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Securing Your Retirement

By McKay Lindseymckayl@squire.com

As much as you love your job, you’re probably not going to want to work for the rest of your life. With the number of years the average American spends in retirement at an all-time high, in addition to figuring out how to fill your time, you need to consider how you’re going to fund your retirement. Congress recently passed the Setting Every Community Up for Retirement Act (SECURE Act), effective January 1, 2020, which made significant changes to help you “secure” your retirement.

Key Changes

  • Easier and less expensive for small businesses to set up safe harbor 401(k) plans
  • Allows more part-time workers to participate in 401(k) plans
  • 401(k) plans can offer annuities
  • Required Minimum Distributions (RMDs) moved back from 70 ½ to 72
  • Removed age limit on IRA contributions
  • 10-year distribution schedule for non-spouse inherited IRAs
  • Penalty-free IRA and 401(k) withdrawals after the birth or adoption of a child
  • 529 account funds can be used to repay up to $10,000 of qualified student loan debt

401(k) Plan Changes

Under the SECURE Act, small businesses can receive a tax credit for starting a new retirement plan. The tax credit is the greater of $500 or $250 multiplied by the number of non-highly compensated employees up to $5,000. There is also a $500 tax credit for starting a new SIMPLE IRA or a 401(k) plan with automatic enrollment. These tax credits are available for up to three years.

Small businesses also have the option to save costs by joining with other businesses in a Multiple Employer Plan (MEP), which was previously only an option for related businesses. The failure of one business in the MEP will no longer disqualify the other businesses in the MEP under the SECURE Act.

Although 401(k)s and IRAs are meant to be used for retirement, the SECURE Act has made it easier for growing families to access their retirement monies to ease the financial pressures after the birth or adoption of a child. Up to $5,000 per individual may be withdrawn penalty-free from an eligible retirement plan (401(k), IRA, 403(b) or 457(b)) within one year following the birth or adoption of a child.

The eligibility barriers to participating in a 401(k) plan have been lowered to allow more part-time workers to participate. Employees age 21 and older who work 500 or more hours for three consecutive years will now be eligible to participate in their employer’s 401(k) plan. The prior eligibility requirement was one year of service and 1,000 hours. While these part-time employees may be eligible to participate, employer matching contributions will not be required for these participants.

IRA Changes

For individuals reaching age 70 ½ after December 31, 2019, Required Minimum Distributions (RMDs) from qualified retirement plans and IRAs are not required until age 72. Participants of qualified plans may further delay RMDs from their current employer’s plan if they continue working past age 72. Prior to the SECURE Act, Required Minimum Distributions (RMDs) from a traditional IRA were required when an individual reached age 70 ½.

With the removal of the age limit on IRAs, individuals with earned income may continue to contribute to an IRA as long as they live, however, RMDs from IRAs are still required after age 72.

Non-spouse beneficiaries of inherited IRAs are required to take RMDs over a 10-year period under the SECURE Act, rather than allowing beneficiaries to stretch RMDs over their lifetime. There are exceptions to the 10-year distribution schedule for certain eligible beneficiaries including: spouses, minor children, disabled individuals, chronically ill individuals, individuals within 10 years of the age of the IRA owner.

529 Education Savings Account Changes

Under the SECURE Act, an owner of a 529 plan may make a tax-free distribution of up to $10,000 to the account beneficiary to repay qualified student loan debt. It’s important to note that these distributions are allowed under federal law, but many states view these distributions as a non-qualified withdrawal.

While COVID-19 related issues have taken center stage for the past few months, don’t forget about these important changes the SECURE Act has made to help you “secure” your retirement. If you have any questions about how the SECURE Act affects you, contact a Squire professional for help.

Monthly Investor Letter— September 2020

In recent years, U.S. stocks have outperformed international stocks and growth stocks have outperformed value stocks. This has led many to question the benefits of diversification and ask what they should do when an investment strategy performs poorly. We should begin with a look at the appropriate lens through which to view investment strategy performance. Then we will address several issues that work to fog our lens and challenge our ability to stay the course. Taken together, we believe an understanding of these topics fosters the mindset necessary to remain disciplined in the face of adversity.

