Are Investors Underestimating the Risk of a Recession?

bridge

Once again, stocks have rallied on the news that the U.S. and Japanese economies remain sufficiently weak that both require still more gentle nurturing from their respective central banks. In the absence of growth, investors continue to take solace in monetary accommodation, particularly as the corollary to soft growth—low interest rates—tends to prop up risky assets.

But there can be too much of a good thing. Although soft growth may be positive for equities, given the typical monetary response, negative growth is not. Bear markets typically coincide with recessions. And should a recession occur now, it would be particularly problematic for stocks: Earnings estimates for next year are aggressive at a time when central banks are struggling to conjure mediocre growth, even with the benefit of an evermore exotic toolkit.

All of this suggests that investors should be sensitive to any information that suggests the probability of a recession is increasing.

In fact, the Chicago Fed National Activity Index (CFNAI), my preferred leading indicator, recently fell back into negative territory (see the chart below). While this hasn’t stopped the market from imbibing the nectar of cheap money, I have watched this indicator long enough to know that it is telling us something and it merits our attention for three reasons.

chicago-fed-national-activity-index

1. Growth may disappoint.

Of all the indicators I’ve looked at, the CFNAI has the strongest leading relationship with real gross domestic product (GDP). Over the past 35 years, the level of the CFNAI has explained approximately 40% of the variation in the following quarter’s GDP (source: Bloomberg data). At the very least, the most recent reading suggests that the economic—and by extension earnings—rebound that the market is expecting in the second half may not materialize.

2. Consistently negative readings coincide with recessions.

More troubling than the level of the CFNAI is the pattern. The three-month average has been negative since early 2015. The last time this happened was the summer of 2007. Going back to 1980 this pattern has only occurred during recessions, or the period leading up to one.

3. Slower growth is inconsistent with rapid multiple expansion.

Historically, when CFNAI readings have been consistently negative, the multiple on the S&P 500 has been flat year-over-year, according to Bloomberg data. Today, the S&P 500 trades at a 15% premium to where it was a year ago. This confirms that markets have become increasingly dependent on ultralow rates.

True, no single economic indicator can capture more than a fraction of the complexities in an $18 trillion economy. And the record of accurately timing recessions is mixed at best. That said, if there is any scenario that matters for markets, it is a recession. Periods of economic contraction have a pronounced effect on asset class returns.

Yet despite the significance of recessions, few today appear worried. Volatility remains low and multiples high. However, the CFNAI is suggesting that, at the margin, we should all be a bit more concerned about the prospect of one.

Russ Koesterich, CFA, is Head of Asset Allocation for BlackRock’s Global Allocation team and is a regular contributor to The Blog.

 

Investing involves risks, including possible loss of principal. Diversification strategies do not guarantee a profit or protect against loss in declining markets.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of September 2016 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. Past performance is no guarantee of future results. BlackRock makes no representations or warranties regarding the advisability of investing in any product or service offered by CircleBlack. BlackRock has no obligation or liability in connection with the operation, marketing, trading or sale of any product or service offered by CircleBlack.

©2016 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

Top financial concerns in a divorce and how to plan for them

Hands

Divorce is often messy, and emotional.

Anyone going through a marital breakup can be forgiven for wanting to temporarily set aside thoughts about wills, trusts and retirement for another time.

However, professionals say it’s a chapter in life when people involved need to deal with both their emotional and financial well-being.

The process takes time and requires patience, said Debbie Sullivan, a senior vice president and financial advisor with RBC Wealth Management in Canonsburg, Penn.

She says many divorcing couples find it difficult to make good financial decisions in the midst of emotional turmoil.

Her advice: “If you don’t know what to do, don’t do anything”—at least not until you’ve surrounded yourself with professionals who can help. For your finances, that includes a financial advisor, accountant and attorney who will work together in your best interests.

Start with a checklist

Once you’ve assembled your team of financial professionals (which should be separate from that of your soon-to-be ex-spouse), Sullivan recommends having a framework in place that will help provide clarity.

Most financial advisors will provide a checklist of asset and investment topics to cover during a divorce. It starts with the basics of gathering information such as Social Security numbers and assessing the complete financial situation of the couple, from income and expenses to assets and liabilities, employee benefits, insurance policies and credit reports.

“We start with a budget worksheet and usually get a good tax accountant on board right away to look at the tax implications of separating assets and the fact that moving from a couple to a single taxpayer means each may be in a higher tax bracket,” said Sullivan.

One issue that weighs heavily on divorces is the end of trust between spouses, which unfortunately extends to financial trust. Although spouses have a legal duty to be forthcoming about their assets during a divorce, sometimes assets can be hidden.

