Finance 101: May 2025
In May the financial advisors at Ruedi Wealth Management wrote four more columns for The News-Gazette’s Business Extra section. Make sure to look for them every Saturday in the weekend edition of the paper, but in case you missed any in May all four are below.
The Efficient Market Hypothesis
Paul R. Ruedi, CFP®
If you look at the day-to-day movements of the stock market, you would be tempted to believe that movements are completely random and based on absolutely nothing except unexplainable “animal spirits.” The first half of that statement is true, markets do move randomly. But the reason is not because they are wrong, broken, or crazy. Quite the opposite. Markets are extremely good at incorporating all available information.
The brilliant people who studied financial markets have been zeroing in on this idea over the past 125 years. The first hint of the idea of market efficiency shows up in the work of the French mathematician Louis Bachelier in his 1900 PhD thesis “The Theory of Speculation” – and it has been suggested but not proven, he borrowed some of his ideas from another French mathematician who proposed them decades earlier. In his thesis he observed "past, present and even discounted future events are reflected in market price, but often show no apparent relation to price changes."
Though Benoit Mandelbrot (another famous mathematician) and economist Paul Samuelson would recognize the brilliance of Bacheliers work, it wasn’t until Eugene Fama did empirical studies in 1970 and published the paper "Efficient Capital Markets: A Review of Theory and Empirical Work" that beliefs about market efficiency began to really crystallize. Fama would later receive the Nobel Prize for his work studying and describing market efficiency.
His work suggested prices do incorporate all available information. He even categorized the information sets markets incorporate into three “forms” of market efficiency. “Weak form” market efficiency suggests prices incorporate all historical price information. “Semi-strong form” market efficiency suggests prices incorporate all historical information and all current publicly available information like financial statements and news. “Strong form” market efficiency proposes prices even incorporate all public and private (insider) information into current stock prices.
One of the symptoms of an efficient market is that it is very tough to outsmart as an active manager. Empirically, very few active managers are actually able to beat the market, and no more than you would expect by just random luck. The implication of the efficient market hypothesis for investors is that you should not try to time the market, pick winning stocks, or try to do any other form of “outsmarting” the millions of other participants in the market. You should simply buy and hold a diversified portfolio of investments and let markets work for you. If you need help with that, you may want to talk to a financial advisor.
Paul R. Ruedi is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois.
Predicting Your Future
Paul R. Ruedi, CFP®
Though I find working as a financial advisor interesting, it seems when I start talking about my job to some people, I can’t get past one sentence before they get bored. As a result, when I am asked what I do for a living, I am tempted to answer with something more intriguing: “I tell people their futures.”
I’m sure that answer is going to beg an explanation, at which point I’ll come clean and admit to being a financial planner. I can guess where their minds will go next. Can you tell people which stocks are going to do well? Well no, nobody can. Can you tell people the direction of the stock market over the next time period? No, Nobody can.
But as financial planners, we can, in a way, tell people their futures. If you provide us with your current amount of assets, how much you are saving, and how those savings are invested, we can tell you what your financial future will look like. Of course, we won’t be able to do it to the exact dollar amount. Nobody can actually predict the future.
This process doesn’t involve any crystal balls or visions of the future. It is a simple matter of math. In the same way I can observe someone who is walking 5 miles per hour in one direction and “predict” where they will end up, we can look at all the aspects of your finances and see where you will likely end up.
This is very important when funding goals that are decades away, the most common one we deal with is retirement. People have some idea of what they would like their retirement to look like. We can look at their savings rate, investment portfolio, when they want to retire, and how much they want to spend and see if it is possible. If for some reason the math implies they are going to fall short of their goal, they can make adjustments now and put themselves on the right track.
It is always better to look at where you are heading in advance, and make adjustments now when you have the chance. Some adjustments, such as saving more or investing more aggressively during your working years, cannot be done after the fact. Though we can’t perfectly predict the future, financial planners can give you an idea where your finances are heading and, in a way, tell you your future. If that sounds appealing to you, you may want to talk to a financial advisor.
