Federal Reserve Building Investing Bonds Cash Rising Rates Financial Planning

Cash, bonds and rising interest rates

  This month is a little longer than usual as I try to explain several complex, interconnected topics in a digestible way. If you don’t read it all, at least check out the charts at the end. 😊 One of the biggest challenges since the Federal Reserve started cutting interest rates to stimulate the economy following the 2008 Great Recession, has been getting a decent return on conservative money. While the stock market has done great after dropping about 50% in 2008-2009, low interest rates have suppressed returns on the conservative side of any portfolio. With a recovering economy the Fed started raising rates at the end of 2015 from 0.25% to the current rate of 2.0%, projected to go to 2.5% by the end of this year. Rising rates have had both good and bad effects on the two most popular conservative investments, cash and bonds (some may throw annuities and other tools into this camp, but that’s a topic for another day). Cash: Rising rates have been a good thing for cash as you can now actually earn something. I often encourage people to keep a reserve of cash and a good place to do so is an FDIC insured online savings account, where you can currently earn almost 2% (or slightly more with a short- term CD), which isn’t huge but beats the 0.09% you’ve probably been earning at your local bank. You can compare banks at Bankrate and a couple that I’ve had good experiences with include Ally and CIT. Bonds: When you buy a bond you lend money and earn interest for doing so. Bonds come in many forms, the main components determining the interest rate are term and credit. Term is the length of the bond (how long you’re loaning the money, the longer the term the higher the risk) and credit is the credit worthiness of the issuer (treasury bonds issued by the US government are the most secure, on down to issuers such as Tesla, who’s bonds now have junk bond, or high-risk status). Since bonds are designed to be the buoy in your portfolio I generally recommend shorter term, higher credit rated bonds. The downside to raising interest rates is that it actually hurts bond prices. This is because since you can now buy bonds paying more interest, your lower interest bonds become less valuable. Of course, you can hold onto bonds until they mature, but there is an opportunity cost in doing so. Higher rates are better in the long run as new bonds purchased pay a better rate, however, the bonds you currently own drop in value. Two takeaways: 1 - If you have cash sitting around earning close to nothing, consider an FDIC insured online savings bank. The experience my clients and I have had with these accounts has been positive. 2 - Don’t abandon an appropriate investment strategy. All too often I see people follow the crowd and chase performance. We even do this unknowingly or slowly over time. In the decade of 2000-2010 bonds beat stocks and people questioned if they should invest in stocks at all since bonds performed better with much less volatility. Now almost 10 years later, people are saying just the opposite since stocks have had a huge rally and bonds have had little growth and even gone down in some cases (YTD 2018 for example). Timing when to jump back and forth from stocks to bonds is nearly impossible, instead, remind yourself of the purpose of your investments (retirement income, college, home purchase, etc.) and build a strategic balance of stocks and bonds around that. If you’d like to discuss what an appropriate mix for you may be, email me at advisor@blakegallion to set up a complimentary appointment. Take a look at the charts below showing the returns of cash, bonds and stocks. I think they tell a compelling story. The “lost decade for stocks” of Jan. 1, 2000 – Dec. 31, 2009   The bull market experienced from Jan. 1, 2010 – June 30, 2018   The combined period of Jan. 1, 2000 – June 30, 2018    Charts from Portfolio Analytics.The Barclays US Aggregate Bond Index is an unmanaged index considered representative of the U.S. investment-grade, fixed-rate bond market. The S&P 500 Index is an unmanaged index considered representative of the U.S stock market.The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results. Advisory services offered through Arbor Point Advisors. Securities offered through Securities America Inc., Member FINRA/SIPC. Arbor Point and Securities America are separate companies. CA Insurance #0E88557

