Ponderings For the Week of October 5 to 11, 2020

Bad Month but Strong Quarter for Stocks

The third quarter of this troubling year closed last week. While September was the first month since March where stocks declined, the quarter was quite strong. Last week, small- and mid-cap shares led the pack. Foreign stocks also fared well.

There was a lot of bad news that stood to plague the investment markets, but traders seemed to take it in stride. Perhaps they’re numb to the incessant drumbeat of problems since the beginning of the year. Last week, political news dominated, led by the president’s Covid-19 diagnosis. On top of that was the first presidential debate which was widely characterized as horrible. Also, while most everyone wants another round of stimulus, the decision makers seemed content to do nothing but bicker.

Economic and employment news was mixed, but still points in the right direction toward continued recovery, albeit at a slower pace than hoped. Despite all the tribulation, most stock sectors save energy posted gains last week.  

Caveat Homeowners

How much of your total net worth (assets [what you own] minus liabilities [what you owe]) is comprised of the value of the family domicile? This is an important number. A recent study indicates that the value of the homes owned by working age people comprises about 50% of total net worth for those residing in the heartland of the United States and almost 60% of net worth for denizens of the East and West coasts. Many homeowners have enjoyed substantial gains in the values of their homes despite the steep drop in prices during the Great Recession. The danger of having a lot of one’s wealth tied up in the family home is that while net worth may seem adequate when planning for retirement, if the value of the home represents a large percentage of total worth, you may be deluded into thinking that you are better off financially than you are, unless you’re prepared to downsize or rent to provide more spending resources during retirement. Consider this example.
Example: Edward and Edie Edifice are within a decade of retirement and have a seemingly adequate net worth of $1 million. They have been running retirement spending projections based on their $1 million net worth and like what they see. But closer inspection reveals that $550,000 of their net worth consists of equity in their home, net of a sizeable mortgage. Since they have no intention of moving when they retire, the value of the home should be excluded when analyzing retirement cash flow. The Edifices are sobered by this revised, but more realistic projection.


Smart Money Tips

  • Jump in and out of the stock market at your own peril. Some people think they can time the stock market. They think they can jump in when prices are low and jump out when they’re at their peak. Usually these people are wrong. Stock market gains generally occur in spurts and these spurts often occur at unexpected times. The danger of attempting to time the market is you’ll miss these spurts. History has shown time and again that most of the gains in the stock market are earned over very short periods of time, frequently soon after stocks have taken a drubbing. So if you’re not invested in stocks during the month or quarter that the market zooms (like it did earlier this year), you lose out. The moral of this story is simple: never try to time the market.
  • Planning for children with different needs. A lot of parents fret over how they’re going to pass on their estates. They want to treat each child the same, but the children often have different needs or some may be able to handle money while others can’t. In these cases, trying to treat them all the same in your estate planning could be a mistake. If you have any concerns about how to pass on your estate to your kids, speak with an experienced estate planning attorney. He or she is likely to have considerable experience dealing with families in a similar position.







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