Inspire FP Blog

Coronavirus Havoc: Strategies for an Election Year

Coronavirus Research

Coronavirus Havoc: Strategies for an Election Year

 

When the AIDS epidemic broke out in June 1981, the 12 month change on the S&P 500 was -16.5%. When the pneumonic plague broke out in September 1994, the 12 month change on the S&P 500 was +26.3%. During the SARS epidemic which broke out in April 2003, the 12 month change on the S&P 500 was +20.76%.

When the Swine Flu broke out in April 2009 the following 12 months  resulted with an S&P 500 return of  +35.9%. When the Ebola virus broke out in March 2014 the following 12 months produced +10.44% on the S&P 500.

Over the last 50 years there have been many epidemics, and, over time, the market has traditionally kept marching on. Bear in mind, many of us have been wondering if some sort of market correction wasn’t already long overdue, so the market gyrations of late should not bring much insecurity to the educated investor.

Inspire Financial Planning’s mission is to educate and inspire people from all walks of life to become great investors. We believe one of the best ways to become a great investor is to study the past as well as to be hopeful for the future. Without doing a little of both it will be hard to keep your perspective when the seas get rough. And they will, occasionally, get very rough.

Recent Stock Market Returns

When studying January and February returns for the year, it looks like most equity (stock)  total returns are -10%. This includes large caps, mid-caps, small caps, internationals, and emerging markets. During the same timeframe, most fixed income (bond) returns are +4%. This includes aggregate bonds, high quality corporates, short and long-term government, mortgage-backed, tips, and cash. If we throw all this into a soup with equally weighted ingredients, we will end up about -7% in the red. After an incredibly strong 2019 this should not be too hard to absorb given the circumstances.

We do not know what the future holds for the coronavirus and how this may specifically affect the stock market. But we do believe that a well-diversified global portfolio is one of the best ways to stay prepared for events just like this. Our prayers go out to all those that have lost loved ones across the globe, more prayers for the ones that are currently fighting this terrible virus, and a few more for those that are either researching cures or trying to prevent contagion.

Coronavirus: Educated Investor Perspective

To keep a healthy perspective, please enjoy some hopeful articles linked below regarding investment strategy. If you want to become a great investor, stay hopeful, stay diversified, work with a professional, and stay up-to-date with your reading as it pertains to this fascinating world, the global economy, and the global stock market.

Investment Data Sources:

Dow Jones Market Data

AlphaStar Market Monitor, Dow Jones

Related Investment Articles/Blogs

https://inspirefp.net/portfolio-stress-test/

https://inspirefp.net/dave-ramsey-millennial-six-characteristics-millennials-rich/

https://inspirefp.net/preparing-market-downturn/

https://inspirefp.net/four-principles-successful-investor/

https://inspirefp.net/401k-efficacy-asset-allocation/

https://inspirefp.net/disagree-warren-buffett-argument-bonds/

About the Author

Jeff Headrick is an independent financial planner and wealth manager with Inspire Financial Planning. When Jeff was still in his teens his father died unexpectedly. While his father was a hard worker and a good provider, he did not have the best financial plan in place when he died.

This left his family at a tough financial crossroad. This personal experience, coupled with being inspired by Sir John Templeton, Warren Buffett, Dave Ramsey, and the laws of compound interest, prompted Jeff to enter the financial services industry in 1999. He has been helping people with their financial planning ever since.

Jeff lives in Wilmington, NC with his wife and two children. He spends most of his spare time just across the Intracoastal Waterway in Wrightsville Beach, enjoying the beauty of the NC Coast.


Charts and graphs contained herein should not serve as the sole determining factor for making investment decisions. All hypothetical scenarios are for illustrative purposes only. Investment Advisory Services offered through AlphaStar Capital Management, LLC a SEC Registered Investment Adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

Diversification does not guarantee profit nor is it guaranteed to protect assets. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results.

You cannot invest directly in an index. Consult your financial professional before making any investment decision. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.

These are the views of Inspire Financial Planning and not necessarily those of AlphaStar Capital Management, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.

Quarterly Stock Market Update. Staying the Course: Strategies for an Election Year

The Capitol Building in Washington DC

By Jeff Headrick, Financial Planner

 

February 2020

 

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“But divide your investments among many places, for you do not know what risks might lie ahead.”

Ecclesiastes 11:2 NLT

 

It appears from the verse above, that the idea of diversification is not necessarily a new one. Those of us who consider ourselves creative people sometimes forget the reality that most times—both good and bad— have been lived through before by people far wiser than us.

But with that headwinds that I believe we may face over the next year, and in fact decade, it may take more than just good old-fashioned diversification to sail steadily through the season(s) ahead.

Evaluate the Past

We have to steady our ship. And to do this we have to steady our minds. With some of the metrics shown below you might be tempted to be lulled to sleep by recent returns. But the past will not keep you steady when market winds below. In addition to reading blogs like this and other quantitative writings on stock market investing, you might want to consider reading up on behavioral finance. Such research might help you keep your emotions in check.

But since this quarterly stock market update usually looks back before it looks forward. Let’s look at some numbers from 2019.

Vanguard CRSP Model Portfolios

If you’ll recall 2018 ended dismally. It was the worst quarter in quite a while and most equities finished the year in the red. A lot of intelligent people moved money to the sidelines. However, this decision left them not only scratching their heads but missing some amazing opportunities to make a very respectable profit.

An opportunity missed in the large cap arena would have been Vanguard’s Growth ETF. Ticker symbol VUG, this fund finished the year at +37%.

From a more diversified perspective, Vanguard’s 60/40 portfolio returned +19%. Even a very conservative investor with 80% of his money in bonds and 20% of his money in stocks, would finish the year at +11%. These numbers do not include advisor fees, expenses, etc.

*Source: Vanguard ETF Strategic Model Portfolios/ December 31st, 2019.

Understand the Present

Presently we find ourselves in another election year. We are also in a trade war with China. If that’s not enough we are experiencing continued historically low interest rates, and the coronavirus outbreak. .

I recently attended a webinar from AlphaStar Capital management titled: 2020: The Year of Paradox. One example of paradox is the fact that stock prices continue to rise as earnings continue to fall. It’s almost as unnerving as the inverted yield curve we began flirting with last year. Some of this just doesn’t feel right.

I also attended a live webinar recently with “Global Chief Economist and Head of Investment Strategy Group Joe Davis at Vanguard.” Anyone with a title that long has to be pretty smart, right? His outlook for 2020, as well as the next decade can be summed up in one word: subdued.

10-Year Investment Outlook

Vanguard’s 10-year annualized nominal return projections, based on market conditions as of September 30, 2019, are as follows:

Vanguard 10 Year Stock Market Outlook

Please bear in mind that these are just assumptions. They are best guesses from very intelligent people.

However, I can tell you from past experience that they are wrong—a lot. The biggest example I can give of this is how those in the know have touted international stocks over the past five years verses US stocks. They were wrong about this assumption. US stocks have continued to show their teeth over the last five years, so please know that even the best minds in the business don’t always get it right.

Stay the Course: Optimally Allocated Global Portfolio

So, what do we do now? I believe the best thing to do is to lean back on fundamentals.

“Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.”

Ecclesiastes 11: 2 NIV

I am a strong believer in optimal global diversification. That means investing in US large-cap stocks, US small-cap stocks, internationals, emerging markets, short, medium, and long-term bonds, global bonds, global emerging bonds, as well as fixed indexed annuities when bonds are underperforming. Diversify, diversify, diversify.

