Learn financial planning and investment management strategies to make sure you have a successful 2019 with financial advisor and podcast host, Doug Fabian. Doug will cover market performance in the last couple of months of 2018, how to assess the year in terms of the performance of your investment strategies, and insights he gained from a recent wealth management coaching session, including the importance of identifying your top financial goals and determining if those goals are being met by your portfolio of assets.
How was your 2018 in markets? Well, if you were fully invested in either U.S. or international stocks this year, you probably aren’t thrilled with the outcome. At least, not as thrilled as you were this time a year ago.
In this episode of the Science of Economic Freedom, “How to Prepare for a Successful 2019,” we cover three separate but related wealth management segments and tie then them all together.
In segment one, we discuss markets, and specifically the struggles in the markets over the past couple of months. And despite these struggles, I see several positive tailwinds brewing that could lift stocks in 2019.
In segment two, we go over how to assess 2018, not just in terms of the performance of the securities you own, but also how you are doing on your “personal balance sheet,” i.e., how was your cash flow, have you saved enough, did you revisit your assets and liabilities?
In the final segment, I share with you a little insight I gleaned from a recent wealth management coaching session. That insight includes the importance of identifying your top financial goals, and then determining if those goals are being met by your current portfolio.
Plus, the five financial planning action steps you must to make sure you have a successful 2019.
“Doug Fabian: Today, on the Science of Economic Freedom, we’re going to talk about your success in 2019. What are the first steps that you should be taking in order to make 2019 the best year it could possibly be, and what should you look back on from your experiences in 2018? We’ll discuss all that and more on this episode of the Science of Economic Freedom.
Male Voice: The Science of Economic Freedom is intended as an investor education resource. The views and opinions expressed on this program should not be construed as a recommendation to buy, sell, or hold any specific security. Consult your investment advisor and read any investment prospectus carefully before making any changes to your investment portfolio. This program is sponsored by Mercer Advisors. Mercer Global Advisors Inc. is registered with the Securities and Exchange Commission and delivers all investment related services. Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services.
Doug Fabian: Welcome to the Science of Economic Freedom. I’m your host, Doug Fabian. This podcast is all about helping you achieve your financial dreams. We call that economic freedom. This program is all about your journey to achieve economic freedom for yourself and your loved ones. Today, we want to help you identify your next step on that journey.
This is Episode 40 – How to Prepare for a Successful 2019. One of the things I’m going to do today is go back to an old format that I used in my previous podcast where I talk about three different subjects today.
Today, we’re going to talk about the markets. Not in great detail, but I want to give you some positive news in light of the market correction that’s still ongoing.
Second, we’re going to talk about the subject du jours, which is how to prepare for a successful 2019 and what we can do to start that process right now.
And then, lastly, I want to take you behind the scenes. I want to talk to you about a wealth coaching conversation I’ve had this past week with a listener because I think that there are some important lessons for us to think about as we’re closing out 2018 and moving towards 2019.
So let’s jump in. First of all, market news. Year-to-date, most of the major indices here in the United States are flat. International indexes are down anywhere from 5 to 10%. Now, there is some good news out there. What we’ve heard of late is the Fed may be close to the end of its interest rate cycle hikes.
So before people are still talking about how the Fed is going to be continuing to raise interest rates into 2019, we still have one more Fed meeting left in 2018, and maybe we have one Fed hike left in this market cycle.
Second, there appears to be, despite all the volatility of the headlines, there appears to be progress on the China tariff trade front. We will just continue to be hopeful there, nothing we can do about it.
But one of the things that I’ve been noticing is I’ve been watching the major indexes for the Chinese stock market and they have bottomed and started to go up into a new positive trend, so we’ll see what that takes us as we go into 2019.
I want you all to remember that the US economy remains strong. When you take a look at just anecdotal evidence, people are busy, traffic is bad here in Southern California, restaurants are full, shopping malls are full, and holiday season here, so the US economy is clicking right along.
Energy prices are down. Oil prices are down more than 30%. Even here in California, we’ve seen gas prices now fall below $4.00 a gallon. So the fact that energy is not a headwind as it was not that long ago, Labor Day we had some of the highest gas prices in years, so we have seen a big correction in oil, and that equates to a little bit of a raise for everybody with lower gas prices.
