Hi everyone! Long time no talk. I hit pause on my writing for a bit to focus on some big changes in my world. As many of you know, in addition to my writing, I work as a financial planner. Toward the end of last year, I decided to go out on my own and start my own financial planning company. It’s something I’ve thought about doing for a long time, but never pulled the trigger.
Then last year I thought, what better time to do it than during a pandemic induced global shutdown! Seriously though, I’d been with my previous company for 25 years, enjoyed the people and the work and made a good living. It was a tough decision to move on, but it ended up being one of the best decisions I’ve ever made (more on the new company at the end of this article).
I’m sure many of you have faced similar forks in the road or are maybe even contemplating one right now. So for my first article back, I thought I’d write about the best advice I got and lessons I learned as I contemplated the change and then took the plunge. Hopefully, it will help some of you
Don’t let fear make your decision. Pretty much anything you do in life that’s worthwhile and difficult will get you out of your comfort zone. In other words, it’s going to scare you. That fear is a good indicator that you should be paying attention. It’s a reminder that you should consider your path carefully. Just don’t give it veto power over your decision making. If you let fear make your decisions, you’ll never do anything worthwhile. Choosing unhappiness over uncertainty is often a bad choice.
Sometimes you’re not ready to do it until you’re ready to do it. When I told my brother about my decision to start the company, his first response was “It’s about time.” Then he laughed and said he was only kidding. He’s a successful business owner and he said looking back on it, he wasn’t ready to start his business until the day he started it. Had he started it 6 years or even 6 months earlier it would have failed. As I said before, don’t let fear hold you back, but also don’t start before you have the things you need to make it work. Timing is important.
Sometimes the only difference between a huge success and the status quo is just a willingness to say yes. I have a friend who coaches founders of very successful organizations. He told me it’s easy to look at these people and think that their success is a direct result of their skills, hard work or brilliance. Truth be told, he’s often surprised by how normal they are. What they have, however, is a willingness to try. When the time came where a decision was required, they said yes and took the risk. You don’t need to be Albert Einstein or Elon Musk to succeed at something. You just need to put your yes on the table.
Sometimes the best time to do something is when things look their worst. When I talked to my dad about it, I asked if I should wait because of all the uncertainty surrounding the pandemic. He thought about it for a second and then told me the story of when he started his business back in the early 70s. The economy was in terrible shape and he’d just been laid off. Unlike me, he didn’t have much choice about what came next. No one was hiring and he had a growing family to feed, so he started his own company. Looking back on it years later, he realized that was the perfect time to start. His opportunity was greatest when he said yes to something that everyone else was saying no to.
Sometimes older is better. We tend to venerate youth and think of our 20s and 30s as the ideal time of life to take big risks. That’s not always the case. Yes, as you get older you have more responsibilities and more at stake, but you also have more skills, wisdom and life experience. When discussing my situation with a close friend he said “You’ve been doing this for 25 years. There are very few corners you can’t see around.” It’s easy to get complacent and play defense later in life, but truth be told, that’s often a great time to go on offense.
Get comfortable with discomfort. As we age, we often get comfortable. We make more money. We upgrade our house, cars and lifestyle. We get settled into a career. As this happens, we’re less willing to rock the boat. Less willing to take risks. More willing to compromise. Sometimes our fear of discomfort can keep us from doing something that we need to do. If you take a big risk or make a significant change, I can almost guarantee that you’ll go through a period of discomfort. There will be stress, uncertainty, long hours and a big learning curve. But there will also be growth, excitement, challenge, fulfillment and payoff.
Focus on taking the next step. A big change often means a long To-Do list. Don’t get distracted or overwhelmed. Just focus on what’s next. It you try to do too much, very little gets done and the things that you do, don’t get done well. Concentrate your efforts on a few wildly important goals that can be broken down into a series of logical steps. Each day ask yourself: “What’s important now?” What’s the next step that needs to be done to advance the process? Whatever that is, that’s your focus. Not the 500 other things on your list.
Accept Reality. Sometimes an option you’re considering depends on someone or something else. If you’ve tried that door and it stays closed, however, that’s probably a good indication that your way forward is on a different path. Give thanks for the clarity, accept reality, make your decision and move forward.
Don’t burn bridges. Ever. If change takes you someplace new, leave on good terms. Act honorably. Be transparent. Wish everyone well and move on.
