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Consumer Article from the FPA: A No-Bull Bear Market Survival Guide for Investors

For use by FPA members with the public and media:

A No-Bull Bear Market Survival Guide for Investors

 

Inevitably it happens whenever the stock market takes a negative turn of some duration: Investors begin to wonder if the downturn is the harbinger of an imminent bear market — a prolonged period of broad equity market declines and a return, perhaps, to the dark days of the Great Recession, when people saw the value of their assets decline steeply, at least on paper.

 

If the Great Recession and the behavior of the equity markets since then have taught us anything, it is that knee-jerk, short-sighted and often panic-fueled investing and financial decisions made in reaction to a bear market can erase years of solid investment performance and decision-making, hamper a person’s ability to meet long-term life goals and undermine their overall financial health.

 

There is a better way. When it appears a bear market is imminent or already upon us, investors, rather than making asset-management decisions that ultimately run counter to their best financial interests, should instead take a deep breath, then level-headedly choose a better course of action. It is recommended not to act in haste and avoid listening to the “noise” to act and make changes immediately that will be brought up throughout media circles. The following five suggestions offered by financial professionals and outlined below are designed to help people prepare in advance, so they can resist making ill-advised, heat-of-the-moment choices about their assets when the next bear market hits, as history suggests it inevitably will.

 

The rationale for doing so? “People that live in places that are prone to tornadoes need a tornado shelter, in case that tornado comes,” says FPA member Eric Walters, a CERTIFIED FINANCIAL PLANNER™ professional who heads SilverCrest Wealth Planning in Greenwood Village, Colo. “It’s the same for investors. They need tornado-preparedness for their [investment] portfolio.”

 

  1. Know the history and the context. Equity markets, and the stock market in particular, are prone to long and sometimes extreme highs and lows. As FPA member Robert Stoll, CFP® of Honey Lake Advisors in Barrington, Ill., notes, history suggests that when it comes to equity markets, what goes up must also come down — “that the S&P500 has had 25 years with negative returns since 1926. That's a bit more than one out of every four years. Understanding the history of the market and its volatility can help investors mentally prepare for bad years.”

 

History also suggests that equity markets will recover — sometimes faster than others. An analysis by T. Rowe Price found that from 1928 to 2017, stocks grew annually by an average of 10.2 percent. That includes the 25 years of negative returns.

 

“Mentally and emotionally, know that a bear market is a temporary time-out or pause in a market that is ever-advancing over the long-term,” advises FPA member Edward J. Snyder, CFP®, with Oak Tree Financial Advisors in Carmel, Ind.

 

“I often review how many months different bear markets took to hit their bottom and how many months it took to recover,” adds Walters. “By talking about declines and recoveries in months it helps emphasize that investors can get through bad markets.”

 

This kind of perspective helps investors to realize that any drops in the value of their assets are on paper only and not true losses. They only become true losses when those assets are actually sold. Having a broad historical perspective helps them to resist selling assets when their value has plummeted, hardly an optimal move.

  1. Ensure your assets are appropriately allocated. A person’s assets should be strategically allocated across various classes — equities (stocks, etc.) and fixed investments (bonds and the like), primarily, along with real estate and so-called alternative investments — such that those assets provide both the potential for growth and downside protection, in the event of a bear market. So, take stock of your asset allocation, suggests Walters. “Does it align with your risk tolerance and emotional ability to handle volatility? If not, it is better to change it now than when we are in a bear market.”

 

Stoll suggests that investors assess how their assets are allocated at least annually, and adjust as necessary, because that allocation likely will shift over time as the value of assets in different asset classes fluctuates. “For example, an asset allocation of 70 percent stocks, 30 percent bonds 10 years ago, if left untouched, would have turned into an allocation of about 85 percent stocks, 15 percent bonds, today, due to the equity market's strong returns over that time period.”

 

In the context of asset allocation, it’s also important for people to maintain a cash reserve or emergency fund, from which they can draw in a pinch (such as due to a job loss, which could be likelier during an economic downturn) instead of having to resort to liquidating stocks or tapping retirement accounts when their value is down during a bear market. Walters recommends keeping enough cash to cover as little as three months — but preferably closer to six to nine months — of basic living expenses in that reserve. Also be sure that money is readily accessible, in a high-yield savings or money-market account, for example.

 

  1. Have a genuine big-picture financial plan that includes goals, and revisit the plan to remind yourself of those goals. Walters recommends that people have a long-term financial plan, one that connects their resources to their goals, and specifies the asset-management strategies and steps needed to reach those goals, taking into account bear markets, bull markets and everything in between. “By focusing on dreams and the [investment] returns required to meet them, they can endure difficult markets better,” posits Walters. Instead of selling off assets whose value has depreciated, violating the fundamental “Buy low, sell high” investing credo, that goal-oriented financial plan serves as a compass to keep them on the right path.