Our investment strategy is grounded in three key principles. First, we believe markets are highly efficient pricing mechanisms. This leads us to conclude that active management is a loser’s game. Second, because we believe markets are highly efficient, it must follow that all unique sources of risk have similar risk-adjusted returns – not similar returns, but similar risk-adjusted returns. Third, because all unique sources of risk have similar risk-adjusted returns, we also believe portfolios should be diversified across many unique, or independent, sources of risk and return. Moreover, the premiums associated with these unique sources of risk and return should be persistent, pervasive, robust, implementable, and have intuitive risk- or behavioral-based explanations. These three principles form the foundation of an investment process that culminates in a portfolio fine-tuned to provide you the greatest odds of achieving your life and financial goals.

Having a process in place, however, is the easy part. Sticking to it is the real challenge. As Warren Buffett noted, “Investing is simple, but not easy.” While diversification has been called the “only free lunch in investing,” it doesn’t eliminate the risk of losses. It also requires you to accept that parts of your portfolio will behave entirely differently than the portfolio itself. And it may underperform a broad index for a long time. The result is that diversification is HARD. And, because misery loves company, losing unconventionally with a portfolio that doesn’t look like the broad U.S. market, on which the media reports daily, is harder than losing conventionally. In addition, living through difficult times is harder than observing them in back tests – another reason it’s so hard to be a successful investor.

Which leads us into how we’re wired to react when times get tough. First, hindsight bias, or the tendency after an outcome is known to see it as virtually inevitable, contributes to the mistake of resulting. To avoid this mistake, John Stepek, author of “The Sceptical Investor,” advised: “You must accept that you can neither know the future, nor control it. Thus, the key to investing well is to make good decisions in the face of uncertainty, based on a strong understanding of your goals and a strong understanding of the tools available to help you achieve those goals. A single good decision can lead to a bad outcome. And a single bad decision may lead to a good outcome. But the making of many good decisions, over time, should compound into a better outcome than making a series of bad decisions. Making good decisions is mostly about putting distance between your gut and your investment choices.” The bottom line is that because we live in a world of uncertainty, where at best we can only estimate the odds of investment outcomes, the quality of a strategy should be judged before, not after, the outcome is known. Otherwise, you risk the mistake of confusing strategy with outcome.

Next, the recency effect – in which more recent observations have a larger impact on our memory and, thus, perception – is a well-documented cognitive bias. It leads investors to focus on the most recent returns and project them into the future. This can result in buying what has done well recently at high prices, when expected returns are lower, and selling what has done poorly recently, at low prices, when expected returns are higher. Buying high and selling low is not a prescription for investment success. Yet the research shows that this is exactly what many investors do, presumably because of recency bias.

When it comes to investing, Warren Buffett believes that temperament, a source for the discipline to adhere to a well-thought-out plan, is more important than intelligence. While achieving diversification is simple, living with it is hard. Knowing your level of tolerance for tracking-variance risk, and investing accordingly, will help keep you disciplined. Conversely, taking more tracking-variance risk than you can stomach is a prescription for failure. As Michael Mauboussin noted, “A quality investment philosophy is like a good diet: It only works if it is sensible over the long haul and you stick with it.” If you have the discipline to stick with a globally diversified, passive asset class or factor-based strategy, you are likely to be rewarded for it.

What History Tells Us About Elections and the Market

Investors often wonder whether the market will rise or fall based on who is elected president. The data show that capturing the long-term returns of the capital markets does not depend on which party controls the White House. In a recent webcast, Dimensional’s Mark Gochnour and Jake DeKinder offered lessons from history.

Bulls, Bears, and Benefits of Stock Investing

The stock market’s ups and downs are unpredictable, but history supports an expectation of positive returns over the long term. For the best shot at the benefits the market can offer, stay the course.

Stock returns are volatile, but nearly a century of bull and bear markets shows that the good times have outshined the bad times.

• From 1926 through March 31, 2020, the S&P 500 Index experienced 17 bear markets, or a fall of at least 20% from a previous peak. The declines ranged from —21% to —80% across an average length of around 10 months.
• On the upside, there were 17 bull markets, or gains of at least 20% from a previous trough. They averaged 56 months in length, and advances ranged from 21% to 936%.
• When the bull and bear markets are viewed together, it’s clear equities have rewarded disciplined investors.

