SUMMARY:
The stock market is still struggling to get back to the pre-crash highs of early 2022.
But we are still sitting well above the lows reached in October of 2022 and are still only 6% below the all-time highs in the S&P 500.
Small cap stocks have not rebounded as much and are still well below their all-time highs.
The major stories are still the same – interest rates, inflation, and recession concerns.
The trend in interest rates and the fact that stocks are approaching a key resistance level (all-time highs) means that we can expect a lot more volatility in the markets in the short term.
The market rally of 2023 has stalled out since the beginning of August. As of the market close on Friday September 8th, the S&P 500 is only down about 6% from its previous peak at the start of the 2022. The Nasdaq is down about 13% from its all-time high and the Russell 2000 is still down around 24%. In the graph below, you can see the nice bounce off of the October 2022 lows. Stubbornly high interest rates, global economic concerns and the market digesting the big runup since late 2022 have us in a holding pattern right now.
The Nasdaq has climbed roughly 34% from its low in October of last year while the S&P 500 has gained about 25% since then. The Russell 2000 (small and mid-cap stocks) has only gained about 9% since October. This is more evidence of why you don’t want to own small-cap and mid-cap funds. They underperform the large cap index funds over longer time periods, and they get hit just as hard if not harder in bear markets. Advisors recommend small and mid-cap stocks for diversification, but this strategy doesn’t work and doesn’t make any sense.
This bear market has been driven by inflationary pressures and its resultant impact on interest rates. While the Fed seems to be nearing the end of its rate raising cycle, the debt markets are still struggling.
A nice way to track bonds and interest rate trends is by looking at bond prices. Remember that bond prices move in the opposite direction of interest rates. When interest rates rise, bond prices go down and vice versa. And the cleanest way to track bond prices is by looking at zero coupon bonds. Since zero coupon bonds don’t pay any interest, the total return on these bonds is reflected in the price of those bonds. We use the symbol ZROZ to track bond prices.
In this first chart, you can see the deep and steady decline of bond prices since the start of the stock market decline at the beginning of 2022. The price of these bonds is now back at the low of October 2022 which represents a loss of about 50% from the peak at the end of 2021.
As I cover in my book, FIX YOUR 401K, in more detail, this is an example of why you do not want to own bonds. You receive lower long-term returns than stocks and you get very little, if any, protection of your capital. If you purchased these bonds at the end of 2021, you were receiving an interest rate of 1.9%. We are told that bonds are safer than stocks, but how safe have they been over the last 18 months? For a measly return of 1.9%, you were exposed to a 50% loss of your principal. Again, most advisors recommend bonds in your portfolio for the purpose of asset allocation and diversification, but this approach doesn’t work on any level. Shorter term bonds have not dropped as much as longer term bonds like ZROZ, but the trends are the same.
We remain in a period of volatility and instability in most financial markets. We expect this to continue in the near term. Janet Yellen recently commented that she believes a soft landing for the economy is looking more and more likely. I don’t know her track record at predicting such things and one should never rely on these forecasts for investment decisions.
The reality is that no one knows if the worst is over or not. Because of the uncertainty, it is important to follow a disciplined approach to investing. Followers of our Market Signals newsletter are positioned to benefit if the market keeps moving higher and will be able to limit losses if the market turns down from here. It is critical to have an investing strategy that wins no matter which way the market moves. No one can predict which way things will move in the short term. But we all know that in the long term, the direction of the stock market will be higher. Stay disciplined, my friends.
Happy Investing,
Phil
Disclaimers *The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
Updated: Sep 16
In today’s economy, we have so many companies that make terrific products. Automobile companies make some great vehicles. Technology companies make some amazing products. Pharmaceutical companies make drugs that save millions of lives. The products that these and other industries create continue to evolve and improve over time.
The financial services industry is the ninth largest industry in the world, The financial services industry in the United States alone represents about 8% of our Gross Domestic Product – about $2 trillion. Financial services companies employ about 8 million people in the US, and they hire some of the best and brightest from the top schools across the country. They utilize the most sophisticated and powerful computers and software that exists.
