Midterm Elections: What Do They Mean for Markets?

It’s almost Election Day in the US once again. For those who need a brief civics refresher, every two years the full US House of Representatives and one-third of the Senate are up for reelection.

While the outcomes of the elections are uncertain, one thing we can count on is that plenty of opinions and prognostications will be floated in the days to come. In financial circles, this will almost assuredly include any potential for perceived impact on markets. But should long-term investors focus on midterm elections?.


We would caution investors against making short-term changes to a long-term plan to try to profit or avoid losses from changes in the political winds. For context, it is helpful to think of markets as a powerful information-processing machine. The combined impact of millions of investors placing billions of dollars’ worth of trades each day results in market prices that incorporate the aggregate expectations of those investors. This makes outguessing market prices consistently very difficult.1 While surprises can and do happen in elections, the surprises don’t always lead to clear-cut outcomes for investors.

The 2016 presidential election serves as a recent example of this. There were a variety of opinions about how the election would impact markets, but many articles at the time posited that stocks would fall if Trump were elected.2 The day following President Trump’s win, however, the S&P 500 Index closed 1.1% higher. So even if an investor would have correctly predicted the election outcome (which was not apparent in pre-election polling), there is no guarantee that they would have predicted the correct directional move, especially given the narrative at the time.

But what about congressional elections? For the upcoming midterms, market strategists and news outlets are still likely to offer opinions on who will win and what impact it will have on markets. However, data for the stock market going back to 1926 shows that returns in months when midterm elections took place did not tend to be that different from returns in any other month.


Exhibit 1: Congressional elections and annual returns

Exhibit 1 shows the frequency of monthly returns (expressed in 1% increments) for the S&P 500 Index from January 1926–August 2018. Each horizontal dash represents one month, and each vertical bar shows the cumulative number of months for which returns were within a given 1% range (e.g., the tallest bar shows all months where returns were between 1% and 2%). The blue and red horizontal lines represent months during which a midterm election was held, with red meaning Republicans won or maintained majorities in both chambers of Congress, and blue representing the same for Democrats. Striped boxes indicate mixed control, where one party controls the House of Representatives, and the other controls the Senate, while gray boxes represent non-election months. This graphic illustrates that election month returns were well within the typical range of returns, regardless of which party won the election. Results similarly appeared random when looking at all Congressional elections (midterm and presidential) and for annual returns (both the year of the election and the year after).


While it can be easy to get distracted by month-to-month or even one-year returns, what really matters for long-term investors is how their wealth grows over longer periods of time. Exhibit 2 shows the hypothetical growth of wealth for an investor who put $1 in the S&P 500 Index in January 1926. Again, the chart lays out party control of Congress over time. And again, both parties have periods of significant growth and significant declines during their time of majority rule. However, there does not appear to be a pattern of stronger returns when any specific party is in control of Congress, or when there is mixed control for that matter. Markets have historically continued to provide returns over the long run irrespective of (and perhaps for those who are tired of hearing political ads, even in spite of) which party is in power at any given time.

Exhibit 2. Growth of $1 Invested in the S&P 500 Index and Party Control of Congress January 1926–August 2018

Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. S&P data ©2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

Equity markets can help investors grow their assets, and we believe investing is a long-term endeavor. Trying to make investment decisions based on the outcome of elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome based on such a strategy will likely be the result of random luck. At worst, it can lead to costly mistakes. Accordingly, there is a strong case for investors to rely on patience and portfolio structure, rather than trying to outguess the market, to pursue investment returns.

1.This is known as the efficient market theory, which postulates that market prices reflect the knowledge and expectations of all investors and that any new development is instantaneously priced into a security.

2. Examples include: “A Trump win would sink stocks. What about Clinton?” CNN Money, 10/4/16, “What do financial markets think of the 2016 election?” Brookings Institution, 10/21/16, “What Happens to the Markets if Donald Trump Wins?” New York Times, 10/31/16.

The ABCs of Education Investing

With school back in session in most of the country, many parents are likely thinking about how best to prepare for their children’s future college expenses. Now is a good time to sharpen one’s pencil for a few important lessons before heading back into the investing classroom to tackle the issue.


According to recent data published by the College Board, the annual cost of attending college in the US in 2017–2018 averaged $20,770 at public schools, plus an additional $15,650 if one is attending from out of state. At private schools, tuition and fees averaged $46,950.

It is important to note that these figures are averages, meaning actual costs will be higher at certain schools and lower at others. Additionally, these figures do not include the separate cost of books and supplies or the potential benefit of scholarships and other types of financial aid. As a result, actual education costs can vary considerably from family to family.

To complicate matters further, the amount of goods and services $1 can purchase tends to decline over time. This is called inflation. One measure of inflation looks at changes in the price level of a basket of goods and services purchased by households, known as the Consumer Price Index (CPI). Tuition, fees, books, food, and rent are among the goods and services included in the CPI basket. In the US over the past 50 years, inflation measured by this index has averaged around 4% per year.1 With 4% inflation over 18 years, the purchasing power of $1 would decline by about 50%. If inflation were lower, say 3%, the purchasing power of $1 would decline by about 40%. If it were higher, say 5%, it would decline by around 60%.

While we do not know what inflation will be in the future, we should expect that the amount of goods and services $1 can purchase will decline over time. Going forward, we also do not know what the cost of attending college will be. But again, we should expect that education costs will likely be higher in the future than they are today. So, what can parents do to prepare for the costs of a college education? How can they plan for and make progress toward affording those costs?


