A Bump in the Road?

End-of-Summer Market Update

Dear Friend,

Speed bump, stop sign, or red light? That’s the question many of us are asking.

Let me explain. After cruising for the past five months, the markets screeched to a halt on September 3, the Dow dropping over 800 points, and the Nasdaq plunging nearly 5%.1 All told, it was one of the worst trading days for stocks since the pandemic-driven panic of March. The volatility continued the next day, albeit at lower levels.

So, what does it mean? Was Thursday’s selloff just a short-term blip—the equivalent of hitting a speed bump? Or was it the beginning of a market correction? If so, how long of a correction? Are we merely coming to a stop sign, or will we hit a red light?

Unfortunately, market signals are never as easy to interpret as road signs. But as we start winding down this bewildering year, investors will be gripping their steering wheels ever more tightly. That’s because they’re all trying to determine whether the markets will end the year on cruise control…or in full reverse.

Whenever you drive to a destination, it’s always good to familiarize yourself with the road beforehand. So, as this crazy summer draws to a close, let’s look at the different scenarios we could experience over the next few months.

As a heads up, we’re going to cover a lot of ground in this message. I believe my most important responsibility is to keep you not only informed about what’s going on in the markets but also prepared for what may come in the future. In this message, I will try to do both. Let’s dive in.

Speed Bumps

Between April and May, all three major US stock indexes—the Dow, the S&P 500, and the NASDAQ—climbed for five consecutive months. The S&P 500, for example, rose 60% over that period.2

Every so often, though, the markets experience a dramatic one- or two-day selloff. When those selloffs come during the middle of a major rally, like the one we’ve been experiencing, investors wonder whether it’s the beginning of a market correction. (A correction, remember, is when the markets fall at least 10% from their recent highs.)

Market corrections are relatively common. On average, we’ll see one at least once every 1 to 2 years.3 But more often, these selloffs are not the beginning of anything at all. They are simply speed bumps, and while they may seem random, there are usually underlying reasons for them.

For example, let’s take what happened on September 3 and assume it’s only a speed bump. Why did it happen? A closer look at which stocks fell may provide some answers. Specifically, tech stocks, including big names like Apple and Facebook, were the ones that suffered the most—just as those same stocks have largely fueled the markets rally. (More on this in a moment.) There are a few possible reasons for this. One is that many investors may simply have been cashing out of tech stocks to realize their gains. Another reason is that, because prices for tech stocks have risen so high, many traders may feel there’s simply no justification for plowing more money into them. When that happens, traders and short-term investors often move their money into other sectors they feel are undervalued.

In other words, the shudder that went through the markets is like the one you feel when changing gears in an old car. If that’s the case, the selloff was likely just a speed bump. A short pause for investors to take a breath before the markets resume their climb.

Here’s another reason why many selloffs are just speed bumps: The Federal Reserve. After the country went into lockdown, the Federal Reserve did many things to prop up the economy.4 First, it lowered interest rates to historic lows. This was to lower the cost of borrowing on mortgages, auto loans, home equity loans, and others—a key step to keep the economy moving. Second, the Fed launched a massive bond-buying program. This is another way to keep interest rates low. The Fed has also been lending money to securities firms, banks, major employers, and some small businesses using a variety of means.

These are all familiar tactics for anyone who was paying attention during the Great Recession. Then, as now, the Fed’s actions indirectly propelled the stock market. That’s because lower interest rates prompt increased spending, which in turn causes stock prices to rise. And, perhaps more importantly, the Fed’s massive increase in the money supply juices the stock market. After all, that new money wants a home, it wants a return. It looks at bonds and says, No, no return there. And so it rushes into the US stock market.

As long as the Fed keeps its stimulus programs in place, stocks will continue to be one of the most attractive places for people to put their money. And since the economy remains on very shaky ground, it’s unlikely the Fed will pull back any time soon. “Don’t fight the Fed,” investors are often counseled. Thanks in large part to the Federal Reserve, the stock market continues to be the shortest, surest road for investors to travel. That’s why many selloffs are nothing more than speed bumps.

Stop Signs

Of course, sometimes a selloff is more than just a speed bump. Sometimes, it’s like a neon light flashing: STOP SIGN AHEAD.

When this happens, Wall Street-types like to call it a market correction—a decline of 10% or more from a recent high. There are many reasons why corrections occur. One thing many corrections have in common, though, is they come after months of major market growth. When prices rise extremely high, extremely fast, it’s as if the markets have “overheated” and need to cool off.

It wouldn’t be a surprise if that’s what we’re seeing right now. Again, the S&P 500 rose 60% between March 23 (its most recent low) and September 2 (its most recent high).2 In that same period, the tech-heavy NASDAQ rose roughly 75%!5 Those are staggering numbers. One could argue we’re overdue for a correction.