My opinion is that it is always an appropriate time to be invested in a highly diversified portfolio of stocks, bonds, and fixed indexed annuities. Given enough time, the risk should be worth the reward. Even during an election year.

 

Sources:

Vanguard 2020 Outlook at a Glance

Vanguard CRSP Model Portfolios

 

About the Author

Jeff Headrick is an independent financial planner and wealth manager with Inspire Financial Planning. When Jeff was still in his teens his father died unexpectedly. While his father was a hard worker and a good provider, he did not have the best financial plan in place when he died.

This left his family at a tough financial crossroad. This personal experience, coupled with being inspired by Sir John Templeton, Warren Buffett, Dave Ramsey, and the laws of compound interest, prompted Jeff to enter the financial services industry in 1999. He has been helping people with their financial planning ever since.

Jeff lives in Wilmington, NC with his wife and two children. He spends most of his spare time just across the Intracoastal Waterway in Wrightsville Beach, enjoying the beauty of the NC Coast.

Charts and graphs contained herein should not serve as the sole determining factor for making investment decisions. All hypothetical scenarios are for illustrative purposes only. Investment Advisory Services offered through AlphaStar Capital Management, LLC a SEC Registered Investment Adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

Diversification does not guarantee profit nor is it guaranteed to protect assets. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results.

 You cannot invest directly in an index. Consult your financial professional before making any investment decision. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.

These are the views of Inspire Financial Planning and not necessarily those of AlphaStar Capital Management, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.

 

 

 

 

 

Timing the Market: Strategies for an Election Year

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Timing the Market: Strategies for an Election Year

By Jeff Headrick, Financial Planner

 

January 2020

 

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Timing the market with some type of sell could be a good strategy for 2020. With a trade war in China, an inverted yield curve, global bonds that are paying a negative yield, and the world’s biggest election on the horizon --one could probably argue it’s a good time to close up shop and come back at a later time.

That, in a nutshell, would be timing the market. But then again, many thought the same thing at the beginning of 2019—and the U.S. stock market responded with a banner year. So, you must be careful.

Wikipedia defines market timing as:

the strategy of making buying or selling decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from technical or fundamental analysis.

Market Timers Vs. Buy and Hold

I would consider myself more of a buy-and-hold investor versus a market timer. While I do rely on certain professionals like the management team at American Funds to perform some market timing for me and my clients, for the most part I’m a buy-and-hold (a.k.a. passive) investor. However, it is important to know that I do appreciate both strategies.

While the late Jack Bogle and Warren Buffett have long spoke fondly of the buy-and-hold, we all sell eventually. And when do we sell? During an up cycle? During a down cycle? Or, maybe six months from retirement? It really just depends, doesn’t it?

The Strategy of Rebalancing

As a buy-and-hold investor, I typically will set up a multiple asset portfolio and then rebalance annually to maintain specific positions. A couple of things are accomplished by the strategy of rebalancing.

1) original portfolio allocations are re-tuned to the original calibration

2) a portion of stocks or bonds that have gains, are sold to purchase ones that have not. This makes for 
buying low and selling high.

The strategy of rebalancing, while usually conducted within the scope of a buy-and-hold portfolio, is still a form of active management. You can’t say that you are 100% passive— buy-and-hold investor— if you are making a handful of modest changes every year. However, based on a multitude of research rebalancing can be one of the best ways to both decrease risk and increase return over the long haul.

What Should You Do?

Shakespeare would say follow your heart. I would say follow your convictions. As with any complicated endeavor--and I do believe investing to be a complicated endeavor--you have to know your business. You have to read, you have to study, and you have to put some thought equity into what style of an investor you are.

Once you have educated yourself and added to that guidance from a financial professional, you should be ready to go for the election year.

If you need help processing the current economic and political landscape as it pertains to your portfolio, please feel free to give me a call. I can be
reached at (910) 448-1450.

Related:

Preparing for a Market Downturn

Bear Market on the Horizon

Three Ways to Prepare for a Stock Market Crash

About the Author

Jeff Headrick is an independent financial planner and wealth manager with Inspire Financial Planning. When Jeff was still in his teens his father died unexpectedly. While his father was a hard worker and a good provider, he did not have the best financial plan in place when he died.

This left his family at a tough financial crossroad. This personal experience, coupled with being inspired by Sir John Templeton, Warren Buffett, Dave Ramsey, and the laws of compound interest, prompted Jeff to enter the financial services industry in 1999. He has been helping people with their financial planning ever since.

Jeff lives in Wilmington, NC with his wife and two children. He spends most of his spare time just across the Intracoastal Waterway in Wrightsville Beach, enjoying the beauty of the NC Coast.


Charts and graphs contained herein should not serve as the sole determining factor for making investment decisions. All hypothetical scenarios are for illustrative purposes only. Investment Advisory Services offered through AlphaStar Capital Management, LLC a SEC Registered Investment Adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

Diversification does not guarantee profit nor is it guaranteed to protect assets. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results.

You cannot invest directly in an index. Consult your financial professional before making any investment decision. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.

These are the views of Inspire Financial Planning and not necessarily those of AlphaStar Capital Management, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.

The Frailty of Life

Christmas Tree Bulb

 

The Frailty of Life

By Jeff Headrick, Financial Planner

Photo by Ben White

December 2019

 

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As a financial advisor, it may be a misnomer to write about the frailty of life. After all, if I am in the business of making people money on their money by making solid financial recommendations, why would I waste time discussing anything other than perfectly blue skies?

Wall Street does seem to want financial advisors to portray an image of prosperity. And, this is the way it should be. Just not all the time.

For instance, I believe that every new investor I meet wants to hear and see a confident presentation from a confident financial advisor. Any new coach would want to portray the same for his or her athletes.

But I’ve learned through the years, that some people who really need financial advice don’t always seek it out unless their current financial season is a good one.

Those who have just lost a job, made poor decisions, or just plain had a bad year--- often feel uncomfortable sharing their woes. And to me, that’s incredibly unfortunate. It’s in the winter that the roots grow the deepest. If your current financial season of life has taken some hits, this could be a great time to dig in and make some soulful changes.

Life is Fragile

One of my first blogs last year was on budgeting. The driving force behind the post was that all of us need a budget—even those—who are in a season of prosperity. It’s just smart business. If life is fragile, and can change on a dime, then having had a banner year in 2019 just means that you better have a larger Murphy’s Law fund (AKA Emergency Fund) in 2020.

Murphy doesn’t care how financially healthy you think you are, or how impervious you might feel to financial loss. That’s why I recommend a solid financial plan for folks from just about all seasons of life. (You can read our Beginner’s Guide to Working with a Financial Planner here. )

Bankruptcy & Stupid Debt

Bankruptcy is something that many go through. If this has happened to you don’t feel bad. Many smart people and companies have had to file, and it is not the end of the world. Do you know what  Coca-Cola, Kodak, Marvel, General Motors, and Radio Shack have in common? I’ll bet you guessed it. All have gone bankrupt at least once. While Ford Motor Company has never filed bankruptcy, its founder, Henry Ford, went bankrupt twice before he got it right.

But maybe your situation is not so dire. Maybe you just made some poor decisions with what Dave Ramsey would call “stupid debt”. Stupid debt is when you did something that was financially—well—not such a good idea. For example, you may have gone on a vacation that you couldn’t afford. Or, you may have spent some money before you had it by placing a purchase or two on your Visa.

