NestEgg NEWS – September 2019
September yielded one of the quietest stock markets we have experienced in a while, while politically it was one of the busiest. Despite all of the uncertainty, our stock market ended the month up 1.6% while the bond market was flat. The most common question we received the past couple weeks is “how an impeachment inquiry will affect our markets”? In the year following the Clinton impeachment inquiry, the stock market was up 39%. In the year after the Nixon impeachment inquiry, the market was down 33%.
The Clinton inquiry initiated in October 1998, during the Dotcom economy. The Nixon inquiry initiated on July 27, 1974 at the beginning a recession, which was unrelated to politics. One thought is while the White House and Congress are consumed with the impeachment inquiry, they will be less focused on tariffs and regulation which could our markets would greatly appreciate.
Meanwhile federal bank chairman Powell has hinted another rate decrease is likely. This would be a well-received boost to our economy and markets. Home mortgage rates have again fallen to almost historically low interest rates, confounding most economists who predicted much higher rates by now. Additionally, jobs growth continues to be strong, jobless claims at near historic lows, inflation is still well below expectations and the all-important consumer confidence remains high. So, while our economy appears to be slowing, the underlying economic indicators continue to be strong.
Preparing for a Market Downturn
- The strong stock market has been remarkably tranquil, but a correction could come at any time.
- Positioning your investments to endure potential setbacks has historically been far more effective than making abrupt moves following a market correction.
- Stocks tend to gain a majority of the time in most markets and providing this perspective may be helpful in keeping invested during tough times.
One of the most noteworthy elements of the current strong stock market (ie bull market) has been its remarkable tranquility. Currently in its tenth year, this advance has been marked by extremely low volatility with very few selloffs. History tells us even the most vibrant rallies eventually give way to selling pressure, either temporary corrections or more damaging recessions. It is impossible to predict market corrections — or when market corrections deepen into full-fledged recessions.
It’s helpful to understand the nature of past downturns. Though precise causes vary from one selloff to another, we found two fundamental types of declines: major pullbacks, which often correspond with recessions, and shorter-lived downturns occurring in the course of longer lasting rallies.
In the post-world war 2 period, the DOW (30 largest companies in American) has dropped 15% or more on 16 occasions. Half of those were mild, lasting less than eight months. Nearly one-third of the time, the DOW was at a new high within 10 months of the previous peak. As for major pullbacks, the average duration was 17 months, with a drop of more than 30%. These larger declines are typically associated with recessions. Gauging the potential depth of a market decline involves determining the stage of the economic cycle. Currently, we believe the U.S. economy is not exhibiting obvious excesses or imbalances historically foreshadowing economic contractions.
Avoid the Urge to Time the Market
Regardless of market conditions, there is a natural human instinct to make investment adjustments based on what one thinks will happen. As you know, this impulse isn’t confined to periods when stocks are falling — it’s equally tempting when stocks are rising. Just as we are inclined to reduce stock exposure following a market decline, we are reluctant to maintain stock investments during rising markets because we worry about upcoming market corrections.
Abrupt investment changes can be costly. It’s not only impossible to predict short-term market moves but retreating from stocks at the wrong time can significantly damage long-term returns. For example, the DOW had an average annual return of 7.7% from 1997 to 2018. But investors who missed just the best 40 days during that span would have suffered a 2.4% annual loss.
Going back to 1946 stocks appreciated in 81% of all 12-month periods, including both weak and strong economies. During economically challenging times, such as when inflation was high, gold prices were surging or unemployment was elevated, stock markets delivered overwhelmingly positive returns even during these tumultuous periods. Only recessions have a reliably dampening effect on stocks but avoiding those periods would have required advance warning. Unfortunately, even the most highly regarded economists are notorious for their conflicting — and often incorrect — views about when recessions will materialize.There are two suggestions to consider in preparing for market corrections.
- Pre-Retirees and Retirees should set aside one to two years of living expenses in short-term, liquid assets such as high-quality short-term bonds. This is higher than the typical three-to-six month “emergency cash fund” suggested in basic financial planning courses, this approach provides necessary liquidity to meet short-term liabilities, and helps provide emotional wherewithal to withstand the inherent volatility of longer-term investments. Given the average peak-to-recovery duration for pullbacks of 10% or more is approximately 21 months since 1926, setting aside this amount seems reasonable.
