Life isn’t easy, simple or smooth. March is Women’s History Month which recognizes great contributions women have made to our country. Elizabeth Blackwell was the first women to graduate from medical school in 1849 and is recognized as our first woman doctor. Blackwell faced many prejudicial challenges in education and medicine. She was rejected by most schools, one accepted her on the condition she dress as a man, and was finally accepted by Geneva Medical College in NY. She and her sister Emily (graduated from med school in 1853) opened a women’s clinic. Elizabeth marched on, trained women physicians and nurses in the Civil War, and founded hospitals and women’s medical colleges in the US and England. She was a pioneer in preventative medicine and helped open the doors for other women. At the time of her death at age 85 in 1907, there were over 7,000 women physicians in the US.
Let’s shift gears and talk about three challenges facing investors today, and actions you can take to better put things in your favor:
Volatility vs Risk – Volatility has returned with the US stock markets in correction territory last month and Bitcoin cryptocurrency fell almost 60% from its peak. Numerous culprits have been suggested. The cause doesn’t really matter. Volatility makes people uneasy.
- Volatility is natural. However, it doesn’t necessarily mean risk. Take two investments, one with an average return of 6% but about two-thirds of the time it ranges from being minus 6% to positive 18%. The other averages a 1% return per year and consistently earns 1% with zero volatility. Is it less risky than the other earning 6% on average with volatility?
- Consider risk as things that jeopardize your expected outcomes (e.g. comfortable retirement). Volatility can be managed – prudent diversification. Consider risks – not having a written game plan, business cycles, divorce, aging, etc. What actions should you take to manage them?
- Your response to volatility can be risky. Investors can be their own worst enemy. Some try to time the market diving in at the high and bailing at the bottom – buy high and sell low. DALBAR, a research company, calculates the average equity investor lags the index by three to four percent over a 20-year period (12/31/2016) and similar lags for fixed income investors. Instead, schedule reviews with your financial advisor when times are good (and adjust if prudent), so hopefully in bad times, the conferences will be “You’re going to be ok.”
Rising Inflation and Interest Rates – Some impacts are good, others bad. Example, Social Security retirees received a 2% pay raise (COLA) this year, the highest since 2012. The average retiree saw a monthly increase of $27, and those at the maximum benefit got $101. While payouts increased, so do costs. Full retirement age for younger workers rose. Taxable income cap for FICA taxes increased $1,600 to $128,700.
- Investing: Higher interest rates can benefit savers. Talk to your advisor about using high yield, online, FDIC insured savings accounts paying 1.5% or higher, look at CDs but keep them short (go longer when rates rise), and the risks of owning long-term bonds in rising rate markets.
- Borrowing: Flip side is that borrowing is more expensive. Consider moving adjustable rate debt to fixed rate (e.g. home and student loans). HARP home refinance program has been extended to the end of 2018 – contact HARP.gov and see if that benefits you. And request credit card issuers to review and reduce your interest rates.
Tax Time – Income taxes were illegal until Congress ratified the 16h Amendment. There were 7 brackets from 1% to 7%. Most Americans were at 1% which was for income to about $490k in today’s dollars adjusted for inflation. Times have changed.
- You still have time for 2017 tax savings by contributing to certain retirement – IRAs and SEPs – if eligible and it makes sense for you.
- For 2018 and beyond, higher contribution limits apply for defined contribution plans (including 401k), defined benefit plans and Health Savings Accounts. IRA, Roth and Simples generally remain unchanged.
- Tax Cuts and Jobs Act contains major tax changes affecting both individuals and businesses. Ask your CPA how it will impact you, collaborate with advisors, and adjust tax planning strategies.
- Finally, CPAs are under the gun with filing deadlines and clients who prefer paying less taxes. Organize, be timely, and bring them a latte to brighten their day. And most people hate surprises. Ask for their advice before you do the big transaction – sell a major asset, acquire a business, remarry, etc. – rather than “One more thing, did I tell you about…?”