Speaking of tech-heavy, let’s talk about technology stocks for a moment. When the markets plummeted in March, these stocks were one of the few safe havens around—and they’ve also been the best performers since then. That’s no surprise. At a time when most Americans were largely confined to their homes, it was our technology—from our iPhones to Zoom, from Google to Netflix—that kept the economy going. But remember how I said the S&P rose 60%? Peek under the hood and you’ll see those numbers were driven by two sectors: technology stocks and consumer discretionary stocks. (Think Nike, McDonald’s, Home Depot, etc.) Other sectors either performed much lower or are still in the red. So when we say the markets have recovered well, what we’re really saying is that the top sectors have performed enough to make up for those still struggling.

It’s one of the many reasons the stock market simply isn’t a reliable barometer for the overall economy.

What does this have to do with a market correction? A lot, actually. It’s all thanks to these two terms: capitalization and weighting. Remember, the S&P 500 is an index, not the actual stock market itself. It’s essentially a collection of the five hundred largest companies listed on U.S. stock exchanges, which is where stocks are traded. More specifically, the S&P is a capitalization-weighted index. Without getting too technical, that means the largest companies make up the largest percentage of the index. For example, Amazon, Apple, Microsoft, Facebook, and Google—just five companies—make up 20% of the index!6

Look at that list of companies again. Notice anything about it? Yep, you guessed it: four of them are tech companies. In fact, if we break down the S&P 500 by sector, you’d notice that technology dominates the S&P 500. Actually, let’s do that right now.7

As you can see, the S&P 500 is currently overweighted to technology stocks, to the tune of 27.4%. So if tech stocks were to endure any type of prolonged selloff, that would have a major impact on the S&P 500 as a whole—and could well lead to an overall market correction.

Red Lights

Some market corrections last only a few days or weeks. When that happens, it’s like coming to a stop sign. A brief pause, and then we continue our journey.

But some corrections last longer than that. According to one report, the average correction lasts around four months. When that happens, it’s more like hitting one of those annoyingly-long red lights, just as you’re heading home and the sun is in your eyes. The kind that makes you think, “What does the universe have against me today?”

Before I go on, note that I’m not predicting that is what’s happening here. I don’t try to predict the future—that’s a game for fortune-tellers. Instead, I try to prepare for the future. And to be frank, it’s possible we could see a longer correction in the not-to-distant future. That’s because the future contains a lot of question marks, any of which could prompt the markets to pull back.

For starters, there’s the economy. While the markets enjoyed a V-shaped recovery after March, the overall economy has not. Things are improving, but still a long way from healthy. For example, the U.S. added 1.4 million jobs in August alone…but it’s still down 11.5 million jobs since the pandemic began.8 In other words, things are much less bad than before—but they’re still historically bad. The markets have hummed along despite all this, but at some point, it’s possible the economic reality could drag stock prices down.

At the same time, we’re seeing renewed Trade War fears with China. We’re also only two months away from a bitter presidential election. Historically, the markets don’t really care who sits in the White House, so there’s no reason you should let the election impact your financial thinking. (I’ll have more information on this in the coming weeks.) But in the runup to the election, we can certainly anticipate more volatility as people worry about who will win and what it means.

And of course, there’s COVID-19. We’re all sick of hearing about it, but it’s still a fact of life and will continue to be so for some time. Should cases surge in tandem with the upcoming flu season, the markets may retract into their shell.

In short, it’s certainly possible that we see a market correction over the next few months. But whether we do or not, it’s important to remember that corrections are inevitable and temporary. Corrections can even create opportunities for the future, as they open the door for investors to pick good companies at lower prices.

So what do we do now?

Remember: We can’t predict the future. But we can prepare for it. The fact is, we’re on a road we’ve never been on before—as investors and as a country. In real life, whenever we drive on an unfamiliar road, we drive cautiously, keeping our eye out for hazards. The same is true with investing. Speed bumps are only an annoyance when we go over them too fast. Stop signs and red lights are only dangerous when we speed past them. That’s why we use technical analysis to determine which way the markets are trending. By doing that, we can spot these road blocks ahead of time and slow down (or pull off to the side of the road) accordingly.

Unlike buy-and-hold investors, we don’t need to fear the occasional bout of market volatility. Because we follow set rules for when to enter and exit the markets, we don’t mind stopping occasionally. We are prepared to play defense or even move to cash at any time. That’s what helped us when the markets crashed in March. It’s what will help us moving forward.

Should a downturn happen, your portfolio is prepared. Now we just need to prepare ourselves mentally and emotionally in case there are stop signs and red lights ahead. And if it turns out to be a speed bump? That’s fine, too. We were already driving the speed limit.

As always, my team and I will keep a close eye on the road ahead. In the meantime, enjoy the end of your summer. Please feel free to contact me if you ever have any questions or concerns. I am delighted to be of service in any way I can.