 

 

 

 

Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
In USD. Chart end date is 3/31/2020, the last peak to trough return of −23% represents the return through March 2020. Due to availability of data, monthly returns are used January 1926 through December 1989; daily returns are used January 1990 through present. Periods in which cumulative return from peak is −20% or lower and a recovery of 20% from trough has not yet occurred are considered Bear markets. Bull markets are subsequent rises following the bear market trough through the next recovery of at least 20%. The chart shows bear markets and bull markets, the number of months they lasted and the associated cumulative performance for each market period. Results for different time periods could differ from the results shown. A logarithmic scale is a nonlinear scale in which the numbers shown are a set distance along the axis and the increments are a power, or logarithm, of a base number. This allows data over a wide range of values to be displayed in a condensed way.


Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

2nd Quarter Investor Letter

The first six months of 2020 saw the advent of the worst global public health crisis in a century—since the 1918 influenza pandemic. In response, the world locked down, putting its economy into a kind of medically induced coma.

In this country, the immediate effects were (1) a savage and nearly instantaneous economic recession, accompanied by record unemployment, and (2) the fastest, deepest collapse in stock prices in living memory, if not ever.

This quarterly letter is divided into two parts, the first a statement of general principles, especially those most relevant in the current crisis, with a restatement of how we practice our stewardship of your invested wealth. The second is a review of what little can be known at this point, and our proposal of how we continue to deal with the pervasive uncertainties of the moment

General Principles

We believe that all lastingly successful investing is essentially goal-focused and planning-driven. All failed investing is market-focused and event-driven.

Stated another way; every truly successful investor we’ve ever known was acting continuously on a long-term plan. Every failed investor we’ve known continually reacted to sudden and terrifying market shocks.

Thus we’ve found that long-term investing success is only incidentally a function of the economy and the markets. It is a direct function of how the investor reacts—or, more properly, how the investor refuses to react.

We are long-term, goal-focused equity investors, acting on our plan with patience and discipline. The smaller part of what we do for clients is the crafting of that plan. The much larger part is helping investors not to react in stressful times like these.

We continue to believe that the equity market can’t be consistently forecast, much less timed, and that the only certain way of capturing equities’ superior long-term returns is to sit through their occasionally steep but historically temporary declines.

Review and Outlook

At midyear, the best that can be said is that the first great wave of the pandemic may be abating, and the economy is slowly reopening. As it continues to reopen, there will inevitably be some flareup in new infections. The interaction between the pandemic and the economy in the short to intermediate term is therefore perfectly impossible to forecast, as is the timing of the development of a vaccine.

The equity market crashed from a new all-time high on February 19 to a bear market low (so far) on March 23, down 34% in 33 days. There is no historical precedent for this steep a decline in so little time. Confoundingly, it then posted its best 50 days in history. The S&P 500 closed out the first half at 3100.29, approximately 8.4% off its all-time high.

It is not possible to forecast the near-term course of corporate earnings or dividends, as they—like the economy they reflect— are still largely hostage to the pandemic. That said, we invite your attention to the fact that at June 30 the yield on the 10-year U.S. Treasury note was about 66 hundredths of one percent.

We infer from the current state of interest rates that though it is impossible to forecast equity earnings, dividends and prices, it can be stated as fact that few of our clients can continue to advance toward the achievement of their long-term financial goals in bonds, at anything close to today’s yields. This is just another reason why we’ve advised investors to stay the course in equities.

It should also be noted that even if the pandemic subsides and the economy to recover, investors will still have to deal with what may be the most widespread civil unrest in our country in decades, and what promises to be a bitterly partisan presidential election cycle. Emotions seem likely to continue to run high, with unpredictable short-term market consequences.

We’ve very deliberately labored in this summary to convince you of the sheer unknowability of the short (say, the third quarter of 2020) to intermediate (say, through the first quarter of 2021) term economic and market outlook. In the next breath, we remind clients that not one of you is investing for the next one to four calendar quarters. We say again: we are long-term, goal-focused, planning- driven, patient, disciplined investors. Our focus is on history rather than headlines, and our mantra is from Churchill: “The farther back you can look, the farther forward you are likely to see.”

Finally, we urge you to think back to January 1 of this year. Have your most cherished lifetime financial goals changed since then? If not, we see no compelling reason to change your plan—and no reason at all to change your portfolio.

Be of good cheer. This too shall pass. Optimism remains, to us, the only long-term realism.

