People Have Memories. Markets Don’t

Check out this article by David Booth, Chairman and Founder of Dimensional Funds Click HERE.

One of the best things about markets is that they don’t have memories. They don’t remember what happened last week or last year. They don’t even remember what happened a minute ago. Prices change based on what’s happening right now and what people think will happen in the future.

The Cost of Procrastination

Some of us share a common experience. You're driving along when a police cruiser pulls up behind you with its lights flashing. You pull over, the officer gets out, and your heart drops.

“Are you aware the registration on your car has expired?” 

You've experienced one of the costs of procrastination.

Procrastination is avoiding a task that needs to be done—postponing until tomorrow what could be done today. Procrastinators can sabotage themselves. They often put obstacles in their own path. They may choose paths that hurt their performance.

Though Mark Twain famously quipped, “Never put off until tomorrow what you can do the day after tomorrow.” We know that procrastination can be detrimental, both in our personal and professional lives. Problems with procrastination in the business world have led to a sizable industry in books, articles, workshops, videos, and other products created to deal with the issue. There are a number of theories about why people procrastinate, but whatever the psychology behind it, procrastination may cost money—particularly when investments and financial decisions are put off.

As the illustration below shows, putting off investing may put off potential returns.

If you have been meaning to get around to addressing some part of your financial future, maybe it's time to develop a strategy. Don't let procrastination keep you from pursuing your financial goals.

Early Bird

Let's look at the case of Cindy and Charlie, who each invest $100,000.

Charlie immediately begins depositing $10,000 a year in an account that earns a 6% rate of return. Then, after 10 years, he stops making deposits.

Cindy waits 10 years before getting started. She then starts to invest $10,000 a year for 10 years into an account that also earns a 6% rate of return.

Cindy and Charlie have both invested the same $100,000. However, Charlie's balance is higher at the end of 20 years because his account has more time for the investment returns to compound.

This is a hypothetical example of mathematical compounding. It’s used for comparison purposes only and is not intended to represent the past or future performance of any investment. Taxes and investment costs were not considered in this example. The results are not a guarantee of performance or specific investment advice. The rate of return on investments will vary over time, particularly for long-term investments. Investments that offer the potential for high returns also carry a high degree of risk. Actual returns will fluctuate. The type of strategies illustrated may not be suitable for everyone.

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Fallacy of Forecasts

By Ryan and Mike O’Donnell, CFP®

Key Takeaways

• Our only prediction for 2023 is that it won’t be a boring year.

• Wall Street analysts are cautiously optimistic about 2023. But research consensus estimates are historically unreliable.

• Now is not the time to stray from your disciplined approach to saving, spending and investing.

• A well-constructed financial plan has bear markets, recessions and volatility already baked in.

Baseball legend Yogi Berra famously said: “Making predictions is hard; especially about the future.” That’s how we feel sometimes when people ask me how the markets will do next year.

Sure, we’re all hoping for a rebound after a difficult 2022. But the market doesn’t care that we just flipped the calendar over to a new year. Things will improve only when it sees clear direction on interest rates, inflation, recession-risk and corporate earnings.

While it’s still fairly cloudy out there, the only thing we are willing to predict is that 2023 won’t be a boring year.

A MarketWatch survey of top Wall Street forecasters put the average S&P 500 estimate at 4,031 for the end of 2023. That’s represents a modest gain of 6% for the year, but it might not be enough to stay ahead of inflation or recover the 19% the index lost in 2022. Factset’s survey of over three dozen analysts was a little more optimistic, with a consensus estimate averaging 4,500 for the S&P by year end 2023 -- a gain of 18%.

Both surveys are based on an expectation that stocks would bottom out in the first half of 2023, before rebounding in the second half as inflation slows and unemployment rises. Theoretically this would induce the Fed to start slashing interest-rates without spiking inflation.

Naturally Fed Chairman, Jerome Powell, made it clear he can’t make guarantees about monetary policy. But most rational minds expect to see the Fed ease the pace of rate hikes in 2023, eventually stopping them before year end. However, the Fed’s latest “dot plot,” released in December, suggests that central bankers don’t expect to cut rates until 2024.

While all this conjecture sounds reasonably optimistic, let’s rewind the tape to New Year’s Day a year ago, when the markets were at their all-time high. The same esteemed group of equity analysts predicted an average S&P finish of 5,264 for 2022, which would have been a gain of 12% from the all-time high set on Jan 3 of 2022. That consensus forecast was not just a swing and miss; it was like striking out looking – in T-ball!

Statistically, the odds are in favor of a positive year for stocks. As the chart below shows, the S&P 500 has advanced 13.5%, on average, in the years following a pullback. In fact, the index in positive territory 18 of the 21 times there has been a down year for stocks going back to 1946. If you’re keeping score at home, that 13.5% mean gain is pretty close to the midpoint between +6% (Marketwatch) and +18% (Factset) discussed above.

Just don’t base your investments or financial plan on consensus predictions of where the stock market is heading over the short term. Nobody knows for sure. Doing so is just another form of market timing and that’s not investing, it’s more like gambling (or dart throwing).

As New York Times columnist, Jeff Sommer reminded us recently, the median Wall Street forecast since 2000 has been off by about 13% a year. “These attempts at clairvoyance are stymied by a fundamental problem,” wrote Sommer. “It’s simply impossible to forecast the path of the markets six months or a year ahead with accuracy and consistency, as many academic studies have shown.”

