January 2020 - DESMO Wealth Advisors, LLC

A Goals-Based Approach to Retirement Planning

You may have heard that a good plan starts with meaningful goals. But how can we use goals to design our plan, monitor our progress, and manage key risks to our retirement? Read it in our contribution to The Street’s Retirement Daily publication, edited by Robert Powell (aka Mr. Retirement).

Massi De Santis is an Austin, TX fee-only financial planner. DESMO Wealth Advisors, LLC provides objective financial planning and investment management to help clients organize, grow and protect their resources throughout their lives. As a fee-only, fiduciary, and independent financial advisor, Massi De Santis is never paid a commission of any kind, and has a legal obligation to provide unbiased and trustworthy financial advice.

Photograph by Benjamin Elliot on Unsplash

Stock Market Lessons From The Future

January is the time of the year where there is no shortage of expert predictions about financial markets and the economy. And this year the start of a new decade makes us wonder what the new ’20s will look like and how they will compare to previous decades. But, just how useful are those expert predictions for investors? Is there something we can learn from them, and how should we prepare our portfolios for the next decade?

Well, if you are interested in that question, you are in luck, because there is no shortage of expert predictions about the future and available data to check their accuracy. Here is a summary of the lessons we can learn.

You can’t predict the future. Obvious? If it was that obvious, how do you explain all the predictions and recommendations based on them?
Don’t change your portfolio based on predictions about the markets or the economy.
Luckily, you don’t have to rely on predictions to have a satisfying investment experience.

Last year’s predictions vs reality

Let’s start with the most recent year, 2019. There were plenty of predictions for 2019 after global stock markets experienced serious declines in the fourth quarter of 2018. At the time, every investor wanted to know what was coming next. Some experts expected a bad 2019, and urged investors to get out of stocks altogether. Many did, and stocks experienced record outflows in December 2018.

2019 Predictions

Last year the IMF lowered global growth expectations for 2019 citing weakness in Europe and the emerging markets. In Europe, slow growth was predicted in Italy over fiscal policy concerns and the UK over Brexit concerns. In emerging markets weakness was expected in South Africa, Argentina, and Turkey. Bright spots were expected to be Japan and India.

2019 Reality

Emerging market stocks returned 18% in 2019, international developed markets returned 22%, and the US stock market returned 31%. So much for the expected weakness. Across developed nations, Italy was one of the best performing countries, with a 27% return. The UK was in the middle of the pack with 23%. Among emerging markets, South Africa (11%) and Turkey (13%) had respectable returns, ending the year in the middle of the pack for emerging markets. Argentina finished at the very bottom, with -18%. So, one right for the experts. The bright spots of Japan and India? Japan returned 20%, below both Italy and the UK, and India returned 5%, below both South Africa and Turkey. (Source: all the returns based on MSCI indices for each region or country).

2019 Lessons

You can’t predict performance with any useful reliability. The performance across countries shows that. And being the top-performing country one year does not make it more likely to perform better next year. As a result, investors should not worry about picking countries and instead hold a globally diversified portfolio. But the bigger lesson of 2019 is that you cannot time the markets. Investors who got out at the end of 2018 have learned this the hard way, by missing a 31% return in the US and 20% across ex-US markets. And it’s not just 2019. Here is a look at how much investors can miss if they fail at market timing. Missing just a few days can mean a big opportunity cost.

Data source: Dimensional Fund Advisors

Decade long lessons

We now know that the 2010s were one of the best decades in recorded history for stocks globally. But did experts expect it? Remember that financial markets were just coming out of the global financial crisis, and the worst-performing decade in recorded history for stock markets. The period 2000 to 2009 is termed ‘the lost decade’ for a reason. Stocks returned -1% a year, as measured by the S&P 500, the lowest returning decade recorded for the S&P 500, even including the 30’s. The big government intervention that propped markets in 2009 came to an end, and it was uncertain whether the stock market could stand on its own.