How about you? Is there a change you want to make or a new adventure you want to pursue? There’s no time like the present. Don’t talk yourself out of it just because it’s scary or because you’ve had a few birthdays. Decide what you really want out of life and then start taking those plans very seriously.
About the new company
In my financial planning practice, I focus almost exclusively on retirement planning. For 25 years, I did that work at another company and then did all my writing about retirement in books, newspaper articles and at this website. I always thought it would make sense to do those things under the same umbrella, so when I made the switch, I jumped through the hoops necessary to turn Intentional Retirement from a publishing company into a financial planning company. You won’t notice much change going forward. I’ll still post articles regularly at the site and there’s no cost or obligation to follow along. That information is general in nature, however, and is not intended as advice for your specific situation. If you enjoy the articles, but want to do more detailed planning for your retirement, now I can likely help with that as well. Just reach out to me at Intentional Retirement HQ and we can talk further. No pressure obviously, but feel free to touch base if you’d like more information. Thanks for following along. Like I mentioned earlier, the transition went amazingly well and I’m settled into a new day to day rhythm. With that in the rear view mirror, I’m looking forward to writing more regularly again and I’m excited for the new adventure.
The markets had a great first half of the year. Stocks were up. Bonds were up. Both U.S. and International markets were up. Everything seemed to be working. Unfortunately, the second half has had a rockier start. And given the headlines (e.g. trade war, weakening international economies, excess debt loads, inverted yield curve, etc.), that volatility could continue for a while. Given that, I thought it would be a good time to scroll through the archives at Intentional Retirement and review a few past articles on how to deal with volatility, keep your emotions in check and make sure your retirement plans stay on track. Even though they were written during past periods of volatility, the lessons are just as relevant today.
The sharp market selloff in the fourth quarter of last year was partially caused by investor concern over an inverted yield curve. Just last week we saw another big drop as the curve inverted again. What is the yield curve and why are people worried about it? More importantly, how could it affect your plans if you’re at or near retirement and what can you do to protect yourself?
What is the yield curve?
When you get a loan, the interest rate you pay is based (in part) on how long you need to borrow the money. All else being equal, the longer you borrow, the higher the interest rate will be. The same is true when the government borrows. They pay higher interest on 30-year bonds than on 30-day bonds. If you plot out government bond rates (e.g. 1-year, 2-year, 5-year, etc.) and connect them with a line, that is the yield curve. In a normal economy, the curve slopes up and to the right, because as we just discussed, rates rise along with time to maturity.
Why is everyone worried about it?
As we just saw, a normal yield curve slopes up and to the right because long-term rates are typically higher than short-term rates. Once in a while, however, conditions are such that short-term rates rise above long-term rates. This is a warning sign that the markets are anticipating trouble for the economy and they expect the Federal Reserve to cut rates. When short-term rates rise above long-term rates, that graph we talked about earlier shifts from upward sloping to downward sloping. In short, it becomes inverted. This is concerning, because it turns out that an inverted yield curve is a pretty good predictor of recession.
Does an inverted curve guarantee a recession?
Not every inverted yield curve has led to a recession, but every recession we’ve had since World War II has been preceded by an inverted yield curve. So when the yield curve inverts, it’s worth paying attention to.
Is the yield curve inverted now?
The yield curve flattened for most of 2018 as the Fed raised short term interest rates and long-term rates stayed low. Then, during the fourth quarter, portions of the yield curve inverted. It wasn’t entirely inverted, but even having portions inverted is a red flag. Rates normalized a bit earlier this year (and the markets rallied), but last week portions of the curve inverted again when 10-year rates fell below 3-month rates.
If a recession follows an inversion, how long does it usually take?
An inverted curve is a good predictor of recessions, but they generally don’t happen right away. The average time between inversion and recession is about a year.
What does the stock market typically do after the curve inverts?
Markets will usually continue to rise for a period of time after an inversion. For example, markets rose an average of 35% after the last 3 inversions (1989, 1998 and 2006), before ultimately falling as the economy went into recession. And returns on the S&P tend to be above average for many months after an inversion. So yes, an inverted yield curve can signal a potential recession, but it can also signal a period of strong stock returns before the recession arrives.
What should investors be doing?
A yield curve inversion isn’t a perfect indicator and it’s by no means the only economic indicator. There are plenty of signs that point to a strong U.S. economy and as we saw above, markets usually continue to rise for a period of time even after an inversion. That said, it’s a red flag, as are signs of slowing economic activity in Europe and China. The best thing you can do is to make sure that you are invested in a way that is consistent with your risk tolerance, time to retirement, goals and overall financial situation. Then, even if things get choppy, you’ll be able to ride out the storm. For further ideas on what to do, read: Should you prepare for a deeper downturn?
