Financial planning is just as important in the beginning phase of your career as in the last stages. Many young adults seem overwhelmed with the new responsibility of managing a budget and saving for their near term goals, like a home or marriage, in addition to retirement. If you are just starring your career and follow these basic tips, you will be way ahead of your peers and even your parents when you reach their age.
The economy continues to ebb and flow with more in the ebb column lately. The winding down of QE2 (the second round of “quantitative easing”) gives new meaning to the expression, “sell in May and go away”. In the wake of lackluster leading economic indicator (LEI) readings, unemployment figures, and housing price behavior and in anticipation of the halt of the Federal Reserve’s $600 Billion bond purchase program, market insiders seem to be taking some profits off the table. Individual investors are still skeptical of the market but at the same time they are stretching for yield and other sources of return in some dicey places.
This is what keeps me up at night:
- Savers and retirees desperate to earn some meaningful income have to reach far on the risk spectrum to earn appropriate income that will help them buy basic necessities such as food and gas that have increased due to global inflationary pressures.
- The stock market appears to be overvalued based on traditional fundamental analysis and stretched thin on a technical basis.
- Bonds are not necessarily a safe harbor in the storm due to their already pathetically low yields and high valuations.
Investing in this environment is challenging to say the least.
The most recent market downturn and deteriorating economic statistics are a flashback to what we were experiencing last summer prior to QE2. Unfortunately, the government has little to show for the unprecedented expansion of the Federal Reserve balance sheet and QE2 has clearly failed address the primary issue at stake within the US economy, which is household debt.
As John Hussman, from the Hussman funds so eloquently states in his 6/6 weekly commentary, “Basically, we’re coming up on the can that the Fed kicked down the road when it initiated QE2. While the Fed was successful in releasing a modest amount of pent-up demand, and was certainly successful in provoking speculative activity, there was never a realistic prospect of creating a beneficial “wealth effect” for the economy as a whole”.
What is the result of this massive spending spree? We have higher mortgage rates, higher commodity prices, a continued decline in home prices nationwide and extremely lackluster employment figures. Add the cost of TARP, the off balance sheet cost of the Fannie and Freddie bailout to the growing liability of Medicare and Social Security liabilities and it becomes patently clear that the current path of massive debt accumulation is unsustainable. The insurmountable debt problem was underscored when Standard and Poor’s recently downgraded the US treasury debt. Not only do we need to address the underlying cause of the economic malaise—the debt burden of American households—but we also have the herculean task of solving the mathematical equation of the long term governmental tab for the financial crises AND the more granular issue of entitlement programs such as Medicare, Medicaid and Social Security.
America has been through some trying times before, and I continue to be an “optimistic pragmatist”. As a recent article in the WSJ states, “It would probably take a significant shock to knock the economy off course….In the current environment there are plenty of potential shocks to worry about.”
I believe in the resourcefulness of the American people and our resolve to ultimately make the tough choices to mend these structural issues. The long term demographics of the US are better than China, Japan, and most European countries. Population and immigration growth will fuel GDP. With meaningful reform (both tax and entitlements) we can incentivize business investment and encourage consumption to improve growth in an organic and sustained way.
What does all this mean from a financial planning standpoint?
Increased taxes and a possible “haircut” to some of the entitlement programs are inevitable and thus conservative estimates of income should be built into financial planning projections. As a best practice, I always assume moderate Social Security payments and cost of living adjustments based on clients’ age and assets. I also use higher inflation rates for medical and health expenses in retirement. These expectations result in clients saving more to ensure adequate reserves in retirement. The bottom line is that as American will need to save more for retirement or likely work longer. Working into our 70s or taking on part time work in retirement will be the new normal. We will spend more out of pocket for our health care. Planning for long term care should be addressed and adopting a healthy lifestyle is also essential. We will have higher tax rates and likely lower investment returns in the near to intermediate term future. As investors, we will need to manage our expectations based on these realities. It will also be important to update our financial plan on an ongoing basis in order to incorporate the most current economic and governmental policies.
From an investment standpoint, it pays to be cognizant of investment risk and be ready to maintain your composure and investment strategy in the midst of market turmoil and volatility. Investing is a little like working out. You don’t to give up on your exercise program when it gets a little tough or you feel a little burn, otherwise you will never be fit. Exercise is a long term investment and “no pain, no gain”.
As a fiduciary financial planner my goals for my clients are:
- Provide realistic projections based on prudent assumptions to improve successful outcomes in retirement.
- Recommend low cost and diversified investment portfolios that are consistent with risk attitudes and goals.
- Manage expectations and emotions to ensure that the investment policy is maintained through the peaks and the troughs of the market.
- Educate, educate, educate.
I continue to dedicate myself to client relationships and the belief in the value-added derived from the financial planning process.