Sommer also pointed to another fundamental problem with forecasting: we have no way of seeing around the corners. In other words, we had no way of knowing that Vladimir Putin would order Russia’s invasion of Ukraine in 2022 — or that fossil fuel companies would end up leading the stock market in 2022 after underperforming so badly in recent years.” So just be ready for more extreme outlier events in 2023.

We hope that our clients know that we have extreme market volatility and occasional bear markets already built into your long-term plans with an appropriate asset allocation that aligns with your risk tolerance and your long-term financial goals. There’s no price tag you can put on that kind of peace of mind.

If you take a step back from all the stomach churning volatility we endured in 2022, you will see that equity investors are still up about 50% since the start of the pandemic and still up about 600% since the depths of the global financial crisis in 2009. Those returns are still very much in line with the long-term historical average annual return of 8% to 10% for stocks.

Conclusion
“Lack of specific knowledge about the future is a fact of life,” wrote Sommer. “Guessing, or betting wildly isn’t a prudent solution.” Bottom line: Stick to your plan and you’ll be fine. Deviate from your plan or start second-guessing yourself and now you’re just gambling.  We are happy to discuss any questions you may have about your portfolio or retirement plan during these uncertain times. Please don’t hesitate to reach out.

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SECURE Act 2.0: An Overview

In the final days of 2022, Congress passed a new set of retirement rules designed to make it easier to contribute to retirement plans and access those funds earmarked for retirement.

The law is called SECURE 2.0, and it's a follow-up to the Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed in 2019.

The sweeping legislation has dozens of significant provisions, so to help you see what changes may affect you, I broke the major provisions of the new law into four sections.

New Distribution Rules

RMD age will rise to 73 in 2023. By far, one of the most critical changes was increasing the age at which owners of retirement accounts must begin taking required minimum distributions (RMDs). And starting in 2033, RMDs may begin at age 75. If you have already turned 72, you must continue taking distributions. But if you are turning 72 this year and have already scheduled your withdrawal, we may want to revisit your approach.1

Access to funds. Plan participants can use retirement funds in an emergency without penalty or fees. For example, starting in 2024, an employee can get up to $1,000 from a retirement account for personal or family emergencies. Other emergency provisions exist for terminal illnesses and survivors of domestic abuse.2

Reduced penalty. Also, starting in 2023, if you miss an RMD for some reason, the penalty tax drops to 25% from 50%. If you fix the mistake promptly, the penalty may drop to 10%.3

New Accumulation Rules

Catch-Up Contributions. Starting January 1, 2025, investors aged 60 through 63 can make catch-up contributions of up to $10,000 annually to workplace retirement plans. The catch-up amount for people aged 50 and older in 2023 is $7,500. However, the law applies certain stipulations to individuals earning more than $145,000 annually.4

Automatic Enrollment. Beginning in 2025, the Act requires employers to enroll employees into workplace plans automatically. However, employees can choose to opt-out.5

Student Loan Matching. In 2024, companies can match employee student loan payments with retirement contributions. The rule change offers workers an extra incentive to save for retirement while paying off student loans.6

Revised Roth Rules

529 to a Roth. Starting in 2024, pending certain conditions, individuals can roll a 529 education savings plan into a Roth IRA. So if your child gets a scholarship, goes to a less expensive school, or doesn't go to school, the money can get repositioned into a retirement account. However, rollovers are subject to the annual Roth IRA contribution limit. Roth IRA distributions must meet a five-year holding requirement and occur after age 59½ to qualify for the tax-free and penalty-free withdrawal of earnings. Tax-free and penalty-free withdrawals are allowed under certain other circumstances, such as the owner's death. The original Roth IRA owner is not required to take minimum annual withdrawals.7

SIMPLE and SEP. From 2023 onward, employers can make Roth contributions to Savings Incentive Match Plans for Employees or Simplified Employee Pensions.8

Roth 401(k)s and Roth 403(b)s. The new legislation aligns the rules for Roth 401(k)s and Roth 403(b)s with Roth Individual Retirement Account (IRA) rules. From 2024, the legislation no longer requires minimum distributions from Roth Accounts in employer retirement plans.9

More Highlights

Support for Small Businesses. In 2023, the new law will increase the credit to help with the administrative costs of setting up a retirement plan. The credit increases to 100% from 50% for businesses with less than 50 employees. By boosting the credit, lawmakers hope to remove one of the most significant barriers for small businesses offering a workplace plan.10

Qualified Charitable Donations (QCD). From 2023 onward, QCD donations will adjust for inflation. The limit applies on an individual basis, so for a married couple, each person who is 70½ years old and older can make a QCD as long as it remains under the limit.11

Remember that just because retirement rules have changed does not mean that adjusting your current strategy is appropriate. Each of your retirement assets plays a specific role in your overall financial strategy, so a change to one may require changing another.

Also, retirement rules can change without notice, and there is no guarantee that the treatment of specific rules will remain the same. This article intends to give you a broad overview of SECURE 2.0. It's not intended as a substitute for real-life advice. If changes are appropriate, we will outline an approach and work with your tax and legal professionals, if applicable.

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What's My 2023 Tax Bracket?