Go Time for the Fed

Way back in July, Federal Reserve Chair Janet Yellen said: “I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy.” Well, later this year is here. There are only three Fed policy meetings left in 2015, starting with the two-day confab beginning on Wednesday and concluding Thursday. After delivering that speech, the consensus was that the Fed would increase rates at the September meeting, but a funny thing happened over the past two months: China’s stock market plummeted, raising fears that the economy there had slowed down dramatically; raw commodity prices plunged, which has put global disinflation (a period when the inflation rate is positive, but declining over time) on the front burner; and global stock and currency markets entered a new, tumultuous phase.

All of the sudden, the September rate hike now looks less likely. In fact, traders now only see a 25 percent chance that the Fed will act this week. Of course, Yellen has always kept her options open. In that same speech, she said “I want to emphasize that the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step.”

Economists and investors have long been agonizing over the timing of the Fed’s rate hike. Those who advocate action cite the improvement in the U.S. economy: 13.1 million jobs over the past 66 months and unemployment at 5.1 percent, which is lower than the levels seen at the beginning of the Fed’s last tightening cycle in 2004; auto sales running at their fastest pace in a decade; commercial real estate prices surpassing their bubble-era peaks; and residential housing strengthening. That impressive list of accomplishments makes it tough to justify interest rates still being at emergency levels of 0-0.25 percent, which is where they have been since December 2008.

Former Treasury Secretary Larry Summers is the cheerleader for the no-action camp. Last week, he said “Now is the time for the Fed to do what is often hardest for policymakers. Stand still.” Besides global uncertainty, Summers reminds us that part of the Fed’s dual mandate is to promote price stability and with disinflation infecting emerging markets and U.S. core inflation remaining stubbornly low, he is advocating that the Fed do nothing at this time.

All of this may seem like navel-gazing to you, but if the Fed is too late in raising rates, inflation might rise. According to Paul Ashworth of Capital Economics, “Historically, central banks have mostly erred on the side of raising interest rates too little and too late. The result is that inflation starts to spiral out of control, eventually forcing a more aggressive tightening of policy than would originally have sufficed.”

Then again, if the Fed acts too quickly, it could snuff out the recovery. Andrew Haldane, the Chief Economist at the Bank of England has noted, “The act of raising the yield curve would itself increase the probability of recession.”

WHAT DOES ALL OF THIS HAVE TO DO WITH YOU?

In the seven years since financial crisis, companies, governments and consumers have gotten used to ultra-low interest rates. Whether the Fed decides to increase rates this week, in October or in December, the low rate cycle is about to conclude. Here’s how it could impact you:

Savers: Any increase in the Fed Funds rate will help nudge up rates on savings accounts, so savers will finally be rewarded. That said, rates will still be low and the likely slow pace of increases will mean that savers’ suffering is not likely to end any time soon.

Borrowers: While rates for mortgages key off the 10-year government bond, adjustable rates are linked to shorter-term rates, which means that consumers should be careful about assuming these loans and also should consider locking in a fixed rate now. Additionally, as rates increase, the availability of 0 percent credit card and auto loans could diminish.

Investors: Typically, stock markets have dipped after the first rate increase, but usually regain their upward momentum, as long as the rate increase is in response to stronger economic activity. Stocks usually top out after the final increase. The last tightening cycle began with interest rates at 1 percent in June 2004 and ended with rates at 5.25 percent two years later. The stock market peaked in October 2007 and you know what happened after that!

Finally, billions of dollars have flowed into global bond markets over the past seven years, as nervous investors sought the safety of fixed income. While few are advocating selling out bond positions, to help protect your portfolio against the eventual rise in interest rates, you may want to consider lowering your duration, using corporate bonds and keeping extra cash on hand. (For more on bonds, check out this post.)