Despite all the assets and strengths of the financial services industry, I contend that they offer the worst products of any industry. I have been an investor for 40 years and the investment products available to consumers today have changed very little over that time.
Technology has changed the speed and the costs of trading financial products and allowed for the introduction of index funds and exchange traded funds in the last 30 years. While these advancements have increased efficiency, they have very little impact on the results of individual investors. Blockchain technology which supports cryptocurrencies is an impressive technology innovation, but no one understands the value of cryptocurrency.
The financial services industry introduced their prized asset-allocation strategy in the early 1950s. Asset allocation didn’t work then, and it doesn’t work now.
It isn’t fair to blame the financial services industry for the irrational behavior of financial markets. Financial markets are irrational because we humans who trade the markets behave emotionally and irrationally.
But I think it is fair to blame the financial services industry for the lack of safe and effective investment vehicles available to ordinary investors today. All financial services companies advertise about their ability to help people successfully navigate the irrational financial markets. They are constantly promoting their sophisticated solutions and capabilities.
How did those solutions work out for you in 2022? Or 2008? Or 2001? Do you feel that your retirement accounts are protected if the economy enters a recession this year? Will your investments be protected if inflation increases again. How confident are you in your investment strategy? Will your results be better the next time markets crash?
I think I know the answers to those questions.
In our business, we see the results of the weak and confusing solutions offered by the financial services industry. We see conservative investors who have cryptocurrency investments in their IRA accounts. We see inexperienced investors with commodity investments in their retirement accounts. We see experienced investors with over 50% of their retirement funds in cash accounts. We see other investors who have their funds spread across a dozen different investment assets that they barely understand. We have smart customers, and the financial services industry has confused and frustrated all of them.
Invariably, the unusual investment strategies of our customers are the result of working with several ineffective investment advisors. In many cases, our customers were forced to react to the poor results of bad investment advice.
The bad advice did not come from one or two clueless individuals or a couple of bad companies. There are incompetent people and weak companies in every industry.
The lousy guidance came from all the biggest names in the financial services industry. The advice typically originates from the best and the brightest people in the esteemed research departments of the most sophisticated Wall Street firms.
Bad advice and bad solutions are not the exceptions, they are the rule in the financial services industry. Can you name another industry with solutions and products as bad as the financial services industry? I can’t.
It is not unreasonable to expect better investment solutions for yourself and for your family. The stakes are very high. Don’t settle for less than you need and less than you deserve.
The dismal performance of the financial services industry motivated me to solve this big problem. I was forced to take matters into my own hands.
I created the Market Signals product to provide all investors with the ability to achieve better than average returns AND protection against market collapses. We have been told by the financial services industry that higher returns are only possible with a higher risk for losses. Not true.
We achieve higher returns because we avoid major losses in market meltdowns. Losing less money in bear markets actually leads to higher returns. It’s basic math.
If you are not already a subscriber to our Market Signals newsletter, click here to learn about a better and safer way to invest.
Happy Investing,
Phil
Disclaimers *The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
Developing financial projections during the retirement years is very similar to the ones we covered last week during the working years. The only differences are:
You need to substitute annual withdrawals (your annual spending) for deposits (your contributions during your working years).
You need a solid cash management strategy to support those withdrawals.
Note: There are tax considerations that need to be taken into account during retirement, but we are not going to cover those today. You should consult either your accountant or a financial advisor to address taxes in retirement.
WHAT YOU’LL NEED:
Beginning retirement accounts balances at age 65 or the age at which you retire.
Estimated amount of money needed to withdraw each year to support your living expenses.
Your investing strategy and expected annual returns.
A cash management strategy.
Beginning balance
Your beginning account balance is simply your ending account balance from the projections we discussed last week. If you plan on retiring at age 65, for example, this would be the projected or actual account balance at the end of your working years at age 65.
Annual withdrawals
During your working years you were making annual contributions to your retirement accounts. During your retirement years you will probably not be making more contributions to your retirement accounts. So rather than adding in your annual contributions to your spreadsheet projections, you will be deducting your annual withdrawals.
