Marathons & Markets: You’ve Trained For This!
Highlights
Lately, we’ve seen a meaningful uptick in market volatility fueled by economic instability here and abroad. From Chinese real estate woes threatening to disrupt their economy, to political wrangling in Washington that will continue to ripple through our own, there’s no escaping that the headlines have near-term market impacts around the world. But if the ups and downs have you worrying, don’t forget—you’ve trained for this!
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About the Author
Jared Kizer
As Chief Investment Officer and chair of Buckingham’s Investment Policy Committee, Jared evaluates findings from academic research and applies that learning to architect the firm’s investment strategy.
Does Planning End at Retirement?
Imagine that, in the foreseeable future, you’ll have turned in all your company property, collected your final paycheck, and will be drinking a hurricane at half past noon while chair-dancing to “It’s Five O’Clock Somewhere.” You’ve planned on reaching that celebratory beach vacation over the many years of your career while also designing, building and protecting your financial life. By 65 you have diligently accumulated the wealth you need to retire. You’ve won the game, earning satisfaction and congratulations for completing a solid plan. Other than tee times, volunteer activities or family trips, there isn’t much planning left to do, is there?
Of course there is, or there wouldn’t be a need for this article. In reality, you’re just beginning the second phase of your adult financial life. While it is indeed 5 o’clock somewhere, you need to determine whether you’re in the right time zone to start celebrating or whether you’re actually running a couple hours behind. The time to evaluate your situation is now, rather than waiting until after you’ve jettisoned yourself from the workforce.
Essentially, there are two phases in your adult financial life: accumulation and distribution. From your graduation through the collection of your final earned income paycheck, you are in the accumulation phase, during which the goal is to generate financial resources sufficient that you won’t run out of money before you run out of time. You may have more goals than this simple benchmark, yet virtually everyone’s minimum objective is to provide for their own needs in retirement rather than becoming a financial burden to their children.
Once there is no more earned income, the distribution phase begins. Conversion from the accumulation to the distribution phase is a paradigm shift that requires prudent strategies to manage and execute. My nearly three decades in financial services has taught me that, for most people, the distribution phase generates greater emotional angst than the accumulation phase. Even though the purpose of accumulating assets over a career is to distribute them throughout your non-working years, the fear of spending money when you’re not earning income can be overwhelming. What if we spend too much, too fast? What if we live longer than anticipated? What if we need assisted living or skilled nursing care? Can we support our kids’ families if they need help? Can we afford to spoil our grandchildren? What if we need to support one or more of our parents if they run out of money or go into poor health? How much travel can we afford? Do we need to sell our lake home and boat so we can afford other lifestyle priorities? All of these relevant questions, and more, can be answered with proper advanced planning, which will provide the necessary peace of mind to spend joyfully, with confidence.
Short of being diagnosed with a terminal ailment, it’s highly unlikely you will know precisely how many years you have post-career. According to the Social Security Administration’s life expectancy calculator, today a 65-year-old woman should estimate living approximately to 87 and a 65-year-old man until 84. Yet, life expectancies have increased rapidly, as has the cost of the medical care that’s extending our lives. As a result, retirees should financially prepare for maintaining an acceptable standard of living until at least 90. We now have an end goal in mind; specifically, to support lifestyle needs for two people (assuming you’re married or have a partner) over the 25 years following retirement without running out of money. The list of wealth management and preservation issues to plan for over multiple decades is substantial, and dynamic, so many of these elements may need updating several times. All of the following areas, while not an exhaustive list, can affect successful distribution outcomes: retirement income planning, portfolio planning, tax planning, risk management planning and legacy planning.
Retirement income planning is necessary for funding your lifestyle once there isn’t a paycheck. It includes strategies for optimizing Social Security retirement benefits, required minimum distributions (RMDs), withdrawals from taxable accounts and, possibly, pensions, annuities or rental income from real estate. Without addressing and coordinating these many moving parts, how will you know the most effective way to obtain the money you need to pay monthly expenses?
Portfolio planning is necessary to pursue goals-based results through periodic retirement projection updates. If your spending desires require your portfolio to generate 5% returns net of taxes and fees, yet your portfolio is structured to generate 3% returns after taxes and fees while inflation sits at 3%, your adult children may need to have a bedroom available for you down the road. Similarly, using proper asset location to place the right type of tax-efficient and tax-inefficient investments into the right types of accounts can help increase after-tax returns. Your personal return, net of taxes and fees, is what counts toward your future financial success, not the gross investment return itself.
