Volatility, Market Timing, and Long-Term Investing
For many savers, the objective of a retirement account is to accumulate assets while you are working and use those assets to pay for your expenses during retirement. While you are in the accumulation phase, assets are usually invested and hopefully earn a sufficient rate of return to meet your retirement goal. For the majority,
Volatility, Market Timing, and Long-Term Investing
For many savers, the objective of a retirement account is to accumulate assets while you are working and use those assets to pay for your expenses during retirement. While you are in the accumulation phase, assets are usually invested and hopefully earn a sufficient rate of return to meet your retirement goal. For the majority, these accounts are long-term investments and there are certain investing ideas that should be taken into consideration when managing portfolios. This article will discuss volatility, market timing and their role in long-term retirement accounts.
“Market timing is the act of moving in and out of the market or switching between asset classes based on using predictive methods such as technical indicators or economic data” (Investopedia). In other words, trying to sell investments when they are near their highest and buy investments when they are near their lowest. It is difficult, some argue impossible, to time the market successfully enough to generate higher returns. Especially over longer periods. That being said, by reallocating portfolios and not experiencing the full loss during market downturns, investors could see higher returns. When managing portfolios over longer periods, this should be done without the emotion of day to day volatility but by analyzing greater economic trends.
So far, the stock market in 2018 has been volatile; particularly when compared to 2017. Below are charts of the S&P 500 from 1/1/2018 – 10/21/2018 and the same period for 2017.
Source: Yahoo Finance. Information has been obtained from sources believed to be reliable and are subject to change without notification.
Based on the two charts above, one could conclude the majority of investors would prefer 2017 100% of the time. In reality, the market averages a correction of over 10% each year and there are years the market goes up and there are years the market goes down. Currently, the volatility in the market has a lot of investors on edge, but when comparing 2018 to the market historically, one could argue this year is more typical than a year like 2017 where the market had very little to no volatility.
Another note from the charts above are the red and green bars on the bottom of each year. The red represent down days in the market and the green represent up days. You can see that even though there is more volatility in 2018 compared to 2017 when the market just kept climbing, both years have a mixture of down days and up days.
A lot of investors become emotional when the market is volatile but even in the midst of volatility and downturns, there are days the market is up. The chart below shows what happens to long-term portfolio performance if investors miss the best days in the market during that period.
Source: JP Morgan. Information has been obtained from sources believed to be reliable and are subject to change without notification.
Two main takeaways from the illustration above are; 1) missing the best days over a period in the market could have a significant impact on a portfolios performance, and 2) some of the best days in the market over the period analyzed came shortly after the worst days. This means that if people reacted on the worst days and took their money from the market then they likely missed some of the best days.
Market timing is difficult over long periods of time and making drastic moves in asset allocation because of emotional reactions to volatility isn’t always the best strategy for long-term investing. Investors should align their portfolios taking both risk tolerance and time horizon into consideration and make sure the portfolio is updated as each of these change multiple times over longer periods.
When risk tolerance or time horizon do not change, most investors should focus on macro-economic trends rather than daily/weekly/monthly volatility of the market. Not experiencing the full weight of stock market declines could generate higher returns and if data shows the economy may be slowing, it could be a good time to take some “chips off the table”. That being said, looking at past down markets, some of the best days occur shortly after the worst days and staying invested enough to keep in line with your risk tolerance and time horizon could be the best strategy.
It is difficult to take the emotion out of investing when the money is meant to fund your future needs so speaking with your financial consultant to review your situation may be beneficial.
About Rob……...
Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.
Planning for Long Term Care
The number of conversations that we are having with our clients about planning for long term care is increasing exponentially. Whether it’s planning for their parents, planning for themselves, or planning for a relative, our clients are largely initiating these conversations as a result of their own personal experiences.
The number of conversations that we are having with our clients about planning for long term care is increasing exponentially. Whether it’s planning for their parents, planning for themselves, or planning for a relative, our clients are largely initiating these conversations as a result of their own personal experiences.
