The Nike Deferred Compensation Plan can be a powerful way to lower your income taxes and save additional pre-tax funds above and beyond any 401(k) contributions.

With open enrollment approaching, we wanted to share the 5 most common mistakes we see with Nike Executives.

1. Ignoring Profit Sharing Contributions from Nike

If you earn over $280K (2019) in combined Salary & PSP, then Nike makes profit sharing contributions on your behalf directly into the Deferred Compensation plan even if you do not contribute to the plan.  These contributions are often viewed as insignificant, but they can quickly accumulate to a sizable amount.  We commonly see these contributions ignored and left invested in the default, which is cash, and thus miss out on multiple years of potential growth.

2. Forgetting about Evergreen Provisions

Evergreen provisions mean that any elections you make in the previous year will continue to roll forward each year if you do not participate in open enrollment. For example, if you decided to defer 10% of your salary last year and do not participate in open enrollment, you will automatically be re-enrolled at 10%. Deferred Compensation plans are more rigid than 401(k) plans and you cannot change your salary deferral to the Deferred Comp Plan mid-year. The takeaway is that if you want to make any changes to deferral percentages, sources or distribution options it is important to participate in open enrollment.

3. Not Having a Strategic Plan for Distribution Option Selection

In the Nike plan you have the option to select a distribution schedule in which the funds are paid out after leaving Nike. The options range from Single Lump Sum or Installments over 5, 10 or 15 years. It is important to remember that distributions are initiated soon after you leave Nike regardless whether it is voluntary, such as retirement/job change, or involuntary, such as being laid off/fired. The distributions are subject to ordinary income tax so if you receive a large distribution in a short period of time it may push you into a high tax bracket and create an unnecessarily large tax bill.

This is where detailed financial planning and tax projections can help minimize the tax impact. Planning out year by year the combined amount of these distributions with other anticipated income sources is crucial to managing your tax bracket and maximizing this benefit. Once you have elected a distribution option you can change it, but there are very specific rules outlined by the IRS that you need to follow. All changes need to be made at least 12 months in advance of leaving Nike, so it is important to do any planning ahead of time.

4. Misunderstanding the Investment Time Horizon

Determining an appropriate mix of investments is impacted significantly by the time frame for when distributions are needed.  Investments in stocks can be volatile in the short-term but can provide a greater return than safer short-term investments like cash or bonds over a long period of time (10+ years).  Funds in a deferred compensation plan are often mis-categorized and lumped together with more aggressively invested retirement funds like 401(k)s and IRAs. 

The time horizon for Deferred Compensation Plans are very different than IRAs and 401(k)s.  For IRAs and 401(k)s, you are not required to take distributions until the year you reach age 70 ½, and those distributions can be spread out over the rest of your life.  On the other hand, Deferred Compensation plans have a much shorter time frame since they are initiated after leaving Nike and have a set distribution schedule of between 1 and 15 years.  Due to the shorter time horizon with a Deferred Compensation plan, we believe it is prudent to have a more conservative investment mix than other retirement accounts and to incorporate it into your financial planning projections to determine the best mix. 

5. Missing Out on the State Income Tax Strategy

An often-missed state income tax strategy exists with Deferred Compensation plans. If you select the lump sum or 5-year distribution option, the state of Oregon will still tax your Deferred Compensation distributions regardless of what state you live in at that time of distribution.  If you move out of Oregon to a state with no/low income tax rates (i.e. Washington), it is advantageous to select a 10 or 15-year distribution option to avoid Oregon state income taxation.  If there is a possibility that you will move out of Oregon after leaving Nike, make sure to evaluate the local taxation compared to Oregon and plan accordingly.

We’re here for you if you have questions

In summary, the Nike Deferred Compensation Plan can be a very advantageous benefit from a savings and tax perspective but due to its unique rules and IRS requirements it is most effective when incorporated within a customized financial plan.  If you have questions or want to better understand how to take advantage of the Nike Deferred Compensation Plan, you can schedule time with me on Calendly below, e-mail me at marc@humanvesting.com, or call or text me at (503) 608-2968.

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2020 has put a wrench in most plans. As a recent graduate, you were likely excited to make career moves, grow your friend circle, move somewhere new, and maybe even get your own pots, pans, and plants. Instead, you are living at home with your parents.

