Individuals, families, pension and profit sharing plans, entrepreneurs and charitable organizations have been relying on Willow Creek Wealth Management for their financial needs since 1984. Our goal as Certified Financial Planners is to provide personalized financial advice and comprehensive solutions to help you reach your short and long-term objectives.
The rising interest in sustainability-driven investing is a recent phenomenon. After all, who wouldn’t want to invest, earn potentially great returns over the long-run, and promote a worthy cause?
But is it too good to be true? Understandably, many investors have doubts and questions.
For those who feel passionately about promoting green initiatives and environmentally sound companies, sustainable investing may be an option, but let’s take a closer look at the realities.
What is sustainable investing?
Sustainable investing is generally done through mutual funds and exchange traded funds (ETF), investment strategies that let you pool your money with other investors to purchase diversified collections of stocks or bonds. These funds have stated objectives and goals dictating what stocks they include and how they invest.
When you choose to invest with a sustainable goal, you are promoting companies using renewable energy, cutting pollution, and reducing their carbon footprint. By pooling money with other investors, you are increasing the demand of these corporations’ stock and driving up the price. You are supplying capital to these companies so that they continue to grow.
As shareholders, many of the mutual funds that invest your money into these companies have voting rights and, therefore, the ability to guide these companies toward green initiatives. Qualities that are looked at to determine the score of a company may include energy use, waste, pollution, carbon footprint, or even treatment of animals.
Chances are, you own mutual funds that are not invested with this kind of agenda. If this is something that you do feel strongly about, it could be a way to bring some of your values to your investment portfolio.
What about returns?
One of the most common concerns we hear about sustainable investing is the idea that it will hurt returns.
In the past, that notion was largely due to costs. Sustainable-specific funds could be very expensive to invest in, which would ultimately translate into lower returns.
But because this area is becoming so much more popular, with so many more options to choose from, costs have dropped significantly. Many mutual funds or ETFs that invest with this goal in mind generally do not cost more than their standard counterparts.
When it comes to actual return numbers, ignoring fees, studies show that there is no consensus that they historically underperform when compared to other funds. Certain industries may be represented less in a sustainable portfolio, like oil and gas, which can and almost certainly will cause the sustainable options to differ in returns from the rest of the market.
However, whether that is generally a positive or negative impact on returns is not conclusive. Many of these sustainable options perform better historically. Maybe that’s because companies focusing on these initiatives tend to be more progressive, adaptable, and agile in a rapidly changing world. It even could be a result of the recent hype this type of investing has received. It could just be pure luck.
So, what should I do?
Investing with a sustainable goal is not for everyone.
Returns will vary when compared to standard portfolios because of the exclusion or underrepresentation of many industries and stocks. If this is something you are passionate about, however, you may want to look at available options in your retirement accounts, for example.
You could also ask your investment adviser what options they have for sustainable investing. Your money has power, and in the world of investing, it gives you a voice to choose who to support. How you invest could very well change the actions and directions of major corporations and at the same time provide you peace of mind that your dollars are aligned with your own values.
Jake Weber, Associate Advisor at Willow Creek Wealth Management, Sebastopol, recently received his Certified Financial Planner (CFP®) designation and Heather Belli, CFP® was recently awarded her Chartered Advisor in Philanthropy (CAP®) certification.
What can you do in 2019 to get ahead financially? These five smart money moves will put you on the fast track to strengthen your financial profile. Try any of these best practices or take on the entire list. Either way, you’ll be that much ahead when 2020 rolls around.
Review those plans! A fresh new year can be a great time to review and renew your investment plan – or create one, if you’ve not yet done so. Have any of your personal goals changed, or will they soon? How could this impact your investment mix? Have market conditions put your portfolio ahead of or behind? Are you unsure where you stand to begin with? It’s time well-spent to periodically ensure your plan remains relevant to you and your personal circumstances.
Be prepared …just in case. No one could have predicted the fires or the floods Sonoma County has seen the past few years. Cars break done, roofs need repair and life throws us curve balls more than we like to admit. Having sufficient liquid, rainy-day reserves to tide you through any rough patches is a best practice no matter what the future holds. Knowing your near-term spending needs are covered should help with both the practical and emotional challenges involved in leaving the rest of your portfolio fully invested as planned, even if the markets take a turn for the worse
Identify financial factors in need of attention. Take time to redirect some attention to any number of related financial and advanced planning activities. Things change, and that’s why it’s worth reviewing your financial landscape on a regular basis and identifying areas in need of attention. Maybe you’ve got a debt load you’d like to reduce, or an estate plan that’s no longer relevant. Perhaps it’s been a while since you’ve reviewed your insurance policies, or you’d like to revisit your philanthropic goals in the context of the latest tax laws. Reviewing any or all of these items is likely to contribute more to your financial success than will fussing over the stock market’s daily gyrations.