Sincerely,

Jack Reutemann, Jr. CLU, CFP®

SOURCES
1 “Dow and Nasdaq plummet in the worst day since June,” CNN Business, September 3, 2020. https://www.cnn.com/2020/09/03/investing/nasdaq-selloff-stock-market-today/index.html
2 “S&P 500 Historical Prices,” The Wall Street Journal, https://www.wsj.com/market-data/quotes/index/SPX/historical-prices
3 “Here’s how long stock market corrections last,” CNBC, February 27, 2020. https://www.cnbc.com/2020/02/27/heres-howlong-stock-market-corrections-last-and-how-bad-they-can-get.html
4 “What’s the Fed doing in response to the COVID-19 crisis?” Brookings, July 17, 2020. https://www.brookings.edu/research/fed-response-to-covid19/
5 “Nasdaq historical prices,” The Wall Street Journal, https://www.wsj.com/market-data/quotes/index/COMP/historical-prices
6 “5 companies now make up 20% of the S&P 500,” Markets Insider, April 27, 2020. https://markets.businessinsider.com/news/stocks/sp500-concentration-large-cap-bad-sign-future-returns-effect-market-2020-4- 1029133505#
7 “U.S. Stock Market Sector Weightings,” Siblis Research, June 30, 2020. https://siblisresearch.com/data/sp-500-sectorweightings/
8 “U.S. adds 1.4 million jobs in August,” CNN Business, September 4, 2020. https://www.cnn.com/2020/09/04/economy/jobsreport-august-2020/index.html​​

Special Message from Jack Reutemann

Friends and Clients,

We took a hit yesterday. Everybody took a hit. But it wasn’t too serious. 

The S&P 500 was down 3.51%, our aggressive growth model was down 4.75%. Tech took the biggest hit, and tech is responsible for much of our 21% YTD gains over the S&P.  We are not always going to have up days.  No one can. (As before, these numbers refer to our 100% aggressive growth model.  If you are in a blend with our fixed income model, your results are still very positive, but less.  YTD the fixed income model is +2.09%. Example, if you are in our “60/40” blend,  then you are +16.4% YTD.)

We are now 20% ahead of the S&P benchmark, instead of +21%.  This is not a disaster. In fact, it is quite outstanding by any measure.   Further, I have checked on all of our 11 holdings this morning. Eight are doing well and will stay put for the time being. We have 3 positions I am monitoring carefully: IBUY, IJK, and VBK. 

My most critical risk indicator, which compares one moving average with another, has raised a flag on these three positions causing concern. VBK shows the most damage, and that is concerning.  Historically, bear-market sell offs begin with the first signs of weakness in small-cap growth, which is exactly what VBK represents.  I may be forced to sell it today.  Also, XLY remains super strong, with its moving averages still in good territory.  As you will recall from my many previous emails and webinars, the XLY—consumer discretionary— is where the 30% of wealthiest Americans and businesses spend 70% of their money.  When XLY flips into sell signals, the party is over, and it’s time for us to take defensive action as we did earlier in the year.

As you know I am monitoring the situation closely. I will take the actions necessary to protect our investments.  At this point, I do not see a major sell-off in the making. 

As I’ve noted before, I am concerned as election day draws near.

But I have your backs….

Jack

240-401-2355

P.S. Call me at any time.

Forgotten 401(k)s

Zombies
They’ll eat you alive!

Failure to Rebalance – Zombie Sign #1

When was the last time you rebalanced your 401(k) or other retirement account? When you set it up, you took a fairly conservative approach and bought 60% stock mutual funds and 40% bond mutual funds. Over time, the values of those funds have changed, perhaps significantly. Right now, your stock funds might comprise 85% of your account.
Great. Excellent gain. But . . . . you are now subjecting yourself to greater risk. You need to rebalance. Now. And at least every six months.

If you’re sitting on an out-of-balance retirement account—or several different retirement accounts—then you are sitting on a Zombie Account. That’s right. That’s what investment advisors call it: an account left for dead, an account that might just rise up (at night, of course) and devour your net worth.

Not a pretty sight, these Zombie accounts . . . .

iStock by Getty Images

Failure to Increase Contributions to Retirement Accounts – Zombie Sign #2

When was the last time you increased your contributions to your retirement account? You’re making more money now. Shouldn’t you be saving more? Yet many people set up retirement accounts in their youth and establish relatively small automatic contributions. But as your income increases, so should your retirement allocations. Under current federal tax law, you can contribute $19,500 to your 401(k) or similar workplace plan; that’s up from $19,000 in 2019. If you’re 50 or older, the catch-up contribution limit is $6,500, up from $6,000 in 2019. “If your employer allows after-tax contributions or you’re self-employed, you can save even more. The overall defined contribution plan limit moves up to $57,000 [in 2020], from $56,000 [in 2019].”[i]

Ask any rich person, “What’s your secret?” One answer they always give: “Save as much as you can. Compounding investment amounts in tax-free accounts can result in large returns when you reach your 60s.”

So any retirement account you have sitting around growing with contributions you made when you were young . . . . Well, that’s a Zombie Account.