Predictions

Not many were expecting much growth for the decade. The WSJ published an article titled “Bull Market Exhibits Signs of Aging.” Many experts predicted a correction at the beginning of 2010, and many investors pulled out of equities, according to the article. There were numerous reports about the slowest recovery recorded in history after the recession, and a new term was coined: “the New Normal,” according to which growth in the US economy would settle at a lower rate than that experienced historically. Greece defaulted on its debt in 2009, and for a while, it looked like other European countries (like Ireland, Spain, or Italy) could follow, the so-called Euro Debt Crisis of 2011. Then we had Brexit in 2016.

Reality

On a total return basis, stocks more than doubled globally in the decade. The average return over the decade was close to 14% for the S&P 500 and about 9% for the MSCI All Country index, annually.

Am I cherry-picking? Maybe a little bit. You always find a wide range of predictions, so some of them may have been right. But there is a way to address the question more objectively, by testing the following question: “Have investors or investment managers who relied on stock picking or market timing based on predictions been able to do better than a simple strategy of holding a market index?” Here is one answer, from S&P Dow Jones. Over the 10 years ended in June 2019, 88% of active funds (those that actively deviate from market indices to place bets on individual stocks, industries, or time the market based on forecasts) failed to outperform a passive benchmark. To learn more about this topic, see here.

Lessons

Equities have returned about 10% on average annually, over the last 90 years or so. It would be great if we could get the high returns that equities have offered without the volatility that comes with it. But we can’t. So, here is my advice for the 2020s. Make a meaningful plan. Then review your investments by answering the most important investment questions. Change the way you think about investing. Realize that you don’t have to be good at predicting markets or the economy to benefit from the power of financial markets! If you’d like to upgrade your investment experience, check out our approach, and give us a call.

Until Next Time!

Photograph by: Drew Beamer

For 2022 Make a Financial Plan!

For 2020 Make a Plan! | Goal Plan | DESMO Wealth Advisors, LLC

Forget new year or new decade resolutions. In 2020 make yourself the gift of a financial plan. If you think financial planning is boring and by the numbers, we are here to change that. A financial plan is much more than that. Keep reading and you will realize that financial planning is about making the connection between the tangible things in life, like money, and the intangible things that bring us life satisfaction, like watching your kids learn how to swim or helping someone in need. Life and money questions are connected.

Start simple

We are not talking about a 60 pages plan full of pie-charts, simulations, or accurate budgeting over the next 25 years. No, we are simply advocating for a simple plan that contains a few, carefully selected elements. This simple plan is a single page, written with a sharpie, and it may have no numbers. Take a piece of stock paper, divide it into three areas, and write as headers, from left to right: Values, Goals, Actions, like this.

The idea of the simple plan is to change your mindset, from just “going through” life to “having a strategy” to make the most out of your resources, including time, energy, passion, and money. Going through the process of filling this out will bring you awareness of what’s important to you and what’s not, so you can focus on the former.

Discover your values

The first benefit of financial planning is discovering your values. At DESMO, we use the word values to summarize anything important that you are trying to achieve in life. Money is important to you only to the extent it helps you achieve life satisfaction. You can’t start a financial plan without first thinking why money is important to you. So, the first step in planning is discovering, through deep thinking or a conversation with a trusted friend or advisor, of the really important things in your life. Examples are more time with your family, starting a business, spending time cycling with friends, and traveling to a new country every year. Having clear values is not just a step in creating a personal plan. Your values are the why of your plan. Values act as motivators, can help us acquire and stick with good financial habits and can get us out of negative thinking when things get tough on the way to our goals. Learn how to discover your values here, and write them down in the Value column. Use sticky notes to add color if you like.

Set life goals

“If you don’t know where you are going, you may not get there,” says Yogi Berra.

If values are the why of your plan, goals are the what. Use your values to set measurable goals that require planning to achieve. Determining goals is crucial in determining the actions you are going to take to maximize the likelihood of achieving them. Examples of goals are “save $X in 5-10 years to follow my passion and start my own business,” or “retire at age 60 with $Y per year available to travel.” Your goals have to be consistent with your values, so one way to set goals is to ask “what measurable result(s) will help me live up to my values?” Read our blog on how to set meaningful goals to get you started and write down a few, important goals that are consistent with your values. We have written a few blogs on retirement or education planning, which are common goals, so browse our blog page. If we haven’t covered your goal in our blog posts, let us know about it, and maybe we will. Write your goals under the Goals column.