Tighten up your cyber-security. With identify theft on the rise, protecting yourself against cybercrime is a smart use of your time. Consider revisiting a few basic, protective steps, such as: changing key passwords on your most sensitive login accounts; reviewing your credit reports; keeping passwords in a safe place or use a password vault like LastPass or 1Password. When available, use two-factor authentication to increase your online security.
Have that talk with your kids, your parents, or both. When is the last time you’ve held any conversations about your family wealth with your loved ones? It’s never too soon to begin preparing your children or grandchildren for a financially literate adulthood. As they mature, additional in-depth conversations in order. Children should know how to find crucial information should there be an unexpected illness or crisis. They should know where you keep important documents, your safety deposit key, and other critical papers.
The Talk with parents can be difficult, but important. What are their wishes or plans if dementia, disability or death take their tolls? Armed with their information, you’ll be prepared to handle whatever comes up.
You may also want to consider holding ongoing conversations related to any legacy you’d like to leave as a family. For all these considerations and more, an annual “money talk” is crucial to successful outcomes.
Above all else, remember what your money is there for your financial security and to fund your moments of meaning.
Next time you find your stomach tightening at the latest frightening or exciting financial news, tune it out. Walk away. Go do something you love, with those whose company you cherish. You’ll have peace of mind because you know you’ve taken steps to make your best money moves this year, for now and the future.
At the end of the last quarter, it was announced that one lucky ticket holder had won a $768 million Powerball Lottery. In an instant that person’s life changed – if they received the lump sum payout (which is usually the right thing to do in these situations), they would get $477 million before taxes. An incredible sum that will put them into the richest realms of American life – way beyond just the top 1%.
On one level, lotteries like the Powerball are fun. They promise unimaginable riches, every once in a while, to a lucky winner or two. And they allow those who do play, but do not win, the chance to daydream about what they would do with all of that money.
On the other hand, most anyone who has ever bought a ticket has realized that the odds are against them. One study showed that, on average, for every dollar invested in lottery tickets, only 40 cents is returned in the form of winnings (a 60% loss). In other words, people who invest in lottery tickets are expected to lose money. Like going to a Casino, the odds are stacked against them. The odds of winning the Powerball Lottery is almost 1 in 300 million. That is insanely small – the odds of being hit by lightning is 1 in 135,000 and 1 in 8 million for a shark attack.
Here’s the funny thing – on one level most people know the odds are stacked against them, and there is little to no chance of them winning, but they keep on playing. In 2016, Americans spent almost $80 billion on lottery tickets – that is about $325 for every adult in the United States. What this means is that huge sums of money are being spent on an investment that is almost certainly guaranteed to lose money.
But this got us thinking, what if people simply used that money and invested it in something that offered a strong probability of a positive long-term return – the stock market. Now immediately many people would protest and say “wait a minute, stocks are risky! I could lose money! Why would I do that?”
In the short term, they would be right. The S&P 500 can be a volatile investment. Since 1980, it experienced an average loss of 14% within any given calendar year. And in some years the loss has been substantially greater – in 2008 the market was down 32%. However, over that time the index returned an average of 8% per year (and this is a period that has included several large and dramatic downturns). Despite periods of negative returns, over the long term, the market goes up much more often than it goes down – around 75% of the time. Those are pretty good odds and certainly better than those of any lottery.
And investors also forget that most companies issue dividends, which are regular distributions of cash to shareholders. So, even when things are bad, most investors are actually getting some real cash return on their holdings. It might not be a lot, but every bit helps when it comes to down periods.
The trick with investing is to look at the probabilities and realize, in the long run, they are in your favor. At no time since 1926 has an investor who has invested in US stocks and held for any 20-year period ever lost money. If you held for a ten-year period, the chances of experiencing a loss would have been only 6%.
If those lottery players invested the money they used to buy tickets, they would be substantially richer in the long term. Assume the average adult was, instead of buying lottery tickets, o invest in a diversified portfolio every week. They would put in $6.23 each week. And if they were to do that for 45 years (the average working span of an adult) and earned just 6% per year, they would have almost $75,000 at the end. That is for a total cash investment of just under $15,000. The trick there is the compounding.
