CAS News
Samantha Webster Earns CFP® Certification
We are proud to announce that Samantha has earned her CERTIFIED FINANCIAL PLANNER™ certification!
Samantha’s hard work and dedication reflect our firm’s unwavering commitment to expanding our financial planning acumen and delivering knowledgeable guidance to our clients.
“Samantha has demonstrated a consistent willingness to learn and grow in her role as an associate advisor,” said Ray Ciccarelli, Vice President of Ciccarelli Advisory Services. “Her educational achievement is a prime example of her dedication to serving the ever-changing needs of our client families.”
In light of Samantha’s completion of the CFP® program, Ciccarelli Advisory Services now has 10 CERTIFIED FINANCIAL PLANNER™ professionals on our team!
The CFP® certification is regarded as one of the most prestigious and rigorous financial education programs. By completing all of the requirements, Samantha has developed a strong foundational knowledge of essential financial planning concepts, including:
- The financial planning process and
regulatory - Planning for retirement needs;
- Investment management;
- Insurance planning;
- Income taxation; and
- Estate planning.
Congratulations, Samantha!
Investment advisory services offered through Ciccarelli Advisory Services Inc., a registered investment adviser independent of FSC Securities Corporation. Securities and additional investment advisory services offered through FSC Securities Corporation, Member FINRA/SIPC and a registered investment adviser. 9601 Tamiami Trl N, Naples, FL 34108. 239-262-6577.
Start the New Year Fresh with Leisure and Finances
We’ve all heard the New Year’s resolution clichés – lose weight, eat healthier, learn a new language or skill, and so on. After all, what better time than the New Year to reflect on years gone by and to build a bold vision for the future?
One New Year’s resolution that is often overlooked is leisure and time management. We all have a finite amount of time at our disposal, and your financial circumstances often are the greatest constraint on your ability to be free from obligations and to enjoy leisure time with family and friends (as well as the much-coveted time for self-care and relaxation!).
Will your leisure time be worry-free? To maximize the enjoyment you obtain from your free time, you must actively prepare for it. Simply put, leisure is a financial priority that requires careful planning.
A crucial step in preparing for your leisure time – especially for those who are approaching or have recently begun retirement – is to update your net-worth statement at least once a year. The New Year is the ideal time to take a fresh look at your circumstances and determine your budget – not only for how you spend your money, but also for how you spend your time.
If you are excited by the prospect of creating a net-worth statement, you are in a small minority. For many women, reviewing financial statements and documents is often perceived as an overwhelming task. However, the benefits of understanding your financial positioning – and the associated leisure time that your financial situation affords you – is the key to helping you gain real fulfillment from your leisure time with less anxiety and more confidence.
A net-worth statement provides a succinct but comprehensive overview of your full financial picture. Your net worth statement serves four primary purposes: it documents where you stand financially, creates a reminder to take action, serves as a starting point for locating assets when necessary, and provides a tool to help you make informed decisions.
Where Do I Start?
The first step is to track down all of the accounts and other assets you own, which include (but are not limited to): bank/brokerage accounts, mutual funds, retirement and benefit plans, insurance policies, certificates, bonds, notes held, personal property and real estate. Note that jointly held assets and trusts should also be included. An experienced financial advisor can be instrumental in sorting through the details and illuminating the big picture.
Once you’ve listed each account, document how the assets are held (i.e. joint, individual, trust, qualified plan, etc.), the account numbers, and their current value. If any of your holdings are not clearly valued, include it on your net-worth statement with a value of $1. If desired, you may want to map out all of this information using a flow chart or a similar visual organization tool.
Now that your net-worth statement is compiled, the big question is: How do my financial circumstances impact my freedom to fulfill the most important priorities in my life? As with all aspects of your life, if you focus on a direction and continue to map out your journey, you will increase the probability of reaching your destination – in this case, to achieve the most quality leisure time possible.