Not to worry, you just have to pay the stupid tax. In other words, pay your debtors, plus interest.

Stay Inspired No Matter What

This Christmas season don’t get taken down by the past. The past is gone, and you can’t get it back. But you can learn from your mistakes—or misfortune—and get busy rebuilding.

Also, please know that not everyone’s financial health is perfect when they seek out a financial advisor. And yours doesn’t have to be either. Financial advisors are doing a better job these days helping people from all financial seasons because life, after all, is fragile.

Related:

How to Stay Inspired

Be Smart: Why Everyone Needs a Budget

The Financial Planning Revolution: A Beginner’s Guide to Working with a Financial Planner

Sources:

10 Once-Dominant Businesses that Ended up Declaring Bankruptcy

15 Most Memorable Companies that Vanished

Henry Ford’s Bankruptcy’s Offer Lessons in Persistence

 

About the Author

Jeff Headrick is an independent financial planner and wealth manager with Inspire Financial Planning. When Jeff was still in his teens his father died unexpectedly. While his father was a hard worker and a good provider, he did not have the best financial plan in place when he died.

This left his family at a tough financial crossroad. This personal experience, coupled with being inspired by Sir John Templeton, Warren Buffett, Dave Ramsey, and the laws of compound interest, prompted Jeff to enter the financial services industry in 1999. He has been helping people with their financial planning ever since.

Jeff lives in Wilmington, NC with his wife and two children. He spends most of his spare time just across the Intracoastal Waterway in Wrightsville Beach, enjoying the beauty of the NC Coast.

Charts and graphs contained herein should not serve as the sole determining factor for making investment decisions. All hypothetical scenarios are for illustrative purposes only. Investment Advisory Services offered through AlphaStar Capital Management, LLC a SEC Registered Investment Adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

Diversification does not guarantee profit nor is it guaranteed to protect assets. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results.

You cannot invest directly in an index. Consult your financial professional before making any investment decision. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.

These are the views of Inspire Financial Planning and not necessarily those of AlphaStar Capital Management, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.

 

 

 

 

 

 

Preparing for a Market Downturn

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Preparing for a Market Downturn

By Jeff Headrick, Financial Planner

October 18th, 2019

 

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Control the Controllable

I have a son that just turned eleven. He is a ruffian and loves tackle football. During the first few years he played he was about average size. But this year he weighs much less  than many of his teammates.

Obviously, this has made the game more demanding on him. There are certain factors in sports that are uncontrollable, and the disparity in his teammates size is one of those uncontrollables.

Recently I noticed that even during wind sprints at the end of practice he was coming in   near last place every time. This is typically an area of strength for him—but I believe his slow running was a psychological effect of losing some of his confidence due to his size.

So, I made him a deal.

I told him that if he could start running in the top half of the pack for one-week, I’d take him to Dunkin’ Donuts. I also told him that if he started placing in the top 10% of the pack for one-week, I’d take him to Cracker Barrel.

The result?

In one week of practice he went from an average of 12th or 13th to being 1st, 2nd, or 3rd,  every time.

While he cannot control the fact that his peers outweigh him, he can control his effort and his God-given ability to run like the wind. Control the controllable. His confidence is now much higher, and he is performing better at all the aspects of his game.

Control the Controllable with Your Investment

The same methodology in sports works in the world of investing. For example, what  can’t you control?

  • You can’t control the economy
  • You can’t control the stock market
  • You can’t control political factors that influence both the economy and the stock market

But you can control the following:

  • You can control the expenses of your portfolio through investment selection
  • You can control your asset allocation
  • You can control how you react, or do not react, during a market downturn

Controlling your behavior, your expenses, and your investment allocations are just a few things that you can control if you want to become a successful investor.

Learn to control what you can now, before a bear market begins and causes you unneeded stress.

 

“With a major election brewing, an inverted yield curve, and world trade tensions rising, take time to prepare now—while you can still think objectively.”

Preparing for a Market Downturn

As we have written this past year in blog posts such as Three Ways to Prepare for a Stock Market Crash, preparation matters. It seems inevitable that the bear market will show its teeth sometime in the future--we just don’t know when.

But we do believe that the time to prepare is now. The proper asset allocation can be very effective when it comes to a stock market correction. In the blog post Your 401K and the Efficacy of Asset Allocation,  we walk you through three specific steps that you can take to mitigate a precipitous crash. The beauty of this type of asset allocation is that it will help you remain predominantly offensive, while still keeping losses to a minimum.

With a major election brewing, an inverted yield curve, and world trade tensions rising, take time to prepare now—while you can still think objectively.  

Be Open Minded to Investment Advancements

The investment industry is constantly evolving. Even as a professional I have a very hard time staying on the cutting edge of new investment ideas.

As human beings we tend to lean too heavily on investment concepts from the past. Many of which that may be outdated.

In particular, I have recently read some provocative research that explore why fixed indexed annuities may be a better alternative to bonds in your portfolio*. Until recently, I would never have thought that investing in a fixed indexed annuity could be quite so competitive. But the design of this particular investment has changed dramatically over the last few years, and traditional bond investing has proven difficult with historically low interest rates.

While preparing for a market downturn, we must continue to keep abreast of the latest in investment thinking. We must continue to desire an optimal return and to obtain it through research, patience, knowledge, and innovation. 

Sources:

*Fixed Indexed Annuities: Consider the Alternative by Roger G. Ibbotson, PhD.

 

About the Author

Jeff Headrick is an independent financial planner and wealth manager with Inspire Financial Planning. When Jeff was still in his teens his father died unexpectedly. While his father was a hard worker and a good provider, he did not have the best financial plan in place when he died.

This left his family at a tough financial crossroad. This personal experience, coupled with being inspired by Sir John Templeton, Warren Buffett, Dave Ramsey, and the laws of compound interest, prompted Jeff to enter the financial services industry in 1999. He has been helping people with their financial planning ever since.

Jeff lives in Wilmington, NC with his wife and two children. He spends most of his spare time just across the Intracoastal Waterway in Wrightsville Beach, enjoying the beauty of the NC Coast.


Charts and graphs contained herein should not serve as the sole determining factor for making investment decisions. All hypothetical scenarios are for illustrative purposes only. Investment Advisory Services offered through AlphaStar Capital Management, LLC a SEC Registered Investment Adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

Diversification does not guarantee profit nor is it guaranteed to protect assets. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results.

You cannot invest directly in an index. Consult your financial professional before making any investment decision. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.

These are the views of Inspire Financial Planning and not necessarily those of AlphaStar Capital Management, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.

Dave Ramsey and the Twelve Percent Investment

Dow Jones Indutrial Average

 

By Jeff Headrick, Financial Planner

September 11th, 2019

 

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I have heard many debates over the years about Dave Ramsey and the twelve percent investment. While most of these discussions were among my professional colleagues, many were among clients or prospective clients.

Instead of focusing on optimal asset allocation, budgeting, or the importance of working with a financial professional, we seem to have become preoccupied with things that we have little control over—aka market returns.

Truth be told an investment that can average twelve percent per year over the long haul is a hard thing to come by. Sorry to burst your bubble so early. But please read on. 

The Bigger Question

Instead of debating about Dave Ramsey and the twelve percent investment, let me ask you another question. How much additional surplus income do you have at the end of the month to put towards your retirement?  

