession. This is old news. As the cycle starts to slow investors get nervous and headlines that might otherwise get overlooked take on greater significance. For example, it turns out Google may be subject to an antitrust investigation by the Department of Justice, and possibly Amazon and Facebook as well. Since the tech industry makes up nearly a quarter of the S&P 500, the long-term viability of the business models of these companies matters a great deal. I don’t know that these antitrust revelations are necessarily new, but they contribute to a growing sense of anxiety within the stock market.

Piling on last month was worsening geopolitical and trade news. We learned that British PM Theresa May was resigning after failing to deliver Brexit. This almost ensures another down-to-the-wire ordeal come October when their extension to leave the European Union ends. Continued disfunction around Brexit adds to fears about the structure of the EU itself. Taken to the extreme, the EU collapsing as other countries with nationalist tendencies try to leave would obviously have far-reaching ramifications. On top of this we learned of more tariffs from the Trump Administration directed at China and, at month’s end, potential tariffs aimed at Mexico. All of this raises the tension level in the room, so to speak.

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What Planners Talk About

Ever wonder what financial planners talk about when they go to an industry conference? I know you spend lots of time wondering, so this week I’m going to give you a sense of the conference I attended last week in Austin, TX.

I’m a member of the National Association of Personal Financial Advisors, the organization that puts on this twice-annual continuing education extravaganza. NAPFA’s conferences are unlike many I’ve attended because they’re filled with high-quality educational content, not product pitches from the latest mutual fund or insurance product.

There were some interesting themes this year, with maybe half of the content being investment-related and the rest addressing topics such as health, wellness and aging. Here are three examples.

Keeping Our Brain Young

This talk was given by a wellness guru about brain health and how serious mental decline isn’t necessarily a given as we age. Apparently, lifestyle choices we make over time have a huge impact on brain health. Sleep plays a major role. The speaker provided some basic tips to ensure quality sleep, such as staying on a schedule, limiting screen-time prior to bedtime and darkening our bedrooms at night followed by natural light in the morning.

Dementia, the speaker also explained, is a set of symptoms and not a disease, such as Alzheimer’s. A third of dementia is preventable and much is treatable if it’s caught early. Alzheimer’s research is rapidly evolving. 95% of what we know about the disease has been discovered within the last 15 years and much of that has come in the last few years. For example, the speaker talked about how our roughly 80 billion brain cells produce waste every day. This waste, if left to accumulate too long, starts interfering with how the cells in our brain communicate with each other. The waste gets cleared up during sleep, which is part of what makes getting a good night’s sleep so important.

Other tips for keeping the brain young included getting good exercise, going outside for even just a few minutes of nature-time daily, eating heart-healthy foods (“what’s good for the heart is good for the brain”), social engagement and learning new things. It’s also important to monitor for issues like sleep apnea and diabetes as both are risk factors for Alzheimer’s. Interestingly, these suggestions don’t require fancy gadgets or apps on our phone; they’re simple things we can do each day.

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Don't Call it a Comeback

There are some financial products out there that really get my hackles up. I’ve talked previously about my loathing for different types of annuities, for example. Products like these are said to be “sold and not bought” because anyone who went looking wouldn’t choose to buy due to the product’s complexity, lack of transparency and high cost. So, to get investors to buy, the products need to be sold by a slick salesperson who pockets a fat commission at the end of the transaction. This is an age-old problem and won’t be going away anytime soon.

Another product like this is the reverse mortgage. Just uttering the name causes a visceral reaction as I recall stories from folks who got swindled by clever salespeople. But as a fee-only planner charged with ensuring my clients accomplish their goals, I have to be open to investment products that may once have been anathema to me. In other words, I can’t continue to reject a product because it was bad in the past. It’s hard to say it, but the much-maligned reverse mortgage may be making a comeback.

The reason, as I see it, has to do with several factors. First, more Americans are retiring with insufficient cash and investments to cover their needs for what they hope will be a long retirement. The asset they do have, however, is the equity in their home but with limited ways to access it.

Second, expected returns from stocks and bonds are lower than they’ve been in the past. Interest rates are low and so is inflation. This makes it challenging to “lock in” higher interest rates on longer-term bonds, for example, to help fund retirement. Folks understandably look at CDs offering near 3% for a few years and compare this to a 30yr Treasury bond paying the same rate. It’s a no-brainer that many pick the short-term CD.

This leads to the third factor helping bring reverse mortgages back to the retirement planning toolkit: short-term thinking for a long-term problem. As investors focus more on short-term yields, they forget they probably need higher returns to meet their long-term planning objectives. A CD may sound appealing and “safer” but not if you need to average, say, 5-6% over time to ensure you don’t run out of money. If some are intent on having less exposure to stocks and bonds, they’re going to need to get creative with other income sources to help fill their personal performance gap.  