Key Questions to Consider
✔With your net-worth statement in mind, hereIn addition to reviewing these short-term considerations, you will want to put your net-worth sheet in the context of your 3-5 year financial strategy. This is a great way for couples to determine if you are on the same page emotionally and with regards to their shared vision. Talk openly about your concerns and goals, focusing on a plan that works for both of you.
On behalf of our CAS family team, Happy New Year and happy planning!
Investment advisory services offered through Ciccarelli Advisory Services, Inc., a registered investment adviser independent of FSC Securities Corporation. Securities and additional investment advisory services offered through FSC Securities Corporation, member FINRA/SIPC and a registered investment adviser. 9601 Tamiami Trail North, Naples, FL. 239-262-6577.
Driving Meaningful Philanthropy – A Guide to Charitable Giving Vehicles
By Kim Ciccarelli Kantor, CFP®, CAP®
Pledging your hard-earned money to support a good cause can be an enormously gratifying experience. To further enhance the power of your charitable giving, however, you may want to consider planning your philanthropy in advance with the guidance of your advisory team and your family.
A strategic approach to planned giving provides you with the opportunity to (1) maximize tax efficiencies; (2) build a sustainable, organized framework for your family’s charitable giving as a component of your wealth management plan; and (3) enrich and educate your children and grandchildren about the positive impact of philanthropy.
Many vehicles exist that can drive meaningful philanthropy for years to come. Each charitable giving method is distinctive in its structure and the results generated. Here is a brief overview of five popular charitable vehicles that could be successfully implemented in your family’s full financial picture:
Charitable Lead Trusts provides income to a charity of your choice for a specific time period. Upon termination, the remainder reverts to the original donor or another beneficiary. CLTs are especially effective when the primary donor has assets that are expected to appreciate and to be inherited by your loved ones.
Charitable Remainder Trusts are essentially the inverse of charitable lead trusts. Charitable remainder trusts provide income to a non-charitable beneficiary for a specified time period, with the remainder being passed to the charity. CRTs are useful for donors with highly appreciated assets who need additional income and would like to diversify their holdings.
Donor-Advised Funds serve as a conduit between your family and a community foundation or charitable organization. The donor funds an account and may select an investment strategy that reflects their goals. DAFs provide a great deal of flexibility in establishing a personalized timetable for recommending grants to specific qualified charities. The donor can also appoint successor advisors (i.e. family members) to sustain charitable endeavors for future generations.
Endowment Funds are established by a community foundation or public charity that makes consistent withdrawals to support either a specific need or the organization’s operating costs. Endowment funds are perpetual in nature and may be initiated during the donor’s lifetime or as part of their legacy plan.
Pooled Income Funds is a charitable fund maintained by a public charity which generates income for life to the donor and grants the remainder interest to a designated charity. The fund receives contributions from the donor that are pooled for investment and administrative purposes. A qualified charity will receive the remainder interest. Pooled income funds present a great opportunity for significant tax deductions, extensive family involvement and flexibility.
Your selection of charitable vehicle will depend upon your unique personal circumstances. Discuss these options with your advisor and family to identify which choice will best enrich your current philanthropic goals and suit your family dynamics.
Year-End Charitable Gifting FAQs
By Kim Ciccarelli Kantor, CFP®, CAP®
If you are making charitable donations this holiday season, you stand to benefit from understanding the potential tax savings that can be achieved through proper planning. By addressing these three frequently asked questions about year-end philanthropy, you can strategically maximize the impact of your gift.
How do I deduct charitable gifts from my tax return? To deduct charitable donations, you must itemize them on the IRS’ Schedule A and save documentation in case of an audit. The IRS needs to know three things: the name of the charity, the gifted amount and the date of your gift.
From a tax planning standpoint, claiming itemized deductions is only worthwhile when these line items exceed the standard income tax deduction ($12,000 for individuals, $18,000 for heads of household, $24,000 for joint filers).
Also, in order to qualify for an itemized deduction, your donation must go towards a qualified charity with 501(c)(3) non-profit status. To verify the tax-exempt status of your favorite charities – and to discover more about how effectively the organization utilizes donations – visit www.CharityNavigator.org.