The longer you wait and the more you let your earnings build on themselves, the more you will have generated. Time is your friend when it comes to investing.
A last thought on the lottery: for those who win the larger pots, it is estimated that up to 70% of them go bust within five years. Mostly they spend it on consumable items (homes, cars, and trips), more gambling, and gifts to family and friends. If only they had a good financial advisor to put them on a smart, sustainable lifestyle.
So, if you ever hear of anyone winning, please be sure to send them to Willow Creek so that they can plan their future in a wise way.
California gets an “F when it comes to preparing our children for the real world of money,” says a recent report by the Champlain College Center for Financial Literacy.
The center graded every state on their efforts to produce financially literate high school graduates, and California scored close to the bottom. There’s just no effort to teach the basics of personal finance as part of the state’s core graduation requirements.
Nationwide, financial literacy is sorely lacking. A 2017 survey found that 57 percent of respondents had less than $1,000 in cash savings.
To fill this dire void, we must teach our children about money and finance. So what tools should we provide to them which allow them to make wise, informed decisions on the big and small financial matters they’ll face as adults?
Understanding compound interest
This one is critical. Given enough time, even modest rates of growth add up: at 7 percent annual growth, an investment will just about double in ten years (and by comparison, the U.S. stock market, as measured by the S&P 500 index, has grown about 11 percent per year since 1980, which means the market doubled about every 7 years since that time. At 7 percent, $10,000 grows into $76,000 in 30 years and $150,000 in 40 years.
Learning how to invest wisely.
Do not get carried away with investment fads and trends. Stick to basic diversified investments, focus on long term returns and do not worry about short term volatility. Teach your kids that if it sounds too good to be true, it probably is!
Building an emergency reserve fund
Strive to put at least six months’ worth of expenses aside in a liquid savings account as an emergency reserve. This can help ensure that unexpected expenses –an auto repair bill or health crisis– do not derail your life.
Not all debt is bad.
If we all had a choice, it would be nice to live debt free. But for most of us, it is the only way we can often afford life’s larger costs. For example, a mortgage is the only way most of us ever get into a home. Auto loans can be useful, as can student loans, to help you to earn more and have a more meaningful life.
Avoiding credit card debt.
Credit cards are useful for convenience, but they should not be used to support lifestyle decisions. They should be fully paid off monthly to avoid interest rates up to 20 percent if just the minimum payment is made. Young adults need guidance on how to shop for the right card: finding ones with lower rates and no annual fee.
Maintaining a good credit score
Young adults need to learn that every late payment is recorded on their credit scores – and once you go below certain thresholds, loans become more expensive or impossible to get, job offers can be revoked and apartments impossible to rent.
Knowing how to open a bank and an investment account and how to take out a loan; read the fine print.
Are there pre-payment penalties? Is there a lock up or surrender period to get out of an investment? This is common with annuities and other life insurance products. What are the real fees? What is the real cost difference between a fixed and a variable rate loan or a loan of different terms (15-year mortgage versus a 30-year mortgage)?
Learning to budget
How much do you earn? How much will be deducted in the form of taxes, Social Security and insurance (that’ll be an eye-opener to many young adults entering the workforce for the first time). Then there are the fixed expenses: rent or mortgage, utilities, basic food, clothing and transportation and maybe student debt. After that comes discretionary spending: vacation and travel and non-essential personal items and activities. Making a budget quickly shows what is possible and what is not.
Learning to save
Set goals. Whether saving for a home, a car, a trip, young adults should figure out ways of reducing spending so they can save more. It is a discipline to get into, no matter how little the amount is, but it is a vitally important lesson that will serve them well throughout their lives.
These are just a few of the sensational phrases the financial media used last year to describe stock market activity. As a certified financial planning practitioner for over 20 years, I would argue that when the media reports hourly (or even daily) stock market returns, all they do is create unnecessary excitement and anxiety for rational investors. The stock market’s hourly/daily activity is NOT newsworthy of our attention and is irrelevant in the long-term. These market reports tell an incomplete story, yet we are subjected to them on a daily, if not hourly basis.
When you catch the market index returns for the day, what do they report on? Of course, it is the Dow Jones, and usually the S&P 500. We often forget that the Dow Jones is only 30 stocks. The S&P 500 is 500 stocks. These are hardly good representations of the entirety of the U.S. stock market, which includes thousands of other stocks representing other areas of the market, all of which are included in a fully diversified investment portfolio.
