Major stock indices in the United States and overseas are poised to deliver double-digit gains for the year. Even with uncertainty about Britain’s exit from the European Union (EU), the FTSE 100 boasted a gain of more than 10 percent at the end of last week. That’s not bad for a year which included (in the United States) an inverted yield curve, an earnings recession, and a contentious trade war.
The strong stock market performance of 2019 owes a lot to central banks, and so does the performance of the bond market. Reuters reported,
“…the screeching change of direction by the world’s top central banks, led by the Federal Reserve, which cut U.S. interest rates for the first time since the financial crisis more than a decade earlier…fired bond markets up like a rocket. U.S. Treasuries, the world’s benchmark government IOU, have made a whopping 9.4 percent after yields plunged as much as 120 basis points…German Bunds – Europe’s safest asset – have had their best year in five years, making roughly 5.5% in euro terms as the European Central Bank has reversed course too.”
So, what lessons should we take from 2019?
Perhaps, we should try to come to terms with loss aversion. When you make an investment decision, it’s important to consider the impact of loss aversion on your thinking. The pain from a loss carries twice the impact of the pleasure from a gain. As a result, fear of loss may affect investment decision making.
2019 offered a great example. During a year of exceptional returns, investors pulled money out of stocks at a record pace because they were worried about recession and other issues. Axios reported,
“Data from the Investment Company Institute shows money has been pulled out of [stock investments] in every month this year except January. In total, more than $130 billion has been drawn from [stock investments] in 2019, making it already the largest year of outflows on record.”
When it comes to investing, uncertainty is normal. It is part of investing. Tolerating uncertainty may help investors earn attractive returns. As a result, our advice is to stay invested even when uncertainty makes you nervous, even when markets are falling.
If you have a diversified portfolio built to help you reach your goals, stay with it, unless you risk tolerance has changed. In 2019, pulling money out of stocks meant some investors missed out on some exceptional returns.
|Data as of 12/20/19
|S&P 500 (Domestic Stocks)
|Dow Jones Global ex-U.S.
|10-yr Treasury Note (Yield Only)
|Gold (per ounce)
|Bloomberg Commodity Index
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend)
and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of
the historical time periods.
Sources: Yahoo! Finance, MarketWatch, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.
The secure act may affect your retirement and your legacy planning…Last week, reports indicated the ‘Setting Every Community Up for Retirement Enhancement’ (SECURE) Act was attached to the federal spending bill President Trump signed into law on Friday.
The SECURE Act is intended to expand retirement savings opportunities. Many of its provisions make it easier for Americans to save more for retirement and, also, to convert their savings into income for retirement. The Act will change IRA rules in some significant ways. For instance, Drinker Biddle and Barron’s reported:
- Contribute to IRA accounts at any age. In the past, Americans had to stop contributing to IRAs at age 70 ½.
- Begin taking required minimum distributions (RMDs) at age 72. The age for RMDs was pushed to 72 from age 70 ½.
The Act also changes post-death IRA distribution rules, eliminating stretch IRA estate planning strategies. Barron’s explained, “Under the bill, beneficiaries of an IRA would need to draw down the account – and pay income tax on the money – over a decade, rather than a lifetime.” This will affect some legacy planning strategies and necessitate the adoption of alternative solutions.
Workplace plans may change, too. Part-time workers are now eligible to participate in defined contribution plans as long as certain criteria are met. The Act also made it easier for defined contribution plans of all sizes to add lifetime income options to plan investment lineups.
In addition, the incentive for smaller business owners to establish workplace retirement plans increased. Tax credits, of up to $5,000 for three years, can be claimed to offset plan start-up costs. Additional tax credits are possible when new plans include automatic enrollment features or existing plans add automatic enrollment features.
If you would like to discuss how the SECURE Act may affect your retirement, business, or legacy plans, please give us a call.
Weekly Focus – Think About It
“I feel that one of the most important lessons that can be learned is that what we ‘see’ may be different than what is actually in front of us.”
–Mark Singer, Journalist 
Dean, Jacobson Financial Services