Friday, January 15, 2016

2016: Ten Predictions to Count On

Jim Parker
Outside the Flags
Vice President

The New Year is a customary time to speculate. In a digital age, when past forecasts are available online, market and media professionals find it harder to hide their blushes when their financial predictions go awry. But there are ways around that.

The ignominy that goes with making bold forecasts was highlighted in a recent newspaper article, which listed many bad calls US economists had made about 2015. These included getting the timing of the Federal Reserve’s interest rate increase wrong, incorrectly calling for a rise in long-term bond yields, and assuming an end to the commodity rout.1

For the broad US equity market, 22 strategists polled by the Wall Street Journal2 estimated an average increase for the S&P 500 of 8.2% for 2015. The most optimistic individual forecast was for a rise of 14%. The least optimistic was 2%. No one picked a fall. As it turned out, the benchmark ended marginally lower for the year.

In the UK, a poll of 49 fund managers, traders, and strategists published in early January 2015 forecast that the FTSE 100 index would be at 6,800 by midyear and 7,000 points by year-end. As it turned out, the FTSE surpassed that year-end target by late April to hit a record high of 7,103 before retracing to 6,242 by year-end.3

Australian economists were little better. The consensus view, according to a January 2015 Fairfax Media poll, was that local official interest rates would stay on hold all year. The Reserve Bank of Australia proved that wrong a month later, before cutting rates again in May.

It shouldn’t be a surprise that if economists can’t get the broad variables right, it must be tough for stock analysts to pick winners. Even a stock like Apple, which for so many years surprised on the upside, disappointed some forecasters last year with a 4.6% decline.4

In Australia, the “Top Picks for 2015” published by one media outlet a year ago included such names as Woodside Petroleum, BHP Billiton, Origin Energy, and Slater & Gordon, all of which suffered double-digit losses in the past year.5

It should be evident by now that setting your investment course based on someone’s stock picks or expectations for interest rates, the economy, or currencies is not a viable way of building wealth in the long term. Markets have a way of confounding your expectations. So a better option is to stay broadly diversified and, with the help of an advisor, set an asset allocation that matches your own risk appetite, goals, and circumstances.

Of course, this approach doesn’t stop you or anyone else from having or expressing an opinion about the future. We are all free to speculate about what might happen in the economy and markets. The danger comes when you base your investment strategy on such opinions. In the meantime, if you insist on following forecasts, here is a list of 10 predictions you can count on coming true in 2016:

  1. Markets will go up some of the time and down some of the time.
  2. There will be unexpected news. Some of this will move prices.
  3. Acres of newsprint will be devoted to the likely path of interest rates.
  4. Acres more will speculate on China’s growth outlook.
  5. TV pundits will frequently and loudly debate short-term market direction.
  6. Some economies will strengthen. Others will weaken. These change year to year.
  7. Some companies will prosper. Others will falter. These change year to year.
  8. Parts of your portfolio will do better than other parts. We don’t know which.
  9. A new book will say the rules no longer work and everything has changed.
  10. Another new book will say nothing has really changed and the old rules still apply.
You can see from that list that if forecasts are so hard to get right, you are better off keeping them as generic as possible. Like a weather forecaster predicting wind, hail, heat, and cold over a single day, your audience should prepare themselves for all climates.
The future is always uncertain. There are always unexpected events. Some will turn out worse than you expect; others will turn out better. The only sustainable approach to that uncertainty is to focus on what you can control.

In the meantime, let me wish a happy new year to you all.
1. Malcolm Maiden, “The Year Market Economists Failed to See Coming,” SMH, December 30, 2015.
2. “Strategists Expect Stocks to Keep Climbing in 2015,” Wall Street Journal, January 2, 2015.
3. “Five Fund Strategies to Ride Rising Markets,” The Times, January 3, 2015.
4. “Seven Stocks to Buy for 2015,” CNN Money, December 31, 2014.
5. “Top Stock Picks for 2015,” Motley Fool.


This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.

Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

Friday, January 1, 2016

A Course on College Funding

Pathways Advisory Group. Inc.
Michelle Carter, CFP®

In case you missed it from the March 2015 Newsletter...

Last October, I gave birth to my 3rd and 4th children (they were a package deal).  After a long wait to become a parent, I now have 4 kids under age 4.  They are fun, smart, sweet and expensive!  And I hear it only gets worse, culminating with the pièce de résistance... college.