And how about international indices, both large and small, which also represent thousands of more stocks? There are so many indices to track; from Emerging Markets and Real Estate Investment Trusts (REITs), Value and Small, to Growth and Large. Obviously, the media can’t report on all these other indices from around the globe in a quick five-second sound bite on the nightly news. But their continued focus on such a small area of the stock market does nothing to inform or educate the general public.
On average, there is a 50/50 chance of the market being up or down each day, but over longer periods market indices are positive. We would all be better off if the daily stock market returns were not reported at all. Weekly reports suffice and keep everyone’s blood pressure down. (Financial professionals commonly recommend reviewing your portfolio at most once a month, but likely quarterly is best). The less often you look, the less volatile you’ll perceive your portfolio to be and the easier it will be to achieve those long-term positive market returns.
Slow and steady wins the race. Cable TV’s business new channels, with their constant ticker tape of stock market index tracking and guest commentators making baseless market predictions or selling their mutual fund leaves investors confused on how to really invest. “Beat the market,” speculative stock picking efforts, and market timing strategies consistently cause a negative contribution to portfolio returns. For the most part, these hyperactive market-tracking activities waste time, cost money, and don’t reward your efforts. This is a complete distraction to sound investing principles such as low costs, diversification, asset allocation, and tax management.
This is not just our firm’s opinion; it’s been proven time and again by numerous academic studies. The most important point of disciplined long-term investing and portfolio rebalancing is to have a plan in place in preparation for market volatility. Always expect extreme volatility from time to time and take advantage of portfolio rebalancing opportunities when they are identified. Although volatility isn’t necessarily comfortable for investors to experience, it can reward you handsomely if handled properly.
So, the next time you’re having your early morning coffee and hear your trusted news outlet reporting on the Dow Jones Futures (not just the actual down to the second index performance, but a prediction of what it might be before the stock markets even open) quickly turn down the volume and avoid this meaningless “news”. Then, later in the day when you’re driving home from work, and you hear how the stock market did for the day, quickly change the station and maybe try to catch the Warriors or Giants game instead.
Many earners are in the smart retirement savings habit of making pre-tax contributions to company or individual retirement plans, such as a 401(k), 403(b) or SEP IRA. Strong incentives include a tax deduction for the contribution and often some form of employer match or contribution. Accumulated contributions are then invested, usually in stocks and bonds, and grow tax “deferred” until money is distributed for income needs in retirement. Distributions taken after age 59.5 are taxed as ordinary income. (Although there are some exceptions to the rule, distributions prior to age 59.5 years are also penalized 10%). However, a less common, and often equally powerful retirement savings vehicle to consider is the Roth account.
Company sponsored retirement plans often allow participants to make Roth contributions in addition to, or in lieu of, pre-tax contributions. Unlike tax-deductible contributions, an earner receives no tax deduction for the Roth contribution. However, the Roth IRA account grows “tax free” while contributions remain inside the account. Also, there is no requirement to start distributing the account at 70.5 years old as is required with a pre-tax deferral account.
So, which is better, a tax-deductible IRA or Roth IRA contribution? Well, it depends. The simple math suggests you should make a pre-tax contribution if the marginal tax savings on the contribution is greater than the marginal tax cost on the distribution in retirement. Conventional wisdom suggests individuals are taxed at higher rates while working compared to in retirement where income is typically lower. In reality, the analysis can be much more complex as future tax rates, income streams, and tax legislation are unknown.
Should you do both? If you can afford it, the short answer is “yes”. The contribution limit for a 401(k) or 403(b) company retirement plan for 2018 is $18,500, plus an additional $6,000 if you are age 50 or over. Plus, you may be eligible to make an additional $5,500 Roth IRA contribution, plus an additional $1,000 if you are age 50 or over. Here’s the catch: contributions to a Roth IRA are subject to income limits based on modified adjusted gross income (MAGI): If MAGI is over $135,000 for single filers, or $199,000 for married filers, then Roth contributions are not allowed. However, there might be another way.
Once considered a gray area, the practice of completing a “backdoor” Roth contribution is now permitted by the IRS. Here’s a how a “backdoor” Roth contribution works:
Make an after-tax contribution (up to $5,500, plus an additional $1,000 for over 50 years old) to a Traditional IRA. This contribution is not subject to any MAGI limitations.