The majority of people that I have asked this question to recently cannot answer this question very easily either. In my opinion, if we focus on cash flow first and force ourselves to save more now, then we can dig into the technical aspects of performance later.

Know Your Cash Flow

For example, if I invest $5,000 at the beginning of every year and it earns 10% per year for 20 years, I’ll  end up with about $315,012.50. However, let’s say upon examining my current monthly budget I realize that I have another $300 a month ($3,600 per year) that I could comfortably put towards my retirement. In doing so I would then be leveraging about $8,600 per year into retirement versus my $5,000 previously. Based on my calculations this adjustment would earn me an additional $226,809.00 for a new total of $541,821.50 in 20 years.

Are You Asking the Right Question?

Based on what I have seen, most people would rather talk about Dave Ramsey and the twelve percent investment instead of discussing their surplus cash flow. Let’s face it, it’s just a more fun conversation.

But if we turn a blind eye to cash flow and stick with their original $5000 per year investment, let’s see what kind of a difference that twelve percent investment might make.

Most investors that I know are making nowhere near twelve percent per year. However, if they could defy the odds and average twelve percent year, would you like to guess how much money they would have at the end of 20 years? (assuming the $5000 investment at the beginning of every year)

Don’t worry, I have done the math for you. If they could find this ideal Dave Ramsey twelve percent investment they would have $403,493.68 at the end of the a 20 year time period. That’s $138,327.82 less than if they had focused on their cash flow. So much for focusing on performance instead of cash flow and contributions.

What Would Benjamin Franklin Do?

Benjamin Franklin was once asked how to build wealth. He said that there are two ways to build wealth. One way is to find the best investments in which to invest. The second way is to live frugally and save as much money as you can. But then he added, “If you are wise you will learn to do both at the same time.”

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Dave Ramsey’s Twelve Percent Investment

There are a few investments on my radar that may fit Dave Ramsey’s twelve percent assumptions. One is an investment called the Growth Fund of America (GFFFX). With an inception date of December 1, 1973, this fund has a lifetime average of 13.78%*. This is an F-2 Share Class fund that is very difficult to find unless you are utilizing the services of a professional financial advisor.

If you are out there trying to do all of this research and portfolio building on your own, you may want to consider working with a trained and licensed financial advisor. If you need help learning where to start feel free to read the article: The Financial Planning Revolution: A Beginner’s Guide to Working with a Financial Planner.  

I hope this month’s post has got you asking the right questions, and that you now know that there are still some investments that hit that twelve percent metric Dave Ramsey has mentioned in the past.

As always, thanks for reading-- and please check back once a month for more on the world of financial planning and investments from Inspire Financial Planning.  

*Source: American Funds

Related:

Three Ways to Prepare for a Stock Market Crash

Mutual Funds Vs. ETFs: A Comparison

Your 401(k) and the Efficacy of Asset Allocation

About the Author

Jeff Headrick is an independent financial planner and wealth manager with Inspire Financial Planning. When Jeff was still in his teens his father died unexpectedly. While his father was a hard worker and a good provider, he did not have the best financial plan in place when he died.

This left his family at a tough financial crossroad. This personal experience, coupled with being inspired by Sir John Templeton, Warren Buffett, Dave Ramsey, and the laws of compound interest, prompted Jeff to enter the financial services industry in 1999. He has been helping people with their financial planning ever since.

Jeff lives in Wilmington, NC with his wife and two children. He spends most of his spare time just across the Intracoastal Waterway in Wrightsville Beach, enjoying the beauty of the NC Coast.


Charts and graphs contained herein should not serve as the sole determining factor for making investment decisions. All hypothetical scenarios are for illustrative purposes only.

Investment Advisory Services offered through AlphaStar Capital Management, LLC a SEC Registered Investment Adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

Diversification does not guarantee profit nor is it guaranteed to protect assets. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. 

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results.

You cannot invest directly in an index. Consult your financial professional before making any investment decision. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.

These are the views of Inspire Financial Planning and not necessarily those of AlphaStar Capital Management, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.

Stock Market Year-to-Date

New York Stock Exchange

By Jeff Headrick, Financial Planner

August 13th, 2019

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Stock Market in General

To put it mildly, most asset classes have been on a tear for the first half of the year. When I look across the array of Vanguard equity ETFs in our portfolios, the worst performer is FTSE AW ex-US Small Cap (VSS). The return year-to date through June was 12.16% The highest performer was the Vanguard Growth (VUG) at 22.44%.

Vanguard year-to-date investment performance

Source: Vanguard

Wrestling our Fears

For all the chariots that are barreling down Wall Street in a positive way, there is also an awful lot of fear. It seems like no matter how well the markets are doing, there’s always a spoiler to take the fun out of making money over the long term.

China

I empathize with your concerns. The trade war with China creates a tension (and a lot of news), that is almost palpable. However, based on what I’ve seen, the U.S. cannot continue to roll on glassy eyed and lackadaisical without a more evenly dispersed trading policy with China.

This is going to cause some short-term pain, but I believe in the long run both sides will strike a deal that they can live with.

Inverted Yield Curve

Perhaps the biggest concern I have currently is the inverted yield curve. This happens when investors  are able to get a better return over the short term than over the long term as related to bonds. The majority of time that this happens, this has been a negative harbinger of things to come. However, yield

curves are not as newsworthy as Trump tweets about China. So you may want to log out of your  Twitter or Facebook and go buy a copy of The Economist in order to get a better handle on the global economy.

Jeff Headrick at New York Stock Exchange
Author outside of New York Stock Exchange: July 2019.

Extracting the Positives

Now for the good news. Unemployment is very, very low. When more Americans are working, more Americans are spending money.

The U. S. is still the one of the best places on the world to invest. I have been a fan of the emerging market economies since as far back as 2004 or 2005. I use to teach financial workshops on China, Brazil, and India back Pre-Financial Crisis.

However, there is a soul to investing in U. S. companies that—in my opinion—is second to none. And while I know that eventually this will change, I believe this change to be a generation or two down the road.

Summary

From now until the presidential election on November 3rd, 2020, the news is only going to escalate. Maybe it’s time to insulate from some of the talk speak on the tube and hire a financial planner. It might do you a world of good. The time to prepare is always now.

Also, here is another article on how you can get started diversifying your 401(k)-- today. There is no time like the present! Above all, we recommend a long-term investment philosophy, spiked with a lot of reading and prayer. The first half of the year was great for investors, and it’s perfectly normal to stop and celebrate once in a while when things have been this good.

Related Blogs:

Your 401(k) and the Efficacy of Asset Allocation

Three Ways to Prepare for a Stock Market Crash

Disagreeing with Warren Buffet: An Argument for Bonds

Charts and graphs contained herein should not serve as the sole determining factor for making investment decisions. All hypothetical scenarios are for illustrative purposes only.

Investment Advisory Services offered through AlphaStar Capital Management, LLC a SEC Registered Investment Adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

Diversification does not guarantee profit nor is it guaranteed to protect assets. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results.

You cannot invest directly in an index. Consult your financial professional before making any investment decision. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.

These are the views of Inspire Financial Planning and not necessarily those of AlphaStar Capital Management, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.

 

How to Stay Inspired

Millenial couple running to stay inspired.

