Last year the US stock market vastly outperformed their peers in the international and emerging markets. With US markets up over 30% and emerging stocks negative for the year, some people were questioning whether they should maintain exposure to emerging markets at all. As we came into 2014 this thought process was exacerbated with the events happening over in Ukraine. Our response has been that those that maintain diversification across markets would be very happy they didn’t put everything in US stocks at some point in the future. Well that time we were speaking of came quicker than many thought. Here is a chart of the US markets (blue) vs. emerging markets (green) over the past month:
Emerging markets are up nearly 5% in the last month while US markets are down close to 2% during that same period. Now, we don’t know if this trend will last, but that is the whole point. No one knows what the future will bring. Rather than betting the farm on one area of the market, it is much more prudent to spread your capital to other markets in order to avoid the inevitable volatility you experience when you concentrate your assets.
Financial planning not only involves managing and growing investments, but risk management as well. Most people think of insurance when they hear that term, but one of the most important elements of risk management is establishing an emergency fund. That is why it is so disheartening to see stats found in this study from FINRA:
Less than 40% of all people are certain they could come up with $2,000 if an unexpected need arose. There are several reasons why having an emergency fund is one of the key tenants of an effective risk management strategy:
- You can pay for emergencies- it sounds simple, but emergencies seem to happen often. Not only will a sufficient cushion cover these unexpected expenses, but it will give you peace of mind, which is very hard to put a price tag on.
- It will prevent you from going into debt- when emergencies arise and you don’t have cash to cover them, what are your options? Most of the time it is putting those expenses on a credit card. By having an emergency fund you are less likely to go into debt.
- It will improve your investment experience- for those people who have investments but little in the way of cash, an unexpected expense could be funded by selling investments. There is a decent chance that this may not be an opportune time to sell. There could be a dip in the market or it may make your investments unbalanced.
- It could reduce your tax liability- I often see individuals use 401k or IRA assets to fund emergency expenses because that is the only pot of money they have to pull from. For those under 59 1/2 they not only have to pay taxes but also penalties on these distributions. Having an emergency fund can prevent you from tapping those resources prematurely.
So what is the right amount to have in your emergency fund? It is hard to say since it depends on the individual, but it is typically some multiple of monthly expenses. Typically I would see around 3 to 6 months of expenses in cash, but for some individuals it could be much higher.
This morning was the monthly jobs report, which is a decent barometer for how the economy is fairing. The Great Recession was devastating to the jobs market. The drop in consumer demand (due to in a large part deleveraging) along with company profits soaring to record highs (by keeping their labor costs low) have kept jobs growth muted over the past several years. It finally looks like we may be getting back to our high water mark in the next few months. Here is a great chart from Calculated Risk showing this jobs recovery compared to others:
The first observation I see when reviewing this chart is how severe the recession was on the jobs market and how long it has taken to recover. The second observation is that we are within a few months of recovering all the jobs that were lost during the recession. While jobs have taken a long time to recover, this chart shows that it would be hard to argue that the economy isn’t improving.
Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.