According to 2015 data from the Census Bureau, some 82 percent of American adults think that moving out of their parents’ house is a “somewhat,” “quite,” or “extremely” important component to enter adulthood. For those of you currently living at home with your parents, hopefully this post resonates with you.

Some of you may be choosing to live at home, but many of you have no other option. Do you find yourself vacillating about moving back home? Or maybe you are considering spending your savings just to get some space from your family? Regardless of the specifics, have you thought about the impact that saving money on rent can have on your future? Maybe this is a great opportunity for you to start saving money like a millionaire.

For illustrative purposes let’s consider Sophia, a fictitious 23-year-old. She had other plans for herself, but she is living at home for a variety of reasons. She wakes up grateful for safety and shelter, but she is also human and feels a little nostalgia for what this year could have been. Let’s run some numbers on the potential financial benefit of living at home to make her day a little brighter.

Doodle credit: Rachelle Locey

Let the savings begin

If Sophia were not living at home, she would be spending $1,100 a month in housing expenses. After 12 months of living at home, she could save $13,200 that would have ‘normally’ been spent on her rent/wifi/utilities/parking.

Please note: It’s understandable if you’re not able to save $13,200 while living at home. Whether living at home allows you to save $13,200 or $3,000, the benefit is huge for your future financial wellbeing.

Sophia is comforted by these additional savings in her bank account today. She remembers someone (like Uncle Mike or her economics teacher Ms. Anderson) explain inflation, the stock market, and compounding interest. Now what is a girl to do?

Because Sophia is living with her parents, she saved $13,200 of extra cash that she can invest in the stock market.

here’s her 5 step game plan

One year of savings, Thirty years later

**This chart assumes a 7% annualized growth for her investment over time. The 7% is based on historical data of S&P500 returns. **

By living at home, Sofia has safety, shelter, and savings. She also has significant savings for not only today, but also for the future. If you are living at home, please be thankful for your dishwasher and applaud your future self because the financial trade-off is immense.

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“Isn’t financial planning a dying profession?”

A first-year undergraduate student majoring in Financial Planning approached me after class one day and asked what he thought was a very simple question – “What’s the difference between a financial planner and a financial advisor?” Simple answer? Not really. 

As I was working to establish a CFP Board Registered Program at a university, an administrator asked me the following few questions as part of his vetting process: “Isn’t financial planning a dying profession?” “Don’t robots already do financial planning?” “Who is going to hire a 23- year-old financial planner to help them with their finances?” These came from a smart individual who had a strong record of professional success. What was he talking about? 

I was speaking with a long-distance friend the other day who told me, “I’m sure glad that my financial planner doesn’t charge me a fee each time we meet but, instead, she only takes a very small percentage from returns on the investments I have with her.” Did this financial planner appropriately disclose compensation methods? I am sure she did. Did this friend understand the true cost of what he was paying for financial planning services? Obviously not. 

“We don’t trust you.”

Several years ago, I was at an annual conference for a large financial planning organization. The conference organizers planned an innovative and unique keynote session where they invited a panel of strangers gathered randomly and spontaneously from off the streets outside of the meeting venue. This group of individuals was diverse and clearly represented many demographic and socioeconomic classes. They were asked a variety of questions about their need for financial advice and desire for help with the money management tasks of life. It was evident that this group was readily willing to admit their lack of financial knowledge and self-efficacy when it came to money-related topics and behaviors.

Then came the curve ball. The panel was told that the room of people (nearly one thousand) who were in front of them were all financial professionals. They were asked another simple question – “Would you hire any of these individuals to help you with your personal finances?” Every one of the panelists said “no!” When asked why, they all said in their own words a message that sounded like “we don’t trust you.” Did these individuals need help managing their financial decisions? You bet. Were they looking to the financial planning industry to fill that role? No. Before you dismiss this as a case of non-target-audience identity for financial planning services, let me introduce you to another conversation. 

“I can’t get objective advice anywhere!”

Recently, I found myself in a conversation with the leader of a local company. He had come to our financial planning firm as a prospective client for planning services. Given the fact that he had been affluent for a significant number of years and was nearing the latter part of his working years, I inquired about his experiences with financial planning in the past and what brought him to our company. His answer was firm and without deliberation – “I can’t get objective advice anywhere!” Was this individual the ideal financial planning client? Pretty much. Why is it so hard to get objective advice? 

So, what is the difference between a financial planner and a financial advisor?

