Election Cycle Freeze

What will America look like after the election? Will the markets and the economy crash and burn if Joe Biden wins (as his opponent suggests)? Will rioting in the streets of major cities continue if Donald Trump wins (as the left wing suggests)? I don’t know if there is a legitimate argument to be had with either of these scenarios (or the countless other conspiracy theories that are out there) but I do know there are a LOT of investors who are doing nothing with their investment dollars until the election is over. The challenge with sitting on the sidelines, under any circumstances, is that nobody knows how the markets will behave from day to day, week to week, or even over the course of the year. Over the course of the last ten years we heard the smart people prognosticate at the beginning of each year that we needed to manage our expectations and returns would be muted. Many times, that year delivered twenty percent or more! If nervous investors tried to time it based on a “feeling” they probably came up short. The point of this is simple: if you think you are smarter than every investor out there, you are arrogant and often wrong. The returns anyone gets from investment in the stock market are more predictable over long periods of time, like ten to fifteen years or more. In the shorter term, the variance of returns can be staggering. There is no limit to the number of things that might cause massive spikes and declines in stock prices. This is why I am such a fan of a process called “aging” of portfolios rather than relying on flawed risk profile questionnaires (these things try to identify an emotional investor’s tolerance for risk) to set allocation policy that stays static and asks the investor to tolerate the market’s wild movements. Portfolios that are aged allow for the greatest amount of risk to be taken at the point farthest from the purpose-based account’s distribution date. Each year the allocation moves gradually away from risk (stocks) to income producing asset classes and, eventually, to liquid asset classes (short-term US Treasuries). By creating a lot of purpose-based accounts (each with its’ unique distribution date) and managing them in this manner, the investor never has to worry about a market crash negatively impacting a portfolio that is approaching its’ distribution date.

For those investors who have their arms crossed while they read this, I will ask you take this time to review strategy. Financial planning is a great way to apply strategic thought to your unique scenario. We all have family obligations that we would like to manage. Examples of these obligations might be paying off our mortgage in the most painless way. We all have an obligation to fund our own retirement so we don’t become a burden to someone else. Many of us want to fund our children’s college education to the extent that we can, so that they can enter the working world with little or no debt. It might be nice to fully fund our children’s weddings in advance of that unknown date. These are important conversations that can take place right now, while we wait nervously for the election results.

One of my favorite tools for this kind of work is a unique financial planning calculator called Dynamic Map. This free app is available on the Apple app store or Google Play to help anyone visualize their financial future in ten minutes or less. Let’s take a look at a case study that would enable a family to make very smart decisions moving forward.

Jack and Linda Frost are both 50 years old. They are planning on retiring at age 65 and expect at least one of them might live to age 95. Their retirement assets are currently worth $750,000 and they invest $1000 per month into that account. They are planning on a 6% rate of return over their life expectancies and a 2% rate of inflation.  They believe they will need $10,000 per month in today’s dollars for their retirement lifestyle.  They visited the Social Security website and found they will be able to receive $2200 per month from Social Security in retirement. Their two kids, Johnny (18) and Jane (16) will be going to colleges that currently have tuition rates of $55,000 per year. Johnny’s college tuition savings is $200,000 and Jane’s is $185,000. They know that the inflation rate for college tuition is higher than everything else, so they are planning for 4% increases each year in college costs. Additionally, their mortgage payment on their house is $3200 per month and their interest rate is 3.25%. If they paid it off today, they would owe $410,000. 

This seems like a lot of information that would be difficult to visualize, but it isn’t! 

The graph you see above shows the image of a sailboat. Each dot along the hull of the boat is a calculation of what they will owe for either retirement, or in the case of the split pea green line, their mortgage. The dots above the timeline represent their assets growing at the assumed rate of 6%. The orange line represents those assets declining in their retirement years net of withdrawals. The good news: they will have paid off their entire mortgage before they retire. Those early years of retirement are a lot of fun! It would be a shame if they were burdened with mortgage payments that prevented them from doing the things they always wanted to do. The bad news: Their assets run out at age 90, instead of 95. With an increase in dollars allocated towards retirement now, their chances of improving this outcome go up significantly.

How about the kids?

Both Jack and Jane come up a little short for their college funding needs, but not by much!

As you can easily see, both Jack and Jane are VERY close to having all they need for four years of college. This is great news and should make the small amount of debt they incur very manageable when they exit college.

Although financial planning is far more comprehensive than just running calculations, I find most advisors and investors spend the most time on “running the numbers.” By executing those calculations in a visual format really quickly like this, it allows for everyone to begin a strategic conversation about HOW to achieve these goals with realistic expectations around market returns. Since so many have shut down the idea of investing right now, I say we focus on this type of planning so we can make great decisions when we are ready to invest again.