“It’s not supposed to be easy. Anyone who finds it easy is stupid.” – Charlie Munger
During WWII, Ken Arrow, who went on to win the Nobel prize in economics, was a long-range weather forecaster with the Army Air Corps. He, along with his colleagues, realized after some time that his forecasts were no better than random chance given the limitations of the technology at the time. When he brought this fact to the attention of his superior officer he was told, “The commanding general is well aware that your forecasts are no good. However, he needs them for planning purposes.”
Many times, the same could be said about investing. We know we have little confidence in forecasted returns, but we need them for planning purposes. Given the present situation of my retirement savings, what is the growth rate estimate I should use to calculate whether or not I will have enough money to retire comfortably? The real answer of course depends on thousands of unanticipated events that will occur throughout our lives that impact not only our standard of living, but the returns in our retirement fund. However, it’s just easier to say 7.5% because that’s what my advisor told me.
An interesting perspective on life
The MIT AgeLab divides a person’s life into four segments, each lasting roughly 8,000 days, or 22 years. The segments are:
1. Learning – birth through college;
2. Growing – early professional career, starting a family, buying your first home etc.;
3. Maturing – prime earnings years, becoming empty nesters;
4. Exploring – retirement journey beginning mid 60s
For many people, the thought of being retired for 8,000 days will strike us with both wonderment and fear. Using your handy 7.5% return estimate, you can calculate if you’ll have enough money for 8,000 days but as you’ll read below, there is more to it than just money. I have observed in my 30+ years in the trust business that bank trust companies can certainly help with each of the four life segments, but they are particularly adept at helping to navigate through the last 8,000 days.
The AgeLab goes on to break the Exploring segment, or retirement, into four phases:
1. Honeymoon Phase - You still have plenty of money and are in good health. You can travel and your friends are still around.
2. Big Decision Phase – Thinking about where to live. Who will be around to help you? Will you age-in-place or in a retirement community?
3. Navigating Longevity Phase – Often entered as a result of the loss of your partner, or being diagnosed with a terminal condition.
4. Solo Journey Phase – Impacts women disproportionately. More than 43% of women over 70 live alone.
I don’t do many self-promoting commercials in my weekly emails, but I feel strongly that Old National in particular is well suited to help people plan and navigate their retirement. I would encourage you to reach out to anyone on our Wealth Management team to talk about how we can help you have the best 8,000 days of your life.
Stop telling me everything is fine, when it isn’t.
We won’t pretend that there is nothing going on in the stock and bond markets. Clearly, the Dow is off over 1,200 points, or about 5% in just the last two trading days. Year-to-date returns for both the Dow and the S&P 500 are negative again, although less than 1%. The yield curve briefly inverted yesterday with the 2-year yield marginally higher than the yield on 5-year Treasuries. One thing to keep in mind though is that inverted yield curves do not cause recessions. The curve inverts because yields reflect investor expectations about future economic growth.
- Stock investors are re-assessing the China trade/tariff situation, which has been made worse by the arrest of Huawei’s CFO over alleged violations of Iran sanctions.
- Oil prices are lower, which is causing investors to re-assess future inflation and has driven the yield on the 5-year Treasury lower, while Fed policy has kept the 2-year relatively stable.
- Investors are re-assessing corporate profitability and earnings growth for next year (2019). Whereas S&P 500 Earnings Per Share rose about 20% from 2017 to 2018, the expectation now is for 2018-2019 growth to be only 4% - 5%.
What does all this mean? It means the growth rate of the US economy is slowing, not contracting. That’s an important difference. We do not expect the US to enter into a recession in either 2019 or 2020. However, 20%+ growth rates in earnings per share are over for a while. The stock market needs to adjust for lower earnings GROWTH.
It looks like the Fed may slow the pace of rate increases even further. There is some speculation that we may see a rate hike on December 19th and possibly none in 2019.
Expect stock market returns in the 5%-10% range for 2019. The 10-year US Treasury yield will likely be in the range of 2.5% - 3.0% and Fed funds will peak around 2.75%.
Stay focused on long-term objectives.
Our Promise to You
Managing money is more than simply trading stocks and bonds. It's planning of life's milestones, in your life and in the lives of those you care about most. At Old National Wealth Management, we invest the time to understand your goals and the discipline to manage your assets accordingly.
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