The Financial Year In Review
Thats why I decided this week to highlight some of the major events we covered in 2016, before we enter into a year that is sure to be filled with even more changes.
First, lets review the new Department of Labor rule that will bring significant changes to the financial industry. That headline-making rule imposes a fiduciary standard on all advisors who are getting paid to provide investment guidance on any kind of retirement account (401(k), IRA, Roth IRA, Simple IRA, SEP IRA, et cetera). Previously, that fiduciary standard was imposed only on financial advisors who deal with employer-sponsored plans covered under the federal statute, ERISA, or who are licensed as Investment Advisor Representatives. Once the new rule becomes effective and is implemented, which is expected to be sometime in the first half of 2017, all advisors must act in the best interests of their clients if they are offering investment advice on any kind of retirement account.
This will send ripples through the financial industry, affecting both the services offered and the fees charged by a lot of the major brokerage firms that have not been previously held to this standard. Bank of America Merrill Lynch (Merrill Lynch) has announced that starting in April of 2017, its brokers will no longer offer new, advised commission-based IRAs. Those accounts will be opened through either their fee-based, investment advisor program; or its self-managed retail style offerings. Keep your eyes peeled as a lot of these changes continue to be made.
Obamacare is another issue to watch in 2017. This past year highlighted the problems with the current cost of healthcare in America. In fact, in 2016, healthcare spending rose by 25 percent nationally and it is not getting any better. According to recent reports, prices for 2017 are projected to rise, on average, 30 percent. So, since 2014, consumers' premium prices are up 50 percent, for what many believe to be watered-down insurance.
The markets in 2016 were unpredictable. This may be the understatement of the year. At the start of 2016, we saw very high trading activity as investors tried to escape feared equities to find safer investments. In fact, this was the worst year's start to the markets in the history of the markets, only to be followed up in June with the market volatility surrounding Brexit.
Lastly, Trumplove him or hate him, his win shook the world. But let's talk about the recent media hype surrounding the post-election market runup, specifically in the Dow and the S&P 500.
Folks, there is nothing wrong with using the S&P 500 and the Dow as benchmarks and wanting to achieve S&P 500- and Dow-like returns, provided you are also willing to accept the same type of volatility, drawdowns, and losses. To put things into perspective, the S&P 500 has suffered two significant declines of 50 percent or more in the past 15 years.
Another thread of information relative to making informed financial decisions in 2017 is that the S&P 500 declines (on average) by 20 percent every five years; it suffers 10 percent declines (on average) every 16 months; and drops 5 percent (on average) 3.3 times per year. Most investors cannot stomach this type of volatility and sell at the market bottomincurring taxes and transaction costs as well. Please do not be that average retail investor in 2017you know the onewho always makes investment-related decisions based on emotions and who chases returns at the worst possible time. Look, I get it. I am a passionate guy who lets my emotions steer me in many aspects of my life, but an emotion-based investment strategy is never successful. Don't be "that" investor in 2017.
Make 2017 the "Year of the Rules." Implement a rules-based investment strategy. Doing so will help to protect your portfolio in a downturn, and will allow you to take advantage of the upticks, all without relying on a single emotion.
You have probably heard me say this before, but it bears repeating. A study performed in 2014 by DALBAR, the nations leading financial services market research firm, found that the average retail investor earned just 3.69 percent when investing in equity funds, versus the S&P 500 Index returns of 11.11 percent over the same period of time (since the inception of the DALBAR study on January 1, 1984).
Unfortunately, this is a lesson that many people continue to learn the hard way and will likely be exacerbated in the 2017 investment landscape as well, if they do not modify their investment behavior.
Each year that goes by without reviewing and protecting your investments is a year wasted. Don't let 2017 be another wasted year.