“It can be difficult to prove that someone has hidden assets and very expensive to hire a forensic accountant,” said Sullivan. “Often the only person who will win is the attorney.”

Her recommendation? “It’s better to make sure you are able to sustain a comfortable lifestyle and let the rest go if you can,” said Sullivan.

Primary residence is a common topic

The first decision made while splitting assets is usually around the primary residence. Women often want to keep the house, said Sullivan, but it can be more difficult if they’re not working or if they need to refinance a mortgage.

“You have to separate the credit of each spouse and get the title and mortgage into one owner’s name,” said Sullivan. “A good attorney will make sure all your joint accounts are closed and that you establish new credit in your name only.”

Some couples end up selling their home before the divorce is final because of the tax implications, said Kirsten Waldrip, an associate professor of estate planning and taxation at the College of Financial Planning in Centennial, Colo.

According to Waldrip, a married couple can exclude a capital gain of up to $500,000 but a single person can exclude only $250,000. As a result, she said, they may choose to sell first.

“If one spouse decides to stay in the home, the other may need to be compensated for their investment in the property,” said Waldrip.

Important financial documents

Although where to live and the budget are usually the main focus during a divorce, Waldrip said there are other financial documents that should be dealt with immediately. That includes a determination of how health insurance will be provided and paid for if one spouse isn’t working.

“It’s easy to push these things to the back burner, but it’s best to update your estate trustee right away and, even more importantly, your financial and medical power of attorney,” said Waldrip. “This is especially important if you’re in the midst of an angry divorce.”

On the other hand, changing your will and the beneficiaries on your life insurance policy and retirement accounts should be done after your divorce is final, she said, because state laws typically don’t allow you to disinherit a spouse.

If you have a joint trust with your spouse, you’ll need to negotiate how to handle the assets in the trust and create a new trust as part of the divorce.

If you have a prenuptial agreement, that can streamline the divorce proceedings but won’t eliminate disagreements over assets, according to Deborah Juran, a senior vice president and financial advisor with RBC Wealth Management in Monterey, Calif.

“Prenups get disputed all the time in a divorce, and the only thing that’s completely airtight is to keep your inherited property and other assets completely separate from your spouse,” said Juran.

Looking to the future

Although immediate financial needs often take precedence in a divorce proceeding, long-term retirement planning should also be part of the process.

“Splitting retirement accounts can be extremely tricky, so it’s better to compensate with other property if possible,” said Waldrip.

If retirement assets are divided through a Qualified Domestic Relations Order, there should be no tax implication, she said. However, if funds are withdrawn in any other way it will be considered a taxable withdrawal with a penalty, said Waldrip.

If you’re counting on spousal support for your future financial security, Juran recommends getting a life insurance policy on your ex-spouse as part of the divorce settlement and making sure it’s paid.

College planning should be part of the settlement if you have children, no matter how young.

“Judges and attorneys don’t always think about future needs and sometimes spouses think, ‘Well, they’re his kids, too, so of course he’ll pay for college,’ but if it’s not in writing, that won’t necessarily happen,” said Juran. “If he says he’ll open a special account for college, then insist it gets opened now and regularly funded.”

It’s important not to try to speed through the process, however tempting it may be, said Juran.

“While almost everyone I work with at some point says, ‘I just want to be done with this,’ you should never rush; that’s just too risky,” said Juran. “You need to take a pause and realize that until your settlement is complete, you really don’t have a clear understanding of your financial picture.”

This article was originally published on Forbes WealthVoice.

Financial literacy and the generation gap

Family

Chances are your children will learn about money matters much differently than you did.

More than one-third of Americans adults today (35 percent) say no one taught them about investing, according to a new survey by RBC Wealth Management-U.S. and City National Bank (RBC/CNB).

But that experience doesn’t appear to be shared across generations.

Baby Boomers (age 55 and older) are the least likely to have had any sort of financial instruction, the survey found. In fact, 38 percent of Americans in this age group say no one taught them about investing. But for Millennials (ages 18 to 34), the experience is clearly different; only 29 percent say they grew up without any instruction on investing, while another two-thirds say they learned about investing from their parents, someone else, or in school.

What’s contributing to the generational shift?

“The combination of longer life spans and the elimination of the pension has created the need for people to self-fund their retirement for the first time in American history,” says Kirstin Turner, who oversees 65 financial advisors as the West Palm Beach complex director for RBC Wealth Management-U.S. “And the Internet and technology are making investing much easier and more mainstream than it was 50 years ago.”

The experience for future generations could be different still, given growing support for some sort of financial literacy curriculum for kids.

