ConGRADulations Class of 2018
You did it!
It may have taken more time (and money) than you thought, but you did it. You graduated and have taken yet another step down the path of adulthood.
We have had the privilege of getting to know some of our clients’ children over the years and it’s fun to see them all grown up and graduated. You recent grads may not realize it just yet, but your parents are about to get really smart. You’re going to be astounded at how much your parents are going to learn in the next five years... prepare yourselves and praise them accordingly for their growth.
None of our loyal newsletter readers have kids that don’t listen to their parents. I know I listened with baited breath for the next pearl of wisdom from my parents. And I know my own kids are chomping at the bit to hear the sage advice from their family’s tribal elders.
Still, we get requests from clients to meet with their kids and help them get off on the right foot. BTW...we LOVE doing this. On more than one occasion, we (as advisors) can be the swing vote in how best to proceed down life’s financial path. Parents say one thing and kids hear the other. I guess sometimes it sounds better coming from someone other than mom and dad.
If you’re fortunate enough to have a job lined up, then 2018 is likely the biggest pay raise you’ll ever get. Assuming you made zero to $15 per hour up to this point, you are likely to see a significant bump in pay. You might even get dental and/or health insurance and a retirement plan to boot.
With this as a backdrop, I (and your parents) would like to share some practical financial advice that can make your lives better.
- Avoid debt in general and credit cards in specific. If you have to have a credit card, set the credit limit low-like $1000 at first. Do not let the credit card company tell you how much you can borrow. Avoid store-specific cards and teaser interest rates.
- Make your current car last a year or two. If you don’t have a car now, buy (or even lease) something sensible that you can afford. Do not let the car dealer tell you how much car you can afford. Consider Uber and Lyft. You may not even need a car.
- Max out your retirement plan contributions and if possible contribute to a Roth IRA or Roth 401(k). Don’t put off saving until you’re 25 or 30 or 40 or have kids. Kids are expensive and they don’t like it when you don’t spend money on them.
- If you have college debt, divert some of your retirement contribution to this, but still contribute the maximum to your retirement. For example, if you were going to save $1000 per month, then do $250 to school debt and $750 to retirement savings. You want to get out of debt, for sure, but the more seeds you plant, the sooner you plant them, the better. Time is on your side. Let it work for you.
- Be realistic about graduate school. My wife has a master’s degree from Penn State. It was money well spent, but do not ignore the economic impact of graduate school loans, especially if you already have a mountain of undergraduate debt. Life’s financial path is long...the less weight you have to carry, the better.
- If you’re getting married soon, be realistic about your wedding. I’ve been to big, expensive weddings and I’ve been to small, “inexpensive” ones. The people who matter most are going to think it’s fantastic whichever route you go. Your parents might have some guidance for you here as well. Every dollar you spend on flowers and music is a dollar not available for other priorities. I am pro-wedding, but do not ignore the economic impact of extravagant weddings.
- If you plan on buying a house: 1) Don’t buy one unless you think you’ll be there for 3-5 years; 2) only take out a 15-year mortgage; and 3) don’t let the bank tell you what you can afford. Houses are hungry animals. Whatever you think you need to have set aside for home expenses, add 50%. Don’t forget about furniture.
- If you have a retirement plan at work, talk to a trusted advisor about how to allocate your portfolio. Most advisors do this kind of stuff for free. Take full advantage of any company matching program they have.
- The best way to accumulate wealth is not to spend it. Get that money out of your hands and into a “tomorrow bucket.” Set up a separate account (like a Roth IRA) and fund it automatically every paycheck. If you get paid on the 1st and 15th of the month, set up your auto draft to run on the 2nd and the 16th. Tomorrow is uncertain and expensive. Having money set aside for the future will keep you flexible and afford you choices you might not otherwise have. Less money available for life’s curveballs means fewer options.
- Financial success is hard and will require a sacrifice on your part. If you want life to be easy now, it will be hard later. And it can be really hard. Or, you can make it hard now and when you really need it to be easy (like when you’re 40 and kids, tuitions, braces and car insurance hit) it should be much more manageable.
If you make the hard decisions now, it will set you up for success later. Your parents already know this, of course. They learned it about ten years after they graduated, but you’re going to learn it now.
Congrats again and wishing you a healthy and prosperous adulthood.
Market Commentary: What’s Going On With Bonds?
Written April 20th, 2018
This year we have experienced the extreme highs of January, the plummet of February, and the zigzags of March. Yet, as I write this, Morningstar’s year-to-date benchmark for the broad U.S. stock market is up 0.9%. This isn’t bad considering we are facing a possible trade war with China and an actual war with Syria. Not to mention the shockwaves the privacy scandal of the social media giant, Facebook, sent through the technology sector that still ripple today. I think those risks to the stock market are minimal. A trade war with China is highly unlikely and while information technology companies might face higher regulations, they will still make a lot of money.