Do you know? Could you explain it to this young and eager student? Is there a difference? We would argue that it does not matter. The core issue is about substance and structure – not semantics. People are looking for a service and not a job or profession title. Why do we continually encounter situations like the ones we have described? Why all the confusion around the discipline of financial planning and why the lack of trust and objectivity? Why is this not a prevailing theme of most other professions (think doctors, lawyers, architects, teachers, pharmacists, engineers, etc.)? It does not take much more than a quick look at the culture and system of the industry to find the dilemma. 

There is a long list of systemic factors that have impaired financial planning outcomes and distorted the way in which financial planning is done. Here are a few: 

• Products over services 

• Business models of financial planning firms and compensation structure for planners 

• Career status and prestige based solely on sales achievements 

• Role of incentives (Charlie Munger was right when he said “Show me the incentive and I’ll show you the outcome”) 

• Conflicts of interest that are not transparent 

• The need for and confusion surrounding “fiduciary” 

• Measures of success and effectiveness tied to a book of business 

• Academic preparation/credentialing/pathway to profession 

• Focus on money content and education while overlooking behavior 

• Technology/Machine learning and the loss of the human 

• Investment services silo instead of comprehensive financial planning 

• Individual planner model instead of team approach 

Restoring confidence in all of us

We are going to be publishing a series of blog posts that highlight and elaborate on these dynamics that have contributed to the rationale for the questions that are mentioned above and the current state of the financial planning profession. In other words, we are going to define what we see as wrong. See, it is not any one thing. Nothing big is wrong. Big things tend to be addressed with swift action through market response or regulation. It is smaller pieces that are broken and those small pieces accumulate into a perception of confusion and mistrust and suboptimal financial planning outcomes. 

We will not stop at identifying problems but, instead, will share what we believe are solutions to these obstacles. We will elaborate on how we do financial planning and define its effectiveness by addressing these challenges to offer our clients the most comprehensive and purest form of human-centered financial planning. It is exactly why our core purpose is to faithfully serve the financial pursuits of all people. That is a big ambition, but it is precisely what individuals and families need, and it is our highest ideal for financial planning. We believe it is a mission worth pursuing.

Ryan Halley, Ph.D., CFP® is Director of Planning Practices and Research at Human Investing. He holds a doctorate in Personal Financial Planning from Texas Tech University and an MBA with a concentration in Finance from The Ohio State University. Ryan has his CERTIFIED FINANCIAL PLANNER™ certification. Dr. Halley is also a Professor of Finance and Financial Planning at George Fox University, where he directs a CFP® Registered Program located near Portland, Oregon. He has co-authored a book and has numerous peer-reviewed journal articles. Additionally, he has been an invited professor and lecturer at various universities in the United States, Canada and China. 

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@emilegt

We have all been told to save for retirement.  We need the “Magic Number” before we can retire.  What about having debt during retirement?  Most retirement planning calculators ignore debt and debt payments can limit the amount of future income and can wreak havoc on retirement.  A comprehensive financial plan considers debt in the retirement equation providing a tool and process to fully answer the retirement questions.

Studies Show Debt is Increasing for those Entering Retirement

More of us than ever before have debt going into retirement.  A study by Lusardi, Mitchell and Oggero entitled “Debt Close to Retirement and Its Implications for Retirement Well-being,” quotes numerous findings demonstrating that those nearing retirement have increased borrowing at all economic levels.  Based on a 2015 NFCS survey of persons from age 56 to 61, 37% had mortgages, 11% had home equity loans, 14.6% still had student loan debt, 29.6% carried auto loan debt and, 36.4% had credit card debt with a balance paying interest.  And more concerning, 23% had what they called, “expensive credit card behavior” meaning, “paying the minimum only, paying late or over-the-limit fees, or using credit cards for cash advances.”  

Debt is a Presumption of the Future

When we take out debt, we presume that we will have future income that will both cover living expenses and the additional payments we promise to make.  We effectively reduce our future income.  For the retiree with adequate income and assets, debt might be okay.  The retiree that has cash in an account to purchase a car that takes a no interest loan might come out ahead.  And at any time, they have the power to pay off that debt.  However, often debt is a decision that can cripple future living.