By Jeff Headrick, Financial Planner

July 19th, 2019

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How to Stay Inspired

Do you ever wish you knew how to stay inspired? At Inspire Financial Planning, we’re concerned about keeping you inspired for investing. But we are also concerned about keeping you inspired for life.

Every morning I get up at 4 a.m. I do some light reading, make myself a delicious organic breakfast, and then work out for an hour. I also spend some time journaling before I wake-up my wife to serve her breakfast in bed.

Actually, none of this is true. Over the course of the year my wake-up time varies between 5:30 a.m. and 6:45 a.m. depending on my mood, my fatigue, and whatever other force I am allowing to make me break from a near perfect morning routine. What’s the problem? I can’t stay inspired—which begs the question: “How do we stay inspired?”

I have known people over the course of my life who have no problem staying inspired. Some were in the Marines, some were phenomenally successful business professionals, and some were from the greatest generation. We’ve all come across them at different times in our lives.

One of these inspired individuals, we’ll call him “Randy,” is one of the most inspired individuals I have ever known. He has a great marriage of nearly twenty years, three beautiful kids, tons of friends, and makes it to church nearly every Sunday. Oh, and I forgot to mention he’s a very successful businessman.

I ask him once, “How do you stay inspired?” I can’t remember his answer exactly, but the jest of it was: he didn’t really know. He just was. While I am a believer in Christ, I do feel that God has wired us all differently. Call it DNA or whatever, some people struggle with daily motivation and inspiration, and some people do not. If you're one of those who do not, you can quit reading about here. For the rest of you, please read on and we can grow together as we explore how to stay inspired.

Most Inspiring Sermon

One day I was in church with Randy. We were both there with our families enjoying another Sunday. The title of the sermon was : “Feed the Good Dog”

The pastor had a belief that we all have two voices speaking to us at all times. One, was good. The other, not so good. It’s almost as if the devil is on one shoulder and an angel on the other. Both are speaking to us trying to influence our decisions.

But which one do we listen to?

If you want to stay inspired, you listen to the good dog most of the time. I think that most anyone would agree with that. While you may miss out on some short term excitement listening to the good dog, it’s probably the best route to go over the long haul.

But just knowing that we all have these inner voices influencing us is huge. You have to train yourself to listen to the voice that you should listen to—not the necessarily the voice that’s yelling the loudest.

1. How Do You Stay Inspired? Feed the Good Dog

Feeding the good dog is how to stay inspired. Picture of dog running on beach.

The good dog has to be fed. That good dog will bark better, longer, and louder if he’s got fuel to run on. Likewise, the bad dog needs to be starved. For example, if the company you keep is continually influencing you in a negative way, you may need to cull that relationship.

The good dog needs audio real estate, and the bad dog has to be starved to let the good dog be heard.

The good dog, like you, needs motivation. So, if you have ever wondered how to stay inspired, read on for some specific tactics.

2. Remember Who You Are

Most people who are over the age of 20 or so, have already earned a bit of grit. For example, by the time I was 20, I had lost a beloved aunt to an aneurism, and my father had decided this world was too much for him and took his life. While these circumstances, and others, had caused me a certain amount of pain and grief, they also instilled a “salt” , if you will, of someone perhaps a few years older. I’m sure you have life experiences that you survived to get your grit, too. Just remember that.

Never let anyone talk down to you because you are younger, less experienced, or whatever. Just lean back on who you are—by remembering who you are. You are tough enough for just about any moment—you may just not know it yet.

3. Fear Not

I’m not sure how many times “fear not” is mentioned in the Bible. However, it’s a whole heck of a lot. What I particularly like about the phrase "fear not" in the Bible, is that it’s not usually provided as an option. It’s usually more of a command. As followers of Christ we are called specifically to have no fear. I think it was in the 90s that the “no fear” slogan was brought about in sports campaigns. But it originated thousands of years ago.

4. How to Stay Inspired: Be Strong and Courageous

I’m not sure how many times the words “be strong and courageous” are in the Bible. But it’s a lot, too. Recently I have been reading some very old books like Deuteronomy and Joshua. It motivated and inspired me to hear these words so many times. Obviously, God knows that we need encouragement. In most of the verses that I was reading it is God who tells Moses to be strong and courageous. God is trying to inspire him.

I’ve read a lot of leadership books over the years. I’ve heard a lot of stories. But off the top of my head I can’t think of one single leader in the history of the world-- other than Jesus-- who had a more audacious task than Moses. But I do believe, like most of us, that Moses had his weaknesses as well. He had a good dog and a bad dog.  He just chose to listen to the good dog more often than not, and I believe that served him well.

5. Pass it On

Joshua had about 40 years of tutelage under Moses. When Moses’ leadership days were coming to an end, he simply handed the mantle down to Joshua and said these words: be strong and courageous.

Not only can being strong and courageous bless you, but whether you are a stay-at-home mom or the CEO of a Fortune 100 company, passing these positive skills and words of encouragement on down the line should be a goal of every leader. So always remember once you get on a roll—you need to pass on that courageousness.

6. Build a Monument

God also seems to be a fan of feeding the good dog. Several times throughout the books of Deuteronomy and Joshua we find God requiring the Israelites to build monuments along the way. It’s almost as if he knows that these folks are going to need all the encouragement they can get. He wanted them to create these monuments as a testimony to Him, and as a visual representation of a certain event or moment in time.

We Have a Tendency to Forget

Zig Ziglar said it best. Motivation is like bathing. You need to get it every day or eventually you are going to start to stink. No matter how amped up, keyed up, read up, pumped up, or prayed up you become, it too shall pass. And if you’re like most of us, it will pass very quickly.

As human beings we have a tendency to forget. How do we get around this? We build a monument. Maybe we do this by filling up a new journal. Maybe we go out and buy a new T-shirt that inspires us. Maybe we write a song or poem to remind us about some of the good and wonderful things of this life.

Whatever you do, just remember that if you do not build some sort of monument, the likelihood that you will forget some of the best things in life is almost certain.

7. How to Stay Inspired: Drink Deeply from Great Books

Reading is a great way to stay inspired. Photograph of multiple colored books.

John Wooden was one of the greatest coaches who ever lived. His achievements at UCLA from the 60s and 70s are unrivaled to this day. When studying his life many years ago, I read that he was an ardent reader. I believe one of his top two or three keys to success was to drink deeply from great books.

The truth is there has never been a period in history when we had as many motivational books as we do now. And I’m not just talking about self-help books. You may choose a book on your favorite sports hero like Tiger Woods, Serena Williams, or Michael Phelps. Or you may find a classic Western full of stories of determination, hardship, and overcoming adversity. Whatever your flavor, just grab a hot cup of coffee or chai or whatever floats your boat, and read...

The good dog is very literate. And unless you want the bad dog to win more battles than not, I highly recommend drinking deeply and regularly from the best books you can get your hands on.

Here are a few authors that I can personally recommend: Oswald Chambers, Alexander Dumas, Jimmy Buffett, David Jeremiah, Joyce Meyer, and Tony Dungee.

8. Circulation

In researching this blog post I came upon this motivational video from Robin Sharma that points to something he calls circulation. Circulation is simply getting out into the world and being a part of it. Yes, you can still circulate with your regular golf buddies that you meet with on the weekend. However, Robin emphasizes the fact that we need to circulate with people that are different from us as well. We need to circulate in different circles, we need to be out and about to stay fresh and to stay invigorated.

