5 Year End Ideas That Aren't Idiotic

Remember when the class Dunce was relegated to the corner? If the internet has made the world a village, it has also given rise to many of the idiots that once were confined to a corner or at least a local coffee shop. No place was this more evident than an interview this week with entrepreneur Grant Cardone on CNBC.

In the article, Cardone was quoted as saying, "I would never, ever invest money in a 401(k). Why would I go to work, have my employer give me another $6,000 a year, and then take that money and send it off to Wall Street, where I can't even touch it for 30 years? I wouldn't do that."

Hey Grant, since no one answered your question in the article, I thought I would help you out. The reason you would invest in a retirement account and take advantage of an employer match, if offered, is so you won't be one of the 55% of Americans that a 2016 study by Fidelity Investments showed do not have enough money to afford 80% of expenses in retirement. 

Sure, everybody could take your advice to “focus on earning”, but what about the fact that 71% of small businesses fail by their 10th year? No doubt you have enjoyed successful business ventures, but winning the lottery doesn’t qualify you to suggest that buying Powerball tickets is a good idea.

It's at least partially due to ignorant or stupid statements such as these that lead to 1 out of 4 employees leaving employer 401(k) matching money on the table each year, an average of $1,336, according to Financial Engines. 

If you are interested in some ideas that arguably aren't quite as dumb as Grant's, consider the following before year end:

Review Your Portfolio - Year end is a great time to review your investments to see if you are on track. During the review, you should confirm that your investment mix is still appropriate for your goals. If the mix has drifted too far off target, now is an ideal time to re-balance or make a clean break for 2017. If you have any investment losses in your taxable accounts, you should consider selling some losers to generate a tax write off or to offset other capital gains.

An often overlooked tactic when addressing imbalances is to contribute shares of appreciated stock to your favorite charity or a donor advised fund (DAF). This approach may allow you to simultaneously lighten your exposure, avoid capital gains, and get a tax deduction. 

Pay Yourself First - Are you getting the most from your retirement accounts? If your employer offers a matching contribution, you are passing up free money if you aren't contributing up to the matching amount. If you are getting a year-end bonus or raise, use this opportunity to increase the amount you are saving in your retirement accounts. If you are 50 years old or more, there are probably "Catch Up Contributions" available to allow you to save even more. You not only will be increasing your savings, but you may save some tax money, too.

Remember that retirement contributions are perishable. Once you pass the deadline, you’ll never be able to take advantage of this year’s contributions again.

Check Your Beneficiaries - This is a simple administrative task, but is a crucial step in insuring your estate plan will work as you intend. If you want your state or the IRS to get more of your inheritance, not naming beneficiaries is a great way to increase their share.

A more common problem is not updating beneficiaries after deaths, divorces, births, etc. These designations are considered contractual and supersede your will. 10 minutes a year on this task can save a lot more than money. Don't believe me? Check out this Accountable Update from last year.

Don't Forget Your Required Distributions - For most folks, if you are 70.5 before year-end, you are required to distribute some money from your retirement accounts. The penalty for not taking the Required Minimum Distribution (RMD) can be 50% of the amount not taken, so it is very prudent to always confirm that you have satisfied the requirement. The only year you get a grace period is the year you turn 70.5, and then for only 3 months. Mistakes can often be made when inheriting an IRA or when accounts have been transferred from one company to another, so be especially mindful if this applies to you.

Use Your Flexible Spending Account (FSA) - If you set aside money in an FSA and have more than $500 left at year end, you need to use it or lose it. Here is a list of eligible expenses.

If all of this is a little much, give me a call if you would like some help.

The Death of Stock Pickers?