MARKETS:

• DJIA: 16,433 up 2% on week, down 7.8% YTD
• S&P 500: 1,961 up 2.1% on week, down 4.7% YTD
• NASDAQ: 4,822 up 3% on week, up 1.8% YTD
• Russell 2000: 1157, up 1.8% on week, down 3.9% YTD
• 10-Year Treasury yield: 2.19% (from 2.13% a week ago)
• October Crude: $44.81, down 3.1% on week
• December Gold: $1,107, down 1.6% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.35 (from $2.40 wk ago, $3.41 a year ago)

THE WEEK AHEAD:

Mon 9/14:

Tues 9/15:

8:30 Retail Sales

8:30 Empire State Manufacturing

9:15 Industrial Production

10:00 Business Inventories

Weds 9/16:

8:30 Consumer Price Index

10:00 Housing Market Index

Thurs 9/17: 8:30 Housing Starts

2:00 FOMC Decision/Econ Projections

2:30 Yellen Presser

Fri 9/18:

Quadruple Witching

10:00 Leading Econ Indicators

#236 Credit Reform with John Ulzheimer

There are big changes afoot in the credit reporting industry-credit expert John Ulzheimer joins the show to explain what consumers need to know! While we had him, John provided identity theft protection tips, which are especially important as we look towards the holiday season frenzy!

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John (aka "the Credit Czar") explained the new credit reporting changes that will help consumers, why it is important to check your credit report (only 4 percent do it!), how medical debt will be handled in the future and how we can be the best stewards of our personal information. As John said, there is "NO SUCH THING AS SECURE DATA!"

We also talked to Jeff and Eric, both of whom are in their early fifties and trying to strategize about retirement.

Thanks to everyone who participated this week, especially Mark, the Best Producer in the World. Here's how to contact us:

• Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

• Send an email: askjill@jillonmoney.com 

• Tweet us: @jillonmoney and @MTalercio

Credit Reporting Reform: What You Need to Know

It’s been nearly 60 years since the Fair Isaac Corporation (FICO) started on the premise that data could be mined and used to inform business decisions. FICO honed the score and currently sells it to banks, insurers, retailers and credit card companies. Today, FICO score ranges from 300 to 850 and are based on data provided by the nation’s three credit reporting agencies (TransUnion, Experian and Equifax). Borrowers with scores above 750 are generally considered excellent, while scores below 650 are considered poor.

The most important factors that determine your score are:

(1) Payment History (including especially paying bills on time) accounts for about 35 percent.

(2) Total debt outstanding takes into account how many accounts you have and how close you are to your total credit limit. It makes up 30 percent of the score.

(3) Number of inquiries, which are broken into "soft", for preapproved offers; for insurance or employment purposes; and for when you check your own credit report or score. Soft inquiries, which do not hurt your score. Hard inquiries, like when you are shopping for a mortgage, auto or student loan can count against you and are responsible for about 10 percent of your score.

(4) The mix of credit (credit cards; installment loans like mortgages or car loan, and/or a student loan), contributes about 10 percent.

(5) Credit history – the more established your credit history, the better. This accounts for about 15 percent.

The ubiquitous use of credit scores makes their accuracy all the more important. If scores are lower, due to bad data or error-ridden reports, a consumer’s cost of borrowing could be higher than it should be or their living arrangements or job prospects could be negatively impacted.

After the Consumer Financial Protection Bureau conducted a 14-month probe, which found that it is notoriously difficult for consumers to correct credit report errors, the State of New York led the charge on reforming the credit reporting agencies. In a sweeping settlement, credit bureaus will make sweeping changes to everything from the credit reporting format they will accept from lenders to how they conduct investigations of disputed items to how and when they'll accept medical collections. The settlement will be implemented in three phases, starting this month and concluding by June 2018.

The highlights of phase one include a big change for consumers: bureaus cannot refuse to accept a consumer's dispute simply because she does not have a current copy of her credit report. Additionally, if the bureaus receive a dispute from a consumer that contains documentation, which supports the consumer's dispute, they must modify the information accordingly or fast track the dispute to an employee who is empowered to make the change as requested by the consumer on the sole basis of the documents they provided.

This so-called “empowered agent” provision of the settlement underscores the importance consumers providing supporting documents with their disputes. Otherwise the credit bureaus will simply contact a collection agency and take their side with respect to the disputed information.

In addition to removing errors from your credit record, there are a number of steps to take to improve your score. The most important is to pay your bills on time. According to FICO, 96 percent of people with excellent credit (above 800) pay their bills on time. (Most lenders will not report a late payment until you are 30 days late.)

You should also keep your total balances in check. Consumers with the best scores use just 7 percent of their revolving credit lines, but anything below 30 percent is considered acceptable. Apply for new credit judiciously and don’t close accounts—just don’t use them. Remember that co-signing a loan counts in this calculation. Maxing out a credit card could cost you as many as 45 points), according to FICO, even if the amount you owe is small.

