Last night, the British voted “Leave” on their referendum to exit the European Union (EU). This result is poised to increase uncertainty and weakness within the union of 28 countries.
SigFig’s Investment Team expects increased volatility in global markets, as investors assess the impact of the vote. Though there are likely to be few immediate economic consequences, many European economies, and especially the British, are likely to suffer from weaker connections to the Continent, with global impact.
What should you do?
Focus on the long-term and ignore the short-term market fluctuations.
Markets will adjust to the Brexit result and recalibrate. Meanwhile, it’s important to recognize that a globally diversified, asset-class diversified, time-horizon appropriate portfolio will weather this storm. Your SigFig portfolio is designed to invest your capital wisely to endure the ups and downs of market volatility.
With the uncertainty about global economic growth caused by the Brexit result, international markets are likely to decline. Meanwhile, U.S. Treasuries are likely to be a source of safety and could rise as investors seek to relocate their capital to more stable assets.
SigFig portfolios deploy assets in all major markets, including the U.S., Europe, Asia, and points in between. Moreover, the portfolios contain U.S. Treasuries, investment-grade bonds, and other sovereign debts for asset-class diversification, while accommodating different risk levels and different investment horizons.
If in doubt about whether your portfolio is matched to your time horizon, retake our risk tolerance questionnaire.
P.S. With the British pound falling in value relative to the U.S. dollar, now is a great time to visit England!
Worldwide, stocks have fallen significantly and volatility has increased in the early weeks of 2016.
The hardest part about being a disciplined investor is maintaining a patient, thoughtful approach in the face of market headwinds. It’s tempting to sell your portfolio and wait out the storm, at least until things seem to have settled down.
Some investors hit the panic button, liquidate everything, and wait. When people make investment decisions based on fear, however, they abandon the smart, calm approach that should guide their rational long-term planning.
This is a good chance to consider the opportunities available to long-term investors. Modern portfolio theory suggests that the smart, long-term approach is to stay the course.
Though the S&P 500 has had a correction of approximately 10% in the last month and international markets are off 10% to 20%, diversified portfolios with stocks and bonds have been less impacted than concentrated portfolios. This presents excellent opportunities to invest (and reinvest) in a globally diversified portfolio.
Though it’s natural to want to pull out when the market gets volatile, it is impossible to know where the bottom is. Frequently, market timers withdraw at the bottom, already absorbing all of the losses. Other times, they attempt to buy back in at what they think is the bottom, only to see the market fall further — what is known as “catching a falling knife.” Then, once the fear factor has been initiated, it is hard to anticipate the market’s upswing, building the courage to reinvest while getting the re-entry timing correct. In fact, research shows that market timing generally underperforms a buy-and-hold, disciplined approach. Simply riding the swings, even the volatile ones, outperforms active investing and market timing.
As an example, the chart below shows the S&P 500 over the one-month period from July to August 2011. The S&P 500 fell almost 15% in the month. The market had been on a tear through mid July, up 50% from its 2009 lows.
If you jumped out of the boat in August 2011, nervous that stocks were overvalued, you’d have missed a big chunk of a great market rally. Over the next three years, the market was up 66%.
The research says stay the course. Don’t try to time the market. Invest in a diversified portfolio, reconfirm your risk tolerance, and harvest available tax losses.
- Don’t try to time the market. Attempts to time the market, by jumping out at initial signs of market tops, or jumping in at signs of market bottoms, underperform a disciplined, buy-and-hold, stay-the-course approach. Most finance research indicates it is nearly impossible to figure out where the market is going (minutes, days, weeks, months, or years from now). It is impossible to know if the markets will move higher in the coming days or continue with volatility. Even the so-called experts do not beat the market reliably. Still, markets historically reward smart, disciplined risk-taking over the long-term: investors take on risk by investing in companies and are rewarded with capital gains and dividends.
- Invest. We strongly advocate setting up regular, recurring deposits. These serve several purposes. First, they build your account value, getting more of your assets to work for you. Second, deposits enable a simple rebalancing of your portfolio to pick up small relative under-valuations between asset classes. Finally, they enable you to invest when the market has experienced a larger decline. These factors combine to lower your portfolio volatility and your overall risk.
- Confirm your risk tolerance. If you’re watching the market downturn nervously, it’s a signal to rethink your risk exposure. Visit our Managed Accounts page to retake your questionnaire and see if your portfolio’s risk level matches your current comfort with market volatility. Your portfolio should be aggressive enough to achieve the long-term returns you want, while still enabling you to be comfortable living through short-term market pullbacks.