Exhibit 1

The Wall Street Journal published an article this week titled, The Dying Business of Picking Stocks.  In the piece, there are some startling statistics that demonstrate the massive shift away from high cost active fund management to low cost passive approaches. Some that caught my eye:

• Over the three years ended Aug. 31, investors added nearly $1.3 trillion to passive mutual funds and their brethren—passive exchange-traded funds—while draining more than a quarter trillion from active funds, according to Morningstar Inc.
• Hedge funds, which bet on and against stocks and markets world-wide and generally have higher fees than mutual funds, haven’t outperformed the U.S. stock market as a group since 2008.
• Although 66% of mutual-fund and exchange-traded-fund assets are still actively invested, Morningstar says, those numbers are down from 84% 10 years ago and are shrinking fast.
• Over the decade ended June 30, between 71% and 93% of active U.S. stock mutual funds, depending on the type, have either closed or underperformed the index funds they are trying to beat, according to Morningstar.
• Public pension plans had 60% of their U.S. stock allocations in index funds in 2015, up from 38% in 2012, according to research firm Greenwich Associates. At endowments and foundations, the index-fund share rose to 63% from 40% in that time period.

The world has changed dramatically from my early days at Fidelity Investments when the Magellan fund was still basking in the glow from the Peter Lynch years where he more than doubled the return of the S&P 500 index from 1977 to 1990. Investors literally would stand in line waiting to invest their money with us.

Fidelity manages hundreds of funds, but the small minority of managers, like Lynch, that were able to beat the market for a while were marketed so effectively that they became the largest fund company in the world. Interestingly, Fidelity’s own 500 Index fund has almost surpassed their largest actively managed fund, Contrafund.

You may have seen Contrafund on television recently as Fido has been advertising customer letters written to the manager, Will Danoff. I guess you can’t blame them for trying to rekindle some of the Lynch years’ magic for their current statistical oddity, er, I mean star manager.

Academics have consistently shown that the vast majority of managers don’t beat the market. However, there will likely be the occasional outlier, like Lynch or Danoff, that will come along from time to time. There is no doubting their success, but due to their rarity, it is a fool’s errand to try and figure out who is likely to be the next longshot winner. You could chase the performance by investing in a fund like Contrafund, but how much longer will Danoff be there considering he took it over in 1991?

One of the arguments made by critics of passive investing (usually those in the business of active stock picking) is that with increasing index investing, active managers can more easily exploit inefficiencies in markets. The first time I heard this argument was probably 10 years or so ago, by Fidelity Chief Executive, Abigal Johnson at a conference I attended. So far, the evidence hasn’t favored that point of view.

In fact, as you can see in Exhibit 2, only about a third of active managers have beaten their benchmarks in the last decade or so. Even when you take the winners and look at them in subsequent periods, only about a third of them continue outperforming. 

Exhibit 2

What the long term evidence has shown, is that markets do a good job of fairly pricing stocks. Furthermore, if you are willing to take on the additional volatility, some types of stocks have demonstrated persistent out-performance. I have shared some of this information before in the February 19, 2016 Accountable Update.

If you missed it, the Cliff’s Notes version is that small companies have consistently outperformed large companies, value has beaten growth, and companies with high profits have returned more than those with less. These premiums have in some cases been observed for close to a century, and in markets both foreign and domestic (see Exhibit 1), albeit they don't occur every year or even every decade, as seen in Exhibit 3.

Exhibit 3

All of this is to say that the WSJ article may be correct in pointing out that investors have become much more savvy in their choice of investment approach. But the death of the “business of stock picking” may have been exaggerated. The evidence points us not to an untimely demise, just a smarter way to go about “picking”. If you have questions about how your picks are working out, get in touch.

Deadlines, Elections, and Markets

Exhibit 1.

Hardly a day goes by lately that one of the candidates for President (okay, mostly just one of the them) doesn't do or say something that makes you shake your head. Just this week, the "Donald" got confused and encouraged a group of Florida voters to head to the polls on November 28, only three weeks after the actual election! 

To help you avoid being disenfranchised, or worse, here are a couple of important upcoming dates to keep in mind:

Monday, October 17 – There are a number of deadlines next Monday.