Finally, stay away from credit repair pitches. There's nothing a so-called “credit repair clinic” can do that you can't do on your own.

Jobs Report Complicates Fed Policy

The economy added 173,000 new jobs in August and the unemployment rate edged down by two tenths of a percent to 5.1 percent, the lowest level since the spring of 2008. Although the top line job creation number was short of expectations, the previous two months were revised higher; putting monthly job creation at 213,000 this year and the three-month average at 221,000. With job creation remaining consistently above 200,000 over the past year and the unemployment rate within the Fed’s desired range of 5 to 5.2 percent, the central bankers may believe that the economy is now out of the intensive care unit and no longer requires emergency-level medicine in the form of zero to a quarter of a percent interest rates. As Mark Spindel, CEO and CIO of Potomac River Capital, LLC, noted: “The strength of the U.S. economy came through loudly and clearly in the employment figures announced this morning. As for raising rates, if not now, when?”

That would be perfectly reasonable thinking, if global markets were not in turmoil over a potential hard economic landing in China and the ripple effects that a Chinese slow down is causing in emerging markets and natural resource exporting countries like Canada, Australia, Brazil, Mexico and Russia.

Minutes after the jobs report was released, Mohamed El-Erian, chief economic adviser at Allianz SE and Chair of President's Global Development Council told me “It’s a really tricky call as domestic and external factors are locked in a complex tug of war – domestic economic conditions warranting a hike but global ones urging patience and caution. If global financial instability continues, I suspect that they will wait rather than hike in September.”

As volatility in global financial markets amped up in late August, El-Erian said “The window [to raise short-term interest rates] was open a few weeks ago when you had strong domestic economy, which you still do, you had pretty neutral international economy and the financial markets were in relatively good shape,” but global uncertainty has “turned violently against the Fed, so I don’t think the Fed will take the risk of hiking in this environment, because if it makes a mistake, it will end up making a mistake that will spill back on to the U.S. economy.”

The International Monetary Fund agrees with El-Erian. In a note prepared for the Friday kick off of a two-day G-20 Finance Ministers and Central Bank Governors meeting in Turkey, the IMF warned that “global growth remains moderate, reflecting a further slowdown in emerging economies and a weak recovery in advanced economies. In an environment of rising financial market volatility, declining commodity prices, weaker capital inflows, and depreciating emerging market currencies, downside risks to the outlook have risen, particularly for emerging markets and developing economies.” As a result of that assessment, central banks’ “monetary stance must stay accommodative.”

Paul Ashworth of Capital Economics summed up the debate, when he noted that the August employment report “can be used to make a case for or against a rate hike at the upcoming FOMC meeting. As far as we’re concerned, the September meeting is a 50-50 toss-up. Nevertheless, even if the Fed doesn’t hike rates this month, it won’t leave rates at near-zero for much longer.”

MARKETS:

• DJIA: 16,102 down 3.3% on week, down 9.7% YTD
• S&P 500: 1,921 down 3.4% on week, down 6.7% YTD
• NASDAQ: 4,684 down 3% on week, down 1.1% YTD
• Russell 2000: 1136, down 2.3% on week, down 5.7% YTD
• 10-Year Treasury yield: 2.13% (from 2.19% a week ago)
• October Crude: $46.05, up 1.8% on week
• December Gold: $1,121.40, down 1.1% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.40, the lowest Labor Day weekend price since 2004 (from $2.48 wk ago, $3.44 a year ago)

THE WEEK AHEAD:

Mon 9/7: US MARKETS CLOSED FOR LABOR DAY

Tues 9/8:

6:00 NFIB Small Business Optimism

3:00 Consumer Credit

Weds 9/9:

10:00 Job Openings and Labor Turnover (JOLTS)

10:00 Quarterly Services Survey

Thurs 9/10: 8:30 Import/Export Prices

Fri 9/11:

8:30 Producer Price Index

10:00 Consumer Sentiment

#235 The Labor Day Show

As Serena Williams tries to make tennis history, tune into the Grand Slam of money shows! We started with Bob, who is 72 years old. Half of his $3 million nest egg is invested in rental real estate: Is that too much?