Taxes have the ability to erode retirement income, investment returns and Social Security benefit payments quickly. We’ve experienced a relatively low tax environment by historical norms in recent years, yet, based upon the many pending proposals for new tax laws, chances are high that taxes will become a bigger factor in future financial outcomes. After paying significant taxes over your career, you have many options available to reduce the impact of taxes throughout retirement. At a minimum, proper advance tax planning should take into consideration the present year and your projected lifetime. The key is to look forward and make intentional decisions rather than waiting to be told how much you’ll owe in taxes or simply increasing estimated quarterly tax payments.
Risk management includes all forms of insurance coverage; you may be over-insured, under-insured or appropriately insured in any given area. Health insurance, Medicare and Medicare supplements included, is quite complex and long-term care insurance is even more difficult to navigate. If you and your spouse need healthcare support for multiple years at a cost of, say, $100,000 annually (which is a realistic amount for care), will you still have money to use elsewhere? In other words, can your financial projections remain positive if total out-of-pocket expenses for two adults to receive in-home care, and/or move into assisted living, and/or live in a nursing home facility reach $500,000? According to a new cost-of-care survey, 70% of Americans may need at least one form of long-term care, so the odds are too great to ignore proper management of health risks.
Legacy planning can be as simple as having your accounts updated with your desired primary and contingent beneficiaries. Do you still have a former spouse listed as the primary beneficiary on that long-forgotten IRA? However, planning your legacy also includes keeping your estate documents current to ensure the people and charities you care for the most will be the recipients of your assets. Returning to the topic of taxes, without tax law changes, federal estate and gift tax exemptions will effectively be cut in half at the end of 2025. Pending tax law proposals, if they become law, may reduce the exemption considerably lower than is projected for 2025, and the reduction could come as early as 2022. Therefore, many more heirs and beneficiaries may find themselves subject to federal estate taxes without proper estate planning. Remember to include a living will and powers of attorney as well, so that a loved one or two can make critical medical and financial decisions on your behalf in the event you become incapacitated. Many financial and healthcare institutions will not honor documents that are older than five to seven years, so remaining current is a necessity.
A fair question is when, given current trends facing those considering retirement, you should address all these issues. The answer is to start solving the most critical of them now, if they’re not already solved. None of our time is guaranteed, and the fastest way to alleviate the risk of unintended consequences is to plan accordingly while you are still mentally and physically able to do so. While we need to plan for a lengthy lifetime in retirement, it’s in no way a given, so enjoy whatever time is in store for you. Just consider properly organizing your affairs now, for the benefit of your surviving loved ones.
Given the abundance of distribution-phase planning considerations, it’s understandable if you are now craving a second or third hurricane before packing up and leaving for that retirement beach vacation. After all, you’ve had a wonderful career by excelling at your chosen profession, not because you completed a master’s degree in personal financial planning. Establishing a holistic, evidence-based planning and investment strategy that answers emotion-laden questions will allow you and your spouse or partner to distribute wealth with confidence. If you are unsure how to approach any or all of these topics, connect with a well-credentialed, fiduciary wealth advisor that can quarterback solutions for all these issues. Once you are confident that you are in the right time zone, convert to island time and enjoy the relaxed pace.
Imagine that, in the foreseeable future, you’ll have turned in all your company property, collected your final paycheck, and will be drinking a hurricane at half past noon while chair-dancing to “It’s Five O’Clock Somewhere.” You’ve planned on reaching that celebratory beach vacation over the many years of your career while also designing, building and protecting your financial life. By 65 you have diligently accumulated the wealth you need to retire. You’ve won the game, earning satisfaction and congratulations for completing a solid plan. Other than tee times, volunteer activities or family trips, there isn’t much planning left to do, is there?
Of course there is, or there wouldn’t be a need for this article. In reality, you’re just beginning the second phase of your adult financial life. While it is indeed 5 o’clock somewhere, you need to determine whether you’re in the right time zone to start celebrating or whether you’re actually running a couple hours behind. The time to evaluate your situation is now, rather than waiting until after you’ve jettisoned yourself from the workforce.