- Consider objectives of your investments such as capital appreciation, income, capital preservation or a combination of these allows a reasonable tolerance around how much to allocate to stocks, bonds, etc. Do you have the right mix of investment objectives in your portfolios? If you are especially sensitive to equity declines, consider a growth and income strategy, which typically exhibits less volatility and lower downside capture.
Of course, none of this protects investors from sudden or sharp declines. Market corrections caused by geopolitical events and policy miscues can spark pullbacks. We believe the best strategy is to establish a thoughtful investment strategy based on your time horizon, risk tolerance, risk capacity and personal financial goals. This approach will help you stick with your portfolio objectives through the inevitable gyrations in the market. The stock market has been up far more often than it has been down, meaning odds are moving to the sidelines would ultimately be a costly experience.
We LOVED sharing the songwriter experience with so many of you and hope you enjoyed it as much as we did!
Get to Know Special Needs Trusts
Trust assets can be used for a variety of helpful and enriching benefits,
all while not jeopardizing valuable government assistance.
Caring for a family member with a disability or special needs can be difficult to navigate without expert help and the right plan. Whether due to an accident or mental disability, a special needs trust can help enrich your loved one’s life while not jeopardizing government benefits that can be a significant source of income and health insurance.
WHAT IS A SPECIAL NEEDS TRUST?
A special needs trust, sometimes called a supplemental needs trust, is a legal arrangement where one person or entity – the trustee – is charged with protecting the interest and assets for the benefit of another – the beneficiary. The trust essentially allows an individual with a disability or special needs to benefit from the income and principal of the trust without reducing their eligibility for government assistance such as Supplemental Security Income (SSI) or Medicaid.
HOW SPECIAL NEEDS TRUSTS WORK
The use of a special needs trust can protect against the reach of creditors, and it provides protection for a beneficiary who may be vulnerable, susceptible to undue influence or unable to manage money independently. But most importantly, a special needs trust stretches each dollar contributed to the trust and allows the beneficiary to be cared for at a higher level of care without jeopardizing the beneficiary’s benefits.
A special needs trust is designed to preserve a beneficiary’s eligibility for needs-based government benefits while being able to benefit from and enjoy trust assets. There are two types of special needs trusts – first party and third party – that are distinguished by the source of assets used to fund the trusts. Given the complexity and longevity of administering a special needs trust, it’s important to consider the best-qualified person or a corporate trust company to serve as trustee.
HOW CAN THE ASSETS BE USED?
The use of a special needs trust can be an important strategy for loved ones in such a situation. It protects against the reach of creditors and provides protection for a beneficiary who may be vulnerable, susceptible to undue influence or unable to manage money if the assets were given outright. But most importantly, the special needs trust stretches each dollar contributed to the trust and allows the beneficiary to be cared for at a higher level of care than is available from government-sponsored benefit programs and ensures the wealth transfer to a disabled individual can occur without jeopardizing the beneficiary’s benefits.
There are two types of special needs trusts – first party and third party – that are distinguished by the source of assets used to fund the trusts. With a first party trust, also referred to as a “self-settled” special needs trust, it must contain the assets of an individual under the age of 65 who is disabled. The trust, which often results from a medical malpractice or personal injury situation, can only be established by a parent, grandparent, guardian or court. The trust must also be irrevocable and can only be for the sole benefit of the beneficiary. Upon the death of the beneficiary, any remaining assets in the trust are repaid to the state up to an amount equal to any medical assistance benefits that were paid to the beneficiary while alive. Third party special needs trusts are funded with other’s assets (a third party) like a gift or inheritance. Unlike a first party trust, a third-party trust does not require any state payback at the beneficiary’s death, and any remaining assets pass according to the grantor’s wishes.
Trust assets can be used to buy a wide variety of goods and services to assist the beneficiary and enrich his or her life. Common uses include personal care attendants, vacations, home furnishings, out-of-pocket medical and dental expenses, education, recreation, vehicles and physical rehabilitation.
Given the complexity and longevity of administering a special needs trust, it’s important to consider the best-qualified person or a corporate trust company to serve as trustee. Properly managing a special needs trust means understanding the disabilities of the loved one and communicating effectively with parents, caregivers or guardians, which can require a significant time commitment. The trustee must be able to prudently manage the assets held for the loved one’s benefit and understand the governmental regulations and how to work about them.
