Keeping Things in Perspective

Imagine you just came back from a 15-year vacation and decided to check your investments. Suppose there was no “YTD” button on your online brokerage?

By Mike and Ryan O’Donnell, CFP®

Key Takeaways

• Stay disciplined and ignore the noise.

• We have to endure some volatility at time to achieve a positive investor outcome long-term.

• Even with this year’s sell-off, stocks are essentially unchanged over the past 12 months and well into positive territory over three, five and ten years.

Market volatility is sky high. We’re on the cusp of a bear market. Inflation is at a 40-year high, and recession may be imminent. We know it’s hard to stay positive.

At times like these, our best advice is simply to “avoid the noise.” In order to have a positive investment experience, you need to have an investment philosophy you believe in, and you need to remain disciplined – even when others are panicking.

15-year vacation
Let’s rewind the calendar to 2007. Imagine you just sold your company for $1 million and put those proceeds into the stock market. Remember when many people said you were foolish since the market was at its all-time high then? Well, let’s say you rewarded yourself for all your years of hard-work and took a 15-year vacation to recharge on a remote island with no Internet or cell service. Now let’s say an important family gathering brought you back home and you decided to get caught up on the news.

Pretty shocking, right? You missed that Lehman brothers went bankrupt. You missed the Great Recession of 2008-09 and the COVID recession of 2020. Two of the most punishing recessions since the Great Depression froze capital markets and crashed the real estate market. A businessman with no political experience became President. The worst pandemic since the Spanish flu of 1918 cost 1 million Americans their lives. Shocking as those events were, when you looked at your account balance you see your $1 million is now worth almost $2.7 million. “Not bad,” you think to yourself. “I didn’t get the 9% a year I had hoped for, but I did better than 6% a year and nearly tripled my money.”

In order to get returns like these you have live through some volatility. We know it’s been painful the past couple of months to watch the markets drop here and abroad. But if you remain patient and disciplined during these stressful times, you will be rewarded for your steadfastness. In addition to helping you stick to your plan and tune out the noise, we do other things for our clients behind the scenes such as rebalancing their portfolios as needed and buying more stocks (not less) when the markets drop. This puts us in better position when the markets rebound.

Keeping things in perspective
Between inflation, supply chain disruptions, rising interest rates and the war in Ukraine, you may not be sleeping as well as you’d like. But we’d like to share a few charts with you from our friends at Morningstar to help keep things in perspective.

Rising interest rates: In March, the Fed raised interest rates by 0.5% (50 basis points), the first in a series of planned rate hikes that have spooked the stock, bond and real estate markets -- even though they were highly anticipated. As expected, stocks and bonds are in retreat, but going back to 1990 (see chart at left), stocks have returned nearly 9% on average, six months after a 50-basis (or greater) rate hike and have returned nearly 21% on average twelve months after the initial rate hike. Bonds also tend to perform well after initial rate hikes (+5.9% after six months and +13.8% after twelve months), according to Morningstar.

Stocks: 3rd worst start to a year since 1926: Like a hangover that never ends, stocks stumbled out of the gates in the first week of January and still haven’t regained their footing. Down 12.9% for the first four months of 2022, stocks are off to their third worst start to a year since the Great Depression. Many talking heads on TV would like you to head for the hills. Just know that slow starts in equities don’t often translate into off years. Going back to 1926 (see above), stocks on average returned +14.1%, eight months after a historically bad start and +24.7%, twelve months after a historically bad start. A slow start doesn’t guarantee a strong year ahead. It’s just that worries about the factors causing the slow start are not persistent enough to depress equities for the longer term.

Bonds: worst start to a year since the Great Depression: Having lost 9.5% for the first four months of 2020, bonds are off to their worst start to a year in almost a century. But if you peel back the onion and look at the 10 worst starts to a year for bonds, you’ll see this asset class returned +5.2% on average over the next eight months and +7.3% over the next 12 months following historically bad starts. As with stocks, a slow start for bonds doesn’t guarantee a strong year ahead. It’s just that worries about factors causing the slow start are not persistent enough to depress fixed income for the longer term.

Ditch the YTD button

Year to date through mid-May, S&P 500 is down about 14.3%. Ouch!

1-YR: But expanding our view, the past 12 months have been pretty uneventful, down only about 1%

3-YR: Going back three years, things look even more promising, up 45% (+ 13.2 annually), even including the big selloff this year.

10-YR: And going back 10 years, the S&P 500 has returned about 203% (11.7% annually)

5-YR: Going back five years, the S&P 500 has returned about 71% (about 11.3% annually)

Conclusion
Taking the long view is the best way to keep your sanity and ensure a positive investor experience. John Quincy Adams once said: “Patience and perseverance have a magical effect before which difficulties disappear and obstacles vanish.”  Or as Warren Buffet likes to say: “Be fearful when people are greedy and be greedy when people are fearful.” We are happy to discuss any questions you may have about your portfolio or retirement plan. Please don’t hesitate to reach out.

The Bumpy Road to the Market’s Long-Term Average

Since 1926, the US stock market has rewarded investors with an average annual return of about 10%. But it’s important to remember that returns in any given year may be sky-high, extremely poor, or somewhere in between.

Read the article from Dimensional HERE.

Is it time to sell stocks?

Check out this article by Weston Wellington, VP of Dimensional Funds Click HERE.

Is inflation bad for stocks. Do the losses in popular tech stocks signal a downturn ahead for the broad market? Should I be doing something different in my portfolio? This is just another version of the market timing question. It’s almost impossible to know when to get out (or pare down) and when to get back in. Meanwhile, the time you spend on the sidelines can be very damaging to your portfolio.