Is it more beneficial to make outright gifts of cash or to donate other assets? Donating securities – especially those that you have held for more than one year – can be a tax-savvy move. By authorizing your bank or brokerage institution to transfer shares directly to a charity, you can avoid paying the capital gains tax on assets you have held for more than one year.
Additionally, you can take a current-year tax deduction for the full fair market value of the donated shares, and the charity will receive the full before-tax value of the shares.
As a retiree, what are some other tax-efficient methods for charitable giving? If you are not dependent on the income generated from your traditional IRA, you may consider making a qualified charitable distribution (QCD) from your account.
Traditional IRA owners ages 70½ and older can arrange direct transfers of up to $100,000/year from an IRA to a qualified charity. The full amount of your annual QCD is excluded from your adjusted gross income for the year, and these gifts can satisfy some or all of your required minimum distributions.
Secondly, if you have an unneeded life insurance policy, you might consider gifting that policy to a qualified charity. In doing so, you can benefit from a current-year income tax deduction; and if you keep paying the policy premiums, each payment could become a deductible charitable donation.
A donor-advised fund (DAF) can also be a viable option for providing you with a significant charitable deduction. Especially given the changes to the standard deduction under the new tax law, utilizing a donor-advised fund for your philanthropic endeavors can provide you with a larger itemized deduction today for ongoing grants to your preferred charities in future years.
Your planned giving strategy will depend upon your individual circumstances and the nuances of your family’s wealth management plan. Plan well and your efforts will be rewarded!
A Roadmap to Better Health Care
By Lynn A. Ferraina | èBella Magazine | December 2018
Your financial plan serves as the cornerstone of your retirement, providing you with the foundation you need to enjoy your desired retirement lifestyle. That being said, an effective financial plan goes beyond the management of your assets and investments.
Health care is an issue that impacts everyone in a deeply personal way, especially as we enter the golden years of retirement.
Given the steadily rising costs of services and the ever-growing complexity of health care decision-making, the need to weigh legal and medical considerations has never been more critical for promoting your continued financial success.
I interviewed Jill Ciccarelli Rapps, a financial advisor at Ciccarelli Advisory Services, Inc.; Dr. Susan Cassidy, a physician and attorney who owns CriticalMD; and Marve Ann Alaimo, an estate planning attorney at Porter Wright to discuss how you can prepare for the inevitable medical decisions that lie in your future.
Q: What are the most common mistakes you see when evaluating a client’s health care plan?
Jill – Failing to communicate your wishes seems to be a common pitfall – not just the what, but also the why and how. You have to start the conversation early with the health care surrogates you have chosen to discuss these uncomfortable issues in a meaningful way.
Marve Ann – A common mistake I see is assuming that a living will and health care surrogate form are nothing more than boilerplate forms. But these documents are essential; they are more than just add-ons to a will or trust. The living will and health care surrogate documents require careful consideration.
Susan – It’s imperative to remember that, just like estate planning or financial planning are necessary, medical planning is equally important. You need your specific wishes and values to be in writing and official – all the way down to the specialized situations or complications you might face.
Q: Which legal documents will I need to ensure that I remain in control of my health care plan?
Marve Ann – The basic foundation would be a will and your health care documents – the living will and health care surrogate form. Within these documents, you need to address quality-of-life issues as they relate to your medical care. All of your other priorities also need to be documented formally.
Susan – On top of that foundation, I use a tool called a medical roadmap for care. The roadmap lays out your values and preferences, highlights major life transitions, and outlines how to make decisions about which medical interventions fit those values and preferences.
Q: What’s the best approach for talking to my family about my health care wishes?
Marve Ann – Ideally, you should gather all involved parties together for an in-person family meeting. Start by explaining the reasoning for your health care plan. One key reason is to prepare yourself to live a dignified life during the months or even years between incapacitation and death. Then, discuss who you have appointed as your surrogates (and why) and how that person should make decisions and communicate on your behalf.