Final Deadline for Individual Federal Income Tax Returns: nationwide final deadline for filing an individual federal income tax return for tax year 2015 after having filed for an extension. Extensions also apply to:

• Removal of Excess Contributions and Roth IRA Conversion Recharacterization: last day to remove excess retirement contributions or to recharacterize a Roth IRA conversion from 2015.
• SEP and SIMPLE IRA Contributions: 2015 contributions for Qualified Retirement Plans (QRP), Simplified Employee Pension Individual Retirement Account (SEP IRA), and Employer Savings Incentive Match Plan for Employees (SIMPLE) IRA.

If you have questions about these retirement issues, get in touch today to discuss your situation.

Tuesday, November 8 – Election Day, even in Florida.

Understandably, the election is causing consternation for many of the folks I talk to.  Elections add uncertainty, and uncertain markets act, well, uncertainly. We won’t know for sure for a few more weeks, but recent polls have increasingly indicated that the Democrats will keep the White House. Barring a WikiLeaks trove of Hillary’s lost love letters (or emails) from Vladimir Putin, maybe it’s time to look back at some of the items in President Obama’s last budget for clues to what may be coming down the pike and plan accordingly.

For some insight into elections and their impact on markets, the following Issue Brief[i] shows how making investment decisions based on the outcome of presidential elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome will likely be the result of random luck. At worst, it can lead to costly mistakes.

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Presidential Elections and the Stock Market

Next month, Americans will head to the polls to elect the next president of the United States. While the outcome is unknown, one thing is for certain: There will be a steady stream of opinions from pundits and prognosticators about how the election will impact the stock market. As we explain below, investors would be well‑served to avoid the temptation to make significant changes to a long‑term investment plan based upon these sorts of predictions.

SHORT-TERM TRADING AND PRESIDENTIAL ELECTION RESULTS

Trying to outguess the market is often a losing game. Current market prices offer an up-to-the-minute snapshot of the aggregate expectations of market participants. This includes expectations about the outcome and impact of elections. While unanticipated future events—surprises relative to those expectations—may trigger price changes in the future, the nature of these surprises cannot be known by investors today. As a result, it is difficult, if not impossible, to systematically benefit from trying to identify mispriced securities. This suggests it is unlikely that investors can gain an edge by attempting to predict what will happen to the stock market after a presidential election.

Exhibit 1 (above) shows the frequency of monthly returns (expressed in 1% increments) for the S&P 500 Index from January 1926 to June 2016. Each horizontal dash represents one month, and each vertical bar shows the cumulative number of months for which returns were within a given 1% range (e.g., the tallest bar shows all months where returns were between 1% and 2%). The blue and red horizontal lines represent months during which a presidential election was held. Red corresponds with a resulting win for the Republican Party and blue with a win for the Democratic Party. This graphic illustrates that election month returns were well within the typical range of returns, regardless of which party won the election.

LONG-TERM INVESTING: BULLS & BEARS ≠ DONKEYS & ELEPHANTS

Predictions about presidential elections and the stock market often focus on which party or candidate will be “better for the market” over the long run. Exhibit 2 shows the growth of one dollar invested in the S&P 500 Index over nine decades and 15 presidencies (from Coolidge to Obama). This data does not suggest an obvious pattern of long-term stock market performance based upon which party holds the Oval Office. The key takeaway here is that over the long run, the market has provided substantial returns regardless of who controlled the executive branch.

Exhibit 2.

CONCLUSION

Equity markets can help investors grow their assets, but investing is a long-term endeavor. Trying to make investment decisions based upon the outcome of presidential elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome based on such a strategy will likely be the result of random luck. At worst, it can lead to costly mistakes. Accordingly, there is a strong case for investors to rely on patience and portfolio structure, rather than trying to outguess the market, in order to pursue investment returns.

[i] Source: Dimensional Fund Advisors LP.

All expressions of opinion are subject to change. This information is intended for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.

Diversification does not eliminate the risk of market loss. Investment risks include loss of principal and fluctuating value. There is no guarantee an investing strategy will be successful.

Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor’s Index Services