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Ponderings For the Week of March 25 to 31, 2019

Stocks Decline Amidst Bond Worries

Bond yields sent quivers through the U.S. markets on Friday. The culprit was an always-feared inverted yield curve. This means that the interest paid on a long-term Treasury bond is lower than the yield on short-term Treasurys. This is an unusual occurrence since under normal conditions longer-term bonds yield more than shorter-term bonds. But worse, an inverted yield curve can be a harbinger of a recession and declining stock prices. Evidence of deteriorating manufacturing conditions both here and in Europe further exacerbated investor angst. For the week, stocks declined almost 2% on average, with smaller company shares faring worse than the biggies. 

A one-day or for that matter a one month yield inversion doesn’t necessarily portend economic doldrums, but rest assured that a lot more attention will now be directed toward what might go wrong in the investment markets. The second quarter of 2019 ends this week, so earnings season is nigh. Disappointing results will make matters worse. But weak earnings comparisons have been predicted many times over the last several years only to be proven wrong. We can only hope that corporate profits continue to please the investment community.


The Early Bird Gets the Dough

Most people realize that the earlier they start saving for retirement, the more likely they will accumulate the needed funds. Postponing getting started has startling implications. Late starters may find that it is impossible to save the necessary amount to provide for a desired retirement income. Consider three individuals, each age 25 and each of whom estimates that $1 million of retirement savings will be needed at age 65. One plans to start saving immediately, the second will begin saving at age 35, and the third will begin at 45. The assumptions are the same for each: the rate of savings will increase by 5% per annum and annual investment returns are estimated to be 6%. Under these assumptions, here are the first year savings necessary to accumulate $1 million at age 65:

  • Starting at age 25 and saving for 40 years: first year savings of $3,100.
  • Starting at age 35 and saving for 30 years: first year savings of $7,000.
  • Starting at age 45 and saving for 20 years: first year savings of $18,500.



Smart Money Tips

  • Sleep tight with an emergency fund. Recent studies indicate that a high percentage of the populace would have difficulty coming up with $1,000 to pay an unanticipated bill. Yet unanticipated bills arise all the time. This is where an emergency fund can help while allowing you to sleep more soundly. Start small with $500 to $1,000 in a bank or credit union savings account or brokerage money market fund. Then, gradually build up the fund to the equivalent of two to three months spending, ideally one that pays some interest. Only tap into the money to meet a financial emergency. Resist the temptation to spend some of it on fripperies. Just because something you desperately want goes on sale, this in no way constitutes a financial emergency.    
  • Manage your home equity loan like a business.  If you’ve tapped into your home equity credit line, do you have a plan for repaying the loan over an appropriate period of time? It must be human nature, but whenever a homeowner obtains a home equity credit line, previously unrecognized opportunities to spend large sums of money become immediately apparent. Before you take money out of your credit line, you should have a timetable for paying it back. Take a cue from well-run businesses that borrow for short- and long-term purposes and pay off those loans accordingly. If you’ve used your credit line to buy a car, for example, you should pay off the loan within two or three years. Home-equity lines that are accessed for longer-term purposes like home improvements or college tuition can be paid off over a longer period of time, say a decade or so. What you want to avoid under any circumstances is a situation where you are simply increasing your borrowing with no end in sight. Actually, there is an end in sight for home equity loans because most of them mature in ten years, after which you have to begin paying interest and principal each month like a mortgage.




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