Essentially, there are two phases in your adult financial life: accumulation and distribution. From your graduation through the collection of your final earned income paycheck, you are in the accumulation phase, during which the goal is to generate financial resources sufficient that you won’t run out of money before you run out of time. You may have more goals than this simple benchmark, yet virtually everyone’s minimum objective is to provide for their own needs in retirement rather than becoming a financial burden to their children.
Once there is no more earned income, the distribution phase begins. Conversion from the accumulation to the distribution phase is a paradigm shift that requires prudent strategies to manage and execute. My nearly three decades in financial services has taught me that, for most people, the distribution phase generates greater emotional angst than the accumulation phase. Even though the purpose of accumulating assets over a career is to distribute them throughout your non-working years, the fear of spending money when you’re not earning income can be overwhelming. What if we spend too much, too fast? What if we live longer than anticipated? What if we need assisted living or skilled nursing care? Can we support our kids’ families if they need help? Can we afford to spoil our grandchildren? What if we need to support one or more of our parents if they run out of money or go into poor health? How much travel can we afford? Do we need to sell our lake home and boat so we can afford other lifestyle priorities? All of these relevant questions, and more, can be answered with proper advanced planning, which will provide the necessary peace of mind to spend joyfully, with confidence.
Short of being diagnosed with a terminal ailment, it’s highly unlikely you will know precisely how many years you have post-career. According to the Social Security Administration’s life expectancy calculator, today a 65-year-old woman should estimate living approximately to 87 and a 65-year-old man until 84. Yet, life expectancies have increased rapidly, as has the cost of the medical care that’s extending our lives. As a result, retirees should financially prepare for maintaining an acceptable standard of living until at least 90. We now have an end goal in mind; specifically, to support lifestyle needs for two people (assuming you’re married or have a partner) over the 25 years following retirement without running out of money. The list of wealth management and preservation issues to plan for over multiple decades is substantial, and dynamic, so many of these elements may need updating several times. All of the following areas, while not an exhaustive list, can affect successful distribution outcomes: retirement income planning, portfolio planning, tax planning, risk management planning and legacy planning.
Retirement income planning is necessary for funding your lifestyle once there isn’t a paycheck. It includes strategies for optimizing Social Security retirement benefits, required minimum distributions (RMDs), withdrawals from taxable accounts and, possibly, pensions, annuities or rental income from real estate. Without addressing and coordinating these many moving parts, how will you know the most effective way to obtain the money you need to pay monthly expenses?
Portfolio planning is necessary to pursue goals-based results through periodic retirement projection updates. If your spending desires require your portfolio to generate 5% returns net of taxes and fees, yet your portfolio is structured to generate 3% returns after taxes and fees while inflation sits at 3%, your adult children may need to have a bedroom available for you down the road. Similarly, using proper asset location to place the right type of tax-efficient and tax-inefficient investments into the right types of accounts can help increase after-tax returns. Your personal return, net of taxes and fees, is what counts toward your future financial success, not the gross investment return itself.
Taxes have the ability to erode retirement income, investment returns and Social Security benefit payments quickly. We’ve experienced a relatively low tax environment by historical norms in recent years, yet, based upon the many pending proposals for new tax laws, chances are high that taxes will become a bigger factor in future financial outcomes. After paying significant taxes over your career, you have many options available to reduce the impact of taxes throughout retirement. At a minimum, proper advance tax planning should take into consideration the present year and your projected lifetime. The key is to look forward and make intentional decisions rather than waiting to be told how much you’ll owe in taxes or simply increasing estimated quarterly tax payments.
Risk management includes all forms of insurance coverage; you may be over-insured, under-insured or appropriately insured in any given area. Health insurance, Medicare and Medicare supplements included, is quite complex and long-term care insurance is even more difficult to navigate. If you and your spouse need healthcare support for multiple years at a cost of, say, $100,000 annually (which is a realistic amount for care), will you still have money to use elsewhere? In other words, can your financial projections remain positive if total out-of-pocket expenses for two adults to receive in-home care, and/or move into assisted living, and/or live in a nursing home facility reach $500,000? According to a new cost-of-care survey, 70% of Americans may need at least one form of long-term care, so the odds are too great to ignore proper management of health risks.
