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"Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves." -- Peter Lynch
BY JULIA ANDERSON
Investors who remained in the U.S. stock market after the Covid 19 selloff in March 2020 can be happy, maybe proud of their ride-it-out strategy. Markets more than doubled since a quick 30 percent downturn before making one of the fastest recoveries in history.
Now here in the fall of 2021, investors can celebrate another 20 percent to the upside thanks to rock bottom interest rates, economic stimulus packages including cash pumped into jobless benefits and strong consumer demand for goods and services.
Can this go on? Can markets climb higher?
Headwinds are gathering but traders show no signs of abandoning ship. Analysts with a longer-term outlook expect market growth to slow from what we have experienced in the past 18 months. But no one is saying we are headed for a crash.
But at some point, there must be a correction. It could be triggered by a bump up in interest rates from the Federal Reserve Bank, a return of Covid lockdowns that pushes jobless rates up, continued supply chain choke points that stifle GDP growth or some catastrophe that we’ve not thought of.
That’s why I have devised a plan to protect my portfolio in case of a downturn as the Federal Reserve begins to look at raising rates, as stimulus money dries up and we get a little more back to normal, whatever that might be. We are getting back to normal, right?
Here’s the challenge: How do you prepare for a downturn while continuing to earn dividends and build your nest egg? This largely depends on your age.
Let’s start with those fully retired, those in early retirement and those at 60 near retirement:
Over 60? In the decade of your 60s, things change. You may retire, you may lose a spouse. You may sell your house and move. Likely you will continue to work part-time, but you may start claiming Social Security benefits and/or drawing money out of your retirement tax-deferred nest egg.
Making these moves requires planning. How will you keep growing your nest egg as you make these transitions? The stock market is still your friend offering the best returns over time.
Plenty of spread sheets will show you income curves related to types of investments – stocks, bonds, money market accounts or some combination. Don’t get too conservative. Don’t sit on the sidelines because you are afraid of seeing your nest egg lose value. Your money must keep earning money. Keep most in stocks paying dividends inside your tax-deferred account but have enough in cash so you can sleep at night if there’s sell off.
In your 70s, the IRS will require you to begin withdrawing money from your tax-deferred portfolio. These Required Minimum Distributions or RMDs will be taxed as ordinary income.
Here’s a strategy to anticipate an economic slowdown. Convert enough of your nest egg to cash to cover the Required Minimum Withdrawals for the next 18 to 24 months. Leave the rest in dividend paying stocks. That way, if there’s a sellout, you don’t have to sell anything at a discount. Meanwhile, your quarterly dividend money gets reinvested in more shares of the stocks or mutual funds that you own.
Now for the younger crowd:
If you are age 18 to 30, just keep chucking money into your 401(k) at work or an Individual Retirement Account, Roth IRA or all three. Don’t be bothered by a sell off. All that means is that U.S. stocks are on sale. Your long-term investment money will buy more shares in a mutual fund or individual dividend-paying stock than when markets were up. Count on an average 100-year stock market return of 8 to 10 percent a year. You are a long way from retirement. You will get where you need to go if you stick with the plan.
If you are 30 to 50 years old, do the same as the above-mentioned younger group. The money you are putting into retirement savings is not going anywhere. Make sure that your retirement money is not emergency money. You have that money stashed somewhere else. This is not money squirreled away for the next vacation or to buy a new house.
If interest rates go up, consider putting new cash into a money market fund at 2 percent or more outside of a deferred plan. You want to stay ahead of inflation with long-term investments. Inflation can bite. Saving is important but earning money on your savings is more important.
At 50, retirement begins to loom. Are you on track to have a big enough nest egg at age 65, 70 to live on? You may face an early buyout or a layoff. Do you still want to be in the stock market? Yes, if you are job-secure and can count on working until your mid-60s. If there are clouds on the horizon, you may need to make an early withdrawal from a deferred account. Then some of it should be in cash so you don’t sell during a market sell-off. Withdrawing money from an IRA or 401(k) should be the very last thing you do. There are penalties for that.
Meanwhile, build an emergency outside your deferred accounts with enough cash to pay your bills for a year. That way you can stay in the market with your retirement money through the ups and downs without having to sell something when markets or a stock is down.