The baby-boomer generation is the first generation that on a large scale is seeing the ugly aftermath of not having a plan in place to address a long term care event because they are now caring for their aging parents that are in their 80’s and 90’s. Advances in healthcare have allowed us to live longer but the longer we live the more frail we become later in life.
Our clients typically present the following scenario to us: “I have been taking care of my parents for the past three years and we just had to move my dad into the nursing home. What an awful process. How can I make sure that my kids don’t have to go through that same awful experience when I’m my parents age?”
“Planning for long term care is not just about money…….it’s about having a plan”
If there are no plans, your kids or family members are now responsible for trying to figure out “what mom or dad would have wanted”. Now tough decisions need to be made that can poison a relationship between siblings or family members.
Some individuals never create a plan because it involves tough personal decisions. We have to face the reality that at some point in our lives we are going to get older and later in life we may reach a threshold that we may need help from someone else to care for ourselves or our spouse. It’s a tough reality to face but not facing this reality will most likely result in the worst possible outcome if it happens.
Ask yourself this question: “You worked hard all of your life to buy a house, accumulate assets in retirement accounts, etc. If there are assets left over upon your death, would you prefer that those assets go to your kids or to the nursing home?” With some advance planning, you can make sure that your assets are preserved for your heirs.
The most common reason that causes individuals to avoid putting a plan in place is: “I have heard that long term care insurance is too expensive.” I have good news. First, there are other ways to plan for the cost of a long term care event besides using long term care insurance. Second, there are ways to significantly reduce the cost of these policies if designed correctly.
The most common solution is to buy a long term care insurance policy. The way these policies work is if you can no longer perform certain daily functions, the policy pays a set daily benefit. Now a big mistake many people make is when they hear “long term care” they think “nursing home”. In reality, about 80% of long term care is provided right in the home via home health aids and nurses. Most LTC policies cover both types of care. Buying a LTC policy is one of the most effective ways to address this risk but it’s not the only one.
Why does long term care insurance cost more than term life insurance or disability insurance? The answer, most insurance policies insure you against risks that have a low probability of happening but has a high financial impact. Similar to a life insurance policy. There is a very low probability that a 25 year old will die before the age of 60. However, the risk of long term care has a high probability of happening and a high financial impact. According to a study conducted by the U.S Department of Human Health and Services, “more than 70% of Americans over the age of 65 will need long-term care services at some point in their lives”. Meaning, there is a high probability that at some point that insurance policy is going to pay out and the dollars are large. The average daily rate of a nursing home in upstate New York is around $325 per day ($118,625 per year). The cost of home health care ranges greatly but is probably around half that amount.
So what are some of the alternatives besides using long term care insurance? The strategy here is to protect your assets from Medicaid. If you have a long term care event you will be required to spend down all of your assets until you reach the Medicaid asset allowance threshold (approx. $13,000 in assets) before Medicaid will start picking up the tab for your care. Often times we will advise clients to use trusts or gifting strategies to assist them in protecting their assets but this has to be done well in advance of the long term care event. Medicaid has a 5 year look back period which looks at your full 5 year financial history which includes tax returns, bank statements, retirement accounts, etc, to determine if any assets were “given away” within the last 5 years that would need to come back on the table before Medicaid will begin picking up the cost of an individuals long term care costs. A big myth is that Medicare covers the cost of long term care. False, Medicare only covers 100 days following a hospitalization. There are a lot of ins and outs associated with buildings a plan to address the risk of long term care outside of using insurance so it is strongly advised that individuals work with professionals that are well versed in this subject matter when drafting a plan.
An option that is rising in popularity is “semi self-insuring”. Instead of buying a long term care policy that has a $325 per day benefit, an individual can obtain a policy that covers $200 per day. This can dramatically reduce the cost of the LTC policy because it represents less financial risk to the insurance company. You have essentially self insured for a portion of that future risk. The policy will still payout $73,000 per year and the individual will be on the line for $45,625 out of pocket. Versus not having a policy at all and the individual is out of pocket $118,000 in a single year to cover that $325 per day cost.
As you can see there are a number of different options when it come to planning for long term care. It’s about understanding your options and determining which solution is right for your personal financial situation.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
