Finance 101: July 2023

In July the financial advisors at Ruedi Wealth Management wrote four new “Finance 101” columns for The News-Gazette’s Business Extra section. Make sure to look for them every Sunday, but in case you missed the columns from July all four are below.

Don’t Let Yourself End Up There

Paul R. Ruedi, CFP®

Throughout my years of training Brazilian jiu-jitsu, I learned that there was usually a technique to get you out of just about any bad situation. But there are certain positions and situations that there is seemingly no escaping from; they are the jiu-jitsu equivalent of a checkmate. Naturally, as a student I would ask my instructors how to deal with those impossible situations and was almost always given the same response: don’t let yourself end up there.

 Personal finance is not so different. There are a handful of scenarios that people can get themselves into that are more or less impossible to escape from. It is essential you do not let yourself end up there.

The first I can think of is accumulating an amount of debt that will be impossible to escape from. Debt can be used responsibly to build credit, buy a house, or cover emergency expenses as a last resort. But financial institutions will loan you more than you can afford to pay back, which enables people to rack up outrageous amounts of debt. It can get to the point where a person’s income can struggle to even cover the interest, let alone get traction towards paying those debts off. Don’t let yourself end up there.

The second would be putting off saving for retirement. People often think they can kick the retirement can down the road, but that can lead them into a situation where they do not have enough to retire and don’t really have any options to change that.

Accumulating a large enough sum to fund a retirement is fairly easy for those who save early and let compounding happen over long periods of time. But scrambling to save such a large amount starting from square one with only 5 or even 10 years to go before retirement can be a borderline impossible feat. Don’t let yourself end up there.

These are just a couple of tough, or even impossible financial situations to escape from. I feel like just about everyone knows it is bad to rack up a bunch of debt you have no plan to pay off. But understanding whether or not you are undershooting your retirement savings is an entirely more complicated manner. If you aren’t sure whether your savings are putting you on a path towards an inescapable situation or a well-funded retirement, you may want to talk to a retirement planner.

Lessons from The First Half of 2023

Paul Ruedi

The first half of 2023 has surprised investors for many reasons and delivered a handful of important lessons. With the stock market up across the board, and the S&P 500, for example, up over 15%, investors who stuck with their investments over the past 6 months were handsomely rewarded. But as usual, it wasn’t all smooth sailing amongst a backdrop of universal pessimism.

After taking a bruising in 2022, investors began 2023 worried about the future of the US economy and the global stock market. The Federal Reserve seemed determined to bring down inflation, even if it meant doing things that would crush the economy. The consensus among almost everyone was that a recession was certainly on the horizon or had already arrived. How could a stock market do well with so many headwinds?

Defying all predictions, the market marched upward. But just when investors were starting to become slightly more cheerful about their stock portfolios, we started to see a wave of bank failures. When the market reacted to the news, almost all the gains from the year were wiped out. It would have been very tempting for investors to panic and sell their stocks at that time. But we know how that story played out. The stock market hit a low in the days surrounding the announcement that Silicon Valley Bank had failed, and has rallied pretty much uninterrupted since.

The dust barely had time to settle on all the bank failures before people had found a new boogeyman to worry about: the debt ceiling. For a couple weeks it was all anyone could talk about. Would political fighting get in the way of a deal? Would cooler heads prevail and get a deal done like they had in the past? It was yet another moment that worried investors enough to potentially scare them out of their investments.

Should we be surprised the market is where it is today despite the headwinds it faced this year? Perhaps. But should we be surprised that investors who stayed the course during times of universal pessimism and a couple panic moments were rewarded? Not at all. Investors are compensated for taking on risk in the form of returns. When perceived risk is higher, expected returns are also higher. If 2023 has taught us anything, it is that investors who stick with their investments despite the perceived short-term risks will be handsomely rewarded for doing so.

What’s It All For?

Paul R. Ruedi, CFP®

After spending over a decade working in finance, I have met many people who worked very hard, made calculated career moves, and have been rewarded with high incomes as a result. I know these people are not struggling from a personal finance standpoint. I’m sure they are saving plenty and their money is invested well. For this reason, I really like to tease their brains from the other side of financial planning: the personal side. I hit them with open ended questions like: “you’re working so hard… what’s it all for?”

The most common response I receive is something along the lines of “I’m not really sure.” Not one person could tell me what their specific goal or end game was for working so hard. After realizing they weren’t exactly sure what they were working for, the most common follow up was “to make enough so I never have to work again.” Now we’re getting somewhere.

A lot of people dream of retirement but aren’t really sure where to start when setting their goals. Every retirement will be different, and each person will have their own unique set of goals. But when it comes to retirement the two primary, interconnected goals people should start their planning around are: how much you want to spend, and when you want to retire.

You can decide how much you want to spend many ways. It can be as simple as thinking of a number that just sounds nice to you and start planning around that. If you aren’t sure what amount to even aim for, you can think about keeping up your current lifestyle as a starting point. Since many expenses like commuting fall away during retirement, it may take less than you think to keep up your current lifestyle.

With a retirement spending goal in mind, you can start thinking about when you want to retire. This will likely be a function of when you can save up enough money to achieve your desired level of spending. These goals are interconnected because if a person is willing to spend less in retirement, they will not need to work and save as many years to achieve their spending goal and will be able to retire sooner.

It can be helpful to have specific financial goals, even if you know you are financially ahead of the game. If you aren’t sure what goals are possible for you and how to achieve them through careful financial planning, you may want to talk to a financial planner.

Stock Investing is a Wild Ride

Paul A. Ruedi

People who have been invested in the great companies of America and the world may feel they have been taken on a particularly wild ride the past few years, having experienced large swings both up and down. But if you look at past annual return numbers, you find that big positive or negative returns aren’t just possible, they are the norm. Don’t believe me? Below are the total returns (including dividends) for the S&P 500 index since 1997.

*data from slickcharts.com

We see plenty of big numbers both positive and negative. Out of the 26 years above, 13 saw a rise or fall greater than 18%. There were only three years when the annual return fell within 4% of the long-term expected return of around 10%.

Though you may expect to reap a long-term return similar to the average over long periods of time, in any given year the return you receive can be radically higher or lower than that. Of course, we must always mention past performance is not an indicator of future results.

Investing in the great companies of America and the world is clearly a rollercoaster of emotions. Now imagine you are retired and living off your investment portfolio - the emotions magnify. If you aren’t sure you can handle that emotional investing journey yourself, you may want to talk to a financial advisor.

Disclaimer: Past performance is no indication of future results. You should not make any investment decisions without first performing your own due diligence and consulting your financial advisor.