The vast majority of Americans (87 percent) think financial literacy is so important that it should be taught to kids in school, according to the RBC/CNB survey conducted in mid-March. According to data from the Council for Economic Education, that’s exactly what is starting to happen. The Council found that the number of states including economics in K-12 studies has increased in the last decade as has the number of states requiring high school personal finances to be offered or taken.

Research from Champlain College’s Center for Financial Literacy suggests the quality of those efforts is indeed improving. In its 2015 National Report Card on State Efforts to Improve Financial Literacy in High Schools the Center for Financial Literacy gave 25 states a passing grade ( an A or B), up from 20 in 2013. In addition, fewer states (15) received a failing grade (a D or F) than in 2013 (22).

“This has definitely become a hot topic,” says Brooke McGeehan, a financial advisor with RBC Wealth Management-U.S. in New York. “We need to make sure we’re teaching our children about financial responsibility. They’re our future entrepreneurs, business leaders and educators.”

When to talk to kids about money

Money is a topic not often discussed at the family dinner table, but perhaps it should be.

Today, 83 percent of parents with kids between 16 and 22 say they think they’ve done a good job of teaching their kids about money, the RBC/CNB poll found.

However, that sentiment declines with the age of children. Among parents with kids 11 to 15, 78 percent say they’ve done a good job teaching them money skills, but 21 percent say they’ve either done a poor job or done nothing at all. And among parents with kids age five to 10, 30 percent say they’ve done a poor job or nothing.

“It’s never too early and it’s never too late to have a conversation with your minor about financial literacy,” says McGeehan, who already does so with her two children, ages six and three. “You just need to find a way to relate it to their world.”

Peter Mortimer, an RBC Wealth Management –U.S. financial advisor based in Oakbrook Terrace, Ill. agrees.

“Financial literacy is very important, but it’s a dicey subject,” Mortimer says. “You can discourage kids because it can look pretty scary and daunting, but realistically, you can’t put your head in the sand and ignore the importance of these issues.”

Stan Framburg of Naperville, Ill., is from a family that took a proactive approach to financial literacy, so he does the same with his children. When his three children turned 13, he took them to meet his financial advisor (Mortimer). His mother did the same with him, and he found it to be an invaluable lesson.

“If you’re old enough to spend money, you’re old enough to save money,’ ” Framburg says he told his sons, now 23 and 21, and daughter, 20. “I always had really good intentions about trying to instill in my kids that saving is something important.”

ABCs of financial literacy

Of the 87 percent of Americans who think financial literacy should be taught in the classroom, 15 percent say classes should start as early as elementary school. The rest say it should be taught in middle and high school.

Last fall, Turner and her husband, RBC Wealth Management-U.S. financial advisor Telby Turner taught an eight-week money skills class — everything from budgeting and buying a car to credit cards and interest rates — to 60 football players at William T. Dwyer High School in Palm Beach Gardens, Fla.

Turner says she was amazed at the impact the sessions have and she and her husband plan to offer part two this fall and maybe add another high school.

“They’re sponges, and no one ever talked with them,” Turner says.

Room for improvement

Overall, the RBC Wealth Management-U.S. survey shows some worrying trends when it comes to financial literacy.

Regardless of age, more women (43 percent) than men (26 percent) says no one taught them about investing. In addition, fewer women say they learned about investing from their parents (17 percent) or in school (11 percent) than men (21 percent and 16 percent, respectively).

Kirstin Turner is trying to narrow the gender gap.

She hosted a five-hour Women’s Investment Forum in February 2015 in West Palm Beach, Fla., for about 130 women. She has a second one planned for May 4 in St. Petersburg.

“We talk about why it’s so important for women to have a seat at the table about their financial life,” Turner says. “I have some women … who say ‘My husband just died and I have no idea what we own. I don’t even know if we own our house.’ ”

The Hidden Portfolio Risk in Higher Rates

dice

This week, investor attention will once again fixate on the Federal Reserve (Fed). While the central bank is likely to demur this time, it will eventually renew its tightening cycle. However, despite the fixation on this topic, it is unclear that the next few interest rate hikes will have much of an impact on the real economy. It is not even clear that 25 or 50 basis points (0.25% or 0.50%) of additional tightening will have an enormous impact, other than a short-lived bout of volatility, on asset prices.

However, the long term is a different story. A more active Fed may have an enormous impact on how investors build portfolios, a development we may all want to start contemplating today.

