MD Financial Market Update
By Josh Lantz, CRPC and Katherine Vessenes, JD, CFP®, RFC
Happy New Year from MD Financial! We hope that you got some time off around this holiday season to spend time with your family and relax.
By now you’ve probably seen nerve-racking headlines in the news about the stock market. Not to worry, we wanted to give you a short update to let you know what’s going on and how it might impact your portfolio.
Here’s the short version: While in 2017, both Emerging markets and International markets were the largest performers in your portfolio, in 2018 they were the biggest losers. Both Emerging markets and Internationals markets became negative around April of 2018. Then, around October, the United States markets began to suffer. It wasn’t until December that all Emerging, International, and United States markets became negative. Many of our doctors have become more aware of the market due to the large ups and downs in December that have made the news.
Below is a graph of the value of $1 in 2018 in the markets for various key benchmarks. The blue line is the entire US Market, the green is the International markets, and the teal is Emerging markets. You will notice all three were down by the end of December.
2018 Benchmark Returns
Bonds are the only positive asset class for 2018, which is a great reminder as to why we suggest including bonds as part of your portfolio.
Since all of our portfolios contain international companies, the result is almost all portfolios are down for 2018 for each of the different models, whether you’re 60/40 or 90/10. Many clients are asking why.
Why are the markets down in 2018?
There is never one reason why the market behaves the way it does. Thousands, if not millions of factors, go into changing market prices. However, there are two key things to remember when thinking about stock markets. First, markets are predictive, meaning they are looking at what’s coming in the future. Second, market prices can be summed up as the present value of all the future cash flows these companies expect to make. Thus, if markets go down, it means the millions of people participating in the market expect the companies being traded on stock exchanges to make less in the future.
Most economists would agree that there are three main reasons as to why the stock market has been down in 2018. First, a lot of economists believe world growth is slowing down. The debate about how much it will slow down and whether the slow-down will occur in the United States is ongoing.
Second, there is uncertainty as to what central banks will do with interest rates. The largest being the United States Federal Reserve. If the Fed raises interest rates, that puts the breaks on the economy. If they don’t raise rates, or don’t raise them as much, stock markets will generally respond in a positive way, as we saw recently when the Fed announced they were postponing a rate increase.
The third reason is trade uncertainty. There’s a standoff going on with China and the United States. Multinationals that do business with China are currently evaluating whether they will need to move their manufacturing operations to places like Vietnam. This uncertainty is causing businesses to wait to spend money.
Do note that two of the three reasons above could be solved in a rather short period of time. For example, the Fed could announce it won’t raise interest rates and China and the United States could come to an agreement on a trade policy. Both events would shoot market prices up. Let this be a caution for investors who try to time the market.
Avoid Market Timing
As a reminder, since your first meeting with us on our investment philosophy, we’ve shared that we don’t think it benefits you to try and time the market. Studies show it is nearly impossible to predict, with any certainty market returns. Therefore, we highly discourage trying to flee to cash while you wait for a recovery. There are many reasons and extensive market research and data to support the importance of staying invested at all times. The largest reason is you have a to be perfect twice. First, when you get out. Second, when you get back in. In the rare chance investors get out before the drop, they often miss the recovery.
What can you do?
We are big fans of controlling the things you can control. We can’t control what markets are doing. However, you can take certain actions to improve your financial situation when markets are down. Here are a few to consider:
1. Fund a Roth IRA in 1st Quarter
The stock market is currently down, which is perversely good news for savers. The reason it is so good for savers is all of your new savings buys more shares because stocks are effectively on sale.
Here’s how this works. Say you want to fund a back-door Roth with $6,000 dollars which is the new IRS contribution limit (under age 50) in 2019. A popular mutual fund we use was trading at $18.57/share on November 12th. That same mutual fund was trading at $16.45/share on December 31st. If you put in $6,000 on November 12th, then you would have purchased 323.10 shares. Versus if you purchased that same mutual fund on December 31st, you’d have purchased 364.74 shares. That’s 41.64 more shares. Remember, those losses are only on paper if you don’t need to withdrawal the money yet.
2. Switch to a Roth Option at Work in Your 401k/403b
Not all doctors have a Roth option through their retirement plan at work, but if you do, we suggest switching to funding a Roth option as soon as possible. The reason is when you fund Roth options, you’re effectively putting aside more savings given you’re pre-paying your tax bill upfront. It’s best to fund Roth options when the market is low. We know the market’s low right now, so it makes a good opportunity to fund Roth options now, once again your money goes farther when the prices are lower. In fact, given we know it’s lower now and we don’t know where the market values will be at the end of the year you might even consider front loading your retirement plan through work by funding it earlier in the year.
3. Do a Roth Conversion
If you’ve already maxed out your other tax advantaged savings options and have IRA money that is eligible to do a Roth Conversion, you might convert some funds while the market is lower. The reason is you pay taxes on a Roth Conversion in the year that you convert them. However, the value on which you pay the tax bill is determined by the market value of your account on the day of your Roth Conversion. Therefore, when you convert while the market is low, you end up paying less taxes than you would have if you had converted last year when the market was higher. Also, taxes are at lower rates now than they are likely to be in the future.
4. Review your Risk Tolerance
If the volatility in the stock market is keeping you up at night, it means we should review your risk tolerance again to see if you’re investing with the appropriate amount of risk. Maybe you selected a model that was 80% stocks and 20% bonds, but after seeing the ups and downs you’re realizing that you’re more of a 60% stocks and 40% bonds investor. We don’t suggest moving around your model due to timing the market---that will end up hurting you. However, there are doctors who selected the wrong model to begin with. It’s about finding your true risk profile as an investor. We are happy to help you through this process. Remembering, the more bonds in your portfolio, the less risk, the less volatility, but also the less return over time.
5. Update Your Retirement Plan
We feel markets should be looked at through the context of your goals and dreams. For many of you, you invest to be able to provide for life down the road in retirement. If the markets make you nervous, now might be a good time to update your retirement plan. We could look at a new scenario outlining if can you retire on time if the market drops like it did back in 2008. This is a particularly important step for our doctors in their 50’s and 60’s.
6. Save, Save, and Save
When markets are down, perversely this is the best time to save. It’s because your dollars buy more shares, which will be worth more at a later date. If you want to get ahead, this is the year to put in extra. Let’s talk about increasing your monthly savings into your brokerage accounts.
7. Have Hope
Most of all we want you to know that things will be fine with the proper planning and adjustments. Markets have always historically recovered. Generally, they recover from a market dip within three years.
Take a look at the chart below, which describes the value of a dollar invested globally from 1970 to 2017 and the impact of world events. You will see, over time, the market goes up. Don’t let short term set backs derail your long-term goals.
If you’re at all concerned about your accounts, reach out to us. We can run performance reports, update your plan, or review many of the topics above. We’re here to help and don’t want you worry or stress.
Here’s to a prosperous and fruitful 2019 and we look forward to seeing you soon!
Katherine and Josh