Legacy planning can be as simple as having your accounts updated with your desired primary and contingent beneficiaries. Do you still have a former spouse listed as the primary beneficiary on that long-forgotten IRA? However, planning your legacy also includes keeping your estate documents current to ensure the people and charities you care for the most will be the recipients of your assets. Returning to the topic of taxes, without tax law changes, federal estate and gift tax exemptions will effectively be cut in half at the end of 2025. Pending tax law proposals, if they become law, may reduce the exemption considerably lower than is projected for 2025, and the reduction could come as early as 2022. Therefore, many more heirs and beneficiaries may find themselves subject to federal estate taxes without proper estate planning. Remember to include a living will and powers of attorney as well, so that a loved one or two can make critical medical and financial decisions on your behalf in the event you become incapacitated. Many financial and healthcare institutions will not honor documents that are older than five to seven years, so remaining current is a necessity.
A fair question is when, given current trends facing those considering retirement, you should address all these issues. The answer is to start solving the most critical of them now, if they’re not already solved. None of our time is guaranteed, and the fastest way to alleviate the risk of unintended consequences is to plan accordingly while you are still mentally and physically able to do so. While we need to plan for a lengthy lifetime in retirement, it’s in no way a given, so enjoy whatever time is in store for you. Just consider properly organizing your affairs now, for the benefit of your surviving loved ones.
Given the abundance of distribution-phase planning considerations, it’s understandable if you are now craving a second or third hurricane before packing up and leaving for that retirement beach vacation. After all, you’ve had a wonderful career by excelling at your chosen profession, not because you completed a master’s degree in personal financial planning. Establishing a holistic, evidence-based planning and investment strategy that answers emotion-laden questions will allow you and your spouse or partner to distribute wealth with confidence. If you are unsure how to approach any or all of these topics, connect with a well-credentialed, fiduciary wealth advisor that can quarterback solutions for all these issues. Once you are confident that you are in the right time zone, convert to island time and enjoy the relaxed pace.
Making Sense of Education Savings: What’s Right for You?
Highlights
Feeling overwhelmed by your college savings choices? It’s no wonder – there are myriad options, and which ones are a good fit will depend on your specific circumstances. Whether you’re saving for college, graduate school or some other educational credential, working alongside an advisor who understands the available savings vehicles and their rules can help ensure that the decisions you make best serve your goals and are in concert with your overall financial plan. If you’re in the process of deciding on an education savings path, let this decision tree help guide you!
The opinions expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Partners®. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice. Individuals should speak with qualified professionals based upon their individual circumstances. The analysis contained in this article may be based upon third-party information and may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. IRN-21-2560
© 2021 Buckingham Strategic Partners®
About the Author
Jeffrey Levine
As Chief Planning Officer at Buckingham Strategic Partners, Jeffrey serves as a technical resource for advisors and the firm’s primary thought leader regarding evidence-based planning concepts and strategies.
What can we expect from the stock market in 2021?
If there was ever a year that we were reminded of the difficulty of making stock market predictions, it was 2020. Yet, many clients continue to search for "expert" market outlooks in hopes of positioning their portfolio to outperform.
If there was ever a year that we were reminded of the difficulty of making stock market predictions, it was 2020. Yet, many clients continue to search for "expert" market outlooks in hopes of positioning their portfolio to outperform.
While it's tough to fault anyone for failing to predict that we would experience a global health pandemic that would send shock waves across markets, it goes to show that an investment approach based on discipline and diversification rather than prediction and timing is perhaps the better route to take.
While it's tough to fault anyone for failing to predict that we would experience a global health pandemic that would send shock waves across markets, it goes to show that an investment approach based on discipline and diversification rather than prediction and timing is perhaps the better route to take.
To exemplify the difficulty of making market forecasts, we can look in the rear-view mirror at several examples of 2020 market forecasts and see how they turned out. A well-known financial publication surveyed 10 Wall Street strategists to gather their outlook1, below are a few takeaways:
To exemplify the difficulty of making market forecasts, we can look in the rear-view mirror at several examples of 2020 market forecasts and see how they turned out. A well-known financial publication surveyed 10 Wall Street strategists to gather their outlook1, below are a few takeaways:
The consensus of the strategists was that the S&P 500 would rise 4.1% in 2020, a substantial difference from the 18.4% that the index returned, despite all the headwinds faced. Even the panel’s most bullish member undershot where the S&P 500 would end up, estimating the index would rise to 3500 by year end. The strategists predicted that the 10-Year Treasury would end the year yielding 1.89%, a number more than double the 0.919%2 that we saw on December 31st. The strategists also didn’t expect the Fed to lower the federal funds rate to the level where it sits today, a target of 0% – 0.25%. The lowest range any strategist put on the rate was 1.25% - 1.50%. From a sector standpoint, 8/10 strategists were overweight financials going into 2020; the financial sector ended up being one of four sectors that experienced loses in 2020. Only two of the strategists were overweight the technology sector which ended up being the best performing sector. On the contrary, only one member of the panel was underweight energy, the sector that saw the lowest returns for the year.