The fourth factor is recent favorable research about reverse mortgages and enhanced regulation making the product more accessible. Here are my thoughts about leveraging reverse mortgages:

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Driveway Moments

One of the things I enjoy about writing this weekly blog is that the subject matter can ebb and flow over time and doesn’t have to follow any particular pattern (or, at least I don’t think so…). This week is a perfect example. I was set to write about recent market volatility, the yield curve and evolving expectations. But then I had a “driveway moment” while listening to Marketplace on KQED. The topic dovetails with our brief discussion last week about brain health and other posts I’ve written regarding elder financial abuse, so I wanted to continue the conversation.

Called “Brains and Losses”, the short series from the folks at Marketplace tackles the complicated issues associated with financial fraud perpetrated against seniors. The series also looks at some of the causes and what to do about them. We all probably know, or at least know of, a senior who has been a fraud victim. Sometimes we equate the loss to their simply being too old to manage their own finances or even the onset of dementia, but it’s more complicated than that. Interestingly, doctors studying seniors who are otherwise physically and mentally healthy are finding that some are still at heightened risk for financial abuse.

According to Marketplace there’s a new term for this: “age-associated financial vulnerability”, or the decreasing ability to detect fraudulent activity as folks age, even without other symptoms of cognitive decline. One researcher showed how the brains of scam victims and others who had fended off scammers were physically different. The differences appeared in the area of the brain thought to control our intuition, or what one researcher referred to as our “spidey sense”. If true, this would make it that much harder for folks to avoid well-honed fraudulent schemes. Lack of other symptoms would also make it harder for loved ones to tell when there might be a problem.

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Inheriting Problems

In recent days the stock market has been going though some turmoil due to tariff-related headlines you’ve probably heard about. In the midst of an otherwise healthy economy, this latest volley in our trade war with China seems ill timed. It’s frustrating for sure, at least in part because there’s nothing we can do about it in the short term. 

Since there’s no use trying to “trade” this kind of event it’s best to remind ourselves to instead focus on controlling what can be controlled. An example of this has nothing at all to do with geopolitics and trade: avoiding some common mistakes related to inheriting IRAs. 

I recently had questions from someone, let’s call her Jane, who was inheriting three IRAs from her recently deceased grandmother. Jane wanted to know her options and the best next steps for moving accounts into her name, accessing money and so forth.

Jane inherited one of the accounts 50/50 with brother, which is pretty straightforward. IRAs, like life insurance proceeds, can go direct to whomever is listed as beneficiary. There’s no probate either, which saves time, money and lots of headaches. The other two accounts were left 100% to her.

Jane knew that her grandmother had intended for all of her retirement money to be spilt evenly between Jane and her brother. But for some reason he wasn’t a named beneficiary on the other two accounts, so he’s not directly entitled to any of that money. This obviously presents problems.

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Don't Take the Bait

Identity theft is a scary thing and these days it’s all too possible for it to happen to you. One of the routes in for fraudsters is through so-called “phishing” emails. You’ve probably heard about these as they’ve been around for years. Early phishing emails were fairly easy to spot. They were plain text, perhaps with misspellings or grammatical errors, or the format just didn’t seem right. Now, however, these emails are much more sophisticated and dangerous.

For whatever reason over the past several months or so I’ve been getting pummeled by phishing emails. I’m guessing this is because my email address has made it onto a bunch of different lists. Most of the emails are of the old variety and are obviously fake, but others are good. Really good. Take a few emails I received from “Apple” as an example.

I have an Apple Developer account that goes along with the app clients can use to access their portfolio information. Several months ago, I received a few emails that looked exactly like other emails I’d received from Apple. The font and colors were right, and so was the general tone of the email as it asked me to click a link to update my account. I don’t know what it was about the email, but something just didn’t feel right, even though it looked good and generally coincided with my Apple relationship and experience. I decided to:

  • Slow down a moment and not simply click the email link as per muscle memory.
  • Read the email again to see if I could clarify what didn’t feel quite right.
  • Log into my Apple Developer account on my own by going directly to the website (not clicking the link in the email) to see if there were any popups or other flags that would indicate my account needed updating.

Seeing nothing, I decided to do nothing – at least in terms of clicking the link in the email. Instead, I contacted Apple. They hadn’t heard of this particular phishing attempt yet, so I sent a copy of the email to a special department. After a few days they confirmed the email was fraudulent. It turns out this email wasn't just sent to me, but pobably to thousands of others - phishing by casting a wide net. What would have happened had I clicked the original email link? My guess is I would have been taken to an Apple-look-alike website and asked to provide my personal information. Or, perhaps a file would been downloaded on my computer allowing fraudsters into my system. (By the way, I once saw a live demonstration of how this works, and it took only minutes for the hacker to start rummaging through the person’s computer.)

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