What are you afraid of? Be honest. We all have stuff that scares us. Maybe it’s something big. Maybe small. Regardless of what it is, the outcome is often the same: Stasis. Fear acts as a roadblock that keeps us from doing something. Fear is often the great preserver of the status quo. It keeps you from having that uncomfortable conversation with your spouse or friend. It keeps you from going to the doctor. Or asking for a raise. Or joining the gym. Or dealing with an addiction. Or moving to a new town. Or changing jobs. Or starting a business. Or making new friends. Or traveling. These fears, big and small, stop us in our tracks and the longer we allow them to persist, the more insurmountable they seem.
But here’s the thing. Almost every fear that you and I have—those things that have been holding us back for years and that are keeping us from the things that we genuinely want from life—can be overcome with a few seconds of uncomfortable action. It reminds me of that quote from Matt Damon’s character in the movie We Bought a Zoo:
“Sometimes all you need is 20 seconds of insane courage. Just literally 20 seconds of embarrassing bravery and I promise you something great will come of it.”
This is true because fear isn’t something that persists for very long in the face of action. Once you start, the fear subsides and you focus on the action at hand. In that sense, inaction is much more uncomfortable than action because the fear and anxiety of inaction is a long-term state. We marinate in it, sometimes for years. Once you start, however, and push through the fear with a short burst of bravery, the fear subsides and your focus shifts to whatever it is that you’re doing.
I’m writing about this idea because I’ve had constant reminders about it on this trip. When traveling, especially internationally, there are dozens of little fears that crop up. Not being able to speak the language. Driving a rental car in a strange city. Figuring out the subway. Those things can make you want to curl up in a ball in your hotel room and cry. Fortunately, inaction isn’t really a choice. Scared of driving? Too bad. You’ve got 100 cars behind you. Subway make you nervous? Unless you want to sleep at the airport, you’d better take a stab at it. So you do. And…hey…what do you know! You figure it out. Maybe you didn’t do it perfectly, but you survived. You learned something and built a bit of confidence that you can keep in your back pocket for the next challenge. More importantly, fear vanquished, you get to do the thing that you’ve been wanting to do. String a bunch of those together and you have a life that is rewarding and untarnished by regret.
So I’ll ask again: What are you afraid of? Whatever it is, you have a choice. You can let it fester and keep you from the life you want or you can muster 20 seconds of bravery and take the first step toward resolution. Choose the former and you’ll likely be miserable. Choose the latter and you’ll wonder why you didn’t do it sooner. Good things are just on the other side of an impermanent barrier that can be breached with a few seconds of bravery. What are you waiting for?
“Do not be too timid and squeamish about your actions. All life is an experiment. The more experiments you make the better. What if they are a little coarse and you may get your coat soiled or torn? What if you do fail, and get fairly rolled in the dirt once or twice? Up again, you shall never be so afraid of a tumble.” ― Ralph Waldo Emerson
I wrapped up my time in France yesterday and hopped an early morning flight to Naples, Italy. From there I came to a little seaside town on the Amalfi Coast called Positano. I’ve got four days here with a few concentrated on work and a few for activities (e.g. visiting Pompei and Vesuvius, hiking the Sentiero degli Dei (Path of the Gods), etc.). I’ll get a post up soon filling you in on my time in France. Thanks for following along!
Every year the flu kills about 36,000 people in the United States. Those who die typically have an immune system that is already compromised in some way, such as by age or illness. In other words, it’s not necessarily the strength of the flu that is so dangerous, but the weakness of some immune systems.
In the same way that the flu virus can disproportionately affect those with weakened immune systems, a financial virus can disproportionately affect those with compromised financial health. The virus could be something as simple as an unexpected car repair or something a bit more serious like a market crash, job loss, divorce, disability, illness or unexpected death. How well you’re able to respond to those things depends on how financially healthy you are and how well you’ve immunized yourself against those threats.
Some people are fragile and at risk. Others are financially resilient. The closer you get to retirement, the more resilient you want to be so that something unexpected doesn’t derail decades of planning. Below are five things that, financially speaking, will either make you weak or strong, depending on how you handle them.