What happened once COVID-19 threw a wrench into many forecasts? The New York Times Jeff Sommer writes that many doubled down, “In April, the Bloomberg survey showed, forecasters predicted that the S&P 500 wouldn’t rise at all for this calendar year: They said the market would fall about 11 percent.”
What happened once COVID-19 threw a wrench into many forecasts? The New York Times Jeff Sommer writes that many doubled down, “In April, the Bloomberg survey showed, forecasters predicted that the S&P 500 wouldn’t rise at all for this calendar year: They said the market would fall about 11 percent.”
In a year that was characterized by sharp swings for stocks, those who paid attention to those market forecasts may have made regretful decisions. While the dramatic downturn was swift and steep, with the S&P 500 falling 33.79% from peak to trough, the recovery would be just as quick, as the index followed that up with its best 50-day period in history3 and returned 70.18% from March 24th through year end.4
In a year that was characterized by sharp swings for stocks, those who paid attention to those market forecasts may have made regretful decisions. While the dramatic downturn was swift and steep, with the S&P 500 falling 33.79% from peak to trough, the recovery would be just as quick, as the index followed that up with its best 50-day period in history3 and returned 70.18% from March 24th through year end.4
It would be biased to highlight the inaccurate forecasts for this bizarre year if the record in the past had been impressive, but that isn’t the case. Year in and year out, economists across the industry give their outlook for the upcoming year, and when we reflect back on these forecasts, they turn out to be about as accurate as a weatherman that calls for rain in the desert.
It would be biased to highlight the inaccurate forecasts for this bizarre year if the record in the past had been impressive, but that isn’t the case. Year in and year out, economists across the industry give their outlook for the upcoming year, and when we reflect back on these forecasts, they turn out to be about as accurate as a weatherman that calls for rain in the desert.
Success in the market doesn’t require making accurate predictions, it requires the ability to stay in the game. An investor who is able to stay disciplined with their investment plan that their advisor set out for them, will be better off than one who constantly makes decisions based on “expert” market forecasts.
Success in the market doesn’t require making accurate predictions, it requires the ability to stay in the game. An investor who is able to stay disciplined with their investment plan that their advisor set out for them, will be better off than one who constantly makes decisions based on “expert” market forecasts.
Should You Do Your Own Taxes, or Pay a Professional?
Deciding whether to prepare your own taxes or to pay a professional to prepare your tax return depends a great deal on your confidence in understanding the tax rules and on choosing the right software. You're could be fine forging ahead on your own if crunching numbers is your thing, but you might want to pay a professional to deal with your return otherwise.
The Cost
The Cost
The single biggest reason most people consider preparing their tax return themselves (just like with home improvements, painting a room, or fixing the plumbing) is the cost savings.
This does not mean that preparing taxes yourself is free though, as many people choose software to assist throughout the process. You will find a large number of software providers to choose from, like TurboTax and H&R Block, just to name a few. The costs of this software range from as little as $29 to as much as $299 depending upon the amount of guidance provided during the preparation process. So if you’re aiming for help to identify deductions or remembering all the different types of income that need to be reported, it could cost you.
Perhaps the most costly factor that most people forget about though, is the time it will take to prepare your tax return yourself. The time necessary will depending upon your level of knowledge of tax law and the complexity of your financial situation. And to give you an idea, according to the IRS, the average person will take 11 hours to prepare their 2019 tax return. [footnote]
2020 Tax Law
With the Tax Cuts and Jobs Act (TCJA) of 2018, you might want to reconsider the help of a professional to prepare your 2020 tax return, even if you consider yourself capable of preparing your own tax returns. This new TCJA tax law made sweeping changes to the tax code when it went into effect in 2018, which had significant effect for professional athletes and their tax returns.
Our tax department at Athletes Financial has noticed a marked difference in the effects of this new tax law on our clients effective tax rates. For example, the TCJA limits the state and local tax deduction (SALT) to $10,000 per calendar year. So if you are paying more than $10,000 in taxes to the states where you played plus your real estate taxes, your deductions will be significantly limited compared to before. Additionally, Personal exemptions have been eliminated from the tax code as well. [footnote]
NOTE: You might be better off hiring a professional to make sure your return is right if you think you might be better off itemizing your deductions despite the provisions of the TCJA.