Debt in Retirement Limits Lifestyle

Of course, a debt payment means higher total expenses, but it doesn’t stop there.  Debt usually means more expense due to the added interest.  Additional debt and interest require higher retirement distributions.  Higher distributions from IRA accounts increase taxable income and can increase the likelihood Social Security income will also be taxed.  And for many, the result of the compounding expenses due to debt eventually lead to the need for a cut to lifestyle and live on less. To the 23% with “expensive” debt behavior in the study, even more expenses come due to late payments and higher interest costs which further the cycle of limits on lifestyle.

Financial Planning Answers the Questions

While some debt might be considered “okay”, most we know is not.  How do we know?  The answer comes in a financial plan.  It pulls together all the other pieces of the story and provides a structure to answer the question.  A financial plan provides possible options, strategies and answers.  It is a tool and process that fully answers the retirement equation.  Do I have enough for retirement, including debt?

Want to create your financial plan today?

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@markusspiske

On July 31st Jerome Powell, Chair of the Federal Reserve, announced the Fed Rates are to be cut by a quarter-percentage point, its first reduction since 2008. The decision to cut rates was made “in light of the implications of global developments for the economic outlook as well as muted inflation pressures.”

WHAT DOES THIS MEAN FOR THE INVESTOR?

• Investors holding bonds before the rate cut greatly benefit. Bond prices rise as yields fall, making the bondholder money with a decrease in the interest rates.

• Good news for those who are looking to borrow money. A cut should mean a decrease in the cost of mortgages, auto loans, and credit cards. Thus, encouraging consumers to spend and sustain the expansion of economic activity.

• A possible decrease in the yield for those who have dollars deposited in savings accounts.

AS FOR THE US ECONOMY?

With any changes to monetary policy, there tends to be a lot of talk about what will happen next and what this means for our economy. Where will we end up? The last few times the Fed cut rates, in 2008 and before that 1996 and 1998, the results varied:

• The last time the Fed cut rates was December 16, 2008, where there was a market decline as the S&P 500 continued to fall by of over 25% by March 9, 2009.

• While the cuts in 1996 and 1998 managed to positively impact the economy and drive up the S&P 500 more than 20% in the following year.

What will the impact of the Fed cuts be this time around? I am reminded that prognosticators often have a poor aptitude in predicting what’s next. There is a correlation between the Target Federal Fund Rate and the 10 Year Treasury Rate, providing an example for us of how hard it is to predict what’s next.

In an October 2018 survey conducted by the Wall Street Journal, more than 50 economists predicted where they thought the 10-Year Treasury yield go in 2019.

Did any of the analysts guess correct? No, not one was close. With the Fed’s recent announcement, the delta continues to grow between their assumptions and reality. As of August 1st, the yield for the 10-Year Treasury Note was below 2%.

Sources: WSJ Survey of Economists (predictions); Tullett Prebon (actual)

What does this say about our ability to predict the future of the stock market, interest rates and the next “10 Hot Stock Picks For 2019”? Betting our financial future on radio personalities, financial websites, and even economists can be emotional and folly. Building a financial plan provides a solid foundation for one’s financial future, rather than basing it on intuition and predictions.

HOW CAN WE HELP?

Are you interested in trading in guesswork for a disciplined process, or learning more about comprehensive financial planning (we call this hiPlan™)? Please call us at (503) 905-3100 or let us know about your needs.

Further Reading

Here’s what that Fed rate cut means for you, CNBC

Federal Reserve, Press Release on Rate Cut.

Bloomberg, Why Are Economists So Bad at Forecasting Recessions?

WSJ, Some Investors Had Hunch Yields Were About to Fall.

REFERENCES

Chilkoti, A., & Kruger, K. (2019, June 9). Some Investors Had Hunch Yields Were About to Fall. Retrieved from www.wsj.com

Board of Governors of the Federal Reserve System (2019). Federal Reserve issues FOMC statement [Press release]. Retrieved from: https://www.federalreserve.gov/newsevents/pressreleases /monetary20190731a.htm

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In 2018 Nike opened Restricted Stock Units to their already generous benefit line up.  Now employees have the option of choosing either Stock Options, RSUs or, a combination of the two. 

The following content provides guidance—and highlights the benefits and drawbacks of each option choice.

RSUs (Restricted Stock Units)

An RSU is a grant of stock units that, after a specified vesting period, provides an employee with a pre-determined amount of company shares.  The vesting schedule for RSUs varies by company.  At Nike, the vesting schedule is typically 3-4 years.  You do not receive the stock until you are vested, but once vested the stock is yours and will always have value unless the stock price goes to $0.  

