Anytime there is a plane crash anywhere in the country, I get calls from people (usually my mom) checking to see if I am ok. I often remind people that the fact plane crashes make such big news is evidence of their rarity. As an example, our Saint George airport reports 54,000 flights per year, yet in the past 20 years we have had only four fatal airplane accidents, all of which were attributed to pilot error.
When it comes to the stock market, much as with flying, the dramatic events always make the headlines. The sharp rises and falls capture the attention of reporters who love drama. In the process we often overlook the slow but continual plodding forward of our economy and the benefits it can bring to investors over their lifetimes.
When people come to me seeking investment advice I often hear comments such as, “We got hammered in the crash,” or “the markets haven’t made us any money in years.” When, like a NTSB accident investigator, I look into the cause of their past problems, I often find much of it related to pilot, or investor, error.
It’s easy to blame the markets when we don’t do well. But just as most flights end safely, most long-term investors who do their homework and follow some basic rules, generally turn out just fine. From my experience, the problem is rarely the market. I have found that success in investing for retirement is almost always based on things the investor can control.
Let’s start with a 2015 report by Deutsche Bank that found 47% of American households save NOTHING. That is shameful. No matter how little you make you can always set something aside for the future. Nearly half of American families are failing to prepare for retirement and they cannot blame markets for that.
Whether it be selling and buying on emotion, failing to set aside resources for the future, being too heavily concentrated, chasing last year’s returns, going to cash in a moment of panic, following the crowd, being unwilling to admit your mistakes, buying without proper research, dabbling in risks you do not understand, not accounting for inflation or any other number of mistakes, investors continue to be their own worst enemy.
I believe that saving enough for retirement is quite doable for the large percentage of Americans. Like flying an airplane, if done with proper preparation and skill, the outcome is usually successful. Yet like some pilots, investors continue to suffer setbacks largely because of their own mistakes. Evidence of this is the annual Dalbar* report which continues to show that investors as a whole vastly underperform the very markets in which they invest.
Life is full of tragic events, many of which are avoidable. If you are unprepared for retirement, or if your investments have struggled for years, do not blame the markets. Look in the mirror and realize that your success or failure is largely dependent on things that lie well within your own control.
“Elections have consequences.” Yes, they do. Moments after the results were known, world investing markets entered a tailspin. Investors had already factored in a Clinton victory. It appeared initially that the investing world did not want a Trump presidency, but that was not necessarily the case. Investors were simply caught off guard and were pulling funds off the table to give some time to assess the situation.
Before U.S. markets had opened the following morning, the climate had changed dramatically. The new reality of a Trump led Republican majority quickly gained approval from the markets as investors determined this may actually lead to a positive outcome.
Without getting into political issues, let me just give my take on how I believe our newly elected government may affect investors and the economy. Keep in mind this is based on anticipated policies. We cannot know which of those policies will actually be enacted. Here are two key topics I believe could positively affect investors and the economy as a whole.
Regulations - As a businessman, Trump appreciates the “yuuuge” drain that regulations can have on business and economic growth. He has promised to roll back many of Obama’s executive orders and other departmental regulations that are seen as being stifling to business. Just this week I taught seminars on the potentially negative effects of the new Department of Labor Fiduciary ruling set to take effect next April. I consider it a significant positive for investors that Trump has indicated he will repeal this ruling.
He has also promised to have all agencies do a top-down review of current regulations. Average Americans do not notice the heavy weight of regulatory burdens placed on businesses, and the unproductive costs involved in complying with them. A reduction in regulations would positively affect the bottom line of American companies, and encourage new growth.
Taxes – Trump promised to reduce corporate taxes. American corporations are some of the highest taxed in the world. A tax on a corporation is only a tax on its stockholders, its employees and its customers. Reducing these taxes will free up more money for growth, dividends and wages, and encourage more companies to maintain or seek a U.S. base. He is also proposing incentives to allows companies to repatriate foreign dollars. If companies that hold billions of dollars overseas are allowed to bring those dollars home, it could provide significant resources to spur additional growth.
President-elect Trump has promised to simplify and streamline taxes so that 90% of Americans could file on a postcard. Complying with our current tax code is a major drain on personal and corporate productivity. Any improvement here would be an economic benefit. The current makeup of government may finally make tax code simplification a reality.
As a president who understands the business world, I think investors are now viewing Trump as one who will enact policies to favor business, and thereby favor investors. Purely from an investor viewpoint, I view this election positively.