Remember: Fear and greed drive markets. Many investors can’t stand the heat of a selloff. They bailout at or near the bottom of a market downturn and then fail to get back in time to take advantage of the eventual turnaround. Investors, especially women, “need help in developing emotional discipline,” says national financial columnist Chuck Jaffee. I agree. But how to do that?
Think about your MONEY PLAN in advance. Remain confident that doing nothing, staying the course IS A PLAN! If markets crater it is NOT the end of the world, the value of your portfolio will recover. History proves it. Have a talk with yourself in advance about how to handle a sell-off.
After a breath-taking 30 percent Covid induced decline in March 2020, the recovery began almost immediately. A year later, the Dow Jones was up 80 percent from 12 months earlier and has been hitting fresh new highs all summer. My sympathies to those investors who bailed out and are now on the sidelines wondering what to do.
What’s ahead? Most experts predict that a sell off is coming after the spectacular 2021 ride to record stock market values. On the plus side, the Fed will likely keep interest rates low in the face of the Delta covid variant. That keeps money in stock markets. The U.S. economy is in better shape that most of the rest of the world. The nation’s labor market is adding jobs. Consumers are consuming. All these indicators point to further increases in stock values if corporate earnings stay positive. Passage of a federal Transportation Bill will help.
On the negative (selloff side) markets may be “over-bought” and need a breather. A slight increase in interest rates could trigger market declines. There could be another unexpected disaster… covid variant, terrorist attack, weather-related difficulty. Supply systems could remain stuck. Computer chip shortages could mean trouble for manufacturers. Unemployment could remain elevated with slowing job recovery. And there’s a certain taste for speculation in markets with the crypto craze, high flying tech stocks and speculative Ponzi-like pressures that are putting younger investors at big risk.
There’s a lot to ponder, to worry about. Don’t ignore these worries, analyze them, and have a plan. Remember: The average annualized rate of return for U.S. stock markets is about 8-10 percent. Embrace that fact but keep some cash on the side.
"Risk comes from not knowing what you're doing." - Warren Buffett, investor.
BY JULIA ANDERSON
My parents trained me by example to manage money and think long-term. Living on a farm, they had me working little jobs (pulling weeds in the bean field) and saving for college when I was 8 years old. As a teenager, 4-H beef projects gave me early “business” experience with the basics of profit and loss, record-keeping and expense management. My seven years of 4-H beef projects paid for college.
A college degree in education and journalism gave me career opportunities that fit my interests.
Investing in dividend-paying stocks was painless. My mother began giving me small amounts of stock (10 shares of IBM) when I was in my 30s. She saw nothing complicated or mysterious about buying stock for the long-term and reinvesting the quarterly dividends. She loved seeing her net worth grow. She was a confident investor.
Early on she taught me the “Miracle of Compound Interest,” earnings from both stock investments and certificates of deposit at the credit union. Growing a long-term nest egg, saving, and investing are a key part of my financial plan. I became a confident investor by sticking to what I understood.
I never passed up free money. I made sure that I saved enough inside my 401(k) plan at work to win the employer matching money. With an eye on the long-term, I picked moderately aggressive investment funds.
I started my own self-managed Individual Retirement Account and separate stock account. I learned by doing. I didn’t wait until retirement to start managing my investments. At retirement, I moved my 401(k) money to an online self-managed brokerage account where management fees are low and there's no charge when I buy or sell something.
I sought out mentors. My mother was the first. She shopped for bargains at the store, was careful with credit cards, looked for the best CD savings rates even if it meant changing banks. She bought shares in companies that she understood (McDonalds). My mentors were themselves confident investors. Money advice came from people who were not selling me something or charging a management fee. For me, it's simple -- Reinvest earnings – dividends or interest. Don't get into something that you don't understand. Check out management fees and commissions.
When I retired, I expected to be in charge of my money. I learned the basics sooner than later so I had the confidence to manage my money and make reasonable trade-offs between risk and financial reward.
I could have planned better for unexpected challenges. I did not expect to divorce at age 60. I lived through it, kept the house, and soldiered on. It has worked out. My advice -- plan for the worst, expect the best. Have your own money. As they say at WIFE.org, "A Man is Not a Financial Plan." A spouse may become seriously ill or die. You may divorce. Meanwhile, you may inherit assets from your mother or aunt. Have a plan for how those assets will be managed. Have a plan for how you would manage on your own.
