HEARD ON THE MAINLINE
 Weekly Investment Newsletter
By: Kevin Dombrowski
Past performance is not an indication, predication or guarantee of future results.
Weekly Update
We experienced a healthy amount of volatility this week as markets slowly trended up. Wall Street reacted to mixed signals as Facebook, Syria, and Paul Ryan dominated the headlines. As first quarter earnings are slowly released, cautious optimism lingers. In fact, analysts now expect the quarterly earnings of S&P 500 companies to increase by 18.5% from one year ago. Blackrock, the world’s largest asset manager, kicked-off earnings season by releasing solid numbers that beat most analysts’ estimates, increasing their shares by over 2%. With increasing earnings and the market’s recent dip, the S&P 500’s forward price to earnings ratio, a traditional valuation measure, was at its lowest since mid-2016, yet slightly above its 10-year average . Falling prices have made the market look less expensive, but don’t call it cheap. 

The Eighth Wonder of the World
Albert Einstein is rumored to have said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” 
There are few better examples of this than with your mortgage and investment accounts. Often, investors ignore the small details of investments and find relief when their account is growing. That is not enough. Just a 1% change per year can significantly alter your nest-egg. This 1% can be earned through proper diversification, risk-mitigation, decreasing fees, and ( in many experts’ opinion - the least likely ) picking investments that outperform the market. 

To illustrate this change, consider a 45-year-old with $400,000 who contributes $18,500 annually (the maximum permitted in 2018 for savers under 50) to his or her 401(k) and you can see the effect of compounding if he or she retires at 66 with varying rates of return.
This hypothetical illustration assumes a $400,000 initial investment balance, annual savings rate of $18,500 per year and annualized average returns of 4-8% over 21 years. The illustration doesn't represent any particular investment, nor does it account for inflation. There is no guarantee that each year returns will be positive or that any portfolio will experience consistent growth .  
Social Security is less Secure
With Paul Ryan’s announcement on Wednesday that he will not seek re-election, it has become increasingly clear that Social Security, Medicare, and Medicaid reform lose one of their most vocal advocates. Ryan was a major voice for reform, as funding continues to grow at a much slower rate than spending in these popular retirement and health care programs. If nothing is done, at the current rates, it is projected that Social Security will face depletion by 2034 , which could trigger a 21% across-the-board benefit cut. Additionally, with no reform, Medicare could face depletion by 2029 at current rates. Just to understand how large and looming of an issue this is, Medicare and Social Security accounted for 41% of federal spending last year (up nearly 15% from 2011).

What does this mean for your retirement? First, the younger and more affluent you are, the less likely you might be to receive these legacy retirement and health care programs in their entirety. So, the most prudent thing you can do is prepare as if you will retire without the benefit of social security and with higher out of pocket medical expenses. Second, if you are relying on a state or company pension, use the same logic as above. If you are currently retired or nearing retirement, you will likely receive a majority (if not all) of what you are promised. However, the younger you are, the less likely you will receive what’s promised to you. Similarly to Social Security, Medicare, and Medicaid, many companies and state governments face the same funding problem . In fact, only New York, Wisconsin, South Dakota, and Tennessee are at least 90% funded . 

To better prepare, talk to a trusted advisor. Saving early is a great start. Determine your risk tolerance and discuss what type of diversified investment line up works best for you and may better prepare your portfolio to weather the peaks and troughs that come along with investing. Lastly, figure out what investment vehicles are most suited to your personal situation. For instance, if you have access to a good 401k plan, it may make sense to maximize your 401k contributions first before considering other types of accounts ($18,500/yr for 2018). 
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kdombrowski@mainlineco.com
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