Americans have always had a soft spot for the underdog. Our natural compassion leads us to cheer for those who face great adversity and yet are still willing to put everything on the line, even when they know their chances of success are low. This may be partly due to our own historical underdog status as a nation. Few battles began more lopsided than the revolutionary war, where a band of determined farmers with shotguns took on the most powerful military in the world.
In sports, we love to root for the underdog. It makes us feel good when the little guy, against all odds, is able to pull off the victory. And so it was as the 2016 world series began in what could accurately be described as the Cleveland Indians against the world. Not that the Indians didn’t have their own giants to overcome, but the legendary underdog status of the loveable Cubs made them the clear crowd favorite.
The American desire to cheer for the underdog carries with it inherent emotional risks. After all, underdogs lose more than they win. Cub fans have much to celebrate this week, but it followed a century of disappointment. What a price those fans have paid for this year’s great victory.
This desire to cheer the underdog does not end with sports. It can be seen in the arts, in educational activities, even in politics. We just like to see someone win who doesn’t get to win very often. I have also seen this wonderful American quality carried over into the world of investing. Small startups can attract a lot of buying attention from investors who hope they might be able to “take down the big guys.” Companies that are one the ropes, whose stocks have fallen dramatically for one reason or another, may also attract buying attention from investors who view them as underdogs. Perhaps investors think the stock surely can’t fall any further (known on Wall Street as trying to catch a falling knife), or because they quietly sympathize with the financial underdog and, with their money, seek to cheer him on.
In investing, as in sports, there is a reason why underdogs are underdogs. If a stock’s price has fallen precipitously, there is usually a cause. If big money investors are fleeing an equity position, don’t assume that its lower price suddenly makes it a good value. Sports fans who cheer the underdog lose more games than they win. Investors who spend their time buying the “dogs” of the market, may find themselves likewise on the losing end of many of their investments.
In sports, unless my team is playing, I always root for the underdog. It’s just my nature and part of my American Heritage. But in investing, I resist that nature and look for the strongest, the most talented, the most likely to succeed when I select investment opportunities. In short, if investing were a sport, I too may cheer on the underdog, while quietly putting my money on the favorite.
I should start today's column with a disclosure. I have only a very small portion of my personal assets in retirement accounts. That may seem like an odd admission for a financial advisor who manages significant retirement assets, but since I was quite young I have never been a fan of IRA's for most people. It stems from my basic, and healthy, distrust of government.
The IRA was based on the simple concept that you could defer taxes on some of your income until you retired. It would also grow tax deferred. Tax deferral sounded like a great idea. My problem with it was by agreeing to the IRA, I was agreeing to let the government determine what my tax bracket would be 20 or 30 years down the road. As a young married couple we had lots of tax deductions so we were in a relatively low tax bracket. Putting money in an IRA back then seemed like saying, "I won't pay taxes now at my low bracket but when account gets really large at the time I reach retirement, you go ahead and tax me at whatever rate you want then." Of course the government insisted our tax brackets would be lower when we retired. If you believe that...
What I did not anticipate as a young investor is what the government has recently done to all retirement investors through the new Department of Labor ruling that will take effect next year. The ruling will have the effect of greatly limiting the types of investments you can hold in a retirement account. There is not place here for a detailed review of this policy, but in short, in a government effort to help protect the retirement assets of Americans, regulators have determined to exercise a stronger influence over those accounts. The chilling effect of the ruling will be greatly reduced investment options for most retirees in their IRAs and other qualified accounts.
I understand the government's inherent desire to protect us, but I wonder if they are the ones best qualified to regulate our relationship with our financial advisors, or the investments we choose to make. Many wonder where government gets its authority to involve itself in how we manage our own private financial affairs. The Department of Labor, part of the Executive Branch, is using the ERISA act of 1974, which was originally written to safeguard pension assets, to now claim jurisdiction over all retirement assets.
I am personally deeply concerned about this precedent and suspect it may only be the first step. After all, according to the Federal Reserve Board of Governors, Americans currently hold more than $20 Trillion dollars in retirement accounts. That's a lot of money, even in Washington. It comes as no surprise that some politicians want to control it. As we move closer to implementation, I will try and offer more information on how this new regulation may affect you and your investments.
Hi, I'm Dan. I'm a CFP® Professional.
Securities and advisory services offered through Commonwealth Financial Network®.
Member www.finra.org / www.sipc.org , a Registered Investment Advisor. Wyson Financial, 1173 S. 250 W. Suite 505, St. George, UT 84770.
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