How to Get Started
The best place to get started to prepare your own tax returns is to download the relevant forms and instructions from the IRS.
By figuring out whether you need to file Form 1040 as an Individual, or Form 1120 as a Corporation, or Form 1065 as a Partnership, or Form 990 as a Foundation, is the first crucial step. Each of these IRS forms comes with its own separate set of instructions that will walk you through Who Should File and all other relevant details.
Once you know which form(s) to file, you can begin the process of narrowing down your tax software choices that will be best for you.
TIP: Don’t forget to get tax returns from your resident state’s tax department website, as well as each state where you played this season, while you’re online.
Tax Preparation Software
Your best option might be to use tax preparation software. It’s the next best thing to having a tax professional sitting next to you as you work.
There are several options for you to choose from, including free and paid software. Some of the more well-known software providers include TurboTax and H&R Block. Prices range from free to $100 or more for premium versions, or if you have more complex tax filings.
Free internet programs are also available through the IRS Free File Alliance, but this program is limited to individuals whose incomes were $72,000 or less in the 2020 tax year. This may work if you were in minor league baseball, NFL practice squad, or golfer with earnings below this threshold. But for just about every other athlete, your income will put these options out of reach.
NOTE: You can expect these tax preparation softwares to be up to speed with the TCJA changes and will provide the updated 1040 form.
If You Hire a Tax Professional
The majority of professional athletes decide it would be best for them to hire an accountant or tax professional to prepare their tax returns because they want to be sure that it’s done right. They don’t want to hear from the IRS or any of the multiple states after they file tax returns.
Be sure to find a tax professional with extensive knowledge and experience working with professional athletes like you. Some accountants are general practitioners. Athletes Financial specializes in helping athletes like you who are required to file multiple state tax returns, have state residency issues, wages and self-employment income, and so much more. We know your tax situation, because we have prepared thousands of tax returns just like yours for over 20 years.
The Final Decision
Keep in mind that you will still have work to do yourself even if you hire a professional.
In many cases, it will be up to you to gather all your tax-related documents. The sooner you start, the more information you’ll have at your fingertips to make the best decision.
You’ll want to save time for reviewing your tax return for accuracy when it’s completed regardless of which route you take. A professional will certify accuracy and can help you down the road in a tax audit, but your tax return is only as good as the information you provide.
Additionally, you will want to keep copies of your tax return and related supporting documents for at least three years just in case any of the tax agencies have any questions for you.
About the Author
Mike George, CPA, PFS™
As Chief Executive Officer at Athletes Financial, Mike serves as the primary resource for advisors and the firm’s primary thought leader regarding evidence-based planning concepts and strategies.
Question of the Week: Should I invest in gold?
We’re currently in the midst of a global health pandemic and economic recession, have an impending presidential election, and have seen many economists speculate on the devaluation of the U.S. dollar. With all of this uncertainty facing investors at one time, it's natural that this question is on investors’ minds. Some proponents will make the claim that gold deserves a significant weighting in investors' portfolios. Gold's often-cited portfolio benefits include a strong long-term return, a hedge against inflation, and a portfolio diversifier. However, the evidence raises doubt about gold as an essential component in a portfolio. In examining the long-term return of gold when considering its addition to your portfolio, it's important to recognize that gold's price appreciation has been limited to unpredictable, isolated episodes of high demand. In fact, if you disregard the 1971-1974 period where US investors were unable to own gold directly, its long-term performance drops substantially. From January 1970 – December 2019, gold returned 7.81% annually, however, when we look at the return figures starting in January 1975, which is when the government removed ownership restrictions and U.S citizens were free to directly own gold for the first time, the annualized return gets cut to 4.79%. Investors often think of gold as a hedge against inflation. As Exhibit 1 shows, however, gold has been about 15 times more volatile than inflation. Over the period from January 1970 – December 2019, the annualized compound return for gold was 7.81% with a volatility of 19.24%. For comparison, the annual inflation rate has been 3.91% with a volatility of 1.29%. Investors may also consider whether an asset allocation to gold should be included as a part of a diversified portfolio strategy. However, it is important for investors to keep in mind that gold’s historical return and market correlation characteristics alone may overstate its potential value as a portfolio asset. Professor’s Ken French and Eugene Fama argue that much of the stock of gold is in the form of jewelry and other goods that pay a "consumption dividend." This dividend increases the current price of gold and lowers its expected capital gain return. But an investor who holds gold as a portfolio asset only expects to get the expected capital gain, which does not suffice to compensate for the risk of the asset. Given that gold’s only source of return is price appreciation caused by shifting supply and demand, this makes gold a speculative asset. If you put gold in a vault and wait a few decades, it will not produce anything, and its value will reflect the current spot market price. In fact, holding physical bullion may incur negative cash flows due to storage, insurance, and other costs. In contrast, a stock reflects ownership in a business enterprise that seeks to generate profits and produce more wealth. Investors who put their capital to work in the economy expect a potential return from cash flows and appreciation. Famed investor Warren Buffet summarized gold’s speculative nature, non-productive quality, and high opportunity cost in Berkshire Hathaway’s 2011 annual report – while the metrics referenced may have changed, the story remains the same: “Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A. Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?” The decision to own gold is often motivated by an emotional response to current events, leading to abrupt shifts in allocation strategy and failure to achieve capital market rates of return there for the taking. Investors may be better off allowing gold to fulfill their material desires, rather than including it as a component in their portfolio.
