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Notes Along the Path Ocober 2019

Dear Friends,

 As always, I hope you may benefit from this edition of Notes Along the Path.  Our topics are:
  • In the Media,
  • 8 Ways to Quickly Whittle Down College Debt,
  • Market Update

In the Media

I was recently quoted on Bankrate again.  This time for an article on Saving for college: 
https://www.bankrate.com/banking/savings/best-college-savings-plans/

Last week I responded to a press request for ideas on election year investing.   Hopefully, some of this will make it to AARP's website.  Until then, here is my submission: 

I remember well what happened the night of November 8th and the Wednesday morning that followed.  Nobody expected Trump to win, and as the news spread, the futures market went into a deep swoon. 

https://money.cnn.com/2016/11/09/investing/dow-jones-trump-wins-election/index.html


But at the end of the day on Wednesday, The Dow was up 257 points while the S&P and NASDAQ were up 1.1% each.What can we learn from this?  There are probably just as many people upset about one outcome as another.  Politics will cause volatility, but it's actual legislation and actual policies that change the fundamental profitability of our investments.If you are earning money and investing in your retirement plan with each paycheck, that volatility is your friend due to the power of dollar-cost averaging.  If you are retired or otherwise drawing down your investments, this is a good time to make sure you have enough cash or very-short term securities and money market funds set aside to pay your living expenses for at least a year and up to 2 years.  That way, you do not have to sell stocks to withdraw money during a temporary dip in prices.   A good financial plan will already have you positioned in this way, but it is more important now than ever.I live in the suburbs of Washington, DC.  When President Obama was elected, some Republicans I know predicted the absolute destruction of the world economy.  Many of them missed out on the opportunity to triple their money from 2009 to 2016.  Likewise, I have a liberal relative who sold everything when Trump came in and has missed out on some significant gains since then.  I always tell people that the US economy is the biggest thing that exists on planet earth.  No one person or even one political party can turn it around too quickly.   


8 Ways to Quickly Whittle Down College Debt

As I was leaving the grocery store last month, a headline from USA Today caught my eye: College Student Loans: Debt hits a new high in 2018.

Last year, college seniors graduated with a diploma, a well-paying job (hopefully), and an average student loan debt of $29,200, according to a new study by the Institute for College Access and Success.

Almost two in three college seniors (65%) who graduated from public and private nonprofit colleges in 2018, carried college debt into their post-graduate world.

 Connecticut held the dubious honor of the largest debt load—$38,669, while Utah had the lowest burden.  [Link]

If there is any good news, debt levels were up just 2% from 2017.

I don’t believe anyone is surprised by the high debt burden. Soaring college costs are well documented.

In 1985, the annual tuition, fees, and room and board rates charged to full-time undergraduate students at a four-year public university ran $3,859. By 2015, the cost had ballooned to $19,189, according to the National Center for Education Statistics. For private schools over the same period: $9,228 to $39,529.

 These are averages, and costs will vary, but they paint an unsettling picture.

While we believe college education is a worthy investment, $30,000 in debt is a heavy burden for someone that is 22 or 23 years old.  That debt could be 2 to 3 times more for private school attendees.

Unfortunately, many underestimate the time it will take to pay back their loans. According to a survey of 2,500 recent and soon-to-be graduates, respondents believe they are six years away from being debt-free.  If only.

This month, I’ll offer several ideas that can help bring your student debt loans, or any debt burden, under control.

(If you know recent grads that might find these ideas to be valuable, please share these ideas.)

Before we get started, let me say that there is no magic formula. Debt is debt, it accrues interest, and lenders expect to be repaid.

But if you set a goal, map out a plan, and stick to the blueprint, you’ll be surprised at the ground you can cover.

 That said, typical rates run from 4.5% to 7%, with a term of about ten years.  That’s a monthly payment of $324 and $9,702 in interest on the average debt of $29,200, assuming 6% interest.
  1. Apply for student loan forgiveness.  You can try, but the odds are very low you’ll have any success. 
 The U.S. Department of Education rejected 99% of the applicants who applied for relief between May 2018 and May 2019, according to the [[https://www.gao.gov/assets/710/701157.pdf Government Accountability Office (GAO)]].  Several lawsuits are making their way through the system on behalf of students who went into specific careers in exchange for a promise of debt forgiveness that has not been forthcoming.  In the meantime, let’s look at more realistic ideas. 
  1. Make more than the minimum payment. By adding just $100 per month to your payment, you’ll pay the average debt off three years early and shave a cool $3,000 off your interest payments (data taken from Bankrate.com loan calculator). 
 Be sure to confirm the extra payments are correctly applied to the principal. This step is essential, especially as it relates to the method you use to pay down your debt—steps 3 or 4. 
  1. Pay off high-rate loans first—the avalanche method. If you have more than one loan, make the minimum payment on lower-rate loans but apply that extra payment to the highest rate loan first. There’s no reason to pay more in interest than necessary.
   Some people prefer this approach:
  1. Pay off the smallest loan first—the snowball method. This loan may not be your most expensive loan, but you may feel a sense of accomplishment from ‘checking the box’ or ‘wiping out’ one loan. It’s visible, tangible progress when a loan fades into oblivion.  Plus, by knocking one loan out, you can improve your credit score and lower your debt-to-income ratio.   That might allow you to refinance the remaining loans(s) at a lower rate.
 Either way, don’t overspend but reward yourself (with your spouse if married) when you’ve paid off your first loan. It’s an accomplishment. 
  1. Rollover over the payment. Once you have eliminated the first loan, take that entire payment and roll it into the loan with the next highest rate (or the loan with the lowest balance).  Do you see what you are doing?  It’s called MOMENTUM.  When that loan is paid off, you have additional cash to plow pack into the third loan.
 Keep the ball rolling until you’ve eliminated all your debt, credit card, and auto debt, for example.  After that, increase your retirement savings and/or save for a down payment on a home.