- Harvest tax losses. Our investment team carefully reviews market conditions for opportunities to reduce your taxes. We automatically look for conditions to lock in a lower cost-basis and capture tax losses for our clients, who can use that loss to offset other gains (and even income) to reduce their taxes. We purchase a similar asset class ETFs so our clients remain fully invested for a market rebound. If you haven’t turned on Tax Loss Harvesting, you can do it now by clicking here. If you want to learn more about Tax Loss Harvesting, visit our FAQ.
At SigFig we work to deliver the optimal investing tools and asset management services for our clients and their portfolios in any market conditions. Volatile markets can frighten even the most seasoned investors, but with the right tools and investment partners, even a market downturn can be an opportunity to invest better.
One of the interesting challenges in studying investor behavior is accounting for the notion of cognitive dissonance, which describes the difficulty of weighing two contradictory ideas at the same time.
Consider how you would describe yourself. Are you a nice person? As you reflect on the affirmative, you might also remember a time when you acted with indifference or even cruelty, bringing about an uncomfortable feeling as you ponder this seeming contradiction; I think I’m nice, but I’ve also done some not-so-nice things.
As a behavioral “problem,” people often manage this uncomfortable feeling by ignoring or disregarding information that conflicts with their preferred view. Put differently, we usually dismiss the memories of our being unkind in favor of our positive self-image. The problem is obvious; by filtering the information to align with our preferred perception, we have an incomplete picture of a complex reality.
This filtering affects our worldviews, too. Consider your view of the U.S. economic recovery. Has there even been one? For many, the recovery has not improved net wealth, job prospects, income, or confidence in the future. Recent presidential debates have focused economic discussions on the economy’s weakness.
Yet by nearly every statistical measure, the U.S. economy is strong and growing; the stock market has enjoyed a bull run for more than five years, unemployment is down to 5% (with college graduate unemployment down to 2.5%!), inflation remains under 2%, the dollar is at decade highs against the euro and the yen, and companies report record earnings. Nevertheless, many believe that the economy continues to struggle, perhaps inspired by weak wage growth.
The truth is somewhere between. One feature of this economic recovery continues to be a general shift towards higher-skilled jobs. Without marketable skills, education, and flexibility, many people have been left behind. Meanwhile, the recovery has delivered significant gains to investors, the highly educated, and flexible-work employees. The U.S. economy is expanding, but consumers are suspicious of the recovery’s underlying strength. Even though the stock market remains near all-time highs, our perceptions of the economy reflect this cognitive dissonance.
In spite of anecdotal evidence suggesting a weak recovery, most statistical analysis indicates the U.S. economy is strong: job creation has increased while inflation remains low. Following the late August stock market hiccup, the benchmark U.S. S&P 500 Index is up nearly 10%.
(S&P 500 Index performance 8/26/15 – 11/17/15. Chart from Google Finance.)
Meanwhile, U.S. bonds remained stable through October, as the Fed continues to defer a rate hike. With a great jobs report and continued evidence that inflation remains low, expectations have grown that the Federal Reserve will nudge the benchmark overnight rate by a quarter point, though we prefer they resist the temptation. Why? The risks facing the economy are asymmetric: there’s less chance that the economy overheats in the next quarter than falters.
A deferred hike provides the Fed with more opportunity to gauge macroeconomic impacts. Though the US’s economy is strong, many of the country’s international trading partners face concerning weakness, potentially slowing domestic growth. Further, where the Fed might typically raise rates to combat increasing Inflation, the evidence indicates inflation remains remarkably low. Finally, a quarter-point signal move does little to provide “ammunition” for the Fed if it faces sudden weakness; better to keep the rates low a little longer and maintain a watchful eye than risk slowing an economy that doesn’t show signs of overheating.
Developed international markets have been volatile, up about 3% after tumbling by 9% during the worldwide correction at the end of August.
(3-month performance chart, ending November 17, 2015 of IEFA, an ETF tracking the MSCI Developed Markets Index. Chart from Google Finance.)
The European Central Bank began a version of quantitative easing to offset austere fiscal programs, which weakened eurozone economies. The British economy has also slowed. The Japanese economy reentered a recession in spite of more aggressive government spending, as a shrinking workforce struggles to sustain output. More broadly, the outlook for Europe remains unclear — the success of the a single economic zone has been repeatedly tested over the last few years, with debt issues across the southern half of the continent, suggestions that Greece drop out of the currency union, and questions about how to handle the influx of Syrian refugees.
The lack of synchronicity between the Fed and other central banks have interesting consequences for global markets. The minutes of Fed meetings and speeches given by various policymakers suggest that the US will be first to raise rates among the major central banks. This action has already led to a strengthening dollar as international investors transition to dollars. Meanwhile, emerging markets are at risk of getting trampled as the dollar strengthens against other currencies.