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Michael and his wife are in their late 40's with two teenage boys. Is their asset allocation appropriate or are they too heavily invested in equities? Michael also expressed frustration over finding a fee-only advisor.

Meanwhile, John is trying to decide between using a financial adviser or doing it himself and Felissa wanted to know whether her approach for her non-retirement funds should be similar to that of her retirement account.

Thanks to everyone who participated this week, especially Mark, the Best Producer in the World. Here's how to contact us:

• Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

• Send an email: askjill@jillonmoney.com 

• Tweet us: @jillonmoney and @MTalercio

Back to School for Your Money: Life Insurance

It's National Life Insurance Awareness Month, a perfect time to tackle the complicated topic. According to the industry research group LIMRA, more than 70 million Americans know they need more life insurance, but many are worried about the cost and the process of actually purchasing coverage. Unfortunately, many are sold insurance policies that are too expensive or worse, which they do not need. Life insurance is critical when your death would cause a financial hardship for your survivor(s) or when you need to create liquidity upon your death for estate purposes. How much coverage should you purchase? You need enough to cover living expenses for survivors; the lump sum amount necessary to fund future educational expenses; and/or money to provide for the future retirement needs of the surviving spouse. Years ago, instead of drilling down and figuring out exactly what you need, many simply used a rule of thumb -- eight to 10 times of annual income. But with the use of technology, it is simple to determine your specific needs with a calculator and the one provided by LifeHappens.org is an easy one to use.

Once you know how much you need, the next decision is what type of life insurance is most appropriate for you. There are two basic types: term and permanent. Term is best for those who have a specific insurance need for a defined period of time, like a young couple with kids who have not yet saved a sufficient nest egg to support their survivors in the event of premature death. During the stated term of a term-life policy, if the insured dies, the insurance company pays the face amount of the policy to the named beneficiary.

Premiums for term policies are often reasonable for those in good health up to about age 50. After 50, premiums start to get progressively more expensive. Conversely, permanent life insurance is a much more expensive option, because it combines the death benefit with a savings or investment component. Within the permanent universe, there are three types: traditional whole life, universal and variable universal. Whole life policy owners rely on insurance company dividends as the source of accumulation inside the policy. Universal and variable universal life holders invest by using sub-accounts, which are akin to mutual funds, inside the policy.

Permanent life insurance earnings grow on a tax-deferred basis, but you don't have to die to get your money -- these policies allow you to borrow against your cash value. The downside is the hefty price tag. High fees and commissions can lop off as much as three percentage points from the annual return and up-front commissions are typically 100 percent of the first year's premium.

After being sold permanent coverage, some consumers discover that few years into the contract, they can't afford the premiums. The Society of Actuaries found that 20 percent of whole-life policies are terminated in the first three years, and 39 percent within the first 10 years. Those who bail out within the first few years will likely lose everything they have put in, due to surrender fees that can apply during the first 7-10 years of the policy. Unfortunately, many of these people would have been better off if they had purchased term coverage.

If you are weighing term versus permanent, you may want to consult a fee-only financial adviser, who does not sell insurance, but can evaluate your needs, determine the right type of coverage and refer you to a reputable life insurance agent. A cheaper option is to use the policy evaluation service offered by the Consumer Federation of America at www.evaluatelifeinsurance.org. It typically costs $100 for the first analysis and $70 for each additional one.

Back to School for Your Money: Bonds

Now that the kids are back to school, it’s time to hit the books for you and your money, starting with one of the most misunderstood asset classes: BONDS. Companies have two basic ways to finance their operations: through stock and through bonds. When you purchase stock (“shares” or “equity”), it represents ownership of a publicly traded company. As a common stock holder, you get a piece of what the company owns (assets) and what it owes (liabilities). You are also entitled to voting rights and dividends, which are the portion of a company's profits it distributes to its shareholders. Stock prices move based on supply and demand: if more people think the company will deliver future financial results, they will buy it and the stock will rise.

When you buy a bond, you are actually lending money to an entity -- the US or a foreign government, a state, a municipality or a company -- for a set period of time — from 30 days to 30 years — at a fixed rate of interest (the term “fixed income” is often used to describe the asset class of bonds.) At the end of the term, the borrower repays the obligation in full.