A special needs trust can help fund a lifetime of care for a disabled or special needs individual. While governmental support is designed to only provide for the very basic necessities, such as food and shelter, the funds in a special needs trust can be used for those many extras that will make the beneficiary’s life more rewarding and fulfilling. You may find it helpful to consult a special needs attorney, talk with your financial advisor, and read the full information guide below to learn more about special needs trusts and other strategies tailored for disabled or special needs individuals.
In 1993, with the passage of the Omnibus Budget and Reconciliation Act (OBRA ’93), Congress created an exception to the general rule that money held in trust is considered countable assets for SSI and Medicaid eligibility. It specifically authorized the use of special needs trusts for the benefit of individuals who are under the age of 65 years and disabled according to Social Security standards. Third party special needs trusts are largely created by case law.
WHAT CAN THE TRUST BE USED FOR?
A special needs trust should not provide money directly to the beneficiary as it could interfere with eligibility for Supplemental Security Income and Medicaid. The trustee can however spend trust assets to buy a wide variety of goods and services to assist the loved one with special needs. Special needs trust funds are commonly used to pay for personal care attendants, vacations, home furnishings, out-of-pocket medical and dental expenses, education, recreation, vehicles and physical rehabilitation. Most important, a special needs trust helps to enrich the beneficiary’s life and make it more enjoyable.
GOVERNMENT BENEFITS AVAILABLE TO INDIVIDUALS WITH DISABILITIES OR SPECIAL NEEDS TO USE ALONGSIDE A SPECIAL NEEDS TRUST:
SOCIAL SECURITY DISABILITY INCOME (SSDI) / MEDICARE SSDI is a cash assistance program for people who have sufficient work history and are disabled as determined by the Social Security Administration. Medicare is a federal health insurance program for individuals 65 years or older with a sufficient work history or who are under 65 and have received SSDI for 24 months, have end stage renal disease or ALS. Neither are “means-tested” programs, which simply means the government does not look at the assets or income of the individual to determine eligibility for SSDI or Medicare.
SUPPLEMENTAL SECURITY INCOME (SSI) / MEDICAID SSI is a cash assistance program for financially eligible individuals who are 65 years or older, blind or disabled. Eligibility is tied to asset and income limitations. Medicaid is a federal/state insurance program for certain individuals/families with limited income and resources. In most states, if someone is eligible for SSI, they are automatically eligible for Medicaid.
While SSDI/Medicare and SSI/Medicaid provide income and health insurance, there are several other programs, such as food stamps, Section 8/HUD housing, veterans benefits, etc., that a beneficiary may also receive concurrently, which a trustee must also be mindful of. Given the complexity and longevity of administering a special needs trust, it’s important to consider the best-qualified person or a corporate trust company to serve as trustee. Properly managing a special needs trust means understanding the disabilities of the loved one and being able to effectively communicate with a parent, caregiver or guardian, which can require a significant time commitment on the part of the trustee. They must be able to prudently manage the assets held for the loved one’s benefit and understand the governmental regulations and how to work about them. The trustee, whether an individual or corporate institution, should be knowledgeable about what can be paid from the trust and what shouldn’t, as well as be able to prepare and retain records of earnings and disbursements for tax purposes. A corporate trustee is often better positioned than an individual trustee to effectively administer a special needs trust in a way that is compliant with state and federal laws. In summary, a special needs trust established for the benefit of a disabled individual can help fund a lifetime of care even if the family is unable to. Governmental support is designed to only provide for the very basic necessities, such as food and shelter. The funds in a special needs trust supplement government benefits and can be used for those many extras that will make the life of an individual with a disability or special needs more rewarding and fulfilling
Lily spent the past weekend with her sister, Pearl. They were both very EGG-cited to check out the office, and are happy to report back that we have been running the place alright!
We hope you found this to be educational and helpful. As we always emphasize, it is our job to assist you! If you have questions or would like to discuss anything in further detail, please give us a call.
As always, feel free to pass this on to someone important to you.
Thank you very much for the trust and confidence you’ve placed in our team.
Financial Advisor – Wood Tarver Financial
Financial Advisor – Wood Tarver Financial