Month: April 2016

Celebrate Financial Literacy Month

April isn’t just the first full month of spring … it’s also Financial Literacy Month!  The United States Senate first proclaimed April as Financial Literacy Month back in 2004, in order to promote good financial habits and the importance of financial education.

How important is financial education?

In 2002, Alan Greenspan, then chairman of the Fed, said in prepared testimony before the U.S. Senate Committee on Banking:

“… Education can play a critical role by equipping consumers with the knowledge required to make wise decisions when choosing among the myriad of financial products and providers. In addition, comprehensive education can help provide individuals with the financial knowledge necessary to create household budgets, initiate savings plans, manage debt, and make strategic investment decisions for their retirement or children’s education. Having these basic financial planning skills can help families to meet their near-term obligations and to maximize their longer-term financial wellbeing. While data available to measure the efficacy of financial education are not plentiful, the limited research is encouraging.”¹

When you come right down to it, financial education is all about making good financial decisions and avoiding bad ones.  Since the recession of 2008, making good financial decisions is more important than ever.  It doesn’t matter who you are, where you live, or how much money you make.  Nowadays, people just can’t afford to make bad financial decisions anymore.

Furthermore, the benefits to making good decisions are substantial.  According to the Financial Educators Council, “Research shows that individuals that have taken a personal finance education course have higher savings rates, higher net worth, and make larger contributions to their 401(k) plans.”² Add all that up, and it means financially literate people have less debt, a better retirement, and more money to live life the way they want to.

As a financial advisor, here are just a few topics we recommend taking time to educate yourself on:

Ÿ  Your cash flow.  Do you actually know how much you’re bringing in versus how much you’re spending?  Understanding and improving your cash flow is one of the most important things you can do to save for the future and reach your financial goals.

Ÿ  The level of risk in your investment portfolio.  Many people invest too conservatively when they’re younger, reducing the chance of building a sizeable nest egg during their prime earning years.  Conversely, many people invest too aggressively when they’re older, when they simply can’t afford to lose a large chunk of their retirement savings.  Nobody does this on purpose—they simply don’t realize they’re doing it at all.

Ÿ  What kind of insurance you have and how much you’re paying for it.  It’s not uncommon for us to review a client’s insurance policies, only to find that they could either be paying less for what they’re getting, or getting more for what they’re paying.

Ÿ  Financial security.  These days, it’s easier than ever to fall prey to fraud or identity theft.  It’s critical to know how you are vulnerable and what you can do to protect yourself.

Ÿ  Estate planning.  Do you have a will?  Have you set up your Power of Attorney?  What about your Advance Medical Directives?  It’s never pleasant to think about the inevitable, and if you’re young and in good health, it’s easy to just dismiss the idea altogether.  But take it from us: the peace of mind that comes with knowing your legacy is secure and your family taken care of (even if something unexpected happens) makes it all worth it.

There’s no better way to spend the month of April then to take a little bit of time learning more about your own finances.  We’ve sent you information on many of these topics in the past, and we’ll continue to do so in the future.  But if you ever have any questions, don’t hesitate to let us know.  We’d be happy to sit down and talk with you.

In the meantime, never discount the value of a good education—especially when the topic is your own money.

Happy Financial Literacy Month!

¹Greenspan, Alan. 2002. “Prepared Statement.” Hearings on the State of Financial Literacy and Education in America. U.S. Senate Committee on Banking, Housing, and Urban Affairs, February 6.

²Shorb, Vince, “Financial Literacy and the Revival of the American Dream,” National Financial Educators Council, accessed March 29, 2013. 

Weekly Wire – The Oil Slick That Stocks Are On

Historically, oil prices and the US Stock market are not highly correlated. Meaning, when one goes up or down that does not necessarily signify the other is going to follow suit. However, right now, we are definitely seeing more of a connection between the two.

Over the weekend, OPEC met in Doha, the capital of the peninsular Persian (Arabian) Gulf country Qatar.  The goal was to set a production freeze in order to keep prices from falling too much because of increased supply levels. For several reasons, the talks failed to produce a freeze therefore production continues and oil prices continue to fall.

At the pump we all like lower gas prices, no question about that. We can’t recall ever hearing someone say, “I wish this gas was a bit more expensive”. So why are the equities markets so nervous about something consumers like?