9. Self-Development

Another thing that you can do to stay inspired is self-development. By that I mean, never stop growing. Going back to the story of Moses mentioned earlier, when God decided to take him home at well over the age of 100 Moses was not only still strong but also had perfect eyesight.

No Moses was not the exception. After Moses died Caleb entered the promise land at age 85 stronger than ever. This guy was still warrior. I mention both these old guys for one reason. To let you know that age should not be a barrier to self-development. If there are people in their 60s and 70s who complete in the Iron Man every year in Hawaii, you can go back to school, or learn a new skill whatever age you are.

Nobody’s asking you to do a 1.5 mile ocean swim, a 100+ mile bike ride, and a 26 mile marathon (although, you could probably do this too if you set your mind to it). Just consider developing a mindset of growth and self-development. The better you are, the better you will be for those around you.

10. Physical Fitness

If I had to put a priority on the importance of physical fitness in regard to staying inspired, it would be in the top three. Scientific research shows that without a certain amount of daily physical activity, the mind cannot and will not perform optimally. I have been amazed over the years at how even a leisurely stroll around the office for fifteen or twenty minutes can rejuvenate both mind and body.

Ever heard of Laird Hamilton? Laird is one of the greatest big wave surfers of all time. He takes his fitness very seriously. I read in one of his books how even on his “off” days he goes to the beach to play with his kids or does some other sort of light physical activity in the yard. Physical fitness should be incorporated into everyone’s daily rituals and thank goodness it doesn’t always have to be performed at the gym.

There's No Place Like Wrightsville

My favorite thing to do is to go to the South End of Wrightsville beach—and walk. No extreme surfing, no hot yoga, just good old-fashioned walking. Sometimes I’ll take a couple of 5lb weights. Sometimes I’ll take a couple of 15 lb. weights. When I get bored of that sometimes I’ll carry an eight- pound medicine ball. My point is, this is very light activity, but it will get you out enjoying life, and has so many other ancillary benefits. Throw in your favorite music from Spotify or Pandora, and what could be more motivational than that? Don’t have a beach? Go to the woods. My point is, to stay inspired, get out and move.

11. Take a Road Trip

Road Trip Through the Mountains

Road trips are also a great motivator. Especially in the vast country that we live in.

I do not think I have ever been on a road trip of more than an hour, when I did not have at least five or ten minutes of absolute peace. If your road trips don’t do the same for you, perhaps you need to listen to some music. Or, perhaps you could get yourself a great audiobook on a topic you enjoy. Another one of my favorite quotes is:

“You are who you are because of what has went into your mind.” How do you stay inspired? Feed the good dog.

12. Watch a Movie

Movies are an art form. Think about it for a second. If the average movie costs $100 to $150 million to make, it ought to be pretty inspiring. I’m probably showing my age here, but I’ll give you an example of movies that have inspired, and still do inspire me. Cinderella Man, Gladiator, Braveheart, Rocky (yes, the original), Dances with Wolves, In Good Company, Forest Gump, etc..

While movies are designed for entertainment, entertainment can inspire us in all sorts of wonderful ways. Don’t overlook the power of this wonderful media. It contains both writing, music, and visual art—and can be highly impactful for those looking for another way to stay inspired.

13. Cook Something!

Full disclosure on this one (in case my wife reads this): I like to cook-- sometimes. I just have to be “in the mood”. And I’ll admit it’s not often. However, many Saturday mornings I find that the freedom of the day inspires me to make an egg, or to fix breakfast for the family. I enjoy the smells of the food, and the smiles it brings my loved ones when I prepare a simple Saturday breakfast.

I also enjoy prepping food for cooking. There’ a certain harmony in life when you’re not in a rush, and your slicing a fresh onion or tomato for a meal you’re preparing.

So many people in this world were not born in a country with such bounty. I like to think that every time I slow down enough to prepare a meal (or help my wife prepare one), I am also giving thanks to my maker for His abundant blessings.

14. Sports

This method of how to stay inspired is not for the couch potato who can’t put down the remote. If your not an avid sports fan, this method of how to stay inspired is especially for you.

Sports have, even since pre-biblical times, unified people. It’s kind of like movies, in that it is entertainment. However, unlike the actors who though very skilled at their craft are pretending to do great things, athletes are the real deal. They have trained for this.

You don’t win a marathon if you do not get up every day and earn that elite physical conditioning. You can’t compete on the PGA tour if you do not embody hard work and discipline. You cannot win the World Cup if you don’t eat, sleep, and breathe soccer for years and years leading up to that pivotal moment.

It’s not the victories in sports that wow me. There’s a winner every Sunday. But the stories about the grind it took them to get there is what keeps me watching. The best of athletes have come through enormous hardships and trials to get where they are. In other words, they typically have had to earn it. Whether you're an athlete or just a fan-- sport can inspire us all. It has been that way for thousands of years.

Summary: How to Stay Inspired

As I mentioned at the onset of this blog, I have not even come close to where I want to be as far as staying inspired. However, I know it is an area that I need to continually improve. When I find myself grumbling about my job, sad or depressed that something didn’t go as I had planned, I try and pick up the bible, go to the beach, or perhaps just sit down and watch an Avenger movie with my ten-year-old son.

This is how I feed the good dog.

How do you do it?

I hope that this read has benefited you in some way. Feel free to look back to this page from time to time for inspiration. If you know of a friend who struggles in this area, feel free to forward this post to them.

Thanks for reading. God bless. And stay inspired!

About the Author

Jeff Headrick is an independent financial planner and wealth manager with Inspire Financial Planning. When Jeff was still in his teens his father died unexpectedly. While his father was a hard worker and a good provider, he did not have the best financial plan in place when he died.

This left his family at a tough financial crossroad. Jeff’s personal experience, coupled with being inspired by Sir John Templeton, Warren Buffett, Dave Ramsey, and the laws of compound interest, prompted him to enter the financial services industry in 1999. He has been helping people with their financial planning ever since.

Jeff lives in Wilmington, NC with his wife and two children. He spends most of his spare time just across the Intracoastal Waterway in Wrightsville Beach, enjoying the beauty of the NC Coast.

 

Investment Advisory Services offered through AlphaStar Capital Management, LLC, a SEC Registered Investment Adviser.  SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability.  AlphaStar Capital Management, LLC and Inspire Financial Planning are independent entities.

Are Lifecycle Funds a Good Investment?

Three Investment Managerss discussing Lifecycle Funds

By Jeff Headrick, Financial Planner

June 26th, 2019

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Are lifecycle funds a good investment? How do they work? When should I use lifecycle funds in my portfolio? In this month’s post, I will share with you some thoughts that will shed some light on these seemingly simple, but all too often misunderstood investment strategies.

What are Lifecyle Funds?

Lifecycle funds, also known as target date funds, are designed to be an all in one portfolio for investors at various stages in their lives. They have cool numerical names like the 2025 fund, the 2030 fund, the 2040 fund, etc. From American Funds to Vanguard to Fidelity, I cannot think of many big-name investment shops that don’t carry a smorgasbord of these funds.

Conceptually, lifecycle funds are easy to grasp. They are marketed to investors with a glide path methodology that takes some of the constant thinking out of the equation. But are lifecycle funds a good investment? Read on to learn more.

Example

Hypothetically, let’s say that you are a pre-retiree age 57 in 2019. You plan on working until age 67 so that you can retire right about the same time that you start drawing full Social Security. Knowing you only have about 10 years to go, how would you allocate your life savings? Would you select eight or 10 different ETFs and mutual funds and design your own portfolio from scratch?