In the post-crisis world, bonds have been a poor source of income, but they have been a good source of diversification. In recent years, the correlation between stocks and bonds has been more reliably negative (see the chart below; a negative correlation means stocks and bonds don’t move in sync). Why should this be the case given that over the long term the correlation between stocks and bonds tends to fluctuate?

stock-bond-correlation-2

In answering that question, it is important to recall that the Fed’s policy rate has remained extremely low for many years, predating the financial crisis, given the persistent slow growth regime. Since 2001, the federal funds rate has averaged just 1.60%; prior to 2001 the average, including the low rates of the 1950s, was around 6%. In this low rate environment, investors have rarely had much reason to “fear the Fed.” Rather than an aggressive central bank, slow or no growth has generally represented the bigger threat to markets.

This is important as the correlation between stocks and bonds has tended to relate to monetary policy, specifically the federal funds rate. Correlations have historically been lower when the Fed has set and maintained a low policy rate. As a rough rule of thumb, when the federal funds rate has been above 2%, the median stock/bond correlation has been 0.19. When the rate has been below 2%, as it has since 2008, the median correlation has been -0.39.

What correlation has to do with diversification

This has significant implications for portfolio construction. While cash is obviously less volatile than bonds, to the extent bonds tend to rise when stocks are declining, bonds may provide a more effective hedge against equity risk. Conversely, if stocks and bonds are moving together, cash is probably the better way to dampen portfolio volatility.

This is borne out using BlackRock’s Aladdin Portfolio Builder, our proprietary risk analytics and portfolio construction and management tool. A typical 60/40 U.S. stock/bond portfolio (with the 60% stocks measured by the S&P 500 and the 40% bonds by the Barclays Aggregate Index) and a 60/40 stock/cash portfolio have roughly the same expected, or ex-ante, risk (about 8.65%). However, over the past five years they performed differently depending upon the nature of the market shock. During the U.S. debt downgrade in 2011, the 60/40 stock/bond portfolio lost money, but still outperformed the 60/40 stock/cash portfolio. The reason: Systematic fears pushed bond yields down and prices up. However, with the “rate shock” in 2013, the stock/cash portfolio lost less as stocks and bonds both fell together on concerns over a less accommodative Fed.

The lesson: The source of the volatility may matter as much if not more than the magnitude. If the source is the Fed, bonds may not provide the familiar diversification that investors have come to rely on.

Russ Koesterich, CFA, is Head of Asset Allocation for BlackRock’s Global Allocation team and is a regular contributor to The Blog.

 

Investing involves risks, including possible loss of principal. Diversification strategies do not guarantee a profit or protect against loss in declining markets.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of September 2016 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. Past performance is no guarantee of future results. BlackRock makes no representations or warranties regarding the advisability of investing in any product or service offered by CircleBlack. BlackRock has no obligation or liability in connection with the operation, marketing, trading or sale of any product or service offered by CircleBlack.

©2016 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

Don’t let a choppy market derail your long-term

Telescope

Less than a month into the New Year and investors’ heads are already spinning. The still tenuous Chinese economy and continually falling oil prices sent markets plunging the first few days of the year. And while the Dow Jones Industrial Average and S&P 500 have both since recovered some of their early losses, many investors are wondering how long into 2016 this roller coaster ride will continue and whether they need to get off at the next stop.

But just as markets recovered after the last correction – a 10 percent drop in late summer 2015 — this too shall pass. Investors who keep that adage in mind rather than make abrupt changes to their portfolios based on today’s headlines should fare the best in the end.

Volatility may be difficult to stomach, but it’s hardly unprecedented. Markets typically experience a 10 percent to 20 percent correction roughly every one to two years. Indeed, over the course of history, the financial markets have experienced many “corrections” (declines in stock prices of at least 10 percent from their recent highs), and after every single one, eventually recovered all the lost ground and then moved to new heights.

How investors react during these periods of decline is critical to their long-term success.

Last fall, RBC Wealth Management conducted a poll and asked Americans how they responded to the late summer 2015 market correction. The vast majority of Americans (71 percent) with investable assets didn’t panic and instead opted to maintain their positions during the recent bout of volatility. In fact, only 4 percent sold and got out of the market entirely.

American investors should exercise similar discretion today. Despite what is happening elsewhere in the world, the U.S. economy is still reasonably solid. Employers are adding jobs at a pretty good pace, wages are rising and home prices are up. Furthermore, consumer debt is at manageable levels and interest rates, even factoring in a small bump, are still at near historic lows.

On the other hand, corporate earnings – a key driver of stock prices – are mixed. Some sectors are being negatively impacted by low oil prices causing a divergence between these groups and greater success in the broader market. Nonetheless, we’re in a lot better shape than we were heading into 2008 and early 2009 – a period in which the financial markets fell into a deep hole.

Still, remaining calm during a correction doesn’t mean investors should simply sit on the sidelines.