Failure to Move Old Retirement Accounts – Zombie Sign #3

Oops, what about that account you set up when you worked for Acme Widgets? Great job, that was. But your current position pays a boatload more. Did you have a retirement account at Acme? The stats should make any working American sit up and take notice. Get this:

A 2013 survey by ING Direct USA showed half of American adults who participated in an employer-sponsored retirement plan, such as a 401(k), have left an account at a previous employer. These “orphaned” accounts represented more than $1 trillion in investment dollars in 2010.[ii] (emphasis added)

You need to launch a search for any Zombie accounts sitting around with previous employers. You can call the Human Resource people at those companies for assistance. You might also get in touch with the Pension Benefit Guaranty Corporation. Or you can check the National Registry of Unclaimed Retirement Benefits at unclaimedretirementbenefits.com. According to the website, “The National Registry is a nationwide, secure database listing of retirement plan account balances that have been left unclaimed by former participants of retirement plans.”

Once you locate these Zombie accounts, you need to roll them over into your current 401(k) or IRA. You should check with an investment advisor or your CPA to make sure you’re performing a tax-free rollover and not a taxable distribution.

Act Now

Anyone with Zombie accounts needs to take the steps we’ve outlined above.

Beating the Zombies

There is a better way. No Zombies can arise in the dark of night from funds we manage at Research Financial Advisors. Check us out here: rfsadvisors.com. When you establish an account with us, we ascertain your comfort level of risk. If you’re relatively young, you should probably use our Aggressive Growth Model where we automatically invest your funds in a variety of ETFs we think show the best chance of growth. Right now, as of August 14, 2020, our Aggressive portfolios are up 23.02% year-to-date, net-of-fees. Yes, you read that right. We’re up 23.02%.

Our more conservative portfolio, consisting of 100% bonds, is designed for those who want to reduce risk and increase income. But the market value of our Bond Model is up 1.62% year-to-date, net-of-fees. And that doesn’t count the income the Bond Model has produced.

Many of our clients choose a mix between the Aggressive Model and the Bond Model. The returns on those accounts are less than the Aggressive results but more than the Bond.

Worried about current market volatility? Afraid of another crash just around the corner? Not a problem here at RFS. We know how to play defense. Consider the recent crash. The all-time high of the S&P 500 Index was February 19th. By March 23, the S&P declined 33.92%. Just 8 days after the S&P all-time high, on February 27, 2020, just before the close at 3:56 p.m., we purchased SPXS for all our accounts (larger amounts in the aggressive funds, smaller amounts in the conservative ones). The SPXS ETF produces three times the inverse of drops in the S&P Index. If the S&P goes down 10%, this ETF goes up 30%.

Our purchase price for SPXS: $16.1189 per ETF.

It’s a risky ETF, and we watch it carefully. After all, when the S&P goes up 10%, this ETF drops 30%. But it performed beautifully in March of this year, and shielded our accounts from gut-wrenching market drops. At 1:06 p.m., on March 23, 2020, the exact date of the S&P 33.92% decline, we sold the SPXS positions, banking a significant profit.

Our selling price for SPXS: $26.28 per ETF.

Today, the SPXS is trading at $5.86 or so. The following chart of SPXS shows how we entered our positions at $16.1189 as the rise started to accelerate Notice that we exited our position on March 23 at $26.28, right near the very top of the spike in price.

Each day, we study charts like the one above. We stay alert, ready for the next market rise or the next market plunge. Will the market go down again? Yes. Absolutely. How much? No one knows. When? No one knows. But we’re ready. We’re nimble. We’ll act and play defense when our indicators tell us a drop is about to morph into a plunge.

So say good-bye to Zombies. At RFS, you’ll never experience a failure to rebalance (Zombie Sign #1), for we constantly review your account and make certain it continues to hold those ETFs best suited to your level of risk. Further, we’ll encourage you to increase your contributions to your account as your salary and other remuneration grow (Zombie Sign #2), making sure you comply with all applicable IRS regulations. And we sure as heck won’t let you forget us (Zombie Sign #3), because we stay in touch with you weekly . . . sometimes daily.

In fact, if you need to get in touch with us quickly, we give out our cell phone numbers: There’s no elevator music on our phone system.

Give Us a Call

So look around your financial world and see if some of your accounts qualify as Zombies. Look for the three signs: accounts not rebalanced, retirement accounts receiving low and out-of-date contributions, and accounts sitting at former employers. Or look at your nonretirement accounts. Do any of them qualify as Zombies?

You may call my cell number right now: (240) 401-2355. We can talk about your situation and look at your various accounts.

After all, doing it yourself can sometimes result in doing yourself in.