q2 2018 market review

The US market had a slight rebound from small losses in the 1st quarter. International stocks continued their slight decline while emerging markets had a larger drop. Interest rates in the US continued their slow rise, bringing bond prices down a bit, while global bonds saw minor gains. Overall, investment returns have been pretty flat this year though the ride has been choppy compared to 2017. For a detailed Market Overview, click here. Planning note: Financial-planning.com recently redesigned a Retirement Pyramid originally inspired by the Journal of Retirement. In the same way a food pyramid provides guidance on a healthy and balanced diet, it is intended to show the elements of a healthy and balanced approach to retirement planning.  Note, the advice is focused around habits and behaviors rather than technical know-how, as that is a key element. The article at the end of the linked Market Overview discusses this topic as it relates to our investment strategies and success.    Advisory services offered through Arbor Point Advisors. Securities offered through Securities America Inc., Member FINRA/SIPC. Arbor Point and Securities America are separate companies. CA Insurance #0E88557

Spending Plan Budget Tools Apps Cash Flow

spending on purpose: my personal experience

 Have you ever asked yourself where your money is going? I recently asked myself this question. To give some background, after working in personal finance for 11 years, I started my own financial planning practice two years ago. Saying goodbye to a steady paycheck is scary and a huge step of faith, to say the least (though there have been many great lessons learned in the process which I’m happy to bore you with 😊). Through this process, my wife Rachael and I had to plan and adjust our finances. Basically, our spending plan was this, don’t buy anything unless it’s absolutely necessary. Thankfully, my business has grown steadily and the initial stress and fear have subsided. As our income grew we spent a little more freely, but we didn’t really feel more financial freedom. After discussing this we realized part of the reason was that we weren’t making purposeful spending decisions. As money came in I put some of it into my business and we occasionally purchased more than the bare necessities. However, some areas that we felt were important to us weren’t reflected well in our spending. When we sat down for a recent “budget meeting” we discovered that since there was a gap between what we wanted to prioritize and what we were actually prioritizing, there was uneasiness. We’ve worked on fixing this and being self-employed means having to make adjustments more frequently, but it definitely feels much better when our priorities and finances are aligned. I help others work through these types of transitions, some of which include: marriage, job change, retirement, divorce, etc. However, in working with others to improve their finances I realized I needed a tune-up myself. When you find yourself in any of these situations I recommend you evaluate your situation periodically. The process isn’t always fun or easy, but the result is a greater sense of control, freedom, and confidence. It will also help you realize your financial goals rather than having a picture in your mind of what you want things to look like only to realize too late that the picture will be nothing more than a dream. Spending Plan Tip: Use what works best for you whether it be an app, spreadsheet, pencil and paper or a cash-based system. Also, if married be sure to create the plan with your spouse and build in some “fun money” for each of you to spend without guilt. Apps: Goodbudget, YNAB, Mint, Everydollar Click here for spending plan worksheets  Advisory services offered through Arbor Point Advisors. Securities offered through Securities America Inc., Member FINRA/SIPC. Arbor Point and Securities America are separate companies. CA Insurance #0E88557

...
...
Retirement Planner in San Diego

 

Advisory services offered through Arbor Point Advisors. Securities offered through Securities America, Inc., Member FINRA/SIPC. Arbor Point Advisors and Securities America are separate companies. This site is published for residents of the United States and is for informational purposes only and does not constitute an offer to sell or solicitation of an offer to buy any security or product that may be referenced herein. Persons mentioned on this website may only offer services and transact business and/or respond to inquiries in states or jurisdictions in which they have been properly registered or are exempt from registration. Not all products and services referenced on this site are available in every state, jurisdiction or from every person listed. CA Insurance #0E88557

Advisory services offered through Arbor Point Advisors. Securities offered through Securities America, Inc., Member FINRA/SIPC. Arbor Point Advisors and Securities America are separate companies. This site is published for residents of the United States and is for informational purposes only and does not constitute an offer to sell or solicitation of an offer to buy any security or product that may be referenced herein. Persons mentioned on this website may only offer services and transact business and/or respond to inquiries in states or jurisdictions in which they have been properly registered or are exempt from registration. Not all products and services referenced on this site are available in every state, jurisdiction or from every person listed. CA Insurance #0E88557​

Rancho Bernardo Financial Planner