Once the contribution is complete, the Traditional IRA owner is permitted to complete a taxable conversion to a Roth IRA account. However, this is not a taxable event because no deduction was claimed on the original contribution. (Warning: If you have another pre-tax IRA account, this conversion could trigger a taxable event and adverse consequences.)
Be sure to Fill out Form 8606 in your 1040 (Non-deductible IRA Contribution) for tax filing.
Once the process is complete, you have effectively contributed to a Roth IRA account and now have the benefits of compounding, tax-free growth. As with any planning strategy, there is the potential for unintended consequences. It is recommended that you work closely with your financial professional to help navigate the opportunities and potential pitfalls of your retirement savings strategy.
(Santa Rosa, Calif.) — Santa Rosa Symphony has received generous support from Willow Creek Wealth Management for the Symphony’s “It’s Elementary” program, which provides vital access to free music education to Sonoma County elementary schools, some of which have been federally-designated as underserved. In addition, the Sebastopol-based financial planning and investment firm and long-time supporter of the Symphony, has funded free tickets for It’s Elementary school students and their families to attend the Santa Rosa Symphony Family Concerts “Vivaldi’s Ring of Mystery” on January 27 and “The Composer is Dead” on April 7 at Weill Hall, Green Music Center.
“We believe strongly that the combination of education and music provides immense value to young students through enhanced focus, engagement, creativity, and discipline that will permeate through their entire lives,” said Timothy Admire, a partner at Willow Creek Wealth Management in Sebastopol. “Based on this belief, we are extremely excited to expand the benefit of music education within our community by supporting the Santa Rosa Symphony’s It’s Elementary program, offering more students and families complimentary access to high-caliber performances at Weill Hall.”
The Symphony’s It’s Elementary program, which serves six Sonoma County elementary schools at a time for a two-year term, includes the following features:
Elementary School Listening Program which provides classical music CDs of five-minute selections for playing over the school’s PA and for in-classroom listening
Four in-school Santa Rosa Symphony ensemble performances, introducing students to orchestral instruments by section (string, woodwind, brass and percussion)
One in-school performance by a SRS Youth Orchestra
Youth Discovery Cards – each student at participating schools receives a season pass for SRS Dress Rehearsals at Weill Hall, Green Music Center
One Free SRS concert at Weill Hall as a field trip during school hours
Free recorders and curriculum for students to play with the orchestra from their seats at the Green Music Center
Curriculum support and professional development for teachers and participating schools, which include lesson plans and after-school workshops
“The Symphony relies heavily on community support, including generous corporate donations like this, to keep the Symphony’s music education programs available to Sonoma County elementary students. We are very grateful to Willow Creek Wealth Management for its support, not just of ‘It’s Elementary,’ but also of the Family Series, making these Family concerts available to more families,” said Santa Rosa Symphony President and CEO Alan Silow.
About the Santa Rosa Symphony
Santa Rosa Symphony, the Resident Orchestra of the Green Music Center, is the third-oldest professional orchestra in California, and the largest regional symphony north of Los Angeles. Francesco Lecce-Chong, the Symphony’s fifth music director in its 91 years, begins his tenure this season. The Santa Rosa Symphony (SRS) is committed to core values of artistic excellence, innovative programming, comprehensive music education and community service. This year the SRS infused the local economy with more than $4 million.
Currently in its 91st season, the Symphony’s performance schedule includes 21 Classical Series concerts (7 sets), 7 Discovery Dress Rehearsal concerts, a 3-concert Family Series and a 4-concert Pops Series, as well as special concerts. The Symphony is also recognized for having one of the most comprehensive music education programs in California, serving nearly 30,000 youths annually.
Collaborations with schools and organizations across Sonoma County have gained SRS national attention and support. Awards include an American Symphony Orchestra League MetLife Award for Community Engagement and a first place award for adventurous programming in the 2012-2013 season from the American Society of Composers, Authors and Publishers (ASCAP).
About Willow Creek Wealth Management
Willow Creek Wealth Management, located in Sebastopol, is a fee-only, independent advisory firm serving over 600 families. With offices in Sebastopol and Marin County, the firm provides a range of wealth management services including investment management, retirement planning, tax and financial planning as well as strategic philanthropic consulting.