Best regards,

Jack Reutemann, Jr. CLU, CFP®​
Research Financial Strategies

 

[i] https://www.forbes.com/sites/ashleaebeling/2019/11/06/irs-announces-higher-2020-retirement-plan-contribution-limits-for-401ks-and-more/#7ecdb4e333bb
[ii] https://finance.yahoo.com/news/zombie-401-k-131547647.html

Where Trillions Dwell

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Where Trillions Dwell

Back in the 1980s, a popular Wendy’s commercial featured a soon-to-be-famous elderly lady peering at a small piece of hamburger perched on a huge bun. She then asked:

Where’s the beef?1

 In the March 11, 1984, Democratic debate, Walter Mondale used the line as a knockout blow to fellow candidate Gary Hart.2 Watch the commercial here. Watch the debate segment here.

Today we can ask a similar question:

Where’s the cheddar?

 With the huge market sell-off in March and April, we know that those who sold stashed a massive amount of cheddar or moolah. Unless they used it in the ensuing rally, it’s still there, somewhere, just sitting.

A little research reveals that a gigantic amount of bread (bigger perhaps than the bun holding the burger shamed in the Wendy’s commercial) is … to mix our metaphors … parked on the sidelines. Sitting. Waiting. Waiting for what?

On June 22, Jesse Pound wrote an article for CNBC. The article’s title pretty much summed up its contents: “There’s nearly $5 trillion parked in money markets as many investors are still afraid of stocks.”3 As pointed out by Mr. Pound, more than $4 trillion flooded into money markets as investors sold anything not nailed down. Money market assets peaked during the week of May 13, setting an all-time record of $4.672 trillion. Recent outflows, he said, still leave 90% of that amount waiting on the sidelines.4

Mr. Pound cites Ryan Detrick, a market strategist at LPL Financial, who noted that “after the 45% bounce, give or take, in the S&P, we haven’t seen really the big part of the retail crowd come back in. … It kind of shows again that a lot of people are really still on the sidelines.”5

Mr. Detrick revealed even more staggering numbers in a recent Tweet:
$15.4 trillion cash in bank accounts right now, a new record.

Recently up 15% the previous 3 months, another record.

Combined with the record of nearly $5 trillion in money markets and safe to say there’s a lot of cash on the sidelines.6

Another Stash of Cash

Another trillion dwells in orphaned retirement accounts. And this amount is likely to grow because of the massive loss of jobs in the recent virus crisis.

Many companies set up 401(k) plans for their employees. The employee contributes to the plan by way of paycheck deductions. In some plans, the employer contributes a certain percentage of the employee’s wages. Over time, these plans can grow significantly, the gains free from tax until the employee starts withdrawing funds upon retirement.

There’s a slight problem. As employees change jobs, they often forget about 401(k) plans with their previous employers. As reported by Mitch Tuchman in a June 2020 MarketWatch article:

Over a recent 10-year period as many as 25 million people in workplace plans changed jobs and left behind a 401(k) plan. Millions more have left behind more than one, according to a GAO study.7

Millions of people who lost their jobs during the pandemic will one day find new jobs, most likely with different companies. Yet their old 401(k)’s with the previous employers might just sit there, with no one paying any attention to any strategy of investment.

Mr. Tuchman offers some sound advice: roll those old 401(k) accounts into an IRA account. That way, you—or your financial advisor—can make rational decisions about staying in the market, getting out of the market, or getting back in the market when the drop appears over. Beware, Mr. Tuchman advised, and make certain you complete a true rollover:

Make sure you request a rollover, not a distribution. If you take money out of your 401(k) plan you will be liable for taxes and, possibly, penalties for early withdrawal. Once the money is transferred you can begin to choose new investments in your IRA that better fit your current age, risk tolerance and retirement goals.8

Fear of Fear Itself

It looks as if fear accounts for this vast amount of wealth sitting on the sidelines. If I get back in the market, I think, it’ll no doubt crash. After all, I say to myself, look at the massive unemployment around me. How can the market possibly go up, I wonder?

Millions of sidelined investors asked those questions as the stock market recovered most of its pandemic losses. Granted, more convulsions loom just over the horizon. But it makes little sense to sit there and watch potential gains pass you by.

Protecting Against Crashes: Our 1-2-3 Approach

At RFS, we protect our managed accounts against the ravishes of stock market crashes.

First, we watch your account, every minute of every day.
Second, we use technical analysis and active management to decide when to deploy your funds … and when to pull them back into cash.
Third, we use trailing stops to guard against crashes.

A Word About Trailing Stops

A trailing stop is a type of stop-loss order that combines elements of both risk management and trade management. Trailing stops are also known as profit protecting stops because they help lock in profits on trades while also capping the amount that will be lost if the trade doesn’t work out.

Here’s how it works. When the price increases, it drags the trailing stop along with it. Then when the price finally stops rising, the new stop-loss price remains at the level it was dragged to, thus automatically protecting an investor’s downside, while locking in profits as the price reaches new highs.

A trailing stop-loss is a way to automatically protect yourself from an investment’s downside while locking in the upside.

For example, you buy Company XYZ for $10. You decide that you don’t want to lose more than 5% on your investment, but you want to be able to take advantage of any price increases. You also don’t want to have to constantly monitor your trades to lock in gains.