To help reduce the expected costs of funding future college expenses, parents can invest in assets that are expected to grow their savings at a rate of return that outpaces inflation. By doing this, college expenses may ultimately be funded with fewer dollars saved. Because these higher rates of return come with the risk of capital loss, this approach should make use of a robust risk management framework. Additionally, by using a tax-deferred savings vehicle, such as a 529 plan, parents may not pay taxes on the growth of their savings, which can further lower the cost of funding future college expenses.

While inflation has averaged about 4% annually over the past 50 years, stocks (as measured by the S&P 500 Index) have returned around 10% annually during the same period. Therefore, the “real” (inflation-adjusted) growth rate for stocks has been around 6% per annum. Looked at another way, $10,000 of purchasing power invested at this rate over the course of 18 years would result in over $28,000 of purchasing power later on. We can expect the real rate of return on stocks to grow the purchasing power of an investor’s savings over time. We can also expect that the longer the horizon, the greater the expected growth. By investing in stocks, and by starting to save many years before children are college age, parents can expect to afford more college expenses with less savings.

It is important to recognize, however, that investing in stocks also comes with investment risks. Like teenage students, investing can be volatile, full of surprises, and, if one is not careful, expensive. While sometimes easy to forget during periods of increased uncertainty in capital markets, volatility is a normal part of investing. Tuning out short-term noise is often difficult to do, but historically, investors who have maintained a disciplined approach over time have been rewarded for doing so.


Working with a CFP® professional who has a transparent approach based on sound investment principles, consistency, and trust can help investors identify an appropriate risk management strategy. Such an approach can limit unpleasant (and often costly) surprises and ultimately may contribute to better investment outcomes.

A key part of maintaining this discipline throughout the investing process is starting with a well-defined investment goal. This allows for investment instruments to be selected that can reduce uncertainty with respect to that goal. When saving for college, risk management assets (e.g., bonds) can help reduce the uncertainty of the level of college expenses a portfolio can support by enrollment time. These types of investments can help one tune out short‑term noise and bring more clarity to the overall investment process. As kids get closer to college age, the right balance of assets is likely to shift from high expected return growth assets to risk management assets.

Diversification is also a key part of an overall risk management strategy for education planning. Nobel laureate Merton Miller used to say, “Diversification is your buddy.” Combined with a long-term approach, broad diversification is essential for risk management. By diversifying an investment portfolio, investors can help reduce the impact of any one company or market segment significantly negatively impacting their wealth.

Additionally, diversification helps take the guesswork out of investing. Trying to pick the best performing investment every year is a guessing game. We believe that by holding a broadly diversified portfolio, investors are better positioned to capture returns wherever those returns occur.


Higher education may come with a high and increasing price tag, so it makes sense to plan well in advance. There are many unknowns involved in education planning, and no “one-size-fits-all” approach can solve the problem. By having a disciplined approach toward saving and investing, however, parents can remove some of the uncertainty from the process. A CFP® wealth professional can help you clarify your goals, present different portfolio approaches, and help you understand the likely outcomes for an informed decision.

A CFP® professional can help you craft a plan most likely to realize your family’s educational goals. An informed strategy for college funding, integrated with your own informed retirement strategy, will help put you in control of your financial future and gain greater peace of mind.

1.Source: US Department of Labor, Bureau of Labor Statistics, Economic Statistics.

Alternative Reality

Diversification has been called the only free lunch in investing.

This idea is based on research showing that diversification, through a combination of assets like stocks and bonds, could reduce volatility without reducing expected return or increase expected return without increasing volatility compared to those individual assets alone. Many investors have taken notice, and today, highly diversified portfolios of global stocks and bonds are readily available to investors at a comparatively low cost. A global stock portfolio can hold thousands of stocks from over 40 countries around the world, and a global bond portfolio can be diversified across bonds issued by many different governments and companies and in many different currencies.

Some investors, in search of additional potential volatility reduction or return enhancement opportunities, may even try to extend the opportunity set beyond stocks and bonds to other assets, many of which are commonly referred to as “alternatives.” The types of offerings labeled as alternative today are wide and varied. Depending on who you talk with, this category can include, but is not limited to, different types of hedge fund strategies, private equity, commodities, and so on. These investments are often marketed as having greater return potential than traditional stocks or bonds or low correlations with other asset classes.

In recent years, “liquid alternatives” have increased in popularity considerably. This sub-category of alternatives consists of mutual funds that may start from the same building blocks as the global stock and bond market but then select, weight, and even short securities1 in an attempt to deliver positive returns that differ from the stock and bond markets. Exhibit 1 shows how the growth in several popular classifications of liquid alternative mutual funds in the US has ballooned over the past several years.

Graph of Number of Liquid Alternative Mutual Funds in the US

The growth in this category of funds is somewhat remarkable given their poor historical performance over the preceding decade. Exhibit 2 illustrates that the annualized return for such strategies over the last decade has tended to be underwhelming when compared to less complicated approaches such as a simple stock or bond index. The return of this category has even failed to keep pace with the most conservative of investments. For example, the average annualized return for these products over the period measured was less than the return of T-bills but with significantly more volatility.

Chart of Performance and Characteristics of Liquid Alternative Funds in the US vs. Traditional Stock and Bond Indices

While expected returns from such strategies are unknown, the costs and turnover associated with them are easily observable. The average expense ratio of such products tends to be significantly higher than a long-only stock or bond approach. These high costs by themselves may pose a significant barrier to such strategies delivering their intended results to investors. Combine this with the high turnover many of these strategies may generate and it is not challenging to understand possible reasons for their poor performance compared to more traditional stock and bond indices.

