What Does Bank of America See That Others Don’t?

A recent article at CNBC.com is entitled, Bank of America sees end of bull market coming in 2018: Here’s how it will happen. According to the article, Bank of America Merrill Lynch specifically predicts that the S&P 500 will top out at 2863.

According to Michael Hartlett, chief investment strategist at Bank of America Merrill Lynch, “The current bull will be the longest in history if it continues to Aug. 22, 2018, while the outperformance of stocks versus bonds, at seven years running, would be the longest streak since 1929.”  Based on historical patterns, the stock market has gone in cycles – in other words, it has gone up for periods of time and then down for periods of time.  Neither one has gone on forever without changing course.

What makes the above prediction interesting is that numerous other “experts” are predicting the opposite.  For example, Goldman Sachs sees a big 2018 for stocks due to ‘rational exuberance’.

They cannot both be right.  However, let’s examine both scenarios.  If Bank of America Merrill Lynch is correct, there is still growth ahead for the S&P 500 from its current level of 2604[i].  In my opinion, if the S&P 500 Index is this close to its peak, investors should begin to be cautious rather than aggressive.

Said another way, I see more value in protecting profits rather than continuing to chase the top.  Michael Hartlett, chief investment strategist, says in the article, “We believe the air in risk assets is getting thinner and thinner.”

The other scenario is that the Goldman Sachs prediction is correct.  According to the article, their view is largely predicated on Congress passing a tax reform package.  If Congress does not pass tax reform, they predict a drop in the S&P 500 Index of 5%.

These two seemingly opposing views can leave investors uncertain about how to invest for 2018 – and how best to protect but still grow their invested money.  My approach focuses on two things:

  1. Invest in more “conservative” type equities – with lower price-earnings ratios and lower volatility than the S&P 500.
  2. Invest in intermediate-term US Government bonds or bond funds

The goal is to provide some growth, but with a strong eye to minimizing risk.

Please note that this approach is not guaranteed and that past performance is no assurance of future results.

Ben Reppond is CEO and Investment Manager of Reppond Investments. Reppond Investments, Inc. is a registered investment adviser in the States of Washington and Montana. We may not transact business in any state where we are not appropriately registered, excluded or exempted from registration. Individual responses to persons that involve either the effecting of transactions in securities or the rendering of personalized investment advice for compensation will not be made without registration or exemption.

Investment Advisory Services offered through Reppond Investments, Inc.

[i] S&P 500 Index as of November 28, 2017, CNBC.com.

How Much Money Do I Need to Retire?

Your needs in retirement are based on how much your anticipated living expenses will be.  This can vary significantly based on several factors.  Some examples include whether or not you have finished paying off your home mortgage, the amount of travel you have planned, and the costs associated with the activities or entertainment you will enjoy in retirement.

As a “rule of thumb” (according to NerdWallet.com), income during retirement “should aim to replace 70% to 90% of your annual pre-retirement income through savings and Social Security. For example, a retiree who earns an average of $63,000 per year before retirement should expect to need $44,000 to $57,000 per year in retirement.”  Obviously, some of the costs associated with employment will diminish in retirement – i.e., those associated with commuting, lunches, clothing, etc.

Use a Retirement Income Calculator

The website cited above, NerdWallet.com, provides a calculator to help determine your income needs based on your personal situation.

There are usually several sources of income in retirement.  Some of the most common sources are Social Security, pensions, annuities, 401(k), savings, and part-time employment.

How much are my Social Security benefits?

Here is a helpful guide from the Social Security Administration that discusses the following topics:

  • Where to find your Social Security benefits
  • How much Social Security benefits to expect based on the age they begin – and the benefit of delaying filing for benefits
  • The effect outside income has on receiving benefits
  • Children and spousal benefits
  • Taxes owed on benefits received

Additional Social Security resources:

How Does Work Affect Your Social Security Payments?

Determining Your Eligibility and Estimated Benefits

You may want to consider “rolling” your 401(k), 403(b) or 457 plan into an IRA or a Roth IRA.  If you follow the IRS guidelines, there will likely be no tax on this “rollover”.  The IRA or Roth IRA will give you control over how your money is invested.  If you can afford to defer making withdrawals, all of the money in the account can have a chance to grow until it is needed at a later date.

If you need to use the funds from a 401(k), 403(b) or 457 plan for supplemental income, you will need to determine a realistic rate of return on the invested money.  This needs to assume that the stock market will rise and fall during your retirement years.  Inflation and taxes will also need to be factored in as you determine the expected returns from your holdings.

Available part-time jobs

Finally, it is important to consider Medicare benefits (or private health insurance) for you and your spouse, your health and that of your spouse, and your interest in part-time employment.  Part-time jobs are useful as supplemental income and are helpful as a cushion so that you can help needy family members.  Work also keeps a person active and involved in an activity outside the home, and might involve charity work, which may or may not include being paid a salary.  Here are some helpful websites related to part-time employment in retirement.

7 Reasons to Work Part Time in Retirement

10 Part Time Jobs for Retirees

60 Creative Way to Make Money in Retirement

A key issue in retirement is the assurance that you have enough income to sustain yourself, regardless of how long you live and as your health needs change in later years, while hopefully enjoying those years with your family and loved ones.

Ben Reppond is CEO and Investment Manager of Reppond Investments. Reppond Investments, Inc. is a registered investment adviser in the States of Washington and Montana. We may not transact business in state where we are not appropriately registered, excluded or exempted from registration. Individual responses to persons that involve either the effecting of transactions in securities, or the rendering of personalized investment advice for compensation will not be made without registration or exemption.

Investment Advisory Services offered through Reppond Investments, Inc.

[i] <https://www.nerdwallet.com/investing/retirement-calculator

Today’s Stock Market and Your Portfolio Allocation

There are two schools of thought on how to design an investment portfolio. In the first, a “static approach”, an investor puts together a collection of diversified stock and bond funds and leaves it alone, except for periodic rebalancing. In the second school of thought, a portfolio allocation should change over time to reflect the changes and dynamics presented by the stock and bond markets.

The static approach offers broad diversification, but based on the portfolios following this approach, I have found that stocks and mutual funds had poor performance or were extremely volatile over the years. This approach is called Modern Portfolio Theory, and is used by many financial advisors.

Richard Haworth wrote an article in Pensions and Investments entitled, “2008 revealed flaws in modern portfolio theory”. He points out, “2008 is the year everything in finance went wrong.  It highlighted the dangers of everyone slavishly following modern portfolio theory with its deceptively flawed assumptions of constant volatility and correlation. The theory simply ignored grave potential dangers.”[i]

The second approach is to continue to use a diversified portfolio approach, but to use it in a way that adapts to current market conditions. I call it a “modified buy and hold” approach. It is apparent to me that the market is currently overextended and seems to have more downside risk than upside potential. In view of the risks associated with the current market, I am cautiously invested in equities and bonds in my buy and hold approach, avoiding the more volatile sectors.  I am also partially invested in government bonds.

I believe that at some point the market will reverse and even go through another collapse – or at least a significant correction, based on historical patterns. When a market correction happens, I believe that my approach to a diversified portfolio will minimize downside losses. Following a market correction, I will reallocate my client’s portfolios and focus more on growth-oriented equities at that time – when their prices get cheaper.  Patience and belief in historical patterns is inherent in this approach.

Walter Updegrave explains in a recent article in www.time.com/money, “5 Simple Steps to the Perfect Portfolio”. He warns, “Despite what many Wall Street firms and advisers may suggest, you don’t need to stock your portfolio with an ever-expanding array of funds and ETFs to navigate today’s global financial markets. In fact, such a portfolio may do more harm than good. Here’s how to tell whether you’re diversifying or di-worse-ifying.”[ii] Here are the five simple questions he asks.

  1. Do you need the fingers of both hands to count your investments?
  2. Do you own investments you don’t really understand?
  3. Can you explain exactly why you bought each investment you own?
  4. Do you own investments that you’ve never touched after buying?
  5. Do you regularly add new investments to your portfolio?

If you tackle these simple questions thoughtfully, I believe that you can develop a portfolio best suited to your needs and that is also relevant to today’s market conditions.

Ben Reppond is CEO and Investment Manager of Reppond Investments.  Reppond Investments, Inc. is a registered investment adviser in the States of Washington and Montana.  We may not transact business in state where we are not appropriately registered, excluded or exempted from registration.  Individual responses to persons that involve either the effecting of transactions in securities, or the rendering of personalized investment advice for compensation will not be made without registration or exemption.

Investment Advisory Services offered through Reppond Investments, Inc.

[i] Updegrave, Walter, http://time.com/money/collection-post/3263186/diversifying-portfolio-5-rules/

[ii] Haworth, Richard, Pensions and Investments, June 20, 2012, http://www.pionline.com/article/20120920/ONLINE/120929999/2008-revealed-flaws-in-modern-portfolio-theory