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1st Quarter 2018

April 13, 2018

Inside This Newsletter



Many clients called us about possibly eliminating gun stocks from their portfolios.

We are pleased to announce that if you own DFA Sustainable (SRI) funds, gun companies are excluded.

For the third year in a row, Financial Connections Group has been rated as one of the best Financial Advisory firms in the Bay Area, based on a four-step methodology.

To see why we were recognized go to:


The U.S. markets roared out of the gate to start 2018 then reversed direction to end the quarter slightly down. International developed markets lost 2% while emerging markets gained 1%.

What has been reintroduced is market volatility. On average, markets incur one 10% decline and five declines of 5% each year. We’ve mentioned watch out for averages but the message is: it is not unusual for markets to move up and down. It is normal. What has been abnormal is the lack of volatility during this 10-year bull market. See article, “Volatility – Why Was It Missing?”

So far this quarter, we have already seen one 10% decline and four 5% declines. Most of this activity seems to be reactions to the possibility of a global trade war triggered by tariffs, fears about inflation, higher interest rates, and stocks being overvalued.

In addition, the technology stocks tend to determine market swings because they are such a large part of the indexes. Such firms as Amazon, Microsoft, and Apple are creating the positive returns. If removed from the index, the negative returns would be reflected.

The reality is corporations continue to be profitable, unemployment is low, and the economy proceeds at a slow but steady pace.

It is important not to be deterred by-day-to-day activity but think in terms of years and decades. If you would like to discuss your investments or financial plan, please contact us.


When Congress passed the Tax Cuts and Jobs Act, it authorized $1.5 trillion in tax cuts, which balloon our deficit. Certain procedural rules are in place, as a “work around”, to allow the tax cuts to expire in 2026. There will also be tax increases most of us won’t see.

A new measure called Chained Consumer Price Index (chained CPI) will be applied to tax brackets, allowing them to adjust for inflation at a slower rate. The bracket grows more slowly, so more income is taxed at a higher rate. Usually, brackets would adjust based on traditional CPI.

The Chained CPI versus the Traditional CPI results in inflation going up an average of ¼ of 1% (0.25%/25 basis points) slower.

This also applies to contribution limits for Health Savings Accounts.

The only good news is 401(k) contributions or Social Security were not included in this change.


Returns from your investments are unlikely to make up for a shortfall in savings. Consistently, Fidelity, Vanguard, JPMorgan, Schwab, etc. all forecast lower returns for stocks over the next decade.

Add to low market returns the uncertainty of how long you will live, the quality of your health in later years, inflation, and tax laws. Saving more seems self-evident.

Here are some ways you might save more for retirement. We are available to help.

  • Contribute the maximum to your retirement account(s) if you are still employed.
  • Remember, if you are over 50, a “catch-up provision” applies and you can contribute more: in 2018 you may contribute as much as $24,500 to a 401(k).
  • Even with an employer plan, you may contribute to a non-deductible IRA (contribution not tax deductible). It can grow for decades, tax deferred. If you are over 50, you may contribute $6,500 in 2018. Remember to tell your tax preparer that you are contributing to a non-deductible IRA because a form must be filed to let the IRS know that you’ve already paid taxes on the deposit amount.
  • If one of you still works and you make enough money, don’t forget that you may contribute to an IRA for your spouse. So potentially, you can save $13,000 between the two of you!
  • Work part-time for a few years in order to:
    • Reduce the number of years you need to fund your retirement
    • Allow your investments to grow longer before drawdowns
  • If you wait until age 70 to collect Social Security benefits, the government increases the benefit you would have received at Full Retirement Age by 8% per year. Where can you get a risk free 8% return on your money?!
    • Coordinate Social Security between spouses to receive the maximum benefits.
  • If you become self-employed, several more robust retirement plans are available. For instance, a solo 401(k) plan permits you to save $55,000 plus an additional $6,000 if you are over 50 (and if your income is high enough to contribute the maximum). You could reduce your taxable income by $61,000 while saving! We can discuss potential opportunities.
  • Review your expenses to see if you can reduce them.

On a qualitative level, studies show that the longer people work—whether turning a hobby into a business, working for a non-profit, or choosing a low-stress job—the longer they live.

If you would like to update or prepare a retirement plan, please let us know. And if you would like to participate in our Retirement Coaching workshop (non-economic issues in retirement), please call Jill.


A war of words on tariffs is being exchanged like bows and arrows between the governments of the U.S. and China. The market, reacting to every headline, climbs and drops hundreds of points daily in reaction.

The reality is as of this writing, hardly any tariffs have been levied. It would be best for all concerned if it stayed as a war of words but we can’t predict the future. If the situation moves to actual action on the part of either government, we will write about its impact in the next quarterly newsletter.


The VIX (a measure of market volatility, a.k.a. Fear Index) began in 1990 and was at historical lows by the end of 2017. From the beginning through 2017, the VIX marked below 10 only 54 days—half occurred in 2017. Historically, the VIX averages 20.

Payden & Rygel, a global mutual fund company, wrote in its Point of View, Winter 2018 newsletter, an article on the topic of volatility we wanted to share. Below is a summary.

A frequent question is does market volatility (VIX) predict market performance? 2018 has certainly been volatile this first quarter— reacting to politics, interest rate increases, etc., issues it ignored last year.

Payden & Rygel believe the low volatility reflects our economic data with low volatility:

  • Employment report for non-farm payroll is at all-time lows
  • Gross Domestic Product (GDP) volatility is at record lows

The cause of this moderation in the economy, especially since the Great Recession, seems unclear. You’ve probably seen headlines and our comments on numerous occasions about how the economy is moving like a turtle instead of the hare but moving forward nonetheless.

Why? A major reason is the transition from a manufacturing economy to a service-oriented economy. Previous boom and bust recessions referred largely to the manufacturing sector. Now, with about two-thirds of economic activity from the service sector, the impact of manufacturing has declined, favoring a lower volatility of GDP and employment. (Source: St. Louis Fed)

Payden & Rygel note other contributing factors to the lower volatility that include but are not limited to:

  • More passive investing (indexes don’t trade frequently);
  • Transparency by the Fed and other nations’ central banks, so fewer surprises; and
  • Parallel of bonds’ “fear index” (a.k.a. MOVE) with low volatility

Payden & Rygel conclude that low volatility is a poor indicator of the market’s future direction. For discussion on current volatility, see article, “First Quarter 2018.”

For the complete article: https://www.payden.com/displayfile.aspx?fileloc=455


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