Bond prices fluctuate based on the general direction of interest rates. Here’s how it works: if you own a 10-year US government bond that is paying 5 percent, it will be worth more now, when new bonds issued by Uncle Sam are only paying a little more than percent. Conversely, if your bond is paying 2 percent and your friend can purchase a new bond paying 5 percent, nobody will be interested in your bond and the price will fall. That’s why bond prices move in the opposite direction of prevailing rates, regardless of the bond type. So, if you hear that interest rates are on the rise, you can count on your individual bond or bond mutual fund dropping in value.

Although often hailed as “safe,” bond investors face a number of risks, in addition to the interest rate risk described above. One is ­credit risk, which is the risk of default or that the entity does not pay you back. That is a pretty low risk if the entity is the US government, but can be a high one if it’s a company or town that is in trouble. Another risk is inflation. Even if the bonds are paid in full, the promised rate of interest can turn out to be worth less over time due to inflation, which eats into the fixed stream of payments.

Because bonds deliver a consistent stream of income, many investors view them as the perfect retirement vehicle. But as mentioned above, bond prices can fluctuate. The worst calendar year for the broad bond market was 1994, when returns were -2.9 percent due to an unexpected upward shift in interest rates (prices dropped more, but the interest from bonds helped defray some of those losses). So you CAN lose money in the bond market, though the magnitude of the fluctuations tends to be smaller than those in stocks and other riskier asset classes.

The magnitude of a bond loss is partially tied to the duration of the holding. Duration risk measures the sensitivity of a bond’s price to a one percent change in interest rates. The higher a bond’s (or a bond fund’s) duration, the greater its sensitivity to interest rates changes. This means fluctuations in price, whether positive or negative, will be more pronounced. Short-term bonds generally have shorter durations and are less sensitive to movements in interest rates than longer-term bonds. The reason is that bonds with longer maturities are locked in at a lower rate for a longer period of time.

For those of you who own individual bonds, the price fluctuations that occur before your bonds reach maturity may be unnerving, but if you hold them to maturity, you can expect to receive the face value of the bond. If you own a bond fund, it may be scary to see the net asset value (NAV) of the fund drop when rates increase. To soothe you a bit, remember that when NAV falls, the bonds within the fund should continue to make the stated interest payments. As the bonds within the fund mature or are sold, they can be replaced with higher-yielding bonds, which could create more income for you in the future. Additionally, if you are reinvesting interest and dividends back into the fund, you may benefit from purchasing shares at lower prices.

To help protect your portfolio against the eventual rise in interest rates, you may be tempted to sell all of your bonds. But of course that would be market timing and you are not going to fall for that, are you? Here are alternatives to a wholesale dismissal of the fixed income asset class:

Lower your duration: This can be as easy as moving from a longer-term bond into a shorter one. Of course, when you go shorter, you will give up yield. It may be worth it for you to make a little less current income in exchange for diminished volatility in your portfolio.

Use corporate bonds: Corporate bonds are less sensitive to interest-rate risk than government bonds. This does not mean that corporate bonds will avoid losses in a rising interest rate environment, but the declines are usually less than those for Treasuries.

Explore floating rate notes: Floating rate loan funds invest in non-investment-grade bank loans whose coupons "float" based on the prevailing interest rate market, which allows them to reduce duration risk.

Keep extra cash on hand: Cash, the ultimate fixed asset, can provide you with a unique opportunity in a rising interest rate market: the ability to purchase higher yielding securities on your own timetable.

The Fed’s Two-Day Correction

There were ostensibly three factors behind the recent stock market correction: (1) fear of a slow down in China, which can’t be stopped regardless of measures out of Beijing; (2) a sell off in commodities, which is pressuring emerging markets; and (3) continued concern about when the Federal Reserve will increase interest rates and how the lift off will impact asset prices. After two weeks of volatility, I am more convinced that the Fed may have had a larger role in the correction than the other two factors. Many look back to last Monday (aka “Black Monday” in China, where the main stock market index plunged 8.5 percent) as the beginning of the brutal downside action. Despite reports that Chinese government intervention was coming; there was none that day. All of the sudden, there was talk about the spread of contagion from a collapse in the Chinese stock market, to the Chinese economy, to emerging market economies and then to developed economies.