Jill – We have had great success when a third-party moderator drives the health care discussion with the whole family. Select a facilitator who is independent and experienced. That person will often bring up questions that the family never even considered before. Of course, this health care discussion isn’t a one-time deal, either. The key for effective family communication is having these open conversations on a regular basis.
Q: What is the single most critical piece of health care planning advice you could provide for someone who is approaching retirement?
Jill – A well-thought-out health care plan is an integral part of an effective financial plan. Find an experienced advocate who can guide your family through your health care plan and handle the regular updates and maintenance of your plan. Working with your family dynamics and personal circumstances is a huge part of building a successful health care plan. It’s also a great opportunity to start engaging your children and get them thinking about their own plan.
Marve Ann – As people build their savings during their lifetime, the legal and financial considerations they face get more complex and difficult to navigate. There is a serious need to recognize the complexity of medical considerations and to prepare the appropriate legal base of documents that address the details of your plan.
Susan – Communication alone is not enough for your health care plan. You must draft your plan! That means having official written documents that reflect the values that are important to you. Many doctors don’t have the training to read legal documents and may misinterpret your wishes if the living will is not laid out clearly. Without detailed, well-drafted documents, you could put yourself in a position where the care you receive actually induces more suffering.
9 Tax-Saving Opportunities for 2018
By Steven T. Merkel, CFP®, ChFC®
With the passage of the Tax Cuts and Jobs Act of 2018, the tax planning landscape has changed significantly since last year – presenting new challenges and opportunities for our clients.
While your family’s circumstances are unique, most of the suggestions below are widely applicable for promoting year-end tax efficiency and keeping more money in your pocket as we enter the New Year.
Important: All of the following actions need to be completed before December 31, 2018, in order to achieve any tax benefit. Your CAS advisor can provide strategic direction on how to best apply our general recommendations to your specific financial plan.
#1 – Make the Most of the Annual Gift Tax Exclusion
The gift tax exemption has been increased to its highest level in history. In 2018, individual filers can gift up to $15,000 to each family member (joint filers can gift up to $30,000 per beneficiary).
Example: If you and your spouse have three children, you can give up to $30,000 to each child ($90,000 total) without paying any gift taxes.
Capitalizing on the annual gift tax exclusion is an effective way to reduce your taxable estate while providing your loved ones with a financial boost to end the year.
#2 – Take All Required Minimum Distributions (RMDs) for Individual Retirement Accounts (IRAs)
If you own one or more IRAs and are age 70½ or older, ensure that you have taken your required minimum distributions for each account. This includes RMDs for all inherited IRAs of which you are listed as the beneficiary.
Failure to take the annual RMDs can result in a penalty tax of 50% on the shortfall. For instance, if you were required to take distributions of $5,000 from an IRA in 2018 – but only withdrew $1,000 – you would owe the IRS $2,000 (half of the remaining RMD).
#3 – Maximize Retirement Plan Contributions
If you are under age 70½ and have been contributing to a retirement plan – a 401(k), traditional or Roth IRA, SEP IRA, etc. – you could benefit from making the maximum contribution to each plan.
In 2018, the limit on total combined contributions you can make to all of your traditional and Roth IRAs is $5,500 ($6,500 if you are above age 50). SEP IRAs and 401(k)s are also subject to annual contribution caps.
By reaching the limit each year, you will be taking full advantage of the tax-deferred benefits offered through these retirement accounts.
#4 – Evaluate Tax Loss Harvesting Opportunities
Especially with the recent downturn in many sectors of the domestic and international markets, you may want to consider selling some positions that have lost market value.
By “harvesting” this loss, you can leverage the decrease in value to offset taxes on both capital gains and income.
Tax loss harvesting can be an effective way to remove struggling stocks from your portfolio while also reducing your tax burden. Ask your advisor whether this strategy would be appropriate for your financial circumstances.
#5 – Be Smart with Charitable Giving
If you are age 70½ or older, you are eligible to make qualified charitable contributions (QCDs) directly from an IRA. You may transfer up to $100,000/year to the charity of your choice with no tax liability.
