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Market commentary – april 2018

Stock Markets

Returns from various stock market indices over several periods ending March 31, 2018 are shown to the right. Here are a few highlights:

  • While not observed in these graphs, volatility seems to have come back, which is normally how stock markets work.
  • Except for emerging markets, stocks were down over the past quarter – REITs continue to lag.
  • Even with the off quarter (with the exception of REITs), stocks were up nicely over the past twelve months.
  • Note that over the past five and ten years, returns from stocks traded in domestic markets were well above those in non-domestic markets. However, don’t let these results fool you. Diversification to non-domestic markets is still important to long-term success.

 

Bond Markets

The Yield Curves to the right show the yield to maturity of U.S. Treasury securities over several maturities, from the short term (one month) to the long term (twenty years).

  • Look at how the curve has moved since the beginning of the year. It is essentially showing a parallel shift upward. As yields move up, prices and returns go down.  Consequently, we realized negative bond returns this past quarter – the longer the maturity, the greater the loss.
  • Now look at the changes since a year ago. Yields for longer maturities did not change much over the past year and, in fact, fell between March and December.  Notice how yields on shorter-term Treasury securities moved up.  These shifts explain the negative annual returns on bonds of shorter maturities and positive returns on bonds of longer maturities.
  • The Yield Curve got flatter over the past year.  The Fed’s activities have increased short-term yields without much effect on longer-term bond yields.  Generally, longer yields are driven by the expectation of future short-term interest rates and inflation.  Today’s Yield Curve implies lower interest rates in the future – quite different from both the announced goal of the Fed and what is usually experienced in a robust economy.

 

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Tax scams: what to look for and how to avoid them

As another tax season comes to a close, we wanted to draw attention to a number of scams and schemes to defraud unsuspecting taxpayers. We think it is important that our clients be aware of how these scams work, and what precautions you can take to protect yourself.

How the Scams Work:

One popular method for defrauding taxpayers is to steal their identity using “phishing” techniques, or malware to obtain their victim’s personal information. Phishing scams use fake emails or website links designed to appear to be legitimate. Once accessed, these fake links will either ask for information or potentially even infect your computer with software allowing the fraudsters to access personal information.

Recently, identity thieves have used this stolen information to file fake tax returns, but use the taxpayer’s actual bank account to deposit the fraudulent refund. Once the refund has been deposited, they will call the taxpayer posing as an IRS agent, debt collector, or law enforcement and demand that the refund be returned.

Taxpayers who receive the refunds should follow the steps outlined by Tax Topic Number 161 – Returning an Erroneous Refund. The tax topic contains full details, including mailing addresses should there be a need to return paper checks. By law, interest may accrue on erroneous refunds.

Telephone scams are another popular way criminals look to defraud taxpayers. These scams involve callers contacting taxpayers claiming to be IRS representatives. The victims are told that they owe the IRS money and that the amount must be paid immediately using either a gift card or wire transfer. Callers posing as the IRS will often become hostile or insulting, and threaten the victims with arrest, suspension of a business or driver’s license, or even deportation if they do not pay. If the phone is not answered, the thieves may leave an urgent callback message.

Scammers do not just operate during tax season. Thieves posing as IRS agents have targeted parents and students during the summer and back-to-school months, by calling and demanding payment of a fake “Federal Student Tax,” or some variation thereof. Just like in the telephone scams previously discussed, these callers will demand payment via gift card or wire transfer, and will threaten to report the student to the police to be arrested if payment is not made.

These are just a few of the most popular scams thieves have engaged in to attempt to defraud innocent taxpayers, and new techniques and tactics are being developed all the time. With that said you can protect yourself by taking the following precautions.

Know What the IRS Will Not Do – The IRS will never:

  • Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. Generally, the IRS will first mail a bill to any taxpayer who owes taxes.
  • Threaten to bring in local police, immigration officers or other law-enforcement to have you arrested for not paying. The IRS also cannot revoke your driver’s license, business licenses, or immigration status. Threats like these are common tactics scam artists use to trick victims into buying into their schemes.
  • Demand that taxes be paid without giving the taxpayer the opportunity to question or appeal the amount owed. You should also be advised of your rights as a taxpayer.
  • Ask for credit or debit card numbers over the phone.