And then, lastly, I want to mention the international markets. Historically, and I just made a presentation at a client event in Scottsdale, Arizona, for Mercer Advisors, and I was talking about the international markets, historically, the emerging markets are the top performing market, looking at the last 40 years or so, emerging markets have compounded at about 12%.
International stocks and US stocks are right around 10%. So when we go through periods of time when international stocks are underperforming like the have in 2018, there is a tendency for investors to abandon international stocks.
I want to remind everybody that international stocks, both the emerging markets and developed markets, had a great year in 2017, handily outperforming the S&P 500, but this year, they’re down, down anywhere from 10 to 15%.
So one of the good things that I’m seeing from that is the fact that valuations internationally, if you just look at price to earnings ratios, are better than that in the US. The moral of that story is, don’t abandon your international investments because of a period of underperformance.
If you did not listen to last week’s episode, which is titled Market Talk with Don Calcagni, Don is Chief Investment Officer for Mercer Advisors, I would encourage you to do so. Don gave a great overview of what’s happening in the financial markets right now, in Episode 39.
And then, a reminder, let’s just state the obvious, we’re in a stock market correction. We are in the middle of a range of a 10% correction, down towards the bottom end of that range. The correction could come to an end at any time or it could extend lower. But during market correction it’s important to keep your head on straight. So I would encourage you to listen to Episode 28 – How to Navigate a Stock Market Correction.
Let’s move on to my next subject which is how do we have a successful 2019? Well, in order to have a successful 2019, we ought to take a look at 2018 and see how things have done. And there are some specific things that I want you to look at relative to 2018.
Now, one of the things, I’ll just say, and this is a simple assignment, and you will need to wait until the end of the year to pull this all together, but let’s start pulling together the balance sheet. Now, the balance sheet is the list of your assets and liabilities.
And one of the tools that we have for you at the scienceofeconomicfreedom.com is a special report entitled Balance Sheet Basics. And I just want to read you the first paragraph and the instructions in this special report.
What you’re worth equals your freedom. Your balance sheet reflects your assets and your liabilities. It is the sum of your net worth. When we talk about the achievement of economic freedom, it is the balance sheet that will provide the security, income, and peace of mind for those who achieve it.
We want to build our balance sheet. We want it to be healthy and strong. Most people are not in the habit of creating or even reviewing their assets and liabilities and this is a mistake. We want to change that with this report. I reread the report this morning, preparing for today’s show, I was really happy with the work we did on this report.
The actual worksheet, in order to be able to list out your assets and liabilities, is one page, and at the very top of that page are your most liquid assets. This is the cash you might have in your checking account or savings account in the bank.
And then, below that, you list liquid assets that are investable assets like stocks, bonds, mutual funds. Below that, you have your retirement assets. And as your working your way down the balance sheet, you’re going towards less liquid assets like your real estate holdings. They’re not as liquid as your cash or your mutual funds.
And then, on the right side of the balance sheet, we list the liabilities. This is where you would list your mortgage. Now, this might be obvious, but sometimes it’s good to talk about the obvious, the way that you build your balance sheet is you build it by saving money, by paying down debt, and getting a positive rate of return on your assets. Those are the three way you can change your balance sheet.
Now, we’ve got two types of listeners here today. We’ve got those listeners who are in accumulation mode, you’re still growing your assets, you’re not drawing upon your balance sheet yet.
And then we have those people who are in retirement and you may be drawing down on your balance sheet. Your taking your required minimum distribution, or your taking some distribution out of your assets to provide for your lifestyle. That’s what economic freedom is all about.
So when you take a look at 2018, how did you do in terms of building your balance sheet? Or, if you’re in retirement, how much did your balance sheet draw down, if any? These are important questions to ask because it drives the question how much are you saving?
Now, one of the things I wanted to bring up today, and I actually had one of my colleagues pull together this data, is I wanted to talk to you about retirement accounts and savings. And this is going to tie back to the wealth coaching session that I’m going to talk about in just a moment.