Many consider RSUs to be a less-risky investment. However, it is essential to remember that the realized value of your vested grant may increase or decrease depending on the movement of the stock price.  Once the stock vests, you may choose to either sell the stock immediately or hold it.  RSUs are taxed as ordinary income equal to the market value of the stock at the time of vesting.  One crucial planning consideration is that the actual tax due on the RSU is often higher than the amount of tax withheld at vesting.  This leaves many RSU option owners with an unpleasant surprise at tax time. 

At Human Investing, we help our clients plan for the additional they will need to set aside for taxes, thereby avoiding end-of-year tax surprises. Tax planning and anticipating future tax liabilities are important for both RSUs and Stock Options.

Nonqualified Stock Options

Nonqualified stock options differ from RSUs as they are an option to buy Nike stock at a specified price, called the grant price.  Nonqualified stock options can provide a considerable upside if the stock grants are held during a time of substantial growth in the underlying stock.   

The downside is that if the stock price does not rise above the grant price, the options will be worth $0 at vesting.  Another piece to monitor is that stock options expire if they are not exercised within ten years, leaving the owner without benefit.  When a stock option is exercised, it is taxed on the grant price as ordinary income.  If held for a qualifying period, there will also be a tax on long-term capital gains on the difference between the grant price and market price at the time of sale.

Making Your Choice

Ultimately, considering the following questions has the potential to improve your outcome.  Questions like:  How high is your risk tolerance?  What is your confidence in how the stock will perform in 3, 5, and 10 years?  Is your portfolio diversified or highly concentrated in company stock? Are you looking to retire or leave the company? 

While RSUs can provide more predictable income and tax planning, if you separate from the company, you will lose any RSUs that are not vested.   

Stock Options must be vested upon separation and are generally required to be exercised within 90 days of separation from employment.  This is a risk depending on the stock price at the time of departure.  There is one exception to this rule when you turn 55, but additional criteria apply.

Both Stock Options and RSUs are great benefits and a great way to build wealth. At Human Investing we walk our clients through these choices with a close look at their situation.  We help our clients to determine the best course of action with all their benefits with a comprehensive financial plan we call hiPlan. 

Want Us To HELP? Let’S TALK.

You can schedule time with me on Calendly below, e-mail me at marc@humanvesting.com, or call or text me at (503) 608-2968 to take your next steps.

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Take control of your benefits

At Intel, along with the great benefits provided, there seems to be no shortage of “events” that require thoughtful consideration and timely attention. Our aim is to come alongside you with measured and practical methods to approach each event.

These events can be related to 401(k), ESPP, RSUs, Stock Options, or SERPLUS Deferred Compensation. Some others include performance bonuses, estimated tax payments and open enrollment for insurance benefits. 

Two ways to get started

1. Sign up below to receive your 2019 benefits calendar to learn how Human Investing will implement a cadence to serving you.

2. Talk to us about creating a financial plan for you and your family. For information about our offering built for Intel employees, please click here.

@marissa_price

Although the front end of the baby boom generation is well into retirement, we are still 10-15 years away from the final boomers to hit retirement age.  With this in mind, we wanted to take a look at this cohort and highlight the research specifically aimed at women.  You may be surprised by the uphill battles they’ve faced over the last few decades.

Limited Career Choices and Gender Bias in Retirement Policies

Although Baby Boomer women were far more likely to go to college and get a job than the previous generation, the concept of “acceptable” careers for women often pointed them toward work with lower compensation.  As a result of these lower paying careers, women had less money to defer into retirement accounts than their male counterparts—if they chose to defer funds at all.

Also, due to part-time work and lower wages these women are looking at significantly smaller Social Security payments in retirement.  This may leave many women either dependent upon a spouse or relying on Social Security and personal savings.  This, coupled with less time in the workforce due to pregnancy and child rearing, has left many female Baby Boomers at a great disadvantage.

Individual Responsibility and the Psychology of Saving

Another challenge facing female Baby Boomers is the fear of risk and the perception that money is something that should be left to men.  The latter mindset may have led some women to leave retirement planning and budgeting up to their spouses.  Couple this with a lack of individual responsibility on the parts of both men and women in this generation, and we are left with a big problem. 