Look ahead to retirement by knowing what your expenses will be and how much income you will have. (See worksheets on this website). Don’t ignore Social Security as an important income stream in retirement. I claimed benefits at 64. That was too early.
My 80/20 (stocks vs cash) investment strategy has served me well. I continue to trust that the U.S. stock market will over time deliver an annual average return of about 10 percent. I keep management fees low. I don’t try to “time” the market by getting in and out. I don’t panic when markets sell off. The U.S. stock market and the American-based companies it represents with its regulated capitalistic environment will reward those who are patient. I believed that as a kid. I still believe it. I am a confident investor.
BY Julia Anderson
Divorce is often a financial setback for a woman. Statistics prove it.
After a divorce, women have less household income. They must juggle a job and family responsibilities, if they have children under 18. Their pay for an equivalent amount of work may be lower. They may be qualified for lesser paying jobs. All these factors make it more difficult for women manage their finances, let alone save for the long-term, for retirement.
When I appeared recently with my friend, Juliet Laycoe, on her Facebook live program, we talked about how important getting a “good” divorce settlement is and how it sets up your financial future for years to come. Laycoe is a divorce attorney, book author (Divorce Wisdom) and social media host.
She asked me as a financial guru to discuss how best to manage the early stages of a divorce.
Bottom line: Divorce is hell: Your emotions swing from grief to anger. There’s stress and deep anxiety. The tendency is to want it over as quickly as possible. A good attorney will advise you to SLOW THINGS DOWN.
You may not be thinking straight under the stress of a divorce. It is best to take a deep breath, get outside counseling and look to the long-term.
My early in a divorce TIPS:
Reminder yourself that this divorce will have a big impact on your long-term financial future. Let your attorney advise you on a long-term strategy. If your spouse is initiating the divorce, you may have more leverage. Play it cool. Ask for half of any pension payout that eventually would come to your ex-husband. Ask for half of his 401(k). Don’t count on child support. Half of divorced women are not getting child support.
Look carefully ahead at your FUTURE household budget. What will your income be, once the divorce is final? Add up your household expenses. Then look at income. Can you cover your expenses? If not, what changes can you make? Start establishing your own credit with a credit card in your own name. Get your own checking account. Keep your job skills up to date, add new job skills.
Polish up your employment resume. You are going to have to work, manage kids, pay for groceries. Can you find a better paying, full-time job. A good resume is important. Network with your friends on how to write good one. Think of yourself as an independent contractor…. with employers. What do you bring to the job they want you to do?
Get counseling, not just financial counseling. A good counselor can bring clear thinking to your future, what you want and how to make it happen. In the beginning, I was going to pack a bag and just leave. My therapist helped me realize I was just running when I needed to stay put, take a deep breath, and negotiate from a position of strength, not injury. Staying put was a GREAT financial decision.
Make saving a part of your financial plan. If you get a lump sum settlement from your divorce put the money to work for the long-term in a self-directed IRA. Make sure you are taking advantage of your employer’s 401(k) tax-deferred savings plan with matching. Build an emergency fund, so you don’t have to turn to high-interest credit cards.
Keep the faith. It may feel like the deck of cards has been thrown in the air but not yet landed. They will. Over time your future will become more clear, new doors will open, your heart will heal or at least mend a bit. Don’t try to rush through this terrible time in your life just to get away from the bad feelings, the anxiety and anger. Let it spin out slowly.
Click here to a link to a Smart Money show with Juliet Laycoe as our guest.
BY JULIA ANDERSON
Nik Miles knows a thing or two about cars, the automotive industry and where it’s headed.
With electric vehicles grabbing headlines and some two-thirds of Americans now open to buying electric, we thought it was time to talk to Miles, a nationally known “car guy” and principle at ourautoexpert.com.
Smart Money co-host, Pat Boyle, and I covered the basics with Miles: -- How to buy an electric car, what’s out there and when to buy. Click here for the video on YouTube presented by TVCTV public television in Beaverton, Ore.
The landscape is changing so fast that it is hard for buyers, dealers, and reviewers like himself to keep up with new offerings, new technology and performance enhancements, he said.
Battery technology improvements are the big driver.
