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Ponderings For the Week of May 14 to 20, 2018

Investors Cheer Strong Week for Stocks

Thanks to big gains in stock prices, the Dow Jones Industrial Average and Standard and Poor’s 500 Index moved from negative to positive year-to-date returns. Both indexes gained nearly 2½%. The gains were broad based with foreign stocks and small company shares also faring very well. The strength was not so much due to strong economic and corporate data as it was investor enthusiasm, preferring to sink more money into equities despite some, but not a lot of troubling news.

Investors are by and large an optimistic lot. At least that can be said of successful investors. But it’s important to stay grounded in reality. The equity markets have been rising and falling within a rather narrow range. In fact, the S&P 500 Stock Index has crossed the unchanged level eight times this year. So while it’s enjoyable to see stocks rise as mightily as they did last week, keep in mind that despite all the recent gains we so fondly recall, stocks have little to show for it so far in 2018.

 

Nothing in Your Financial Life” is “Either/Or”

A lot of people think that most of their financial choices are "either/or" decisions. In other words, when confronted with a financial decision, you must either take one course of action or the other. Financial salespeople often abet such thinking when trying to steer you into a particular, high commission financial product. But most financial choices don't require you to do either one thing or the other. Often, a combination is more appropriate. Here are some examples:

-    The investment markets are often scary, and you may be in a quandary about whether to sell a particular stock or mutual fund. If you’re in a dither, why not sell a portion – say half of the amount you hold. That’s what a lot of professional investors have always done when concerned about a holding.
-    Anyone who holds traditional IRAs can convert them into Roth IRAs regardless of income. But you have to pay taxes on the conversion, so you may be reticent to incur a big tax bill. Again, this isn't an either/or decision. Perhaps converting a portion of your IRA money into a Roth is the answer. You can always convert more money in later years.
-    Long-term care insurance policies are an area where a compromise may be advisable. Either you get the coverage with all the expensive bells and whistles or you go without the coverage, right? A compromise might be to obtain a basic policy that offers moderate protection but won’t impair your budget with expensive options.    
-    Some pre retirees view the decision of what to do with their company retirement savings plans as either taking a lump sum payout from their plans or putting the money into an income annuity. But a combination of a part lump sum and part annuity may be a better course of action or take the lump sum now and consider an income annuity later in life.
-    The decision about when to collect Social Security is a particularly challenging one that is often viewed as either collecting at the earliest possible time, age 62, or waiting until normal retirement age, which varies depending on your year of birth. But there are often situations where it’s preferable to collect after age 62 or even after normal retirement age – as late as age 70. Also, every month you delay commencing benefits results in a higher lifetime Social Security check.

So keep in mind that very little in your financial life involves an "either/or" decision. Realizing this will help you take better control of your financial future. Remember, it’s your money and therefore you are the one who should be in control.

Smart Money Tips

  • Start early, save often.  Younger people understand this, but they don’t necessarily do it. Life is a series of trade-offs. The more you favor current consumption over long-term investment, the longer it will take you to build the necessary savings to achieve your financial dreams. Even small amounts of money grow well if invested smartly. Money grows a lot more if you can regularly increase the amount you save, which should be achievable as your work income increases and/or your living expenses level off. 
  • When it comes to thinking about long-term care needs, Americans have their heads in the sand.  A survey that looked at how Americans are planning for long-term care later in life reveals that while a majority of survey respondents thought long-term care expenses could jeopardize their retirement wellbeing, almost 70% have done little or no planning for long-term care. About half of the respondents to the survey said they would pay for these onerous costs by qualifying for Medicaid, either by becoming impoverished or by transferring assets to family members. These are lousy solutions, though. My recommendation is for people to start getting realistic about the potential financial threat that long-term care costs pose. And that’s usually best addressed while you’re in your 50s or early 60s, particularly if you’re contemplating acquiring long-term care insurance. 

 

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