Emerging markets have stabilized somewhat after being hit hard by three factors: a) an economic slowdown in China has led to lower demand for construction supplies, including commodities; b) global decrease in commodity demand has softened prices; and c) weakness in many developed nations reduced trade. Oil prices have collapsed from 2014, down nearly 60% this year.
The chart below shows the relative performance of IEFA and GSG, ETFs tracking an emerging markets index and a commodities index, respectively.
(6-month performance chart, ending November 17, 2015 of IEMG and GSG, ETFs tracking the MSCI Emerging Markets Index and the S&P GSCI Commodities Index. Chart from Google Finance.)
Returning to the notion of cognitive dissonance, we have lots of conflicting information about the state of global markets, but we should avoid filtering to fit our preferred worldview. Markets around the world remain in a state of flux; smaller U.S. companies have done well, while large-cap U.S. stocks and developed markets tread water in 2015, and emerging markets declined significantly. This state of uncertainty is exactly the reason it is valuable to be globally diversified in many asset classes.
Diversified portfolios help us manage conflicting information; we remain exposed to multiple opportunities while reducing the risks associated with the ups and downs of market moves. This is especially important when markets yield conflicting information and do not always move in the same direction.
Towards the end of the year, a flurry of activity begins—and not just in the nation’s kitchens. With just a few months left in 2015, people are starting to think about 2016—and the tax bill that will be due in April.
You probably know that it is a good idea to do some year-end tax planning to try to reduce your 2015 tax bill. However what actually works, and what exactly should you do? Donate to charity? Sell some losing stocks? Pay January’s mortgage bill now?
The answer, of course, depends on your individual circumstances. While a certified financial planner or other professional can help you make a customized plan, here are some rules of thumb for when to try some common tax-reducing strategies—and when to skip them:
1) If your income fluctuates a lot from year to year, take a look at whether you can accelerate or defer some of that income. This strategy often works best for people who are self-employed, like small business owners, freelancers, and some doctors and dentists, or those who work on commission, like real estate brokers or other salespeople. If you are having a particularly good year, you could hold off on sending out a couple of end-of-year bills to push some of that income to next year. If it is a bad year—if you have just started a business or spent a lot on business expenses and your profits are low—see if you can pull some January income into December, in the hopes that your tax bracket will be lower this year than next.
For most people with traditional full-time jobs, accelerating or deferring income will not make a big difference. “When you have changes in income, that is a place where a lot of opportunities come in,” says John Scherer, a certified financial planner with Trinity Financial Planning.
2) If you are in a low tax bracket, you should consider tax-gain harvesting, Scherer says. This strategy works well for retirees who do not have a lot of income coming in, or for people with fluctuating income who are in a lean year, for example.
Most people know about tax loss harvesting, and for many investors, that is worth doing most years. “It is sort of like free money,” Scherer notes. But “tax gain harvesting, people do not talk a lot about,” Scherer says. Anyone who is in the 15% tax bracket (singles earning up to $37,450, or married couples filing jointly earning up to $74,900) will not have to pay capital gains tax, Scherer says. So any year you are going to end up in that lower tax bracket, you can lower your future tax bills by taking gains now, he says.
Here is how this works: You will sell some investments that have appreciated, and you will not pay any capital gains tax on them. You then immediately buy them again at today’s higher price—so you keep your investment portfolio the same, but later, when you need to sell those investments for income, your cost basis will be higher, and your tax bill will be lower.
3) If your deductions are close to the standard deduction amount, consider bunching your deductions. Generally, you should itemize if your itemized deductions will be greater than the amount of the standard deduction, which this year is $6,300 for single people. But if your itemized deductions are not adding up to much more than that standard deduction, you can bunch your deductions into on and off years and reduce your total tax bill, Scherer says.
Basically, you would pull as many deductions into this year as possible—pre-pay your January mortgage, property tax, or tuition bills, make 2016’s charitable contributions in December, and so on. You would itemize your deductions this year and take as many deductions as you can. Then, next year, you would have fewer deductions and take the standard deduction. You could save yourself a few thousand dollars over the course of two years through this method, Scherer says.
4) If you are subject to the alternative minimum tax, most deductions will not help you—except for deductions for charitable donations, Scherer says. So if you are subject to AMT, make sure you get receipts for all your donations, including donations of goods. Most people do not keep track of the value of, say, old clothes they are donating to Goodwill, but those donations can add up, Scherer says.
Of course, donating to charity only saves you money if you were going to donate anyway, Scherer notes. If you donate $1,000 and it saves you $250, you are still out $750; so do not donate just for the tax deduction. “It is like buying something at the store that is on sale—you are still out the money,” Scherer says.