You set a trailing stop on XYZ that orders the position to automatically sell if the price dips more than 5% below the market price.

The benefits of the trailing stops are two-fold. First, if the stock moves against you, the trailing stop will trigger when XYZ hits $9.50, protecting you from further downside.

But if the stock goes up to $20, the trigger price for the trailing stop comes up along with it. At a price of $20, the trailing stop will only trigger a sale if the stock drops below $19. This helps you lock in most of the gains from the stock’s rally.

I Don’t Have Any Positions

When talking to your friends, you might say you don’t currently have any positions in the stock market.

But you do.

Your position is cash. And it forms a part of a gigantic ocean of liquidity that will one day seek and find a home. The home it finds is most likely to be the U.S. stock market. The wise approach is to have some of your wealth in cash, some in bonds, and some in stocks. Your risk tolerance will govern the percentages for each type of investment. But you really ought to have some positions other than a 100% position in cash.

Give Us a Call

Call Jack at (301) 294-7500, and we can start figuring out a sensible plan designed just for you.

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Heads or Tails?

Heads or Tails?

Them’s your odds.

Heads a normal, relatively healthy retirement. Tails long-term care (LTC).

So it’s 50-50.

Actually, the stats show differing percentages for men and women over 65. For men, 46.7% will need LTC, for women it’s 57.5%. 1

For all, roughly 50-50. Flip a coin. Heads or tails.

No one should plan a financial future with a coin flip.

Unfortunately, many do just that: they take the chance that the coin flips to heads. Then, something happens. A broken hip. Onset of dementia. Or these days, COVID-19. Suddenly, the husband or the wife, or both, need assisted care. The cost can spell financial disaster.

Horror Stories Abound

Writing for MoneyWatch, Steve Vernon recounted “3 Horror Stories” involving the need for long-term care. 

Here’s one:

A seventy-something friend of ours is taking in her 98-year old aunt, who ran out of money. The aunt’s son can’t or won’t help his mother, for whatever reason. Our friend and her eighty-something husband feel very strongly about letting her aunt live with them, despite the extreme disruption to their lives. But what happens when the aunt needs some form of long-term care? Our friend still works full time, and her husband isn’t really qualified or able to help if the aunt needs extensive care.  

​Many will face situations requiring LTC. And when they check their balance sheets, the question inevitably arises: Just how the heck am I going to pay for this?

Long-Term Care: The Price Tag

The numbers provide little solace. According to the National Association of Insurance Commissioners and the Center for Insurance Policy and Research, of those turning 65 between 2015 and 2019, 57.5% can expect to pay less than $25,000 on long-term care during their lifetimes. But 15.2% can expect to pay more than $250,000. 3

In 2016, the median annual cost of a semiprivate room in a nursing home was $82,125. A private room ups the ante to $92,378. 4

Planning for Long-Term Care

Many have looked to insurance to stave off the costs of long-term care. In the late 1970s, LTC insurance was called “nursing home insurance.” Only a few insurance companies wrote these policies. Back then, the annual national cost of long-term care totaled $20 billion. By 1980, those numbers grew to $30 billion. Now they have ballooned to $225 billion. 5

When the calendar flipped to the current century, many carriers started to exit the market. In the words of the NAIC Report:

Most insurers’ [LTC policies] issued before the mid-2000s have seen adverse experience when compared to their original pricing assumptions. Rising claims, low mortality and lower than expected lapses have led to higher prices often unaffordable to a large segment of the affected population. A number of insurers have also opted out of the market, leaving only a relatively few insurers to provide much needed LTC products. 6

The LTC policies provided back then were reimbursement, term-type policies. They resembled car insurance. They provided no cash value and no refund options if you died suddenly. You received no guaranteed renewal options. The insurance company could cancel your policy or raise your premiums. Not a pretty sight.

Needless to say, buyers of these products stopped buying. So insurance companies came up with hybrid products.

Now, using a guaranteed “no lapse” life insurance policy with two important riders, clients can protect their families from their early death, from disability, and from running out of money at, say, age 85.

The NAIC study describes this new approach:

One area of continued growth in the market is with combination or hybrid products. These products combine LTC benefits with either life insurance or an annuity. They can pay out if LTC is needed, but if not needed, there is a death benefit or annuity payout. In cases where an individual uses some, but not all, of LTC benefits, the remainder would be payable as a death benefit. This is one of the principal appeals of combo products. If LTC is never needed, there is still a return on the money invested in the premium. 7 

Example of the Hybrid Approach

To take just one example, a one million dollar life insurance policy with LTC and annuity riders protects your family from your premature death with the payment of a tax-free amount of $1 million. If you become disabled and can show an inability to perform certain daily routines, the LTC rider provides up to $120,000 of annual long-term care costs. And, if you live to age 85, the annuity feature kicks in: you can receive the entire $1 million death benefit through 10 annual payments of $100,000.