Exhibit 1: Performance Statistics, January 1st, 1970 – December 31st, 2019
Past performance is not a guarantee of future results. In USD. Source of Gold Spot Price is Bloomberg. Source of US Consumer Price Index is Bureau of Labor Statistics. Source of MSCI World Index (net div.) is MSCI. MSCI data copyright MSCI 2019, all rights reserved.
Tuning Out the Noise
For investors, it can be easy to feel overwhelmed by the relentless stream of news about markets. Being bombarded with data and headlines presented as affecting your financial well-being can evoke strong emotional responses from even the most experienced investors.
For investors, it can be easy to feel overwhelmed by the relentless stream of news about markets. Being bombarded with data and headlines presented as affecting your financial well-being can evoke strong emotional responses from even the most experienced investors.
Headlines from the so-called lost decade–the 2000s, when the S&P 500 ended below where it began–can help illustrate several periods that may have led market participants to question their approach.
March 2000:
Nasdaq Stock Exchange Index Reaches an All‑Time High of 5048
April 2000:
In Less Than a Month, Nearly a Trillion Dollars of Stock Value Evaporates
October 2002:
Nasdaq Hits a Bear-Market Low of 1114
September 2005:
Home Prices Post Record Gains
September 2008:
Lehman Files for Bankruptcy, Merrill Is SoldWhile these events are more than a decade behind us, they can still serve as an important reminder for investors. For many, feelings of elation or despair can accompany headlines like these. We should remember that markets can be volatile and recognize that, in the moment, doing nothing may feel paralyzing. However, if one had hypothetically invested $10,000 in US stocks in January 2000 and stayed invested, that would be worth approximately $32,400 at the end of 2019.1
When faced with short-term noise, it is easy to lose sight of the potential long-term benefits of staying invested. While no one has a crystal ball, adopting a long-term perspective can help change how investors view market volatility and help them look beyond the headlines.
Headlines from the so-called lost decade–the 2000s, when the S&P 500 ended below where it began–can help illustrate several periods that may have led market participants to question their approach.
While these events are more than a decade behind us, they can still serve as an important reminder for investors. For many, feelings of elation or despair can accompany headlines like these. We should remember that markets can be volatile and recognize that, in the moment, doing nothing may feel paralyzing. However, if one had hypothetically invested $10,000 in US stocks in January 2000 and stayed invested, that would be worth approximately $32,400 at the end of 2019.1
When faced with short-term noise, it is easy to lose sight of the potential long-term benefits of staying invested. While no one has a crystal ball, adopting a long-term perspective can help change how investors view market volatility and help them look beyond the headlines.
EXHIBIT 1
Hypothetical Growth of Wealth in the S&P 500 Index
January 1, 2000–December 31, 2019
EXHIBIT 1
Hypothetical Growth of Wealth in the S&P 500 Index
January 1, 2000–December 31, 2019
Part of being able to avoid giving in to emotion during periods of uncertainty is having an appropriate asset allocation that is aligned with an investor’s willingness and ability to bear risk. It also helps to remember that if returns were guaranteed, you would not expect to earn a premium. Creating a portfolio investors are comfortable with, understanding that uncertainty is a part of investing, and sticking to a plan may ultimately lead to a better investment experience.