Powers of Attorney and Adult Children

By Ryan and Mike O’Donnell, CFP®

Key Takeaways

• Once a child turns 18, many parents are shocked they can no longer help with or inquire about their medical, educational, or financial status, even if they are still supporting them.

• Having a Healthcare proxy, HIPPA release and durable power of attorney can give you tremendous peace of mind.

• Without these documents in place, you could be leaving your child’s welfare to the courts.
  

As parents, we always want to do what’s best for our kids. That includes making the right financial and medical decision on their behalf. But things change after your child turns 18 and it can get more complicated if your child encounters difficulties while away at school or working out of state.

I know this is not a pleasant subject, but consider these possible scenarios:

• Your 18-year-old daughter goes on a spring break trip to Florida with college friends. While there, she is involved in a car accident and is taken to the hospital unconscious.

• Your unmarried son, in his 20s, suffers a severe head injury at his construction job, rendered unconscious, and is rushed to the hospital.

• Your daughter is in her 30s and just got divorced. She suffers a stroke that has left her incapacitated and unable to communicate.

Sadly, these situations play out all too often. I bring up Powers of Attorney (POAs) as part of National Financial Literacy month since they’re so important and so often misunderstood.

When there’s a crisis involving the young adult in your life, the first reaction is to contact your child’s medical providers for information about their condition so you can help them. But as a legal adult, your child has rights, including the right to privacy about their medical information. Your child’s doctors cannot release that information to you without your child’s consent, and your child is now in a position where they cannot grant that consent.

Suppose your child languishes in the hospital, and you try to participate in their care to the extent that you are able, their rent and bills may be going unpaid, leading to potential financial disaster if and when they regain their health. You can avoid this nightmare if your child executes a financial POA, a medical POA, and a HIPAA release (which grants you the right to receive their medical information). More on those documents in just a minute.

Protecting your adult children in case of emergency

Springfield, Massachusetts-based estate panning attorney, Hyman G. Darling, told me recently that when a child goes to college, he or she should complete a health care proxy or health care POA so if they become ill, the college’s medical personnel have the authority to discuss medical issues with the family. “Otherwise under privacy laws, parents are unable to access medical information to assist with any decisions that must be made, including the decision to be kept alive by mechanical means or not,” said Darling. “Similarly, the child should sign a financial power of attorney to allow their parents to attend to any financial decisions, including dealing with bank accounts, student loan documents, and all other financial matters,” noted Darling. If these documents are not in place, then Darling said parents may have to pursue a guardianship/conservatorship which is public, time consuming, and often costly.

A financial POA lets you conduct financial business and transactions on your child’s behalf. Like a medical power of attorney, a financial power of attorney can be “springing,” meaning it does not take effect unless and until it is necessary.

3 must-have documents for parents

1. Healthcare Proxy. This gives you the legal ability to communicate with medical professionals on behalf of your child if they are unable to do so. You may need more than one healthcare proxy if your child is attending college out of state, as there are state-specific versions of this document. For the child, a healthcare proxy ensures someone they trust can make decisions on their behalf if they have serious medical issues. From the parent’s perspective, you want to be able to be an active participant in your child’s healthcare issues if a serious event occurs.

2. HIPAA Release. Under HIPAA rules, once your child turns 18 you can no longer access their health records without written consent. HIPAA laws prevent you from even getting medical updates if your child cannot communicate their wishes to have you involved. A HIPAA release allows you to have access to your child’s medical records and to receive medical updates after they turn 18. Having this form in place is especially helpful if your child experienced an ongoing or sudden medical issue.

   NOTE: You need both a HIPAA release and a healthcare proxy because a HIPAA release simply allows you to get information about your child’s medical status and records. A healthcare proxy enables you to make decisions on behalf of your child if they’re unable to do so.

3. Durable Power of Attorney. With a POA, you can access your child’s financial resources and sign legal documents for them, especially if they are out of the state or overseas. If you needed to resolve bills or other financial difficulties for them, a POA grants you access to their bank and credit card accounts. A durable POA is the preferred type of POA for your child as they get into their 20s and begin working full time, because it can be broad enough to handle most of your child’s potential situations and is effective immediately. Further, it continues even if the child were to become incapacitated.

Introducing your child to POAs

As with discussing the “birds and the bees” with adolescents, there’s no easy way to broach the subject of POAs with older teens and young adults. If you are still supporting your child, including with college tuition, you should not get much pushback. But the conversation might be harder with kids who are older and have had more freedom.

If parents don’t feel comfortable discussing POAs directly with their children, they can consider asking the family attorney or any other trusted person who has a good relationship with the child, said Darling, a shareholder of Bacon Wilson, P.C., which has five offices in New England. “Within these documents, the decisions include the right to be, or not to be, kept on life support, organ donations, and burial instructions including cremation,” Darling added.

Risks of not having a well-written POA

According to Darling, if you don’t have these documents in place, a court action may be necessary to obtain a decree from a judge who did not know the person, and “he or she is making life or death decisions over a person who did not clearly establish their intentions,” he warned.

Darling cited the historical decisions in the cases of Karen Quinlan, Nancy Cruzan and Terri Schiavo, all young women who did not specify their intentions clearly. Each case continued for years before the courts made a final decision. These matters were “very costly to the family, regardless of what the family wanted,” noted Darling. If the women’s intentions had been clearly specified, Darling said it’s likely the litigation wouldn’t have been necessary. “It was indeed unfortunate to continue with litigation while maintaining the incapacitated person on machines for years while multiple court proceedings were ongoing,” he added.

Conclusion
If you or someone close to you has concerns about protecting their young adult children, please don’t hesitate to reach out. We’ve helped many clients like you in similar situations.

Market Behavior and the Weather

Think about the markets more like you think about the weather. People move to florida for sunshine, but do they except the sun to shine all the time? Check out This VIDEO