Important: Retain all of your receipts and written records of charitable gifts (including cash, property and appreciated assets) in the event that you are audited by the IRS.
Other tax-efficient strategies for your year-end charitable giving include donating to a private foundation, donor-advised fund (DAF), or charitable remainder trust.
Prior to the New Year, we will send you a more detailed breakdown of best practices for end-of-year charitable giving.
#6 – Utilize Health Savings Accounts (HSAs)
For those of you who are enrolled in a high-deductible health insurance plan, you may be eligible for a health savings account (HSA).
These savings accounts can be advantageous from a tax standpoint when you use your funds on qualified medical expenses. In addition, the funds can roll over and accumulate from year to year if they are not spent.
If you are eligible for an HSA, we recommend making a contribution each year (the appropriate amount is contingent on your anticipated medical expenses and other factors). The maximum annual contribution for an individual HSA is $3,450; for family HSAs, the limit is $6,900.
#7 – Establish and Contribute to 529 Plans
Another tax-advantaged account to consider is 529 plans. These education savings accounts can be established on behalf of your child or grandchild, and the earning accrued are completely tax-free if the distributions are spent on qualified education expenses.
In most cases, an individual may gift up to $15,000/year per beneficiary ($30,000 annually for married couples) to a 529 plan without gift tax consequences (see our previous article on 529 plans for more details).
#8 – Compare New Standard Deduction to Anticipated Itemized Deductions
The standard deduction for 2018 is significantly higher than in previous years (see table below). As a result, those of you who have typically itemized your tax deductions may find it more difficult to do so this year.
It may be in your best interest to shift (or “bundle”) some of your current-year deductions to 2019 if your itemized deductions for 2018 will be less than the standard deduction.
#9 – Check All Beneficiary Designations
Ensure that the desired beneficiaries are listed on all of your accounts, including (but not limited to) employer benefits, IRAs, life insurance policies, and annuities. Complete a new beneficiary form if your listings are inaccurate or out of date.
Also, adding “TOD” (transfer on death) to all taxable accounts is a great way to allow your beneficiaries to receive assets from your investment accounts after you pass without going through the probate process.
For more guidance on how to update your beneficiaries, see our article on the topic.
As we close out 2018, make sure that you are not missing out on any opportunities to reduce your tax burden for the year. As always, our team is happy to guide you through these action items to help preserve and enhance your family’s financial wellness.
For more details on how the new tax law could impact you, check out our comprehensive presentation.
Kim Ciccarelli Kantor and FSC Securities Corporation do not offer tax advice or tax services. Please consult your tax specialist for individual advice. We make no specific comments or recommendations on any tax-related details.
Education – The Gift that Keeps on Giving
Reinforcing the Value of College Savings for Future Generations
By Kay Anderson, CFP®
The economic landscape of the U.S. has shifted considerably over the past 30 years. As the U.S. has steadily lost our comparative advantage as a manufacturing powerhouse (largely due to automation and inexpensive overseas labor), high-skilled service positions have emerged as the greatest opportunity for gainful employment in the 21st century.
Fortunately, the job market has been thriving for the past several years. The October 2018 BLS report found that the national unemployment rate is 3.7% – the lowest level since 1969. In October alone, 250,000 jobs were added. While strong job creation trends are encouraging, the new openings will increasingly demand that workers possess a strong educational background.
A Georgetown University report projected that there will be 55 million jobs created in the U.S. economy through 2020. Of these job opportunities, 24 million openings will be newly created, whereas 31 million openings will result from Baby Boomer retirements.
About two-thirds of these job openings will require higher education: 35% of the jobs will require prospective employees to earn a bachelor’s or graduate degree, and 30% will demand an associate’s degree or some college.
As a result of these employment trends, enrollment in American colleges and universities has reached an all-time high, with a projected student enrollment of 19.9 million students in fall 2018 (a 23% increase in enrollment since fall 2000).
Without question, the need for postsecondary education has never been more vital to achieving success in your career. To gain a competitive edge in today’s workplace, younger generations must embrace some form of training or education beyond a high school diploma.
