elections and the stock market

The upcoming presidential election is getting a lot of attention. Pollsters attempt to predict the outcome, and many individuals start to consider what the impact on their investments might be depending on which candidate wins. The information below illustrates stock market returns related to election years and presidential terms.  Given this view, it is important to note that markets usually make money under both administrations (the same goes for congressional control, but I didn’t want to include too many charts). We don’t know what the outcome of the election will be, but even if we did, we don’t know what the market will do. Many republicans were concerned during the Obama presidency, yet the markets went up. Many democrats were concerned with a Trump presidency, and markets have also gone up. Rather than try to predict the outcome and make reaction-based decisions to your investment strategy, history tells us that sticking to a strategy designed around your financial plan is a preferred solution. Usually, that means maintaining exposure to the stock market with the expectation of being rewarded for riding through the ups and downs, while allocating enough money in conservative investments to help bridge the valleys and for shorter-term needs.  Keep in mind, I am not saying that the President has no impact on the market or the economy, but historically the market has made money regardless, and that’s the point, isn’t it? As Benjamin Graham (who mentored Warren Buffet) noted : “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”   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

the impact of low interest rates

Interest rates have been falling for almost 40 years. In 1981 you could buy a 10 year government issued treasury bond paying over 15%, if you bought an equivalent bond today it is paying less than 1%. The impact that interest rates have is very broad but in general lower rates are good for borrowers but not so good for savers. In the 1980s mortgages with double digit interest rates were common. Now, the average 30-year mortgage is around 3%, so the cost of borrowing money is much lower. At the same time, people used to buy Certificates of Deposit at banks that could pay double digit returns, where as now many CDs are paying around 1%. It is important to pay attention to this change as it relates to financial and retirement planning. As people get older they tend to have less debt and more savings. Many people also overweight their portfolio to safer investments such as cash, CDs and bonds in retirement. If you use historical rates of return and assume you will get those returns going forward, that may lead you to faulty and overly optimistic return assumptions. Also, important to note is how you can make money investing in bonds. In short, bond prices and interest rates move in opposite directions. Therefore, as interest rates have been coming down, bond prices have been going up, so you can actually earn more money on bonds as rates go down. For example, if we use a well known bond mutual fund, the Vanguard Bond Market Index Fund, it has had a total return of over 6% through the first half of this year. At the same time, it is paying interest of just over 1%.  So how is the total return over 6% when it is only paying a little over 1%? There are many factors to consider when investing in bonds and many moving parts to determine their price, however, here is an example to demonstrate the inverse relationship of bond prices and interest rates. Example: If I buy a 10-year bond when it is issued for $1,000 and it is paying 2%, I will collect 2% interest ($20/year) for 10 years and also get my $1,000 investment back when the bond matures in 10 years. Now assume that interest rates go down and I can buy an equivalent bond, but it is only paying 1%. The value of the bond paying 2% has increased because relative to what can be bought now, it is paying more interest. If the 2% bond is sold it will demand a higher price, let’s say $1,050. The owner of that bond could therefore sell the bond for more than he paid for it, earning him a premium above what the interest rate is. Of course, the opposite is also true and if rates increase and I can buy a bond paying more than 2% then the value of the bond only paying 2% would decrease. Nobody knows what interest rates will be in the future. For years many “experts” have said that rates will increase while they have continued to drop. Some countries even have negative interest rates, which seems an academic experiment in and of itself. The Federal Reserve has said they do not have any plans for negative interest rates, yet, they have also said they don’t have any plans in the next couple of years to raise interest rates. So how should you view bonds now? I believe that bonds can still play a role as a way to diversify a portfolio and offset stock market risk, however, betting that the next 30 years will deliver returns similar to the last 30 years may cause you to overestimate your return assumptions which could put your financial and retirement plans at risk.     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

stock market returns 2020, investing, san diego financial planning, financial advisor, retirement

Q2 2020 Market review

 Almost as quickly as the market dropped in Q1, the market had a strong rebound in Q2. Though it hasn’t yet reached its prior highs, it covered a lot of lost ground very quickly, especially considering the elevated amount of uncertainty surrounding us. To illustrate just how volatile the stock market has been this year, below are numbers for the CBOE Volatility Index (VIX), which measures volatility for the S&P 500, the higher the number the higher the volatility. CBOE Volatility Index (VIX)Year                 Average          High2020                32.8                 82.692019                15.39               25.452018                16.64               37.322017                11.09               16.042016                15.83               28.14 In Q2 the US market was up over 22%, international markets were up over 15% and emerging market gained over 18%. Despite low interest rates and a rallying stock market, bonds also made money with domestic bonds up almost 3% and international bonds up close to 2%. For a detailed Market Overview, click here.  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