In a downturn, just about everybody takes a hit, but if you were particularly affected, you might be over-concentrated in just a few types of stocks. If that’s the case, you may want to take this opportunity to consider whether you need to further diversify your holdings. You can help reduce the impact of volatility on your portfolio by owning a mix of domestic and international stocks, bonds, government securities, certificates of deposit (CDs) and possibly even “alternative” investment vehicles, including real estate and commodities, such as precious metals.

Another thing to keep in mind is that a market correction, by definition, means that prices have dropped for most stocks, including the ones that represent strong companies with favorable prospects. When prices are down, for many investors, that might signal a good time to buy. Younger investors with longer investment horizons are the most likely to benefit from purchasing additional investments when prices are low. In fact, according to RBC Wealth Management’s fall 2015 survey, 21 percent of younger Americans used the summer 2015 correction as an opportunity to purchase more investments.

Bottom line, don’t jeapordize your long-term investment strategy out of fear that a few bad weeks or months in the market will persist. If you’ve created a strategy that reflects your risk tolerance, time horizon and financial goals, and if you make needed adjustments over time, you’ll give yourself the ability to look past today’s headlines.

The information included in this article is not intended to be used as the primary basis for making investment decisions. RBC Wealth Management does not endorse this organization or publication. Consult your investment professional for additional information and guidance.

The Millennials’ guide to retirement planning

Bicycle

To a generation that entered the workforce during the decade of the one-two punch of the 2000 stock market crash and the 2008 financial collapse, retirement planning might sound like an oxymoron. After seeing their parents suffer through the worst economic recession since the Great Depression, Millennials are gun-shy about investing and struggling to hold onto employment in a tight labor market.

Eyes on the prize

But despite the rocky financial entree into adulthood, Millennials — roughly defined as those born between 1980 and 1999 — have a lot going for them. They’re quick on the draw with technology, generally display more entrepreneurial drive than previous generations, and have an “intense curiosity” and mission to succeed, said Sophia Bera, a Millennial and founder of Gen Y Planning. “I actually see more opportunities than challenges,” she added.

But getting Millennials to remain focused on a retirement that could be 40 or more years away means convincing them to invest early, think long-term, and take advantage of tax-advantaged accounts and company matches, where available. If they can ignore stock-market volatility, day-to-day economic news, and stay focused on the end goal, they have a time horizon that will pay them back in spades.

Millennials with high-paying jobs would be well-advised to save the bulk of their salary early. Even if retirement saving is stalled or slowed later on due to major events in life, such as marriage, children or job loss, the money they invest early will fund a nice nest egg.

“If they put $50,000 in a 401(k) at age 25 and don’t touch it, assuming a [annual] seven percent return, they’ll have $800,000 or more by the time they’re 65, just through the compound value of money,” said Brandon Honcoop, senior vice president and senior portfolio manager with RBC Wealth Management. “I really stress to Millennials that they need to take the long-term approach. Every 10 years they delay starting, they have to save double.”

A new view on the market

Today’s roller coaster stock market would give any investor pause, but Millennials have extra reason to be leery, said Rick Friedman, senior vice president and financial advisor for RBC Wealth Management. “I don’t think they trust the market in general. Part of the reason is they’ve never seen a normalized cycle, compared with the Baby Boomer generation, who witnessed the markets climbing during the ’80s and ’90s,” he said. “We weren’t having these swings of a hundred points a day, or thousands of points a week.

Stock market volatility and the sluggish economic environment have left scars on the oldest Millennials, said Honcoop. “Coming out of the tech bubble, if they had jobs, they lost them during the tech bust,” he said. “They got new jobs in the mid-2000s, only to lose them again during the recession. They’ve been burned twice and in some cases, forced to dip into money that they might have looked at for the long term.”

As a result, Honcoop said when Millennials do invest in the market, they tend to be too conservative for their age. Often, they choose the same asset allocation as their parents, who are a couple of decades closer to retirement. To simplify age-appropriate asset allocation, he recommends target date funds, which are in most company-sponsored retirement plans.

These funds are targeted to a specific retirement year and allocate a mix of equities and bonds that start out more aggressive to promote growth and, as the investor nears retirement age, adjust in favor of bonds in order to reduce the possibility of extensive losses approaching retirement.

Friedman also recommended target date funds for Millennials as a solid place to start investing. “It gives them the ability to be fully allocated without having to monitor it every day,” he said. Rebalancing is not necessary because the fund does it for you.

Bera agreed that retirement investing doesn’t have to be complicated with worries about whether an 80-20 mix of stocks and bonds is better than 75-25. “I tell Millennials that the main thing is to get into your 401(k),” she said. “Asset accumulation is more important than asset allocation in the early years.”