According to several studies conducted in the mid-nineties (O’Neill, 1991; Twentieth Century Services, 1994). Hayes and Parker (1993), Kadlec (1994), and Pope (1994), the Baby Boomer generation was shaped by a more affluent lifestyle than their parents.  They enjoyed a higher median gross income and higher free spending limits.  Additionally, since Boomers are a generation detached from the Great Depression’s influence on the importance of saving, many have more reliance on Social Security for retirement and simply have not saved enough.

Risk Averse and Under Educated

Research dating back to 1994 and prior (NCWRR) found that women tend to be conservative, low-risk investors.  At the time of these studies, 72% of the women who saved chose investments that provided only marginal returns.   In order to keep up, women now need to be willing to take more risk in their investments.  This is counter intuitive to how many women of this generation were raised and educated.  To compound this difficulty, many financial advisors and brokers assume women want less risk and therefore fail to do the planning and education needed to help their clients see the risk-reward return and to understand a pace of investing that keeps up with inflation. 

How We Can Help

In our work over the years with married, divorced or never married women, the answer always seems to be the same: Advisors need to understand their client’s biases, feelings, and fears about money and retirement.  We need to make a concerted effort toward financial literacy and, most importantly, to provide a solid, comprehensive financial plan.  Education and planning enable our clients to see the impact of their spending, savings, and the aggressive/conservative balance of their investments. 

At Human Investing we accomplish this through our process called hiPlan.  The hiPlan goal is to give our clients the peace that comes from the stability of a plan that enables them to live out the retirement they have worked hard and dreamed about.

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@chuttersnap

Do trade wars have an impact on the economy and market? The simple answer is…

It depends (Freeman, 2004).  Krishna, Mukhopadyay, and Yavas (2002) determined that free-trade can hurt the economy when capital markets are distorted.  While at the same time, trade can positively impact the economy when labor markets are in equilibrium.  Whether you are a free market zealot or, believe globalization was an experiment gone wrong, this trade war is not just about trade and tariffs.  It is a part of a much larger conflict between the U.S. and China, which in addition to trade/tariffs, encompasses politics, ideology, and even the current global geopolitical order.

In our view, regardless of the outcome of the current trade negotiations, this is just one chapter in a book that will continue to be written over the decades to come. Anyone looking for a neat and clean expeditious resolution will likely be disappointed. The uncertainty surrounding this conflict will continue for a long time and is out of our control. 

So, what can be agreed upon and has strong academic roots?

What appears to be universally accepted is policy to eliminate deficits, maintaining market-oriented exchange rates, improving the education system, strengthening the legal system, and increasing competition amongst domestic firms (Baldwin, 2003).  These are essential economic considerations both now and into the future—and what will move the needle long term for our economy, our markets, and our country.

How can you prepare for what happens? Having a Financial Plan.

At Human Investing, we emphasize comprehensive financial planning (we call this hiPlan™), which is very different from traditional planning, which tends to focus on a single area such as investing or insurance. By taking a comprehensive approach, we can create stress-tested, long -term, adaptive plans for our clients and gaze beyond the short-term implications of news headlines.

Further, we work as a team to serve our clients.  Much like a peloton where each team member jumps out front to take the lead when appropriate, we've assembled a team of financial planning experts—each with specific knowledge that our clients can leverage for their benefit.  So why are we so focused on financial planning?  For us, the answer is simple, empirical evidence points to its advantage, and we have personally seen it work for the clients we serve.   

Several studies have shown that individuals and families who employed the financial planning process enjoy greater wealth during retirement versus those who fail to plan (Hanna & Lindamood, 2010) (Van Rooij, Lusardi, & Alessie, 2012). As a non-commissioned, fee-only firm, we can provide the most objective and independent advice, making it more feasible to optimize the financial well-being of our clients. We believe that by working with our expert team and taking a long-term and comprehensive approach to financial planning, our clients can have peace of mind regardless of the headline of the day.

Have you started your plan today?

If not, or, if you are interested in learning more about our people and process, please call us at (503) 905-3100 or let us know about your needs.

References

Baldwin, R. E. (2004). Openness and growth: what's the empirical relationship?. In Challenges to globalization: Analyzing the economics (pp. 499-526). University of Chicago Press.

Freeman, R. B. (2004). Trade wars: The exaggerated impact of trade in economic debate. World Economy, 27(1), 1-23.

Hanna, S. D., & Lindamood, S. (2010). Quantifying the economic benefits of personal financial planning.