“We are seeing advances in battery ranges in the 250-mile range and are starting to see 300-mile ranges before recharging,” Miles said. “It’s crazy how fast the technology is going.”
Next year (2022), he expects there will be at least 100 electric vehicle brands and models on the market from lower-cost commuter cars to high-end luxury models tempting the rich.
Moving to electric
Ford Motor Co. now says that 40 percent of its vehicles will be electrified by 2030. Next year, Ford will start making an all-electric F-150 truck called the Ford F-150 Lightning. The company will start production in late 2022 of its first fully electric cargo van. You can order its Mustang Mach-E, right now. Priced at $42,895.
A Nissan Leaf sells right now for between $31,670 and $40,520. That’s before the possible $7,500 federal tax credit on the purchase. (See below) The Chevrolet Bolt EV is priced at $40,000.
Cadillac will be in production in late 2022 with the Cadillac LYRIQ, an electric luxury sedan. BMW will soon offer the BMWiX, a fully electric “sport activity vehicle.” Volvo said it will be all-electric by 2030.
Toyota, long in the hybrid business with its Prius, will be out with its first all-electric SUV soon. The company intends to sell 5.5 million electrified vehicles worldwide by 2025.
“Toyota is clearly the market leader with the most hybrids out there,” Miles said. He expects Toyota to do it right when it makes its move into electric.
After more than 100 years of gas- and diesel-power engines and gas stations to go with them, it is no surprise that interested buyers may be a bit overwhelmed by the new technology and its reliability.
THREE buying TIPS from Nik Miles at ourautoexpert.com.
Tip No. 1: Don’t buy, lease!!! The technology is advancing so fast that an electric car you buy today or even tomorrow will be out of date with old technology in two or three years. The resale value will be questionable. “When your lease is up, you won’t be stuck owning an outdated vehicle,” Miles said.
Tip No. 2: Don’t go out looking at what’s electric. Instead, thoughtfully (my words) consider what you need in a vehicle. What fits your lifestyle. Then look at how much money you can spend.
“After all that, start looking at electric cars,” he said. “Do it the other way around (looking first) and you end up with something that doesn’t work for you.”
Tip No. 3: Test drive and test drive some more. “Test drive everything you can get your hands on,” Miles said. “Test driving doesn’t cost you anything. It will make a big difference.”
Because our interview with Miles was to pick his brain on the basics of electric vehicles, we left a lot of questions unanswered. Cost could have been a big topic. Research again will pay-off. At www.fueleconomy.gov, the U.S. Dept. of Energy provides a table showing federal tax credits available by brand and model, if you buy hybrid or all-electric.
For example, you get up to a $7,500 federal tax credit when you buy a 2021 Ford Mustang Mach-E Premium AWD. But there are quotas and other considerations to gain these tax credits. Automakers are allotted 200,000 buyers per eligible EV buyer. When that number of buyers have used up the credits, they’re gone for the rest of the year.
Bottom line on cost: You can get into an electric vehicle for a little as $7,500, if you buy used. Or go for a luxury car such as the Tesla long-range Model 3 with a battery range of 353 miles for $50,190. There is a lot more coming to address every price category and user preference.
This is another area deserving in-depth buyer research. How will you charge your electric car battery and how long will it take? Must you invest in upgraded 220-volt or 240-volt outlets at home to get a full charge in a reasonable amount of time? How much will all that cost? Will cold weather affect battery range and performance? We didn’t talk with Miles about any of this.
He observed that the door on the electric car market is only just beginning to open. “We are in the pre-fireworks stage of electrics, he said.
A big unanswered question: How reliable is the nation’s power grid? Can existing electric power companies, their generating capacity and infrastructure supply enough power to juice up all these electric batteries every night? What happens if we begin experiencing more brownouts and blackouts like those that already have occurred in California. Will we be walking to work?
Electric car technology is just getting started. Exciting but a lot to think about before you buy. Thanks, Nik!
BY JULIA ANDERSON
The Campbell Soup Co. is raising prices on an array of grocery items by fall.
Crude oil prices are hitting three-year highs, boosting the gasoline pump price by 95 cents a gallon from a year ago.
As restaurant operators struggle to hire and retain workers the cost of eating out has skyrocketed. Yes from home construction materials to automobiles, prices are rising.