Multitasking retirement planning

Planning for the future while paying for today involves a bit of multitasking. Millennials should follow this list of fiscal priorities:

  1. Fund a savings account for emergencies: “I call it an airbag,” said Friedman. Whatever you call it, Millennials should put 10 percent to 20 percent of their pay into an account for emergencies, so if they lose their job for a period, they have cash in reserve.

Friedman recommends saving in such consistently small bites that you hardly notice. Because Millennials in general don’t carry cash and run the risk of not realizing how much they spend, he also suggests creating a monthly budget that tracks spending and adding a saving component.

  1. Maximize retirement account savings: Honcoop believes too many Millennials don’t take advantage of what he calls “government gimmies.” Retirement accounts such as IRAs and 401(k)s are terrific way to boost savings because of their favorable tax status and—if the plan is sponsored by your employer—the company match, he added. “I tell clients that most companies have some sort of retirement account with a match of 3 percent, so why would you leave 3 percent of free money on the table? You wouldn’t do that if you saw $100.”

Bera said part of the reason Millennials are reluctant to contribute to a retirement account is they lack fiscal education and don’t understand their 401(k). “They say, ‘I’ve signed up, now what do I do?’” I explain that they never have to touch it if they have an emergency savings account.”

Millennials are known to change jobs often, Friedman added, so they should weigh the pros and cons of keeping their current company retirement account, moving it to a new employer plan or rolling over to a traditional IRA

For an additional boost, Millennials can contribute to a Roth IRA, said Honcoop. When they advance in their careers and earn more money, the income limits will preclude them from having both a Roth and traditional IRA, so the earlier they contribute to both, the better.

  1. Simultaneously tackle debt: No doubt about it, Millennials are often saddled with significant student loan debt. After securing their emergency fund, they can aggressively pay down their loan while simultaneously saving for retirement, said Bera.

Put enough toward the 401(k) initially to at least obtain the company match, she added, and then, with each raise, bump up the investment by 1 percent or 2 percent while continuing to whittle down debt. “It’s what I call turning up the knob on retirement,” she said.

While the basic tenets of solid retirement planning haven’t changed over the past few generations, Millennials will find their desire to work longer in a career that gives their life meaning will benefit them, said Friedman. “I think the millennials have a very different outlook on life and, in some ways, I think they’re doing it the right way.”

This article was originally published on Forbes WealthVoice.

Wealth planning for couples: How to wisely merge your financial plans

Travelers

If you and your partner are ambitious and successful—perhaps you run your own business or occupy a seat in the C-suite—you’re already aligned on career, but can you say the same for your finances? A marriage between two power players brings the potential for future bliss, but also the need to protect your assets while merging life goals.

“Whether this is a first marriage for both partners or a second marriage for one or both of them, if you’re an adult with accumulated assets, you need to approach the financial side of your marriage like a business decision,” said Sally Kirkpatrick, a senior vice president and financial advisor with RBC Wealth Management in Chevy Chase, Maryland.

“In the thick of the romantic decision to get married, no one wants to have these conversations about their money, healthcare and estate planning, but they are a necessary evil,” she said.

While planning your wedding, you and your partner should connect on serious topics and consult with professional advisors such as a marriage and an estate-planning attorney, Kirkpatrick said. Considerations include where to live (since many couples have their own homes), how to treat dependents and who gets what if the marriage ends.

Although the potential for divorce isn’t an easy subject to broach with your partner, it’s an important conversation. A prenuptial agreement has also become a standard document among people aiming to protect their wealth. A 2013 survey from the American Academy of Matrimonial Lawyers found that 63 percent of attorneys saw an increase in prenups over the previous three years.

Protection of separate property was the most common item covered by 80 percent of respondents, followed by alimony and spousal maintenance (77 percent) and division of property (72 percent). Nearly half of the respondents also noted an increase in women initiating prenups, the report showed.

Before “I do”

“Some people see a prenuptial agreement as an impediment to getting married,” said Kirkpatrick. “A prenup is almost like saying, ‘In case this marriage doesn’t work…’ No one wants to hear that, but it’s essential that they see it as protection for both partners.”

Stuart Bear, an attorney with Chestnut Cambronne in Minneapolis, suggests negotiating a prenuptial agreement six to eight weeks before the wedding to avoid potential future claims of being under pressure when signing the agreement.

Topics to address in a prenuptial agreement include what assets each partner owned before the marriage, such as real estate and investment accounts, and what should happen to them going forward. Children from previous relationships are also part of the equation.

