Schindler Financial Newsletter Q1 2018

Aaron Schindler

Aaron Schindler

Market Correction Reflection: What’s Your Predilection?

By Aaron D. Schindler, CFP ®

February 6, 2018 – As we have frequently discussed, a stock market correction is long overdue, particularly after an unusually lengthy and continuous rally. Last March and December, I sold or trimmed some equity positions to capture profits and reduce risk in most Envest portfolio models. I used the proceeds to increase cash and low volatility short-term bond positions to make funds available to purchase equities on a correction at lower prices. There are multiple themes that I’ve been waiting to own from robotics (see my Q2 2017 Newsletter by Robert Lovenheim) to hyperloops to commodities.

On average, market corrections (a drop of at least 10%, but not more than 20%) occur once a year, yet we haven’t witnessed one since November 2015. During that correction, it took 100 days for the S&P 500 to drop 13.3%, before taking another two months to regain losses in mid-April 2016.1/2  In June 2016, BREXIT caused the S&P 500 to lose 5% in two trading days, yet the S&P 500 reached new highs two weeks later.3  Historically, the average correction has been 13.5% and lasted 54 days.2 

While we haven’t yet experienced an actual correction or dip of 10% in 2018, we should expect downside volatility and be ready for investment opportunities that may arise. Keep in mind that the S&P 500 hit an alltime high in January when it was up approximately 7% in only 26 days into 2018. Most equity markets were way ahead of themselves.3 

The first big question (I have four for you so please put your thinking caps on and be ready to make an appointment with me to ask your own questions) is why are most equity and bond markets finally giving back gains? Is it simply a desire to take profits by reducing equity positions until rising interest rates make bonds look more attractive? Or is some new systemic financial risk about to rear its ugly head like the 2007 mortgage crisis? Or is political risk on the horizon such as a constitutional crisis? On Friday, House Republicans released a memo alleging surveillance abuses by the Federal Bureau of Investigation during its Russia probe.  

I personally don’t see a major systemic financial risk event in the near future. While mixed, most fourth quarter corporate earnings have so far exceeded analysts’ expectations. Looking forward, most analysts are predicting a rise in corporate profits due to changes in the US tax code. Additionally, high employment (on Friday, the US Department of Labor reported the nation’s unemployment rate at 4.1%, the lowest level since December 2000) and rising wages should buoy or increase consumer spending. And even with the 10-Year Treasury rate rising to 2.8 percent, it is way below the historic average of 5%.3  For me, the economic picture looks bright until the midterm elections in November.  

My second query encompasses a subset of personal finance and psychology questions:  Can you stomach watching your portfolio fall, even temporarily, after such a long upward ride? Is it time to review your risk tolerance and portfolio allocation with Aaron? Is your predilection to gamble on adding funds to high PE (price to earnings ratio) tech stocks or patiently seek value? Where shall we invest cash if valuations become attractive? How much cash do you have available for monthly living or business expenses, or an upcoming major bill such as income taxes or college tuition?  

Can you put aside euphoria for the upside and fear of the downside to make rational investment decisions based on available data? 

It’s Tax Time: Should You Continue Maximizing Your Retirement Contributions?  

My last two multi-layered questions explore the effect of income taxation on investing in both retirement and taxable accountsWith the April 15th income tax filing deadline approaching and most equity markets near highs, should you increase or reduce qualified retirement plan (IRA, 401(k)-Profit Sharing, Pension) contributionsPer my May 4, 2017 Newsletter, you might also ask yourself: 

In the realm of new tax laws and potentially lower property and state tax deductions, your intuition and CPA might instruct you to increase your retirement plan contributions to increase deductionsHowever,  are today’s retirement plan tax deductions worth potentially higher income taxation when you withdraw funds from retirement accounts during retirement tomorrow? And is this the right time to increase equity exposure? 

Do you have a Roth 401(k) option at work? (I’m contributing to my Roth 401(k), thereby foregoing income tax deductions today for lower taxation tomorrow. I am further diversifying my assets by using a portion of annual savings to build whole life insurance cash value.)  

How much cash or liquid savings do you have on hand? 

Do you have any credit card or variable interest debt that should be paid off before interest rates rise further? 

Do you have short and intermediate-term goals that you want to save for and achieve before retirement? 

It’s Tax Time: Should You Have Taken Profits in 2017 in Taxable Accounts and Pay Capital Gains in April? 

If you didn’t sell securities in 2017 to avoid paying capital gains, are you still comfortable with your decision? Will your thinking change when equities retrace highs? 

Elder & Homecare Planning: 

If you are thinking about elder or homecare planning for yourself or a parent, please check out Care Concierge NY, my destination for multiple homecare services from home assessments by a geriatric care manager to direct hire, background checked home aides (at a much lower cost than hiring an aide via an agency) to budgeting & cash flow management to social activity planning.  

Let’s talk. Please reach out to make an appointment. I can be reached at aschindler@wagllc.com.  

Footnotes: 

*The case study is a hybrid of the actual homecare experiences of multiple clients. Some names and details have been changed to protect privacy.

Stock Market Briefing: S&P 500 Bull & Bear Market Tables, December 1, 2017, Yardeni Research, Inc. 

2 Opinion: Tony Robbins on stock market corrections: Get Used to Them, Tony Robbins, MarketWatch, February 3, 2018 

3 www.yahoofinance.com 

Copyright, all rights reserved, 2018, by Aaron D. Schindler CFP

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Aaron D. Schindler is a Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS), 355 Lexington Ave, 9th Floor, New York, NY 10017, (212) 541-8800. Securities products/services and advisory services are offered through PAS, a registered broker/dealer and investment advisor. Financial Representative, The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is an indirect, wholly-owned subsidiary of Guardian. Wealth Advisory Group LLC is not an affiliate or subsidiary of PAS or Guardian. 

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