About the Santa Rosa Symphony Family Series concerts
The Santa Rosa Symphony 7th Family Concert Season, comprising three Sunday afternoon, interactive orchestral concerts geared to small children and families filled with fun, mystery and magic continues at Weill Hall, Green Music Center on January 27 and April 7, 2019.
For “Vivaldi’s Ring of Mystery,” on January 27, at 3 PM, Classical Kids LIVE! provides engaging antics for children as they learn about 18th-century Venice, while they follow a young orphan violinist as she searches for her true identity and a missing Stradivarius violin. Along the way, audience members will gain an understanding and appreciation for Antonio Vivaldi, his music and the orchestra’s instruments. The program, conducted by Bobby Rogers and ideal for sharing with young children, includes excerpts from Vivaldi’s famous works, including his Four Seasons, the Violin Concerto in A minor and the Guitar Concerto.
On Sunday, April 7, “The Composer is Dead” will be conducted by new SRS Music Director Francesco Lecce-Chong. All the suspects are musical instruments, and they all seem to have a motive – and an alibi. So who killed the composer? This murder mystery was commissioned by the San Francisco Symphony and composed by one of its Youth Orchestra alumns, Nathaniel Stookey. The narration for the piece (and the corresponding children’s book) was written by the popular children’s author Lemony Snicket (A Series of Unfortunate Events). For more information about the program and their collaboration, see this YouTube video.
The Symphony provides a complimentary Instrument Petting Zoo in the lobby beginning one hour prior to the performances. Tickets are $18/adult; $12/youth (12 and younger) and may be purchased at srsymphony.org or by calling (707) 54-MUSIC. All patrons, regardless of age, must have a ticket.
THE WILLOW CREEK PORTFOLIO: The US Market and Beyond
As US-based investors, it is hard not to focus on the US stock market and think that it should be the sum of your returns: your portfolio should be up when the S&P 500 index is up and down when it is down.
Sometimes that is the case but many other times it is not – for better or worse.
Indeed, by design our portfolios are comprised of many different types of investment classes and not just the S&P 500 (which is an index made up of large US-based companies). Instead our portfolios are made up of a blend of stocks and bonds, large companies and small companies, US companies and international companies plus short-term and intermediate-term bonds. There are many different components each with their own return characteristic – some are riskier than others and have better long-term growth possibilities, others are less risky and provide more stable earnings. When blended together they create a diversified portfolio.
The thing about a diversified portfolio is that it will, by nature, never be the best performer or the worst; instead it will be the weighted average of all those holdings. By not being the best or the worst, it will avoid the hard swings we have seen just play out in the US markets over the past few months.
Around the end of the 3rd quarter 2018, the US stock market was the best performing of the major global markets with the S&P 500 index up 10.56%. But, by comparison, international and emerging markets were flat to negative as were fixed income investments. Therefore, if you had a fully diversified portfolio you would have seen only modest growth for the period – not the out performance you had hoped for or maybe expected if you were listening to the media on the “market” (i.e., the S&P 500).
Unfortunately, the tide turned on the US markets and they ended up under-performing other global markets by the close of the year. So, in the 4th quarter, the broad US market lost more (-13.5%) than international (-11.5%) and emerging market (-7.5%) stocks and fixed income (+1.6%).
VOLATILITY IS NORMAL
Just to clarify, this kind of downdraft is normal in stock markets. For example, we have seen an average decline of nearly -14% in the US markets at some point every year since 1980. But overall the annual compound return has been almost +9%. To get those types of positive returns we often have to endure the down times.
This increased volatility underscores the importance of following an investment approach based on diversification and discipline rather than prediction and timing. For investors to successfully predict markets, they must forecast future events more accurately than all other market participants and predict how other market participants will react to their forecasted events.
There is no evidence suggesting that neither of these objectives can be accomplished on a consistent basis. So, instead of attempting to outguess the market, investors should recognize that relevant information is quickly incorporated and is reflected in expected returns.
THE CASE FOR GLOBAL DIVERSIFICATION
When considering investing outside the US, investors should remember 1. that non-US stocks help provide valuable diversification and 2. recent performance has not been a reliable indicator of future returns. If we look at the past 20 years going back to 1999, US equity markets have only outperformed in 10 of those years. The S&P 500’s “lost decade”, for example, recorded its worst ever 10-year cumulative total return of −9.1%, while international indices such as the MSCI World ex USA Index returned +17.5%, and the MSCI Emerging Markets Index returned +154.3%. In periods such as this, investors were rewarded for holding a globally diversified portfolio.