“If either or both partners have children from a previous marriage, they need to address how they will be taken care of financially in addition to taking care of each other,” said Kirkpatrick. “A prenup goes hand in hand with a trust for the kids. A trust can always be altered in the future, but it’s important to get on paper how you want your money to be handled if you become incapacitated.”

If you’re providing support to a sibling or an aging parent or want to leave them with an inheritance, make sure to address it in your prenuptial agreement and estate plan, said Bear.

“You also need to provide a full and accurate disclosure of all your assets in a prenup,” Bear added. “You can’t hide any assets in a trust because that could be grounds for tossing out the entire agreement.”

Even though most states don’t require it, Bear recommends each person in the relationship have his or her own legal representation. “Keep in mind that a prenup can be amended in the future,” he said. “If circumstances change and you want to override it at some point, you can.”

Financial planning for partners

While a prenuptial agreement addresses the “what if” questions of the future, your day-to-day life as a married couple requires some answers about the assets you each have now, as well as those you’ll accumulate during your marriage.

Kirkpatrick suggests couples maintain a joint checking account for regular expenses and that they share costs. Each spouse should deposit money in that account based on his or her individual income, allowing the couple to split expenses on a proportional basis.

“I’m a big fan of maintaining separate stock and investment accounts,” said Kirkpatrick. “You can still use the money to benefit both of you for things like taking vacations or buying property, even if you have separate funds. But once you scramble eggs, they’re hard to unscramble—and so are investment funds.”

Kirkpatrick said men and women tend to have different investing styles, with women particularly concerned about maintaining their lifestyle in retirement. She says women are more cautious because they know they generally live longer and will need to take care of themselves. Men tend to be more optimistic about their ability to continue making money.

“Even if you have separate accounts and separate investing styles, it’s best to have annual financial reviews done by a shared financial advisor,” said Kirkpatrick. “Having someone look at all your accounts together is important.”

Bear recommends that each spouse sign a financial durable power of attorney document to allow access to retirement accounts or other accounts that are held only in one spouse’s name.

“If the account holder is incapacitated, a power of attorney can allow someone to handle the account,” said Bear. “Even in power couples, sometimes one spouse’s assets are illiquid, so it can be helpful to have access to that money.”

Healthcare planning

Couples should also talk about the financial and emotional decisions related to any future healthcare problems, particularly if they are getting married later in life. Kirkpatrick said couples in their 60s or older may have already discussed healthcare directives with their children or other relatives and will need to re-evaluate their choices in the context of their new marriage.

“They need to establish how decisions will be made about their care, particularly if they have adult kids who want to be involved in these decisions,” said Kirkpatrick. “You can even address things like whether you have long-term care insurance or plan to self-fund care issues in the prenuptial agreement. You need to make it clear where the money would come from to pay for long-term care, whether it’s each individual’s assets or joint accounts.”

Bear says a written healthcare directive is essential to establish who makes decisions in the event you become incapacitated. He also recommends signing a HIPAA (Health Insurance Portability and Accountability Act) release so that your health information can be shared.

Choosing beneficiaries

One final topic for engaged couples to address is their beneficiaries. It’s wise to review those designees in the context of your new relationship. Some couples will want to name children or other relatives as the beneficiary of some of their accounts, while other couples will want to name each other as beneficiaries.

Each spouse in a couple comes into the marriage with a financial philosophy in place, said Kirkpatrick. “Some people want to take care of their kids, grandkids or other family members so they can give them advantages in life. Others would rather spend their money and leave their children with less so they have to work hard, too.”

Couples, even if they don’t merge all their money, need to mesh their financial plans to avoid future conflict with each other or among their heirs.

This article was originally published on Forbes WealthVoice.

Stocks Are Not the New Bonds

stocks-bonds-volatility

2016 has been notable for droughts in some places and floods in others. There has been a disconnect, if you will, in normal weather patterns. Lately, we have witnessed a growing disconnect in the financial markets too. Asset class after asset class continues to rise in value despite stagnant global economic growth and flagging corporate profits. Why are investors chasing the market higher? Extraordinarily accommodative central bank policies are the most likely explanation. With a large fraction of the world’s pool of government bond yields in negative territory, flows that normally would have gone into high- quality fixed income securities are instead finding a home in dividend-paying stocks. This “chase for yield” has pushed up traditional high-dividend payers like real estate investment trusts (REITs), utilities and telecom stocks to historically rich price/earnings multiples. This is the most concrete evidence we have seen in years that investors are substituting stocks for bonds in investment portfolios.