What’s next?

Start with this simple question: “What can I do, starting today, that will get me closer to my goal?” And write down the answer. Repeat the question and answer as long as you want. Here are a couple of ideas, to get you started.

Get a clear picture of where you are

Knowing where you want to go isn’t helpful if you don’t know where you are. Do this by getting financially organized. Make an inventory of all the things you own and the things you owe. No need to get this down to the penny. Consider the things you own first. Your bank account, your 401(k) or similar account, any savings or investment accounts, your house, your cars, and other investment properties, like any real estate you may own besides your primary home. List them along with their values. Next, go through everything you owe. Your credit card balance, any bills or payments that are due in the next month or so, student loans, mortgage, car loans, etc. List them and add them all up. The difference between everything you own and everything you owe is your financial net worth.

The other key tool to help you get a good picture of where you are is budgeting. Budgeting is simply being aware of your income, expenses, and the difference between the two, which determines your saving capacity. We have written a few posts about budgeting, including a recent one on the XY Planning Network. To get started, read about our budgeting challenge.

It’s simple. Your goals tell you where you want to be. Your net worth tells you where you are. Your budget tells you about the path you are taking to get to your goal. There has to be alignment between these three, or chances are you won’t reach your goals. Read our blog to help you get financially organized and sign up for our complimentary tool.

Review your investments, talk to a Fee Only Financial Advisor in Austin TX

Think of your investments as tools to help you reach your financial goals. Wouldn’t it be great if your investments were working in sync with your goals? Unfortunately, that’s not how most people build their investments. So it’s always a good idea, as we review a plan, to think about this question: “are my investment aligned with my goals?” Go through our most important investment questions, and build investment guidelines that work for you. You may also want to think about managing your key risks. Do you have adequate insurance coverage? Think about life, auto, liability, disability, or potentially long term care needs. When was the last time you reviewed your insurance policies?

Conquer your fears

Many of us are afraid to go through this exercise because of fear of what we may find. But it’s well worth it. Many times our clients are nicely surprised by what they find. All their properties and investments are scattered through different accounts, so putting them together makes them realize they own more than they thought. And if that’s not the case, now you have information and a plan. You just started to make life changes, for the better.

Put it together

Here is what an investment plan may look like at the end of the process.

Yours may look completely different. You may need to review your insurance coverage, make a will or other estate planning documents, buy a boat to travel the world. All these are OK as long as there is consistency between values, goals, and actions. That’s it, you have your first financial plan!

Decide if you want to talk to a Fee Only Fiduciary in Austin Texas, Desmo Wealth Advisors can help

Go through this simple plan, get inspired, start working towards your goals on your own, then determine if you would benefit from talking to an advisor. Most fee-only advisors, like us, offer complimentary consultations, so talk to us. Don’t assume comprehensive financial planning with an expert is expensive and for rich people only. It’s much more affordable than you think, and the cost of not planning with an expert can be much higher.

Get started and commit to the process

You can be proud of what you have accomplished. Going through the process of putting together your plan is going to save you time and energy down the road. Think about the time and energy we normally spend just thinking and worrying about our finances. Having your values, goals, and actions clearly stated on a piece of paper brings awareness and focus. This focus can help you direct your time, energy, and money away from distractions and towards things that really matter to you.

Build momentum on what you just did. Go through the action list you just created. When you are done, review your values and goals, and update them as you go through life. Planning is a process, just like life. That is also why long financial plans and analyses don’t work. The key to a financial plan is to narrow your focus to what matters, and make small, consistent changes through time. So start with our simple plan and use it to build momentum.

Until next time!

#2020Plan

Your Plan and the SECURE Act of 2019

While most of us were enjoying the Holidays, our government was hard at work and on December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act, was signed into law by President Trump. What does the SECURE Act mean for American savers, and for our DESMO clients? Mostly good news I am happy to report. We will communicate directly with our clients if any of these changes impact their financial plans. In the meantime, you can be confident that our financial planning technology already incorporates the changes included in the bill.