Investor Letter – May 2020

It has been said that one of the most difficult feats in all of sports is hitting a Major League curveball. Yet many pro baseball players have successfully made a name for themselves by doing just that, although you probably cannot list the game’s top three hitters. If you just tried, a name that probably did not come to mind is Rogers Hornsby, a second baseman with a career .358 batting average, who trails only the legendary Ty Cobb on that list. His career lasted from 1915 to 1937, the majority of which was spent with the St. Louis Cardinals. Hornsby batted an astounding .424 during his best year (and proved it was not a fluke by hitting .403 the next season). He hit a dismal .208 during his worst year, but, even then, he thwarted opposing pitchers more than most with his smooth swing and consistent approach at the plate.

Just like Hornsby, the cornerstone of our long-term equity strategy – placing a greater emphasis on small-cap companies and value companies – has had periods of hitting above and below its long-term average. Our strategy has had periods where it wasn’t the top performer, like those years when Lefty O’Doul beat out Hornsby for the best National League batting average. However, those off-years did not diminish Hornsby’s overall career.

The recent strong performance of large-cap growth stocks has caused some to doubt the efficacy of our strategy. The most recent 10-year period ending March 2020 has seen large-cap stocks (13.6%) soar above their historical average (9.9%). The same can be said for growth stocks (15.3% versus 9.8%). We question how long this will last.

Instead, our focus remains on small-cap stocks. Their latest 10-year performance falls in line with their historical average of 11.8%. Value stocks have underperformed their historical average during the latest 10-year period (11.3% versus 12.8%), but not by much, and both still far exceed the historical average for growth stocks (9.8%).

Following performance trends may result in the occasional outperformance, but rarely does it produce superior long-term outcomes. We believe having a prudent, disciplined investment approach based on evidence and data will produce superior long-term results, just like Hornsby’s prudent, disciplined approach to hitting helped maximize his chances of success at the plate.

If you have any questions about your investments, need to inform us of family or work-related changes, or want to discuss your financial planning needs, please reach out. We are here to help you reach your financial life goals!

Source: Ken French Data Library. Factors and indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio nor do indices represent results of actual trading. Information from sources deemed reliable, but its accuracy cannot be guaranteed. Performance is historical and does not guarantee future results. Total return includes reinvestment of dividends. Long-term investing neither assures a profit nor guarantees against loss in a declining market. Past performance does not guarantee future results. Stock investing involves risks, including increased volatility (up and down movement in the value of your assets). All investing involves risk, principal loss is possible.

2020 Q1 Market Update

The journey to achieving your long-term wealth goals follows a road that is not always smooth, clear, or free of debris. Sometimes the market and the world at large will litter our path with obstacles for us to overcome. Global markets have been experiencing increased volatility which comes in stark contrast to the even, steady growth that we often expect.

COVID-19 and the world’s reaction has impacted the global economy in ways no one anticipated. As a result, the first quarter of 2020 has seen record-setting contraction. Unemployment claims jumped to over 10 million in two weeks marking the largest weekly increase in unemployment claims on record two weeks in a row. Naturally, investors priced all this news into the value of stocks, and in Q1 we saw the S&P 500 Index drop 19.6% and small US companies, represented by the S&P 600 index, drop in value by 32.64%.

We don’t know the duration or the extent to which the uncertainty surrounding the COVID-19 coronavirus will affect financial markets. But we do know, at some point, there will be clarity and the fears surrounding the virus will dissipate and markets will react accordingly. Financial markets are incredibly efficient at pricing in news—good or bad—and the reaction can be swift. However, reacting on news is like driving forward while looking in the rearview mirror; news is reflected in prices almost immediately, so navigating based on what is behind us has no value.

It might be days, weeks or possibly months before the fears subside, and the news over that time may get worse before it gets better. Some of you may be tempted to abandon your investment plan and park your investments in cash until the outlook is clear. However, markets can move up just as quickly as they move down, with no clear indication of when you should get back in. Missing these up moves can be the difference between achieving your most important investment goals and failing to reach them in the time you planned or even altogether.

This graph is such a powerful illustration of the danger in trying to time the market. Missing just a few days in the market can drastically impact your portfolio’s overall performance. Remember, it’s “time in” the market, not “timing” the market, that yields great returns.