This data by itself, though, does not warrant a wholesale condemnation of evaluating assets beyond stocks or bonds for inclusion in a portfolio. The conclusion here is simply that, given the ready availability of low cost and transparent stock and bond portfolios, the intended benefits of some alternative strategies may not be worth the added complexity and costs.


When confronted with choices about whether to add additional types of assets or strategies to a portfolio for diversification beyond stocks, bonds, and cash it may help to ask three simple questions.

  1. What is this alternative getting me that is not already in my portfolio?
  2. If it is not in my portfolio, can I reasonably expect that including it will increase expected returns or reduce expected volatility?
  3. Is there an efficient and cost-effective way to get exposure to this alternative asset class or strategy?

If you are left with doubts about any of these three questions it may be wise to use extreme caution before proceeding. A wealth management professional with the right knowledge, expertise, education and experience can help you answer these questions and ultimately decide if a given investing strategy is right for you.

Since few investors can ever know enough on their own to make a fully informed decision, we suggest the first decision you can make in wealth planning is: who can you trust to put your interest first and foremost? We suggest a fiduciary advisor specializing in wealth management is most likely to put you in control of your financial future, show you how to better manage uncertainty, and help you gain confidence and peace of mind.


Absolute Return: Funds that aim for positive return in all market conditions. The funds are not benchmarked against a traditional long-only market index but rather have the aim of outperforming a cash or risk-free benchmark.

Equity Market Neutral: Funds that employ portfolio strategies that generate consistent returns in both up and down markets by selecting positions with a total net market exposure of zero.

Long/Short Equity: Funds that employ portfolio strategies that combine long holdings of equities with short sales of equity, equity options, or equity index options. The fund may be either net long or net short depending on the portfolio manager’s view of the market.

Managed Futures: Funds that invest primarily in a basket of futures contracts with the aim of reduced volatility and positive returns in any market environment. Investment strategies are based on proprietary trading strategies that include the ability to go long and/or short.

Category descriptions are based on Lipper Class Codes provided in the CRSP Survivorship bias-free Mutual Fund Database.

1Short positions benefit if the borrowed security falls in value.

All expressions of opinion are subject to change. 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. Investors should talk to a wealth management professional prior to making any investment decision.

Investing involves risks including possible loss of principal. Stocks are subject to market fluctuation and other risks. Bonds are subject to increased risk of loss of principal during periods of rising interest rates and other risks. There is no assurance that any investment strategy will be successful. Diversification does not assure a profit or protect against loss.

E+R=O, a Formula for Success*

Combining an enduring investment philosophy with a simple formula that helps maintain investment discipline can increase the odds of having a positive financial experience.

“The important thing about an investment philosophy is that you have one you can stick with.”
– David Booth, Founder and Executive Chairman, Dimensional Fund Advisors


Investing is a long-term endeavor. Indeed, people will spend decades pursuing their financial goals. But being an investor can be complicated, challenging, frustrating, and sometimes frightening. This is exactly why, as David Booth says, it is important to have an investment philosophy you can stick with, one that can help you stay the course.

This simple idea highlights an important question: How can investors, maintain discipline through bull markets, bear markets, political strife, economic instability, or whatever crisis du jour threatens progress towards their investment goals?

Over their lifetimes, investors face many decisions, prompted by events that are both within and outside their control. Without an enduring philosophy to inform their choices, they can potentially suffer unnecessary anxiety, leading to poor decisions and outcomes that are damaging to their long-term financial well-being.

When they don’t get the results they want, many investors blame things outside their control. They might point the finger at the government, central banks, markets, or the economy. Unfortunately, the majority will not do the things that might be more beneficial—evaluating and reflecting on their own responses to events and taking responsibility for their decisions.


Some people suggest that among the characteristics that separate highly successful people from the rest of us is a focus on influencing outcomes by controlling one’s reactions to events, rather than the events themselves. This relationship can be described in the following formula:

e+r=o (Event + Response = Outcome)

Simply put, this means an outcome — either positive or negative — is the result of how you respond to an event, not just the result of the event itself. Of course, events are important and influence outcomes, but not exclusively. If this were the case, everyone would have the same outcome regardless of their response.

Let’s think about this concept in a hypothetical investment context. Say a major political surprise, such as Brexit, causes a market to fall (event). In a panicked response, potentially fueled by gloomy media speculation of the resulting uncertainty, an investor sells some or all of his or her investment (response). Lacking a long-term perspective and reacting to the short-term news, our investor misses out on the subsequent market recovery and suffers anxiety about when, or if, to get back in, leading to suboptimal investment returns (outcome).

To see the same hypothetical example from a different perspective, a surprise event causes markets to fall suddenly (e). Based on his or her understanding of the long-term nature of returns and the short-term nature of volatility spikes around news events, an investor is able to control his or her emotions (r) and maintain investment discipline, leading to a higher chance of a successful long‑term outcome (o).

This example reveals why having an investment philosophy is so important. By understanding how markets work and maintaining a long-term perspective on past events, investors can focus on ensuring that their responses to events are consistent with their long-term plan.


An enduring investment philosophy is built on solid principles backed by decades of empirical academic evidence. Examples of such principles might be: trusting that prices are set to provide a fair expected return; recognizing the difference between investing and speculating; relying on the power of diversification to manage risk and increase the reliability of outcomes; and benchmarking your progress against your own realistic long-term investment goals.

Combined, these principles might help us react better to market events, even when those events are globally significant or when, as some might suggest, a paradigm shift has occurred, leading to claims that “it’s different this time.” Adhering to these principles can also help investors resist the siren calls of new investment fads or worse, outright scams.