LOOKING FORWARD: Preparing for 2019
While we cannot control the markets, we can control how we invest. As we commonly say, “control what you can control.”
To that end, what are the things we can do to help us control our financial future? What are the best practices we can follow that will ensure we can get through volatile markets over the coming year?
Do nothing and let us do the work. When the markets are volatile there is a lot going on behind the scenes here at Willow Creek Wealth that you might not be aware of. We are looking at rebalancing your portfolio (buy low/sell high), tax loss harvesting and proactively monitoring your investments. So, if you have a diversified portfolio in place, guided by a relevant investment plan, your best move in difficult markets is to let your advisor and that plan be your guide. It can be tough to endure these periodic downswings but reacting to them will more often hurt you in the long run. After all, over the past 38 years, the market’s average annual return was almost +9% and was up 75% of the time.
Prepare for the unknown with a rainy-day fund. Time will tell whether 2019 markets are friendly, foul, or (if it’s a typical year) an unsettling mix of both. Having enough liquid reserves to tide you through any rough patches is a best practice no matter what lies ahead. Knowing your near-term spending needs are covered allows you to leave the rest of your portfolio fully invested as planned, even if/when the markets take a turn for the worse.
Do some financial planning. That said, a “do nothing” approach to turbulent markets hinges on having that relevant plan in place, guiding your portfolio. A fresh new year can be a great time to tend to your investment plan – or create one, if you’ve not yet done so. Have any of your personal goals changed, or will they soon? It’s time well-spent to periodically ensure your plan remains relevant to you and your personal circumstances.
Focus on the financial matters that you can control. When was the last time you reviewed your insurance policies? Is your estate plan up to date? Is your debt load appropriate? Do you feel like you are under earning in your career? Or over spending and not saving enough for retirement? Have you done an audit of your cyber security risks such as regular password changes, credit freeze, etc.?
These are all items that your advisor can help with and are likely to contribute more to your financial success than something you cannot control – the stock market’s daily gyrations.
Retirement is something that most people look forward to in their working lives: no deadlines, no dressing to company standards, and no handling endless paperwork. It is living life more on one’s own terms. But if it is not planned with a degree of care, it can be much less than the dream it was meant to be. It is something that I have seen both personally and professionally as a financial planner.
On the personal side, I have watched my father struggle with his retirement years. He was the kind of man who lived to work. It is what defined him, and it is how he spent his days. So, when it came time for him to end his consulting business, he struggled. He had little in the way of outside passions to give his life purpose or intent. When he was younger and fitter, he played tennis and golf, rode his bike, and swam in the ocean, but this pretty much ended as his body slowed and aged. He has no hobbies or ways to engage himself. My mother struggles to fill his day or get him to do much more than play computer solitaire or obsess over his investments. As a family, we are not sure what to do and how to help get back the wonderful dad who always seemed so full of activity and life.
As a professional, I have seen similar struggles. Many years ago, a client of mine was on the cusp of retirement. He was beside himself with anticipation of no longer having to work. He was the senior legal counsel for a high-profile company that was frequently involved in complex and antagonistic lawsuits, and could no longer take the stress of it all. Financially he was in great shape, and he could fulfill all his life plans. Indeed, we asked what he planned to do in retirement. He said his days were going to be packed – golf, travel and reading meaty history books. But, as time went on, he ended up dreading his days. He found that he had whole hours with nothing to do – yawning gaps of time as he called them. He could only go out to travel so many days a year, play so many rounds of golf, or read so many pages in a day. He missed the broad social life that work gave him. He said he was on the verge of depression, and we could see it in him when we met. His old energy was gone.
The good news is that he eventually recovered his zest. He rediscovered his love of bridge, and he found part-time work helping small businesses manage nuisance lawsuits. He scheduled things so that he was occupied both physically, mentally and socially throughout each day. It was a more purposeful, social and enjoyable life. He had time for golf and reading, but it became about so much more for him.
So now it is a question I ask every client: what do you plan to do in retirement? I push them to think of the days and the hours and to move past just the dreams of endless travel and golf and to have activities that are fulfilling and that they can age with. Develop hobbies and activities that give you a social network, that you enjoy both mentally and physically but are realistic for when one’s faculties fade. With any luck, your retirement will cover many years – some very healthy, others less so. But you can still find meaning, purpose, and time well spent in all of it. Be mindful of the days and weeks ahead and plan for it as carefully as you would your finances.