Figures 1 and 2. As job openings for high-school-educated workers have sharply declined since the 1980s – and especially since the Great Recession – employees with Bachelor’s degree or other college experience have seen expanded job opportunities.
Demand for Higher Education Drives Skyrocketing Costs
As employers have continued to embrace a college-educated workforce over the past 30 years, the cost of college tuition and fees has risen dramatically. According to the College Board, the cost of a four-year degree from a public college or university has tripled since 1988 (when adjusting for inflation).
During the same timeframe, the inflation-adjusted cost of earning an associate’s degree or a four-year degree from a private college has doubled (see figure 3).
Even within the past 10 years, the expenses associated with college have steadily increased – not only for tuition and fees but also for room and board, books, supplies and other expenses (see figure 4).
An analysis by the College Board found that the average tuition and fees for public, in-state, four-year institutions have increased by 3.1% annually between 2008 and 2018 (adjusted for inflation).
The cost of attending a private college or university has followed a similar trend; in the past year alone, their average tuition and fees rose by 3.3% (before adjusting for inflation).
Contact your CAS advisor for a personalized estimate on future college expenses for your child or grandchild.
Figure 3. Tuition and fees for postsecondary education have skyrocketed since 1988, and the upward trajectory continues to hold steady.
Figure 4. The cost of attending a four-year college – including associated expenses like room/board and books – ranges from about $25,000 to $52,000 per year (before financial aid and scholarships are applied).
About 529 Plans – An Ideal Vehicle for Education Savings
While there are many ways to save for college, 529 plans are widely considered to be the “gold standard” for building financial preparedness throughout your child or grandchild’s college experience.
How does it work?
A 529 plan can be established with a principal as small as $250. Each 529 plan is controlled by an owner (usually a parent or grandparent) who has discretion over the investments and the beneficiary listed. The beneficiary on a 529 account may be changed at any time based on the needs of your family.
When the account is established, you may elect to make monthly, quarterly or annual contributions. You should also ensure that a contingent owner is named on the account, in the event that the main owner is no longer able to manage the 529 plan.
Best of all, the earnings within a 529 account are exempt from federal taxes. As long as the funds are used towards qualified educational expenses – tuition and fees, books and supplies, room and board, and computers or other equipment – you will never pay taxes on the gains.
In addition, while contributions to the 529 plan are not deductible at the federal level, many states do offer a tax credit or deduction on your state income taxes (see figure 5 for details).
New for 2018: Funds from a 529 plan can now be used to pay tuition at private K-12 schools as well (annual limit of $10,000 in distributions per child).
What are the limitations?
Once the account is established, anyone can contribute to the 529 plan. It is not restricted to contributions from the owner only. For instance, if you have multiple family members that want to provide financial support for a child’s educational pursuits, you can all deposit into the one account.
An individual may gift up to $15,000/year per beneficiary ($30,000 annually for married couples) without gift tax consequences.
Exception: The “five-year rule” for 529 plans allows you to make a one-time, lump-sum contribution while bundling five years’ worth of annual exclusions. In other words, an individual may provide an initial contribution of up to $75,000 to the 529 plan ($150,000 for married couples). If you elect to go this route, a gift tax return (709) does need to be filed for informational purposes only; no gift tax will be due.
The five-year rule allows you to start out with a larger principal and potentially build more gains over time. However, you may not contribute any additional funds to the account during the next five years.
Our team would be happy to discuss the optimal strategy for establishing and funding 529 plans based on your family’s unique situation.
Figure 5. Many states offer tax incentives for families who contribute to their child or grandchild’s 529 plan.
Make it Personal – Strategies for Gifting Education to Family
Each year around the holidays, my niece Victoria would receive an abundance of gifts from her parents, grandparents and great-grandparents. Like many families, we would spend every Christmas morning opening the gifts, and then spend the next week figuring out where to put them all!
When Victoria was five years old, I decided to take an unconventional approach to her holiday gifts. Instead of purchasing the latest tech gadget or a new outfit, I established a 529 plan and named her as the beneficiary (of course, I still have a small wrapped gift for her under the tree!).