However, as with many aspects of life, we can all benefit from a bit of help in reaching our goals. The best athletes in the world work closely with a coach to increase their odds of winning, and many successful professionals rely on the assistance of a mentor or career coach to help them manage the obstacles that arise during a career. Why? They understand that the wisdom of an experienced professional, combined with the discipline to forge ahead during challenging times, can keep them on the right track. The right financial advisor can play this vital role for an investor. A financial advisor can provide the expertise, perspective, and encouragement to keep you focused on your destination and in your seat when it matters most. A survey conducted by Dimensional Fund Advisors found that, along with progress towards their goals, investors place a high value on the sense of security they receive from their relationship with a financial advisor, as Exhibit 2 shows.
Having a strong relationship with an advisor can help you be better prepared to live your life through the ups and downs of the market. That’s the value of discipline, perspective, and calm. That’s the difference the right financial advisor makes.
Part of being able to avoid giving in to emotion during periods of uncertainty is having an appropriate asset allocation that is aligned with an investor’s willingness and ability to bear risk. It also helps to remember that if returns were guaranteed, you would not expect to earn a premium. Creating a portfolio investors are comfortable with, understanding that uncertainty is a part of investing, and sticking to a plan may ultimately lead to a better investment experience.
However, as with many aspects of life, we can all benefit from a bit of help in reaching our goals. The best athletes in the world work closely with a coach to increase their odds of winning, and many successful professionals rely on the assistance of a mentor or career coach to help them manage the obstacles that arise during a career. Why? They understand that the wisdom of an experienced professional, combined with the discipline to forge ahead during challenging times, can keep them on the right track. The right financial advisor can play this vital role for an investor. A financial advisor can provide the expertise, perspective, and encouragement to keep you focused on your destination and in your seat when it matters most. A survey conducted by Dimensional Fund Advisors found that, along with progress towards their goals, investors place a high value on the sense of security they receive from their relationship with a financial advisor, as Exhibit 2 shows.
Having a strong relationship with an advisor can help you be better prepared to live your life through the ups and downs of the market. That’s the value of discipline, perspective, and calm. That’s the difference the right financial advisor makes.
EXHIBIT 2
How Do You Primarily Measure the Value Received from Your Advisor?
Top Four Responses
Top Four Responses
1As measured by the S&P 500 Index. A hypothetical portfolio of $10,000 invested on January 1, 2000, and tracking the S&P 500 Index, would have grown to $32,422 on December 31, 2019. However, performance of a hypothetical investment does not reflect transaction costs, taxes, or returns that any investor actually attained and may not reflect the true costs, including management fees, of an actual portfolio. Changes in any assumption may have a material impact on the hypothetical returns presented. It is not possible to invest directly in an index.
1As measured by the S&P 500 Index. A hypothetical portfolio of $10,000 invested on January 1, 2000, and tracking the S&P 500 Index, would have grown to $32,422 on December 31, 2019. However, performance of a hypothetical investment does not reflect transaction costs, taxes, or returns that any investor actually attained and may not reflect the true costs, including management fees, of an actual portfolio. Changes in any assumption may have a material impact on the hypothetical returns presented. It is not possible to invest directly in an index.
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DISCLOSURESDimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.
No account has been taken of the objectives, financial situation or needs of any particular person. Accordingly, to the extent this material constitutes general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. Any opinions expressed in this publication reflect our judgment at the date of publication and are subject to change.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
There is no guarantee investment strategies will be successful. Investing involves risks including possible loss of principal. Investors should talk to their financial advisor prior to making any investment decision. There is always the risk that an investor may lose money. A long-term investment approach cannot guarantee a profit.
All expressions of opinion are subject to change. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their financial advisor prior to making any investment decision.
Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.
No account has been taken of the objectives, financial situation or needs of any particular person. Accordingly, to the extent this material constitutes general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. Any opinions expressed in this publication reflect our judgment at the date of publication and are subject to change.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
There is no guarantee investment strategies will be successful. Investing involves risks including possible loss of principal. Investors should talk to their financial advisor prior to making any investment decision. There is always the risk that an investor may lose money. A long-term investment approach cannot guarantee a profit.
All expressions of opinion are subject to change. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their financial advisor prior to making any investment decision.