These increases on a market-basket of goods and services tracked by the U.S. Department of Labor are running at an estimated overall 6 percent a year. Our cost-of-living is going up. In other words, we have an INFLATION problem.
After more than two decades of keeping inflation at bay, we all are talking about it and what to do about it.
Economists say a bit of inflation in the range of 2 percent a year is OK, but 4-percent, 6-percent, 8-percent a year is a hardship especially on retired people with fixed incomes and on women who tend to save less and are more conservative investors.
Inflation is the invisible enemy that eats into your buying power and your long-term savings and investment strategy. Here’s why:
Let’s say you save $1,000 in a bank savings account. If the cost-of-living increases by 2 percent over the next 12 months, the buying power of that $1,000 drops by $20 to $980. That’s because as prices increase it will take more money to buy the same stuff.
Twenty dollars may not seem like a big deal, but if the cost-of-living increases at 2 percent a year for 10 years, the buying power of your $1,000 drops to $800. In other words, your $1,000 of savings takes a 20 percent hit over those 10 years.
Here’s another way to look at inflation and how it undermines investors. You have $200,000 in a tax-deferred savings plan such as an Individual Retirement Account or a 401(k) through your job. You lose sleep at night when stock markets go down, so you have your money in “safe” money market funds. You just can’t stand seeing your retirement savings drop in value if markets retreat.
The inflation problem
The problem? Money market and bank accounts are paying you nothing on the savings. The Federal Reserve Bank is keeping interest rates low, near zero, to stimulate the economy as it rebounds from the Covid-19 pandemic. Unfortunately, inflation at 6 percent this year is outpacing your savings by a lot. Your money is “safe,” but you actually are losing money on the safe savings. If it keeps up, your $1,000 will lose $60 of purchasing power in just the next 12 months.
Meanwhile that $200,000 retirement account is losing buying power, too, unless its value grows at least even with the inflation rate. Better yet your long-term investments should be gaining on inflation.
To review, over 10 years with little or no interest income on your $200,000 money market account, you effectively lose $40,000 of buying power if the inflation rate holds at around 2 percent. If the cost-of-living jumps to 6 percent a year over ten years, you lose $120,000 or 60 percent of your buying power on the $200,000.
Beating inflation requires confidence
This is where risk vs. reward comes in. In the current financial environment where ordinary bank savings, money market accounts and certificates of deposit are paying little or nothing in interest, you must look for other ways to “GROW” your investments. It is counter-intuitive but safe money in a bank with no interest is not safe.
If you are working, use the 60/40 ratio of stock investments vs bonds or other holdings. Stock index funds work best because they spread the risk and are low-cost. Management fees should be under 1 percent on the value of the fund. Use the fund dividends paid quarterly to reinvest by buying more fund shares. Over time you will be happily rewarded by the “miracle of compound interest” growth in the value of your savings investments.
Diversify by spreading your investments over several growth categories – real estate investment trusts, shorter-duration bonds, Treasury Inflation-Protected Bonds, or individual dividends-producing blue-chip stocks. So, research to determine long-term performance and management fees.
If you don’t have the confidence to do this on your own, hire a financial consultant for a one-hour session to advise you. Or take your nest egg to an adviser to manage. Just make sure you know how much in fees you are paying them for the privilege.
Keep in mind that some inflation around 2 percent a year is normal. Historically over the past 20 years that’s about what we’ve been seeing. Also remember that being too conservative with your savings is a liability. You must accept some risk to earn the rewards.
And beside, The Fed is counting on the inflation surge to abate as the economy gets back to a more balanced supply-demand ratio. But a lot of stimulus (money) has been dumped into the economy. Normal may take awhile.
Historically, U.S. equities (stocks and stock funds) have generated an average 5 percent to 7 percent return annually. They must form the bedrock of your long-term financial plan.
"Worried about surging inflation? Here's 3 ways to protect your wallet from taking a hit, Bankrate.com, click here.
"Warren Buffett's top tips for beating inflation," Bankrate.com click here.
"9 Assets for Protection Against Inflation," Forbes, click here.
I meet women all the time who face job and money transitions and who want to do them right. It’s about building confidence and taking charge of the future. This is your money. No one cares more than you do!
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