 

  1. Enlist the help of a financial professional to guide you through possible scenarios. People who have already walked through the what-ifs ahead of time, with hypotheticals to see how their particular asset allocation has performed in past bear markets, are less inclined to make imprudent asset-management decisions when a negative scenario becomes reality, says Walters.

 

To be worthwhile and accurate, those market scenarios need to account for a wide range of relevant factors. That’s where modeling tools, and a financial professional who knows how to use them, become particularly valuable. Not only can a financial professional run various scenarios on complex modeling software, they can interpret the findings from those modeling exercises and relate them to a person’s specific situation. “For example,” says Walters, “if you have $1 million and the worst return [scenario] is -30 percent, then we talk about what it would be like to have your [investment] statement arrive and see a balance of $700,000 [instead of $1 million). I do this with clients to help them understand that it could happen and to ensure they can endure it.”

To find a CERTIFIED FINANCIAL PLANNER™ professional in your area, visit the Financial Planning Association’s searchable database at www.PlannerSearch.org

 

  1. Invest in yourself by building your skillset. As the Great Recession demonstrated, the financial vulnerability that people face when the economy craters extends well beyond their investment portfolio. Their risk of job loss may also increase, for example. To protect against that risk and give yourself more career options, says Walters, “invest in your skills and build strong relationships within your company and [your] network.”

June 2019 — This column is provided by the Financial Planning Association® (FPA®) and FPA of San Diego, the principal membership organization for Certified Financial PlannerTM professionals. FPA seeks to elevate a profession that transforms lives through the power of financial planning. Through a collaborative effort to provide more than 23,000 members with tools and resources for professional education, business support, advocacy and community, FPA is the indispensable resource in the advancement of today’s CFP® professional. Please credit FPA of San Diego if you use this column in whole or in part. The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION.  The marks may not be used without written permission from the Financial Planning Association.

 

 

 

Consumer Article from the FPA: The Health Savings Account: A Powerful but Oft-Overlooked Asset for Retirement

For use by FPA members with the public and media

The Health Savings Account: A Powerful but Oft-Overlooked Asset for Retirement

 

Some 15 years after the U.S. government established health savings accounts to give people a tax-favored vehicle to pay for medical and healthcare expenses, the HSA remains “the best deal in the tax code,” according to CERTIFIED FINANCIAL PLANNER™ professional and FPA member William M. Harris, cofounder of WH Cornerstone Investments in Duxbury, Mass.

 

That deal comes in the form of “a compelling mix of tax breaks and other savings that can keep [HSA account owners’] health insurance costs down,” explains FPA member Peter Lazaroff, CFP®, co-chief investment officer at Plancorp in St. Louis, Mo. “But under the right circumstances, these accounts offer an even more powerful — and largely underappreciated — chance to boost your long-term savings and provide a nest egg to offset the rising cost of health care later in life.”

 

Established as part of a federal tax law that took hold in 2004, HSAs are available to people who participate in a high-deductible health plan. The compelling mix to which Lazaroff refers begins with a triple tax advantage:

 

  1. Contributions to an HSA net the contributor a current-year tax deduction (of up to $3,500 annually for an individual and $7,000 for a family in 2019).

  2. Any earnings or growth in the value of funds in the account are tax-free.

  3. Funds withdrawn from the account come out tax-free if they are withdrawn according to HSA rules and are used for qualified healthcare/medical expenses.

 

While those tax advantages certainly can be useful to the many people who contribute to an HSA and use funds in the account to pay healthcare and medical expenses on an ongoing basis, it’s the longer-term possibilities to which Lazaroff refers — the widely underappreciated aspects of the HSA — that make it a particularly appealing tool for people saving for retirement. Funds in an HSA can be used to cover qualified healthcare and medical expenses at any stage of a person’s life, including retirement, when they can be used to cover Medicare premiums, long-term care insurance premiums, long-term care expenses and day-to-day costs, from copays to prescription drugs to high-priced surgeries.

 

Those costs can add up over time, particularly during retirement, when people generally are more apt to need health care. According to Fidelity Investments, the average retired couple age 65 in 2019 may need about $285,000 saved (after tax) to cover healthcare and medical expenses in retirement. That figure is in today's dollars and excludes potentially expensive long-term care.