My “Future Collegiates”

Fortunately, there is a plan for that!  Except, there are several.  And so many questions… How much college should I fund?  Which savings plan is best?  What will college cost when my kids get there? (Class of 2034, anyone?)

I find that parents span the spectrum regarding the amount of college they wish to fund.  Some of my clients wish to pay all they can, hoping their child can simply focus 100% of their efforts on school.  Other clients consider college funding a responsibility of the student.  Perhaps they worked their way through school, found it to be a character-building experience and wish the same for their child.  Many clients lie somewhere in the middle of these two examples.  There is no right answer; the choice is a personal one.  And sometimes, it requires compromise between parents.

There are several ways to save for college.  Some of the most common are savings bonds, ESAs (Educational Savings Accounts) and 529 Plans.

Savings Bonds are issued by the U.S. Treasury Department and are backed by the full faith and credit of the United States government.  At redemption, you can exclude the interest from your taxable income, if it is used to pay tuition and fees for post-secondary education. You can pay qualified higher education expenses for you, your spouse or any dependents you claim as exemptions on your tax return.  However, the owner must be at least 24 years old before the bond’s issue date.  For example, buying a bond for a child or grandchild in their name will make the bond ineligible for the tax exclusion, unless the child is 24 years of age or older when the bond was issued.  And there are income limits on the tax-exclusive nature of the bonds (although interest from savings bonds for education is always exempt from state and local taxes, regardless of your income).  It should be noted that the U.S. Treasury has stopped selling paper bonds, so the gifts must be in the form of electronic EE savings bonds.  Even so, many people look at savings bonds as the “old school” form of college savings.

Educational Savings Accounts (ESAs) allow you the opportunity to invest in a variety of funds, which can allow for growth of the assets (but also subjects the assets to market risk).  The growth is tax-deferred and withdrawals from the accounts are tax-free, if they are used for qualified education expenses: tuition, fees, books, room and board. A unique feature of an ESA is that the monies can be used for preschool or private school, not just college and trade schools.  These accounts must be set-up and managed by a parent or guardian and contributions are limited to $2000 per year, until the beneficiary reaches age 18.  Assets must be used before the beneficiary reaches age 30 to avoid penalties and taxes on the remaining account balance.  (Account can be rolled over to a qualified family member.)  There are income limitations on contributions and penalties apply if the funds are not used for school expenses.

The college savings plan we typically recommend most is the 529 Plan.  As with the ESA, it allows you to invest in a variety of funds, giving you opportunity for growth (along with the accompanying risk).  This growth is tax-deferred and withdrawals from the accounts are tax-free, if they are used for qualified education expenses.  Unlike the ESA, monies can only be used for post-secondary education.  Also, anyone can set-up or manage the account for any student, not just a parent or guardian, and the donor is in control of the account.  There is no income limit on contributions and the contribution limits are much higher.  The beneficiary can be changed to a qualified family member at any time, which is a great option should you find you overfunded the account.  Penalties apply if the funds are not used for college expenses.  Each state sponsors their own 529 Plan.  Although you do not have to invest in your state’s plan, some states offer tax-advantages for doing so.  (Note:  At this time, California does not offer a tax advantage for contributing to 529 Plans.  Thus, for residents of California, investment options and fees should be the driving force when deciding what state’s plan to choose.)

How much should we save?  That depends on many factors.  How much college do you want to fund?  How long do you have to save?  Where would your child attend school?  The differences in attending a local state college versus an out-of-state private institution are vast.  Historically, college costs inflate an average of 6% per year.  For fun, I calculated what it might cost my oldest child (Katelyn - 3 Years Old) to attend my Alma matter (Long Beach State). 

Katelyn - 3 Years Old
At this time, she majors in being cute and sassy…

Katelyn’s freshman year (in-state tuition, room & board, books & supplies) may cost approximately $45,000 in 2030, and potentially $200,000 to fund all 4 years.  At an average 10% rate of return, I would need to save approximately $500 a month to fund the entire bill.

There are many variables to deciding how and where to save for college.  Whether you are a new parent, a seasoned parent or a grandparent (which I hear is the most fun), putting some away now can reap big rewards later.  Navigating the options can seem like a huge task, so let us be your co-pilot.  I am sure the youngster in your life will appreciate the foresight.

Now where did I put Katelyn’s piggy bank…

Find Michelle on