This is an oversimplification, but in a nutshell, oil is big business that has a large debt load with financial institutions globally. Financial institutions are also big business. If the profits from oil drop too low, the companies that rely on oil profits experience a diminished profit and may end up being unable to pay back their debt to the financial institutions.  As a result, two very large sectors suffer and the related stock markets take a hit.

In one of our recent Weekly Wires we asked: Does it make sense to total the car over a flat tire? The answer is “no”.  Taking a complete defensive approach to all equity holdings based solely on the falling price of oil may be akin to totaling the car. However, being selectively defensive using a sector rotation strategy may not be a bad idea.

For now, our advice is to enjoy the low prices at the pump, but realize those great prices may be signaling a change in sector leadership in your portfolio.

Markets and Election Years

Every four years, Americans take a few minutes out of their day to choose the next President of the United States.  Voting is a simple, uncomplicated act—but the months preceding it are anything but.  After all, before we vote, we first have to endure the dreaded “campaign season.”  From endless televised debates to the plethora of signs on our neighbors’ lawns, “politics” becomes the order of the day.

If you’re like us, you’re probably starting to get tired of all the campaigning.  But you also know how important the political process is.  Being an informed, engaged citizen is crucial to maintaining the stability of our Republic.  That means asking some pretty tough questions, like: “Which candidate best represents my opinions and values?”  “How will each candidate affect our standing overseas?”  “What will each candidate do to ensure both our safety and our personal liberties?”  Getting the answers can be both frustrating and time-consuming.

Fortunately, there’s one question you don’t have to ask.

“How will the election affect the markets?”

This is a question we get every four years.  This year, we thought we’d make life a little easier for you by answering it now.  That means you have one less question to worry about!

So how does the election affect the markets?  The answer is:

Not much.

Since 1833, the Dow Jones^® has gained an average of almost 6% every presidential election year. ¹ That number increases to 9.5% for the S&P 500^®.²  Of course, there can be some massive exceptions.  For example, in 2008, the Dow sank nearly 34%.¹

But there’s a danger in using averages to try and predict what will happen.  Take the “Presidential Election Cycle Theory” for instance.  Once upon a time, many people believed that U.S. stock markets are always the weakest in the year following a presidential election.  This was the case for Franklin Roosevelt.  It also held true for Truman and Eisenhower.  But in George H.W. Bush’s first year, the market rose 25.2%.  In Bill Clinton’s?  19.9%.  Barack Obama?  15.4%.³ It’s clear that the Presidential Election Cycle Theory just doesn’t hold water.  And that’s true for actual election years as well.  An average merely shows you what has happened, not what’s going to happen.  (Side note: this is why you often see the financial industry emphasize that “Past performance does not guarantee future results.”  Because it’s true.)

“Okay,” you might be saying, “so there’s no hard and fast rule on how election years affect the markets.  But what if the Democrats/Republicans win?  Won’t that have an effect?”

Our answer:

Not really.

As worked up as we often get about our political beliefs, neither party tends to have that much impact on the markets compared to the other.  Historically, the Dow has gone up an average of 9% every year a Democrat lives in the White House.  With Republican presidents, the number is 6%.¹ The difference is very small, and can be attributed to a whole range of factors, not just politics.

“So you’re saying it doesn’t really matter who ends up getting elected?”

Obviously, it matters a great deal who our president is … but not when it comes to the markets.  And that’s a good thing!  Here’s why:

1. The Founding Fathers created a system of government where no branch (executive, legislative, or judicial) was supposed to dominate the other. The fact that neither political party, nor election years in general, have that much influence on the markets shows that our system of checks and balances extends to investing, too.
2. The markets are driven by far more than just one person or event. They’re controlled by the ebb and tide of trade, by the law of supply and demand, by innovation and invention, by international conflict and consumer confidence.  The markets are like life.  The course our lives take isn’t determined by one gigantic decision, but by the millions of small decisions we make every day.  We don’t know about you, but we find that comforting.

“So what’s the takeaway from all this?”

The takeaway is that when it comes to investing, we control our own destinies, not politicians.  The way to reaching your financial goals is by having a sound investment strategy, making informed decisions, and taking emotion out of investing.  Not by worrying about the election.

So this year, as you watch the debates, chat amongst your friends, and decide who you want the next president to be, you can do so with the knowledge that whatever happens, the markets will go their own way … and so will you.