I started making monthly contributions to the plan; and at the end of each year, we review the statement together and talk about her dreams for the future. As with most young children, her career aspirations are always changing over time – from a veterinarian, to a teacher, to her latest desire to be the next pop superstar!
Our annual discussions about her future are a fun and easy way to connect with her. These holiday meetings provide a great opportunity to help Victoria learn more about money, education and the importance of savings. Every year, she asks me more questions and builds on her foundation of practical knowledge.
Most importantly, I feel confident that whatever path she chooses after high school, my family and I will be there to support her dreams.
Our team has also created “529 gift certificates” on behalf of clients who have been funding an account for a family member. These certificates are a fun and visually appealing way to announce the educational savings to your child or grandchild and provide a tangible reminder of your commitment to their future success. Ask your advisor for more details about our certificates.
Given the importance of higher education in attaining a successful career – and the astronomical cost of today’s college experience – the need to start saving early and often has never been more crucial.
A 529 plan provides you with a tax-advantaged means of empowering your child or grandchild to pursue their educational aspirations, while also reducing their potential student loan debt burden. In addition, a 529 plan can serve as an excellent way to teach young people about the importance of consistent saving and the value of their future collegiate endeavors.
Simply put, 529 plans are the gift that keeps on giving!
2019 Client Appreciation Event – RSVP Here!
Remaining Calm throughout the Storm: Understanding Market Volatility
By Jasen Gilbert, CFP®
As I was returning home from a conference in Pennsylvania, I rode at the back of a bus on my way to the Philadelphia airport. On that 40-minute commute, I experienced one of the bumpiest roads of my life. With every pothole and every crack, I lurched in my seat and was thrown around like a rag doll. As I got off the bus, I was green in the face.
Bumps in the road can often be jarring and downright sickening – not only as it relates to my perilous journey on I-76, but also when we experience the ups and downs of a volatile market. As an investor, you are taken for a ride on an emotional roller coaster when the markets fluctuate – from hopeful and elated to alarmed and desolate.
The impulse to run away from the market during a correction period is totally natural and inherently human. Our fight-or-flight response – triggered by the amygdala region of the brain – causes our adrenaline to surge and sparks feelings of anxiety and distress. While this function is essential to our survival, the amygdala can also cause us undue stress when the source of our concern is largely beyond our control.
However, if we take a step back and put the immediate state of play into the broader, long-term context, we can overcome the “alarm bells” of our amygdala. Simply put, the market has always gone down and has always gone back up. Those who stay the course are often rewarded. In addition, volatile market conditions can present significant opportunities for savvy investors.
Why the Volatility?
In a deeply interconnected global economy, a wide variety of factors – both at home and abroad – are contributing to the current volatility. While a comprehensive list of factors is beyond the scope of this article, we will highlight the major current events that are driving the market fluctuations.
If you’ve been keeping up on your business news lately, you will likely be familiar with these topics. These stories have dominated the headlines.
Domestically, the adoption of tariffs has raised concerns for industries that depend on imported goods and for companies that sell their products overseas. In a similar vein, the recent revisions to NAFTA and discussions of other agreements have caused some uncertainty in the realm of international free trade.
Additionally, the Federal Reserve has continued to incrementally raise the federal funds rates (now set at 2.25%); while these rates are historically low compared to their pre-2008 levels, there has been a substantial increase since 2017 (when the rate was 0.5%). These three factors are driving much of the anxiety in the domestic sector.
In international news, the Chinese stock market has been careening downward since January. After reaching an all-time high of 3,559 on January 24, the Shanghai Stock Exchange Composite Index has fallen to 2,602 as of October 31 (a 26.8% decrease). The ripple effect of China’s economic woes can be felt worldwide.
Across the pond, the negotiations for Brexit still hang in the balance. By many indications, the divorce between the European Union and the UK could be a messy one.