Give Us a Call

For 30 years, Research Financial Strategies has helped families like yours achieve their financial goals by providing a customized investment solution that is not only easy to understand and but is also focused on meeting your goals.

This starts with an in-depth understanding of you and your family, your current situation and your aspirations—not just for your money, but for your entire life. Often, that’s where LTC insurance, life insurance, and annuities can play a big role.

We always provide first-class service by taking the time to gain a deep understanding of you and your family. We work closely with you to develop a customized strategy that connects all aspects of your financial life. By focusing on all risks, we can help you protect what you’ve earned and guard against events that can take it away.

​Give Jack Reutemann a call at (301) 294-7500.

75 Must-Know Statistics About Long-Term Care: Sobering data on usage, cost, insurance products, and the toll on unpaid caregivers, by Christine Benz, Aug 31, 2017. https://www.morningstar.com/articles/823957/75-must-know-statistics-about-long-term-care (“Morningstar Report”)
2 The Long-Term Care Threat: 3 Horror Stories, by Steve Vernon, Updated on: July 28, 2011 / 6:03 PM / MoneyWatch, CBS News. https://www.cbsnews.com/news/the-long-term-care-threat-3-horror-stories/
 The State of Long-Term Care Insurance: The Market, Challenges and Future Innovations, by Eric C. Nordman, Director, Center for Insurance Policy and Research, May 2016 (“NAIC Report”). https://www.naic.org/documents/cipr_current_study_160519_ltc_insurance.pdf
4  Morningstar Report https://www.morningstar.com/articles/823957/75-must-know-statistics-about-long-term-care
5  NAIC Report https://www.naic.org/documents/cipr_current_study_160519_ltc_insurance.pdf
6  NAIC Report https://www.naic.org/documents/cipr_current_study_160519_ltc_insurance.pdf
7  NAIC Report https://www.naic.org/documents/cipr_current_study_160519_ltc_insurance.pdf

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Investment advice offered through Research Financial Strategies, a registered investment advisor.
* This newsletter and commentary expressed should not be construed as investment advice.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. The volatility of indexes could be materially different from that of a client’s portfolio. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. You cannot invest directly in an index.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* The Dow Jones Industrial Average (DJIA), commonly known as “The Dow,” is an index representing 30 stock of companies maintained and reviewed by the editors of The Wall Street Journal.
* The NASDAQ Composite is an unmanaged index of securities traded on the NASDAQ system.
* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee it is accurate or complete.
* There is no guarantee a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
* Asset allocation does not ensure a profit or protect against a loss.
* Consult your financial professional before making any investment decision.
* To unsubscribe from the Weekly Market Commentary please reply to this e-mail with “Unsubscribe” in the subject.

 

Investment advice offered through Research Financial Strategies, a registered investment advisor.

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Heads or Tails?

Them’s your odds.

Heads a normal, relatively healthy retirement. Tails long-term care (LTC).

So it’s 50-50.

Actually, the stats show differing percentages for men and women over 65. For men, 46.7% will need LTC, for women it’s 57.5%. 1

For all, roughly 50-50. Flip a coin. Heads or tails.

No one should plan a financial future with a coin flip.

Unfortunately, many do just that: they take the chance that the coin flips to heads. Then, something happens. A broken hip. Onset of dementia. Or these days, COVID-19. Suddenly, the husband or the wife, or both, need assisted care. The cost can spell financial disaster.

Horror Stories Abound

Writing for MoneyWatch, Steve Vernon recounted “3 Horror Stories” involving the need for long-term care. 

Here’s one:

A seventy-something friend of ours is taking in her 98-year old aunt, who ran out of money. The aunt’s son can’t or won’t help his mother, for whatever reason. Our friend and her eighty-something husband feel very strongly about letting her aunt live with them, despite the extreme disruption to their lives. But what happens when the aunt needs some form of long-term care? Our friend still works full time, and her husband isn’t really qualified or able to help if the aunt needs extensive care.  

​Many will face situations requiring LTC. And when they check their balance sheets, the question inevitably arises: Just how the heck am I going to pay for this?

Long-Term Care: The Price Tag

The numbers provide little solace. According to the National Association of Insurance Commissioners and the Center for Insurance Policy and Research, of those turning 65 between 2015 and 2019, 57.5% can expect to pay less than $25,000 on long-term care during their lifetimes. But 15.2% can expect to pay more than $250,000. 3

In 2016, the median annual cost of a semiprivate room in a nursing home was $82,125. A private room ups the ante to $92,378. 4

Planning for Long-Term Care

Many have looked to insurance to stave off the costs of long-term care. In the late 1970s, LTC insurance was called “nursing home insurance.” Only a few insurance companies wrote these policies. Back then, the annual national cost of long-term care totaled $20 billion. By 1980, those numbers grew to $30 billion. Now they have ballooned to $225 billion. 5

When the calendar flipped to the current century, many carriers started to exit the market. In the words of the NAIC Report:

Most insurers’ [LTC policies] issued before the mid-2000s have seen adverse experience when compared to their original pricing assumptions. Rising claims, low mortality and lower than expected lapses have led to higher prices often unaffordable to a large segment of the affected population. A number of insurers have also opted out of the market, leaving only a relatively few insurers to provide much needed LTC products. 6

The LTC policies provided back then were reimbursement, term-type policies. They resembled car insurance. They provided no cash value and no refund options if you died suddenly. You received no guaranteed renewal options. The insurance company could cancel your policy or raise your premiums. Not a pretty sight.