 

So rather than using the HSA mainly as a revolving account to cover qualified expenses in the short-term, there’s merit to the owner of the account instead using it as a long-term savings and investment vehicle, similar to an IRA (individual retirement account), contributing as much as they can to the HSA (up to the allowable yearly limit). Instead of using that money to cover near-term expenses over the course of a given year, they pay all or most of their medical/healthcare expenses out of pocket, thus leaving money in the account, where it can roll over from year to year, and where it has the opportunity not only to accumulate but to grow in value. To give HSA account owners access to upside potential, many HSA providers offer IRA-like mutual fund investment options in addition to a base savings account.

 

An HSA “can be treated as an IRA in that balances can roll from year to year, they can be invested in most any type of marketable security, and their annual contribution limits are substantially higher than an IRA,” explains James H. White, CFP®, who heads J.H. White Financial in Pottstown, PA.

 

That’s when an HSA becomes much more than just a tax-friendly revolving account and begins to function more like a long-term tax-favored retirement asset. Using such an approach, “You can walk into retirement with a nice, healthy pot of money to use for healthcare expenses,” says FPA member Cathy Gearig, a CERTIFIED FINANCIAL PLANNER™ professional with LifePlan Financial Advisory Group in Rochester Hills, Mich.

 

The longer the HSA owner follows that approach, the more time the money in their account has to grow. “If you begin maxing out [annual HSA contributions] at an early age, you can benefit from tax-free compound earnings for a long period of time, says FPA member Jake Northrup, CFP®, of Ballentine Partners in Boston, Mass. “This not only reduces your tax bill in the year of contributions, but creates a powerful investment vehicle that you can specially earmark for future medical expenses. With medical costs and life expectancy rising, this can be a very important strategy to utilize.”

 

Such a strategy works in large part because of the triple tax advantage associated with the HSA. Contributions, any growth inside the account, and distributions (withdrawals) from the account, when used for qualified medical/healthcare expenses, are all tax-free. “By investing your HSA savings as you would your retirement savings — typically in a diversified mix of mutual funds and [exchange traded funds] that offer the opportunity for long-term growth — you’ll build a tax-free fund dedicated to health costs in retirement, which are likely to represent a significant portion of your future budget,” says Lazaroff. “The chance to add another pool of tax-deferred money to your retirement savings is an advantage you shouldn’t ignore.”

 

Leading up to and during retirement, the funds inside an HSA always can be used, tax- and penalty-free, for medical/healthcare expenses. When the account holder hits age 65, the restrictions on how those funds can be spent lift, and HSA funds can be used for any purpose, without the account owner incurring a penalty (although they will have to pay income tax on distributions that aren’t used to cover medical/healthcare expenses). Also come age 65, account owners can use HSA money (again on a tax-free basis) to pay premiums on Medicare and certain kinds of insurance, such as long-term care insurance.

 

How much of that pool of HSA money a person decides to allocate to IRA-style equity investments (tied to the stock market, generally) and how much they opt to keep in a more conservative traditional fixed HSA vehicle depends on a person’s risk tolerance, and the extent to which they’re using the HSA not only as a long-term investment tool but also to cover near-term medical/healthcare expenses, notes Gearig. People who expect to pay near-term expenses out of the HSA may want to allocate more conservatively by keeping money in a savings-type HSA account, where it can’t lose value, knowing they may need to access that money soon, while also maintaining an investment portion of the HSA to access long-term growth potential, knowing the value of that investment allocation likely will fluctuate along with movements in equity markets. “It’s a good idea to treat the investment component of the HSA like you would funds in an IRA — more hands-off,” she advises.

 

As Gearig notes, not everyone has the cash flow required to both fund an HSA and cover all or most of their medical/healthcare expenses out of pocket. “That’s certainly not possible for everyone,” she says. “It really depends on the stage of life you’re in, and what you’re cash flow picture looks like.”


Regardless of the stage of life, it’s worth considering contributing to an HSA, and if cash flow permits, leaving at least some of those funds in the account as a long-term investment for retirement, because, as White points out, “Every dollar you can put in an HSA and save for retirement health care expenses will take some stress off of your other retirement accounts.”

 

June 2019 — This column is provided by the Financial Planning Association® (FPA®) and FPA of San Diego, the principal membership organization for Certified Financial PlannerTM professionals. FPA seeks to elevate a profession that transforms lives through the power of financial planning. Through a collaborative effort to provide more than 23,000 members with tools and resources for professional education, business support, advocacy and community, FPA is the indispensable resource in the advancement of today’s CFP® professional. Please credit FPA of San Diego if you use this column in whole or in part. The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION.  The marks may not be used without written permission from the Financial Planning Association.