Financial Insights- January 31, 2022

SHOULD I STAY OR SHOULD I GO? 

January ranked 15th on the list of worst monthly performance in the S&P 500 over the last 20 years. The worst-performing January over that time was in 2009 during the Great Financial Crisis. This was not the start we wanted. There seems to be an unlimited number of wild cards on the table such as the Fed’s tightening of monetary policy, Omicron, inflation, supply chain disruptions, the Russian invasion of Ukraine, US mid-term elections, and so on. The question plaguing investors is, should I sit this one out or HODL? – a term popularized by speculative cryptocurrency and meme stock traders meaning ‘Hold On For Dear Life.’

To put this sell-off into perspective, let’s go back to before the pandemic. Even after the recent downdraft, the S&P 500 still sits 30% above the February 2020 pre-pandemic high, despite all the turmoil between then and now. Over the last 10 years, the total return for an investor with 100% of the money in the S&P 500 would have been 303% or 15% annually. Going back even further to include the impact of the Great Financial Crisis, an investor’s 20-year return would have been 471% or 9% annually. And for those that would look to pull out their investments and hope to time re-entry into the markets, here’s an interesting statistic. For the 14 months during the last 20 years that had worse performance than January 2022, half were followed by a positive monthly performance while the other half were negative. Exactly the odds of flipping a coin. Just another case in point that time in the market is a better strategy than trying to time the market.

INFLATION AND THE FEDERAL RESERVE

Depending on who you ask, the Federal Reserve is either late in fighting inflation or overreacting to inflation. Those that believe that the Fed is overreacting simply are not willing to admit that inflation is more than transitory. As you’ve heard us say before when there is inflation that’s permanent, it shows up in wages, and clearly, that is happening. Like most, we hoped that inflation would be abating at this point but there is too much money chasing too few goods, so prices are up. In the other camp, many wish that the Federal Reserve had started raising interest rates a while ago. So where are we now? After the meeting last week, the Federal Reserve made it clear that it will start raising interest rates at their meeting in March…about the same time that it will quit buying bonds. So, what does all of this mean to investors? If you’re saving money in the bank, you might begin to earn a reasonable amount of interest by the end of the year. CDs will look much more attractive than they have the past couple of years. While it is true that individuals will have to pay more interest on their credit cards, the good news is that consumer debt levels are reasonable. Businesses will have to pay more to borrow money as well and it will cut into some profit margins. Both individuals and businesses will adjust to the higher rates and as they do, the economy is still going to post growth for the year, lacking some unforeseen events or a geopolitical catastrophe. Higher interest rates will slow things down but it’s unlikely to stop a positive economy. That said, volatility will continue in the markets throughout the year, and we still expect a small positive return before the year is over.

401(k) AND MATCHING CONTRIBUTIONS 

According to the Plan Sponsor Council of America, 98% of employer 401(k) plans have a match and/or profit-sharing contributions contributed by the employer. The match is usually a percentage of the employee’s salary. As an example, the company might match 50% of the first 6% of salary. You make $100,000 and invest 7% into the plan. You put away $7,000 and the company adds $3,000 (50% of first 6%). We always encourage clients to save at least enough to get 100% of the matching amount. The maximum an employee can set aside in 2022 is $20,500 for those under 50 and $27,000 for those age 50 and above. A few plans, especially in the not-for-profit world, will vest immediately, but most have a vesting schedule that varies from one to six years. In other words, the match shows up in your account, but if you leave the company before the vesting period ends, you don’t keep all the match or the growth of the match. With a five-year vesting schedule, the employee “earns” 20% of the match each year. Another approach is to use “cliff” vesting where the employee owns 0% of the match for the first three years and then 100% after three years. Defining a year of work isn’t as straightforward as you might think. In most cases, it means the employee worked a minimum of 1,000 hours per year. Thus, an employee can be part-time and still get the match. The match in the contributory part of a 401(k) usually occurs as the employee puts in money with each paycheck. If a company also has a profit-sharing side to the 401(k) plan, it is usually done once each year and will vary in amount depending on the profitability of the company.

THE GREAT RESIGNATION 

Over the past 12-18 months, there has been a phenomenon dubbed the “Great Resignation”. People are quitting their jobs before they find a new one and that assumes they are looking for a new one. Many Baby Boomers who pre-pandemic thought they would continue working for a few more years have reassessed and are retiring earlier than planned. But many others are opting to leave jobs because they want to work from home – especially women with young children – find a more satisfying job, or perhaps are attracted to the big bonus being paid by some employers, i.e., the Army is offering up to $50,000 for some highly skilled positions. But interestingly, the Great Resignation is occurring in some states more than others according to WalletHub. Here is a list of the ten states with the greatest percentage of resignations:

10) Idaho – 3.2%

9) North Carolina – 3.22%

8) Wyoming – 3.22%

7) Montana – 3.25%

6) Hawaii – 3.26%

5) Mississippi – 3.34%

4) Kentucky – 3.42%

3) Georgia – 3.59%

2) Nevada – 3.75%

1) Alaska – 3.8%

We were a little surprised that the numbers were so low compared to all the hype around the Great Resignation.

HELPING AGING LOVED ONES

WISER’s article “Five Questions to Ask Your Mother or Grandmother”¹ offers some great suggestions to help the seniors in our lives, who may be struggling with a variety of issues from how to support themselves financially, to living independently versus assisted living, to health and mobility issues. Women often serve as caregivers for their aging relatives and these questions are good “conversation starters.”

1. Financial scams: Do you receive sales calls or pressure for loans or home improvement services or unpaid bills? Do you ever give out your personal financial information including banking information and your Social Security number to strangers?
2. Running out of money: Do you have a financial planner to help you work out your income sources and how much you may withdraw annually?
3. Health issues: How are your mobility, hearing, sight, and driving skills? With Covid, greater numbers of seniors have become isolated and depressed. 

By getting some answers to these questions, hopefully, you and your loved one can find solutions to improve the quality of life.

______________________________

¹ Women’s Institute for a Secure Retirement

BEST STATES TO RETIRE

Not everyone will want to change residence and many can’t even if they want to move. WalletHub looked at 47 factors across all 50 states to come up with the list of “best” places to retire. But let’s save the best for last. Here are the worst five:

46) Oklahoma

47) Kentucky

48) New York

49) Mississippi

50) New Jersey

Now for the top ten:

9) Arizona and New Hampshire (tie)

8) Utah

7) Montana

6) North Dakota

5) Minnesota

4) Delaware

3) Colorado

2) Virginia…and yes, you guessed it…

1) Florida

IMPORTANT DISCLOSURE