Paul R. Ruedi is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois.
The Tariff Test
Paul Ruedi
Over the past two months investors have been treated to an investing crash course. The tariff-induced panic quickly drove the S&P 500 down into bear market territory. Then almost as quickly as it went down, it came rallying back into positive territory for the year. It was a major test for investors. Did you pass?
The recent low point for the S&P 500 was 4,835.04 and occurred on April 7. Less than a month and a half later the S&P 500 crossed 5,800 - a nearly 20% increase. Though it is tempting to say you can time the market and have a big opportunity to exploit price movements like this, it is pretty much impossible to perfectly time the bottom.
But buy and hold investors did own their investments at this most recent bottom and they had a decision to make: do I stick with them? Disciplined investors made the choice not to abandon their investments. That choice paid off extremely well over the next month as the S&P 500 shot back up by nearly 20%.
If the tariff decline spooked investors enough to get out of the market "until things get better," they likely ended up watching the rally from the sidelines because we never got a distinct signal that things were better. The most distinct signal arrived when it was announced that the US and China would pause their tariff war for 90 days. But by the time that news broke, the market was already up significantly from its low point. The ship had already sailed.
The stock market doesn't wait to recover once things are decisively better; it recovers when things start to seem even the slightest bit less bleak. The market often experiences its most explosive growth in the face of adversity when you least expect it. If you are able to hold on to your investments during these times, you are rewarded handsomely.
If you were able to stick with your investments through this most recent decline, and are still sticking with them now, congratulations, you passed the tariff test. If for some reason the emotions got the better of you and you abandoned your stock investments, you still have some work to do if you want to be a successful investor. If the emotions of investing are simply too much for you to handle yourself, you may want to consider working with a financial advisor before the market tests us again.
Paul Ruedi is the CEO of Ruedi Wealth Management in Champaign, Illinois.
Reverse Mortgages for Retirees
Paul R. Ruedi, CFP®
As more Americans approach retirement age, many are discovering that their biggest financial asset isn’t in a 401(k) or a pension fund — it’s the home they’ve spent decades paying off. A reverse mortgage can be a useful financial tool to help retirees unlock the equity in their homes and improve their quality of life during retirement. But most people don’t really understand what they are or how they work.
A reverse mortgage is a type of loan available to homeowners aged 62 or older, that allows them to borrow against the equity in their home. Unlike a traditional mortgage where the borrower makes monthly payments to a lender, in a reverse mortgage, as the name implies, the lender pays the homeowner. Payments can be received as a lump sum, fixed monthly payments, a line of credit, or a combination of these options. The loan amount then accrues interest and is eventually repaid when the homeowner sells the house, moves out permanently, or passes away.
The most common type is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA). To qualify, the borrower must live in the home as their primary residence, keep up with property taxes and homeowners insurance, and maintain the home. Though lenders will not have as large of income requirements for reverse mortgages as they do for traditional mortgages, they will do a financial assessment to make sure the borrower will be able to pay for taxes, insurance, HOA dues, and home maintenance.
For retirees with limited financial resources, a reverse mortgage can provide a path to using home equity for spending needs. It can help cover medical expenses, in-home care, home improvements, or even everyday living costs. It can also be used strategically as a backup source of funds to preserve other investments during market downturns.
However, reverse mortgages aren’t for everyone. They come with fees, interest, and the possibility of reducing the inheritance left to heirs. Borrowers should also consider how long they plan to stay in the home as moving out early can trigger repayment requirements.
Before signing on the dotted line, it’s essential to speak with a qualified financial professional to discuss your options. The decision to take out a reverse mortgage is not something that should be taken lightly, and should be made with respect to a comprehensive retirement plan. But for the right homeowner, a reverse mortgage can be a useful tool to turn home equity into a flexible retirement resource.
Paul R. Ruedi is a CERTIFIED FINANCIAL PLANNER™ professional with Ruedi Wealth Management in Champaign, Illinois.
*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.