Without education and training — sometimes gained from bitter experience — it is hard for non-investment professionals to develop a cogent investment philosophy. And even the most self-aware find it hard to manage their own responses to events. This is why a financial advisor can be so valuable—by providing the foundation of an investment philosophy and acting as an experienced counselor when responding to events.

Investing will always be both alluring and scary at times, but a view of how to approach investing combined with the guidance of a professional advisor can help people stay the course through challenging times. Advisors can provide an objective view and help investors separate emotions from investment decisions. Moreover, great advisors can educate, communicate, set realistic financial goals, and help their clients deal with their responses even to the most extreme market events.

In the spirit of the e+r=o formula, good advice, driven by a sound philosophy, can help increase the probability of having a successful financial outcome.

*Jack Canfield, The Success Principles: How to Get from Where You Are to Where You Want to Be (New York: HarperCollins Publishers, 2004)

Adapted from “E+R=O, a Formula for Success,” The Front Foot Adviser, by David Jones, Vice President and Head of Financial Adviser Services, EMEA.

All expressions of opinion are subject to change. 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. Investors should talk to a wealth management professional prior to making any investment decision.

Investing involves risks including possible loss of principal. Stocks are subject to market fluctuation and other risks. Bonds are subject to increased risk of loss of principal during periods of rising interest rates and other risks. There is no assurance that any investment strategy will be successful. Diversification does not assure a profit or protect against loss.

Tuning Out Media Noise and Staying Focused

For investors, the relentless streaming of media news about markets, business and economics can be overwhelming.

Investors are continually bombarded with headlines, charts and financial data over the internet and the press. Topics about U.S. stocks today are popular. All too often, media “news” evokes feelings of greed, fear and envy rather than reasoned thought.

Those whose investing relies primarily on headlines tend to ignore financial history to their peril. For example, in contrast to high recent performance of many featured stocks, the S&P 500 index—comprised of shares representing the most important U.S. companies — for ten years since 2009 – showed a cumulative return of only 0.9 percent, less than a single year’s return for a bank account!

Consumer confidence for business prospects here in the U. S. has risen to its highest level since 2000, when the infamous “Lost Decade” for U.S. stocks began. That is partly due to tax reform, leading many businesses to expand, and S&P 500 corporations to repatriate billions of dollars accumulated overseas. From January 2010 to May 2018, beginning at a low market point, the S&P 500 Index has grown 189.4 percent, leading other asset class alternatives.1

Recalling media headlines from the “Lost Decade”2 reminds us when even experienced market participants questioned the wisdom of disciplined equity investment strategies with U. S. stocks:


  • May 1999: Dow Jones Industrial Average Closes Above 11,000 for the First Time
  • March 2000: Nasdaq Stock Exchange Index Reaches an All-Time High of 5,048
  • April 2000: In Less Than a Month, Nearly a Trillion Dollars of Stock Value Evaporates
  • October 2002: Nasdaq Hits a Bear-Market Low of 1,114
  • September 2005: Home Prices Post Record Gains
  • September 2008: Lehman Files for Bankruptcy, Merrill Lynch Is Sold to Avoid Bankruptcy

Equity markets are inherently volatile as well as cyclical. While those times are well behind us, those crises continue to be important reminders of when headlines directly impacted investor feelings and decisions impacting wealth.

So how well did media headlines after the fact positively influence investor behavior by implying investors should go to cash? Sometimes, doing nothing is the right response, and the best way to avoid disaster.

For example, if one hypothetically held a diversified portfolio of large US stocks worth $10,000 back in May 1999 and stayed invested, that portfolio would be worth approximately $28,000 today, much better than a bond index fund or a bank savings account.3

Hypothetical growth of S&P 500 chart

When media noise focuses on high-performing stocks and funds, losing sight of psychological benefits for staying disciplined and abandoning sound strategy is all too common. Over the recent past, investors have been heavily influenced by media to concentrate in the well-performing top ten to 15 percent of larger U.S. stocks, like those found in an S&P 500 index—after they have already gone up in price and actually may be priced too high. Without a disciplined strategy, an equally strong temptation may be to start selling those same stocks low after media speculative noise has turned from optimism to pessimism.

Recently we see an increasing number of prospective clients wisely avoid expensive actively managed funds, and instead own low-cost index funds. But after professional analysis, X-raying their aggregate portfolios of index and index-style funds, we keep finding the same recurring issue: these personally repositioned portfolios are actually concentrated on a single asset class and a single market factor—closely approximating the U.S. larger company stock asset class, much like the S&P 500 index. International positions are underweighted, and size and value factors are absent. As for fixed income allocation to reduce volatility—those positions are often very underweighted.

Unknowingly, these investors have a diversity of funds but lack stock diversification and informed asset allocations for effective risk reduction, that would protect them in a market downturn and position them better for a recovery.

While no one has a crystal ball, looking beyond the headlines and adopting a long-term perspective can change how market volatility is viewed, and set more realistic expectations for sound investment strategy for successful long-term retirement planning.


Having a sound investment policy aligned with your ability to bear risk minimizes emotional responses when volatility hits and media once again, after the fact, blares a different trumpet.

A professional wealth management process combined with smart economic philosophy can lead to more confidence, more disciplined behavior, and fewer investing mistakes.

A Dimensional Fund Advisors survey found that those planning for retirement place a high value on the sense of security and peace of mind they receive from working with a professional advisor.

Busy people know they cannot do it all themselves, or lack the time and interest, and need time for other matters of importance. A knowledgeable and experienced specialist with expertise, perspective, and encouragement can more than pay his or her way.

How do you Primarily Measure the Value Received from your Advisor bar graph

Look for a professional wealth specialist who works with people like you, who can help you ignore the noise and stay focused, and so gain confidence and peace of mind with better outcomes.

The right professional relationship can make all the difference in your future retirement lifestyle, and position you to make a bigger impact with your family and community—and so finish strong.

For a short video, please see https://us.dimensional.com/tuning-out-the-noise.

Source: Dimensional Fund Advisors LP. All expressions of opinion are subject to change. 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. Investors should talk to a certified wealth management professional prior to making any investment decision.

Investing involves risks including possible loss of principal. Stocks are subject to market fluctuation and other risks. Bonds are subject to increased risk of loss of principal during periods of rising interest rates and other risks. There is no assurance that any investment strategy will be successful. Diversification does not assure a profit or protect against loss.

There is no guarantee investment strategies will be successful. Investing involves risks including possible loss of principal. Investors should talk to their financial advisor prior to making any investment decision. There is always the risk that an investor may lose money. A long-term investment approach cannot guarantee a profit. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.

  • 1For the US stock market, this is generally understood as the period inclusive of 1999 – 2009.
  • 2OECD (2018), Consumer confidence index (CCI) (indicator). doi: 10.1787/46434d78-en (Accessed on 22 June 2018)
  • 3As measured by the S&P 500 Index, May 1999–March 2018. A hypothetical dollar invested on May 1, 1999, and tracking the S&P 500 Index, would have grown to $2.84 on March 31, 2018. However, performance of a hypothetical investment does not reflect transaction costs, taxes, or returns that any investor actually attained and may not reflect the true costs, including management fees, of an actual portfolio. Changes in any assumption may have a material impact on the hypothetical returns presented. It is not possible to invest directly in an index. To put the S&P 500 index return in perspective, the Bloomberg Barclays US Aggregate Bond Index would have grown to $2.40 for the same period with only 23 percent of the market volatility (measured by annualized standard deviation). With interest rates at historic lows today, however, looking forward the next twenty years, bond indexes cannot deliver a comparable performance.

What You Need to Know About the New Tax Law

With the tax season behind us, we look ahead to new opportunities and challenges presented by the most comprehensive change in Federal tax laws since 1986.

Changes are far-reaching, subject to interpretation and revisions, and will impact nearly every person, family and business. Figuring out a personalized strategy is critical to gaining better wealth outcomes.

People are wondering:

  • How do the new tax laws affect me, my family, my business?
  • Will these tax rules cost me money, or are there smart ways to benefit?
  • How can I position myself, my family and my company to best stay ahead?
  • What actions do I need to take NOW and in the coming years?
  • What should I need to worry most about TODAY?

KEY #1: Many tax deductions you counted on in the past were substantially changed or eliminated. For those with higher incomes, new rules are needed to play this tax game and win.

  • Nearly every bracket sees a 2% to 4% tax rate reduction, for an average savings of $1,600. However, because tax brackets were compressed, many higher earners will be worse off—some, much worse off.
  • Everyone will gradually be pushed into higher tax brackets because based on new inflation measures (Chained-CPI), making tax credits and standard deductions less valuable over time.
  • The standard deduction has nearly doubled to $12,000 for singles and $24,000 for married couples. Four out of five taxpayers will benefit. One out of five taxpayers likely will not.
  • Miscellaneous itemized deductions are no longer allowed, but that is offset with alternative minimum tax relief.
  • “Bunching” allowable deductions, especially involving charity, should be utilized one year and standard deduction only taken the next to cumulatively maximize year-over-year deductions.
  • IMPORTANT: Dividends and capital gains tax rates remain the same under the new tax law.

KEY #2: Living in states like New York, Massachusetts and New Jersey will negatively impact many with new rules how state and property taxes are deducted.

  • For many higher earners, touted tax savings from rate reductions of tax brackets will not be realized.
  • Previously unlimited deductions for state, local and property taxes now are capped at $10,000.
  • Interest deduction on new mortgages is now capped at $750,000, down from $1 million.
  • Home equity loan interest is no longer deductible unless it is used in connection with home acquisition or improvements. Home borrowings for college tuition would not be deductible.

KEY #3: Family-related tax rule changes regarding high-earning couples, children, education, divorce, retirement and estate planning need immediate attention.

  • A $2,000 per child tax credit (up from $1,000) and $500 for non-child dependents may be claimed with up to $1,400 refundable credit! No phase outs until $200,000 for singles and $400,000 for marrieds.
  • 529 college savings plans are now “educational” plans, allowing up to $10,000 annually to be applied for K through grade 12 private education.
  • Alimony will no longer be deductible after 2018 (until sunset), nor will it be income to the payee.
  • Roth IRA conversions can no longer to reversed (recharacterized), so get your timing right.
  • Federal tax law benefits estates valued up to $11 million for individuals but sunsets to $5.5 million in 2025. New York State estate tax is still $5.5 million, with a “cliff” surcharge back to $1.
  • IMPORTANT: Wills and trusts should be checked for language that could accidentally disinherit certain heirs or increase NYS taxes because of temporarily increased federal estate tax exemptions.

KEY #4: All businesses have new opportunities and choices regarding what taxes are paid and how deductions and depreciation are claimed.

  • The corporate tax rate is now 21% and the corporate AMT has been eliminated.
  • Many self-employed business owners are allowed to take a 20% deduction for qualified “pass-through” business income (which may be enhanced for S Corp owners), phasing out between $157,500/$315,000 and $201,500/$415,000 (single/married).
  • Business owners should consider reorganizing their firms for preferential tax treatment, and carefully review new depreciation rules on deductibility of capital equipment and other assets.

OPPORTUNITY: While most will see lower taxes from the new tax law, some with higher incomes could easily pay much more. A professional specialist is needed more than ever for optimal tax outcomes.

Professional Financial will host a Tax Briefing at Monroe Golf Club on Thursday, August 9th at 5:00 PM. Simply call (585) 218-9080 x4 for reservations. Seating will be limited.

Topics to be covered include:

  • How the new tax law seriously impacts your retirement planning strategy.
  • The inflation calculation change in the tax code leading to higher future taxes.
  • Why paying off your mortgage sooner may be smarter than ever before.
  • Why 529 savings plans aren’t only for college anymore, and what that means for planning.
  • Why small business owners could only be taxed on 80% of their business income.
  • Why reorganizing your business into a different entity might be a valuable strategy.
  • How special types of qualified retirement plans may allow some to multiply tax savings.

All expressions of opinion are subject to change. 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. Investors should talk to a wealth management professional prior to making any investment decision.

Investing involves risks including possible loss of principal. Stocks are subject to market fluctuation and other risks. Bonds are subject to increased risk of loss of principal during periods of rising interest rates and other risks. There is no assurance that any investment strategy will be successful. Diversification does not assure a profit or protect against loss.

Sailing with the Tides

Embarking on a financial plan is like sailing around the world. The voyage won’t always go to plan, and there’ll be rough seas. But the odds of reaching your destination increase greatly if you are prepared, flexible, patient, and well-advised.

A mistake many inexperienced sailors make is not having a plan at all. They embark without a clear sense of their destination. And once they do decide, they often find themselves lost at sea in the wrong boat with inadequate provisions.

Likewise, in planning an investment journey, you need to decide on your goal. A first step might be to consider whether the goal is realistic and achievable. For instance, while you may long to retire in the south of France, you may not be prepared to sacrifice your needs today to satisfy that distant desire.

Once you are set on a realistic destination, you need to ensure you have the right portfolio to get you there. Have you planned for multiple contingencies? What degree of “bad weather” can your plan withstand along the way?

Key to a successful voyage is a good navigator. A trusted advisor is like that, regularly taking coordinates and making adjustments, if necessary. If your circumstances change, the advisor may suggest you replot your course.

As with the weather at sea, markets can be unpredictable. A sudden squall can whip up waves of volatility, tides can shift, and strong currents can threaten to blow you off course. Like a seasoned sailor, an experienced advisor will work with the conditions.

Once the storm passes, you can pick up speed again. Just as a sturdy vessel will help you withstand most conditions at sea, a well-diversified portfolio can act as a bulwark against the sometimes tempestuous conditions in markets.

Circumnavigating the globe is not exciting every day. Patience is required with local customs and paperwork as you pull into different ports. Likewise, a lack of attention to costs and taxes is the enemy of many a long-term financial plan.

Distractions can also send investors, like sailors, off course. In the face of “hot” investment trends, it takes discipline not to veer from your chosen plan. Like the sirens of Greek mythology, media pundits can also be diverting, tempting you to change tack and act on news that is already priced in to markets.

A lack of flexibility is another impediment to a successful investment journey. If it doesn’t look as though you’ll make your destination in time, you may have to extend your voyage, take a different route to get there, or even moderate your goal.

The important point is that you become comfortable with the idea that uncertainty is inherent to the investment journey, just as it is with any sea voyage. That is why preparation and planning are so critical. While you can’t control every outcome, you can be prepared for the range of possibilities and understand that you have clear choices if things don’t go according to plan.

If you can’t live with the volatility, you can change your plan. If the goal looks unachievable, you can lower your sights. If it doesn’t look as if you’ll arrive on time, you can extend your journey.

Of course, not everyone’s journey is the same. Neither is everyone’s destination. We take different routes to different places, and we meet a range of challenges and opportunities along the way.

But for all of us, it’s critical that we are prepared for our journeys in the right vessel, keep our destinations in mind, stick with the plans, and have a trusted navigator to chart our courses and keep us on target.

Adapted from “Sailing with the Tides,” Outside the Flags by Jim Parker, March 2018. Past performance is no guarantee of future results. There is no guarantee an investing strategy will be successful. Diversification does not eliminate the risk of market loss. All expressions of opinion are subject to change. 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.

Knowing the Limits of Financial Models

Checking the weather? Guess what — you’re using a model. While models can be useful for gaining insights for making good decisions, they are inherently incomplete simplifications of reality.

As disappointed investors increasingly move away from traditional active management investing and hedge funds, products like ETFs based on factor models have become a popular investing alternative for driving sales by firms and advisors competing in a crowded marketplace. Often nowadays promoted as “smart beta strategies,” factor model-version products are based on underlying scientific financial models. But they also have serious limitations that few investors looking at past performance alone know about when making critical wealth planning decisions.

To help shed light on financial models for planning investment strategy, let’s start by examining an everyday example: a daily weather forecast. Using data on current and past weather conditions, a meteorologist makes numerous assumptions and then attempts to estimate what the weather will be the next day or week. The weatherman’s model may help you decide if you should bring an umbrella when you leave the house in the morning. However, as anyone knows who has been caught without an umbrella in an unpredicted rain shower, reality often behaves differently than the weatherman’s model.

In investment management strategy, models are used to gain insights to inform us about important investment decisions. Financial researchers frequently look for new models to help better answer questions like, “What drives returns?” These models are often touted as being complex and sophisticated and incite academic debates about who has a better model. Investors who are evaluating alternative investment approaches mimicking those models can benefit from a better understanding that no model, just like the weather, can explain the reality of markets. Hence, investors should be wary of many highly promoted “quantitative” approaches whose model version requires a high degree of trust.

Very simply, the risks of a security or a portfolio of securities, just like the weather, cannot be completely “explained” by any model — even one that has become well-accepted, but variously adapted. And even then, few models promoted by the financial industry are understood by them as academic models by those who developed them.

Minding the Judgment Gap

As with weather forecasts, even if the model is respected, investment models rely on multiple inputs. Instead of things like barometric pressure or wind conditions, investment models involve variables like the expected return or volatility of many different securities. For example, using these sorts of inputs, some popular models may recommend an “optimal” mix of securities based on the expected interaction of asset classes or securities with one another over time. Users should be extremely cautious. The saying “garbage in, garbage out” definitely applies to inputs used for “optimization” models. In other words, a model’s output can only be as good as its input.

Also, poor assumptions built into the model obviously will lead to poor decisions. However, even with sound underlying assumptions, a user who places too much faith in inherently imprecise inputs, can expose themselves to extreme model results and consequently a disappointing experience if they act blindly on those results.

Given these limitations, bringing financial research into practice requires an informed advisor if not an informed client — and someone having a very acute awareness of the model’s limitations to identify when and how a particular model is appropriate. Since no model perfectly represents reality, you don’t ask, “Is this model true or false?” (to which the answer is always false), you should ask, “How does this model help me better understand the world, to make a better decisions?” and, “In what ways can the model be wrong, to limit my potential risks?”

When evaluating investment approaches relying on financial models, you must establish how confident you can be in your financial advisor’s ability to test and implement ideas garnered from model he presents. This step requires your judgment and trust in the skill and experience of your advisor and the management solution he recommends.

The transparency offered by some approaches, such as conventional index funds, requires a low level of trust because their model is quite simple: it’s very easy to evaluate whether a particular index fund has matched the return of a specific index: Either Vanguard’s S&P 500 Index matches closely the actual Standard & Poor 500 index of large US stocks or it does not. The tradeoff with this level of mechanical transparency is that it may sacrifice potential higher returns, as it prioritizes matching the index over any possible benefits from management discretion.

But even if a model is highly reliable, does not mean it’s practical for wealth management. In the case of an index fund replicating the S&P 500 index from January 2000 to December 2009, an index manager may brag to the public about how very close his actual return was to the actual index within basis points, but how many retired investors relying on their portfolio for income would have considered return for ten long years of nearly minus 1 percent a year a successful experience — or even stuck around that long?

For more opaque and complex quantitative strategies like those used by hedge funds, the requisite level of trust needed is vastly higher. You (or your advisor) should clearly understand the model’s inputs and assumptions and limitations, how well as how the model is implemented in practice. Finally, have a method to evaluate outcomes periodically.

Rigorous attention must be paid to how any financial model is implemented. To quote Nobel laureate Robert Merton, successful use of a model is “10% inspiration and 90% perspiration.” In other words, having a good idea is just the beginning. Most of the work is implementing the ideas contained in the model and making it work in the real world. Typically there is a huge gap between theory and practice — as so many disappointed hedge fund and ETF investors over the years have sadly learned.


In the end, the difference between judiciously using a model to guide your decisions and blindly following it can be hazardous to your wealth. Cutting through the marketing hype around the “latest and greatest” factor models and identifying which one to use may mean realizing your values, goal and dreams for yourself and your family — or not.

Taking action

The importance of having an customized wealth management framework cannot be overemphasized. A professional retirement specialist working with a network of experts in finance, accounting, tax and law who works with successful families like yours, can help you plan, protect and pass on your wealth. A professional wealth management process for smart decision-making will help put you in control of your future, gain financial freedom, and give you peace of mind. By avoiding costly mistakes from what you don’t know, and from what you don’t know that you don’t know, you chances increase of an abundant retirement, and leaving a legacy for family, community, and causes you care deeply about.

For more information about financial models and the limitations, see Paul Byron Hill, “Informed Strategy: Models and the Art of Science” (Planning Perspectives, 3rd Quarter 2017)

Our Perspective on Recent Market Volatility

After almost two years of relative calm, in recent days a violent unforeseen increase in stock market volatility around the world has caused anxiety for many investors.

From February 1–5, the US market (as measured by the Russell 3000 Index) fell almost 6%, resulting in many investors wondering what outcome the future holds. Should investors be “smart” and change their portfolios, and perhaps maybe “take some profits” to avoid the pain loss? While remaining calm during any substantial market decline may be difficult when daily “noise” from newscasters may be loud and hard to ignore, it is important to remember that volatility swings are not only normal, but inevitable. Additionally, reacting emotionally to volatile markets and suddenly moving substantial portions to cash or bonds may easily be more detrimental to long-term retirement outcomes than the drawdown itself. Recoveries frequently occur with what seems in hindsight, lighting speed.

Intra-Year Declines

Exhibit 1 shows calendar year returns for the US stock market since 1979, as well as the largest intra-year decline that occurred during that calendar year. During this period, the average intra-year decline was about 14%. About half of these years had declines of more than 10%, and around a third had declines of more than 15%. Despite substantial intra-year drops, calendar year returns were positive in 32 years out of the 37 examined. This shows just how common market declines are and how difficult it is to predict whether a particularly large intra-year decline will result in a negative outcome for that year.

Exhibit 1. US Market Intra-Year Gains and Declines vs. Calendar Year Returns, 1979–2017

graphic of US Market Intra-Year Gains and Declines vs Calendar Year Returns 1979-2017

Reacting Impacts Performance

Imitating professional traders and reacting to the latest newscasts, there are legions of retail investors trying to “time” market movements in order to avoid losses associated with periods of increased volatility. Should those activities be expected to help or hinder long-term outcomes? If current market prices aggregate the information and expectations of all market participants, as academic research implies, stock mispricing cannot be systematically exploited through market timing efforts. In other words, it is unlikely that investors can enhance returns timing the market. For the few that do manage it, it is almost always luck at work rather than skill. Smart investors don’t gamble with their retirements.

Further complicating the dim prospects of market timing activities enhancing long-term portfolio performance is the fact that a substantial proportion of stock total return comes from just a handful of days. Few investors (if any) are likely to identify in advance and systematically those days having strong returns. The informed strategy is to remain invested (or even modestly add to market positions) during periods of negative volatility rather than futilely jump in and out of stocks. Otherwise, an investor risks being sidelined in cash on days when returns happen to be strongly positive. Nothing creates stress like holding cash as a bull market surges and most of your buddies are invested.

Exhibit 2 helps illustrate this point. It shows the annualized compound return of the S&P 500 Index going back to 1990, and then shows the negative impact of missing up to 25 days of the best market returns. The bars represent the hypothetical growth of $1,000 over the period. We see the results of missing the best single day during the period and the gains lost missing the best 5, 15, and 25 single days. Being out of the markets for only a few of the best single days would have resulted in substantially lower realized returns than comparable model returns if continuously invested. While not illustrated below, for would-be timers unlucky enough to miss the 40 best days over the last forty years, the realized S&P 500 Index return could drop to about zero. (Given the prevalence and variety of timing activities, no surprise then, that multiple academic research studies suggest that the typical investor, on average, experiences long-term performance after costs close to the “risk-free” one-month US T-bill return.)

Exhibit 2. Performance of the S&P 500 Index, 1990–2017

graphic of Performance of the S&P 500 Index, 1990–2017


While market volatility can have painful memories for those who endured a major market crisis like the Tech Bust or the Global Financial Panic, reacting emotionally and changing sound investment strategies in response to episodic short-term declines usually negatively impacts wealth accumulation. By trying to avoid market risk, fearful investors miss the full and fair returns that markets have to offer. By instead adhering to a professionally managed investment strategy, planned well in advance of inevitable market turmoil that considers their risk preferences and circumstances, disciplined investors may have greater confidence, and experience less anxiety during episodes of uncertainty and crisis.

Taking Action

The importance of having an customized wealth management framework cannot be overemphasized. An acknowledge professional with a proven process and a network of experts in finance, accounting, tax and law specializing in working with successful families like yours, can develop an informed integrative process for retirement planning. A professionally structured process will put you in control of your family’s future, and guide smart decision-making. By avoiding costly mistakes you never imagined, you are far more likely to experience the abundant retirement lifestyle you’ve dreamed about, and hopefully leave a legacy for family, community, and causes you care deeply about.

Source: Dimensional Fund Advisors LP.

All expressions of opinion are subject to change. 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. Investors should talk to a wealth management professional prior to making any investment decision.

Investing involves risks including possible loss of principal. Stocks are subject to market fluctuation and other risks. Bonds are subject to increased risk of loss of principal during periods of rising interest rates and other risks. There is no assurance that any investment strategy will be successful. Diversification does not assure a profit or protect against loss.

As Goes January, So Goes the Year?

As investors ring in the new year, some may see the occasional headline about the “January Indicator” or “January Barometer.” This theory suggests that the price movement of the S&P 500 during the month of January may signal whether that index will rise or fall during the remainder of the year.

In other words, if the return of the S&P 500 in January is negative, this would supposedly foreshadow a fall for the stock market for the remainder of the year, and vice versa if returns in January are positive.

So have past Januarys’ S&P 500 returns been a reliable indicator for what the rest of the year has in store? If returns in January are negative, should investors sell stocks? The graph below shows the monthly returns of the S&P 500 Index for each January since 1926, compared to the subsequent 11-month return (i.e., the return from February through December). A negative return in January was followed by a positive 11-month return about 60% of the time, with an average return during those 11 months of around 7%. This data suggests there may be an opportunity cost for abandoning equity markets after a disappointing January.

Take 2016, for example: The return of the S&P 500 during the first two weeks was the worst on record for that period, at -7.93%. Even with positive returns toward the end of the month, the S&P 500 returned -4.96% in January 2016, the ninth-worst January return observed from 1926 to 2017. But a subsequent rebound of 18% from February to December resulted in a total calendar year return of almost 13%. An investor reacting to January’s performance by selling out of stocks would have missed out on the gains experienced by investors who stuck with equities for the whole year. This is a good example of the potential negative outcomes that can result from following investment recommendations based on an “indicator.”


Over the long term, the financial markets have rewarded investors. People expect a positive return on the capital they supply, and historically, the equity and bond markets have provided meaningful growth of wealth. As investors prepare for 2018 and what the year may bring, we should remember that frequent changes to an investment strategy can hurt performance. Rather than trying to futilely beat the market based on hunches, headlines, or indicators, clients who remain focused on their planning and disciplined approach can let markets work for them over time to help them successfully realize their retirement goals and dreams.