Your Guiding Angel

Frank Capra’s film “It’s A Wonderful Life” was released in the winter of 1946. It would take almost three decades before it became a classic. The finer things in life tend to take time.

Senior Angel: “A man down on earth needs our help.”

Clarence: “Is he sick?”

Senior Angel: “No, worse. He’s discouraged.”

The story’s about a desperately frustrated banker, father, husband and community man who was thinking about throwing away God’s greatest gift – his life. And Clarence who hadn’t yet earned his wings in 200 years was sent to be George Bailey’s guiding angel.

We’re about to leave 2016 which may go down as one of the most eventful years for investors since the Financial Crisis. The year started with a tumultuous market sell-off, then major geopolitical events including Brexit and the surprise Trump victory. The US stock markets (S&P and Dow Jones) have sky rocketed, the US dollar has soared to its highest level in 14 years, and interest rates are on the rise.

Some people are concerned. Others may be peering over the bridge’s edge into the icy waters below. There are reasons for nervousness. Maintain control and don’t be discouraged for 2017. Here are three areas all focused on the theme “Be Flexible.”

Goals and Financial Plan – Are you planning for the “right” goals? Consider both big goals (retiring in 20 years or funding a 30 year retirement) and easy win goals (create a budget, a 2-year credit card payoff plan, or update beneficiary designations). Stay motivated using “eat an elephant one bite at a time” and recognize your progress.

Why do people tend to make decisions they later regret? Some pay to remove tattoos they once thought were great ideas, and others divorce the ones they rushed to marry. Are you possibly saving for something you won’t want in the future? The concept called “The End of History Illusion” was published in an article by Quoidbach, Gilbert and Wilson (Science, January 2013). They surveyed people asking them how much they had changed in the past decade, and to predict their changes over the next decade. Surprisingly, people predicted minimal change in the future despite the significant changes they’ve made in the past “…leading people to overpay for future opportunities to indulge their current preferences.” This has significant planning implications. Will you sell the second home or downsize main home? Live longer than you think? (Inflation is a hidden menace – SS recipients get a measly pay raise of 0.3% or $5 a for the average recipient). What if SS isn’t fixed and benefits are reduced by 20% (or 30%) for future retirees? Will your family dynamics change? You dream that assisted living is for other people, not you? Be flexible.

Investment Plan – The year ends in about a week, and looks like US stocks outperform foreign stocks for fourth year in a row. S&P is up about 13% for 2016, DJIA up 16%, Russell 2000 up 22%, EAFA (foreign developed) up 1%, and EM (foreign emerging) up 8%. And interest rates are on the rise. What’s ahead for 2017?

A recent report in Barron’s summarized 2017 forecasts by 12 strategists from major Wall Street firms (Goldman, JP Morgan, BofA/Merrill, Blackrock, etc.). They’re forecasts, not guarantees, but predict returns to be slightly higher. The average GDP growth is about 2.6%, S&P up 5.4%, and 10 year Treasuries up slightly to 2.7%. Second, capital markets tend to have a permanent upward trend, but it’s not a straight line. The S&P is triple its March 2009 lows, and some argue we’re due for a correction. Third, there’s a saying “You drive like hell and you’re going to get there.” So diversify and trade the opportunity of ever making a killing for never getting killed. Look at your right hand as a reminder – five fingers representing a form of diversification – US stocks, foreign stocks, real estate, bonds and commodities. And fourth, all the hoopla about Dow hitting 20,000 – it’s just a number. It stood about 496 when I was born 59 years ago, and my daughter will see it hit 650,000 (that’s 6% growth over 60 years). Be flexible.

Tax and Estate Plans – The US elections marked a 9.0 policy earthquake. Four of Trump’s main issues were infrastructure, tax reform, immigration, and Obamacare. Policy changes mean adapting our financial plans. However, it’s too early to know what campaign rhetoric is ultimately enacted as policy. That process will take time, and as my partner Kirstin says “Breathe… if a wall’s going up, it won’t be built overnight.” Take tax reform as an example. Most agree that simplification makes sense. However, people differ on the details. Talk includes cutting corporate tax rates and eliminating estate taxes. For individuals, Trump’s and the GOP’s plans take 7 brackets down to 3, but they differ significantly on deductions, and thus impact on the deficit. And it’s a good sign there are dissenters among his cabinet nominees – expect healthy debate. For planning, a general idea is to accelerate losses into 2016 and defer income to 2017. However, it’s not prudent to make drastic changes or speculate on the outcome of tax reform. Be flexible.

May your list of worries be shorter than your New Year resolutions.

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