In addition, Italy’s 2019 draft budget has been rejected by the EU. As seen in Greece, the massive debt incurred by Italy – coupled with the economic strain of the EU’s austerity measures – could be dire for Italy, and these factors have prompted murmurs of an Italian exit from the international alliance.
Lastly, leadership changes in Mexico (a new populist president, Enrique Peña Nieto) and in Brazil (a new far-right president, Jair Bolsonaro, who has advocated pro-market policies) could influence the investor outlook in the Latin American sector, as well as U.S. interests that are enmeshed in the region.
Without question, the global economy has never been more complicated and intertwined – and the future is sure to be filled with even more complexity. That being said, the level of volatility we are seeing today is not a new phenomenon.
Zoom Out to Bring the Full Picture into View
Despite the alarming nature of these recent financial news headlines, the reality is likely far less scary than we are inclined to believe. Let’s calm down our amygdala by putting the current situation into proper historical context!
On the graph below, you can see the annual performance data of the S&P 500 for each year since 1980. The gray bar represents the annual percentage of return; the red boxes represent intra-year declines – the difference between the highest and lowest points of the index during each particular year – as a measure of market volatility.
In 2017, the S&P 500 experienced a fairly steady market trend, where the strong upward trajectory was not offset by any significant corrections. In the first 10 months of 2018, we have seen a noticeable increase in volatility. However, the year-to-date market performance is still well within the historical norm.
With an intra-year decline of 10% in 2018, the circumstances facing the S&P 500 are far from dire and are quite comparable to the course taken by the markets in 2016. Also note that even in years where the intra-year declines were substantially larger (between 11-19%), the average calendar year return was 7.6%. For this reason, staying the course when the markets get choppy is often a wise decision.
The Greatest Opportunity
As investing legend Warren Buffett has famously said, “Be fearful when others are greedy and greedy when others are fearful.” Without a doubt, a correction period presents the potential to tap into significant financial planning opportunities:
- Buying opportunities for accumulators: If you are a career-focused professional who is actively saving money for retirement, corrections are essentially a seasonal sale on stocks. In many cases, it may behoove you to put your cash to work when the market takes a dip.
- Tax loss harvesting: You may want to consider selling some positions that have lost market value. By “harvesting” this loss, you can leverage the decrease in value to offset taxes on both capital gains and income. Tax loss harvesting can be an effective way to remove struggling stocks from your portfolio while also reducing your tax burden.
- Rebalancing: In some cases, it may be beneficial to revisit your asset allocation and identify areas for enhancement. The recent losses and volatility are not evenly distributed among asset classes; some sectors are performing well or holding steady, whereas others are lagging. Rebalancing allows you to reinvest the profits from an outperforming stock or industry into a different asset class that could have greater growth potential, while also maintaining a diversified portfolio to hedge against risk.
If the bumps in the road we have been experiencing in the market are causing your stomach to churn, you are not alone. You are human! We are hard-wired to react emotionally when the market slides. The often-sensationalized media coverage of current events and financial news also fuels the fear response and apprehension about staying in the market.
However, when we look at the big picture of market performance over the long haul, we find that – in many cases – the most prudent course of action is to (1) stay the course and (2) capitalize on any untapped opportunities that may arise as a result of the correction.
Fortunately, your CAS advisor is always available to help you look past the fear and anxiety, bring the big picture into focus, and explore the possibilities for maximizing your upside as we weather the turbulent tides of volatility.
CAS Rochester Market Wrap 2018
Our Rochester office hosted the annual Market Wrap event on Thursday, October 25. Nearly 150 of our clients convened for Ray Ciccarelli’s annual remarks focused on the current state of the market, the economy, employment and happenings around the globe.
There was a chill in the air as clients arrived, as is typical when autumn arrives in Western NY. With the backdrop of the lush green lawns of the Monroe Golf Club and an inviting harvest décor, the clients were welcomed into the ballroom by the warmth of our CAS team!
Following Ray’s remarks and an engaging Q&A session, the clients savored a lavish dessert buffet. Gourmet decorated apples were the favor for the evening. Most importantly, clients left feeling better able to weather the cold and the volatility that lies ahead!
