Your Financial Future: Investing
Editor’s note: As a practicing Pennsylvania certified financial planner, Gary Boatman is able to share many concerns that people in our area deal with daily. He has lived in the area for most of his life and has been in the industry for over 20 years. Your Financial Future, a column now published in the Community section of the Herald-Standard, explains Wall Street to Main Street. Although there are immense amounts of financial information thrown around, it is often difficult for people to sort through the jargon to understand how all of these events affect their lives. Many people look at financial planning in a vacuum of investment management. What needs to be done is a comprehensive overview which includes areas such as taxes, social security planning, health care, college planning and more.
There is an old adage in the stock market that says, “As goes January, so goes the market for the rest of the year.”
Investors need to hope that does not ring true this year, because the stock market is off to a very rough start. January was the worst performing month for the Dow and the S&P 500 since 2009. This was true despite the large gains the last two days of the month credited to the Bank of Japan’s action. They lowered interest rates into negative territory. It seems bizarre that you would pay a national bank for the right to deposit your money with them. You may be surprised to learn that this has been happening in some European countries for a while.
The Bank of Japan is hoping to stimulate growth in their country with these actions. Many other national banks have used similar strategies including our own Federal Reserve Bank. The world economies are in a sad state of affairs. The US economy is the strongest in the world, but our growth rate is much slower than it should be. Governments use a combination of fiscal and monetary policies to try to increase or slow down economic growth. If an economy grows too fast, inflation becomes a problem. If it grows too slowly, stagnation or even deflation could become issues.
Most governments want to see a low level of inflation. This means that it cost them less to pay back national debt and there will probably be a slow and steady increase in wages and living conditions for their citizens. Governments despise deflation. We are seeing some of that right now with lower oil and other commodity prices. While it is great when we fill our tanks with motor fuel for half the cost, this scares governments. Why? If all prices start to fall, people will hold off on major purchases until a later time because they believe things will be cheaper in the future.
Companies will start to cut back on production because they could start to lose money on their products. This could mean that they would lay off workers and not buy as much raw materials affecting other companies. The ripple effect would spread throughout the whole economy. All of these actions would reduce government tax revenues and make paying back national debt harder.
The rocky start to the market this year is also blamed on the Chinese economy. It has been one of the fastest growing ones in the world. Their demand for commodities has driven prices higher. It is a simple case of supply and demand. Once they quit buying these items in bulk, there became a surplus and prices went down. While this is beneficial to consumers, it hurts the corporate profits of many companies, which often makes their stock prices tumble. Today, more than ever before, many people own stock in their 401K plans.
Several decades ago, most employees were covered by defined benefit pensions. These provided some pre-determined amount of income to you once you retired. Today, most privately owned companies have discontinued these plans because of high cost. Today, many of these people are now covered by 401(k) s. These new plans shift the investment risk from the company over to the employee.
So what does all of this mean to investors in Western Pennsylvania? Money that you will need in the next few years should not be in the market. Younger investors, who will not need the money for years do not need to be as concerned. If they keep buying every month, they will be dollar cost averaging and time will help smooth out the bumps. People close to retiring or those already retired are in a completely different situation. Sequential risk could wipe out their retirement savings. We will talk more about sequential risk in a future column. For retirement, it all starts with an income plan that provides money with the same regularity as your pay check did.
Do not try to time the stock market. No one can: not you, me or Warren Buffett. Your market money must always be in the market and your non-market money can never be in the market. This is because if you pull money out when the market is going down, you lock in losses and you could miss some big bounce back days which would reduce your gains dramatically. If you have money in the market that you need short term, it may not be available when you need it the most.
The first decade of the 21st Century was known as the lost decade because the S&P 500 had a loss for the whole 10-year period. Everyone knows that the goal of investing in the stock market is to buy low and sell high. The problem is, many investors do the exact opposite because they get scared and think that they can somehow time the market. We will look at some of these other areas in the future.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.” If there is an area that you would like to see discussed in the column, please send your suggestions to gary@BoatmanWealthManagement.com.