Bonds: Accept no substitute

There are two powerful reasons why stocks are not a substitute for bonds. The first is the relative volatility of the two asset classes. Stocks are historically about three times as volatile as bonds. Investors therefore demand higher returns in exchange for holding these riskier assets. Second, dividend payments to stockholders are not a contractual obligation; there is no legal compunction for corporations to continue to pay dividends. Dividend payments can be — and often are — cut at the first hint of trouble.

Stock investors need to be particularly mindful of potential economic inflection points. History has shown that markets often become the most euphoric at the most perilous point in the economic cycle. The current US economic expansion is now in its eighth year, while the average business cycle typically lasts five years. The stock market has historically peaked 6–8 months before a recession begins, though forecasting recessions is always challenging. When recessions do hit, corporate profits have fallen by an average of 26% and stock markets have typically fallen by roughly the same amount. Failing to avoid late-cycle euphoria can have severe costs for investors, especially for investors who have been driven into equities for the wrong reasons.

Don’t be late

Instead of being an equity market latecomer, yield-starved investors might want to consider adding “credit,” or corporate bonds, to their investment portfolios. Pools of investment-grade corporate bonds are currently not cheap by historic standards, but they are not at extremely rich price levels either.  Investors seeking yield can find attractive opportunities in corporate credit, which offers yields similar to or higher than equity dividends, but generally with far less volatility.

Global central banks have been providing novel forms of support for world bond markets with the aim of stimulating economic growth and inflation rates. But in my opinion, sound investment strategy does not include guessing where central bank policy is heading next. The guiding principles of preserving capital while generating growth are vigilance on the fundamentals, caution regarding gains, and the avoidance of fads. Don’t follow raw market emotion, especially when easy money causes the temperature of the markets to rise just as fundamentals fall.

James T. Swanson, CFA is the chief investment strategist of MFS Investment Management.

 

The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.

Will the U.S. Election Really Matter for Markets?

polling-booth

With the summer over and the presidential debates just around the corner, investor attention is increasingly turning to the U.S. election. In my travels and meetings, I frequently encounter two strongly held views about the election’s investment implications: First, no matter who wins there will be a market-moving increase in fiscal stimulus, and second, the election will be a source of volatility. I would question both views.

Fiscal stimulus

Many economists agree that the United States needs to shift from a reliance on monetary policy to more fiscal stimulus, but it is not clear that the political stars are aligning to do so, even though both candidates favor increased spending. At this point, the most likely election outcome appears to be a continuation of divided government, with polls showing Hilary Clinton ahead, but with a closely divided Senate and a diminished Republican majority in the House. It is not clear that a large fiscal package can emerge from this configuration. This is consistent with history; 2009 aside, the first year of an administration normally does not coincide with a big fiscal push. Since 1905, the median rise in federal spending in the first year of an administration is around 5.5%, almost identical to the other three years.

Even if spending does rise, will it matter for the stock market? While there will doubtlessly be some stocks and segments that benefit, over the past century there has been no consistent relationship between federal spending and equity returns, as defined by the Dow Jones Industrial Average. Nor has there historically been much of a relationship between transfer payments, i.e. direct payments to individuals through various government programs, and market returns. In short, even if the next administration can summon the will and means to ramp up government spending, there may be little discernible impact on the broader equity market.

What about the impact on interest rates? Here again, there is no consistent relationship between spending and interest rates. Looking at annual changes in federal spending against annual changes in the Fed Funds target rate, since 1956 there is no consistently significant relationship. It is just not clear that fiscal spending, even if we get it, will be the dominant theme of 2017.

Volatility

Will the election be a source of volatility? Obviously, to the extent the consensus of a Clinton win is wrong, there will be a reaction. However, once you get past the shock of a non-consensus event, markets often settle down (think of Brexit). Even if elected, will a Trump administration be able to enact many of the policies he has proposed? Given the number of seats the Republicans need to defend, absent significant coattails the Republicans may wind up losing the Senate even in the unlikely event of a Trump victory.

Ironically, politics may still be a source of volatility––just not from the United States Today, I see a greater potential for volatility emanating from Europe. Populism is now starting to infect northern Europe. In Germany, Chancellor Merkel’s center-right CDU party lost a key state election to both the Socialists and the new right Alt Party. In Austria, a far right candidate is leading in polls for the presidency. In southern Europe, the Italian prime minister is facing a critical referendum which may determine his and his party’s fate, while Spain is still struggling to form a government. Finally, both Germany and France are facing national elections next year with insurgent, populist parties on the rise.

In short, politics may very well disrupt markets, but the shock may not be made in America.

Russ Koesterich, CFA, is Head of Asset Allocation for BlackRock’s Global Allocation team and is a regular contributor to The Blog.

 

Investing involves risks, including possible loss of principal.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of September 2016 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

©2016 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners.