Stock Market Investment Strategies & Tips for 2019 – and Beyond
by Paul Partridge and Ian Welham
Amazingly, we’re more than three quarters of the way through 2019.
Did you set some financial goals back in January? If so, now is a good time to take stock of your portfolio and see if your money is working for you.
The S&P 500 is up 18 percent year-to-date as I write this. However, there have been some bumps in the road. The index tanked 6 percent in May and another 6 percent in August, for example. 1 Volatility seems to be on the rise.
If your portfolio has been underperforming, you still have time to hit your targets. Whether your aim is to beat the market, pay down debt, or reduce risk, there’s still time to make 2019 a financial success.
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In an effort to help you fine-tune your investment strategies, my partner Ian Welham and I will each share our two favorite stock market strategies and tips for 2019 – and beyond.
Let’s get started.
Ian Stock Market Strategy #1: Know the real rate of return of your portfolio
As an accountant, there’s one thing that drives me bonkers. When people come to see us for a retirement analysis, I’m shocked by how many don’t know what their money is earning.
Real estate is different. Most homeowners can recite exactly what their home is worth, what they paid, and precisely how much equity they have. For some reason, with their investments, the numbers get a bit murkier.
I typically ask, “What kind of returns has your trading strategy been getting over the last five to 10 years?”
Far and away the most common answer is 10 percent. I don’t know if that’s a number they hear on Squawk Box or from a know-it-all neighbor. But it’s amazing how many people say 10 percent.
But when I review their statements, the total return is seldom 10 percent. More often it’s closer to four or five percent.
Financial research company DALBAR discovered a similar pattern. Every year since 1994, DALBAR tracks how average investors fair vs. common stock market benchmarks.
For example, last year the S&P 500 suffered a loss, losing 4.4 percent. In contrast, the average investor lost 9.4 percent, according to DALBAR – more than twice as much. 2
That’s the short term picture. If you look longer term, the numbers get worse. DALBAR reports that the average investor underperforms the stock market by nearly 6 percent a year.3
That’s a massive difference – especially when compounded over the long term. Why the big disparity?
Presumably it’s because average investors are not very good at market timing. They tend to buy at the high and sell at the low. Rather than following a disciplined system, they’re buying and selling stocks emotionally.
This is not a criticism. It’s completely understandable, and quite common. But few people realize it – or grasp the impact it can have on investment performance.
So go through your statements and do the math rather than just assume your index funds match the benchmark returns. You may be surprised. (Don’t forget to subtract fees.)
And by far the biggest factor that impacts results is Paul’s first tip.
Paul Stock Market Strategy #1: Understand how much investment risk you’re taking
The case for adopting a buy-and-hold investing strategy goes like this:
If you invested $1,000 in stocks 100 years ago, you’d be sitting on almost $14 million today. 4
Except no one talks about the bumps in the road.
Namely that you would have spent almost half of your time – 46 years – holding your breath while waiting to get back to previous highs. 5
In four consecutive years starting in 1929, the Dow lost 17%, 34%, 53% and 23%. During the entire decade of the 1970’s, the Dow gained 38 points. Total. In 10 years. 6
Japanese buy-and-hold investors have been waiting three decades to get back to breakeven. Even after a strong run-up the last few years, the Nikkei is still 43% below the all-time high set in 1989. 7
Looking back, it’s easy to say we would have held on through these stomach-churning events.
But most human beings will not stay in an investment that does nada for 30 years. Or worse, goes backwards.
As retirees and pre-retirees, time is not on our side. We can’t afford to wait a decade – or three – for our savings to grow. Our needs are more immediate.
But many Baby Boomers may be taking too much risk for their age – and for the return they’re getting.
I commonly meet men and women hoping to retire in two years who have 70… 80… even 90 percent of their savings in the stock market.
Even if they’re not active trading, this may be too much risk given their situation – risk they may not even be aware of. Here’s what I mean.
Imagine you have $1.5 million in your IRA and you’ve got 70% of your assets currently in the stock market. In 2008 the biggest drop, highest point to lowest point, was a 53 percent drawdown. 8 A 53% drop in stock prices would result in a $556,500 loss for you.
You don’t have to be in extremely risky mutual funds to be exposed to losses like this. Even target-dated funds, can have large drawdowns when the market experiences a correction.
For example, the Vanguard 2020 fund registered a 44% drawdown during the financial crisis.9 The Fidelity Freedom® fund had a 47% loss. 10
“There is a common misconception among many target-date holders that the portfolio is completely de-risked at retirement, and that simply isn’t true,” says Robert R. Johnson, professor of finance at Creighton University’s Heider College of Business, as quoted in the Wall Street Journal. 11
Sadly, we see this dynamic all the time. It’s one of the most common problems that we help people deal with. They have a false belief that they’re conservative or low-risk when in fact their nest egg could be exposed to significant risk in the next market selloff.
We use a simple three-step process to help retirees figure out and manage risk. Whatever approach you use, it’s important to protect the money you’ve worked so hard to save. And the first step to protecting wealth is managing risk.