Krishna, K., Mukhopadhyay, A., & Yavas, C. (2005). Trade with labor market distortions and heterogeneous labor: Why trade can hurt. In WTO and World Trade (pp. 65-83). Physica-Verlag HD.

Van Rooij, M. C., Lusardi, A., & Alessie, R. J. (2012). Financial literacy, retirement planning and household wealth. The Economic Journal, 122(560), 449-478.

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Happy New Year from your team at Human Investing! We would like to help guide you in your 2019 New Year's resolution of saving appropriately. You may already know but the 2019 limits of how much you can save differs from 2018 amounts. See below for your 2019 contribution limits. Human Investing is here to help make sure you are maximizing your retirement savings. Give us a call 503.905.3100 with any questions. Click here to be directed to the IRS website for further information.

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In my last post, I wrote about the positive impact of financial planning on an investor's ability to stay in the market and manage the cognitive bias of loss aversion. In this post, I want to address recessions, market performance, and the cognitive bias of "recency." Recency bias occurs when an individual is more inclined to remember something that happened more recently than what may be recognized years before, creating a bias.

Economic Slowdowns and the Market

Several times in the last few days I have heard a stock market prognosticator suggest an economic slowdown is upon us. So, what is a slowdown or “recession”? Technically speaking, a recession is two consecutive negative quarters of GDP growth. Importantly, recessions are not uncommon and do not necessarily coincide with a decrease in the stock market.

While examining the chart below, the first column highlights the last nine recessions. The next five columns track the corresponding stock market performance for one year before the recession, the stock market return for the length of the recession, along with one, three, and five-year performance following the recession. In my view, the data is quite interesting and full of surprises.

Recency Bias

Recency bias, as mentioned above, clouds an investor’s understanding of complete market data. As such, with the last two most recent recessions having had a negative 35.5% and 7.2% respectively, investors are more likely to believe all recessions have comparably negative returns—this is in fact not true. 

Although recessions and market volatility are unnerving, it is both normal and part of the price we pay for the opportunity to achieve fantastic long-term returns. We encourage you to focus on the financial plan which offers investors the best odds of achieving financial success.    

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@priscilladupreez

In order to achieve retirement readiness, financial planning should be the focus of most individuals and families. Indeed, knowing how much a household needs to save and invest in producing a suitable level of income at retirement makes much sense.  At the same time, given the recent uptick in market volatility, I have noticed additional benefits.  Clients who have gone through the financial planning process appear to be at greater peace with the stock market gyrations.  Further, when focused on executing their plan and not mentally tethered to the markets, clients are less prone to letting their behavior negatively impact their long-term performance.

Much of the time, financial planning does a great job of identifying how much an individual or family should own in both "safe" and "risk" investments to meet short-term cash and safety needs, as well as long-term growth objectives.  In the absence of a financial plan, investors are left to wonder if they have the right mix of investments.  Moreover, when market volatility increases, they are often the first to let their emotions get the best of them.  Absent a financial plan; the focus is on the stock market.  If the focus is on the stock market, and the market is temporarily going down, the pain of the volatility or what psychologists call "loss aversion bias" is too much to handle.  As a result, at exactly the wrong time and for the wrong reason, we get a call to "sell everything" locking in those temporary losses—only to see the market recover as the investor sits on the sideline wondering when to get back in.  Selling into a market that is going down is a significant reason investor returns and market returns are so different.

Dalbar, Inc. tracks investor return versus market returns, and the results are eye-opening. Our observation is that much of the gap between the long-term investor return and the long-term market returns are due to poor behavior and investors lacking a financial plan.  In our view, having a financial plan is paramount as it gives a leg up to investors in two ways: 1) it helps center the discussion about money around goals and 2) it allows investors to minimize their dependence on monthly, quarterly, and annual stock market swings while redirecting the discussion back to goals-based planning.  Goals-based planning is just a discussion on how many dollars will be needed and in what timeframe—this process alone will help determine the amount of safe versus risky investments.  

Finally, comprehending the odds of success or failure in the market may be a massive help in keeping nerves at bay and focused on the things that matter most.  Although the legal language would point us towards a statement about past performance being no indication of future success, we can look at the distribution of returns in the stock market going back to 1825 and feel very good about the chance of a positive outcome.  It all adds up to 71.5% of the time the stock market has been favorable, in spite of many ups and downs in between.

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