Let’s peel back the onion on this theory. According to Capital Economics, “The debacle in China’s equity market tells us little directly about what is going on in China’s economy.” The reason is that the massive bull market bubble, which began in 2014 and peaked on June 12th, “was speculative, rather than driven by any improvement in fundamentals…we are witnessing the inevitable implosion of an equity market bubble.” Since the top, the bears have wiped out $4.5 trillion of Chinese stock market value. Despite the massacre, the Shanghai Index is up 1.4 percent this year and a staggering 48 percent from a year ago.

Fear of a hard economic landing in China has been floating around for some time. In the big picture, the days of China’s double-digit growth rates are behind it. But because the total Chinese economy has increased in size, it continues to contribute more than a third of global growth. That’s why a slow down in growth from the government’s 7 percent target, to something closer to 5 percent this year, will reduce Chinese demand for a host of commodities, hence the rout in oil, industrial metals and emerging market trading partners who export those items to China.

And for those who were banking on the Chinese government to shield them from the effects of a slowdown, one hedge fund manager told me, “Too many investors believe that officials in Beijing know what they are doing. In fact, China is really in the minor league when it comes to economic management. Think of the U.S. as any big major league franchise, like the Yankees, the Giants or the Cardinals…China is like the Toledo Mud Hens-lots of great potential, but not in the show just yet.”

Of course all policy makers make mistakes (see: ECB), so maybe the take away is that when central bankers get nervous, we should all get nervous. And that leads us to what could have been the most important factor in the recent sell-off: the U.S. Federal Reserve. Yes, the impact of China and falling commodities is important, but some believe that that the selling pressure began on the Wednesday before Black Monday. That’s when minutes from the last Federal Reserve meeting were released. The officials’ views on current conditions painted a picture not of an economy rebounding strongly after a tough, weather-related first quarter, but of one that still faces downside risk, including “persistent weakness in the housing sector”. That comment prompted a lot of chatter because the data seem to indicate that housing is gaining a lot of momentum.

All of the sudden, it appeared that the Fed was not entirely sure what was going on and how it would respond to global events – that uncertainty sent shivers across trading floors. The stock drop only ceased after New York Federal Reserve President Bill Dudley, said that turbulence in the financial markets made a September rate hike “less compelling” than it was a few weeks ago.

With an economy growing at a better than three percent annualized pace, a labor market creating more than 200,000 positions per month, consumers and businesses spending more freely and a housing market finally making inroads, the best justification the central bank has for keeping rates at emergency levels is that there is little evidence of inflation. Still, it is hard to justify treating the U.S. economy like it is still in the intensive care unit. At some point, the central bank is going to have to normalize policy and when it does, nobody really knows how financial markets will react.

MARKETS: With one trading day left in August, stocks are on track for their worst monthly performance in three years.

• DJIA: 16,643 up 1.1% on week, down 6.6% YTD
• S&P 500: 1,988 up 0.9% on week, down 3.4% YTD
• NASDAQ: 4,828 up 2.6% on week, up 1.9 YTD
• Russell 2000: 1163, up 0.5% on week, down 3.5% YTD
• 10-Year Treasury yield: 2.19% (from 2.05% a week ago)
• October Crude: $45.22, up 11.8% on week
• December Gold: $1,134, down 2.2% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.49 (from $2.61 wk ago, $3.44 a year ago)

THE WEEK AHEAD: It will be a busy, pre-holiday week on the economic calendar, highlighted by the August employment report. It is expected that the economy created 225,000 jobs and the unemployment rate should edge down to 5.2 percent.

Mon 8/31:

9:45 Chicago PMI

10:30 Dallas Fed Mfg Survey

Tues 9/1:

Motor Vehicle Sales

9:45 PMI Manufacturing Index

10:00 ISM Mfg Index

10:00 Construction Spending

Weds 9/2:

8:15 ADP Employment Report

8:30 Productivity and Costs

10:00 Factory Orders

2:00 Fed Beige Book

Thurs 9/3: 9:45 PMI Services Index

10:00 ISM Non-Mfg Index

Fri 9/4:

8:30 August Jobs Report

#234 Leap with Tess Vigeland

Never let a correction ruin a great radio show! Our listeners did not seem at all spooked by the recent market gyrations, but did have some great questions. Mandy and her husband are accumulating cash and want to know what to do with it and Sharon needed advice for her daughter, who is carrying $200,000 of student loan debt.

