Question: Charlie in Boone County: Should we be concerned about the bad start to the year for stocks? Is a bigger drop coming?
A: This is a concern we’ve been hearing a lot lately. And while it’s always disconcerting to see the stock market fall – as well as the value of your investments – keep these few points in mind.
First, assuming you don’t sell, your losses are only ‘on paper.’ So take comfort in that.
Second, times like these are the ‘cost of entry’ for participating in the market. Simply put, there are going to be times when the stock market drops. In fact, it’s common for stocks to experience 5 to 15% declines in any given year (according to our data at Allworth Financial, since 1980, the average drop in a calendar year has been 14%).
Third, if a ‘bigger’ drop does occur (which, in all honesty, that word is quite relative and is likely different for every single person reading this column), market corrections are actually quite healthy and normal. They’re not something to be feared, especially if you’re able to keep a long-term perspective. Because history shows that, more often than not, remaining patient during selloffs has been a profitable decision. But is it possible to actually determine if and when ‘a big one’ is coming? Unfortunately, no one has a crystal ball. But you can look at corporate earnings and economic data to at least get some idea of where stocks might be headed in the immediate term.
Our Investment Committee analyzes economic data all day long. And right now, while things on Wall Street are choppy, we don’t see any ring-the-alarm causes for concern yet (we’ll let you know if and when we do). So, here’s the Allworth Advice: If you have a well-developed long-term investment plan, stick with it. If you have one, but this market turbulence is still keeping you up at night, that likely means the investment mix doesn’t match your risk tolerance and it might be time for an adjustment or a meeting with your advisor.
Q: Maggie from Cheviot: My mom is 64 and widowed. She lives basically off her Social Security check and my dad’s pension. She recently told me someone said she should get a reverse mortgage to increase her income. Is this a good idea?
A: No matter what a salesperson may have told your mom, this is key to understand: A reverse mortgage is not “free money” like it’s so often marketed – it’s a loan.
Here’s what’s going on. With a regular mortgage, payments are made to the lender every month to build equity. However, with a reverse mortgage, the lender uses that equity to pay the homeowner (it’s essentially a loan borrowed against the home’s equity). And while the money usually doesn’t have to be paid back for as long as the homeowner lives in the home, that money does need to be paid back eventually – meaning when the homeowner moves, sells, or passes away. Plus, this is the one time when compounding interest can actually be a detriment; the interest will continue to accrue over the life of the reverse mortgage, meaning she would owe more over time.
With all that said, there are instances in which it can make sense for a homeowner to get a reverse mortgage, such as, for example, helping a homeowner in their 80s or 90s stay in their home. But, typically, this type of product should be viewed only as a financial last resort.
The Allworth Advice is that if your mom is actually considering a reverse mortgage, she should first get an unbiased, second opinion – preferably from a fiduciary financial advisor. And for more information, visit the Federal Trade Commission’s website.
Every week, Allworth Financial’s Amy Wagner and Steve Sprovach answer your questions. If you, a friend, or someone in your family has a money issue or problem, feel free to send those questions to [email protected].
Responses are for informational purposes only, and individuals should consider whether any general recommendation in these responses is suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional adviser of his/her choosing, including a tax adviser and/or attorney. Retirement planning services offered through Allworth Financial, an SEC-registered investment advisor. Securities offered through AW Securities, a registered broker/dealer, member FINRA/SIPC. Call 513-469-7500 or visit allworthfinancial.com.
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