Or would you be attracted to a lifecycle fund with a set it and forget it feature that more or less manages itself?

How Are Lifecycle Funds Used?

I think that the original intention of lifecycle funds was to simplify and diversify America’s retirement savings. Generally speaking, most individuals, even very intelligent individuals with a degree or two, tend to have a difficult time with the investment selection process. If you struggle in this area trust me when I tell you that you’re not alone.

Ideally, investors usually have several options with their 401(k). There are all sorts of laws and rules that usually apply, and most 401(k) providers can’t just offer you one or two or three investment choices. They typically have to offer several.

When prospective clients meet with us to review their 401(k), they typically have the following options available to choose from (or something very similar to it):

 

US Large-Cap Stock Fund

US Mid-Cap Stock Fund

US Small-Cap Stock Fund

US Bond Fund

International Stock Fund

Money Market Fund

 

With these six segments (funds) of the market you can typically build a very nice portfolio. However, you need more than a 30-minute meeting with HR and a 20-page investment guide to figure out how to go about it.

More often than not, I meet with people on a regularly basis that are managing substantial portfolios on their own, with very minimal guidance from their employers.

And please don’t think that I am harping on the employers. Sure, employers could do a better job when it comes to investor education. But as educated investors, we’ve all got a be continually sharpening our saw in this area. Our financial livelihood depends on it.

Let’s get back to the drawing board. Many years ago 401(k) designers and employers realized that having everyone design their own portfolio was too tall of an order for some. So, they began designing lifecycle funds that were built to run like clockwork within certain parameters.

Vanguard Target Retirement 2030 Fund (Lifecycle Fund)

Graph shows Vanguard Asset Allocation Model

Source: Vanguard

For instance, if someone in 2019 chooses a 2025 fund, it is thought that they will be retiring in about six years (time is the parameter). Or, if someone has about 11 years until retirement, he or she might select the 2030 fund. In theory it makes sense, and that’s why employers and regulators love it. However, reality is different than theory, and sometimes these funds work well— but all too often they don’t.

When Should You Use Them?

These days I see 401(k) providers that still offer the same six asset classes shown above. However, more and more, I am seeing a splash of several lifecycle funds (also known as target date funds) added to the investment options available to employees. I believe the intention is to either:

  1. Construct a portfolio using the traditional asset classes like US large-cap, US mid-cap, US small-cap, international stock, US bond, and money market.
  2. Skip doing your own portfolio construction and simply choose one of the lifecycle funds.

Again, in concept I think this is fantastic. But here is where I have a problem. All too often, I see clients that are using both strategies. They are selecting some of the more specified holdings based on whatever criteria they like, and then adding one or more of the lifecycle funds in conjunction. This is where I get a little unsettled.

While there may be some radical rationale that I’m not aware of for blending the two strategies, I’m pretty sure that in general this is a bad idea. You get an overlap of bond holdings when you do this, as well as an overlap of stock holdings. You also confuse the understanding of your bond to equity ratio because you’ve combined (mixed) the two strategies. In doing so, a lot of the simple math becomes, well, not so simple. Why not just choose one or the other? If you can rationally explain this, maybe your OK. But if not, maybe it’s time to reallocate.

Are Lifecyle Funds a Good Investment?

I think lifecycle funds (also known as target date funds) can be a great investment. However, I believe they work best for people who have a limited understanding investments, and are ready to fully commit their allocations to such a strategy. Commit means that you don’t water down your investment path with other investments. You keep it simple and straightforward.

Still Confused?

I will admit that this is a tricky topic. I highly encourage just about everybody these days to find a financial advisor or a financial planner that you can trust, and to work with them on an ongoing basis to make sure your retirement plan is running like a new Toyota. (If you have never worked with a financial planner, please read our Beginner’s Guide to help you in the process.)

Like that Toyota, every vehicle needs attention, every vehicle needs maintenance, and those who care for them the best-- tend to get the most mileage out of them.

If we can help you in anyway, please let us know.

We can be reached at (910)448-1450, or you can click here if you’d like to schedule an initial conversation.

Related:

Three Ways to Prepare for a Stock Market Crash

Mutual Funds Vs. ETFs: A Comparison

Your 401(k) and the Efficacy of Asset Allocation

About the Author

Jeff Headrick is an independent financial planner and wealth manager with Inspire Financial Planning. When Jeff was still in his teens his father died unexpectedly. While his father was a hard worker and a good provider, he did not have the best financial plan in place when he died.

This left his family at a tough financial crossroad. This personal experience, coupled with being inspired by Sir John Templeton, Warren Buffett, Dave Ramsey, and the laws of compound interest, prompted Jeff to enter the financial services industry in 1999. He has been helping people with their financial planning ever since.

Jeff lives in Wilmington, NC with his wife and two children. He spends most of his spare time just across the Intracoastal Waterway in Wrightsville Beach, enjoying the beauty of the NC Coast.


Charts and graphs contained herein should not serve as the sole determining factor for making investment decisions. All hypothetical scenarios are for illustrative purposes only.

Investment Advisory Services offered through AlphaStar Capital Management, LLC a SEC Registered Investment Adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

Diversification does not guarantee profit nor is it guaranteed to protect assets. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results.

You cannot invest directly in an index. Consult your financial professional before making any investment decision. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.

These are the views of Inspire Financial Planning and not necessarily those of AlphaStar Capital Management, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.

Portfolio Stress Test: Seven Steps to Strengthen Your Investment Portfolio

Man Standing in Front of Blackboard Stress Test Equation

By Jeff Headrick, Financial Planner

May 14th, 2019

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Are you ready for a portfolio stress test? Do you need to have one? These are great questions. As with just about everything in the world of investments, this is yet another topic that can be incredibly complex or really simple. It just depends how far down the rabbit hole you want to go.

As for me and my firm, we do perform portfolio stress tests on client portfolios. I don’t always refer to them as stress tests, but that’s what they are. It’s not too difficult to look into the past to see what a certain mix of stocks and bonds did or would have done. Likewise, it’s not too difficult to run projections as to what a certain mix of stocks and bonds might do in the future. Keep in mind, whenever you run projections that’s just what they are: projections. They end up being more like educated assumptions, but it’s better than just running blindfolded into the desert. It gives you a plan.

Learn From the Past

The biggest argument I can give for running portfolio stress tests, is that they give you a clearer picture. So many people I have met over the years fall into what’s called the recency trap. They assume that since their retirement account has been going up for the last five or six years consecutively, that will continue to happen. As we learned in 2002 and 2008, that’s not always the case.

Step 1. Get Help

The first step toward stress testing your portfolio should be to get help. Without a professional’s guidance, I do not think that the average or even the experienced investor is up to this task. Not only are financial advisors and financial planners trained using stress testing software, but they practice it every day. And it’s that practice that makes them very good at what they do. So step one is to get help. If you don’t have a financial planner and will like to learn more about hiring one, you may want to read article I wrote on the topic: The Financial Planning Revolution: A Beginner’s Guide to Working With a Financial Planner

Step 2. Stress Testing: Know the Basics

You need to know the basics about stress testing. I looked up the definition on Investopedia, and even they had a hard time defining it. But I did pull this from the definition:

Stress testing involves running computer simulations to identify hidden vulnerabilities in institutions and investment portfolios to evaluate how well they might weather adverse events and market conditions.