We will be keeping things simple today, but this step can require a lot of detailed calculations. Some people make detailed projections of their monthly living expenses in retirement. This is fine if you want to take the time to do it.
Most people have lower monthly expenses in retirement than they incurred during their working years. Housing expenses are often lower in retirement as most people have paid off their mortgages by the time they retire. Many people also downsize their living space which can lead to lower expenses in retirement. Health insurance premiums are also typically lower in retirement due to switching over to Medicare.
Cost inflation is an important consideration for your retirement projections. While your monthly expenses may start out lower in your mid-sixties, your expenses will continue to rise during your retirement years.
A fairly simple way to handle your spending needs in retirement is to use your monthly living expenses before you retire. For example, if your monthly living expenses are around $8,000 per month before you retire, you could use this amount as your annual after-tax withdrawal amount. A $96,000 (8K time 12) annual spending level would correspond roughly with a 30% tax rate. At a 30% tax rate, you would need to withdraw $137,000 per year to cover taxes and the $96,000 in annual spending.
If you are close to retirement age, it might make sense to do more detailed calculations of your living expenses in retirement. If you are a long way off from retirement (10 years or more), I would recommend a simpler approach.
Investment strategy
Your investment strategy and approach take on even greater importance in retirement. During your working years, you can make up for a poor investment strategy with higher annual contributions to your retirement account. You won’t be able to do this in retirement. Everything depends on your investment strategy.
The lack of contributions and having fewer years to recoup losses causes people to become even more conservative with their investment strategy during retirement. This is totally understandable, but it could lead to running out of money during retirement. Working longer is the only way to avoid this.
The average investor makes only about 4% to 5% per year in their retirement accounts during their working years because they invest too conservatively. Following a similar approach in retirement leads to average annual returns of 3% to 4% per year due to the need to keep an even higher amount of funds in cash.
A lot of 401K investors follow industry best practices and earn a little over 7% per year during their working years by investing in target date funds. Following this approach in retirement leads to average annual returns or around 5.5% to 6% per year due to the need to be even more conservative in retirement.
Earning only 4% to 6% in retirement severely limits spending and wealth creation during the retirement years. But until the last five years, investors had no other good options.
Our clients that subscribe to Market Signals earn at least twice these returns during retirement. It often leads to millions of dollars more available to spend in retirement. It often is the difference between working into your seventies or living very comfortably and without any worries in retirement.
Cash management strategy
A core best practice in money management is to never withdraw money from an investment account at a loss. This is true in your working years and in your retirement years. If you do not have a good cash management strategy in place during retirement, you may be faced with this unfortunate situation.
The way to avoid this situation is to move profitable investment funds (current value is above the purchase price) to safe cash accounts before you need to withdraw the funds. Average investors that are very conservative already have their funds in lower risk assets like cash and bonds. These conservative investors do need to be careful with bond investments, however, since they can and do lose money.
If people had money in bonds at the end of 2021, the price of those bonds may still be 20% lower today and they may take several years to recover. If the bonds you hold have terms of five years or less, you would want to start transferring those bonds to cash accounts three to five years before you need to withdraw the money. Long term bonds would require you to make the transfers even earlier.
Retirement funds that are invested in stocks have even greater risk of losing money which may force you to sell the stocks at a loss when you need to withdraw money during retirement. For this reason, it is recommended that retirement investors move their stock investments to safer cash accounts at least seven years before the need to withdraw the money. From our earlier example of a person needing to withdraw $137,000 per year in retirement and if that person had all of their money in stocks, they would need to start moving $137,000 per year to cash at age 58 (seven years before retiring at age 65).
This is another significant advantage for our Market Signals subscribers. Because our investment system is designed to avoid the big losses that happened during stock market crashes, they only need to begin moving money to cash two or three years before the time they need to withdraw the funds. This alone provides a significant investment performance gain during the retirement years.
Managing all these considerations properly during retirement will lead to a much more successful retirement. You deserve a more secure and more comfortable retirement. You need to get this right.
If you are not already a subscriber to our Market Signals newsletter, click here to learn more.
Happy Investing,
Phil
Disclaimers *The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
%20(1).png)