The bill is about 1700 pages long and it is quite broad, so we focus on most items we believe are of common interest across our audience. If you think that any of these changes and others you may have read about affect you, or you simply would like to learn more, don’t hesitate to contact us or your trusted advisor.

Elimination of the lifetime “stretch” provision for inherited IRA accounts

Under previous law, beneficiaries of an inherited IRA account had the option to withdraw from their accounts over their own life expectancy. With the SECURE Act, this provision still holds for spousal beneficiaries, but it is eliminated for non-spousal beneficiaries that inherit an IRA account starting in 2020. Instead, the SECURE Act introduces a new 10-Year rule. Under the 10-Year rule, the entire inherited retirement account must be emptied by the end of the 10th year following the year of inheritance. Within the 10-year period, there are no distribution requirements, so designated beneficiaries will have some flexibility in terms of the timing of the distributions.

Increased retirement savings incentives

Required Minimum Distribution Increased to Age 72

Previous law required that most individuals begin to take annual required minimum distributions (RMD) from their retirement accounts when they reached the age of 70½. Besides eliminating the confusing ½ year requirement, the SECURE Act delays this requirement to age 72. This gives savers additional tax-deferral benefits. The new law only applies to people who turn 70½ after December 31, 2019. If a person turned 70½ in 2019, the law does not apply—that person must take an RMD in 2019, 2020 and beyond.

Repealed maximum age for IRA contributions

The SECURE Act also repeals the maximum age for traditional IRA contributions. Previously, you could contribute to an IRA only if you were younger than 70½ years old. With the new law, you can continue to contribute to your IRA as long as you (or your spouse) have earned income. Repealing the limit allows workers to save longer for retirement, and even after withdrawals begin.

Qualified Charitable Distributions (QCD) still allowed at 70 and ½

Even though the RMD age has been increased to age 72, QCDs are allowed starting the year you turn 70 ½, as per the previous law.

A new exception to the early withdrawal penalty for childbirth and adoption

Section 113 of the Act introduces a new exception to the early withdrawal penalty for funds withdrawn to pay for expenses incurred through the first year after birth or adoption. The total amount with respect to any birth or adoption cannot exceed $5,000. Income taxes will apply to this amount, and the amount withdrawn can be contributed back to the plan.

Expansion of 529 plan qualified expenses

The SECURE Act expands the list of 529 qualified expenses. The Tax Cut and Jobs Act of 2017 already expanded 529 qualified expenses to include tuition at an elementary or secondary public, private, or religious school, up to $10,000 per tax year. The SECURE Act legislation further expands the list. First, the Act allows 529 funds to be used to pay for apprenticeship program expenses that include fees, books, supplies, and required equipment. In addition, as much as $10,000 over a person’s lifetime can be used for qualified student loan payments.

Incentives for small employers to offer retirement plans

Tax Incentives

Employers with fewer than 100 employees are eligible for a 50% tax credit for retirement plan startup costs as high as $5,000. This is much bigger than the previous incentive, capped at $500. In addition, since auto-enrollment is a proven way to increase employee participation, small employers can receive a credit of up to $500 a year for up to three years for including automatic enrollment in their plans.

Multi-employer plans

The Act also includes a provision that makes it easier for employers to join together in multiple-employer plans (MEPs), effective 2021. These arrangements allow small firms to reach a scale that could increase their negotiating power with providers and at the same time reduce administrative and compliance costs. Section 101 of the Act stipulates that in the event a single employer fails to fulfill obligations, the IRS can essentially disqualify that employer’s portion of the plan, while allowing the MEP to maintain its qualified status. For employers to benefit from the new MEP rules provided for by the SECURE Act, the MEP will have to be administered by a “Pooled Plan Provider”, such as a Registered Investment Advisor.

Feel free to contact or schedule a call if you have any questions about these changes and how they may affect your plan. We are here to serve you!