During volatility, take comfort in knowing that history has shown markets are resilient and continue to grow over time, despite short-term declines. Further, we understand the world is providing enough reason for concern right now; your portfolio doesn’t need to be another one. Instead, turn your focus to what drove your long-term financial goals in the first place—family, friends and those in need.

If you have any questions about your investments or want to discuss your financial planning needs, please reach out. We are happy to help!


Q1 2020 Market Commentary

Global stock markets declined to start the year and effectively erased investor gains from 2019. Both domestic and international fixed income served as a ballast to investor portfolios during the quarter. Falling oil prices, heightened market volatility, and the global spread of the COVID-19 virus all provided large hurdles to market growth.

For the quarter, U.S. stocks (as measured by the S&P 500 Index) lost 19.6%, and non-U.S. developed market stocks (as measured by the MSCI World Ex U.S. Index) lost 23.3%. Emerging market stocks (as measured by the MSCI Emerging Markets Index) lost 23.6%.

The U.S. Dollar Index, a measure of the value of the U.S. dollar relative to a basket of foreign currencies, rose in the first quarter—the U.S. dollar increased by 2.8% compared to foreign currencies. Over the past 12 months, the U.S. dollar has appreciated by 1.8%. The increase in the dollar is a headwind to non-U.S. investments held by U.S. investors.

U.S. interest rates fell during the quarter as the Federal Reserve implemented a 1.50% rate reduction to the federal funds rate. The Fed now targets a range of 0.0% to 0.25% for the federal funds rate. Because changes in interest rates and bond prices are inversely related, the decline in interest rates helped increase the quarterly return for many bond asset classes.

U.S. Economic Review

Positive economic growth in the U.S. continued in the fourth quarter of 2019. The final reading for fourth quarter 2019 GDP showed an increase in economic growth of 2.1%. Despite the economic progress of the past 10 years, a slowdown in economic activity due to COVID-19 has started to show in more recent economic data points. The unemployment rate climbed from 50-year lows to 4.4% in March 2020. Domestic inflation remains tame, as the Fed’s preferred gauge of overall inflation, the core Personal Consumption Expenditures (PCE) index, stayed below the central bank’s 2.0% target with a reading of 1.8% in February 2020. Sources: Bureau of Economic Analysis, Bureau of Labor Statistics, U.S. Department of the Treasury, Morningstar Direct 2020.

Financial Markets Review

Both domestic and international stocks across all size and style categories, as well as U.S. real estate investment trust (REIT) securities, declined during the quarter. Non-U.S. stock returns were also impacted by the strengthening U.S. dollar. During the quarter, U.S. large-cap stocks were the best performing asset class while U.S. small-cap stocks were the worst performing. U.S. and global bonds continued performance from the previous quarter by posting positive results.

In the U.S., small-cap stocks underperformed large-cap stocks in all style categories. Value stocks underperformed growth stocks in all style categories. Among the nine style boxes, large-cap growth stocks performed the best and small-cap value stocks experienced the largest loss during the quarter. Source: Morningstar Direct 2020. U.S. markets represented by respective Russell indexes for each category (Large: Russell 1000, Value, and Growth; Mid: Russell Mid Cap, Value, and Growth; Small: Russell 2000, Value, and Growth).

In developed international markets, all nine style boxes were negative for the quarter. International large-cap growth stocks were the highest performer. Similar to the U.S., small-cap stocks underperformed large-cap stocks across all styles. Source: Morningstar Direct 2020. International markets represented by respective MSCI World EX USA index series (Large: MSCI World EX USA Large, Value, and Growth; Mid: MSCI World Ex USA Mid, Value, and Growth; Small: MSCI World Ex USA Small, Value, and Growth).

A diversified index mix of 65% stocks and 35% bonds would have lost 16.5% during the first quarter.

Lessons For The Next Crisis

This article from Dimensional: Lessons for the Next Crisis recaps what we have learned from past major crisis-related events. The information is very applicable to what we are experiencing right now.

It is difficult to draw useful conclusions based on such
observations; financial markets have a habit of behaving
unpredictably in the short run. There are, however,
important lessons that investors might be well-served
to remember: Capital markets have rewarded investors
over the long term, and having an investment approach
you can stick with—especially during tough times—may
better prepare you for the next crisis and its aftermath.