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We were fortunate to have a very special guest on the show, Tess Vigeland, author of "Leap: Leaving a Job with No Plan B to Find the Career and Life You Really Want". Tess tells her fascinating story and offers advice to those who may only be able to hop, skip or jump...

Thanks to everyone who participated this week, especially Mark, the Best Producer in the World. Here's how to contact us:

• Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

• Send an email: askjill@jillonmoney.com 

• Tweet us: @jillonmoney and @MTalercio

Stock Market Correction 2015: 5 Investor To-Dos

The first stock market correction in nearly four years (in 2011, the S&P 500 sank by nearly 20 percent) has been a great reminder to investors of core concepts that can guide us through both good and bad times. First a note about this correction: it was long overdue. In statistics dating back to 1900 for the Dow Jones Industrial, here is the average frequency and duration for stock market sell offs:

• A decline of 5% or more has occurred about 3 times per year on average, and lasted on average about 46 days.
• A decline of 10% or more has occurred about once a year on average, and lasted on average about 115 days.
• A decline of 15% or more has occurred about once every 2 years on average, and lasted on average about 216 days.
• A decline of 20% or more has occurred about every 3.5 years on average, and lasted on average about 338 days.

Despite being a normal part of the investment cycle, these are trying times, which demand 5 simple investor action items. Here goes:

1. Keep Cool, Sit Still and Do Nothing! There are two emotions that influence our financial lives: fear and greed. At market tops, greed kicks in and we tend to assume too much risk. Conversely, when the bottom falls out, fear takes over and makes us want to sell everything and hide under the bed. To guard against this cycle, try not to do anything amid these volatile trading sessions. Consider this: If you had sold all of your stocks during the first week of the financial crisis in September 2008, you would have been shielded from another 40+ percent in further losses (stocks bottomed out in March 2009). But how would you have known when to get back in? Most investors, from seasoned pros to mere mortals who are saving for retirement, lack the guts or lucky timing to buy when stock indexes seem like they are hurtling towards zero! As a result, even if you made a decent sale in the fall of 2008, you most likely would not have bought the rock bottom in March 2009 and you may have missed the near tripling in value of the indexes from the lows.

2. Remember: You are wired to fail. Human emotions can mess with your investment returns. Benjamin Graham, the founder of security analysis, said in his 1949 masterpiece, The Intelligent Investor. “The investor’s chief problem – and even his worst enemy – is likely to be himself.” Research proves the point: According to Dalbar’s 21st Quantitative Analysis Of Investor Behavior study, the 20-year annualized return (through 2014) for the average equity mutual fund investor was 5.19 percent, compared to the 20-year annualized S&P return of 9.85 percent. Investors lagged the index by a whopping 4.66 percent annually!

Dalbar says the biggest reason for underperformance is psychology, highlighted by investor panic selling at the bottom, as well as the lure of following short-term market trends. Guard against these big emotional pulls by reminding yourself that just because you feel something, does not mean you need to do anything!

3. Adhere to a diversified portfolio…and don’t forget to rebalance. One of the best ways to prevent emotional swings is to create and adhere to a diversified portfolio that spreads out your risk across different asset classes, such as stocks, bonds, cash and commodities.

Prior to this sell off, the most frequent investment question I fielded on my radio show was “Should I dump my bonds?” I sure hope that you didn’t, because as the stock market has been sinking, those bonds were like a life vest to your portfolio. But that’s the rub with asset allocation: you have to live with certain parts of your portfolio underperforming at times, in order to reap the payback that occurs when market events turn the previous dogs into champions.

4. Maintain a healthy emergency reserve fund. Bad luck can occur at any time. One great lesson of the Great Recession was that those who had ample emergency reserve funds (6 to 12 months of expenses for those who were employed and 12 to 24 months for those who were retired) had many more choices than those who did not. While a large cash cushion seems like a waste to some (“it’s not earning anything!”), it allows people to refrain from selling assets at the wrong time and/or from invading retirement accounts.

5. Understand what is in your target date fund: Over the past ten years or so, many investors have been flocking to mutual funds in which the fund manager “targets” your future date of retirement an adjusts the asset allocation as you near the time that you will need to access the money. Unfortunately, many of these funds are far riskier than investors understand. Whether it’s a target date fund or an age-based investment for your kid’s college fund, be sure to check out the risk level before you put a dollar to work.