When I look at the data in terms of 2018 limits to savings, in a 401(k), you can contribute as much as $18,500, but if you are above age 50, you can contribute an additional $6,000. Roth IRA or a traditional IRA, you can contribute $5,500. If you’re over age 50, you can contribute another $1,000.
So one of the great ways to measure how you’re doing in terms of building your balance sheet is answering this question — did I maximize my retirement savings in 2018? Maybe you did, maybe you didn’t. It’s kind of a yes or no question. But when we’re thinking about 2019 and setting goals for 2019, maximizing your retirement accounts should be a goal for most people.
Now, if you’re self-employed, do you have other retirement options like a simple IRA or a SEP-IRA, there are many choices out there. I’m not going to go through all of those today. But the point that I wanted to hit on, the point that I wanted to emphasize, is the fact that we want to maximize our retirement accounts.
And you still have time to do that between now and the end of the year if you just look at that. Now, remember, with a traditional IRA contribution, which can be tax deductible for some people, you don’t have to make that contribution until April 15th.
But if you’re contributing to a 401(k), you need to take advantage of the 2018 limitations maximizations in 2018. You don’t have the ability to contribute to 2018 401(k) in 2019 because you’re going to start your contributions to your 2019 401(k).
Most of you know I’ve always been an investment guy, and one of the worlds that was opened up to me when I joined Mercer Advisors was the world of financial planning, and we have some absolutely outstanding financial planners as a part of our team.
But this whole concept of looking at your balance sheet was something that I really never did before until I joined Mercer Advisors and I have to say that it’s a very empowering exercise. And it’s an empowering exercise for everybody, especially those of you who are near or in retirement because it is not just your IRAs or your taxable account that’s going to support you, it’s all of your assets and the management of those assets.
And for those of you who are at the beginning of the journey, one of the great empowering exercises of establishing the habit of being a saver is monitoring your balance sheet, even if you’re 25 or 30 years old. You want to pay down debt, you want to increase savings and you want to maximize your retirement accounts. It’s good stuff.
So, please, download the special report at the scienceofeconomicfreedom.com, the title of the report is Balance Sheet Basics and we have an accompanied podcast to go along with that. That is Episode 5.
Now, I want to move to my third segment in this podcast. In this segment, I’m going to talk about wealth coaching, and I’m going to talk about a specific wealth coaching conversation I had with a couple this past week.
I want to begin by saying I want to encourage you to take advantage of the wealth coaching opportunity you have here at Mercer Advisors. This is something that we enjoy doing, we enjoy having conversations with people, no matter where they are on their journey to achieve economic freedom.
To coach them, to help them, to help them overcome that pain that they might be experiencing right now on that journey, or there is so much to process what is the most important step on my journey right now. That’s what we strive to do with the wealth coaching.
So this past week, I spoke to a couple by the name of Nancy and Rick. The number one goal, and this is where I begin my wealth coaching conversations, what is the number one financial goal you have in your life? And Nancy was very clear. She said, the number one goal is financial security for myself and my husband in retirement.
I said, okay, great. Now, how old are you? Nancy says she’s 55 years old, her husband is age 60. Husband is working, but he does not have a 401(k) plan at work. Nancy also is working, but at this point in time, she’s unemployed. They would like to retire at their retirement age, which is around 67.
And the biggest concern that they had, that they wanted to talk to me about, was they were concerned about the performance of their investment portfolios. And they submitted their investment portfolios to me so I could take a look at them. So one of the things that we did in this conversation is we did spend some time talking about the investment portfolios.
They’re having their portfolios managed by a major brokerage firm, national firm. They were in a combination of exchange traded funds, mutual funds, and some alternative mutual funds. Their desire was to be in a classic asset allocation of approximately 70/30.
But what was bothering Nancy so much is the fact that in the current environment their account is down about 8%. Where the US stock market is flat, international markets are down 5 to 10%, so I was curious as to how much international stock market exposure they had, that could have been the reason why their portfolio was down more than they thought it should have been.
One of the things that you have to remember on this journey to economic freedom is there are going to be years where your portfolio does not produce a positive rate of return. We take from the market what it is willing to give, and the market is not going to be positive each and every year. We don’t know how the stock market is going to end 2018.