 Establishing the right patterns when you are young will pay dividends throughout your life.
  1. Can you refinance to lower rates? A lower interest rate may translate into fewer payments. But be careful about extending the length of the loan. Lower payments may tempt, but the goal is to obliterate your student loans, not pile up additional interest and delay the day when you’ll be student-debt free.
  
  1. The auto-payment option: just do it. Does your loan servicer offer auto-payment? Most do. You may save 0.25%, and auto-payment is a ‘set and forget’ way of paying back debt. Besides, you won’t have to worry about missing a payment, late fees, and a black mark on your credit report.
  
  1. Be careful with extended payment plans. Such plans reduce your monthly payment and may be income-based, but it will take you longer to pay off your student debt, which means you’ll pay more in interest.
  Your goal is to put your college debt in the rearview mirror. Be strategic about your choices. Set up a plan. Use our pointers as a guide. As always, we’re here to answer your questions.

Market Update

Trade headlines have driven price action during much of the year.  September and Q3 were no exception.  A shift in the Fed’s stance and a reduction in trade tensions sparked a rally that took the S&P 500 Index to a new high in July (S&P 500 data—St. Louis Federal Reserve).

Despite a late July rate cut, an escalation in trade tensions in August created a brief bout of volatility. Yet, the peak-to-trough decline in the S&P 500 Index amounted to just 6.1%.

Economic growth and a Fed that was (and probably still is) in rate-cut mode (the Fed snipped another quarter-point from the fed funds rate in September) cushioned the downside.

But a renewal of trade negotiations—more headlines—and a de-escalation of tensions were well-received by investors. When September ended, the S&P 500 wasn’t far from a new high.

Going forward - Enter Q4

While I am sure that trade headlines will continue to influence short-term trading, I'll remind you once again that the uncertainty surrounding Brexit could also affect daily activity.

Meanwhile, Europe appears to be on the cusp of a recession. And, if that’s not enough, the speaker of the House launched an impeachment inquiry against the president.

 Some of us are old enough to remember President Nixon’s troubles coincided with a nasty bear market.  But was there a link between Nixon and the 1973-74 slide, which lopped nearly 50% off the S&P 500?  Or did the economic fundamentals hobble the major averages?

Table 1: Then vs. Now
1973-74—Bear Market1998—Bull Market2019—?
Inflation rose to double-digit levels, peaking at over 12%Inflation low and slowingInflation is low
Interest rates were spiking higher; prime loan rate hit 12%Interest rates steadyInterest rates are low
OPEC oil embargo roils economy; oil prices rise four-foldOil plentiful; prices stableA glut of oil exists today, and prices are well below levels of recent years
The unemployment rate jumped; the economy fell into a steep recessionThe economy expandingThe economy is expanding, and the unemployment rate is near a 50-year low
  Source: St. Louis Federal Reserve, U.S. State Dept.
Past performance is no guarantee of future performance

Though political uncertainty likely exacerbated the sell-off, high inflation, high-interest rates, and a deep recession took an enormous toll on stocks.

Contrast 1973-74 with the late-1998 impeachment of Bill Clinton. Twenty-five years after Nixon, stocks performed well amid much better economic fundamentals.

 While no two situations are exactly alike, economic conditions today are more reminiscent of the late 1990s than Nixon’s second term.


Table 1: Key Index Returns

MTD%YTD %
Dow Jones Industrial Average1.9515.39
NASDAQ Composite0.4620.56
S&P 500 Index1.7218.74
Russell 2000 Index1.9112.96
MSCI World ex-USA*2.4810.69
MSCI Emerging Markets*1.693.65
Bloomberg Barclays US 
Aggregate Bond TR
-0.5310.30
  Source: Wall Street Journal, MSCI.com, Morningstar, MarketWatch
MTD: returns: Aug 31-Sept 30, 2019
YTD returns: Dec 31, 2018-Sept 30, 2019
 *in US dollars

Bottom line

We can point to uncertainty lurking in the near term, but risks never completely abate.  If they do, stocks are usually bid up to reflect perfection.  It won’t be long before disappointment sets in.

So, let’s end on an upbeat note because there is a lot to be positive about.

While we have seen a few rocky days this year, major indices have performed well, and the S&P 500 and the Dow have yet to shed 10 percent—an official correction. For the long-term investor, it hasn’t been a volatile year because interest rates provide little competition for stocks, the consumer has been strong, and the economy is expanding at a modest pace.

That said, successful long-term investors do not make investment decisions based on an emotional response to daily volatility and are wary of being whipsawed by headlines.

 If you have any questions, let’s talk. That’s what we’re here for.

If you like it this newsletter- you have my permission to pass it on to any contacts you have that might benefit. 
I remain honored and humbled that my clients have allowed me to serve as their financial advisor.  Thank you for your support.  

All the Best!

 Gordon Achtermann