How much you owe. There are many tell-tale signs of a person who is financially fragile and having too much debt is often the most obvious. When you take on debt, you are bringing future consumption to the present. That gives creditors a legal claim on your future earnings, which reduces your cash flow, increases the risk that you will run out of money and limits what you can afford to do. Get rid of your debt, however, and not only will you be more financially resilient, but you can also retire sooner. Unfortunately, years of low interest rates have encouraged exactly the opposite behavior. What’s a good level of debt for a retiree? Shoot for zero.
How much you spend. If you live at or above your means, you are financially fragile. That’s true whether you make $50,000 per year of $500,000. Here’s the good news. Most of the people reading this likely have the ability to live significantly below their means. What if you spent 10% to 50% less than you made every year? Would that give you a certain resilience? You wouldn’t be worried about an unexpected car repair, I can tell you that much. So take a stand against lifestyle inflation. Just because you will earn more money this year than you did last year doesn’t mean you have to spend it. Set a lifestyle cap and save the rest.
How much you’ve saved. If you spend less than you make, you’re able to save. That savings not only protects you in the short term (i.e. emergency fund), but it allows you the financial freedom to live the life you want to live in the long run (i.e. retirement). In other words, savings is the secret sauce in both security and independence. How much should you have saved by now? This article will give you a rough idea.
How well you’ve planned. Most people don’t have a plan for retirement. They don’t know what they want to do, how much it will cost or whether or not they are on track to save enough to pay for it. Not surprisingly, that creates a great deal of anxiety, uncertainty and—you guessed it—financial frailty. If you are among the 88% of people who don’t have a written plan, your retirement will probably fall far short of what it could be.
A plan can also help inoculate you against bad decisions. Sometimes a financial virus takes the form of fear and uncertainty. When we’re scared, we tend to make unwise and irrational decisions. To navigate those waters, it’s good to have a North Star. The wind can blow and the seas can rage, but when you look up, it will be there. A detailed retirement plan can act as that North Star. If you have a long-term plan—you know where you are, where you want to be and how you’re going to get there—you can inoculate yourself against short-term fear and uncertainty. When you have context and you understand the big picture, you’re less likely to be blown off course or panic and make a mistake. For help with creating a plan, check out my Ideal Retirement Design Guide or touch base with me if you want some one-on-one help.
How well you’ve prepared for the unexpected. What if something happened to you or your spouse? Would that derail your finances? Are your legal and financial affairs in order? Life is unexpected. The more “What if?” planning you do, the more resilient you will be in the face of tragedy. Here are two articles and a guide that can help:
That’s five ways to boost your immunity, harden your defenses and make yourself more financially resilient. But they only work if you take action. Modern medicine has given us many miracle vaccines, but they only work if you take them. So too, financial vaccines are either contagion or cure, depending on what you do with them.
The current bull market is 9 years old. That’s the second longest on record and it has people wondering how much further it can go. That question has taken on added urgency given the recent volatility, rising interest rates and political uncertainty. Markets lost ground in February (the first losing month in over a year) and they’re on track to close lower in March as well. Is this the beginning of something bigger? Should you make changes to your portfolio or otherwise prepare for a deeper downturn? I’ll share my thoughts below.
Keep Things in Perspective
First of all, I think it’s good to keep things in perspective. Yes, there have been some scary drops recently. In February, the Dow had its two biggest point drops ever. The S&P 500 had four of its largest drops ever. On a percentage basis, however, those drops didn’t even crack the top 20. Still, when the daily loss has a comma, it’s disconcerting. Just try to remember that pullbacks are natural and healthy, especially after the outsized gains we’ve had over the last several years. At the beginning of this bull market (the end of the Great Recession) the Dow was below 7,000 and the S&P was below 700. Now, even after the recent selling, they’re around 24,000 and 2,600 respectively.
Watch the Fundamentals
Warren Buffett has famously said that in the short-term the market is a voting machine, but in the long-term it’s a weighing machine. In other words, fundamentals matter more than feelings. How do the fundamentals look? In a word, strong. GDP and corporate earnings are growing at the fastest pace in years. The tax cuts will boost profits even more. Job creation continues to surprise on the upside. Unemployment is low. Consumer sentiment and consumer spending are very strong. Interest rates are still relatively low. Most signs point to a healthy and growing economy.
3 Key Risks
While most indicators are positive, that doesn’t mean that investors should be complacent. The bullish case is always strongest right before it’s not. And even if the fundamentals stay strong, you can still get some nasty price corrections. What are the key risks?