Right now, it’s flat. If it drops 3% between now and the end of the year, then we’re going to have a negative year in 2018. If it rises 3% or more, then we’re going to have a positive year to the end of 2018. And we only have a few weeks left in the year, so we’ll find that information out pretty soon.
But then, we’re going to go into 2019, and much will be depended upon how companies generate earnings, what’s happening with the Fed, what’s going on with the global economy, what’s happening with trade, there’s a lot of variables. But one of the things that I was coaching Nancy on is you certainly need to pay attention to your investment portfolio and there are some reasons why she might want to ask questions about her portfolio.
Because it is underperforming, at a minus 8%, in a classic 70/30, maybe you would be flat in that portfolio right now. So it is underperforming and further discussions, she has some alternatives in the portfolio, and there’s some international exposure in the portfolio, and some of the bond exposure she had was of the high-yield nature, so that causes it to underperform. So there are some issues to definitely look at, but I believe that she was focused on the wrong thing.
The most important aspect of her situation right now, and she and her husband have a decent nest egg of $300,000, and they’ve got some time, anywhere between 8 to 15 years from retirement, they’ve got to add to their retirement nest egg. So their retirement is underfunded. They must increase their savings.
Now, there’s two people in their family, husband and wife, and one of them is unemployed. Every year you don’t work, the amount of Social Security that you’re going to end up receiving at your retirement age is going to be less than if you did work because if you’re not working, you’re not making contributions to Social Security. That’s how it works.
So when I think in terms of the highest priority for this family, Nancy and Rick, number one priority is increasing the retirement savings. Number two priority is let’s get both, husband and wife, working.
Now, one of the things that we talked about, and Nancy really had a good grasp on the investment expenses on their portfolio. The investment expense of their portfolio was a 1% management fee and about a 70-basis point fee for the underlying investments, so you combine those two things together, she’s at 1.7% in terms of investment management fees.
A little on the high side, but that’s not going to make or break her retirement, and the decision that she needs to make is whether she stays with the current advisor or leaves, is a decision that she needs to make, but my encouragement to her was let’s focus on getting $6,500 because they’re over age 50, 5,500 plus the $1,000 catch-up.
And both, her contribution, even though, she’s not working, and her husband’s contribution because he is working, and they’re earning less than $120,000 a year, their IRA contribution is tax deductible. So they can definitely save on taxes by maximizing their IRAs.
Now, I don’t know what their cash flow situation is and how much they can save, but I know that maximizing their retirement plan options should be at the top of the list. Nancy getting employed is next on the list. Reducing the cost of the investment portfolio could be on the list.
And, lastly, monitor closely what’s happening with the portfolio because it seems like the risk is a little high for a 70/30 portfolio in this environment. But that’s not the most important item.
So with this discussion today, markets are going to do what they’re going to do, but I’m continuing to focus on some of the positive things that are out there, and I want you to focus on what you are in control of in your personal financial life.
Second segment, we talked about let’s start pulling together the information we need in order to be able to make 2019 a great year for economic freedom for our family, and that begins with pulling together that balance sheet and kind of looking at what has happened in 2018.
How much money did I save for retirement? How much money did I save outside of retirement? For those of you who are drawing down on your portfolio, what was your cash flow like? How much did you draw down? What was your balance sheet worth last year and what’s your balance sheet worth this year? And if there was a significant draw down to your balance sheet, why was that? And then, maximizing your retirement accounts is a big message from today’s show.
So, ladies and gentlemen, we’re going to be talking over the next couple of weeks, as we’re closing out 2018, about your success in 2019. I hope you’ll continue to tune in. Now, if you’d like to get on the right path, and like to have conversation with me or a member of my team, in our wealth coaching sessions, please, reach out to me via my email address [email protected], [email protected]
This is Doug Fabian. Thanks for listening to the Science of Economic Freedom.
Male Voice: The Science of Economic Freedom is intended as an investor education resource. The views and opinions expressed on this program should not be construed as a recommendation to buy, sell, or hold any specific security. Consult your investment advisor and read any investment prospectus carefully before making any changes to your investment portfolio. This program is sponsored by Mercer Advisors. Mercer Global Advisors Inc. is registered with the Securities and Exchange Commission and delivers all investment related services. Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services.”