Know What the IRS Will Do:

  • Contact you through regular mail delivered by the United States Postal Service. If there is an issue with your tax return, the IRS will issue you a tax “notice” informing you of the issue.
  • Call or come to your home or business. The IRS may call or send an agent to your home or business, but only in special circumstances such as when a taxpayer has an overdue tax bill, to secure a delinquent tax return or a delinquent employment tax payment, or to tour a business as part of an audit or during criminal investigations

Know Whom to Contact:

  • Contact the Treasury Inspector General for Tax Administration to report a phone scam. Use their “IRS Impersonation Scam Reporting” web page. You can also call 800-366-4484.
  • Report phone scams to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add “IRS Telephone Scam” in the notes.
  • Report an unsolicited email claiming to be from the IRS, or an IRS-related component like the Electronic Federal Tax Payment System, to the IRS at phishing@irs.gov.

The bottom line is that if you are contacted by someone claiming to be from the IRS, DO NOT give out sensitive information over the phone or via email. If the call does not feel right, hang up and contact the IRS at 800-829-1040, or your advisor.

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The value of a financial plan

It’s common for investors to feel nervous when looking at investments by themselves. Are you saving enough? Are you saving in the right place? Are you holding the right mix of investments? Should you own individual stocks or funds? Are you paying too much in fees? What are you actually paying in fees? For the average investor, this is enough uncertainty to make someone feel uncomfortable, and this isn’t even the whole picture.

Dealing with a pension can seem daunting too. How does my retirement date affect my payout? When should I claim my benefit? Should I take the lump sum or the annuity? What, if any, survivorship benefit should I select? The same goes for Social Security:  When should I collect? When should my spouse collect? Will I get the full amount promised to me once I retire?

Any of these items, in a silo, is enough to make an investor nervous. Add them together and you get anxiety. When investors are nervous, they are more likely to make mistakes. That’s where Rockbridge comes in. We can help you answer these questions by framing your financial decisions in a comprehensive financial plan.

Numerous studies have shown investors harm themselves when they act impulsively. This boils down to investors holding cash because they are afraid of the market declining. This may be when the market is at an all-time high and they’re afraid of a correction, or when the market is rapidly falling and the person is worried it will go to 0.

In reality, neither is certain and no one knows what the next day will entail. However, we do know markets go up over time, and every day you hold cash is a day you’re missing out on the next incremental gain.

As advisors, we’ve found investors are less likely to make mistakes or act impulsively when they see their investments as part of a larger plan. Knowing the role each piece of the puzzle plays is helpful in reducing the stresses of personal finance, and makes one more likely to adhere to a course of action that is in the person’s best interest. It can be hard to forego income when you’re middle aged, but understanding the benefit of saving in your 401(k) makes this more doable.

Perhaps a family has a large fixed pension that, combined with Social Security, covers all their living expenses right as they retire. Their investment savings will become important over time as inflation erodes the value of the fixed pension. Knowing this helps a family stay the course when the stock market is volatile.

Alternatively, a person might need to rely heavily on their portfolio in their early 60s while they wait to take Social Security and receive a small inheritance. This investor will want a less risky allocation to protect against large declines in the stock market. They should also stick with their plan and not pursue a riskier allocation because they think the market is about to shoot up. This person’s portfolio plays a much different role than the portfolio of the family in the previous paragraph, despite being close in age.

This is all not to say plans can’t change. For example:  Someone is 68 and delaying their Social Security to claim a larger benefit; if the stock market drops 50%, the course of action giving them the highest probability of success might be to claim Social Security now and not draw down on an investment account while stocks are at depressed levels. These decisions shouldn’t be done impulsively. They should be well thought out and analyzed with mathematical probabilities to ensure that an unemotional, best course of action is being pursued.

No commentary or article you read is going to be perfectly relevant to you because every situation is unique. Investors are best served when they have a plan they buy into that addresses all facets of their financial life. This improves mental well-being and helps families avoid mistakes that can be costly. Rockbridge can help you look at the whole picture and guide you in making the important financial decisions.

 

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Tuning out the noise

The markets have seen several ups and downs over the years, but remember – Volatility is normal. At Rockbridge, we believe financial advisors play a vital role in helping you understand what you can control while providing expertise, perspective and encouragement to keep you focused on your long-term goal. We are here to help you tune out the noise.

Check out this insightful video that our friends at Dimensional Funds Advisors put together!

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