Needless to say, buyers of these products stopped buying. So insurance companies came up with hybrid products.

Now, using a guaranteed “no lapse” life insurance policy with two important riders, clients can protect their families from their early death, from disability, and from running out of money at, say, age 85.

The NAIC study describes this new approach:

One area of continued growth in the market is with combination or hybrid products. These products combine LTC benefits with either life insurance or an annuity. They can pay out if LTC is needed, but if not needed, there is a death benefit or annuity payout. In cases where an individual uses some, but not all, of LTC benefits, the remainder would be payable as a death benefit. This is one of the principal appeals of combo products. If LTC is never needed, there is still a return on the money invested in the premium. 7 

Example of the Hybrid Approach

To take just one example, a one million dollar life insurance policy with LTC and annuity riders protects your family from your premature death with the payment of a tax-free amount of $1 million. If you become disabled and can show an inability to perform certain daily routines, the LTC rider provides up to $120,000 of annual long-term care costs. And, if you live to age 85, the annuity feature kicks in: you can receive the entire $1 million death benefit through 10 annual payments of $100,000.

Give Us a Call

For 30 years, Research Financial Strategies has helped families like yours achieve their financial goals by providing a customized investment solution that is not only easy to understand and but is also focused on meeting your goals.

This starts with an in-depth understanding of you and your family, your current situation and your aspirations—not just for your money, but for your entire life. Often, that’s where LTC insurance, life insurance, and annuities can play a big role.

We always provide first-class service by taking the time to gain a deep understanding of you and your family. We work closely with you to develop a customized strategy that connects all aspects of your financial life. By focusing on all risks, we can help you protect what you’ve earned and guard against events that can take it away.

​Give Jack Reutemann a call at (301) 294-7500.

75 Must-Know Statistics About Long-Term Care: Sobering data on usage, cost, insurance products, and the toll on unpaid caregivers, by Christine Benz, Aug 31, 2017. https://www.morningstar.com/articles/823957/75-must-know-statistics-about-long-term-care (“Morningstar Report”)
2 The Long-Term Care Threat: 3 Horror Stories, by Steve Vernon, Updated on: July 28, 2011 / 6:03 PM / MoneyWatch, CBS News. https://www.cbsnews.com/news/the-long-term-care-threat-3-horror-stories/
 The State of Long-Term Care Insurance: The Market, Challenges and Future Innovations, by Eric C. Nordman, Director, Center for Insurance Policy and Research, May 2016 (“NAIC Report”). https://www.naic.org/documents/cipr_current_study_160519_ltc_insurance.pdf
4  Morningstar Report https://www.morningstar.com/articles/823957/75-must-know-statistics-about-long-term-care
5  NAIC Report https://www.naic.org/documents/cipr_current_study_160519_ltc_insurance.pdf
6  NAIC Report https://www.naic.org/documents/cipr_current_study_160519_ltc_insurance.pdf
7  NAIC Report https://www.naic.org/documents/cipr_current_study_160519_ltc_insurance.pdf

Most Popular Financial Stories

SEP 11 – FRIDAY MARKET COMMENTS

Today is 119 market days from the 3/23 low. Check for consistent ranking within the past 21 days for new commitments OR Jack’s 5-10 day rule as he explained in...

read more

QQQ SUPPORT

The 15 minute chart shows a lack of green volume.   Making new highs much less recovering to the last high will be difficult without more green volume.

read more

 

Investment advice offered through Research Financial Strategies, a registered investment advisor.
* This newsletter and commentary expressed should not be construed as investment advice.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indexes referenced are unmanaged. The volatility of indexes could be materially different from that of a client’s portfolio. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. You cannot invest directly in an index.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* The Dow Jones Industrial Average (DJIA), commonly known as “The Dow,” is an index representing 30 stock of companies maintained and reviewed by the editors of The Wall Street Journal.
* The NASDAQ Composite is an unmanaged index of securities traded on the NASDAQ system.
* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee it is accurate or complete.
* There is no guarantee a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
* Asset allocation does not ensure a profit or protect against a loss.
* Consult your financial professional before making any investment decision.
* To unsubscribe from the Weekly Market Commentary please reply to this e-mail with “Unsubscribe” in the subject.

 

Investment advice offered through Research Financial Strategies, a registered investment advisor.