There is another component to most investors’ portfolios that is as important as stocks - bonds. The vast majority of investors depend on the bond market in one way or another.
As of April 19th, there wasn’t a single Morningstar bond benchmark that is positive for the year. The areas most retirees invest in are down as much as 4.5%. How is that possible? Bonds are supposed to be less risky than stocks, right? Although bonds tend to be less volatile than stocks, it is not true that bonds are always up when stocks are down. Nor is it true that if the stock market is highly volatile, bonds will outperform stocks.
The “60/40 split”1 mentality (a portfolio comprised of 60% stocks and 40% bonds) has persisted due to the following reasons. First, and rightly so, it is always a good idea to diversify your portfolio. In other words, invest in different things that move in different directions. Stocks and government bonds tend to have low or negative correlations. That means their price movements are either not correlated at all or negatively correlated. In other words, as stocks go down, government bonds tend to go up. Second, there were fewer investment choices available in the 80s. You couldn’t log onto your favorite brokerage website and buy energy, infrastructure, currencies, or real estate funds with just a click of your mouse. Third, rates were in rapid decline in the 80s and 90s, and when rates go down, bond prices go up. But why is that?
Here is a very basic illustration of how changing interest rates can have a significant impact on existing bonds, especially those with fixed interest rates like treasuries.
Let’s say today you pay $1,000 for a bond that is going to pay you $50 (or 5%) per year for the term of the bond - or until you sell it. One year from now, newly-issued bonds that sell for $1,000 are paying $40 (or 4%) per year. Your bond is paying more than the going rate, so the value of your bond goes up. If you wanted to sell it, you’d probably get about $1,250 for it. That is a pretty good return.
Fast forward ahead two years. Bonds that sell for $1,000 are paying $60 (or 6%) per year. Now your 5% bond is not worth as much as the newly-issued bonds are. If you sell it, you’d probably get $833 for it. Obviously, bonds have a set maturity date and aren’t perpetual. Bond funds generally don’t have an end date, so if you invest in a bond fund and not individual bonds the effects can be similar, though much less severe.
The chart below shows 10-year Treasury yields dating back to the late 50s. It has been a bond investor’s paradise. See how rates have been declining since the mid-80s up until late 2017? As evidenced by negative bond returns so far this year, and with rates on the rise, that paradise might be drying up. In my opinion, if the era of declining interest rates is over, then going forward, traditional bonds will have a tougher time than in recent history. The Federal Reserve is expected to raise the target for the Federal Funds rate 2-3 more times this year. That action will push all other interest rates higher along with it.
What does all of this mean for investors? It does not mean you shouldn’t own any government or fixed rate bonds. This is because they are still good diversifiers and if stocks fall dramatically, they would probably still be a good insulator from that risk. However, that should not be your entire bond investment. The good news is there are many more diverse and broad investment choices now than even a decade ago. We have ways to invest in bonds that aren’t impacted by the risk of rising rates. There are also other conservative asset classes that aren’t correlated with bonds but will still bring down the risk of a portfolio. Some may be an excellent fit for you. I am not permitted to speak about specific products in my market commentary, but we love to share our ideas with you. To learn more, call or email us.
1There is no guarantee an investing strategy will be successful. Diversification does not eliminate the risk of market loss.
Do I Have To Keep All These Papers?
Another tax season has come and gone. While you are putting away your 2017 tax forms, why not clean out your files, drawers and backlog of statements at the same time? Knowing which financial paperwork to keep or toss is very important.
The following list of keeping/shredding documents may be useful. Be sure to shred any information that has any personal details on it.
Documents which should be kept indefinitely in a secure location:
- Birth/death certificates and Social Security cards
- Marriage Licenses and Divorce Decrees
- Pension plan documents
- Copies of wills, trusts, health care proxies/living wills and powers of attorney (attorney/executor should have copies)
- Tax returns
Suggested timeline for retaining documents:
- Supporting documents for a tax return (7 years) - This is the recommended minimum period to retain. Remember, tax return copies should remain on file forever.
- Investment records and statements (7 years) - These are needed for tax filing. Keep for at least three years. You may want to keep for the same amount of time as the supporting documents for tax returns.
- Credit card statements (45 days-7 years) - Keep up to seven years if it may be used for taxes, as proof of purchase or for insurance.
- Bank statements (1-3+ years) - Keep for three years or longer if you apply for Medicaid, or it pertains to taxes, a business expense, home improvement, mortgage payment or major purchase.
- Insurance policies (until closed) - Keep as long as the policies remain in force.
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