 

-Investopedia

 

Articles like the one you’re reading are a good place to start. So you’re already ahead of the curve! You can also Google the term and perhaps watch some YouTube videos that demonstrate some software scenarios.

Step 3. Understand What the Software Can and Cannot Do

Riskalyze Video Disclaimer

Source: Riskalyze

Please take a moment and watch the video above. Both of these gentlemen do a good job of describing what their software program does. I have utilized this software for a while now, and have found it very useful. This particular program, called Riskalyze, does a really respectable job of analyzing the risk in a portfolio, as well as providing stress testing capabilities. It does this by using historical return and volatility metrics to come up with ratings on almost a quarter of a million securities.

While this software does a wonderful job determining strengths and weaknesses regarding risk in a portfolio, it does not do detailed projections based on withdrawals in the future. At least not to an extent that I am overly impressed with. But the software itself is amazing. I use it to assess both tolerance for risk and how a certain mix of stocks and bonds might perform under a myriad of conditions.

But like all software, there is no panacea of solutions. You need to know what the software you are utilizing can and cannot do. Or, you need to make sure that your financial professional does, and can shed some light on that for you.

Step 4. Complete Your Inventory

Once you have a general idea about stress testing and how some of the software might work, it’s time to take your inventory. Most financial professionals will ask that you provide them recent statements of your current investment accounts. This would include your IRAs, your 401(k)s, and any other investment that you would like evaluated.

Having this information will provide your financial planner with the specific pieces of your current investment puzzle. Once he or she has this information, they will then enter all of your individual securities into the software to begin the process. This way your stress tests are uniquely designed to show strengths and weaknesses in your current portfolio investment structure.

Step 5. Look Back

New York Skyline/Empire State Building

Empire State Building: Photo by Emiliano Bar

I like to look back before I look forward. This gives me perspective. Once I have entered an individual’s specific securities into a particular software, the software will run multiple scenarios. It will show the client how a similar portfolio would have performed in the past, based on things that we know actually happened.

See the graphs below to understand how a certain mix* of securities may have performed during Financial Crisis of 2008 on a $750,000 401(k).

Mutual Fund Portfolio Allocation

I am utilizing these particular funds for two reasons. One, they are used widely and well known. Two, I see a lot of pre-retirees that have a pronounced allocation to equities, with a splash of Lifecyle-Funds thrown in. Not a perfect recipe for great asset allocation, but it may look familiar to something you’ve seen before.

High Portfolio Risk Score

As you can see, based on the data we have today we can tell that if a similar crisis arose, the Vanguard, American Funds, Fidelity portfolio might experience similar losses.

But we can’t be too bearish. Once we have gained our perspective, we need to utilize our bullish vision and see how well a given portfolio may have performed during a period of prosperity as in the 2013 bull market.

Portfolio with a Positive Impact

Step 6. Perform Projections: Look Forward

Forward testing is where a financial advisor can add even more value. Usually, pre-retirement you are in what’s known as the accumulation phase of retirement planning. You are not only waiting on retirement, but you are adding money to your accounts regularly. This is fairly easy to do. But in retirement, you will not only cease adding money to your accounts on a regular basis, but you will begin taking money from them.

This is known as the distribution phase of retirement.

Below are three examples that display the withdrawal phase under three different scenarios. This is there hypothetical scenario:

John and Mary Smith are 59 years of age and wish to retire in six years at the age of 65. They have already run projections on both of their Social Security accounts which they will turn on at age 66. The total income per year from both Social Security accounts is $60,000. John has a pension that begins at age 65 that should be about $50,000 per year.

In addition to their pension and Social Security accounts, they have about $750,000 in a 401(k). The 401(k) is currently invested in the same mix of securities shown in the previous example (45% Vanguard US Growth ETF, 45% Growth Fund of America, and 10% Fidelity Freedom 2020).

They have requested to see multiple portfolio stress test scenarios showing how they're portfolio might perform from now until age 100. Keep in mind, for simplicity sake, they will not be making any more contributions, and their suggested withdrawal rate is 4.5% at retirement which we will adjust for inflation every year at 2.5%. In today’s dollars, 4.5% of $750,000 would be roughly $33,750 per year of income.

Investment Stress Test Average Market CycleStress Test 1. Average Sequence of Returns

 

Investment Stress Test Negative Sequence of ReturnsStress Test 2. Negative Sequence of Returns

 

Investmemt Stress Tests Positive Sequence of ReturnsStress Test 3. Positive Sequence of Returns***

*** RetireUp provides several methods for modeling future returns and stress testing a plan. Each method creates a 100-year sequence of hypothetical returns which are applied to the plan. How Specific Sequences are Determined: Positive, Average and Negative. A typical plan will run 30-40 years, so only a subset of these 100 years will be used. For each plan, the software runs 100 year-by-year permutations of the simulated returns and determines which subsets of the entire sequence would generate the most optimal (Positive Sequence), least optimal (Negative Sequence) and median (Average Sequence) results for an individual plan.

Portfolio Stress Test Results

As you can see, and as Forest Gump would attest, “Life is like a box of chocolates. You never what you are going to get.” In example one during an average period of market volatility, the client’s savings does well.

However, in example two during a time of higher volatility, this same mix of assets could zero out. This may not be probable, but from a historical perspective it is possible.

Finally, example three shows that during a period of minimal volatility and positive growth, this same mix of investments may have even left a sizeable gift to the children, grandkids, and favorite charity.

Solutions 

If you are wondering what to do to smooth out some of this volatility, the answer is: ask your financial planner. They will be able to walk you through some steps to insulate you from those negative scenarios, while still striving to earn a competitive return.

Step 7. Build a Better Portfolio

I hope this gives you a better perspective as to the value of stress testing. Going into retirement without stress testing your portfolio under a myriad of conditions would be imprudent. Look at it like this. If you have a wife and a daughter like I do, what kind of test would you do on their car if it they said they were going to drive an hour away? Probably not much. But if they told you that they had decided to drive from Wilmington, North Carolina to San Diego, California, you would probably take the car into the local garage to get your top mechanic to go through the car bumper-to-bumper looking for potential problems.

Shouldn’t the same level of testing be done with your life savings?

It’s all about building a better portfolio. Stress testing is very helpful during the accumulation stages as mentioned above. But in the distribution stages of retirement it is even more critical. Armed with results of these tests, you can begin to construct a portfolio that may perform far better than it would have otherwise.

As always, good luck in your retirement planning and please do not hesitate to call us if we can be of assistance. (910)448-1450

Sources:

Investopedia, Riskalyze, RetireUp Pro, Yahoo Finance, Vanguard, American Funds, Fidelity, Bob Drury CFP/CFA, Encyclopedia Britannica.

Related: 

Your 401(k) and the Efficacy of Asset Allocation

Three Ways to Prepare for a Stock Market Crash

Disagreeing with Warren Buffet: An Argument for Bonds

The Holy Grail of Financial Planning: The Annual Review

 

If we can help you in anyway, please let us know. We can be reached at (910)448-1450, or you can click here if you’d like to schedule an initial conversation.

Charts and graphs contained herein should not serve as the sole determining factor for making investment decisions. All hypothetical scenarios are for illustrative purposes only.

Investment Advisory Services offered through AlphaStar Capital Management, LLC a SEC Registered Investment Adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

Diversification does not guarantee profit nor is it guaranteed to protect assets. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results.

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