I see three primary risks right now: 1) Valuations, 2) Interest Rates, and 3) Political/Geopolitical risks. Because of the strong economy, stocks have been going up and valuations are at the upper end of their historical range. Markets are priced for perfection. What if we don’t get it? To quote John Mauldin, an economist I follow, “the consequences of a mistake are growing.” Or what if the Fed raises rates too aggressively? That could tip the economy into recession. And the uncertainty in Washington is not helping. If we get into a trade war with China or the Mueller investigation finds serious wrongdoing, markets will not react positively.
How to Protect Yourself
I said earlier that pullbacks are healthy. What do I mean by that? Economist Hyman Minsky had a theory that stability leads to instability. In other words, when the economy and markets are good, it encourages more and more risk taking. People start to focus on reward and ignoring risk. They invest too aggressively. They take on too much debt. They save less. They get complacent. And then a shock hits the system, losses start to build and people panic. The bottom falls out. That sudden instability is referred to as a Minsky Moment. The longer the period of stability, the greater the likelihood that people are making decisions that will eventually lead to serious instability. Periodic corrections are healthy because they keep people from straying too far from home.
Which brings me to the question at the beginning of this article. Should you prepare for a deeper downturn? The answer, of course, depends. During this 9-year bull market, how far have you strayed or drifted from your appropriate investment and retirement strategy? How can you tell? Here are 7 areas to look at closely.
Risk Tolerance. The longer a bull market goes, the less people worry about (or even think about) risk. That’s a problem, because the economy and markets usually revert to the mean. What would mean reversion look like now? We’ve gotten a taste of it over the last several weeks. After years of rising markets, they start to fall. After years of almost non-existent volatility, it spikes. After a decade of historically low interest rates, they start to climb. If the market dropped 20-30% this year, how would that impact your portfolio? Could you (would you) just ride it out? If not, you should probably dial back your risk.
Asset Allocation. The two primary ways to manage risk are through diversification and asset allocation. Look at your portfolio. Do you have any outsized positions? Is your stock/bond balance appropriate given your risk tolerance? Has your allocation drifted or changed over the years? Review your portfolio and align your asset allocation with your risk tolerance.
Time Horizon. All of this is a bigger deal if you’re at or near retirement. You have less to worry about the longer you have to go. Even after the 57% peak to trough drop in 2008-09 the markets fully recovered within about 4 years. Those who rode it out did fine. Could you ride out another major downturn? If you’re already retired, maybe not. At the very least you’re 9 years closer to retirement than you were during the last serious pullback. And even if you have time, sharp drops can cause you to make mistakes and do the wrong thing at the wrong time, so see points 1 and 2 again. Make sure you understand your risk tolerance and that your allocation is aligned with that.
Spending. Most people have lifestyle bloat as they get older. As income grows, so do expenses. Bigger paychecks mean better houses, cars, vacations, wardrobes and gadgets. That’s not necessarily bad, but the longer good times persist, the closer we tend to push our spending to the outer limits. That makes a person financially fragile. It can cause stress, limit your options and force you to make compromises in life. You control your spending. Beware of bloat. The more you live below your means, the more financially resilient you will be. And when you splurge on things or add expenses, do your best to make that spending discretionary rather than fixed. That way you can dial back if your income drops or the economy heads into recession. See this article on how to use dynamic spending to make your money last.
Debt. One of the characteristics of long bull markets is that people load up on debt. The boom years make them more comfortable borrowing for cars, houses and credit cards. Having debt adds risk and reduces cash flow, two things that are especially troublesome for a person at or near retirement. If you want to be better positioned to weather a financial storm, get rid of debt.
Saving. The average savings rate in 2015 was 7.19%. In 2016 it fell to 5.98%. Last year it fell to 3.74%. Care to guess which direction it will move in 2018? This is what Minsky was talking about. Stability leads to instability. People become complacent. They save less, which means they have less of a buffer, which means they’re less able to weather a storm.
Cash. It’s always a good idea to have a portion of your portfolio in cash or short-term securities. That way, if markets drop and a good investment opportunity presents itself, you’ll have some dry powder to invest. Or, if you’re already retired and taking distributions from your portfolio, you can pull your distributions from your cash rather than selling your stocks into a declining market.
Will the markets drop further? Who knows. The risk is certainly there. The important thing is to focus on the things you can control and make sure that if we get another downturn, it won’t derail your plans.