To be clear, I’m not suggesting zero risk. Most of us need some market risk in our portfolio as a hedge against inflation – especially medical inflation as we age. But it’s important to understand:
- Exactly how much risk exposure we currently have
- What’s the appropriate risk for our age, situation and financial goals
- How to grow money without taking on unnecessary risk
Ian Stock Market Strategy #2: Pay attention to taxes
Have you ever considered Roth conversions?
As an accountant I’d say this is probably the most overlooked and underutilized tax strategy that’s available to everyone.
If you have a traditional IRA, you can convert all or part of it to a Roth IRA. You pay taxes on the conversion, and the money then grows tax-free in the Roth IRA. You pay zero tax on Roth withdrawals as long as you meet certain requirements.
And here’s a biggie: unlike traditional IRAs and 401(k)’s, there are no Required Minimum Distributions (RMDs) with a Roth. You have 100% control over when to take distributions. And beneficiaries pay zero taxes on inherited Roth IRAs. 12
Most people are aware of or have heard the term Roth conversions, but don’t understand how they work. Or the power they have to potentially reduce taxes in retirement.
Sadly, not enough CPAs discuss the possibility of Roth conversions with their clients (most accountants are focused on simply getting through this year’s tax deadline). The talking heads on TV don’t mention it because it’s not a sexy enough topic.
Roth conversions are not suitable for everyone. For example, it’s possible conversions could raise your Medicare Part B premiums or Social Security taxes, so make sure to work with a tax professional. For those who qualify, the key is knowing when to get started (you don’t want to wait until you’re 65). Also important: how much to convert per year (if you convert too much or too little, you’ll lose the benefit). Let’s look at a hypothetical example.
Jeffrey is 63. His combined liquid assets are a little over $4 million. He needs $10,000/month of after-tax spendable income in retirement. If he stays on his current path, he’ll be in the 24 percent tax bracket from 2019 to 2026, the first year his RMDs begin. RMD distributions will quickly push him into the 32 percent tax bracket, assuming a 6 percent growth rate for his assets.
By working with his CPA and doing Roth conversions, Jeffrey should be able to stay in the 24% tax bracket in the early years, and eventually lower his tax bracket from 32 percent to 12 percent later in life. More significantly, he can pass on potentially up to $3.2 million to his family through tax savings.
Yes, you read that correctly. Over $3 million in potential tax savings.
Roth conversions are just one tax strategy retirees can use to limit or reduce the taxes they pay in retirement. There are many more.
If your accountant or attorney or financial planner won’t talk to you about them, you might want to find a professional who will. It can make a tremendous difference to you, your spouse, your family, and the charities you support.
Paul Stock Market Strategy #2: Have a plan beyond “buy and hold”
Bernard Baruch was a famous Wall Street investor and financier. When asked how he got to be so rich, he replied, “By selling too soon.” 13
We’ve just lived through perhaps the best 10-year period ever for U.S. stocks. 14 Stock prices are near all-time highs. Company earnings remain mostly positive.
Today, many men and women we meet are hopeful that the bull market continues. At the same time they admit to being concerned about a stock market downturn. They realize we’re due for a correction, but don’t want to miss out on any potential gains.
In essence their plan comes down to this: crossing fingers and hoping for the best.
Dear reader I think you will agree: hope is not a solid plan.
I remember in 2008 when investors were coming into our office in tears – sobbing over their investment losses. They were panicked about running out of money in their most vulnerable years, and desperate for help.
The 2008 meltdown came without warning. After a long run-up, most investors were expecting higher highs. It was a surprise when stocks dropped 40 percent in 60 days. The stock market fell faster than investors could react. People stopped reading their monthly statements: they couldn’t bear to look at the numbers.
Will it happen again? If history is any guide, it’s quite possible the market will be lower a year from now than it is today. That’s why now could be the best time to adjust your plan. It’s prudent to address dangers before they actually occur — because it’s too late once they happen.
Perhaps you’re thinking, “I’ll be okay. 2008 was devastating. But since then we’ve had a solid 10-year run. I’ve recovered my losses and then some.”
The question is, do we take the gift we’ve been given (a decade of uninterrupted gains) and harvest some of our profits to fund a comfortable retirement? Or do we continue to roll the dice, risking a lot in hopes of pocketing a bit more?
Remember, “gains” are only paper profits until you sell.
The answer may depend on your age. If you’re at or nearing retirement age, you’re about to experience the biggest financial shift of your life.
The focus changes from ‘How much can I save and grow my nest egg?’ to ‘How do I protect what I have and maintain my lifestyle – without a weekly paycheck – even if I live to age 110?’
Accumulation is no longer the end goal. Distribution is more important now. How are we going to safely spend down the money we’ve spent a lifetime saving? How are we going to ensure it doesn’t run out?
Making these decisions requires proper planning. A wrong move at this point can be doubly costly because we don’t have time to recover.
Famous Dallas Cowboys coach Tom Landry said, “Setting a goal is not the main thing. It is deciding how you will go about achieving it and staying with that plan.” 15
The right financial advisor can help you make a plan – and stick to it.
We suggest the first step is to arm yourself with information. If you’re exploring retirement, you’re welcome to download the financial and Retirement Planning Guide available for free at our website. Just click here to get your copy.
Meanwhile we wish you successful trading for the remainder of the year – and in 2020 and beyond.