Make sure all your tricks and tips are really worth it to your personal bottom line. Look for strategies that make sense for your personal situation, and do not spend money just to save money.
SigFig Wealth Management is not a tax advisor. All decisions regarding the tax implications of your investments should be made in consultation with your independent tax advisor. SigFig Wealth Management does not provide tax or legal advice. This material is not intended to replace the advice of a qualified tax advisor, attorney, accountant, or insurance advisor. Consultation with the appropriate professional should be done before any investment decisions are made. The material contained herein is for informational purposes only and does not constitute tax advice. Investors should consult with their own tax advisor or attorney with regard to their personal tax situation.
It is hard to save for retirement when you are just starting out. Maybe you have student loans you are struggling to pay off. Maybe you are saving up for a wedding or a house, or supporting a young family. Maybe you are not making very much money to begin with.
All these individual reasons for saving less add up to a lot of young investors who could be saving more. Our data shows that the majority of investors in their 20s and 30s are not saving as much as they could in their 401(k) accounts. More than half of investors in their 50s or older are on track to make the maximum possible contribution to their 401(k) accounts this year, but only 1 in 5 investors in their 20s are set to do the same.
If these young investors save more in their 20s and 30s, they will reap huge rewards. Every dollar saved when you’re young has more time to compound and grow—making it far more valuable than a dollar saved down the road.
Even if they are struggling to save a lot, these young investors do have one advantage over their elders; they are paying less in fees. Investors under 30 pay a median 0.07% in fees, while investors in their 30s pay 0.10%, investors in their 40s pay 0.15%, and investors over 50 pay a median 0.17%. Just as early savings pay off big down the line, over the course of working life, even small differences in the fees you pay on your investments can add up to hundreds of thousands of dollars in lost savings.
If you cannot afford to save much, then you certainly cannot afford to overpay for your investment options. Our data shows that more expensive investment options do not outperform cheaper options over the long term. In fact, the research shows that the cheapest investments will give you a greater total return in the long term.
The millennial investors who are choosing cheap funds for their 401(k)s are making the smartest possible choice with the limited amount of money they have available—something older investors could learn from.
Still, no matter how smart you are about investing, there is no substitute for starting your saving early and taking a moment to reevaluate how much you can actually afford to save. Consider putting an anticipated bonus or raise straight into your retirement account, or adjusting your tax withholding so that you’re taking less money out of your paycheck to pay the government, and more to pay your future self. A small change now could be worth a lot of money later.
Summer is over. Kids are back in school. It’s time to start thinking about sweaters, pumpkins, and how the holidays will be here before you know it. There’s one more thing you should potentially add to the list: checking in on your 401(k).
Last year, we saw more than 30 percent of investors play catch-up and make last-minute contributions to their 401(k)s. These investors made 10 percent or more of their total contributions for the year in December. In comparison, if this same group of investors had saved and contributed an equal amount each month throughout the year, they would have only needed to make 8 percent of their total contributions each month.
Being late to the party is not necessarily a bad thing. There are plenty of possible strategies for 401(k) investors who want to boost their savings rate in the last few months of the year, and there are plenty of investors who could be saving more. Individuals can contribute a maximum of $18,000 to their 401(k) accounts this year, and investors at the age of 50 or over can make additional “catch-up” contributions of up to $6,000.
However, most investors are not on track to meet that maximum this year. In fact, only 39 percent of investors who track their portfolios with SigFig are on track to max out their contributions to their 401(k) accounts so far.
So who are these latecomers? By and large, younger investors.
Older investors are more likely to max out. Only about 1 in 5 investors under 30 are saving enough to hit $18,000 by the end of the year. Meanwhile, 44 percent of investors in their 30s and 58 percent of investors in their 40s are on track to max out their contributions.
Of course, there are plenty of reasons why younger investors might have trouble saving $18,000 over the course of a year. Younger investors are likely to be making less, and may be saving for other, more immediate goals, like a car or a house—or struggling to pay off student loans.
Unfortunately, delaying saving for retirement will have huge costs down the line. The math is firmly on the side of those who start saving early. If you manage to start saving when you’re 25, and you save $7,000 a year, you’ll have about $1.9 million when you hit retirement age. However, if you max out your 401(k) starting when you’re 25, you’ll end up with almost $5 million. Thanks to the power of compounding, those early dollars—the ones you cannot easily spare when you’re just starting out—are worth much more than any catch-up contributions you might make when you’re in your 50s.
There is still hope though. If, for example, you can’t save much during your 20s, but you start to ramp up your savings in your 30s, you could still end up with more than $3 million by the time you retire. Check out some of these other good reads for more tips around saving for retirement: