The Internal Revenue Service announced that it is waiving the estimated tax penalty for many taxpayers whose 2018 federal income tax withholding and estimated tax payments fell short of their total tax liability for the year.

The IRS is generally waiving the penalty for any taxpayer who paid at least 85 percent of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments or a combination of the two. The usual percentage threshold is 90 percent to avoid a penalty
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https://www.irs.gov/newsroom/irs-waives-penalty-for-many-whose-tax-withholding-and-estimated-tax-payments-fell-short-in-2018

Have you ever heard someone say that experience is the best teacher? Here’s another one - there are no mistakes, just lessons.

Well, I would like to take a slightly different tack. Experience isn’t the best teacher. Someone else’s experience is. Learn from other peoples’ mistakes and you can save yourself a lot of grief.
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In that spirit, I’d like to review the biggest financial mistakes I’ve seen and offer you ways to avoid them.

1. Living paycheck to paycheck

Too many Americans don’t have enough money in savings. According to CareerBuilder, nearly 80% of Americans live paycheck to paycheck to make ends meet. And lest you think this applies only to those who are in low-wage positions, nearly one in ten workers who earn over $100,000 or more are in the same boat. (http://press.careerbuilder.com/2017-08-24-Living-Paycheck-to-Paycheck-is-a-Way-of-Life-for-Majority-of-U-S-Workers-According-to-New-CareerBuilder-Survey)

I’m shining a bright spotlight on this predicament in the wake of the recent government shutdown. During the closure, we were treated to a healthy dose of stories from federal employees who were running out of money after missing one or two paychecks. And these folks were guaranteed back pay and were offered plenty of assistance from banks and credit unions! 

I’m not trying to minimize the frustration many of them experienced, but imagine what might happen during an extended period of unemployment.

Don’t wait to start socking money away. Pay yourself by stashing away funds after each pay period. I would recommend at least three to six months of emergency funds. And I find in many cases six-12 months is even better. A financial house that is in disorder is among the leading causes of stress. Savings will mitigate the emotional and mental burden.

2. You can’t start too early saving for retirement

We all know the reason earlier is better–it’s the magic of compounding. Those deposits made in our 20s will have a lifetime to grow. Don’t waste the chance to increase your savings now. You’ll never get it back.

3. Do you know where your money goes? 

Without a spending plan that tracks expenditures, you may wonder why there is month at the end of your money, and not money at the end of your month.

I can tell you how much we spent on gasoline in March 2001. That may sound extreme, but tracking expenses allows you to review and control what you want to happen. 

Focus on the essentials–rent, mortgage, utilities. Leave room for your financial goals–repaying debts, retirement, emergency funds. And have some fun by budgeting for lifestyle choices–recreation, hobbies, vacation, and so forth.  

4. Credit cards and personal debt 

Credit cards are a convenience and most pay some type of reward. But don’t place yourself in bondage to monthly payments. Pay them off in full each month or you will suffer from steep interest charges.

If you feel like you’re buried under a mountain of credit card debt, an auto payment, student loans, and personal debt, you’ll need a plan of attack. Let’s talk. It will be the best financial decision you ever made. Just knowing there’s a roadmap to debt-free living will be liberating.

5. Those luxury purchases

That new car sure is fast, the ride is exceedingly quiet, and it has all the latest gadgets. But the new car smell will eventually wear off. The payments, however, won’t. When looking for a new vehicle, what you don’t know can hurt you. What is the gas mileage? Does is require an expensive grade of gasoline? What will it cost to insure? And what will the annual license renewal run?

If you can answer these questions and the payments comfortably fit into your budget, you’ll sidestep any surprises that could crowd out your hobbies and financial goals. 

A tribute to Jack

“You cannot measure the quality of a man by the size of his bank account, but in Jack Bogle’s case, you can measure it by the size of your bank account. No one on this planet has done more to increase the lot of individual investors in the last 50 years than John C. “Jack” Bogle, founder and former chairman of the Vanguard Group and creator of the world’s first index mutual fund.” – Forbes

“If there is ever an official investor hall of fame, Jack Bogle would be a lock as a unanimous first-team ballot winner in the inaugural class.” – The Motley Fool

“I don’t believe that there has ever been, nor will there ever be, anyone who has given more to investors and taken less in return than Jack Bogle.” – Morningstar

Jack may not have the name recognition of the legendary Warren Buffett, but his contribution to the world of investing can’t be understated.

He founded the Vanguard Group in 1974 and pioneered the first index fund two years later, a mutual fund that was tied to the S&P 500 Index (Investopedia). Investors ponied up just $11 million. It was mocked as “Bogle’s Folly.” 

Today, there are over $13 trillion invested in passively managed mutual funds or exchange-traded funds (ETFs) worldwide, according to Barron’s.

Jack’s idea transformed an industry, significantly lowered costs for large and small investors, helped democratize investing, and, let me add, is a staple to the approach we use to assist you as you run the race to your financial goals.

In a CNBC interview last September, Jack said, “If you hold the stock market, you will grow with America.” If you attempt to time the market, “Your emotions will defeat you totally.” 

His long-term approach has paid dividends for disciplined investors.

Jack passed away on January 16. He was 89 years old.

I hope everyone had a wonderful holiday season. Whether you reached your personal goals in 2018, faced challenges, or are looking for a 2019 reboot, let’s take a moment to hit on the key themes from the past year. 

​The U.S. economy exhibited strong growth in the second and third quarter, a recession did not ensue, and yes, 2017’s lack of volatility was remarkable. We knew it wouldn’t last, but predicting an expected exit date is difficult.

January began 2018 on a firm footing, building on highs in the wake of tax reform, low interest rates, low inflation, and strong corporate profit growth. If stocks rise or fall on the fundamentals (and they usually do), the outlook was quite favorable as the year began.

However, while I will always believe no one can consistently time the peaks and valleys of the market, when there’s too much good news priced into stocks, any disappointment can create volatility.

A spike in Treasury bond yields tripped up bullish sentiment early in 2018. President Trump’s decision to level the playing field of international trade created uncertainty in the first half. Then, investors decided trade wasn’t important—until they decided late in the year that it was.

Another bout of selling began in October and the decline accelerated in December. Several factors contributed to the weakness, including fears that continued rate hikes by the Fed might stifle economic activity in 2019 and quash profit growth. 

We’re also experiencing heightened uncertainty brought on by the ongoing trade war with China. In addition, key tech stocks that had been market leaders for several years lost their mojo and pulled on the major averages.

As the year came to a close, the peak-to-trough decline in the S&P 500 Index totaled 19.8% (St. Louis Federal Reserve thru 12.24.18). We exceeded the long-term average annual peak-to-trough drawdown by six percentage points. Still, we’re just shy of the 20% threshold, which is the commonly accepted definition of a bear market.

If Christmas Eve marks the bottom of the sell-off, it won’t be the first time we’ve had a steep correction that side-stepped a bear market. We witnessed similar declines in 2011 and 1998. In both cases, a profit-crushing recession was avoided.

But let me offer a little bit of perspective. The Q4 decline may have been unsettling. Nevertheless, the total decline in the S&P 500, including reinvested dividends, amounted to just over 4% (S&P Dow Jones Indexes) for calendar year 2018. 

Overseas stocks fared quite a bit worse, as the global economy shifted into a lower gear earlier in the year, and trade tensions, which are more likely to rattle foreign economies, added to woes.

My thoughts

When I was in my 20s and 30s, I wouldn’t blink at a stock market decline. The contribution rate of my 401k was on autopilot. Each pay period, I’d purchase well-diversified mutual funds. 

When stocks declined, dollar-cost averaging allowed me to purchase a greater number of shares. Besides, I knew it would be decades before I’d need the funds for retirement.

With a very long-term time horizon, even a vicious bear market wasn’t an issue.

As we age, we can’t take such a sanguine view, and a more conservative mix of investments becomes paramount. Though we are unlikely to match major market indexes on the way up, we can still anticipate longer-term appreciation and sleep at night when the unpredictable market sell-offs materialize.

The same can be said of accounts that hold college savings, especially if the beneficiary is in college and doesn’t have the time to recover from a sharp dip in stocks.

Our recommendations are based on many different factors, including risk aversion. It’s rarely profitable to make decisions based on current market sentiment, i.e., panic selling or euphoria that sends us chasing the latest trends. 

What’s in store for 2019

While 2018 began with unbridled optimism, caution quickly entered the picture and most major U.S. indexes had their first downturn since 2008.

In 2019, we have the mirror image. There is no shortage of cautious sentiment. But the fragrance that’s in the air today doesn’t always determine market direction throughout the year. As we’ve seen, markets can be unpredictable as investors try to anticipate events that may impact the economy and corporate profits.

I’ve always found it interesting that some analysts hope to discern trends from various calendar-like indicators.  We’ve just entered a new year, and typically the so-called January barometer gets some play in that arena. Loosely defined, some say that how January performs sets the tone for the rest of the year.

Of course, if stocks perform well in January, the bulls already have a leg up on the bears. Throw in reinvested dividends and a natural upward bias in stocks, and it helps explain why a positive January usually results in a positive year.

But, that wasn’t the case for 2018. And by the same token, 2016’s weak start didn’t carry over into the rest of the year.

Then, there was this October 4th article in the Wall Street Journal: “Midterms Are a Boon for Stocks—No Matter Who Wins.” On average, the months of October, November and December have been the top-performing months during any year that included a midterm election (1962-2014). This year, though, there was a failure to launch.

Investor’s corner

We know that stocks can be unpredictable over a shorter period, and sell-offs are normal. And they aren’t pleasant. But we take precautions to minimize volatility and, more importantly, keep you on track toward your long-term financial goals.

I came across a recent piece by LPL Research that highlighted this. They found that the S&P 500 has lost an average of 31% every five years since WWII; included are declines of 19%. Yet, the index has registered an annual advance 75% of the time (Macrotrends) and almost 80% when dividends are reinvested (NYU Stern School of Business Stock/Bond Returns).

Further, the S&P 500 has averaged an annual advance of nearly 10% since the late 1920s (CNBC/Investopedia).
During up markets and down markets, I like to stress the importance of your investment plan and the progress we’re making toward your financial goals.

Stocks will hit small bumps in the road, and occasionally hit a major pothole, but the long-term data highlight that stocks have easily outperformed bonds, T-bills, CDs, and inflation.

As Warren Buffett opined a couple of years ago, “It’s been a terrible mistake to bet against America, and now is no time to start.” (Investment U, Motley Fool).

I trust you’ve found this review to be educational and helpful. 

Let me emphasize again that it is my job to assist you! If you have any questions or would like to discuss any matters, please feel free to give me a call. 

As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor.

As 2019 gets underway, I want to wish you and your loved ones a happy and prosperous new year!